ITW's Q1 Earnings Beat Ests, Guidance Up

Industrial tool maker, Illinois Tool Works Inc. (ITW) reported better-than-expected bottom-line results for first-quarter 2014. Earnings per share from continuing operations, excluding one-time items, were $1.01, above the Zacks Consensus Estimate of 98 cents. Compared with the year-ago quarter, earnings per share grew 14.8%, while was at the top-end of the company’s guidance range of 93 cents to $1.01.

The earnings improvement was the result of accelerated share buybacks in the quarter (shares of common stock in the quarter decreased 6.6% year over year) as well as solid contribution from enterprise initiatives.

Revenue

Illinois Tool Works generated operating revenues of $3,569 million in first-quarter 2014, up 4.4% year over year. The year-over-year growth was within the company’s guidance range of 3−6%. Organic revenue in the quarter grew 3.3% year over year, registering roughly a 1.0% increase in North America and an increase of 6.3% in international revenues.

However, the top-line result lagged the Zacks Consensus Estimate of $3,574 million.

ITW reports its revenues under the following segments; a brief discussion has been provided below:

Test & Measurement and Electronics revenues decreased 0.1% year over year in first-quarter 2014; Automotive OEM (Original Equipment Manufacturer) revenues were up 13.4%; Polymers & Fluids recorded a 2.7% decline in revenues; Food Equipment revenues went up 9.4%; Welding revenues were down 1.8%; Construction Products revenues were up 1.7% and Specialty Products revenues increased 8.1%.

Margins

ITW's cost of revenue in first-quarter 2014 increased 3.8% year over year and represented 60.5% of total revenue, down from 60.8% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenue, were at 19.1%. Operating margin in the quarter was 18.7%, up 180 basis points (bps) year over year. Enterprise initiatives contributed nearly 120 bps to operating margin.

Balance Sheet

Exiting first-quarter 2014, Illinois Tool Works had cash and cash equivalents of $3,547 million, down 2.0% from $3,618 million in the previous quarter. Long-term debt increased 71.5% sequentially to $4,789 million.

Cash Flow

Net cash flow generation from operating activities in first-quarter 2014 decreased 14.2% sequentially to $314 million. Illinois Tool Works used $68 million for additions to plant and equipments, representing a decline from $89 million spent in the year-ago quarter.

Free cash flow in the quarter was $246 million as against $277 million recorded in the year-ago quarter.

Outlook

For 2014, Illinois Tool Works increased its total revenue growth guidance to a range of 3−4% from the 2−4% projected earlier.

Earnings per share are expected to be within the $4.45−$4.65 range, an increase from the previous guidance range of $4.30−$4.50 per share. The new mid-point of $4.55 represents a year-over-year increase of 25%.

For second-quarter 2014, earnings per share from continuing operations are expected to be within a range of $1.16−$1.24 and total revenue growth is expected to vary within the 3−5% range.

Illinois Tool Works has a $35.9 billion market capitalization and carries a Zacks Rank #2 (Buy). Other stocks worth considering in the industry include Kadant Inc. (KAI), Middleby Corp. (MIDD) and Colfax Corp. (CFX). While Kadant and Middleby hold a Zacks Rank #1 (Strong Buy), Colfax carries the same Zacks Rank as Illinois Tool.

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