ITW(ITW) - 2022 Q4 - Annual Report

Part I Business ITW is a global diversified manufacturer operating through seven segments guided by its unique ITW Business Model - ITW is a global manufacturer of a diversified range of industrial products and equipment with 84 divisions in 51 countries and approximately 46,000 employees as of year-end 2022[10] - The company's operations are organized into seven reporting segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding, Polymers & Fluids, Construction Products, and Specialty Products[11] - The core of ITW's value creation is its Business Model, which consists of three elements: the 80/20 Front-to-Back process, Customer-back Innovation, and a Decentralized, Entrepreneurial Culture[14][15][17] - The company's enterprise strategy, initiated in 2012, focuses on achieving full potential through portfolio discipline, 80/20 excellence, and driving organic growth[18][21][22] - In 2022, ITW divested two businesses for a combined pre-tax gain of $197 million, as part of its ongoing portfolio refinement[26] - As of year-end 2022, the company holds approximately 19,200 granted and pending patents, underscoring its focus on innovation[15] Risk Factors The company faces significant economic, operational, strategic, and regulatory risks that could impact its business - Economic Risks: The COVID-19 pandemic, global economic conditions, geopolitical instability (including the Russia-Ukraine conflict), rising interest rates, and foreign currency fluctuations are cited as significant economic risks[58][61][63][65] - Business & Operational Risks: Key operational risks include the failure to realize expected benefits from the enterprise strategy, inability to introduce new products, inadequate protection of intellectual property, potential impairment of significant goodwill and intangible assets, raw material price increases, and cybersecurity breaches[66][68][69][70][71][73] - Strategic Risks: The company faces risks related to acquisitions, such as the inability of an acquired business to adapt to the ITW Business Model, and retained liabilities from divestitures[75][76] - Legal & Regulatory Risks: Risks include unfavorable changes in tax laws, adverse outcomes in legal proceedings, impacts from environmental regulations and climate change, and potential penalties for violations of anti-bribery, trade, or other laws[77][78][80][81] Properties ITW operates approximately 440 facilities globally, with the majority located outside the United States - As of December 31, 2022, the Company operated approximately 440 plants and office facilities worldwide[86] - Approximately 290 of the facilities were located outside of the United States, with principal foreign countries including Germany, China, France, and the United Kingdom[86] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock is listed on the NYSE, and it actively manages capital through share repurchase programs - The company's common stock is listed on the New York Stock Exchange (NYSE)[92] - The $3.0 billion 2018 stock repurchase program was completed in the first quarter of 2022[95] - A new $3.0 billion stock repurchase program was authorized in May 2021, with approximately $1.5 billion remaining for repurchases as of December 31, 2022[96] Q4 2022 Share Repurchase Activity (in millions) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2022 | — | $ — | | November 2022 | 0.5 | $222.66 | | December 2022 | 1.8 | $221.25 | | Total | 2.3 | | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2022 financial performance, including revenue growth and segment results Consolidated Results of Operations In 2022, the company achieved 10.2% revenue growth to $15.9 billion, driven by 12.1% organic growth Consolidated Results: 2022 vs 2021 | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Operating Revenue | $15,932M | $14,455M | 10.2% | | Operating Income | $3,790M | $3,477M | 9.0% | | Operating Margin | 23.8% | 24.1% | (30) bps | - For 2022, organic revenue grew 12.1%, with growth in all seven segments, offset by a 4.3% unfavorable foreign currency translation impact[129][130] - Diluted EPS for 2022 was $9.77, an increase of 14.8% from 2021; excluding a $0.60 per share gain from divestitures, EPS increased 7.8%[130] Consolidated Results: 2021 vs 2020 | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Operating Revenue | $14,455M | $12,574M | 15.0% | | Operating Income | $3,477M | $2,882M | 20.6% | | Operating Margin | 24.1% | 22.9% | 120 bps | Results of Operations by Segment All seven business segments reported organic revenue growth in 2022, led by Food Equipment Operating Revenue by Segment (in millions) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Automotive OEM | $2,969 | $2,800 | $2,571 | | Food Equipment | $2,444 | $2,078 | $1,739 | | Test & Measurement and Electronics | $2,828 | $2,346 | $1,963 | | Welding | $1,894 | $1,650 | $1,384 | | Polymers & Fluids | $1,905 | $1,804 | $1,622 | | Construction Products | $2,113 | $1,945 | $1,652 | | Specialty Products | $1,799 | $1,854 | $1,660 | Operating Income by Segment (in millions) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Automotive OEM | $499 | $545 | $457 | | Food Equipment | $618 | $469 | $342 | | Test & Measurement and Electronics | $684 | $643 | $507 | | Welding | $583 | $490 | $376 | | Polymers & Fluids | $479 | $457 | $402 | | Construction Products | $548 | $530 | $421 | | Specialty Products | $481 | $504 | $432 | Liquidity and Capital Resources The company maintains strong liquidity through free cash flow, prioritizing dividends and share repurchases - Primary sources of liquidity are free cash flow and short-term credit facilities; as of Dec 31, 2022, the company had $708 million in cash and no outstanding borrowings under its $3.0 billion revolving credit facility[180][194] Cash Flow Summary (in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,348 | $2,557 | $2,807 | | Additions to plant and equipment | ($412) | ($296) | ($236) | | Free cash flow | $1,936 | $2,261 | $2,571 | - In 2022, the company repurchased approximately 8.3 million shares for $1.75 billion and paid $1.5 billion in dividends[130] - The total debt to EBITDA ratio improved to 1.8x in 2022 from 2.0x in 2021 and 2.5x in 2020[197] - After-tax Return on Average Invested Capital (ROIC) was 29.1% in 2022, a slight decrease from 29.5% in 2021, but up from 26.2% in 2020[187] Critical Accounting Estimates Key estimates involve income taxes, goodwill impairment, and pension benefit obligations - The company identifies three critical accounting estimates: Income Taxes, Goodwill and Intangible Assets, and Pension and Other Postretirement Benefits[199][200] - Goodwill and Intangible Assets: The company had approximately $5.6 billion in goodwill and intangible assets as of December 31, 2022, with impairment testing relying on estimates of future cash flows and market data[201][202] - Pension Benefits: Determining pension obligations involves significant assumptions about discount rates and expected long-term return on plan assets; a 25 basis point decrease in the discount rate would increase the U.S. pension obligation by approximately $27 million[203][204] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from currency, commodity, and interest rate fluctuations - The company is exposed to market risks including fluctuations in currency exchange rates, commodity price volatility, and changes in interest rates[206] - To hedge against foreign currency risk, the company has designated its Euro-denominated notes as a hedge of its net investment in Euro-based operations[209] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements and the independent auditor's report Key Financial Statement Data (Year Ended Dec 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Income Statement | | | Operating Revenue | $15,932 | | Operating Income | $3,790 | | Net Income | $3,034 | | Diluted EPS | $9.77 | | Balance Sheet | | | Total Assets | $15,422 | | Total Liabilities | $12,333 | | Total Stockholders' Equity | $3,089 | | Cash Flow Statement | | | Net Cash from Operating Activities | $2,348 | - Management assessed the company's internal control over financial reporting as effective as of December 31, 2022, based on the COSO framework[212] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[216] Part III Directors, Executive Officers, Compensation, and Governance Information on governance, compensation, and security ownership is incorporated by reference from the 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Director Independence (Item 13), and Principal Accounting Fees (Item 14) is incorporated by reference from the Company's 2023 Proxy Statement[358][360][361][362][363] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K; the financial statements are located in Item 8[366]