ITW(ITW) - 2023 Q4 - Annual Report

Part I Business ITW is a global diversified industrial manufacturer operating through seven segments, driven by its unique Business Model and enterprise strategy - ITW is a global manufacturer with 84 divisions in 51 countries and approximately 45,000 employees as of December 31, 2023[12][44] - The company operates through seven distinct segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding, Polymers & Fluids, Construction Products, and Specialty Products[13][14] - The ITW Business Model, a core competitive advantage, is built on 80/20 Front-to-Back process, Customer-back Innovation, and a Decentralized, Entrepreneurial Culture[17][19] - The 2024-2030 enterprise strategy aims to elevate organic growth as a core strength, driven by Customer-back Innovation (CBI)[23][24] - ITW holds approximately 19,600 granted and pending patents globally, forming a significant intellectual property portfolio[17][38] Risk Factors The company faces economic, operational, strategic, and regulatory risks that could impact its business and financial results - Economic risks include global economic conditions, rising interest rates, and currency fluctuations, as over 50% of net sales are from outside the U.S[57][59][61] - Business and operational risks involve enterprise strategy failure, cybersecurity threats, and raw material price increases or supply shortages[62][67][69] - Strategic transaction risks include potential negative impacts from acquisitions like MTS Test & Simulation and retained liabilities from divestitures[71][72] - Tax, legal, and regulatory risks stem from unfavorable changes in tax laws, adverse legal outcomes, and environmental regulations or climate change[73][74][75] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Cybersecurity ITW manages cybersecurity risk through a global enterprise program based on the NIST Cybersecurity Framework with Board oversight - The company's cybersecurity program is based on the National Institute of Standards and Technology's Cybersecurity Framework (CSF) and includes annual training, vulnerability management, and response planning[83][84] - Oversight is provided by the Board of Directors, a Cybersecurity Governance Committee of senior executives, and a central Cyber Incident Response Team led by the Chief Information Security Officer[85][86][87] - The company has not experienced any material cybersecurity incidents during 2023, 2022, or 2021[84] Properties ITW operates approximately 410 plants and office facilities globally, with production capacity generally exceeding current operating levels - The company operates approximately 410 plants and office facilities globally, with principal foreign operations in China, Germany, France, and the United Kingdom[90] - Properties are considered to be in good operating condition, and production capacity currently exceeds operating levels[91] Legal Proceedings The company reports no material legal proceedings - None. The disclosure threshold for environmental legal proceedings involving a governmental authority is $1 million[92] Mine Safety Disclosures The company reports no mine safety disclosures - None Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ITW's common stock trades on the NYSE, with a new $5.0 billion stock repurchase program announced in August 2023 - The company's common stock is listed on the New York Stock Exchange (NYSE) with the trading symbol "ITW"[96] - A new $5.0 billion stock repurchase program was announced on August 4, 2023, with approximately $5.0 billion remaining authorized as of December 31, 2023[100] Share Repurchases - Q4 2023 | Period | Total Number of Shares Purchased (millions) | Average Price Paid Per Share | Maximum Value of Shares That May Yet Be Purchased Under Programs ($ millions) | | :--- | :--- | :--- | :--- | | October 2023 | 0.6 | $229.18 | $5,227 | | November 2023 | 0.6 | $235.76 | $5,096 | | December 2023 | 0.4 | $253.48 | $4,990 | | Total | 1.6 | | | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, ITW achieved $16.11 billion operating revenue and $4.04 billion operating income, with strong liquidity and capital allocation Consolidated Results of Operations In 2023, ITW's operating revenue increased 1.1% to $16.1 billion, with operating income up 6.6% to $4.0 billion Consolidated Results: 2023 vs 2022 | Metric | 2023 | 2022 | % Change | Organic Change | Divestiture Impact | Foreign Currency Impact | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $16,107M | $15,932M | 1.1% | 2.0% | (0.8)% | (0.1)% | | Operating Income | $4,040M | $3,790M | 6.6% | 7.6% | (0.5)% | (0.3)% | | Operating Margin | 25.1% | 23.8% | +130 bps | +130 bps | +10 bps | — | - In 2023, diluted EPS was $9.74, with 6.4 million shares repurchased for $1.5 billion and $1.6 billion paid in dividends[137] Consolidated Results: 2022 vs 2021 | Metric | 2022 | 2021 | % Change | Organic Change | Acquisition Impact | Foreign Currency Impact | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $15,932M | $14,455M | 10.2% | 12.1% | 2.4% | (4.3)% | | Operating Income | $3,790M | $3,477M | 9.0% | 14.3% | (0.1)% | (4.5)% | | Operating Margin | 23.8% | 24.1% | (30) bps | +40 bps | (60) bps | — | - In 2022, diluted EPS was $9.77, including a $0.60 per share favorable impact from divestiture gains, and 8.3 million shares were repurchased for $1.75 billion[138] Results of Operations by Segment In 2023, Automotive OEM and Food Equipment segments showed strong growth, while Construction Products and Specialty Products declined Operating Revenue by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Automotive OEM | $3,235 | $2,969 | $2,800 | | Food Equipment | $2,622 | $2,444 | $2,078 | | Test & Measurement and Electronics | $2,832 | $2,828 | $2,346 | | Welding | $1,902 | $1,894 | $1,650 | | Polymers & Fluids | $1,804 | $1,905 | $1,804 | | Construction Products | $2,033 | $2,113 | $1,945 | | Specialty Products | $1,697 | $1,799 | $1,854 | Operating Income by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Automotive OEM | $561 | $499 | $545 | | Food Equipment | $713 | $618 | $469 | | Test & Measurement and Electronics | $686 | $684 | $643 | | Welding | $605 | $583 | $490 | | Polymers & Fluids | $482 | $479 | $457 | | Construction Products | $578 | $548 | $530 | | Specialty Products | $449 | $481 | $504 | Liquidity and Capital Resources The company's liquidity is strong, with $3.08 billion free cash flow in 2023 and a 30.4% After-tax ROIC - Capital allocation priorities include internal investments for organic growth, attractive dividends, selective acquisitions, and an active share repurchase program[185] Cash Flow Summary (in millions) | Cash Flow | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $3,539 | $2,348 | $2,557 | | Additions to plant and equipment | $(455) | $(412) | $(296) | | Free cash flow | $3,084 | $1,936 | $2,261 | After-tax Return on Average Invested Capital (ROIC) | Year | After-tax ROIC | | :--- | :--- | | 2023 | 30.4% | | 2022 | 29.1% | | 2021 | 29.5% | Total Debt to EBITDA Ratio | Year | Total Debt to EBITDA | | :--- | :--- | | 2023 | 1.8x | | 2022 | 1.8x | | 2021 | 2.0x | Critical Accounting Estimates Management identifies Income Taxes, Goodwill and Intangible Assets, and Pension Benefits as critical accounting estimates - Income Taxes: Estimates involve interpretation of tax regulations, future taxable income, and uncertain tax positions[206] - Goodwill and Intangible Assets: Impairment testing relies on management's judgment to determine fair value; total goodwill and intangible assets were approximately $5.6 billion as of December 31, 2023[207][208] - Pension and Other Postretirement Benefits: Expense and obligations are determined by actuarial valuations using key assumptions for discount rates, expected return on plan assets, and life expectancy[209] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate changes and foreign currency fluctuations, mitigated by Euro-denominated debt hedges - The company is exposed to interest rate risk related to its fixed-rate debt and variable-rate commercial paper and Euro term loans[213] - To reduce foreign currency risk, Euro-denominated notes and term loans are designated as hedges of net investment in Euro-denominated foreign operations[215] Financial Statements and Supplementary Data This section includes consolidated financial statements, auditor's report, and notes, with Income Taxes identified as a critical audit matter - Management assessed the company's internal control over financial reporting as effective as of December 31, 2023, based on the COSO framework[218] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and internal control over financial reporting[222] - The auditor identified Income Taxes as a Critical Audit Matter due to complex judgments required for determining tax expense and unrecognized tax benefits[229][231] Statement of Income For 2023, ITW reported $16.107 billion operating revenue, $4.040 billion operating income, and $9.74 diluted EPS Statement of Income Highlights (in millions, except per share amounts) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Operating Revenue | $16,107 | $15,932 | $14,455 | | Operating Income | $4,040 | $3,790 | $3,477 | | Net Income | $2,957 | $3,034 | $2,694 | | Diluted EPS | $9.74 | $9.77 | $8.51 | Statement of Financial Position As of December 31, 2023, ITW had $15.518 billion total assets, $12.505 billion total liabilities, and $3.013 billion total equity Statement of Financial Position Highlights (in millions) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $1,065 | $708 | | Goodwill | $4,909 | $4,864 | | Total Assets | $15,518 | $15,422 | | Liabilities & Equity | | | | Total debt (Short & Long-term) | $8,164 | $7,763 | | Total Liabilities | $12,505 | $12,333 | | Total Stockholders' Equity | $3,013 | $3,089 | Statement of Cash Flows In 2023, net cash from operations was $3.539 billion, with a $357 million increase in cash and equivalents during the year Statement of Cash Flows Highlights (in millions) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $3,539 | $2,348 | $2,557 | | Net cash provided by (used for) investing activities | $(403) | $(110) | $(984) | | Net cash provided by (used for) financing activities | $(2,782) | $(3,000) | $(2,564) | | Net increase (decrease) in cash | $357 | $(819) | $(1,037) | Notes to Financial Statements The notes provide detailed information on accounting policies, acquisitions, divestitures, revenue, income taxes, goodwill, debt, and pensions - Note 3 (Acquisitions): Details the December 1, 2021 acquisition of the MTS Test & Simulation business for $750 million, adding $430 million in goodwill and $259 million in intangible assets[269] - Note 4 (Divestitures): In 2022, two businesses were divested for $279 million proceeds, resulting in a $197 million pre-tax gain; another business was sold in April 2023 with no significant gain or loss[272][273] - Note 11 (Debt): Total debt was $8.164 billion as of Dec 31, 2023; the company maintains a $3.0 billion revolving credit facility and borrowed €1.3 billion under a new Euro Credit Agreement in May 2023[308][309][317] - Note 14 (Stockholders' Equity): A new $5.0 billion share repurchase program was announced on August 4, 2023, completing the 2021 program in Q4 2023[340][341] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control - The President & CEO and Senior Vice President & CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[365] - No changes in internal control over financial reporting were identified during Q4 2023 that materially affected or are reasonably likely to affect controls[367] Other Information Executive Vice President Michael R. Zimmerman adopted a Rule 10b5-1 trading arrangement on December 6, 2023 - Executive Vice President Michael R. Zimmerman adopted a Rule 10b5-1 trading arrangement on December 6, 2023[368] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no disclosures are required under this item - None Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2024 Proxy Statement[371][372][373] Executive Compensation Information regarding director and executive compensation is incorporated by reference from the 2024 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2024 Proxy Statement[374] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the 2024 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2024 Proxy Statement[375] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2024 Proxy Statement[376] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2024 Proxy Statement[377] Part IV Exhibit and Financial Statement Schedules This section lists financial statements and provides a detailed list of all exhibits filed with the report - This item lists the financial statements filed under Item 8 and notes that no financial statement schedules are included[379] - A comprehensive list of exhibits is provided, including credit agreements, indentures, incentive plans, and various certifications[380][381][382] Form 10-K Summary The company reports no Form 10-K summary - None