1. ITW: Managing through
a Recession
Barclays Capital Industrial Select Conference
February 10, 2009
South Beach, Florida
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2. Today’s Topics
• Macro Trends + Deteriorating End Markets =
Recession!
• Recession Impacts Q4 Financial Results and 2009
Forecast
• How Will ITW Respond in 2009?
– Utilize 80/20 Process and Related Tools
– Employ Flexible Capital Structure and Strong Free
Cash Flow
– Be Opportunistic per Acquisitions
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4. Review of Economic Trends
Since December 2008 Investor Meeting in New York City,
macro and end market trends have continued to deteriorate
U.S. Data International Data
• Industrial production: • Euro-Zone industrial production:
-2.2% in Oct. 2008 vs. -6.9% in Dec. 2008
-6.1% in Oct. 2008 vs. -10.2% in Dec. 2008
• Euro-Zone Purchasing Manager’s Index:
• ISM Index:
41.1% in Oct. 2008 vs. 34.4% in Jan. 2009
36.2% in Nov. 2008 vs. 35.6% in Jan. 2009
• Euro-Zone capacity utilization:
• Capacity utilization:
83.0% for full year 2007 vs. 81.6% for Q4 2008
79.2% in Dec. 2007 vs. 70.5% in Dec. 2008
• European auto:
• NA auto:
Q4 builds forecasted to be -8% to -10% per
Q4 combined builds forecasted to be -18% to
Dec. meeting vs. -16% Q4 actual
-20% per Dec. meeting vs. -26% Q4 Actual
• Q4 Housing starts:
Forecasted to be -30% to -35% per Dec.
meeting vs. -41% Q4 actual (680k starts in Q4)
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5. Review of Economic Trends
Auto/Housing Data
• Automotive:
– North America 2008 auto builds: -16%
• Detroit 3: -21%
• New Domestics: -8%
– 2009 forecast
• Detroit 3 -25% to -30%
• New Domestics -10% to -15%
– Europe Auto Builds for 2008: +4%
– 2009 forecast: -18% to -22%
• Construction:
– New residential housing starts declined 32% in 2008, Europe declined 13%
– Non-residential construction fell 20% in N. America and 6% in Europe
– 2009 U.S. housing starts forecasted to be 700,000-750,000 (NAHB)
– U.S. non-residential square footage initiated projected to decline 12% in
2009 (Dodge)
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7. Financial Results—2008 Fourth Quarter
Dollars/%
%Change(y/o/y)
Revenues: $3.7B -6%
Income from
cont. operations: $273M -38%
Diluted income per share from
cont. operations: $0.54 -34%
Operating margins: 11.3% -450 basis points
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8. Financial Results—4th Quarter Operating Analysis
%F(U) Prior Year
Operating Operating Operating
Revenues Income Margins
Base Manufacturing Businesses
Operating Leverage -9.2% -24.4% -2.6%
Changes in VM & OH Costs - - -
Total -9.2% -24.4% -2.6%
Acquisitions/Divestitures 7.8% 0.3% -0.9%
Translation -4.5% -4.7% -0.2%
Impairment - - -
Restructuring - -4.3% -0.8%
Intercompany/Other - - -
Total -5.9% -33.1% -4.5%
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9. Highlights—2008 Fourth Quarter
• Power Systems and Electronics Revenues: -9.6%
Base revenues: -10.8%
• Welding base revenues worldwide: -9.0%
• North America: -15.7% and International: +9.4%
• Ground support equipment base revenues: +17.9 %
• Transportation Revenues: -4.7%
Base revenues: -20.3%
• Automotive base revenues North America: -26.5%
• Automotive base revenues International: -21.7%
• Automotive aftermarket : -3.6%
• Construction Products Revenues: -21.9%
Base revenues:-14.6%
• North American construction base revenues : -23.4 %
• International base revenues: -10.5 % (Europe: -16.9% and Asia-Pacific : -1.6%)
• Food Equipment Revenues: -4.1%
Base revenues: +1.7 %
• International operations drove base revenue growth in the quarter
– Europe: +3.0% and Asia-Pacific: +6.4%
9 – North America base revenues : -0.7%
10. Financial Results—2008 Full Year
Dollars/%
%Change(y/o/y)
Revenues: $15.9B +7%
Income from
cont. operations: $1.6B -8%
Diluted income per share from
cont. operations: $3.04 -1%
Operating margins: 14.7% -180 basis points
50 acquisitions with acquired revenues of approximately $1.6 billion
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11. Financial Results—Full Year Operating Analysis
%F(U) Prior Year
Operating Operating Operating
Revenues Income Margins
Base Manufacturing Businesses
Operating Leverage -2.5% -6.5% -0.7%
Changes in VM & OH Costs - -1.0% -0.2%
Total -2.5% -7.5% -0.9%
Acquisitions/Divestitures 6.5% 1.5% -0.7%
Translation 2.8% 2.6% -
Impairment - - -
Restructuring - -1.1% -0.2%
Intercompany/Other -0.1% - -
Total 6.7% -4.5% -1.8%
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12. 2009 Forecast
• Continued weakness in worldwide end markets
• 1st Quarter:
– diluted income per share from continuing operations to be in a range $0.26 to
$0.42
– revenue growth range of -17% to -11%
• Full year:
– diluted income per share from continuing operations to be in a range of $1.84 to
$2.48
– revenue growth range of -12% to -6%
• If the Company meets the midpoints of the first quarter and full-year
forecasts, diluted income per share from continuing operations would
decrease 51% and 29%, respectively
• Acquired revenues in the range of $400 to $600 million
• Restructuring costs of $60 million to $100 million
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13. 2009 Forecast—Total Year Operating Analysis
%F(U) Prior Year
Operating Operating Operating
Revenues Income Margins
Base Manufacturing Businesses
Operating Leverage -9.0% -25.1% -2.6%
Changes in VM & OH Costs - 0.3% -
Total -9.0% -24.8% -2.6%
Acquisitions/Divestitures 6.8% 2.0% -0.5%
Translation -6.9% -7.7% -0.4%
Impairment - -0.2% -
Restructuring - -1.1% -0.2%
Intercompany/Other - - -
Total -9.1% -31.8% -3.7%
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14. How Will ITW
Respond in 2009?
– Employ our 80/20 process and reduce costs
– Utilize our sound capital structure
– Be opportunistic per acquisition opportunities
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15. How Will ITW Respond in 2009?
• We are taking a long-term view in spite of short-term difficulties
• We will do what we do best:
– Stay close to our customers
– Invest in focused innovation programs
– Apply 80/20 process and related tools vigorously
• We have an experienced management team and dedicated
people around the world capable of responding in this
challenging environment
• We are prepared for the challenges ahead!
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16. How Will ITW Respond in 2009?
Our 80/20 Process and Related Tools are Even More Important
During Recessionary Periods
• What is the ITW Toolbox?
– A set of best practice business processes developed
over the years by ITW employees utilizing the core
principles of 80/20
– Like our business, the Toolbox continues to grow as
its users utilize the tools in innovative ways and share
their experiences with others
– The Toolbox also serves ITW as the primary vehicle in
communicating its core culture across a multitude of
diverse business units and geographies
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17. How Will ITW Respond in 2009?
Our 80/20 Process and Related Tools Maximize Financial Results
• ITW Toolbox today:
• 80/20 – the principal analysis tool
• Other tools include:
– Product Line Simplification (PLS)
– In-lining
– Market Rate of Demand (MRD)
– Understand, Simplify, act (USa)
– Market Segment Selling (MSS)
– Continuous evaluation and application of 80/20 principles
• ITW uses all these tools to reduce business complexity
and there are linkages in their application
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18. How Will ITW Respond in 2009?
Capital Structure Equals Strong Free Cash Flow
Free cash flow to net income conversion of 114% in 2007 and
123% in 2008 used for:
•Dividends
– Guideline of 25% to 35% of trailing two years net income
– Increased annual dividend rate from $1.12 to $1.24 (11% increase)
in August 2008
•Acquisitions:
– Preferred use of free operating cash flow
– 2009 range: annualized revenues of $400 million to $600 million
•Share repurchase program:
– August 2007: $3 billion authorization ($1.2 billion remaining)
– Estimated benefit of share repurchases (net of interest) to
2008 EPS = 13¢
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19. How Will ITW Respond in 2009?
Capital Structure—Free Cash Flow 1999-2008
Target debt-to-capital range of 20% to 30%
Current debt-to-capital ratio at 32% as equity shrinks*
Would go above target range for larger acquisitions
*29% debt-to-capital ratio without equity adjustments related to translation/pension
$2,500
CAGR Recession
Net Income = 8%
$2,000
Free Cash =
14%
Recession
$1,500
Net Income
$1,000
Free Cash
$500
$0
19 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
20. How Will ITW Respond in 2009?
Capital Structure—Liquidity
• Primary sources of liquidity are strong free cash flow and
credit facilities
• Credit facilities recently increased from $2.0 billion to $3.0
billion
• Credit facilities used to backstop commercial paper
program
– No issues with placing commercial paper
– “Flight to quality” - rated A1+/P1
– Current outstanding is approximately $1.8 billion
– Average term: 71 days
– Average interest rate: 1.4%
• AA-/A1 credit rating with negative outlook
– Debt capital markets readily accessible
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21. How Will ITW Respond in 2009?
Capital Structure—Summary
• Strong conservative balance sheet with
strong credit ratings
• Have historically generated strong cash
flow in downturns
• No liquidity issues
• Ample short-term debt capacity
• Readily accessible debt capital markets
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22. How Will ITW Respond in 2009?
Acquisitions
• Acquisition market currently in a pause due to wary sellers
• Valuations are lower than before due to falling market values and
the economy’s impact on business outlook
• ITW’s strong cash flow helps finance acquisitions without relying on
debt markets
• Review of 2008 Acquisitions:
– Of 50 acquisitions completed, most of the deals were generated
by business units
– On average, ITW paid approximately 1.0X revenues for deals
– Majority of companies acquired are international
– Acquisitions complement existing business units and add to
growth platforms (food equipment, test and measurement)
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24. How Will ITW Respond in 2009?
Acquisitions
10-year, 5-year and 1-year snapshot: Strict pricing discipline remains the same
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25. How Will ITW Respond in 2009?
Acquisitions – Historical Look
• Reviewed performance of larger acquisitions from 2000 – 2007
– Revenues > $20 million
– Businesses which remained discrete for five years
• 73 Acquisitions with $4.2 billion of first year revenue
(70% of total)
• Conclusions:
– Revenue growth only 0.2% in 2nd full year from first full year –
reflects impact of 80/20 simplification
– Margins improve each year – from 9.2% in
year 1 to 19.3% in year 5
– Return on investment improves from 9.2% in
year 1 to 17.0% in year 5
– More recent acquisitions have room for continued improvement
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26. How Will ITW Respond in 2009?
Acquisitions – Historical Look
Acquired in 2000-2007
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27. Summary
• Global recession is here and defines 2009
• Our 80/20 process and related tools are critical in these difficult times
• ITW’s balance sheet, free operating cash flow and credit ratings
remain strong despite slowing end markets
• 2009 will be a challenging year in nearly all end markets with
preliminary total company revenues expected to be in a range of -6%
to -12% for the full year
• Based on our long track record and strong financial and management
resources, we are prepared for the challenge!
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