ITW(ITW) - 2023 Q2 - Quarterly Report

Part I - Financial Information Financial Statements Illinois Tool Works Inc. reported increased operating revenue to $8.09 billion and net income to $1.47 billion for the six months ended June 30, 2023, alongside improved operating cash flow Statement of Income Statement of Income (Unaudited) | Metric | Three Months Ended June 30, 2023 (Millions USD) | Three Months Ended June 30, 2022 (Millions USD) | Six Months Ended June 30, 2023 (Millions USD) | Six Months Ended June 30, 2022 (Millions USD) | | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $4,074 | $4,011 | $8,093 | $7,950 | | Operating Income | $1,010 | $926 | $1,982 | $1,821 | | Net Income | $754 | $738 | $1,468 | $1,400 | | Diluted EPS | $2.48 | $2.37 | $4.81 | $4.48 | Statement of Financial Position Statement of Financial Position Highlights (Unaudited) | Metric | June 30, 2023 (Millions USD) | December 31, 2022 (Millions USD) | | :--- | :--- | :--- | | Total current assets | $6,404 | $6,270 | | Goodwill | $4,887 | $4,864 | | Total assets | $15,652 | $15,422 | | Total current liabilities | $4,040 | $4,460 | | Long-term debt | $6,947 | $6,173 | | Total liabilities | $12,558 | $12,333 | | Total stockholders' equity | $3,094 | $3,089 | Statement of Cash Flows Cash Flow Summary (Unaudited, Six Months Ended June 30) | Metric | 2023 (Millions USD) | 2022 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,518 | $824 | | Net cash provided by (used for) investing activities | ($180) | ($146) | | Net cash provided by (used for) financing activities | ($1,117) | ($1,284) | | Increase (decrease) in cash and equivalents | $214 | ($648) | - The significant increase in operating cash flow was primarily due to a smaller increase in trade receivables ($42 million vs $396 million) and a decrease in inventories ($140 million) compared to a large increase in the prior year ($374 million)[24] Notes to Financial Statements - In Q4 2022, the company divested two businesses (one in Polymers & Fluids, one in Food Equipment) for a total of $279 million, resulting in a combined pre-tax gain of $197 million. A third business in the Specialty Products segment was sold on April 3, 2023, with no significant gain or loss[28][29] - The effective tax rate for Q2 2023 was 21.4%, up from 18.3% in Q2 2022. The 2023 rate included a $20 million discrete tax benefit, while the 2022 rate included a larger $51 million benefit from a U.S. tax audit resolution[42] - Total debt increased to $8.22 billion as of June 30, 2023, from $7.76 billion at year-end 2022. This was partly due to borrowing €1.3 billion ($1.4 billion) under a new Euro Credit Agreement in May 2023[47][50] Management's Discussion and Analysis (MD&A) ITW's Q2 2023 saw operating revenue of $4.07 billion with 3.0% organic growth, operating margin expansion to 24.8%, and increased diluted EPS, reflecting successful enterprise strategy execution ITW Business Model and Enterprise Strategy - The ITW Business Model is the company's core source of value creation, based on three elements: - 80/20 Front-to-Back Process: An operating system focusing on the most profitable 80% of opportunities and eliminating complexity from the less profitable 20% - Customer-Back Innovation: Developing unique solutions based on understanding the needs of key customers - Decentralized, Entrepreneurial Culture: Enabling businesses to be fast, focused, and responsive to their specific customer needs[61] - The company's next strategic phase (2023-2030) focuses on two key priorities: 1. Executing a growth agenda with high-quality organic growth and selective acquisitions 2. Sustaining foundational strengths, including high-quality ITW Business Model practice and leadership development[64][68] Consolidated Results of Operations Consolidated Results of Operations | Metric | Q2 2023 (Millions USD) | Q2 2022 (Millions USD) | % Change | YTD 2023 (Millions USD) | YTD 2022 (Millions USD) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $4,074 | $4,011 | 1.6% | $8,093 | $7,950 | 1.8% | | Organic Revenue Growth | 3.0% | - | - | 4.1% | - | - | | Operating Income | $1,010 | $926 | 9.0% | $1,982 | $1,821 | 8.8% | | Operating Margin | 24.8% | 23.1% | +170 bps | 24.5% | 22.9% | +160 bps | - Q2 operating margin increased by 170 bps, primarily due to favorable price/cost of 260 bps and benefits from enterprise initiatives of 130 bps, partially offset by higher operating expenses[78] - Diluted EPS for Q2 2023 was $2.48, an increase of 4.6% from $2.37 in Q2 2022. Excluding discrete tax items in both years, EPS increased 9.0%[78] Results of Operations by Segment Segment Operating Revenue (Q2 2023 vs Q2 2022) | Segment | Q2 2023 Revenue (Millions USD) | Q2 2022 Revenue (Millions USD) | % Change | Organic Growth % | | :--- | :--- | :--- | :--- | :--- | | Automotive OEM | 826 | 711 | 16.2% | 16.3% | | Food Equipment | 654 | 614 | 6.3% | 6.9% | | Test & Measurement and Electronics | 700 | 696 | 0.7% | 1.1% | | Welding | 490 | 486 | 0.7% | 0.7% | | Polymers & Fluids | 459 | 496 | (7.6)% | (0.5)% | | Construction Products | 526 | 565 | (6.8)% | (5.7)% | | Specialty Products | 423 | 447 | (5.4)% | (3.6)% | Segment Operating Income (Q2 2023 vs Q2 2022) | Segment | Q2 2023 Income (Millions USD) | Q2 2022 Income (Millions USD) | % Change | Operating Margin % (Q2 2023) | | :--- | :--- | :--- | :--- | :--- | | Automotive OEM | 139 | 101 | 36.2% | 16.8% | | Food Equipment | 182 | 152 | 19.6% | 27.8% | | Test & Measurement and Electronics | 162 | 157 | 3.5% | 23.2% | | Welding | 167 | 142 | 16.8% | 33.9% | | Polymers & Fluids | 119 | 125 | (4.4)% | 25.9% | | Construction Products | 154 | 156 | (1.2)% | 29.3% | | Specialty Products | 109 | 121 | (8.6)% | 26.0% | Liquidity and Capital Resources - Primary sources of liquidity are free cash flow and credit facilities. As of June 30, 2023, the company had $922 million in cash and no borrowings under its $3.0 billion revolving credit facility[124] Free Cash Flow (Unaudited) | Metric | Six Months Ended June 30, 2023 (Millions USD) | Six Months Ended June 30, 2022 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,518 | $824 | | Additions to plant and equipment | ($198) | ($155) | | Free cash flow | $1,320 | $669 | - Under the 2021 Program, the company repurchased 1.6 million shares for $375 million in Q2 2023. As of June 30, 2023, approximately $740 million remained authorized for repurchase[129][150] - The After-tax Return on Average Invested Capital (ROIC) was 29.8% for the three months ended June 30, 2023, an increase from 27.8% in the prior-year period[130] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023. No material changes to internal control over financial reporting were identified during the quarter - The Chairman & CEO and SVP & CFO concluded that as of June 30, 2023, the Company's disclosure controls and procedures were effective[144] - No changes in the Company's internal control over financial reporting were identified during the quarter ended June 30, 2023, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[145] Part II - Other Information Legal Proceedings The company reported no material legal proceedings. The disclosure threshold for environmental legal proceedings involving potential monetary sanctions by a governmental authority is $1 million - The company reports no legal proceedings for the period[147] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors described in the Company's 2022 Annual Report on Form 10-K[148] Unregistered Sales of Equity Securities and Use of Proceeds The company continued its 2021 stock repurchase program, buying back 1.6 million shares for approximately $375 million during the second quarter of 2023. As of June 30, 2023, $740 million remained available for future repurchases under this program - The Board of Directors authorized a $3.0 billion stock repurchase program on May 7, 2021. As of June 30, 2023, approximately $740 million of authorized repurchases remained under this program[150] Share Repurchase Activity (Q2 2023) | Period | Total Number of Shares Purchased (Millions) | Average Price Paid Per Share (USD) | Maximum Value Remaining Under Program (Millions USD) | | :--- | :--- | :--- | :--- | | April 2023 | — | $— | $1,115 | | May 2023 | 1.2 | $227.41 | $825 | | June 2023 | 0.4 | $235.96 | $740 | | Total | 1.6 | | |