Industrial tool maker Illinois Tool Works Inc. (ITW - Analyst Report) reported impressive results for second-quarter 2015. The company’s earnings came in at $1.30 per share, surpassing the Zacks Consensus Estimate of $1.28 as well as the year-ago tally of $1.21.

Also, the bottom line scaled the higher end of Illinois Tool Works’ projected range of $1.22−$1.30 per share. The improvement in earnings was driven by a 9.6% fall in share count due to ongoing share buyback activity and contributions from enterprise initiatives.

As disclosed, Illinois Tool Works recorded roughly 12 cents per share of adverse impact from foreign currency translation. Excluding this, the company’s earnings growth rate would have been 17%.

Illinois Tool Works Inc. - Earnings Surprise | FindTheBest

Revenue: Illinois Tool Works generated operating revenues of $3,434 million, down 7.7% year over year. The top-line fall came within the company’s expectation of 7−8% decline, due primarily to weakness in end-market performance, ill effect of product-line simplification activities and impact of unfavorable foreign currency movements.

Organic revenues nudged up slightly year over year, registering positive growth in North American and International operations. This was, however, offset by a decline of 1% led by activities associated with product-line simplification.

Moreover, revenues came below the Zacks Consensus Estimate of $3,454 million.

Illinois Tool Works reports its revenues under the segments discussed briefly below:

Test & Measurement and Electronics revenues declined 11% year over year to $496 million, while revenues from Automotive OEM (Original Equipment Manufacturer) segment were down 3.4% to $649 million. Food Equipmentsegment generated revenues of $518 million, decreasing 3.6% year over year.

Welding revenues came in at $426 million, down 9.4% year over year.Construction Products revenues were down 5.7% to $419 million, while revenues of $486 million from Specialty Products reflected a decline of 9.9%. Polymers & Fluids segment’s revenues of $446 million were down 11.9%.

Margins: Illinois Tool Works’ cost of revenues decreased 8.8% year over year, representing 58.9% of total revenue versus 59.7% reported in the year-ago quarter. Selling, administrative, and research and development expenses, as a percentage of total revenue, came at 18.1%.

Operating margin improved 80 basis points (bps) year over year to 21.3%. Enterprise initiatives contributed nearly 100 bps to the operating margin.  

Balance Sheet: Exiting second-quarter 2015, Illinois Tool Works’ cash position remained solid, with cash and cash equivalents of $2,858 million, up roughly 7% from $2,672 million in the previous quarter.

However, the company’s long-term debt increased to $6,994 million versus $5,845 million at the prior quarter-end.  

Cash Flow: Illinois Tool Works’ cash flow generation from operating activities slipped 21.8% year over year to $448 million. Lower cash flow impact was partially offset by a 17.9% fall in capital used for purchasing plant and equipment.

Free cash flow was $384 million against $495 million recorded in the comparable year-ago quarter.

Outlook: For 2015, Illinois Tool Works increased its earnings guidance to a range of $5.07–$5.23 per share from the previous projection of $5.00–$5.20 per share. The new guidance reflects year-over-year growth of 10% at the mid-point of $5.15, including a negative 8% impact related to foreign currency translation.   

Organic revenue growth is predicted to be roughly 1%. Operating margin is likely to exceed 21%, driven by positives of enterprise initiatives.
 
For third-quarter 2015, earnings per share are expected within $1.32−$1.40. Organic revenue is expected to be flat to up 1%. Operating margin will be roughly 22%.

With a market capitalization of nearly $33.9 billion, Illinois Tool Works presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the machinery industry include Middleby Corp. (MIDD - Analyst Report), Nordson Corp. (NDSN - Snapshot Report) and IDEX Corp. (IEX - Analyst Report). While Middleby Corp. sports a Zacks Rank #1 (Strong Buy), both Nordson and IDEX carry a Zacks Rank #2 (Buy).