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Illinois Tool (ITW) Q3 Earnings Top Estimates, Revenues Miss

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Illinois Tool (ITW) Q3 Earnings Top Estimates, Revenues Miss

Illinois Tool Works' (ITW) third-quarter 2018 earnings rise year over year backed by continued benefits from enterprise initiatives. However, revenues decline.

Illinois Tool Works Inc. ITW reported mixed results for third-quarter 2018, wherein earnings beat estimates but revenues missed.

This industrial tool maker’s earnings in the quarter were $1.90 per share, surpassing the Zacks Consensus Estimate of $1.89. Also, the bottom line increased 11.1% year over year.

The year-over-year improvement came on the back of continued benefits from enterprise initiatives.

Revenues

Illinois Tool Works generated revenues of $3,613 million in the reported quarter compared with $3,615 million a year ago. The decline was primarily due negative impact of foreign currency movements, partially offset by 2% organic gains.

Notably, the top line lagged the Zacks Consensus Estimate of $3,723 million.

Illinois Tool Works Inc. Price, Consensus and EPS Surprise

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

Illinois Tool Works reports its revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the third quarter increased 2.1% year over year to $536 million. Revenues from Automotive OEM (Original Equipment Manufacturer) fell 1.8% to $781 million. Food Equipment generated revenues of $567 million, increasing 3.3%.

Welding revenues were $414 million, surging 9.5% year over year. Construction Products’ revenues were down 2% to $431 million while revenues of $475 million from Specialty Products reflect a decline of 4.6%. Polymers & Fluids’ revenues of $415 million decreased 4.4%.

Margin Details

In the reported quarter, Illinois Tool Works’ cost of sales increased 0.2% year over year to $2,096 million. It represented 58% of the quarter’s revenues versus 57.9% in the year-ago quarter. Selling, administrative, and research and development expenses declined 1.9% to $581 million while came in at 16.1% of revenues versus 16.4% in the year-ago quarter.

Operating margin was 24.6%, an improvement of 30 bps, excluding the impact of 2017 legal settlement. Enterprise initiatives contributed 100 bps to operating margin.

Balance Sheet and Cash Flow

Exiting the third quarter, Illinois Tool Works had cash and cash equivalents of $1,589 million, down 2.4% from $1,628 million recorded at the end of the second quarter. Long-term debt decreased 0.2% sequentially to $6,054 million.

In the third quarter, the company generated net cash of $844 million from its operating activities, reflecting growth of 8.2% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $101 million, higher than $78 million used a year ago. Free cash flow was $743 million, reflecting year-over-year growth of 5.8%.

Notably, the expected tax rate was roughly 23.7%. During the third quarter, the company bought back $500 million of its common shares.

Outlook

For 2018, Illinois Tool Works revised its earnings guidance from $7.50-$7.70 to $7.55-$7.65 per share, reflecting growth of 15 cents at mid-point.

For the top line, the company expects a healthy business portfolio and a strengthening demand for products to support organic revenue growth of 2-3% (guidance narrowed). Total revenues are anticipated to increase 3-4% year over year.

For fourth-quarter 2018, earnings per share are expected to be $1.78-$1.88.

Zacks Rank & Key Picks

Illinois Tool Works currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space are Altra Industrial Motion Corp. AIMC, DXP Enterprises, Inc. DXPE and Cintas Corporation CTAS. While Altra Industrial Motion sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Cintas carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial Motion surpassed estimates thrice in the trailing four quarters with an average beat of 4.01%.

DXP Enterprises exceeded estimates twice in the trailing four quarters with an average beat of 101.32%.

Cintas surpassed estimates in each of the trailing four quarters with an average beat of 7.22%.

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