Illinois Tool Works Inc. (ITW) reported encouraging results for the third quarter of 2010. Earnings per share from continuing operations were 83 cents, up 38% compared with 60 cents in the comparable quarter of 2009. EPS in the quarter surpassed the Zacks Consensus Estimate of 82 cents by a penny and was toward the high-end of the company’s guidance range of 72–84 cents.
Net income from continuing operations soared 38.6% year over year to $419.3 million, compared with $302.4 million in the third quarter of 2009. Increase in net income was due primarily to higher organic growth in revenue and benefits derived from restructuring activities.
Revenue
Operating revenue in the third quarter increased 12.2% year over year to $4,018.5 million, compared with $3,580.4 million in the year-ago quarter and above the Zacks Consensus Estimate of $4,010.0 million. Growth in operating revenue symbolized continued improvement in end market demand. The year-over-year increase was at the high-end of the company’s projected growth range of 9%-13%.
Of the total revenue, base revenue in the quarter grew 11.2% year over year, registering a 11.5% increase in North American and a 10.8% hike in international revenues. Acquisitions added 3.6% while currency translation had a negative impact of 2.4% to the total revenue growth.
Revenue in the Power Systems and Electronics segment increased 23.7% year over year, with base revenue increase of 23.8%, due to strong demand for welding (especially in North America) and electronics businesses.
Revenue in the Industrial Packaging segment rose 16.4% year over year, with base revenue increase of 16.4%, due to growing demand for protective packaging products, steel strap and plastic strap.
Cost of goods sold increased 11.7% year over year and represented 64.3% of total revenue versus 64.7% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, declined to 18.4% in the quarter from 20.1% in the year-ago quarter due to benefits realized from the company’s restructuring activities in the past years.
Better end-market demands and benefits of restructuring activities fueled a 240 basis point increase in operating margin to 15.9% in the third quarter of 2010. Base businesses accounted for roughly a 160 basis point hike in margin and restructuring activities contributed 60 basis points.
Balance Sheet
Exiting the third quarter, Illinois Tool Works’ cash and cash equivalents increased 30.3% sequentially to approximately $1,649.1 million compared with $1,265.2 million in the second quarter of 2010. Long-term debt, net of current portion increased to $2,737.4 million versus $2,724.3 million in the second quarter of 2010.
Net cash flow from operating activities was $483.9 million, down from $569.2 million in the third quarter of 2009. Capital expenditure increased to $72.2 million versus $53.0 million in the year-ago quarter.
Lower operating cash flow and higher capital expenditures led to a 20.2% year-over-year decline in free cash flow (net cash flow from operating activities minus capital expenditure) which totaled $411.8 million, compared with $516.2 million in the third quarter of 2009.
The company repurchased approximately 8.1 million shares worth $350 million in the quarter.
Outlook
For the fourth quarter of fiscal 2010, Illinois Tool Works expects EPS from continuing operations to be in a range of 74-82 cents. The guidance is based on total revenue growth expectations in the range of 7%–9%.
For full-year 2010, the company expects EPS to be within $2.99-$3.07 range compared with the prior guidance range of $2.82-$3.08, reflecting an increase in the mid-point from $2.95 to $3.03. Revenue growth for the year is expected to be within 13%-14% versus the prior forecast of 11%-13%. The company expects improved contribution from acquisition activity in the quarters ahead.
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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