Illinois Tool (ITW) Beats Q4 Earnings & Sales, Ups '18 View

Industrial tool maker Illinois Tool Works Inc. (NYSE:ITW) kept its earnings streak alive in fourth-quarter 2017, pulling off a positive earnings surprise of 4.9%. Results were primarily driven by sales growth, benefits from enterprise initiatives and 2.4% fall in the diluted share count due to the company’s active share buyback activities.

Earnings, excluding roughly $1.92 per share of tax charge in the quarter, came in at $1.70 per share, topping the Zacks Consensus Estimate of $1.62. The bottom line increased roughly 17% from the year-ago tally of $1.45.

For 2017, the company’s earnings were $6.59 per share, lagging the Zacks Consensus Estimate of $6.70. However, the figure grew 16% year over year. As noted, the bottom-line results excluded roughly 17 cents benefit accrued from a legal settlement and $1.90 per share of tax charge.

Revenues Driven By Organic and Forex Gains

Revenues in the quarter totaled $3,629 million, reflecting growth of 7% from the year-ago tally. The improvement was driven by 3.7% organic gains and 3.2% positive impact of foreign currency movements, partially offset by 0.1% negative impact from acquisitions/divestitures.

Also, the top line surpassed the Zacks Consensus Estimate of $3.55 billion.

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

In the quarter, Test & Measurement and Electronics’ revenues increased 11.7% year over year to $545 million. Revenues from Automotive OEM (Original Equipment Manufacturer) grew 7% to $828 million. Food Equipment generated revenues of $548 million, increasing 3% year over year.

Welding revenues came in at $388 million, growing 7.4% year over year. Construction Products’ revenues were up 6.7% to $412 million while revenues of $487 million from Specialty Products reflected growth of 6.9%. Polymers & Fluids’ revenues of $427 million increased 4.9% year over year.

For 2017, the company’s revenues totaled approximately $14,314 million, increasing 5.3% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $14.2 billion.

Margin Profile Improves

In the quarter, Illinois Tool Works’ cost of sales increased 5.9% year over year, representing 58.5% of total revenues compared with 59% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenues, came in at 16.7%.

Operating margin improved 160 basis points (bps) year over year to 23.4%, driven by roughly 140 bps contributions from enterprise initiatives.

Cash Position Strong, Debt Increases Slightly

Exiting the fourth quarter, Illinois Tool Works had cash and cash equivalents of approximately $3,094 million, up from $2,785 million in the previous quarter. Long-term debt was $7,478 million versus $7,439 million in the previous quarter.

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The company generated net cash of $695 million from its operating activities in the quarter, up 4.7% year over year. Capital expenditure on purchase of plant and equipment totaled $78 million. Free cash flow was $617 million, reflecting a conversion rate (as a percentage of adjusted net income) of 106%.

Outlook

For 2018, Illinois Tool Works increased its GAAP earnings guidance to $7.45-$7.65 per share, reflecting 40 cents growth at mid-point. The increase reflects the positive impact of tax rate cuts to 25-26% and forex gains.

For first-quarter 2018, GAAP earnings per share are expected within $1.80-$1.90. Organic revenues are expected to be 3-4%.

In addition to these, the company declared its intention to increase the dividend payout rate from 43% to 50% of free cash in August 2018. However, this increment is still subject to the company’s board approval.

Illinois Tool Works Inc. Price and Consensus