In common with its peer 3M Company (NYSE:MMM), diversified industrial Illinois Tool Works (NYSE:ITW) reported a solid set of earnings that helped reassure investors who were fearful of an industrial recession. Both companies have been busy streamlining their businesses and managing to squeeze every bit of margin expansion possible from difficult end markets. Let's take a closer look at the earnings trends from Illinois Tool Works' fourth quarter.
The raw numbers
Reported revenue fell 6.5% in the quarter, but the company has been jettisoning underperforming businesses, so it was no surprise to see organic revenue only decline 0.6%. Meanwhile, operating margin expanded to 20.7% from 19.6%, helping operating income to decline by just 1%, to $679 million.
The company reduced its full-year 2015 earnings guidance for three quarters in a row; therefore, it was a relief to see full-year EPS of $5.13, at the top end of guidance for $5.05-$5.15. Moreover, management reaffirmed its expectations for full-year 2016 for EPS of $5.35-$5.55, and organic revenue growth of 1% to 3%.
Similar to 3M Company's report
The comparison with 3M Company is noticeable in two regards:
- Both companies reported relative outperformance in Europe.
- In line with trends in the industrial sector, both companies reported better petrformance from consumer-facing businesses than from industrial-facing businesses.
The following table highlights geographic performance in the fourth quarter. As you can clearly see, this was Europe's quarter to outperform.
ITW Organic Revenue Growth
3M Organic Local Currency Sales Growth
As part of its earnings presentation, Illinois Tool Works' management outlined the outperformance of its consumer-facing businesses. For example, in the fourth quarter, consumer-facing businesses generated 2% and 4.6% organic revenue growth in its North America and International businesses, respectively, whereas industrial-facing businesses saw declines of 5.6% and 5.7%, respectively, in the same regions. For the record, management defines 60% of its total revenue as consumer-facing.
Similarly, the only segments in which 3M Company generated organic local-currency sales growth were in consumer and healthcare. 3M's industrial, safety and graphics, and electronics and energy segments all reported declines in the fourth quarter.
It's a good idea to break out Illinois Tool Works' segmental performance. As you can see below, it's the industrial-facing and cyclical businesses, like welding, polymers and fluids, and test and measurement/electronics, that are suffering.
Ready to grow?
Management also updated investors on its five-year enterprise strategy plan -- 2015 represents the third year -- and gave hope to the idea that its own initiatives could yield more growth.
As part of the earnings presentation, management outlined that it still had potential to grow organically because not all of its product lines have been prepared for growth as part of the plan yet.
- 45% of revenue defined as ready to grow and growing
- 15% ready to grow and not growing
- 40% preparing for growth
All told, it was a decent quarter of margin expansion in the face of deteriorating industrial markets. If the economy turns around, then Illinois Tool Works could find itself with higher margins and the potential to outgrow its peers.
For now, and in common with 3M Company, the name of the game is implementation of ongoing self-help initiatives in order to expand margin and squeeze every ounce of growth out of its consumer-facing businesses. Meanwhile, the industrial sector waits for a recovery in U.S. industrial production.