ITW Reports Fourth Quarter and Full Year 2023 Results

Fourth Quarter 2023 Highlights

  • Revenue of $4.0 billion, essentially flat
  • Operating margin of 24.8% as enterprise initiatives contributed 150 bps
  • GAAP EPS of $2.38 included $(0.04) impact from the devaluation of Argentina’s currency

2023 Highlights

  • Revenue of $16.1 billion, an increase of 1% with organic growth of 2%
  • Operating income of $4 billion, an increase of 7%
  • Operating margin of 25.1%, an increase of 130 bps
  • GAAP EPS of $9.74, an increase of 6% excluding $0.60 of divestiture gains in 2022

2024 Guidance

  • Revenue growth of 2 to 4% with organic growth of 1 to 3%
  • Operating margin of 25.5 to 26.5% with enterprise initiatives contributing approximately 100 bps
  • GAAP EPS of $10.00 to $10.40, a year-over-year increase of 5% at the mid-point

GLENVIEW, Ill., Feb. 01, 2024 (GLOBE NEWSWIRE) — Illinois Tool Works Inc. (NYSE: ITW) today reported its fourth quarter and full year 2023 results and initiated guidance for full year 2024.

“In a challenging macro demand environment, the ITW team continued to leverage the strength and resilience of ITW’s proprietary business model and high-quality diversified portfolio to deliver a solid finish to a record year for the company,” said Christopher A. O’Herlihy, President and Chief Executive Officer.

“2023 marked another year of strong operational execution and financial performance, as ITW delivered organic growth of two percent, expanded operating margin by 130 basis points to 25.1 percent, grew operating income seven percent to $4 billion, and increased cash flow by more than 50 percent. We made solid progress in our efforts to build above-market organic growth fueled by customer-back innovation into a defining ITW strength, on par with our world-class financial and operational capabilities. As a result, we are very pleased with our momentum and positioning heading into 2024. I want to thank my ITW colleagues around the world for their extraordinary dedication and commitment to serving our customers and executing our strategy with excellence every day.”

Fourth Quarter 2023 Results

Fourth quarter revenue of $4.0 billion increased 0.3 percent with organic revenue down 0.5 percent, as divestitures reduced revenue by 0.4 percent and favorable foreign currency translation added 1.2 percent. End customer and channel inventory reduction efforts combined with the impact from automotive industry labor actions reduced organic growth by an estimated 1.5 percent in the quarter.

GAAP EPS of $2.38 included $(0.04) of unfavorable impact from the devaluation of Argentina’s currency. Operating income of $988 million was a fourth-quarter company record, and enterprise initiatives contributed 150 basis points to operating margin of 24.8 percent. Operating cash flow was $1 billion, and free cash flow grew 39 percent to a record $908 million, with a conversion of 127 percent to net income. During the quarter, the company repurchased $375 million of its own shares and the effective tax rate was 22.6 percent.

Full Year 2023 Results

Full year revenue of $16.1 billion increased one percent with organic revenue growth of two percent. The net impact from divestitures and foreign currency translation reduced revenue by one percent. End customer and channel inventory reduction impact reduced organic growth by an estimated one percent. On a geographic basis, organic growth was essentially flat in North America, up four percent in Europe, and up seven percent in Asia Pacific.

GAAP EPS of $9.74 increased six percent excluding divestiture gains of $0.60 in 2022. Operating income of $4 billion grew seven percent, and operating margin increased 130 basis points to a record 25.1 percent with enterprise initiatives contributing 130 basis points. Operating cash flow was $3.5 billion and free cash flow was a record $3.1 billion, an increase of 59 percent with a conversion of 104 percent to net income. The company invested approximately $800 million to support the long-term profitable growth of its businesses and returned $3.1 billion to shareholders through dividends and share repurchases and raised the dividend by seven percent per share. The effective tax rate was 22.6 percent.

2024 Guidance

The company is initiating 2024 guidance including GAAP EPS in the range of $10.00 to $10.40 per share and revenue growth of two to four percent based on current levels of demand. Organic growth is projected to be one to three percent with foreign currency translation at current exchange rates adding approximately one percent to revenue. Operating margin is projected to be in the range of 25.5 to 26.5 percent, with enterprise initiatives contributing approximately 100 basis points. Free cash flow is expected to be greater than 100 percent of net income and the company plans to repurchase approximately $1.5 billion of its own shares. The projected effective tax rate is in the range of 24 to 24.5 percent.

Non-GAAP Measures

This earnings release contains certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is included in the attached supplemental reconciliation schedule. The estimated guidance of free cash flow to net income conversion rate is based on assumptions that are difficult to predict, and estimated guidance for the most directly comparable GAAP measure and a reconciliation of this forward-looking estimate to its most directly comparable GAAP estimate have been omitted due to the unreasonable efforts required in connection with such a reconciliation and the lack of reliable forward-looking cash flow information. For the same reasons, the company is unable to address the potential significance of the unavailable information, which could be material to future results.

Forward-looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, statements regarding global supply chain challenges, expected impact of inflation including raw material inflation and rising interest rates, the impact of enterprise initiatives, future financial and operating performance, free cash flow and free cash flow to net income conversion rate, organic and total revenue, operating and incremental margin, price/cost impact, statements regarding diluted income per share, restructuring expenses and related benefits, expected dividend payments, after-tax return on invested capital, effective tax rates, exchange rates, expected access to liquidity sources, expected capital allocation, expected timing and amount of share repurchases, end market economic and regulatory conditions, the impact of recent or potential acquisitions and/or divestitures, and the Company’s 2024 guidance. These statements are subject to certain risks, uncertainties, assumptions, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that could cause actual results to differ materially from the Company’s expectations include those that are detailed in ITW’s Form 10-K for 2022 and subsequent reports filed with the SEC.

About Illinois Tool Works

ITW (NYSE: ITW) is a Fortune 200 global multi-industrial manufacturing leader with revenue of $16.1 billion in 2023. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW’s approximately 45,000 dedicated colleagues around the world thrive in the company’s decentralized and entrepreneurial culture. www.itw.com

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)

  Three Months Ended   Twelve Months Ended
  December 31,   December 31,
In millions except per share amounts 2023   2022   2023   2022
Operating Revenue $ 3,983     $ 3,971     $ 16,107     $ 15,932  
Cost of revenue   2,312       2,309       9,316       9,429  
Selling, administrative, and research and development expenses   658       644       2,638       2,579  
Amortization and impairment of intangible assets   25       32       113       134  
Operating Income   988       986       4,040       3,790  
Interest expense   (70 )     (56 )     (266 )     (203 )
Other income (expense)   9       191       49       255  
Income Before Taxes   927       1,121       3,823       3,842  
Income taxes   210       214       866       808  
Net Income $ 717     $ 907     $ 2,957     $ 3,034  
               
Net Income Per Share:              
Basic $ 2.39     $ 2.96     $ 9.77     $ 9.80  
Diluted $ 2.38     $ 2.95     $ 9.74     $ 9.77  
               
Cash Dividends Per Share:              
Paid $ 1.40     $ 1.31     $ 5.33     $ 4.97  
Declared $ 1.40     $ 1.31     $ 5.42     $ 5.06  
               
Shares of Common Stock Outstanding During the Period:              
Average   300.1       306.8       302.6       309.6  
Average assuming dilution   301.1       307.9       303.6       310.7  

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)

In millions December 31, 2023   December 31, 2022
Assets      
Current Assets:      
Cash and equivalents $ 1,065     $ 708  
Trade receivables   3,123       3,171  
Inventories   1,707       2,054  
Prepaid expenses and other current assets   340       329  
Assets held for sale         8  
Total current assets   6,235       6,270  
       
Net plant and equipment   1,976       1,848  
Goodwill   4,909       4,864  
Intangible assets   657       768  
Deferred income taxes   479       494  
Other assets   1,262       1,178  
  $ 15,518     $ 15,422  
       
Liabilities and Stockholders’ Equity      
Current Liabilities:      
Short-term debt $ 1,825     $ 1,590  
Accounts payable   581       594  
Accrued expenses   1,663       1,728  
Cash dividends payable   419       400  
Income taxes payable   187       147  
Liabilities held for sale         1  
Total current liabilities   4,675       4,460  
       
Noncurrent Liabilities:      
Long-term debt   6,339       6,173  
Deferred income taxes   326       484  
Noncurrent income taxes payable   151       273  
Other liabilities   1,014       943  
Total noncurrent liabilities   7,830       7,873  
       
Stockholders’ Equity:      
Common stock   6       6  
Additional paid-in-capital   1,588       1,501  
Retained earnings   27,122       25,799  
Common stock held in treasury   (23,870 )     (22,377 )
Accumulated other comprehensive income (loss)   (1,834 )     (1,841 )
Noncontrolling interest   1       1  
Total stockholders’ equity   3,013       3,089  
  $ 15,518     $ 15,422  

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Three Months Ended December 31, 2023
Dollars in millions Total Revenue Operating Income Operating Margin
Automotive OEM $ 814   $ 143   17.6 %
Food Equipment   655     177   27.0 %
Test & Measurement and Electronics   731     185   25.3 %
Welding   451     134   29.6 %
Polymers & Fluids   440     125   28.5 %
Construction Products   459     124   26.9 %
Specialty Products   437     116   26.6 %
Intersegment   (4 )     %
Total Segments   3,983     1,004   25.2 %
Unallocated       (16 ) %
Total Company $ 3,983   $ 988   24.8 %
Twelve Months Ended December 31, 2023
Dollars in millions Total Revenue Operating Income Operating Margin
Automotive OEM $ 3,235   $ 561   17.3 %
Food Equipment   2,622     713   27.2 %
Test & Measurement and Electronics   2,832     686   24.2 %
Welding   1,902     605   31.8 %
Polymers & Fluids   1,804     482   26.7 %
Construction Products   2,033     578   28.4 %
Specialty Products   1,697     449   26.5 %
Intersegment   (18 )     %
Total Segments   16,107     4,074   25.3 %
Unallocated       (34 ) %
Total Company $ 16,107   $ 4,040   25.1 %

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Q4 2023 vs. Q4 2022 Favorable/(Unfavorable)
Operating Revenue Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products Total ITW
Organic 7.7 % 2.7 % (1.4 )% (6.8 )% (1.6 )% (3.5 )% (5.4 )% (0.5 )%
Acquisitions/
Divestitures
% (0.9 )% % % % % (1.8 )% (0.4 )%
Translation 1.7 % 2.1 % 1.1 % 0.5 % (1.6 )% 1.2 % 1.8 % 1.2 %
Operating Revenue 9.4 % 3.9 % (0.3 )% (6.3 )% (3.2 )% (2.3 )% (5.4 )% 0.3 %
Q4 2023 vs. Q4 2022 Favorable/(Unfavorable)
Change in Operating Margin Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products Total ITW
Operating Leverage 130 bps 50 bps (30) bps (100) bps (30) bps (60) bps (110) bps (10) bps
Changes in Variable Margin & OH Costs 80 bps (90) bps (110) bps (110) bps 370 bps 190 bps 90 bps 40 bps
Total Organic 210 bps (40) bps (140) bps (210) bps 340 bps 130 bps (20) bps 30 bps
Acquisitions/
Divestitures
10 bps 50 bps 10 bps
Restructuring/Other (160) bps (30) bps (20) bps 10 bps (70) bps 10 bps 60 bps (40) bps
Total Operating Margin Change 50 bps (60) bps (160) bps (200) bps 270 bps 140 bps 90 bps
                 
Total Operating Margin % * 17.6% 27.0% 25.3% 29.6% 28.5% 26.9% 26.6% 24.8%
                 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 20 bps 50 bps 140 bps 10 bps 160 bps 20 bps 20 bps 60 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.06) on GAAP earnings per share for the fourth quarter of 2023.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)

Full Year 2023 vs Full Year 2022 Favorable/(Unfavorable)
Operating Revenue Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products Total ITW
Organic 8.8 % 7.8 % 0.3 % 0.3 % 0.3 % (3.2 )% (4.9 )% 2.0 %
Acquisitions/
Divestitures
% (1.2 )% % % (4.0 )% % (1.6 )% (0.8 )%
Translation 0.2 % 0.7 % (0.2 )% 0.1 % (1.6 )% (0.6 )% 0.8 % (0.1 )%
Operating Revenue 9.0 % 7.3 % 0.1 % 0.4 % (5.3 )% (3.8 )% (5.7 )% 1.1 %
Full Year 2023 vs Full Year 2022 Favorable/(Unfavorable)
Change in Operating Margin Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products Total ITW
Operating Leverage 160 bps 150 bps 10 bps 10 bps (60) bps (90) bps 40 bps
Changes in Variable Margin & OH Costs (120) bps 30 bps 10 bps 90 bps 180 bps 330 bps 30 bps 90 bps
Total Organic 40 bps 180 bps 20 bps 100 bps 180 bps 270 bps (60) bps 130 bps
Acquisitions/
Divestitures
20 bps 30 bps 40 bps 10 bps
Restructuring/Other 10 bps (10) bps (20) bps (60) bps (20) bps (10) bps
Total Operating Margin Change 50 bps 190 bps 100 bps 150 bps 250 bps (20) bps 130 bps
                 
Total Operating Margin % * 17.3% 27.2% 24.2% 31.8% 26.7% 28.4% 26.5% 25.1%
                 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 30 bps 50 bps 160 bps 10 bps 180 bps 20 bps 40 bps 70 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.28) on GAAP earnings per share for 2023.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)

  Three Months Ended   Twelve Months Ended
  December 31,   December 31,
Dollars in millions 2023   2022   2023   2022
Numerator:              
Net income $ 717     $ 907     $ 2,957     $ 3,034  
Discrete tax benefit related to the second quarter 2023               (20)        
Discrete tax benefit related to the fourth quarter 2022         (32)             (32)  
Discrete tax benefit related to the second quarter 2022                     (51)  
Interest expense, net of tax(1)   54       44       204       156  
Other (income) expense, net of tax(1)   (7)       (147)       (38)       (196)  
Operating income after taxes $ 764     $ 772     $ 3,103     $ 2,911  
               
Denominator:              
Invested capital:              
Cash and equivalents $ 1,065     $ 708     $ 1,065     $ 708  
Trade receivables   3,123       3,171       3,123       3,171  
Inventories   1,707       2,054       1,707       2,054  
Net assets held for sale         7             7  
Net plant and equipment   1,976       1,848       1,976       1,848  
Goodwill and intangible assets   5,566       5,632       5,566       5,632  
Accounts payable and accrued expenses   (2,244)       (2,322)       (2,244)       (2,322)  
Debt   (8,164)       (7,763)       (8,164)       (7,763)  
Other, net   (16)       (246)       (16)       (246)  
Total net assets (stockholders’ equity)   3,013       3,089       3,013       3,089  
Cash and equivalents   (1,065)       (708)       (1,065)       (708)  
Debt   8,164       7,763       8,164       7,763  
Total invested capital $ 10,112     $ 10,144     $ 10,112     $ 10,144  
               
Average invested capital(2) $ 10,096     $ 10,006     $ 10,214     $ 10,017  
               
Net income to average invested capital(3)   28.4%       36.3%       29.0%       30.3%  
After-tax return on average invested capital(3)   30.3%       30.8%       30.4%       29.1%  
(1)   Effective tax rate used for interest expense and other (income) expense for the three months ended December 31, 2023 and 2022 was 22.6% and 22.0%, respectively, and 23.2% for the twelve months ended December 31, 2023 and 2022.
     
(2)   Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter within each of the periods presented.
     
(3)   Returns for the three months ended December 31, 2023 and 2022 were converted to an annual rate by multiplying the calculated return by 4.
     

A reconciliation of the 2023 effective tax rate excluding the second quarter 2023 discrete tax benefit of $20 million related to amended 2021 U.S. taxes is as follows:

  Twelve Months Ended
  December 31, 2023
Dollars in millions Income Taxes   Tax Rate
As reported $ 866   22.6 %
Discrete tax benefit related to the second quarter 2023   20   0.6 %
As adjusted $ 886   23.2 %

A reconciliation of the effective tax rate for the three and twelve month periods ended December 31, 2022, excluding the fourth quarter 2022 discrete tax benefit of $32 million related to the utilization of capital loss carryforwards and the second quarter 2022 discrete tax benefit of $51 million related to the resolution of a U.S. tax audit, is as follows:

  Three Months Ended   Twelve Months Ended
  December 31, 2022   December 31, 2022
Dollars in millions Income Taxes   Tax Rate   Income Taxes   Tax Rate
As reported $ 214   19.1 %   $ 808   21.0 %
Discrete tax benefit related to the fourth quarter 2022   32   2.9 %     32   0.8 %
Discrete tax benefit related to the second quarter 2022     %     51   1.4 %
As adjusted $ 246   22.0 %   $ 891   23.2 %

FREE CASH FLOW (UNAUDITED)

  Three Months Ended   Twelve Months Ended
  December 31,   December 31,
Dollars in millions 2023   2022   2023   2022
Net cash provided by operating activities $ 1,039   $ 811   $ 3,539   $ 2,348
Less: Additions to plant and equipment   (131)     (156)     (455)     (412)
Free cash flow $ 908   $ 655   $ 3,084   $ 1,936
               
Net income $ 717   $ 907   $ 2,957   $ 3,034
               
Net cash provided by operating activities to net income conversion rate   145%     89%     120%     77%
Free cash flow to net income conversion rate   127%     72%     104%     64%
  Three Months Ended
  March 31,   June 30,   September 30,
Dollars in millions 2023   2023   2023
Net cash provided by operating activities $ 728   $ 790   $ 982
Less: Additions to plant and equipment   (113)     (85)     (126)
Free cash flow $ 615   $ 705   $ 856
           
Net income $ 714   $ 754   $ 772
           
Net cash provided by operating activities to net income conversion rate   102%     105%     127%
Free cash flow to net income conversion rate   86%     94%     111%

ADJUSTED NET INCOME PER SHARE – DILUTED (UNAUDITED)

  Three Months Ended
  December 31, 2023
As reported $ 2.38
Argentina currency devaluation impact in the fourth quarter 2023   0.04
As adjusted $ 2.42
  Three Months Ended   Twelve Months Ended
  December 31, 2022   December 31, 2022
As reported $ 2.95     $ 9.77  
Net impact of gains from two divestitures in the fourth quarter 2022   (0.61 )     (0.60 )
As adjusted $ 2.34     $ 9.17  

 


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