GLENVIEW, Ill. — Illinois Tool Works Inc. on Tuesday reported its third quarter 2022 results.
“Despite softening demand and inventory destocking in certain end-markets, the ITW team delivered another quarter of strong performance with organic growth of 16%, operating margin of 24.5%, after-tax ROIC of 29.9% and earnings per share growth of 16%,” said Chairman and CEO E. Scott Santi. “Our business teams around the world continue to do an exceptional job of navigating what remains a dynamic and challenging operating environment to deliver for our customers and for the company.
"In addition, we were pleased to see incremental margins return to our normal 30%-plus historical levels in the third quarter as the impact of volume growth, enterprise initiatives, pricing actions, and some moderation in the pace of input cost inflation drove a 130 basis point improvement in operating margin in our base business.
“While it is clear that the economic outlook is becoming increasingly uncertain, demand remains strong across the majority of our business portfolio and as a result ITW is well-positioned to deliver a strong finish to what has been a very strong year.”
Third quarter revenue of $4 billion increased 13% with organic revenue growth of 16%. The acquisition of MTS contributed 3% to revenue. Unfavorable foreign currency translation reduced revenue by 6%.
Five of seven segments delivered double-digit organic growth in the quarter, led by Automotive OEM up 25% and Food Equipment up 23%. Test & Measurement and Electronics and Construction Products were both up 17%, Welding up 14%, Polymers & Fluids up 8% and Specialty Products was essentially flat, or up 3% excluding significant 80/20 Front-to-Back driven Product Line Simplification (“PLS”). At the enterprise level, PLS reduced organic growth by (70) basis points. On a geographic basis, organic growth was 17% in North America, 14% in Europe, and 15% in Asia Pacific.
GAAP EPS was $2.35, an increase of 16%, and included $(0.13) of unfavorable foreign currency translation impact and $(0.07) from a higher effective tax rate. Operating margin of 25.1% improved 130 basis points excluding (60) basis points impact from the acquisition of MTS. Enterprise initiatives contributed 110 basis points. Price/cost was positive on a dollar-for-dollar basis and the margin dilution impact continued to moderate in the third quarter to (40) basis points as compared to (200) basis points in the first half of 2022. Operating cash flow was $713 million, and free cash flow was $612 million, an increase of 12% with a conversion rate to net income of 84 percent. The reported tax rate for the third quarter was 23.9 percent.
Consistent with a previously announced plan to divest certain business units, on Oct. 3, ITW closed the sale of a division within the Polymers & Fluids segment for approximately $220 million, subject to certain closing adjustments. The division has annualized revenue of approximately $100 million in 2022. The gain related to this divestiture is estimated to contribute $0.45 to fourth quarter earnings per share.
ITW repurchased $500 million of shares in the third quarter and expects share repurchases of $1.75 billion for the full year. On Aug. 5, the company raised its dividend by 7% to an annualized rate of $5.24 per share.
Based on 12% organic growth year-to-date and current levels of demand, ITW is projecting full-year organic growth guidance of 11% to 12% and full-year revenue growth of 9% to 10%. The acquisition of MTS is expected to add 3% to revenue. Foreign currency translation at current foreign exchange rates is expected to reduce revenues by 5%.
Prior GAAP EPS guidance of $9.00 to $9.40 was adjusted to a narrower range of $9.00 to $9.10 primarily to account for incremental foreign currency translation headwinds and raised by the estimated divestiture gain of $0.45 resulting in the company raising its full-year GAAP EPS guidance to a range of $9.45 to $9.55 per share. For the full year, operating margin is projected to be approximately 24 percent, with enterprise initiatives contributing 100 basis points. Free cash flow is projected to be approximately 80 percent of net income.