Illinois Tool Fails to Impress Despite Solid Work  

It appears that industrial conglomerate Illinois Tool Works' (NYSE: ITW  ) management is a little shaky about future demand. It's no wonder that the stock tanked 8% on the day it released earnings, despite the company's second-quarter top line growth of 17.5% year over year.

What should investors make of a company that misses its own internal estimates and softens full-year earnings guidance? Let's take a closer look at the numbers.

The numbers
Acquisitions played a role in the company's revenue growth. Organic revenue rose 6.3%, while acquisitions added 4.8%, and currency effects tacked on 6.3% to the top line. Though this is theoretically good, organic growth slowed considerably from its 11.7% pace in the first quarter.

Strong growth in North American and other global markets fueled the top line, with Power and Electronics segment organic revenue jumping 11.9% and industrial packaging seeing a 9.6% rise.

Across the industry, higher demand globally has propelled sales for most electrical businesses. Eaton's (NYSE: ETN  ) second-quarter sales grew 16% to 18% in its electrical segments, while Cooper Industries' (NYSE: CBE  ) electrical group's second-quarter revenues rose by 10.8%.

The higher top line boosted Illinois Tool's income from continuing operations, which went up by 21% from the year-ago period to $483.5 million. As a result, EPS from continuing operations rose to $0.96, from $0.79 in the year-ago quarter.

Financials
While Illinois Tool Works has seen inventory has risen over the past few quarters, its sales have also gone up simultaneously -- albeit not at the same pace. Fortunately, the inventory turnover ratio still looks decent at 6.4.

ITW's total debt to equity ratio is fairly comfortable at 39.1%. The company currently pushes a high interest coverage ratio of 15.7, signifying the fact that there's plenty of liquidity to service near-term debt obligations. Free operating cash flow stands at $225 million, down from $269 million a year ago, and total cash and equivalents stands at $1.23 billion, up from $1.19 billion six months ago.

To make use of cash, Illinois Tool repurchased shares worth $550 million in the latest quarter. It has also recently authorized a buyback of up to $4 billion. Along with this, the company is continuing with acquisitions, acquiring seven companies in the second quarter alone. In July, it acquired thermal processing equipment company Despatch as well as cleaning solutions manufacturer Teknek.

At the same time, ITW has agreed to sell its finishing businesses to Graco (NYSE: GGG  ) for $650 million in cash, cash which it will utilize for its share repurchase program.

The Foolish bottom line
Illinois Tool Works has lowered its third-quarter and full-year outlook owing to an expected weakness in demand. While its tepid outlook may make an investor cautious, the company's diversified nature looks interesting. Further, its growth strategies and a decent financial health give us reason to keep an eye on the stock in the long run.

Add Illinois Tool Works to your watchlist to see what happens next for the company.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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