Illinois Tool Works Inc. ITW delivered better-than-expected results for fourth-quarter 2019, with a positive earnings surprise of 1.62%. This was the sixth consecutive quarter of impressive results.
The industrial tool maker’s adjusted earnings in the reported quarter were $1.88 per share, above the Zacks Consensus Estimate of $1.85. The results excluded 11-cents gain from divestitures.
Also, the bottom line increased 2.7% year over year, driven by margin improvement and a 2.6% fall in share count. However, forex woes and higher restructuring charges had an adverse impact of 6 cents.
For 2019, the company’s adjusted earnings (excluding divestitures gains of 9 cents) were $7.65 per share, increasing 0.7% from the year-ago figure. Also, the results surpassed the Zacks Consensus Estimate of $7.61.
Illinois Tool generated revenues of $3,469 million in the reported quarter, reflecting a decline of 3.1% from the year-ago figure. Top-line results were affected by a 1% impact of unfavorable foreign currency movement, 0.5% from divestitures, and a 1.6% drop in organic sales.
Notably, Product Line Simplification (“PLS”) initiatives had an adverse 0.6% impact on organic sales, and General Motors Company GM strike had a negative impact of 0.5%.
However, the top line surpassed the Zacks Consensus Estimate of $3,447 million by 0.6%.
Illinois Tool reports revenues under the segments discussed below:
Test & Measurement and Electronics’ revenues in the fourth quarter increased 2.6% year over year to $552 million. Revenues from Automotive OEM declined 6.7% to $725 million. Food Equipment generated revenues of $571 million, increasing 0.7% year over year.
Welding revenues were $387 million, declining 6.5% year over year. Construction Products’ revenues were down 3.3% to $384 million. Further, revenues of $446 million from Specialty Products reflect a decline of 4.6%. Polymers & Fluids’ revenues of $408 million declined 3.3% year over year.
For 2019, the company’s revenues were $14.1 billion, reflecting a 4.5% decline from the previous year.
In the reported quarter, Illinois Tool’s cost of sales declined 3.5% year over year to $2,022 million. It represented 58.3% of the quarter’s revenues versus 58.6% in the year-ago quarter. Selling, administrative, and research and development expenses grew 1.4% year over year to $586 million. It represented 16.9% of the fourth quarter’s revenues.
Excluding restructuring charges, operating margin was 24.1%, up 10 basis points (bps) year over year. Enterprise initiatives contributed 130 bps to operating margin and price/costs had a positive impact of 30 bps. Interest expenses in the quarter declined 19% year over year to $51 million.
Balance Sheet and Cash Flow
Exiting the fourth quarter, Illinois Tool had cash and cash equivalents of $1,981 million, up 8.5% from $1,825 million recorded at the end of the last reported quarter. Long-term debt increased 1.5% sequentially to $7,754 million.
In the fourth quarter, the company generated net cash of $774 million from operating activities, reflecting a decline of 4.3% from the year-ago quarter. Capital spending on the purchase of plant and equipment was $82 million, same as the previous-year quarter. Free cash flow was $692 million, reflecting a year-over-year decrease of 4.8%.
In the fourth quarter of 2019, the company bought back $375 million worth of common shares. Moreover, its rewards to shareholders amounted to $2.8 billion in 2019, including share buybacks of $1.5 billion.
For 2020, Illinois Tool projects GAAP earnings of $7.65-$8.05 per share.
The company anticipates organic revenues to be flat to up 2% in the year. Forex woes will likely have a 1% adverse impact on revenue growth and divestitures will have similar impacts too. PLS initiatives will likely have an adverse impact of 0.5%.
Total revenues will likely be $13.8-14.1 billion, suggesting a decline of 2% to flat from $14.1 billion reported in 2019.
The company expects operating margin of 24.5-25%. The results will likely gain from roughly 100 bps of contributions from enterprise initiatives. Effective tax rate will likely be 23.5-24.5%.
Free cash flow will likely be more than 100% of net income. The company is likely to buy back shares worth $2 billion in the year.
Illinois Tool Works Inc. Price, Consensus and EPS Surprise