Illinois Tool Works to double acquisitions in 2011

By Dow Jones Newswires
Posted Feb. 1 at 5:53 a.m.

Illinois Tool Works Inc. expects business acquisitions in 2011 to bring the company $800 million to $1 billion a year in additional revenue, nearly double the amount from 2010.

Chairman and Chief Executive David Speer said the company’s pipeline of potential acquisitions steadily improved throughout 2010, allowing the company to step up its acquisition goal for 2011. Last year, the company bought 24 companies with combined annual revenues of $530 million. Prior to 2009, ITW had been averaging $1 billion a year in acquired revenue. But the economic recession soured the market for acquisitions.

“I’m optimistic that as we head into the year we’re going to see improvement in the acquisition environment for us,” Speer said during a conference call Monday with analysts. “We certainly have seen steady improvement in the 1 8 deal 3 8 pipeline as we entered” 2011.

ITW is expected to be about one-third of the way to $1 billion when it closes its recent purchase of Royal Dutch Shell PLC’s car-care products portfolio. Shell’s Sopus Products unit, which includes Black Magic liquid wax, Gumout fuel system cleaner and Slick 50 engine oil additive, has annual sales of about $300 million a year, according to a Citi Investment Research report. ITW’s acquisition of Sopus, which stands for Shell Oil Products U.S., is scheduled to close by the end of March.

ITW operates almost 800 separate businesses grouped under nearly 10 business segments, including auto parts, industrial packaging, commercial kitchen equipment and building supplies. The Glenview-based company depends on acquisitions to fortify slow-growing base revenue from existing businesses. Moreover, Speer is counting on acquisitions in the coming years to provide ITW with enough companies to create several additional business segments.

Speer expects a robust market for acquisitions to be enhanced by private-equity firms selling companies to generate profits for their investors. Private-equity selling “will be a good, solid indication of improved acquisition activity for us,” Speer said.

Conversely, Speer acknowledged that private-equity firms anxious to put their investors’ money to work have run up prices for the small and midsize companies sought by ITW. Speer blamed unfavorable pricing for the lack of deals in 2010.

“Valuations are still somewhat challenging, but we’re able to make headway,” Speer said.

For 2011, the company forecast earnings of $3.60 to $3.84 on revenue growth of 12 percent to 15 percent. Analysts polled by Thomson Reuters were expecting $3.70 and 9.9 percent revenue growth. The company’s net income for 2010 was $1.52 billion, or $3.03 a share, from revenue of $15.8 billion.

For the first quarter, ITW predicted earnings of 81 cents to 87 cents on 12 percent to 15 percent revenue growth. Analysts had forecast a 76-cent profit on 11 percent revenue growth.

ITW said rising prices for steel, chemicals and feedstocks for plastic have squeezed margins from some business segments, particularly food equipment, industrial packaging and laminate surfaces.

Speer said ITW is passing along higher expenses for materials to its customers through price increases for finished goods.

ITW’s 13.9 percent overall operating margin for the quarter was up from 12.7 percent a year earlier, but was down two points from the third-quarter, raising investors’ concerns about material cost headwinds. Illinois Tool Works ended Monday’s regular trading session down 2.2 percent, or $1.22, at $53.49 a share.

“It’s explainable and understandable, but it’s disappointing,” said Eli Lustgarten, an analyst for Longbow Research, about the company’s margin pressure. “It was a disappointing quarter.”

For the fourth quarter, the company reported a profit of $392.8 million, or 79 cents a share, down from $507.4 million, or $1.01 a share, a year earlier. The year-earlier period included a 37-cent tax-related gain. Revenue rose 11 percent, to $4.17 billion.

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