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Illinois Tool (ITW) Q3 Earnings Beat Estimates, Revenues Lag (Revised)

Zacks Equity Research

Illinois Tool Works Inc. ITW has delivered better-than-expected results for third-quarter 2019, with a positive earnings surprise of 5.2%. This was the fifth consecutive quarter of impressive results.

The industrial tool maker’s earnings in the reported quarter were $2.04 per share, surpassing the Zacks Consensus Estimate of $1.94. On a year-over-year basis, the bottom line grew 7.4% from the year-ago quarter figure of $1.90, driven by margin improvement and a 3.4% fall in share count.

Notably, forex woes adversely impacted earnings by 5 cents per share.

Revenues Decline Y/Y

Illinois Tool generated revenues of $3,479 million in the reported quarter, reflecting a decline of 3.7% from the year-ago figure. Top-line results were affected by a 1.8% impact of unfavorable foreign currency movement, 0.2% owing to acquisitions/divestitures, and 1.7% drop in organic sales (or declined 3.2% excluding the impact of gains from extra business days in the quarter). Product Line Simplification (“PLS”) initiatives had adverse 0.6% impact on organic sales.

Further, the top line lagged the Zacks Consensus Estimate of $3,523 million by 1.2%.
Illinois Tool reports revenues under the segments discussed below:

Test & Measurement, and Electronics’ revenues in the third quarter declined 4.7% year over year to $512 million. Revenues from Automotive OEM (Original Equipment Manufacturer) declined 4.7% to $744 million. Food Equipment generated revenues of $551 million, declining 2.7% year over year.

Welding revenues were $402 million, declining 3% year over year. Construction Products’ revenues were down 3.6% to $416 million, while revenues of $441 million from Specialty Products reflect a decline of 7.1%. Polymers & Fluids’ revenues of $418 million grew 0.8% year over year.

Operating Margin Improves

In the reported quarter, Illinois Tool’s cost of sales declined 4.2% year over year to $2,007 million. It represented 57.7% of the quarter’s revenues versus 58% in the year-ago quarter. Selling, administrative, and research and development expenses dipped 2.6% year over year to $566 million, while were 16.3% of the third quarter’s revenues.

Operating margin was 25%, rising 40 basis points (bps) year over year. Enterprise initiatives contributed 120 bps to operating margin and price/costs had a positive impact of 20 bps. Interest expenses in the quarter declined 18.8% year over year to $52 million.

Balance Sheet and Cash Flow

Exiting the third quarter, Illinois Tool had cash and cash equivalents of $1,825 million, up 8.8% from $1,677 million recorded at the end of the last reported quarter. Long-term debt declined 2.1% sequentially to $7,643 million.

In the third quarter, the company generated net cash of $920 million from operating activities, reflecting growth of 9% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $90 million, lower than $101 million used in the year-ago quarter. Free cash flow was $830 million, reflecting year-over-year growth of 11.7%.

In the quarter, the company bought back $375 million worth of common shares, while increased quarterly dividend rate by 7%.


For 2019, Illinois Tool maintained its GAAP earnings guidance at $7.55-$7.85 per share versus $7.60 recorded in 2018. The mid-point of the projection is $7.70, including the adverse impact of 30 cents (versus the previously stated 25 cents) from higher restructuring and forex-related headwinds.

The company anticipates organic revenue decline of 1-3%. Adverse impact of 70 bps (versus previously mentioned of 80 bps) is expected from PLS activities. Total revenues will likely be $14-14.2 billion, down from the previously mentioned $14.3-$14.5 billion.

The company expects operating margin (excluding restructuring activities) of roughly 24.5%. The results will likely gain from more than 100 bps of contributions from enterprise initiatives, while price/costs will have positive impacts.

Free cash flow will likely be more than 100% of net income. The company is likely to buy back shares worth $1.5 billion in the year.

Illinois Tool Works Inc. Price, Consensus and EPS Surprise

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 approximately $52.3 billion, Illinois Tool currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are Brady Corporation BRC, Dover Corporation DOV and Lakeland Industries, Inc LAKE. All these stocks carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, average earnings surprise for the last four quarters was 9.68% for Brady, 6.70% for Dover and 325.89% for Lakeland Industries.

(We are reissuing this article to correct a mistake. The original article, issued on Oct 25, 2019, should no longer be relied upon.)

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