Profitable Growth with Strong Returns

Size: px

Start display at page:

Download "Profitable Growth with Strong Returns"

Laura Porter
5 years ago
Views:

1 Profitable Growth with Strong Returns Ron Kropp, CFO December 2,

2 Today s Topics Capital Structure Profitable Growth with Strong Returns Acquisitions Operating Margins Return on Invested Capital Q&A 2

3 Free Operating Cash Flow vs. Net Income $ in millions 2, F Average FOCF % of Net Income: 114.3% 2,000 Strong generator of cash flow even in recessionary periods 1,500 1, F Net income FOCF 1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 3

Uses of free cash flow & debt 2001-2010 Capital Structure Overview Strong balance sheet Debt/capital = 31.7% at Sept 2011 Debt/EBITDA = 1.4x at Sept 2011* Issued new long-term debt of $1.

4 Uses of free cash flow & debt Capital Structure Overview Strong balance sheet Debt/capital = 31.7% at Sept 2011 Debt/EBITDA = 1.4x at Sept 2011* Issued new long-term debt of $1.0 billion in August 2011 at attractive rates Credit line of $2.5 billion backstops commercial paper program Cash of $1.3 billion at Sept 2011 (mostly non-u.s.) Target debt-to-capital range of 20% to 30% Currently above target range due to larger acquisitions and share repurchase activity Balanced capital allocation 60% returned to shareholders over last ten years via dividends and share repurchases, which compares favorably to peer group Our capital allocation strategy is flexible to adapt to current market opportunities, including: Investments to accelerate growth, including acquisitions Share repurchases *Debt/EBITDA calculated as total debt divided by EBITDA; EBITDA calculated as operating income before depreciation and amortization & impairment of goodwill and other intangible assets on a trailing twelve month basis. 4

5 Capital Structure Balanced Uses of Capital Dividends Guideline: 30% to 45% of the last two years average free operating cash flow Increased dividend 6% in August 2011 to an annual rate of $1.44 per share Current dividend yield of approximately 3%, which is above peer group average Acquisitions Preferred use of free operating cash flow and available debt capacity Forecasted to hit acquired revenue range of $800 million to $1.0 billion in 2011 Long-term acquisition target of 5% to 7% of total revenues Share Repurchase Program August 2007: $3 billion authorization (completed in 3Q 11) New $4 billion authorization in May 2011 Repurchased $400 million in 3Q2011 and $950 million YTD 5

6 Capital Allocation ITW vs. Peers % 5.4% 9.9% 33.0% 19.7% 11.5% 31.3% 30.5% 29.4% 33.7% 38.1% 41.7% 24.1% 34.6% 33.7% 19.4% 52.3% 60.5% 53.2% 14.1% 24.5% 19.6% 25.6% 35.6% 98.5% 83.1% 12.6% 27.2% 27.9% 40.0% 46.9% 42.5% 66.0% 60.9% 54.6% 46.7% 43.9% 31.5% 39.4% 35.1% 35.0% 34.7% 30.3% 25.4% 19.4% ITW Danaher IR Eaton Dover Parker Hannifin Textron Caterpillar Cooper Emerson Honeywell UTX 3M Tyco Deere Masco 8.0% 7.4% 1) Source: Capital IQ as of 02 Nov Cumulative allocation from ; 2011 values through 9/30/11. 2) Dividends Paid is sum of common dividends paid and preferred dividends paid. 3) Net Share Repurchase is calculated as shares repurchased less shares issued. 6

7 Profitable Growth with Strong Returns Profitable growth with strong returns creates higher economic profit, which drives long-term shareholder value Three drivers of higher economic profit: Growth grow revenues and income both organically and by acquiring new businesses Profitability improve margins of base and acquired businesses Returns generate return on invested capital significantly above our cost of capital over the long-term 7

8 Acquisitions Executing value enhancing acquisitions is important to driving increased shareholder value Contributes to growth in revenue and earnings, which leads to higher economic profit Focused on platforms which have higher long-term growth expectations Operating performance of the acquired companies improved through implementation of the ITW Toolbox Margin improvements for acquired companies drive future earnings growth and higher ROIC We take a disciplined approach to the valuation of acquisitions Focused on generating long-term ROIC significantly above our cost of capital We generally pay below our industry and peer M&A valuation multiples Two types of acquisitions: Smaller, bottoms-up deals executed at business unit level (typically less than $100 mil) Larger, top down deals executed by Corporate operating management (typically $100 to $500 mil) 8

9 ITW Acquisition Activity $ in Millions Nov. YTD Annualized Revenues Acquired $1,714 $995 $1,539 $290 $530 $828 Amount Paid $1,663 $877 $1,597 $286 $531 $1,285 Revenue Multiple 1.0x 0.9x 1.0x 1.0x 1.0x 1.6x Number of Acquisitions % of acquired revenues in 2011 directly tied to emerging market and platform growth initiatives ITW Global Brands (SOPUS) and Despatch: key platform acquisitions Completed seven emerging market-related acquisitions Higher revenue multiple in 2011 related to higher growth, higher margin businesses Margins for newly acquired businesses were 14.6% for Q3 11 YTD (excluding amortization) Consistent long-term ROIC expectations 9

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Acquisition Operating Margins 1 st Year of Acquisition Reported margins distort acquisition performance because of amortization and other non-cash purchase

10 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Acquisition Operating Margins 1 st Year of Acquisition Reported margins distort acquisition performance because of amortization and other non-cash purchase accounting items 8.1% 3.1% 10.0% 3.7% 5.0% -0.1% 11.2% 6.4% 14.6% 5.9% Q3 YTD Acq OI % as reported Acq OI % excluding amortization Excluding amortization calculated as operating income before amortization and other non-cash purchase accounting adjustments. 10

11 Acquisition Performance by Year Operating Margin % by Year Acquisitions 20.0% 17.5% Includes acquisitions > $20 million; 54 deals with acquired revenues totaling $4 billion 15.0% 12.5% 10.0% 7.5% 5.0% Acquisition Year 2007 Acquisition Year 2008 Acquisition Year 2009 Acquisition Year 2010 Acquisition Year Operating income before amortization and other non-cash purchase accounting adjustments. 11

12 Operating Margins Continued focus on achieving high operating margins 80/20 simplification process focuses efforts and investment on most profitable business, and results in: Higher growth and more profitable 80/20 products and customers Lower costs by eliminating activities related to 20/80 activities Lean and efficient manufacturing processes and back offices Continuously focused on margin improvement opportunities Improving the margins of acquired businesses Further improvement of the base businesses Further leveraging enterprise-wide spend Have primarily focused on leveraging indirect spend categories Accelerating efforts re: direct material categories 12

13 Operating Margins: ITW vs. Peer Group 20% 15% 17.3% 16.3% 14.6% Operating margins have consistently been above peer group 14.8% 15.5% 10% 12.4% 11.6% 10.0% 11.4% 13.3% 9.4% 7.8% 5% ITW Peer Group Versus Peer Group 0% ITW Peer Group Average 14.8% 11.0% +3.8% Q3YTD 1) Source: 2010 ITW Annual Report and 2011 Form 10Q s; 2010 and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 2) Peer group includes: Caterpillar, Cooper, Danaher, Deere, Dover, Eaton, Emerson, Honeywell, 3M, Masco, Ingersoll Rand, Parker Hannifin, Textron, Tyco, United Technologies. 13

19% 18% 17% 16% ITW Operating Margins vs. EBITA Margins Noncash amortization of intangibles has reduced reported margins 18.2% 17.5% 17.3% 17.3% 16.9% 17.3% 16.2% 16.8% 16.9% 15.

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q3 YTD Operating Margin % 15.1% 16.1% +1.

14 19% 18% 17% 16% ITW Operating Margins vs. EBITA Margins Noncash amortization of intangibles has reduced reported margins 18.2% 17.5% 17.3% 17.3% 16.9% 17.3% 16.2% 16.8% 16.9% 15.5% 15.7% 15.7% 16.3% 15% 14% 13% 14.5% 13.3% 15.2% 15.5% 14.6% 12.2% 14.8% 15.5% 12% 11% 10% 9% Average Operating Margin EBITA Margin 10.0% Q3 YTD Operating Margin % 15.1% 16.1% +1.0% EBITA Margin 1) Source: 2010 ITW Annual Report and 2011 Form 10Q s; 2010 and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 2) EBITA calculated as operating income before amortization and impairment of goodwill and other intangible assets. 14

15 EBITA Margins: ITW vs. Peer Group 20% 18.2% 17.3% 15.7% Peer group margins have been less impacted by amortization 16.2% 16.9% 15% 10% 13.0% 12.1% 10.1% 12.2% 12.3% 14.1% 8.7% 5% 0% ITW Peer Group Q3YTD ITW US-Based Diversified Industrials Versus Peer Group Average 16.1% 11.7% +4.4% 1) Source: 2010 ITW Annual Report and 2011 Form 10Q s; 2010 and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 2) Peer group includes: Caterpillar, Cooper, Danaher, Deere, Dover, Eaton, Emerson, Honeywell, 3M, Masco, Ingersoll Rand, Parker Hannifin, Textron, Tyco, United Technologies. 3) EBITA calculated as operating income before amortization and impairment of goodwill and other intangible assets. 15

Return on Invested Capital (ROIC) 19.0% 17.0% 15.0% 13.0% 11.0% Consistently generate economic profit with returns significantly above cost of capital 14.9% 14.8% 13.4% 12.9% 13.7% 10.6% 12.3% 13.

16 Return on Invested Capital (ROIC) 19.0% 17.0% 15.0% 13.0% 11.0% Consistently generate economic profit with returns significantly above cost of capital 14.9% 14.8% 13.4% 12.9% 13.7% 10.6% 12.3% 13.7% 16.8% 17.6% 18.3% 18.0% Average ROIC: 14.7% 16.0% 10.7% 15.3% 9.0% ITW Cost of Capital range: 8.5% % 7.0% Return on average invested capital 1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 16

17 ITW Demonstrates Strong Returns to Investors Economic Profit and ROIC $ Billions ROIC % $ % $0.9 $0.8 $0.7 $0.6 Average ROIC: 14.7% 14.9% 14.8% 13.4% 13.7% 12.9% 10.6% 16.8% 13.7% 12.3% $ % 18.3% 18.0% $ % $0.8 $0.7 $ % 15.3% $0.6 $ % 16.0% 14.0% 12.0% $ % $ % $0.3 $0.2 $0.1 $0.2 $0.2 $0.2 $0.2 $0.3 $0.1 $0.2 $0.3 $ % 4.0% 2.0% $ F Economic Profit ($) ROIC (%) 0.0% 1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 2) Economic profit calculated based on the midpoint of the cost of capital range. 17

6% 2006 2007 2008 2009 2010 1) Source: 2010 ITW Annual Report; 2010 and prior numbers not restated for discontinued operations or the elimination of

18 Historical ROIC: ITW vs. Peer Group 20% 18% 18.3% 18.0% Consistently generate higher returns than peer group 16% 16.4% 16.7% 16.0% 15.6% 15.3% 14% 12% 10% ITW ITW Peer Group US-Based Diversified Industrials 5-yr Average 15.7% 14.9% 10.7% 11.4% 14.6% ) Source: 2010 ITW Annual Report; 2010 and prior numbers not restated for discontinued operations or the elimination of the one month reporting lag. 2) Peer group includes: Caterpillar, Cooper, Danaher, Deere, Dover, Eaton, Emerson, Honeywell, 3M, Masco, Ingersoll Rand, Parker Hannifin, Textron, Tyco, United Technologies. 18

19 Profitable Growth with Strong Returns Our primary focus is to target investments that will generate both growth and returns over the long-term Organic investments are focused on innovation and emerging markets, which drive growth at high returns Acquisitions targeted to accelerate growth in key platforms and to enhance long-term returns In the short term, acquisitions dilute the Company s ROIC as we work to grow and improve the acquired businesses Growth and margin improvement are catalyst for improving returns over time 19

20 $18,000 ITW 25 Year Revenue/Operating Income Consistent strategy has yielded long-term results $3,100 $15,000 $12,000 CAGR Revenue: 14% CAGR Net Income: 17% Average ROIC: 14% CAGR Shareholder Return: 15% $2,600 $2,100 $9,000 $1,600 $6,000 $1,100 $3,000 $600 $0 $ Revenues (in millions) Operating Income (in millions) Source: 2010 ITW Annual Report; Numbers not restated for discontinued operations or the elimination of the one month reporting lag. 20

21 Q & A 21

Profitable Growth, Strong Returns

Profitable Growth, Strong Returns ISI Industrial Conference March 6, 2012 100 YEARS STRONG ITW Forward - Looking Statements The remarks made and information presented by ITW at this meeting contain forward-looking