Michael Larsen
Senior Vice President and Chief Financial Officer at Illinois Tool Works
Thank you, Chris. Good morning, everyone. In Q4, the ITW team delivered a solid finish operationally and financially to a strong year for the company.
Starting with the top line, the soft market demand for capex that we talked about in our Q3 earnings call continued into the fourth quarter. In addition, customer and channel inventory reductions and the automotive industry strike reduced our organic growth rate by approximately 1.5%, resulting in essentially flat revenue and organic growth on a year-over-year basis.
That said, we finished the year with stable to slightly improving demand on a sales per day basis, as evidenced by sequential revenue growth of plus 2.5% from Q3 into Q4 compared to our historical sequential growth of plus 1.5%. Foreign currency translation added 1.2% of revenue and divestitures reduced revenue by 0.4%.
GAAP EPS was $2.38 and included a $0.04 impact from the devaluation of the Argentine currency.
On the bottom line, operating income was a Q4 record of $988 million and operating margin was flat year-over-year, as enterprise initiatives of 150 basis points and 60 basis points of price-cost margin benefit net of year-over-year inventory revaluations were offset by a combination of growth investments, including headcount adds, higher employee-related costs such as wages and benefits, as well as increased restructuring expenses year-over-year.
Free cash flow grew 39% to a fourth quarter record of $908 million, with a conversion to net income of 127%. Overall, for Q4, solid operational execution and financial performance in a pretty challenging environment.
Please turn to slide 4, starting with one of the highlights for Q4 and the year -- our free cash flow performance on the left-side of the page. And as you can see, our full-year free cash flow was up more than $1 billion to a record $3.1 billion as our inventory months on-hand metric continued its glidepath to pre-COVID levels.
Now let's move to the segment results, starting with Automotive OEM, which led the way with organic growth of 8% despite North America being down 9% due to the impact of the automotive strike. Meanwhile, Europe's organic growth rate was plus 11% and China was up 31%, driven by strong market share and penetration gains in the rapidly-growing EV market.
Operating margin was 19.2% excluding 160 basis points of headwind from higher 80/20 front-to-back restructuring expenses as the Automotive OEM team continues to work toward its margin goal in the low-to mid-20s over the next two to three years as outlined at our Investor Day.
Looking forward, we expect automotive OEM to grow 3% to 5% in 2024 based on an assumption of essentially flat global auto builds year-over-year, plus our typical penetration gains of 2% to 3% and continued above-market organic growth in China.
Turning to slide 5. Food Equipment delivered organic growth of 3% against the tough comparison of plus 17% in Q4 last year. Equipment grew 1% and service was very strong, up 7% for the quarter. By region, North America grew 4% with institutional end markets up in the mid-teens, retail up mid-single-digits, and restaurants down in the high-single-digits. Europe and Asia-Pacific, both grew 1%.
Test & Measurement and Electronics organic revenue was down 1% due to continued softness in semiconductor related end markets. While, Test & Measurement grew 5%, Electronics declined 14%.
Moving on to slide 6. Slower demand in Welding resulted in an organic revenue decline of 7%. Equipment was down 8% and consumables were down 6%. Industrial sales declined 11% versus a tough comparison of plus 23%. Commercial was down 2% and oil and gas was down 3%. Overall, North America was down 7% and international was down 6%.
Polymers & Fluids organic revenue declined 2% with automotive aftermarket down 3%, polymers grew 6% and fluids was down 7%. Operating margin expanded 270 basis points to an all-time high of 28.5% for the segment.
Turning to slide 7. In a tough housing market, Construction Products organic revenue declined 4% as North America was essentially flat with residential renovation flat and commercial construction up 3%. International markets have been soft all year. And in the fourth quarter, Europe was down 9% and Australia and New Zealand was down 5%.
Specialty Products organic revenue was down 5% as North America was down 6% and international declined 5%. Consumables were down 10% and equipment revenue grew 8%.
Moving to slide 8 and full-year 2023 results. And as Chris said, throughout the year, our colleagues around the world did an exceptional job of delivering for our customers and responding decisively to a challenging and volatile market demand environment.
As a result of their efforts, ITW delivered record financial performance in 2023 with solid organic growth of 2% on top of 12% growth in both 2021 and 2022. Best-in class margins of more than 25% and after tax return on invested capital of more than 30%.
And we delivered these results while continuing to fully fund projects to accelerate above-market organic growth and sustain productivity in our highly profitable core businesses.
We raised our dividend 7% and return more than $3 billion to shareholders in the form of dividends and share repurchases.
Move to slide 9 and our guidance for full-year 2024. And looking ahead, we definitely see some positives in terms of moderating headwinds in the external environment from supply chain, input cost inflation and customer channel partner inventory reductions, but there is certainly some challenges including lower automotive builds that I talked about earlier, for example.
Per our usual process, our top line guidance of revenue growth of 2% to 4% and organic growth of 1% to 3% is based on current levels of demand adjusted for typical seasonality and incorporate current foreign exchange rates.
Operating margin is expected to improve by about 100 basis points to a range of 25.5% to 26.5%, which includes 100 basis points contribution from our enterprise initiatives. After-tax return on invested capital is expected to remain firmly at 30% plus, and we expect strong free cash flows again, with conversion greater than net income.
For 2024, we're projecting GAAP EPS in the range of $10 to $10.40, which includes headwinds of about $0.10 of higher interest expense and $0.20 of higher income tax expense, with an expected tax rate in the range of 24% to 24.5%.
In terms of cadence for the year, we expect our typical first half/second-half EPS split of 49% and 51%.
Our capital allocation plans for 2024 are consistent with our longstanding disciplined capital allocation framework that we discussed at last year's investor days. Our top priority remains internal investments to support the organic growth initiatives associated with the next phase of the enterprise strategy and sustain productivity in our highly profitable core businesses.
Second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of ITW's total shareholder return model.
Third, selective high-quality acquisitions enhance ITW's long-term profitable growth potential, have significant margin improvement opportunity from the application of our proprietary and powerful 80/20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' capital.
And finally, ITW's surplus capital is allocated to an active share repurchase program as we plan to buyback $1.5 billion of our own shares in 2024.
Turning to our last slide, slide 10 for 2024 organic growth projections by segment. And as you can see, five of seven segments combined are projecting organic growth of approximately 4% at the midpoint, partially offset by some unique challenges in Construction and Specialty Products.
These segment projections are the outcome of the bottom-up planning process that we completed in January and a combination of several factors, including current levels of demand, deep underground market and customer insights from our divisions, market share gain expectations, and the growing contribution from our customer backed innovation efforts and the associated new product launches in every one of our divisions.
Consistent with ITW's continuous improvement, never satisfied mindset, every segment is projecting to improve their operating margin performance again in 2024, with another solid contribution from the enterprise initiatives across-the-board.
So, overall, we're heading into the first year of our next phase enterprise strategy well-positioned to continue to outperform whatever economic conditions emerge as we move through 2024.
With that, Karen, I'll turn it back to you.
