Michael M. Larsen
Senior Vice President & Chief Financial Officer at Illinois Tool Works
Thank you, Chris, and good morning, everyone. Starting on Slide 3, as expected, the third quarter ended up looking a lot like the second quarter with continued strong operational execution in a moderating demand environment. Total revenue declined 1.6% with organic revenue down 1.4%. Foreign currency translation reduced revenue by 0.4% and acquisitions increased revenue by 0.2%. On a geographic basis, organic revenue declined about 3% in North America, Europe was down 0.5% and Asia Pacific was down 1% with China essentially flat. In this environment, the ITW team continued to focus and execute well on the things that we can control as evidenced by six of our seven segments expanding operating margin driven primarily by enterprise initiatives that contributed between 70 and 180 basis points to each segment and 130 basis points at the enterprise level.
Third quarter operating margin was 26.5%, up 30 basis points sequentially from the second quarter and flat with the prior year due to a tough comparison. As you may recall, last year's Q3 margin of 26.5% expanded 200 basis points compared to 2022 due in part to the favorable impact of a few corporate items that we discussed on the call last year, including a one-time insurance recovery. Excluding those one-time items last year and looking just at segment operating margin, which is included in the press release tables, our segment operating margin increased by 110 basis points compared to the prior year, which is more in line with our typical margin expansion on a quarterly basis.
GAAP EPS of $3.91 was up 53% and included a $1.26 gain from the divestiture of our non-controlling equity interest in Wilsonart. Excluding this gain, EPS of $2.65 was an increase of 4% year-over-year. I wanted to spend a minute on the previously announced Wilsonart divestiture. The proceeds from the transaction net of transaction costs were approximately $395 million, which we would use to reduce our commercial paper balance. The transaction resulted in a pre-tax gain of $363 million and income taxes on the gain were more than offset by a discrete tax benefit of $107 million related to the utilization of capital loss carryforwards, which resulted in the favorable GAAP EPS impact of $1.26.
Free cash flow was $783 million, which was 102% conversion of adjusted net income. And as Chris mentioned, in the third quarter, we raised our dividend by 7% to an annualized payout of $6 per share, which marks our 61st consecutive year of increases. And as planned, we repurchased $375 million of our own shares during the quarter. The effective tax rate in the quarter of 14.9% was below our typical tax rate in the 24% to 25% range. As you can see from the reconciliation in the press release, the tax rate was favorably impacted by several discrete items in the quarter, including the Wilsonart transaction. Excluding these discrete items, our core tax rate was 23.7%. So in summary, the third quarter looked a lot like the second quarter with moderating, but also stable demand and solid operating margin and profitability performance as we continue to focus and execute well on the things that we can control.
Please turn to Slide 4 for a look at our year-to-date segment margin performance. And as you can see from the table on the left side, six of our seven segments have expanded their already best-in-class margins year-to-date and three segments by more than 100 basis points. Food equipment is a bit of an outlier due to the growth investments in our service business and specifically the near-term inefficiencies associated with onboarding of new service technicians to support accelerated organic growth in this business. This margin headwind is now largely behind the Food equipment segment as evidenced by 110 basis points of margin improvement in the third quarter. Total company margin is up 180 basis points which in fairness includes 100 basis points from the one-time LIFO adjustment in the first quarter, but still solid performance in the current environment.
Moving to the segments and starting with automotive OEM. Organic revenue declined 3% in the third quarter as industry build rates continued to come down. North America was down 6% as the D3 customer builds were down 9%. Europe was down 5% and China was down 2%. Compared to the automobile industry build data, the segment has outperformed builds by about 200 basis points year-to-date and we expect similar outperformance in the fourth quarter. The segment also delivered solid operating margin performance of 19.4%, a 50 basis points increase despite lower volume and we expect more progress in the fourth quarter and next year as we continue to work towards our long-term goal of achieving operating margins in the low to mid 20s by 2026 in this segment.
Turning to Slide 5. Organic revenue in Food Equipment was about flat against a tough comp of plus 6% last year as equipment was down 4% and offset by service, which grew 7%. Regionally, North America was down 2% after being up 10% last year with institutional sales about flat as healthcare was up mid single-digits and restaurants were down about 10%. International was solid, up 3% with the service business up 8% and Europe up 4%. Operating margin improved 110 basis points due to the service margin normalizing and a solid contribution from enterprise initiatives. As we mentioned last quarter, we expect margin to continue to improve as we go through the year.
Test and measurement and electronics organic revenue was down only 1% after being down 3% last quarter with stable demand in semiconductor, electronics and capex sensitive end markets. While test and measurement was down 3%, electronics was up 1% in the quarter after being down 3% last quarter and this marked the first quarter of positive growth in electronics since the end of 2022 and we're beginning to see increased semiconductor customer activity suggesting that perhaps we are near a bottom for this market. As we've discussed before, we remain very well-positioned to capitalize on the growth opportunities in this space when the inevitable recovery does happen. Operating margin expanded by 190 basis points in the quarter to 25.7%.
Moving on to Slide 6. Welding's organic revenue declined 1%, a meaningful improvement from being down 5% in the second quarter as both equipment and consumables revenue declined 1%. North America revenue was down 2%, but international was up 6% with solid growth in Europe and China. As we talked about at the beginning of the year, the welding team was planning on a solid contribution to the top line from the launch of new products, which in the third quarter resulted in a 3% plus contribution to growth. And this is just one of many examples inside the company that illustrates how continued progress on CBI as Chris was talking about gives our segments the ability to gain share and outgrow their end markets. Operating margin of 32.3% was a third quarter record for the welding segment. Polymers and fluids organic revenue grew 1% with polymers up 10% due to international strength and fluids was up 3%. Automotive aftermarket which as you know is tied closely to consumer discretionary spending was down 3% in the quarter. On a geographic basis, North America declined 5% and international grew 11% with Europe again showing solid demand.
Turning to Slide 7. Organic revenue in construction products was down 9% as construction end markets took a sizable step back from the second quarter with new housing starts down 10% on an annualized basis as compared to down 6% in the second quarter. As a result, North America declined 10% with residential down 12% and commercial construction down 7%. Europe was down 4% and Australia and New Zealand was down 11%. Despite the lower volume, operating margin of 30.2% was a record for the segment with another significant contribution from enterprise initiatives. Finally, specialty products had another solid quarter with organic revenue growth of 6% with strength across the portfolio as both equipment and consumables were up 6%.
North America was up 8% and international grew 2%. The 6% growth rate for the segment included about 200 basis points of PLS or product line simplification in the quarter as we continue to make progress on repositioning some of our specialty products divisions for consistent above market organic growth. We expect about 300 basis points of PLS in the fourth quarter and that the segment will be flat to up low-single-digits for the full-year. Operating margin expanded 330 basis points to 31.1%, a third quarter record for the segment with strong contributions from operating leverage and enterprise initiatives.
Moving to Slide 8 and our updated full year 2024 guidance. As you've seen all year, the ITW team continues to execute at a very high level and find a way to leverage our business model and high quality diversified business portfolio to deliver solid operational and financial results in a challenging demand environment. Looking ahead at the fourth quarter, we do not expect the near-term demand environment to improve. And as usual, our guidance is based on current levels of demand seasonally adjusted and foreign currency exchange rates. As a result, we're maintaining our previous projection for revenue and organic growth to be approximately flat for the year.
We're also maintaining our full year operating margin guidance, which is projected to be between 26.5% and 27%, an improvement of 165 basis points at the midpoint with enterprise initiatives contributing more than 100 basis points. As you saw in the press release, we incorporated the impact of the Wilsonart divestiture gain and a lower projected effective tax rate of 21.5% for the full year into our EPS guidance as we raised GAAP EPS guidance from a range of $10.30 to $10.40 per share by $1.33 to a new range of $11.63 to $11.73 per share. Excluding the Wilsonart gain, the EPS range is $10.37 to $10.47 per share or $10.42 at the midpoint.
So in summary, while the overall demand environment remains pretty uncertain and challenging in the near-term, we remain laser focused on leveraging ITW's unique strengths and capabilities to optimize our ability to deliver differentiated performance over the long-term.
And with that, Erin, I'll turn it back to you.
