Illinois Tool Works Inc. (ITW) reported encouraging results for the first quarter of fiscal 2010. EPS was 58 cents, compared to a loss of 2 cents during the first quarter of fiscal 2009. EPS was slightly above the Zacks Consensus Estimate of 56 cents per share. Net income was $294.3 million, up from a loss of $39.4 million in the year-ago quarter.

Increase in net income was due to an increase in revenue accompanied by a decrease in operating expense. Operating expense as a percentage of revenue decreased by 650 basis points.

Net operating revenues were $3,606.4 million, up 14.6% from $3,146.4 million in the same quarter in the previous year. Revenues in the Transportation segment grew 35.6%, while Power Systems and Electronics segment revenue rose 13.7%. Increase in Transportation revenue was driven by worldwide increase in auto builds. Significant improvements in the electronics-related businesses drove the latter.

During the third quarter of fiscal 2009, the company reported free operating cash flow of $218.7 million, down from $383.1 million in the same period of 2009. However, net debt decreased to $1,713.9 million from $1,809.8 million at the end of the previous quarter.

For the second quarter of fiscal 2010, the company expects EPS in the range of 74 cents to 86 cents and the revenue growth of 15% to 19%. For full-year 2010, Illinois Tool Works increased its EPS guidance from the range of $2.43 to $2.93 to the range of $2.72-$3.08. However, the company has reiterated its total revenue growth of 10% to 14%.

Illinois Tool is a multinational manufacturer of a diversified range of value-added and short lead-time industrial products and equipment. The company has grown substantially driven by its ability to develop new and improved products and through numerous acquisitions. However, competitive pressure and a huge exposure to foreign currency risk are a concern. Thus, we reiterate our Neutral recommendation on the stock.
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