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Illinois Tool (ITW) Beats on Q4 Earnings, Lowers Sales View

Zacks Equity Research

Illinois Tool Works Inc. ITW has delivered better-than-expected results for fourth-quarter 2018, delivering positive earnings surprise of 0.5%.

This industrial tool maker’s earnings in the reported quarter were $1.83 per share, surpassing the Zacks Consensus Estimate of $1.82. Also, the quarterly results increased 7.6% from the year-ago tally of $1.70. Notably, fourth-quarter 2017 excludes the impact of $1.92 per share of tax charge.

The year-over-year improvement came on the back of benefits from enterprise initiatives and 3.1% fall in the company’s share count, partially offset by 4 cents per share adverse impact of forex woes.

For 2018, the company’s earnings were $7.60 per share, reflecting growth of 15% from the year-ago tally of $6.59. Notably, fall in auto builds in China, North America and Europe, as well as spike in raw material costs, played spoilsport during the year. Also, the bottom line surpassed the Zacks Consensus Estimate of $7.59.

Revenues Decline Y/Y

Illinois Tool Works generated revenues of $3,580 million in the reported quarter, reflecting decline of 1.4% from the year-ago tally. However, the top line lagged the Zacks Consensus Estimate of $3.62 billion.

Top-line results were adversely impacted by 2.2% from unfavorable movements in foreign curries and 0.1% decline from acquisitions/divestitures, partially offset by 0.9% gain in organic sales.

Notably, organic sales in North America expanded 4% and International sales declined 2%. Product Line Simplification (“PLS”) initiatives had adverse 0.9% impact on organic sales.

Illinois Tool Works reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the fourth quarter decreased 1.3% year over year to $538 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 6.1% to $777 million. Food Equipment generated revenues of $567 million, increasing 3.5% year over year.

Welding revenues were $414 million, increasing 6.7% year over year. Construction Products’ revenues were down 3.8% to $397 million while revenues of $469 million from Specialty Products reflect decline of 3.6%. Polymers & Fluids’ revenues of $422 million decreased 0.9% year over year.

For 2018, the company’s revenues were $14,768 million, reflecting growth of 3.2% from the previous year. However, the top line lagged the Zacks Consensus Estimate of $14.79 billion.

Margin Improves

In the reported quarter, Illinois Tool Works’ cost of sales decreased 1.3% year over year to $2,096 million. It represented 58.5% of the quarter’s revenues versus 58.5% in the year-ago quarter. Selling, administrative, and research and development expenses decreased 5.1% year over year to $578 million while came in at 16.1% of fourth-quarter revenues versus 16.8% in the year-ago quarter.

Operating margin was 24%, increasing 70 basis points (bps) year over year or 50 bps on an organic basis.

Enterprise initiatives contributed 110 bps to operating margin, offsetting a 40-bps adverse impact of unfavorable price/costs.

Adjusted tax rate in 2018 was 24.9% versus 28.3% in 2017.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Illinois Tool Works had cash and cash equivalents of $1,504 million, down 5.3% from $1,589 million recorded at the end of the last reported quarter. Long-term debt decreased 0.4% sequentially to $6,029 million.

In the fourth quarter, the company generated net cash of $809 million from operating activities, reflecting growth of 16.4% over the year-ago quarter. Capital spending on the purchase of plant and equipment was $82 million, higher than $78 million used in the year-ago quarter. Free cash flow was $727 million, reflecting year-over-year growth of 17.8%.

During the year, the company bought back $2 billion worth of common shares. Also, quarterly dividend rate was increased 28% in August.

Outlook

For 2019, Illinois Tool Works maintained the earnings guidance of $7.90-$8.20 per share, reflecting growth of 6% at the mid-point. The revision included 20 cents of adverse impact of foreign currency translation.

The company anticipates organic revenue growth of 1-3%, including adverse impact of 80 bps from PLS activities. The organic sales guidance was lowered from 2-4% growth mentioned earlier. Total revenues will likely be $14.8-$15 billion, down from the previous projection of $14.9-$15.1 billion.

The company expects operating margin to increase roughly 100 bps year over year. Enterprise initiatives are predicted to contribute roughly 100 bps to the operating margin.

The expected tax rate is roughly 24.5-25.5%. Free cash flow will likely be more than 100% of net income. Share buybacks are anticipated to be roughly $1.5 billion in the year.

For first-quarter 2019, earnings are expected to be $1.73-$1.83 per share, including 7 cents of adverse impact of forex woes, 7 cents from restructuring activities and 5 cents from tax rates.

Illinois Tool Works Inc. Price, Consensus and EPS Surprise

Illinois Tool Works Inc. Price, Consensus and EPS Surprise | Illinois Tool Works Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $45 billion, Illinois Tool Works currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Twin Disc, Inc. TWIN and Colfax Corp. CFX. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), Twin Disc and Colfax carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for DXP Enterprises and Colfax for 2019, and that for Twin Disc for fiscal 2019 (ending June 2019) have improved over the past 60 days. Positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 220.64% for Twin Disc and 8.88% for Colfax.

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