ITW Illinois Tool Works Inc

Illinois Tool Works Inc. (NYSE: ITW) today reported its second quarter 2023 results.

“The ITW team delivered another quarter of strong operational execution and financial performance. Quarterly operating income grew nine percent and exceeded $1 billion for the first time in ITW’s history, operating margin expanded 170 basis points year on year, and GAAP EPS of $2.48 was a Q2 record for the company,” said E. Scott Santi, Chairman and Chief Executive Officer. “Organic growth was three percent as resilient demand in many of ITW’s industrial end markets was partially offset by inventory reduction efforts by our end customers and channel partners in response to stabilizing supply chain performance, which we estimate to have impacted organic growth by 1 to 1.5 percent in the quarter. While customer and channel inventory normalization will continue to be a factor for the next several quarters, we expect stable underlying demand and continued strong margin and profitability performance through the balance of the year. As a result, we are raising our full-year 2023 GAAP EPS guidance by $0.10 at the mid-point.”

Second Quarter 2023 ResultsSecond quarter revenue of $4.1 billion increased two percent with organic revenue growth of three percent, as divestitures reduced revenue by one percent.

GAAP EPS increased five percent to $2.48 and included $0.07 of a one-time tax benefit. GAAP EPS of $2.37 in the second quarter of 2022 included a $0.16 one-time tax benefit. Excluding one-time tax items in both periods, EPS increased nine percent. Operating income grew nine percent to a record $1.01 billion. Operating margin of 24.8 percent improved 170 basis points as enterprise initiatives contributed 130 basis points. Operating cash flow was $790 million, and free cash flow was $705 million, an increase of 68 percent, with a conversion rate to net income of 94 percent. The company repurchased $375 million of its own shares and the effective tax rate was 21.4 percent.

2023 GuidanceITW is raising its full-year GAAP EPS guidance by $0.10 to $9.55 to $9.95 per share. The company is projecting organic growth of three to five percent based on first half 2023 performance and current levels of demand. Divestitures are expected to reduce revenue by one percent resulting in total revenue growth of two to four percent. Operating margin is projected to be in the range of 24.5 to 25.5 percent, 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 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 StatementsThis 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, 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 WorksITW (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

Media Contact	Investor Relations
Tel: 224.661.7451	Karen Fletcher
mediarelations@itw.com	Tel: 224.661.7433
	investorrelations@itw.com

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
In millions except per share amounts		2023				2022				2023				2022
Operating Revenue	$	4,074			$	4,011			$	8,093			$	7,950
Cost of revenue		2,344				2,392				4,685				4,749
Selling, administrative, and research and development expenses		690				659				1,365				1,311
Amortization and impairment of intangible assets		30				34				61				69
Operating Income		1,010				926				1,982				1,821
Interest expense		(69	)			(47	)			(129	)			(95	)
Other income (expense)		20				24				30				38
Income Before Taxes		961				903				1,883				1,764
Income taxes		207				165				415				364
Net Income	$	754			$	738			$	1,468			$	1,400
Net Income Per Share:
Basic	$	2.49			$	2.37			$	4.83			$	4.49
Diluted	$	2.48			$	2.37			$	4.81			$	4.48
Cash Dividends Per Share:
Paid	$	1.31			$	1.22			$	2.62			$	2.44
Declared	$	1.31			$	1.22			$	2.62			$	2.44
Shares of Common Stock Outstanding During the Period:
Average		303.3				310.6				304.1				311.5
Average assuming dilution		304.2				311.5				305.2				312.6

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
In millions	June 30, 2023				December 31, 2022
Assets
Current Assets:
Cash and equivalents	$	922			$	708
Trade receivables		3,216				3,171
Inventories		1,921				2,054
Prepaid expenses and other current assets		345				329
Assets held for sale		—				8
Total current assets		6,404				6,270
Net plant and equipment		1,901				1,848
Goodwill		4,887				4,864
Intangible assets		708				768
Deferred income taxes		500				494
Other assets		1,252				1,178
	$	15,652			$	15,422
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	1,275			$	1,590
Accounts payable		590				594
Accrued expenses		1,625				1,728
Cash dividends payable		396				400
Income taxes payable		154				147
Liabilities held for sale		—				1
Total current liabilities		4,040				4,460
Noncurrent Liabilities:
Long-term debt		6,947				6,173
Deferred income taxes		451				484
Noncurrent income taxes payable		151				273
Other liabilities		969				943
Total noncurrent liabilities		8,518				7,873
Stockholders' Equity:
Common stock		6				6
Additional paid-in-capital		1,550				1,501
Retained earnings		26,473				25,799
Common stock held in treasury		(23,116	)			(22,377	)
Accumulated other comprehensive income (loss)		(1,820	)			(1,841	)
Noncontrolling interest		1				1
Total stockholders' equity		3,094				3,089
	$	15,652			$	15,422

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Three Months Ended June 30, 2023
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	826			$	139			16.8	%
Food Equipment		654				182			27.8	%
Test & Measurement and Electronics		700				162			23.2	%
Welding		490				167			33.9	%
Polymers & Fluids		459				119			25.9	%
Construction Products		526				154			29.3	%
Specialty Products		423				109			26.0	%
Intersegment		(4	)			—			—	%
Total Segments		4,074				1,032			25.3	%
Unallocated		—				(22	)		—	%
Total Company	$	4,074			$	1,010			24.8	%

Six Months Ended June 30, 2023
Dollars in millions	Total Revenue				Operating Income				Operating Margin
Automotive OEM	$	1,622			$	267			16.4	%
Food Equipment		1,289				351			27.2	%
Test & Measurement and Electronics		1,403				334			23.8	%
Welding		983				324			32.9	%
Polymers & Fluids		906				228			25.2	%
Construction Products		1,052				299			28.4	%
Specialty Products		846				218			25.8	%
Intersegment		(8	)			—			—	%
Total Segments		8,093				2,021			25.0	%
Unallocated		—				(39	)		—	%
Total Company	$	8,093			$	1,982			24.5	%

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

Q2 2023 vs. Q2 2022 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	16.3	%	6.9	%	1.1	%	0.7	%	(0.5)	%	(5.7)	%	(3.6)	%	3.0	%
Acquisitions/ Divestitures	—	%	(1.0)	%	—	%	—	%	(5.7)	%	—	%	(2.3)	%	(1.1)	%
Translation	(0.1)	%	0.4	%	(0.4)	%	—	%	(1.4)	%	(1.1)	%	0.5	%	(0.3)	%
Operating Revenue	16.2	%	6.3	%	0.7	%	0.7	%	(7.6)	%	(6.8)	%	(5.4)	%	1.6	%

Q2 2023 vs. Q2 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

320 bps

140 bps

30 bps

-

(10) bps

(90) bps

(80) bps

60 bps

Changes in Variable Margin & OH Costs

(210) bps

140 bps

70 bps

460 bps

150 bps

320 bps

20 bps

100 bps

Total Organic

110 bps

280 bps

100 bps

460 bps

140 bps

230 bps

(60) bps

160 bps

Acquisitions/Divestitures

—

30 bps

—

—

30 bps

—

60 bps

10 bps

Restructuring/Other

140 bps

—

(30) bps

—

(90) bps

(60) bps

(90) bps

—

Total Operating Margin Change

250 bps

310 bps

70 bps

460 bps

80 bps

170 bps

(90) bps

170 bps

Total Operating Margin % *

16.8

%

27.8

%

23.2

%

33.9

%

25.9

%

29.3

%

26.0

%

24.8

%

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

30 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 ($0.07) on GAAP earnings per share for the second quarter of 2023.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

SEGMENT DATA (UNAUDITED)

H1 2023 vs. H2 2022 Favorable/(Unfavorable)
Operating Revenue	Automotive OEM		Food Equipment		Test & Measurement and Electronics		Welding		Polymers & Fluids		Construction Products		Specialty Products		Total ITW
Organic	11.9	%	11.3	%	3.3	%	5.3	%	(0.3)	%	(3.6)	%	(4.3)	%	4.1	%
Acquisitions/Divestitures	—	%	(1.1)	%	—	%	—	%	(5.1)	%	—	%	(1.1)	%	(0.9)	%
Translation	(1.6)	%	(1.0)	%	(1.7)	%	(0.3)	%	(1.9)	%	(2.1)	%	(0.5)	%	(1.4)	%
Operating Revenue	10.3	%	9.2	%	1.6	%	5.0	%	(7.3)	%	(5.7)	%	(5.9)	%	1.8	%

H1 2023 vs. H2 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

230 bps

210 bps

80 bps

80 bps

(10) bps

(60) bps

(90) bps

90 bps

Changes in Variable Margin & OH Costs

(330) bps

140 bps

100 bps

210 bps

80 bps

310 bps

—

60 bps

Total Organic

(100) bps

350 bps

180 bps

290 bps

70 bps

250 bps

(90) bps

150 bps

Acquisitions/Divestitures

—

20 bps

—

—

30 bps

—

30 bps

10 bps

Restructuring/Other

110 bps

(10) bps

(20) bps

—

(60) bps

(30) bps

(40) bps

—

Total Operating Margin Change

10 bps

360 bps

160 bps

290 bps

40 bps

220 bps

(100) bps

160 bps

Total Operating Margin % *

16.4

%

27.2

%

23.8

%

32.9

%

25.2

%

28.4

%

25.8

%

24.5

%

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

30 bps

50 bps

180 bps

10 bps

190 bps

10 bps

60 bps

80 bps **

** Amortization expense from acquisition-related intangible assets had an unfavorable impact of ($0.15) on GAAP earnings per share for the first half 2023.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP to NON-GAAP RECONCILIATIONS (UNAUDITED)
AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
Dollars in millions		2023				2022				2023				2022
Numerator:
Net income	$	754			$	738			$	1,468			$	1,400
Discrete tax benefit related to the second quarter 2023		(20	)			—				(20	)			—
Discrete tax benefit related to the second quarter 2022		—				(51	)			—				(51	)
Interest expense, net of tax (1)		53				36				99				73
Other (income) expense, net of tax (1)		(15	)			(18	)			(23	)			(29	)
Operating income after taxes	$	772			$	705			$	1,524			$	1,393
Denominator:
Invested capital:
Cash and equivalents	$	922			$	879			$	922			$	879
Trade receivables		3,216				3,109				3,216				3,109
Inventories		1,921				1,975				1,921				1,975
Net assets held for sale		—				73				—				73
Net plant and equipment		1,901				1,736				1,901				1,736
Goodwill and intangible assets		5,595				5,702				5,595				5,702
Accounts payable and accrued expenses		(2,215	)			(2,241	)			(2,215	)			(2,241	)
Debt		(8,222	)			(7,640	)			(8,222	)			(7,640	)
Other, net		(24	)			(214	)			(24	)			(214	)
Total net assets (stockholders' equity)		3,094				3,379				3,094				3,379
Cash and equivalents		(922	)			(879	)			(922	)			(879	)
Debt		8,222				7,640				8,222				7,640
Total invested capital	$	10,394			$	10,140			$	10,394			$	10,140
Average invested capital (2)	$	10,366			$	10,143			$	10,292			$	10,024
Net income to average invested capital (3)		29.1	%			29.1	%			28.5	%			27.9	%
After-tax return on average invested capital (3)		29.8	%			27.8	%			29.6	%			27.8	%

(1) Effective tax rate used for interest expense and other (income) expense for the three months ended June 30, 2023 and 2022 was 23.6% and 23.9%, respectively. Effective tax rate used for interest expense and other (income) expense for the six months ended June 30, 2023 and 2022 was 23.1% and 23.5%, 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 June 30, 2023 and 2022 were converted to an annual rate by multiplying the calculated return by 4. Returns for the six months ended June 30, 2023 and 2022 were converted to an annual rate by multiplying the calculated return by 2.

A reconciliation of the tax rate for the three and six months ended June 30, 2023, excluding the second quarter 2023 discrete tax benefit of $20 million related to amended 2021 U.S. taxes, is as follows:

	Three Months Ended							Six Months Ended
	June 30, 2023							June 30, 2023
Dollars in millions	Income Taxes				Tax Rate			Income Taxes				Tax Rate
As reported	$	207			21.4	%		$	415			22.0	%
Discrete tax benefit related to the second quarter 2023		20			2.2	%			20			1.1	%
As adjusted	$	227			23.6	%		$	435			23.1	%

A reconciliation of the tax rate for the three and six months ended June 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:

	Three Months Ended							Six Months Ended
	June 30, 2022							June 30, 2022
Dollars in millions	Income Taxes				Tax Rate			Income Taxes				Tax Rate
As reported	$	165			18.3	%		$	364			20.7	%
Discrete tax benefit related to the second quarter 2022		51			5.6	%			51			2.8	%
As adjusted	$	216			23.9	%		$	415			23.5	%

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								Six Months Ended
	June 30,								June 30,
Dollars in millions		2023				2022				2023				2022
Net cash provided by operating activities	$	790			$	501			$	1,518			$	824
Less: Additions to plant and equipment		(85	)			(81	)			(198	)			(155	)
Free cash flow	$	705			$	420			$	1,320			$	669
Net income	$	754			$	738			$	1,468			$	1,400
Net cash provided by operating activities to net income conversion rate		105	%			68	%			103	%			59	%
Free cash flow to net income conversion rate		94	%			57	%			90	%			48	%

ADJUSTED NET INCOME PER SHARE - DILUTED (UNAUDITED)
	Three Months Ended
	June 30,
		2023				2022
As reported	$	2.48			$	2.37
Discrete tax benefit related to the second quarter 2023		(0.07	)			—
Discrete tax benefit related to the second quarter 2022		—				(0.16	)
As adjusted	$	2.41			$	2.21

	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