Illinois Tool (ITW) Beats Q3 Earnings & Revenues, View Up

Industrial tool maker Illinois Tool Works Inc. (NYSE:ITW) reported record results for third-quarter 2016. Earnings came in at $1.50 per share, roughly 0.7% above the Zacks Consensus Estimate of $1.49. Also, the bottom line exceeded the mid-point of the guidance range of $1.42−$1.52.

The company’s bottom line improved 7.9% from the year-ago figure of $1.39 on the back of a 3.2% 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 results by 2 cents.

Illinois Tool Works’ revenues totaled approximately $3.50 billion, surpassing the Zacks Consensus Estimate of $3.49 billion, and increasing roughly 4.2% year over year. The improvement was driven by 3.5% positive impact from divestiture gains and 1.6% organic revenue growth. The organic revenue growth included roughly 1% adverse impacts of the company’s Product Line Simplification initiative. However, the positives were partially offset by 0.9% adverse impact from unfavorable foreign currency movements

Geographically, Illinois Tool Works’ organic revenue grew 1% in North America and 3% in international markets.

Segmental Details

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

Test & Measurement and Electronics’ revenues increased 5.3% year over year to $516 million, and revenues from Automotive OEM (Original Equipment Manufacturer) were up 24.8% to $765 million. Food Equipment generated revenues of $544 million, down 1.3% year over year.

Welding revenues came in at $361 million, down 8.9% year over year. Construction Products’ revenues were up 1.6% to $415 million, while revenues of $477 million from Specialty Products reflected a decline of 0.6%. Polymers & Fluids’ revenues of $422 million were flat year over year.

Margins

In the quarter, Illinois Tool Works’ cost of sales increased 3.8% year over year, representing 58% of total revenue compared with 58.2% 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 40 basis points (bps) year over year to 23.1%, driven by roughly 120 bps contributions from Illinois Tool Works' enterprise initiatives. Excluding dilution of 80 bps caused by the acquisition of the Engineered Fasteners and Components business (EF&C) from ZF TRW, operating margin in the quarter was 23.9%.

Balance Sheet & Cash Flow

Exiting the third quarter, Illinois Tool Works had cash and cash equivalents of approximately $2,299 million, down from $2,355 million in the previous quarter. The company’s long-term debt increased 0.5% sequentially to $6,329 million.

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In the quarter, Illinois Tool Works generated net cash of $624 million from its operating activities, down 11.6% year over year. Capital expenditure on purchase of plant and equipment totaled $81 million, resulting in free cash flow of $543 million.

During the quarter, Illinois Tool Works bought back shares worth $500 million, while paid dividends at the rate of 65 cents per share.

Outlook: For 2016, Illinois Tool Works increased its earnings guidance to $5.56−$5.66 per share from the previous projection of $5.50−$5.70. The revised forecast represents a 9% year-over-year increase.

Organic revenue growth is expected to be 1−2%, including approximately 1% adverse impacts of the company’s Product Line Simplification initiative. Total revenue will likely total $13.7 billion. Operating margin is expected to exceed 22.5%, driven by 100 bps contribution from Illinois Tool Works’ enterprise initiatives. Full year free cash flow is anticipated to be 100% of net income, while share repurchase will likely be roughly $2 billion.

For fourth-quarter 2016, Illinois Tool Works expects earnings per share to be within $1.31−$1.41. Organic revenue growth is predicted to be 0−2% while operating margin will be roughly 21.5%.