ITW Reports First Quarter 2023 Results – Illinois Tool Works (NYSE:ITW)

ITW Reports First Quarter 2023 Results – Illinois Tool Works (NYSE:ITW)


  • Revenue of $4.0 billion, an increase of 2% with organic growth of 5%
  • Operating income of $972 million, an increase of 9%
  • Operating margin of 24.2%, an increase of 150 bps
  • GAAP EPS of $2.33, an increase of 10%
  • Raising full year GAAP EPS guidance by $0.05 to a range of $9.45 to $9.85 per share

GLENVIEW, Ill., May 02, 2023 (GLOBE NEWSWIRE) —  – Illinois Tool Works Inc. (NYSE:ITW) today reported its first quarter 2023 results.

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“The ITW team delivered a solid start to the year with organic growth of five percent, operating margin expansion of 150 basis points, strong free cash flow, and double-digit EPS growth as we continue to demonstrate the performance power of our proprietary business model and the resilience of our diversified high-quality business portfolio,” said E. Scott Santi, Chairman and Chief Executive Officer. “While the near-term economic outlook continues to be uncertain, I am confident that ITW remains well positioned to deliver best-in-class performance in any environment.”  

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First Quarter 2023 Results
First quarter revenue of $4.0 billion increased two percent with organic revenue growth of five percent. Foreign currency translation impact and divestitures combined reduced revenue by three percent.

GAAP EPS increased 10 percent to $2.33, a new first quarter record, and included $0.06 of unfavorable foreign currency translation impact. Operating income increased nine percent to $972 million. Operating margin of 24.2 percent improved 150 basis points with enterprise initiatives contributing 100 basis points. Operating cash flow was $728 million, and free cash flow was $615 million, an increase of 147 percent, with a conversion rate to net income of 86 percent. The company repurchased $375 million of its own shares and the effective tax rate was 22.6 percent.

2023 Guidance
The company is raising its full-year GAAP EPS guidance to $9.45 to $9.85 per share which incorporates a projected lower tax rate for the full year in the range of 23.5 to 24 percent. This compares to previous guidance of $9.40 to $9.80 per share. The organic growth projection of three to five percent reflects current levels of demand and a risk adjustment for further slowing in certain end markets. Foreign currency translation impact and divestitures combined are expected to reduce revenue by one percent, resulting in total revenue growth of two to four percent. This compares to previous guidance of 1.5 to 3.5 percent. Operating margin is projected to be in the range of 24.5 to 25.5 percent, with approximately 100 basis points contribution from enterprise initiatives. 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.

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 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, 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, 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 contained in ITW’s Form 10-K for 2022.

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
  March 31,
In millions except per share amounts   2023       2022  
Operating Revenue $ 4,019     $ 3,939  
Cost of revenue   2,341       2,357  
Selling, administrative, and research and development expenses   675       652  
Amortization and impairment of intangible assets   31       35  
Operating Income   972       895  
Interest expense   (60 )     (48 )
Other income (expense)   10       14  
Income Before Taxes   922       861  
Income taxes   208       199  
Net Income $ 714     $ 662  
       
Net Income Per Share:      
Basic $ 2.34     $ 2.12  
Diluted $ 2.33     $ 2.11  
       
Cash Dividends Per Share:      
Paid $ 1.31     $ 1.22  
Declared $ 1.31     $ 1.22  
       
Shares of Common Stock Outstanding During the Period:      
Average   305.0       312.5  
Average assuming dilution   306.1       313.7  
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
 
In millions March 31, 2023   December 31, 2022
Assets      
Current Assets:      
Cash and equivalents $ 1,143     $ 708  
Trade receivables   3,201       3,171  
Inventories   2,000       2,054  
Prepaid expenses and other current assets   334       329  
Assets held for sale   10       8  
Total current assets   6,688       6,270  
       
Net plant and equipment   1,885       1,848  
Goodwill   4,884       4,864  
Intangible assets   738       768  
Deferred income taxes   503       494  
Other assets   1,223       1,178  
  $ 15,921     $ 15,422  
       
Liabilities and Stockholders’ Equity      
Current Liabilities:      
Short-term debt $ 2,870     $ 1,590  
Accounts payable   599       594  
Accrued expenses   1,504       1,728  
Cash dividends payable   398       400  
Income taxes payable   224       147  
Liabilities held for sale   1       1  
Total current liabilities   5,596       4,460  
       
Noncurrent Liabilities:      
Long-term debt   5,510       6,173  
Deferred income taxes   477       484  
Noncurrent income taxes payable   273       273  
Other liabilities   964       943  
Total noncurrent liabilities   7,224       7,873  
       
Stockholders’ Equity:      
Common stock   6       6  
Additional paid-in-capital   1,526       1,501  
Retained earnings   26,115       25,799  
Common stock held in treasury   (22,743 )     (22,377 )
Accumulated other comprehensive income (loss)   (1,804 )     (1,841 )
Noncontrolling interest   1       1  
Total stockholders’ equity   3,101       3,089  
  $ 15,921     $ 15,422  
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Three Months Ended March 31, 2023
Dollars in millions Total Revenue Operating Income Operating Margin
Automotive OEM $ 796     $ 128       16.1 %
Food Equipment   635       169       26.7 %
Test & Measurement and Electronics   703       172       24.5 %
Welding   493       157       31.9 %
Polymers & Fluids   447       109       24.4 %
Construction Products   526       145       27.5 %
Specialty Products   423       109       25.6 %
Intersegment   (4 )           %
Total Segments   4,019       989       24.6 %
Unallocated         (17 )     %
Total Company $ 4,019     $ 972       24.2 %
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
Q1 2023 vs. Q1 2022 Favorable/(Unfavorable)   
Operating Revenue Automotive OEM Food Equipment Test & Measurement and Electronics Welding Polymers & Fluids Construction Products Specialty Products Total ITW
Organic 7.9% 16.0% 5.6% 10.2% (0.1)% (1.4)% (5.0)% 5.2%
Acquisitions/
Divestitures
—% (1.2)% —% —% (4.5)% —% —% (0.7)%
Translation (3.2)% (2.5)% (3.0)% (0.6)% (2.4)% (3.2)% (1.4)% (2.5)%
Operating Revenue 4.7% 12.3% 2.6% 9.6% (7.0)% (4.6)% (6.4)% 2.0%
Q1 2023 vs. Q1 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 150 bps 300 bps 130 bps 140 bps —  (20) bps (100) bps 100 bps
Changes in Variable Margin & OH Costs (430) bps 130 bps 140 bps (40) bps (10) bps 310 bps (10) bps 40 bps
Total Organic (280) bps 430 bps 270 bps 100 bps (10) bps 290 bps (110) bps 140 bps
Acquisitions/
Divestitures
—  20 bps —  —  40 bps —  —  10 bps
Restructuring/Other 80 bps (10) bps —  10 bps (40) bps (10) bps 10 bps — 
Total Operating Margin Change (200) bps 440 bps 270 bps 110 bps (10) bps 280 bps (100) bps 150 bps
                 
Total Operating Margin % * 16.1% 26.7% 24.5% 31.9% 24.4% 27.5% 25.6% 24.2%
                 
* Includes unfavorable operating margin impact of amortization expense from acquisition-related intangible assets 30 bps 50 bps 180 bps 10 bps 210 bps 20 bps 70 bps 80 bps **
** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.08) on GAAP earnings per share for the first quarter 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
  March 31,
Dollars in millions   2023       2022  
Numerator:      
Net income $ 714     $ 662  
Interest expense, net of tax (1)   46       37  
Other (income) expense, net of tax (1)   (8 )     (11 )
Operating income after taxes $ 752     $ 688  
       
Denominator:      
Invested capital:      
Cash and equivalents $ 1,143     $ 1,296  
Trade receivables   3,201       3,126  
Inventories   2,000       1,883  
Net assets held for sale   9        
Net plant and equipment   1,885       1,795  
Goodwill and intangible assets   5,622       5,883  
Accounts payable and accrued expenses   (2,103 )     (2,237 )
Debt   (8,380 )     (7,858 )
Other, net   (276 )     (306 )
Total net assets (stockholders’ equity)   3,101       3,582  
Cash and equivalents   (1,143 )     (1,296 )
Debt   8,380       7,858  
Total invested capital $ 10,338     $ 10,144  
       
Average invested capital(2) $ 10,241     $ 9,966  
       
Net income to average invested capital(3)   27.9 %     26.6 %
After-tax return on average invested capital(3)   29.4 %     27.6 %

(1)  Effective tax rate used for interest expense and other (income) expense for the three months ended March 31, 2023 and 2022 was 22.6% and 23.1%, respectively.

(2)  Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of the periods presented.

(3)  Returns for the three months ended March 31, 2023 and 2022 were converted to an annual rate by multiplying the calculated return by 4.

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
  March 31,
Dollars in millions   2023       2022  
Net cash provided by operating activities $ 728     $ 323  
Less: Additions to plant and equipment   (113 )     (74 )
Free cash flow $ 615     $ 249  
       
Net income $ 714     $ 662  
       
Net cash provided by operating activities to net income conversion rate   102 %     49 %
Free cash flow to net income conversion rate   86 %     38 %
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  
ITW   ITW
Media Contact    Investor Relations
Tel: 224.661.7451   Karen Fletcher
[email protected]    Tel: 224.661.7433
    [email protected] 


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