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Illinois Tool (ITW) Beats on Q3 Earnings, Cuts '15 Outlook

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Industrial tool maker Illinois Tool Works Inc.ITW has kept its earnings streak alive in the third quarter of 2015 as well. The company's earnings from continuing operations came in at $1.39 per share, surpassing the Zacks Consensus Estimate of $1.36. Also, earnings increased 9% from the year-ago figure of $1.28.

With this, the bottom line was on the higher end of Illinois Tool Works' projected range of $1.32−$1.40 per share. The year-over-year improvement was triggered by a 7.5% reduction in the company's share count due to its ongoing share buyback activity. Earnings were also boosted by its enterprise initiatives.

However, unfavorable foreign currency movements adversely impacted the bottom line to the extent of 12 cents per share. Excluding forex losses, Illinois Tool Works' earnings per share increased 18% year over year.

Illinois Tool Works Inc. - Earnings Surprise | FindTheBest

Revenue

Illinois Tool Works' operating revenues totaled $3,354 million in the quarter, declining 9% year over year. Also, revenues lagged the Zacks Consensus Estimate of $3,436 million. The decrease in the top line was due primarily to weakness in Welding and Test & Measurement and Electronics end markets, a 1% adverse impact of product-line simplification activities and unfavorable foreign currency movements.

Organic revenues were down 1.7% year over year in the quarter, below Illinois Tool Works' expectation of flat to up 1%. Geographically, organic revenue was down 2% in both North America and internationally.

Illinois Tool Works reports its revenues under the segments discussed briefly below:

Test & Measurement and Electronics revenues plunged 16.4% year over year to $490 million, while revenues from Automotive OEM (Original Equipment Manufacturer) segment were down 3% to $612 million. Food Equipment segment generated revenues of $551 million, decreasing 4.2% year over year.

Welding revenues came in at $396 million, down 13.7% year over year. Construction Products revenues were down 8.1% to $409 million, while revenues of $479 million from Specialty Products reflected a decline of 6.5%. Polymers & Fluids segment's revenues of $423 million were down 13.6%.

Margins

Illinois Tool Works' cost of revenues decreased 10.5% year over year, representing 58.2% of total revenue compared with 59.1% of total revenue in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenue, came in at 17.3%.

Operating margin improved 180 basis points (bps) year over year to 22.7%. Enterprise initiatives contributed nearly 110 bps to the operating margin.

Balance Sheet

Exiting third-quarter 2015, Illinois Tool Works' cash position remained solid, with cash and cash equivalents of $3,001 million, up from $2,858 million in the previous quarter. However, the company's long-term debt inched up 0.1% sequentially to $7,000 million.

Cash Flow

Illinois Tool Works generated cash of $706 million from its operating activities in third quarter 2015. Capital expenditure on purchase of plant and equipment totaled $62 million, resulting in free cash flow of $644 million.

Outlook

For 2015, Illinois Tool Works reduced its earnings guidance to a range of $5.05-$5.15 per share from the previous projection of $5.07-$5.23 per share. The new guidance reflects year-over-year growth of 9% at the mid-point of $5.10, including a negative 9% impact from foreign currency translation.

Organic revenue is predicted to be down 1% to flat versus an increase of 1% projected earlier. The revised guidance includes a 1% negative impact from product-line simplification activities. Total revenue is expected to decline 8% in the year. Operating margin is likely to expand 21%, driven by of the company's enterprise initiatives.

For fourth-quarter 2015, earnings per share are expected within $1.15−$1.25. Organic revenue is expected to decline in the range of 1%−2% while total revenue will roughly decline 7%. Operating margin will be roughly 21%.

With a market capitalization of nearly $31.2 billion, Illinois Tool Works presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the machinery industry include Graham Corporation GHM , Barnes Group Inc. B and Middleby Corp. MIDD . While Graham Corporation sports a Zacks Rank #1 (Strong Buy), both Barnes Group and Middleby Corp. carry a Zacks Rank #2 (Buy).

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ILL TOOL WORKS (ITW): Free Stock Analysis Report

BARNES GRP (B): Free Stock Analysis Report

GRAHAM CORP (GHM): Free Stock Analysis Report

MIDDLEBY CORP (MIDD): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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