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Illinois Tool Works (ITW) Q3 Earnings & Revenues Top Estimates

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Illinois Tool Works Inc. (ITW - Free Report) reported better-than-expected third-quarter 2022 results. Its earnings surpassed estimates by 4.4%, while sales beat the same by 2.1%.

The industrial tool maker’s adjusted earnings (excluding a 13-cent impact of unfavorable foreign currency translation) in the quarter were $2.35, surpassing the Zacks Consensus Estimate of $2.25. Earnings increased 16.3% from the year-ago figure of $2.02.

Revenue Details

Illinois Tool generated revenues of $4,011 million in the reported quarter, reflecting growth of 12.8% from the year-ago figure. The top-line results benefited from a 16% increase in organic sales and a 3% contribution from the MTS acquisition. Foreign currency movements had an adverse impact of 6%.

Except for the Specialty Products segment, the increase in sales in other segments supported the quarterly sales rise of 12.8%.

The top line surpassed the Zacks Consensus Estimate of $3,930 million.

Illinois Tool reports revenues under the segments discussed below:

Test & Measurement and Electronics’ revenues in the third quarter increased 29% year over year to $715 million. Revenues from Automotive OEM (Original Equipment Manufacturer) increased 16% to $753 million. Food Equipment generated revenues of $633 million, increasing 16% year over year.

Welding revenues were $477 million, growing 12% year over year. Construction Products’ revenues were up 10% to $527 million. Revenues of $438 million from Specialty Products reflected a decrease of 5%. Polymers & Fluids’ revenues of $473 million grew 4% year over year.

Margin Profile

In the reported quarter, Illinois Tool’s cost of sales increased 13.1% year over year to $2,371 million. It represented 59.1% of the quarter’s revenues compared with 58.9% in the year-ago quarter. Selling, administrative, as well as research and development expenses expanded 7.4% to $624 million. The same represented 15.6% of third-quarter revenues compared with 16.3% in the year-ago quarter.

The operating margin was 24.5% in the quarter, up 70 basis points (bps) year over year. Enterprise initiatives contributed 110 bps to the operating margin, while price/cost had an adverse impact of 40 bps. Interest expenses in the quarter increased 6.1% year over year to $52 million. The effective tax rate in the quarter was 23.9%.

Balance Sheet and Cash Flow

At the time of exiting the third quarter, Illinois Tool had cash and cash equivalents of $774 million, down 49.3% from $1,527 million recorded at the end of the fourth quarter of 2021. Long-term debt decreased 14% to $5,940 million.

In the first nine months of 2022, Illinois Tool generated net cash of $1,537 million from operating activities, reflecting a decline of 13.8% from the year-ago period’s number. Capital spending on the purchase of plant and equipment was $256 million, up 18% year over year. Free cash flow was $1,281 million, reflecting a year-over-year decline of 18.2%.

Outlook

For 2022, Illinois Tool expects organic revenue growth of 11-12% compared with 7-10% projected earlier and a 9-10% rise in total revenues compared with the earlier projected 6-9%, from the respective year-ago actuals. GAAP EPS for the year is anticipated to be $9.45-$9.55 (updated for incremental foreign currency translation headwind and an estimated fourth quarter divestiture gain of $0.45), compared with $9.00-$9.10 expected earlier.

Foreign currency translation is expected to adversely impact sales by 5%, while the MTS acquisition is likely to boost the top line by 3%.

The operating margin is expected to be approximately 24%. Enterprise initiatives are likely to contribute 100 bps to the operating margin. However, dilution from price/costs and MTS buyouts is predicted to lower the margin by 100 bps, each.

The free cash flow conversion rate is expected to be 80% of net income. The tax rate (effective) is expected to be approximately 29%.

For the fourth quarter, the company anticipates organic growth of approximately 10%. EPS growth is anticipated to be approximately 40%. Operating margin is anticipated to improve more than 100 bps and price/cost is anticipated to be accretive to income and margin.

Zacks Rank & Stocks to Consider

ITW currently carries a Zacks Rank #3 (Hold). Some better-ranked companies from the Industrial Products sector are discussed below:

Enerpac Tool Group Corp. (EPAC - Free Report) delivered a four-quarter earnings surprise of 3.4%, on average. EPAC presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.

EPAC’s earnings estimates have increased 9.1% for fiscal 2023 (ending August 2023) in the past 60 days. The company’s shares have gained 26.3% in the past three months.

iRobot Corporation (IRBT - Free Report) presently has a Zacks Rank of 2 (Buy). IRBT’s earnings surprise in the last four quarters was 59.1%, on average.

In the past 60 days, iRobot’s earnings estimates have increased 0.1% for 2022. The stock has rallied 36.7% in the past three months.


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