ITW 3Q EPS Beats, Revenue Falls

Illinois Tool Works Inc. (ITW - Analyst Report) reported its financial results for the third quarter 2012 on October 23. The company’s earnings per share from continuing operations, adjusted for divestment impact, were $1.09. Results came to 3 cents above the Zacks Consensus Estimate of $1.06 and within management’s guidance range of $1.03-$1.11.

EPS including the divestment impact of 3 cents was $1.12, representing a 12% year-over-year increase.

Revenue

Operating revenue in the third quarter decreased 1.7% year over year to $4,501 million and also failed to surpass the Zacks Consensus Estimate of $4,571 million. The year-over-year decline was greater than a 1% decline to 1% growth expectation of management.

Of the total revenue, base revenue in the quarter grew 0.9% year over year, registering a 3.9% increase in North American and 2.7% decline in international revenues. Acquisitions added 1.4% while currency translation negatively impacted revenue growth by 4.1%.

On a segmental basis, Transportation revenue (19.1% of total revenue) declined 2.2% year over year; Power Systems & Electronics (18.1%) grew 4.6%; Industrial Packaging (13.3%) plummeted 4.6%; Food Equipment (10.9%) went down by 4.0% while Construction (10.6%) decreased 7.2%; Polymers & Fluids (6.8%) dived south by 7.3%; Decorative Surfaces (5.9%) decreased by 5.7% and All Other (15.6%) jumped 4.1%.

Margins

Cost of goods sold plummeted 3.6% year over year in the quarter and represented 63.4% of total revenue; down from 64.7% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.0%. Operating margin in the quarter was 17.0%, up 140 basis points year over year.

Balance Sheet

Exiting the third quarter, Illinois Tool Works’ cash and cash equivalents increased 21.4% sequentially to approximately $2,054.0 million. Long-term debt, net of current portion also registered a sequential increase from $3,468.0 million in the previous quarter to $4,572 million in the third quarter 2012.

Cash Flow

Net cash flow from operating activities in the quarter was $635.0 million, down from $787.0 million in the year-ago quarter while capital expenditure increased 8.4% to $90.0 million. Free cash flow was approximately $545.0 million in the third quarter versus $704.0 million in the comparable quarter last year.

In the third quarter, the company distributed $169 million as dividends and repurchased shares worth $416 million.

Outlook

For the fourth quarter 2012, management anticipates a weak international market with currency translation still playing a negative role. Hence, total revenue growth range for the full year was revised to a 0%-1% growth as against 1%-3% expected earlier. Earnings per share for the full year is expected to range within the band of $4.06 to $4.14 versus $4.03-$4.19 projected earlier.

Revenue growth in the fourth quarter is expected to be within (1%)-(4%) and earnings per share to be roughly in the range of 86-94 cents .

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

We currently maintain a Neutral recommendation on the stock.