Illinois Tool Works Inc. (ITW) reported its financial results for the second quarter of 2011 on July 26. Earnings per share from continuing operations were 96 cents, up 21.5% year over year. The results, however, were below the Zacks Consensus Estimate of $1.02 and toward the lower-end of management’s guidance range of $0.95-$1.01.
The reported quarter's earnings excluded 3 cents of income from discontinued operations, including which earnings came in for roughly 99 cents.
Revenue
Operating revenue in the second quarter increased 17.5% year over year to $4,614.9 million, compared with $3,928.1 million in the year-ago quarter. The results lagged behind the Zacks Consensus Estimate of $4,667 million.
The year-over-year increase in operating revenue symbolized continued improvement in end market demand. The year-over-year improvement was toward the lower-end of the company’s projected growth range of 17%-20%.
Of the total revenue, base revenue in the quarter grew 6.3% year over year, registering a 7.4% increase in North American and a 5.1% hike in international revenues. Acquisitions added 4.8% while currency translation contributed 6.3% to the total revenue growth.
Revenue in the Power Systems and Electronics segment increased 18.8% year over year in the quarter, with base revenue increase of 11.9%, due to strong performance in the wielding business. Revenue in the Industrial Packaging segment rose 20.9% year over year with base revenue increase of 9.6%.
Margins
Cost of goods sold increased 19.2% year over year and represented 64.9% of total revenue versus 64.0% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, declined to 18.3% in the quarter from 18.7% in the year-ago quarter due to benefits realized from the company’s restructuring activities in the past years. Operating margin fell from 15.9% in the year-ago quarter to 15.4% in the second quarter 2011.
Balance Sheet
Exiting the second quarter, Illinois Tool Works’ cash and cash equivalents increased 13.5% sequentially to approximately $1,230.7 million versus $1,084.5 million in the first quarter of 2010. Long-term debt, net of current portion increased to $2,622.8 million from $2,597.3 million in the previous quarter.
Cash Flow
Net cash flow from operating activities was $312.6 million, down from $333.4 million in the year-ago quarter. Capital expenditure increased to $87.6 million versus $64.1 million in the year-ago quarter. Lower operating cash flow and higher capital expenditures led to free cash flow of approximately $225.0 million versus $269.3 million in the second quarter of 2010.
A day earlier to the earnings release, Illinois Tool announced the acquisition of Despatch Industries; terms of the transaction were undisclosed. The latter is a leading provider of thermal processing equipment for the solar, carbon fiber and other thermal technology markets.
Outlook
For the third quarter of fiscal 2011, Illinois Tool Works expects EPS from continuing operations to be in a range of $0.95-$1.03 based on total revenue growth expectations in the range of 15%–18%.
For full-year 2011, management expects earnings in the range of $4.05-$4.21 based on total revenue growth assumption of 16%-18%. The full earnings forecasts include 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 $3.80, representing a year -over-year increase of 32%.
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).
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