Earnings Above Ests at ITW

Illinois Tool Works Inc. (ITW) reported an impressive result for the fourth quarter of 2013. Earnings per share from continuing operations, excluding one-time items, were recorded at 92 cents, reflecting an increase of 41.5% over the year-ago earnings of 65 cents. The result also surpassed the Zacks Consensus Estimate of 91 cents and was above the mid-point of the company’s guidance range of 85–93 cents.

The earnings improvement was the result of organic growth increases witnessed in North American and in international operations. Enterprise initiatives of Illinois Tool Works were also a strong contributor to earnings growth.

In 2013, earnings per share from continuing operations, excluding one-time items, were $3.63, up compared with $3.21 earned in 2012 and above the Zacks Consensus Estimate of $3.61. Results also surpassed the mid-point of Illinois Tool Works’ guidance range of $3.56–$3.64.

Revenue

Illinois Tool’s operating revenues in the fourth quarter increased 4.8% year over year to $3,554 million. The increase was above the mid-point of the company’s guidance range of 2.0%–5.0% and also marks an improvement over a fall of 4.4% recorded in the previous quarter. Results also surpassed the Zacks Consensus Estimate of $3,519 million.

Organic revenue in the quarter grew 2.8% year over year, registering roughly 2.6% increase in North America and an increase of 3.3% in international revenues.

Illinois Tool Works reports its revenues under the following heads/segments. A brief discussion has been provided below:

Test & Measurement and Electronics revenues increased 1.2% year over year in the fourth quarter 2013; Automotive OEM revenues were up 12.4%; Polymers & Fluids decreased by 2.4%; Food Equipment went up 9.7%; Welding revenues increased by 1.7%; Construction Products revenue were down 0.1% and Specialty Products increased 9.1%.

In 2013, Illinois Tool Works' operating revenues came in at $14,135 million, up 1.9% year over year and above the Zacks Consensus Estimate of $14,098 million.

Margins

Cost of revenue in the fourth quarter went down 0.2% year over year and represented 61.1% of total revenue, down from 62.5% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenue, were recorded at 19.4%. Adjusted operating margin in the quarter was 17.7%, up 270 basis points year over year.

Balance Sheet

Exiting the fourth-quarter 2013, Illinois Tool Works’ cash and cash equivalents were $3,618 million, up compared with $3,018 million in the previous quarter. Long-term debt was down 26.7% sequentially, to $2,793 million.

Cash Flow

Illinois Tool Works generated $708 million net cash flow from its operating activities in the fourth quarter of 2013. This was an increase over $605 million generated in the year-ago quarter. The company used $111 million for additions to plant and equipments, an increase over $108 million spent in the year-ago quarter.

Free cash flow in the quarter was $597 million, way above $497 million generated in the year-ago quarter.

Outlook

For 2014, management of Illinois Tool Works anticipates total revenue to grow in a range of 2.0%–4.0%. Organic revenue is expected to grow within a 2.0%–3.0% range. Earnings per share are expected to range within $4.30–$4.50.

For the first quarter of 2014, earnings per share from continuing operations are expected to be within a range of 93 cents to $1.01 and total revenue growth is expected to vary within 3.0%–6.0%.

Illinois Tool Works is one of the leading manufacturers of industrial products and equipments. The company has a $34.8 billion market capitalization and carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry include Middleby Corp. (MIDD), Altra Industrial Motion Corp. (AIMC) and Barnes Group Inc. (B). All these companies hold a Zacks Rank #2 (Buy).

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