ITW Beats, Revises Outlook Down

Zacks

Illinois Tool Works Inc. (ITW) reported its financial results for the second quarter 2012 on July 24. The company’s earnings per share from continuing operations were $1.11, representing a 16% year-over-year increase. Results also surpassed the Zacks Consensus Estimate of $1.09 by two cents.

Revenue

Operating revenue in the second quarter increased marginally by 0.87% year over year to $4,655 million, but failed to surpass the Zacks Consensus Estimate of $4,861 million. The year-over-year improvement was far behind management’s projected growth range of 3.5%-6.0%.

Of the total revenue, base revenue in the quarter grew 2.3% year over year, registering a 5.3% increase in North American and 0.8% decline in international revenues. Acquisitions added 3.0% while currency translation negatively impacted revenue growth by 4.5%.  

On a segmental basis, Transportation revenue (19.2% of total revenue) grew 0.1% year over year; Power Systems & Electronics (17.4%) grew 7.7%; Industrial Packaging (13.5%) plummeted 5.1%; Food Equipment (10.2%) went down by 3.3% while Construction (10.5%) decreased 10.5%; Polymers & Fluids (7.2%) dipped by 0.9%; Decorative Surfaces (6.1%) marginally increased by 0.4% and All Other (16.2%) jumped 8.8%.     

Margins

Cost of goods sold fell 1.1% year over year in the quarter and represented 63.7% of total revenue; down from 64.9% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.2%. Operating margin in the quarter was 16.5%, up 110 basis points year over year.

Balance Sheet

Exiting the second quarter, Illinois Tool Works’ cash and cash equivalents increased 29.8% sequentially to approximately $1,692.0 million. Long-term debt, net of current portion decreased to $3,468.0 million from $3,521.0 million in the first quarter of 2012.

Cash Flow

Net cash flow from operating activities in the quarter was $509.0 million, up from $312.0 million in the year-ago quarter while capital expenditures increased 14.9% sequentially to $100.0 million. Free cash flow was approximately $409.0 million in the second quarter versus $225.0 million in the first quarter of 2012.

In the second quarter, the company distributed $172 million as dividends and repurchased shares worth $526 million. The company is still left with $2.9 billion in its share buyback program.

Outlook

For 2012, sluggish demand, higher negative currency translation impact and $100 million of restructuring charges triggered downward revision in management’s revenue growth estimate from the 5%-7% range earlier to the 1%-3% range currently.

Similarly, earnings per share guidance range were lowered from $4.14-$4.38 to $4.03-$4.19 per share range.

Earnings for the third quarter of 2012 are expected to be within the $1.03-$1.11 range based on total revenue growth assumption of (1%)-1%.

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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