Illinois Tool Works Inc. (ITW) reported its financial results for the third quarter of 2011 on October 25. Earnings per share from continuing operations were $1.00, up 25.0% year over year. The results were above the Zacks Consensus Estimate of 98 cents and a cent above the mid-point of management’s guidance range of $0.95-$1.03.
The reported quarter’s earnings excluded 4 cents of income from discontinued operations, including which earnings came in at roughly $1.04 per share.
Revenue
Operating revenue in the third quarter increased 16.2% year over year to $4,580.5 million, compared with $3,941.1 million in the year-ago quarter. The results also surpassed the Zacks Consensus Estimate of $4,556 million. The year-over-year increase in operating revenue symbolized continued improvement in end market demand. The year-over-year improvement was roughly in line with management's projected growth range of 15%-18%.
Of the total revenue, base revenue in the quarter grew 6.2% year over year, registering a 7.8% increase in North American and a 4.2% hike in international revenues. Acquisitions added 5.3% while currency translation contributed 4.7% to the total revenue growth.
Revenue in the Power Systems and Electronics segment increased 21.2% year over year to $750.5 million in the quarter, with base revenue increase of 11.7%, due to strong performance in the wielding and consumable business. Revenue in the Transportation segment rose 25.8% year over year to $790.6 million with base revenue increase of 9.5%.
Industrial Packaging soared 15.5% to $664.3 million while Food Equipment rose 4.9% to $511.5 million. Construction Products revenue increased 12.7% to $513.8 million; Polymers & Fluids revenue was $362.4 million, up 30.5% year over year; Decorative Surfaces revenue increased 12.7% to $283.2 million; and revenue from All Other sources increased 8.5% to $725.7 million. Intercompany revenue in the quarter was ($21.4) million.
Margins
Cost of goods sold increased 16.2% year over year and represented 64.7% of total revenue; in line with the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, stood at 18.3%. Operating margin in the quarter was 15.6%, down 10 basis points year over year.
Balance Sheet
Exiting the third quarter, Illinois Tool Works’ cash and cash equivalents increased 7.2% sequentially to approximately $1,318.9 million versus $1,230.7 million in the previous quarter. Long-term debt, net of current portion increased to $3,522.1 million from $2,622.8 million in the second quarter of 2011.
Cash Flow
Net cash flow from operating activities was $787.2 million, up from $5234.0 million in the year-ago quarter. Capital expenditure increased to $83.0 million versus $76.3 million in the year-ago quarter. Free cash flow was approximately $704.2 million versus $447.6 million in the third quarter of 2010.
During the quarter, the company paid dividends totaling $167 million, made acquisitions worth $451 million and repurchased roughly $400 million worth shares.
Outlook
Management expects no currency translation impact in the fourth quarter 2011 and lower European organic revenue as well as higher restructuring costs. EPS from continuing operations in the quarter is expected to be within the $0.86-$0.94 range, assuming revenue growth in the range of 9.5%-12.5%.
For full-year 2011, management expects earnings in the range of $4.04-$4.12 based on total revenue growth assumption of 15.1%-15.9%. The full earnings forecast includes a 33 cent benefit related to the settlement of an Australian tax case in the first quarter of 2011. Excluding the tax gain, the mid point of the earnings range would be $3.75.
Illinois Tool Works, operating through 800 business units in 57 countries, 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), and Manitowoc Co. Inc. (MTW).
We currently maintain a Neutral recommendation on the stock.
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