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Illinois Tool Works (ITW) Q2 Earnings Beat, Raises '16 View

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Industrial tool maker Illinois Tool Works Inc. (ITW - Free Report) kept its earnings streak alive in the second quarter of 2016. The company’s earnings came in at $1.46 per share, above the Zacks Consensus Estimate of $1.40. Also, the bottom line exceeded the mid-point of the guidance range of $1.34−$1.44 by 7 cents.

Illinois Tool Works Inc. (ITW - Free Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

In addition, the company’s bottom line improved 12% from the year-ago figure of $1.30 on the back of a 2.7% reduction in the company’s share count due to its ongoing share buyback activity. Earnings were also boosted by its enterprise initiatives.

Regarding Illinois Tool Works’ top-line results, revenues totaled approximately $3.43 billion. The result surpassed the Zacks Consensus Estimate of $3.40 billion, declining roughly 0.1% year over year. The year-over-year decline was triggered by 1.3% negative foreign currency translation impact offsetting 1.2% growth in organic revenue. The organic revenue growth included roughly 1% adverse impacts of the company’s Product Line Simplification initiative.

Geographically, the company’s organic revenue inched up 0.4% in North America and increased 2.2% in international markets.

Segmental Details

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

Test & Measurement and Electronics revenues increased 2% year over year to $670 million, and revenues from Automotive OEM (Original Equipment Manufacturer) were up 3.5% to $670 million. Food Equipment generated revenues of $535 million, up 3.5% year over year.

Welding revenues came in at $375 million, down 12.2% year over year. Construction Products revenues were up 1.2% to $424 million, while revenues of $484 million from Specialty Products reflected a decline of 0.4%. Polymers & Fluids’s revenues of $443 million were down 0.8%.

Margins

Illinois Tool Works’ cost of sales declined 2.8% year over year, representing 57.3% of total revenue compared with 58.9% in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenue, came in at 18%.

Operating margin improved 180 basis points (bps) year over year to 23.1% driven by roughly 120 bps contributions from enterprise initiatives.  

Balance Sheet & Cash Flow

Exiting second-quarter 2016, Illinois Tool Works had cash and cash equivalents of approximately $2,355 million, down from $2,448 million in the previous quarter. The company’s long-term debt decreased 0.8% sequentially to $6,300 million.

In the quarter, Illinois Tool Works generated net cash of $535 million from its operating activities, up 19.4% year over year. Capital expenditure on purchase of plant and equipment totaled $64 million, resulting in free cash flow of $471 million.

During the quarter, Illinois Tool Works bought back shares worth $500 million, while paid dividends worth $198 million.

Update on Acquisition of ZF TRW’s EF&C Business

On Jul 1, 2016, Illinois Tool Works completed the acquisition of the Engineered Fasteners and Components business (EF&C) from ZF TRW for approximately $450 million.

During its second-quarter 2016 earnings release, Illinois Tool Works revealed that it anticipates improvement in margin of EF&C business from roughly 10% to 20% by the fifth year of the acquisition. Also, the acquired assets are anticipated to generate returns on invested capital (ROIC) of 16−19% by the seventh year.

For 2016, Illinois Tool Works anticipates generating revenue of $220−$240 million from these assets while it reduces the company’s operating margin and ROIC by 50 bps. Earnings impact is predicted to be nil, with accretion anticipated in 2017.

Outlook: For 2016, Illinois Tool Works increased its earnings guidance to $5.50−$5.70 per share from the previous projection of $5.40−$5.60. The revised forecast represents a 9% year-over-year increase.

Organic revenue growth is expected to be 1−2% versus 1−3% expected earlier given the difficult operating conditions in the Welding segment. Total revenue will likely total $13.7 billion. Operating margin is expected to exceed 22.5%, driven by 100 bps contribution from the company’s enterprise initiatives.

For second-quarter 2016, earnings per share are expected within $1.42−$1.52. Organic revenue is expected to be 1−3% while operating margin will be roughly 23%.

ILL TOOL WORKS Price, Consensus and EPS Surprise

ILL TOOL WORKS Price, Consensus and EPS Surprise | ILL TOOL WORKS Quote

Zacks Rank & Key Picks

With a market capitalization of nearly $40.6 billion, Illinois Tool Works presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the machinery industry include Nordson Corporation (NDSN - Free Report) , Ingersoll-Rand Plc (IR - Free Report) and Luxfer Holdings PLC (LXFR - Free Report) . While Nordson sports a Zacks Rank #1 (Strong Buy), both Ingersoll-Rand and Luxfer Holdings carry a Zacks Rank #2 (Buy).

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