ITW 3Q EPS Beats, Revenue Falls


Illinois Tool Works Inc. (ITW) reported its financial results for the third quarter 2012 on October 23. The company’s earnings per share from continuing operations, adjusted for divestment impact, were $1.09. Results came to 3 cents above the Zacks Consensus Estimate of $1.06 and within management’s guidance range of $1.03-$1.11.

EPS including the divestment impact of 3 cents was $1.12, representing a 12% year-over-year increase.

Operating revenue in the third quarter decreased 1.7% year over year to $4,501 million and also failed to surpass the Zacks Consensus Estimate of $4,571 million. The year-over-year decline was greater than a 1% decline to 1% growth expectation of management.

Of the total revenue, base revenue in the quarter grew 0.9% year over year, registering a 3.9% increase in North American and 2.7% decline in international revenues. Acquisitions added 1.4% while currency translation negatively impacted revenue growth by 4.1%.  

On a segmental basis, Transportation revenue (19.1% of total revenue) declined 2.2% year over year; Power Systems & Electronics (18.1%) grew 4.6%; Industrial Packaging (13.3%) plummeted 4.6%; Food Equipment (10.9%) went down by 4.0% while Construction (10.6%) decreased 7.2%; Polymers & Fluids (6.8%) dived south by 7.3%; Decorative Surfaces (5.9%) decreased by 5.7% and All Other (15.6%) jumped 4.1%.      


Cost of goods sold plummeted 3.6% year over year in the quarter and represented 63.4% of total revenue; down from 64.7% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.0%. Operating margin in the quarter was 17.0%, up 140 basis points year over year.

Balance Sheet

Exiting the third quarter, Illinois Tool Works’ cash and cash equivalents increased 21.4% sequentially to approximately $2,054.0 million. Long-term debt, net of current portion also registered a sequential increase from $3,468.0 million in the previous quarter to $4,572 million in the third quarter 2012.
Cash Flow

Net cash flow from operating activities in the quarter was $635.0 million, down from $787.0 million in the year-ago quarter while capital expenditure increased 8.4% to $90.0 million. Free cash flow was approximately $545.0 million in the third quarter versus $704.0 million in the comparable quarter last year.

In the third quarter, the company distributed $169 million as dividends and repurchased shares worth $416 million.


For the fourth quarter 2012, management anticipates a weak international market with currency translation still playing a negative role. Hence, total revenue growth range for the full year was revised to a 0%-1% growth as against 1%-3% expected earlier. Earnings per share for the full year is expected to range within the band of $4.06 to $4.14 versus $4.03-$4.19 projected earlier.

Revenue growth in the fourth quarter is expected to be within (1%)-(4%) and earnings per share to be roughly in the range of 86-94 cents .

Illinois Tool Works is one of the leading manufacturers of industrial products and equipment. The company’s chief competitors include Cooper Industries plc (CBE), General Electric Co. (GE), and Manitowoc Co. Inc. (MTW).

We currently maintain a Neutral recommendation on the stock.

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