ITW Reports Third Quarter 2023 Results

• Revenue of $4.0 billion, an increase of 0.5%
• Operating income of $1.1 billion, an increase of 9%
• Operating margin of 26.5%, an increase of 200 bps
• GAAP EPS of $2.55, an increase of 9%
• Narrowing full year GAAP EPS guidance range to $9.65 to $9.85 per share
  

GLENVIEW, Ill., Oct. 24, 2023 (GLOBE NEWSWIRE) -- Illinois Tool Works Inc. (NYSE: ITW) today reported its third quarter 2023 results.

“The strength and resilience of ITW’s proprietary business model and high-quality diversified portfolio once again drove strong operational execution and financial performance in the third quarter. Quarterly operating margin expanded 200 basis points year over year to 26.5 percent, free cash flow grew 40 percent, and GAAP EPS grew nine percent to $2.55,” said E. Scott Santi, Chairman and Chief Executive Officer. “Organic revenue growth was two percent on an equal days’ basis in the quarter. Looking ahead at the balance of the year, while we anticipate some impact from ongoing automotive industry labor actions on our Automotive OEM segment in the fourth quarter, the company remains well-positioned to deliver another strong year of differentiated overall performance in 2023.”

Third Quarter 2023 Results
Third quarter revenue of $4.0 billion increased 0.5 percent with organic revenue growth of 0.2 percent, as divestitures reduced revenue by 1.2 percent and foreign currency translation added 1.5 percent. On an equal days’ basis, organic growth was two percent. End customer and channel partner inventory reduction efforts associated with supply chain normalization reduced organic growth by an estimated 1 to 1.5 percent in the quarter.

GAAP EPS increased nine percent to $2.55 and the effective tax rate was 23.8 percent. Operating income grew nine percent to $1.1 billion. Operating margin of 26.5 percent expanded 200 basis points as enterprise initiatives contributed 140 basis points. Operating cash flow was $982 million, and free cash flow was $856 million, an increase of 40 percent, with a conversion rate to net income of 111 percent. During the quarter, the company repurchased $375 million of its own shares and raised its dividend seven percent to an annualized $5.60 per share.

2023 Guidance
ITW is narrowing the range of its full year GAAP EPS guidance from $9.55 to $9.95 per share to a range of $9.65 to $9.85 per share, which includes a $0.12 per share adjustment for the estimated fourth quarter impact of ongoing automotive industry labor actions. The company is projecting total revenue growth of one to two percent with organic growth of two to three percent based on current levels of demand exiting the third quarter, and the estimated fourth quarter impact of ongoing automotive industry labor actions. Combined divestitures and foreign currency translation are expected to reduce revenue by one percent. Operating margin is projected to be in the range of 25 to 25.5 percent, an improvement of 150 basis points at the mid-point, with enterprise initiatives contributing more than 100 basis points. Free cash flow is projected to be greater than 100 percent of net income and the company plans to repurchase approximately $1.5 billion of its own shares. The expected tax rate is in the range of 22.5 to 23.5 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.

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 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, the potential impact of automotive industry labor actions, and the company’s 2023 guidance. These statements are subject to certain risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those anticipated. Such factors include those risk factors contained 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 $15.9 billion in 2022. 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 46,000 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								Nine Months Ended
	September 30,								September 30,
In millions except per share amounts		2023				2022				2023				2022
Operating Revenue	$	4,031			$	4,011			$	12,124			$	11,961
Cost of revenue		2,319				2,371				7,004				7,120
Selling, administrative, and research and development expenses		615				624				1,980				1,935
Amortization and impairment of intangible assets		27				33				88				102
Operating Income		1,070				983				3,052				2,804
Interest expense		(67	)			(52	)			(196	)			(147	)
Other income (expense)		10				26				40				64
Income Before Taxes		1,013				957				2,896				2,721
Income Taxes		241				230				656				594
Net Income	$	772			$	727			$	2,240			$	2,127
Net Income Per Share:
Basic	$	2.55			$	2.36			$	7.38			$	6.85
Diluted	$	2.55			$	2.35			$	7.36			$	6.83
Cash Dividends Per Share:
Paid	$	1.31			$	1.22			$	3.93			$	3.66
Declared	$	1.40			$	1.31			$	4.02			$	3.75
Shares of Common Stock Outstanding During the Period:
Average		301.9				308.8				303.4				310.6
Average assuming dilution		303.0				309.7				304.5				311.6

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions	September 30, 2023				December 31, 2022
Assets
Current Assets:
Cash and equivalents	$	990			$	708
Trade receivables		3,163				3,171
Inventories		1,799				2,054
Prepaid expenses and other current assets		336				329
Assets held for sale		—				8
Total current assets		6,288				6,270
Net plant and equipment		1,904				1,848
Goodwill		4,828				4,864
Intangible assets		682				768
Deferred income taxes		455				494
Other assets		1,238				1,178
	$	15,395			$	15,422
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	1,248			$	1,590
Accounts payable		580				594
Accrued expenses		1,588				1,728
Cash dividends payable		421				400
Income taxes payable		145				147
Liabilities held for sale		—				1
Total current liabilities		3,982				4,460
Noncurrent Liabilities:
Long-term debt		6,818				6,173
Deferred income taxes		464				484
Noncurrent income taxes payable		151				273
Other liabilities		976				943
Total noncurrent liabilities		8,409				7,873
Stockholders' Equity:
Common stock		6				6
Additional paid-in-capital		1,569				1,501
Retained earnings		26,823				25,799
Common stock held in treasury		(23,493	)			(22,377	)
Accumulated other comprehensive income (loss)		(1,902	)			(1,841	)
Noncontrolling interest		1				1
Total stockholders' equity		3,004				3,089
	$	15,395			$	15,422

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

Three Months Ended September 30, 2023
Dollars in millions	Total Revenue			Operating Income		Operating Margin
Automotive OEM	$	799		$	151	18.9	%
Food Equipment		678			185	27.3	%
Test & Measurement and Electronics		698			167	23.8	%
Welding		468			147	31.6	%
Polymers & Fluids		458			129	28.1	%
Construction Products		522			155	29.9	%
Specialty Products		414			115	27.8	%
Intersegment		(6	)		—	—	%
Total Segments		4,031			1,049	26.0	%
Unallocated		—			21	—	%
Total Company	$	4,031		$	1,070	26.5	%

Nine Months Ended September 30, 2023
Dollars in millions	Total Revenue			Operating Income			Operating Margin
Automotive OEM	$	2,421		$	418		17.3	%
Food Equipment		1,967			536		27.2	%
Test & Measurement and Electronics		2,101			501		23.8	%
Welding		1,451			471		32.5	%
Polymers & Fluids		1,364			357		26.2	%
Construction Products		1,574			454		28.9	%
Specialty Products		1,260			333		26.4	%
Intersegment		(14	)		—		—	%
Total Segments		12,124			3,070		25.3	%
Unallocated		—			(18	)	—	%
Total Company	$	12,124		$	3,052		25.2	%

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

Q3 2023 vs. Q3 2022 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	3.8	%	6.3	%	(3.9	)%	(2.4	)%	3.4	%	(2.1	)%	(5.6	)%	0.2	%
Acquisitions/ Divestitures	—	%	(1.8	)%	—	%	—	%	(5.7	)%	—	%	(2.3	)%	(1.2	)%
Translation	2.2	%	2.7	%	1.5	%	0.6	%	(0.8	)%	0.9	%	2.4	%	1.5	%
Operating Revenue	6.0	%	7.2	%	(2.4	)%	(1.8	)%	(3.1	)%	(1.2	)%	(5.5	)%	0.5	%

Q3 2023 vs. Q3 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

70 bps

110 bps

(100) bps

(40) bps

70 bps

(30) bps

(110) bps

—

Changes in Variable Margin & OH Costs

100 bps

(40) bps

(10) bps

50 bps

200 bps

430 bps

40 bps

200 bps

Total Organic

170 bps

70 bps

(110) bps

10 bps

270 bps

400 bps

(70) bps

200 bps

Acquisitions/ Divestitures

—

10 bps

—

—

20 bps

—

60 bps

10 bps

Restructuring/Other

(30) bps

20 bps

(30) bps

—

(10) bps

20 bps

20 bps

(10) bps

Total Operating Margin Change

140 bps

100 bps

(140) bps

10 bps

280 bps

420 bps

10 bps

200 bps

Total Operating Margin % *

18.9%

27.3%

23.8%

31.6%

28.1%

29.9%

27.8%

26.5%

* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

30 bps

40 bps

160 bps

10 bps

170 bps

10 bps

30 bps

70 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.07) on GAAP earnings per share for the third quarter of 2023.

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

YTD 2023 vs. YTD 2022 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	9.2	%	9.6	%	0.9	%	2.7	%	0.9	%	(3.1	)%	(4.7	)%	2.8	%
Acquisitions/ Divestitures	—	%	(1.3	)%	—	%	—	%	(5.3	)%	—	%	(1.5	)%	(1.0	)%
Translation	(0.4	)%	0.2	%	(0.7	)%	—	%	(1.5	)%	(1.1	)%	0.4	%	(0.4	)%
Operating Revenue	8.8	%	8.5	%	0.2	%	2.7	%	(5.9	)%	(4.2	)%	(5.8	)%	1.4	%

YTD 2023 vs. YTD 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

180 bps

180 bps

20 bps

50 bps

10 bps

(50) bps

(100) bps

60 bps

Changes in Variable Margin & OH Costs

(190) bps

70 bps

60 bps

150 bps

120 bps

360 bps

20 bps

110 bps

Total Organic

(10) bps

250 bps

80 bps

200 bps

130 bps

310 bps

(80) bps

170 bps

Acquisitions/ Divestitures

—

20 bps

—

—

30 bps

—

40 bps

10 bps

Restructuring/Other

70 bps

—

(20) bps

—

(40) bps

(20) bps

(30) bps

—

Total Operating Margin Change

60 bps

270 bps

60 bps

200 bps

120 bps

290 bps

(70) bps

180 bps

Total Operating Margin % *

17.3%

27.2%

23.8%

32.5%

26.2%

28.9%

26.4%

25.2%

* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets

20 bps

50 bps

170 bps

10 bps

180 bps

10 bps

60 bps

70 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.22) on GAAP earnings per share for the first nine months of 2023.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED) AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Dollars in millions		2023				2022				2023				2022
Numerator:
Net income	$	772			$	727			$	2,240			$	2,127
Discrete tax benefit related to the second quarter 2023		—				—				(20	)			—
Discrete tax benefit related to the second quarter 2022		—				—				—				(51	)
Interest expense, net of tax(1)		51				39				150				112
Other (income) expense, net of tax(1)		(8	)			(20	)			(31	)			(49	)
Operating income after taxes	$	815			$	746			$	2,339			$	2,139
Denominator:
Invested capital:
Cash and equivalents	$	990			$	774			$	990			$	774
Trade receivables		3,163				3,031				3,163				3,031
Inventories		1,799				2,007				1,799				2,007
Net assets held for sale		—				75				—				75
Net plant and equipment		1,904				1,705				1,904				1,705
Goodwill and intangible assets		5,510				5,557				5,510				5,557
Accounts payable and accrued expenses		(2,168	)			(2,177	)			(2,168	)			(2,177	)
Debt		(8,066	)			(7,628	)			(8,066	)			(7,628	)
Other, net		(128	)			(330	)			(128	)			(330	)
Total net assets (stockholders' equity)		3,004				3,014				3,004				3,014
Cash and equivalents		(990	)			(774	)			(990	)			(774	)
Debt		8,066				7,628				8,066				7,628
Total invested capital	$	10,080			$	9,868			$	10,080			$	9,868
Average invested capital(2)	$	10,237			$	10,004			$	10,239			$	9,985
Net income to average invested capital(3)		30.1	%			29.1	%			29.2	%			28.4	%
After-tax return on average invested capital(3)		31.9	%			29.9	%			30.5	%			28.6	%

⁽¹⁾  Effective tax rate used for interest expense and other (income) expense for the three months ended September 30, 2023 and 2022 was 23.8% and 23.9%, respectively. Effective tax rate used for interest expense and other (income) expense for the nine months ended September 30, 2023 and 2022 was 23.4% and 23.7%, respectively.

⁽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 September 30, 2023 and 2022 were converted to an annual rate by multiplying the calculated return by 4. Returns for the nine months ended September 30, 2023 and 2022 were converted to an annual rate by dividing the calculated return by 3 and multiplying it by 4.
A reconciliation of the tax rate for the nine months ended September 30, 2023, excluding the second quarter 2023 discrete tax benefit of $20 million related to amended 2021 U.S. taxes, is as follows:

		Nine Months Ended
		September 30, 2023
Dollars in millions		Income Taxes			Tax Rate
As reported		$	656		22.7	%
Discrete tax benefit related to the second quarter 2023			20		0.7	%
As adjusted		$	676		23.4	%

A reconciliation of the tax rate for the nine months ended September 30, 2022, excluding the second quarter 2022 discrete tax benefit of $51 million related to the resolution of a U.S. tax audit, is as follows:

	Nine Months Ended
	September 30, 2022
Dollars in millions	Income Taxes			Tax Rate
As reported	$	594		21.8	%
Discrete tax benefit related to the second quarter 2022		51		1.9	%
As adjusted	$	645		23.7	%

AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
	Twelve Months Ended
Dollars in millions	December 31, 2022
Numerator:
Net income	$	3,034
Discrete tax benefit related to the fourth quarter 2022		(32	)
Discrete tax benefit related to the second quarter 2022		(51	)
Interest expense, net of tax(1)		156
Other (income) expense, net of tax(1)		(196	)
Operating income after taxes	$	2,911
Denominator:
Invested capital:
Cash and equivalents	$	708
Trade receivables		3,171
Inventories		2,054
Net assets held for sale		7
Net plant and equipment		1,848
Goodwill and intangible assets		5,632
Accounts payable and accrued expenses		(2,322	)
Debt		(7,763	)
Other, net		(246	)
Total net assets (stockholders' equity)		3,089
Cash and equivalents		(708	)
Debt		7,763
Total invested capital	$	10,144
Average invested capital(2)	$	10,017
Net income to average invested capital		30.3	%
After-tax return on average invested capital		29.1	%

⁽¹⁾  Effective tax rate used for interest expense and other (income) expense for the year ended December 31, 2022 was 23.2%.

⁽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 the period presented.

A reconciliation of the 2022 effective tax rate 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:

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

FREE CASH FLOW (UNAUDITED)
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Dollars in millions		2023				2022				2023				2022
Net cash provided by operating activities	$	982			$	713			$	2,500			$	1,537
Less: Additions to plant and equipment		(126	)			(101	)			(324	)			(256	)
Free cash flow	$	856			$	612			$	2,176			$	1,281
Net income	$	772			$	727			$	2,240			$	2,127
Net cash provided by operating activities to net income conversion rate		127	%			98	%			112	%			72	%
Free cash flow to net income conversion rate		111	%			84	%			97	%			60	%

ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
	Twelve Months Ended
	December 31, 2022
As reported	$	9.77
Net impact of gains from two divestitures in the fourth quarter 2022		(0.60	)
As adjusted	$	9.17

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