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Illinois Tool Works Inc. (ITW - Analyst Report) reported its financial results for the second quarter 2012 on July 24. The company’s earnings per share from continuing operations were $1.11, representing a 16% year-over-year increase. Results also surpassed the Zacks Consensus Estimate of $1.09 by two cents.

Revenue

Operating revenue in the second quarter increased marginally by 0.87% year over year to $4,655 million, but failed to surpass the Zacks Consensus Estimate of $4,861 million. The year-over-year improvement was far behind management’s projected growth range of 3.5%-6.0%.

Of the total revenue, base revenue in the quarter grew 2.3% year over year, registering a 5.3% increase in North American and 0.8% decline in international revenues. Acquisitions added 3.0% while currency translation negatively impacted revenue growth by 4.5%.  

On a segmental basis, Transportation revenue (19.2% of total revenue) grew 0.1% year over year; Power Systems & Electronics (17.4%) grew 7.7%; Industrial Packaging (13.5%) plummeted 5.1%; Food Equipment (10.2%) went down by 3.3% while Construction (10.5%) decreased 10.5%; Polymers & Fluids (7.2%) dipped by 0.9%; Decorative Surfaces (6.1%) marginally increased by 0.4% and All Other (16.2%) jumped 8.8%.     

Margins

Cost of goods sold fell 1.1% year over year in the quarter and represented 63.7% of total revenue; down from 64.9% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.2%. Operating margin in the quarter was 16.5%, up 110 basis points year over year.

Balance Sheet

Exiting the second quarter, Illinois Tool Works’ cash and cash equivalents increased 29.8% sequentially to approximately $1,692.0 million. Long-term debt, net of current portion decreased to $3,468.0 million from $3,521.0 million in the first quarter of 2012.

Cash Flow

Net cash flow from operating activities in the quarter was $509.0 million, up from $312.0 million in the year-ago quarter while capital expenditures increased 14.9% sequentially to $100.0 million. Free cash flow was approximately $409.0 million in the second quarter versus $225.0 million in the first quarter of 2012.

In the second quarter, the company distributed $172 million as dividends and repurchased shares worth $526 million. The company is still left with $2.9 billion in its share buyback program.

Outlook

For 2012, sluggish demand, higher negative currency translation impact and $100 million of restructuring charges triggered downward revision in management’s revenue growth estimate from the 5%-7% range earlier to the 1%-3% range currently.

Similarly, earnings per share guidance range were lowered from $4.14-$4.38 to $4.03-$4.19 per share range.

Earnings for the third quarter of 2012 are expected to be within the $1.03-$1.11 range based on total revenue growth assumption of (1%)-1%.

Illinois Tool Works is one of the leading manufacturers of industrial products and equipment. The company’s chief competitors include Cooper Industries plc , General Electric Co. (GE - Analyst Report) and Manitowoc Co. Inc. (MTW - Analyst Report).

We currently maintain a Neutral recommendation on the stock.

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