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

Illinois Tool Works Inc. (NYSE: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%.

Outlook

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