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Illinois Tool (ITW) Q1 Earnings Beat Estimates, View Weak

Zacks Equity Research

Illinois Tool Works Inc. ITW has delivered better-than-expected results for first-quarter 2020, with an earnings surprise of 3.5%. This was the seventh consecutive quarter of impressive results.

The industrial tool maker’s earnings in the reported quarter were $1.77 per share, surpassing the Zacks Consensus Estimate of $1.71. Also, the bottom line decreased 2.2% from the year-ago reported number of $1.81.

Revenue Details

Illinois Tool generated revenues of $3,228 million in the reported quarter, reflecting a decline of 9.1% from the year-ago figure. Top-line results were affected by a 1.5% impact of unfavorable foreign currency movement, 1% from divestitures/acquisitions, and a 6.6% drop in organic sales.

Also, the top line lagged the Zacks Consensus Estimate of $3,334 million by 3.2%.
 
Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the first quarter decreased 7.5% year over year to $485 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 13.7% to $696 million. Food Equipment generated revenues of $483 million, decreasing 6.8% year over year.

Welding revenues were $372 million, declining 12.8% year over year. Construction Products’ revenues were down 2.6% to $390 million. Further, revenues of $414 million from Specialty Products reflected a decline of 10.9%. Polymers & Fluids’ revenues of $393 million declined 5.5% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales declined 9.1% year over year to $1,871 million. Selling, administrative, and research and development expenses declined 8.3% year over year to $560 million. It represented 17.4% of the first quarter’s revenues.

Operating margin was flat at 23.6%. Enterprise initiatives contributed 120 bps to operating margin, while price/costs and others had positive impacts of 20 bps and 10 bps, respectively. However, volume leverage had a negative impact of 150 bps. Interest expenses in the quarter declined 19% year over year to $51 million.

Balance Sheet and Cash Flow

Exiting the first quarter, Illinois Tool had cash and cash equivalents of $1,430 million, down 27.8% from $1,981 million recorded at the end of the last reported quarter. Long-term debt decreased 0.8% sequentially to $7,690 million.

In the first quarter, the company generated net cash of $614 million from operating activities, reflecting a decline of 0.3% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $60 million, down 22.1% year over year. Free cash flow was $554 million, reflecting a year-over-year increase of 2.8%.

In the first quarter, the company’s dividend payments amounted to $1.07 per share.

Outlook

In the quarters ahead, Illinois Tool anticipates benefiting from its diversified businesses, solid product offerings and healthy liquidity position (including revolving credit facility, $1.4 billion in cash and cash equivalents, and minimal short-term debt).

Due to uncertainties related to the pandemic, the company has suspended its previously issued 2020 projections. Dividend payments remain a priority, while share buybacks have been halted temporarily.

For the second quarter, the company expects a sales decline of 30-40%, with Automotive OEM declining 60-70% year over year. Operating income will likely be $200-$400 million, while free cash flow will probably exceed $500 million.

Illinois Tool Works Inc. Price, Consensus and EPS Surprise

 

Illinois Tool Works Inc. Price, Consensus and EPS Surprise

Illinois Tool Works Inc. price-consensus-eps-surprise-chart | Illinois Tool Works Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $50.3 billion, Illinois Tool currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are Silgan Holdings Inc. SLGN, Superior Uniform Group, Inc. SGC and Graphic Packaging Holding Company GPK. While Silgan currently sports a Zacks Rank #1 (Strong Buy), both Superior Uniform and Graphic Packaging carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for Silgan and Graphic Packaging improved for the current year, while have been unchanged for Superior Uniform. Further, earnings surprise for the last reported quarter was 16.33% for Silgan Holdings, 57.14% for Superior Uniform and 24% for Graphic Packaging.

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