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Illinois Tool Works Inc. (ITW - Analyst Report) reported earnings per share from continuing operations, adjusted for one-time items, of 99 cents in the third quarter of 2013, up 11.2% year over year from 89 cents reported in the year-ago quarter. The result, however, was 9.2% below the Zacks Consensus Estimate of $1.09.

Including discrete tax charge related to foreign earnings, GAAP earnings per share in the quarter came in at 90 cents, within Illinois Tool’s forecasted range of 84-92 cents.

Revenue

Illinois Tool reported operating revenues of $3,568 million, down 4.4% year over year and below the Zacks Consensus Estimate of $3,591 million. The poor results were due to the Decorative Surfaces divestiture, excluding which revenue grew 2.9% year over year.

Organic revenues in the quarter grew 0.4% year over year, registering roughly a 1.4% decline in North America and growth of 2.9% in international revenues.

Illinois Tool reports its revenues under the following heads/segments. A brief discussion has been provided below:

Test & Measurement and Electronics revenues declined 10.9% year over year; Automotive OEM revenues increased 13.2%; Polymers & Fluids decreased by 1.1%; Food Equipment went up 10.4%; Welding revenues decreased 1.0%; Construction Products revenue increased 1.7%; and Specialty Products increased 11.4%.  

Margins

Cost of revenue in the third quarter went down 6.2% year over year and represented 60.2% of total revenue; down from 61.3% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.9%. Adjusted operating margin in the quarter was 19.0%, up 220 basis points year over year.

Balance Sheet

Exiting the third quarter of 2013, Illinois Tool Works’ cash and cash equivalents were $3,018 million, up 9.0% from $2,768 million in the previous quarter. Long-term debt increased 1% sequentially to $3,808 million.
 
Cash Flow

Net cash flow from operating activities in the quarter was $811.0 million, up 27.7% from $635.0 million generated in the year-ago quarter. Illinois Tool Works’ spending on addition of plants and equipments were $79 million versus $90 million in the year-ago quarter. Free cash flow in the quarter was $732 million, way above $545.0 million generated in the year-ago quarter.

Outlook

For 2013, management of Illinois Tool Works anticipates total revenue to grow within the 1.0%-2.0% range. Earnings per share are expected to range within $3.56-$3.64 as against $3.50-$3.66 expected earlier.

For the fourth quarter 2013, earnings per share from continuing operations are expected to be within 85-93 cents range while total revenue growth is projected to vary within 2.0%-5.0%.

Illinois Tool Works is one of the leading manufacturers of industrial products and equipment. The company currently has a $34.7 billion market capitalization and carries a Zacks Rank #4 (Sell).

Other stocks to watch out for are Manitex International, Inc. (MNTX - Snapshot Report), with a Zacks Rank #1 (Strong Buy) while Colfax Corporation (CFX - Analyst Report) and Ingersoll-Rand Plc (IR - Analyst Report), both with a Zacks Rank #2 (Buy).

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