Illinois Tool Works (ITW) 10-K risk factor changes: FY2016 vs FY2015

Slower economic growth, financial market instability, high unemployment, government deficit reduction, sequestration and other austerity measures impacting the markets [removed: we serve] [added: the Company serves] can adversely affect the Company’s businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers, increasing order cancellations and the difficulty in collecting accounts [removed: receivable, increasing price competition, and increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.]

The [removed: timing and amount of] benefits from the Company’s [removed: enterprise initiatives] [added: Enterprise Strategy] may not be as expected and the Company's financial results could be adversely impacted.

[removed: The Company’s enterprise strategy and associated] [added: As the Company has substantially completed its Enterprise Strategy] initiatives [removed: include] [added: of] portfolio [removed: management,] [added: management and] business structure [removed: simplification] [added: simplification, its focus has pivoted to organic revenue growth] and [removed: strategic sourcing.][added: continued margin improvement.]

If the Company is unable to [removed: achieve] [added: realize] the expected benefits from [removed: these initiatives or is unable to complete these initiatives without material disruption to] its [removed: businesses, the timing and amount of benefits from these initiatives may not be as expected and] [added: Enterprise Strategy initiatives,] the Company's financial results could be adversely impacted.

[removed: In the past the] [added: The] Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions.

Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts [added: prices to its customers in the form of price increases or its ability to do so could be delayed.]

These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; hardware failures; [removed: or] [added: attacks by] computer [removed: viruses.][added: hackers; computer viruses; employee error or malfeasance.]

In addition, security breaches could result in unauthorized disclosure of confidential [removed: information.][added: information or personal data belonging to our employees, partners, customers or suppliers.]

Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the expected [removed: acquisition or disposition] [added: performance] of [added: acquired businesses and impact of divested] businesses, economic conditions in various geographic regions, the timing and amount of share repurchases, the [removed: Company's Enterprise Strategy and its ability to manage its strategic business initiatives and the] timing and amount of benefits [removed: therefrom,] [added: from] the [added: Company's Enterprise Strategy, the] adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the [added: expected impact of a change in the method of calculating the service and interest cost components of net periodic pension and other postretirement benefit costs to a specific spot rate approach, the] availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the [added: estimated timing and amount related to the resolution of tax matters.]

The Company's businesses are impacted by economic conditions around the globe, including the uncertainty created by the United Kingdom’s June 2016 vote to leave the European Union.

receivable, increasing price competition, or increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.

The United Kingdom's vote in June 2016 to leave the European Union may increase certain of the risks and uncertainties described above.

The United Kingdom represented approximately 5% of the Company's total consolidated operating revenue for the year ended December 31, 2016.

Product line and customer base simplification activities, which are core elements of the Company’s 80/20 management process, continue to be applied to the Company’s scaled up operating divisions and remain active elements of the Enterprise Strategy.

The Company's acquisition of businesses could negatively impact its profitability and returns.

Acquisitions, including the Company’s acquisition of the Engineered Fasteners and Components business on July 1, 2016 from ZF TRW, involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect the Company's profitability and returns:

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| --- | --- |

| • | The acquired business could under-perform relative to the Company’s expectations and the price paid for it, or not perform in accordance with the Company’s anticipated timetable. |

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| --- | --- |

| • | The acquired business could cause the Company's financial results to differ from expectations in any given fiscal period, or over the long term. |

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| --- | --- |

| • | Acquisition-related earnings charges could adversely impact operating results. |

| | |

| --- | --- |

| • | The acquired business could place unanticipated demands on the Company's management, operational resources and financial and internal control systems. |

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| --- | --- |

| • | The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the acquired business’s activities. The realization of any of these liabilities or deficiencies may increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations. |

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| • | As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize charges relating to the impairment of these assets. |

The Company's businesses are impacted by economic conditions around the globe.

The portfolio management initiative, which included divesting businesses no longer aligned with the Company’s long-term objectives, is essentially complete; however, product line and customer base simplification, which is a core element of the Company’s 80/20 management process, is being reapplied to the Company’s scaled up operating divisions and remains an active element of this initiative.

The Company's business structure simplification initiative is also essentially completed, although efforts to realize efficiencies in structure are continuous.

In addition, the Company continues to seek to benefit from its size and scale in the procurement process through its strategic sourcing initiatives, and the leveraging of purchasing power across businesses involves some execution risk.

Also, as its portfolio and 80/20 management activities have positioned its businesses for profitable growth, the Company has shifted its focus to organic growth and has expressed its belief that organic growth will be 200 basis points above global GDP by the end of 2017.

prices to its customers in the form of price increases or its ability to do so could be delayed.

estimated timing and amount related to the resolution of tax matters.

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with [removed: 84] [added: 85] divisions in 57 countries.

As of December 31, [removed: 2015,] [added: 2016,] the Company employed approximately [removed: 48,000] [added: 50,000] persons.

The Company's operations are organized and managed based on similar product offerings and [removed: similar] end markets, and are reported to senior management as the following seven segments: Automotive OEM; [added: Food Equipment;] Test & Measurement and Electronics; [removed: Food Equipment;] [added: Welding;] Polymers & Fluids; [removed: Welding;] Construction Products; and Specialty Products.

| • | ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the [removed: Company.] [added: Company and its customers.] Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”) and eliminates [added: cost,] complexity [added: and distractions] associated with the less profitable opportunities (the “20”). 80/20 enables ITW businesses to consistently [removed: deliver] [added: achieve] world-class operational excellence in [removed: regards to] product availability, quality, and innovation, while generating superior financial performance; |

| • | Customer-back innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on [removed: the] insight gathered from the 80/20 management process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are focused on understanding customer needs, particularly those in “80” markets with solid long-term growth fundamentals, and [removed: then] [added: subsequently] creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than [removed: 16,000] [added: 17,000] granted and pending patents; |

| • | ITW’s decentralized, entrepreneurial culture allows ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their [removed: customers.] [added: specific customers' needs.] ITW colleagues [removed: are clear about what is expected of them with regard] [added: recognize their unique responsibilities] to [removed: ITW’s business model, strategy,] [added: execute the Company's strategy] and values. [removed: This leads to] [added: As] a [added: result, the Company maintains a] focused and simple organizational structure that, combined with outstanding execution, delivers [removed: operational excellence] [added: best-in-class services] adapted to [removed: their specific] [added: each business'] customers and end markets. |

In [removed: 2013,] [added: late 2012,] ITW began the process of transitioning the Company onto its current strategic path to fully leverage the compelling performance potential of the ITW Business Model.

Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past [removed: three] [added: four] years.

The roots of ITW’s Enterprise Strategy began in [removed: 2011-2012,] [added: late 2011 / early 2012,] when the Company undertook a complete review of its performance.

[removed: ITW gathered deep insights from] [added: Focusing on] its businesses [removed: that were] delivering consistent above-market growth with best-in-class margins and returns, [removed: and defined] [added: ITW developed] a strategy to replicate that performance [removed: throughout the Company.][added: across its operations.]

Based on this rigorous [removed: and thorough] evaluation, ITW determined [removed: two paths] [added: that solid and consistent above-market organic growth must be the core growth engine] to deliver world-class financial performance and compelling long-term returns for its shareholders.

[removed: Shift the Company’s Core Growth Engine] [added: To shift its primary growth engine] to [removed: Organic][added: organic, the Company began executing a multi-step approach.]

[added: | • | The first step was to narrow the focus and improve the quality of ITW’s business portfolio.] As part of [removed: this initiative to realign] the [removed: portfolio,] [added: Portfolio Management initiative,] ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. [added: This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions. |]

ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve [added: operating] margins and generate price/cost increases.

[removed: This was] [added: The Company] achieved [added: this] through product line [removed: simplification which focuses on] [added: simplification, or] eliminating the complexity and overhead costs associated with smaller product lines and customers, [removed: and focuses businesses on] [added: while] supporting and growing [removed: their] [added: the businesses’] largest [added: / most profitable] customers and product lines.

[removed: Most of this] [added: With the] initiative [removed: is] [added: nearly] complete and ITW businesses [removed: are] demonstrating notably improved financial [removed: performance;] [added: performance,] the Company [removed: expects] [added: believes that] the [removed: remaining] [added: significant] product line simplification work [added: is essentially finalized and will return] to [removed: largely be accomplished] [added: more normalized levels] in [removed: 2016.][added: 2017 and beyond.]

[removed: The second step, business structure simplification,] [added: | • | Step two, Business Structure Simplification,] was [added: implemented] to [added: simplify and] scale-up ITW’s operating structure to support increased engineering, marketing, and sales resources, [removed: and to] [added: and, at the same time,] improve global reach and competitiveness, all of which were critical to [removed: ITW’s ability to drive] [added: driving] accelerated organic growth. [added: ITW now has 85 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. |]

[added: | • |] With the portfolio realignment and scale-up work largely complete, the Company [removed: is now] [added: was] able to shift its focus to preparing [removed: for,] [added: for] and accelerating, organic growth. [added: As a preparatory step, ITW is in the process of reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth. |]

Once the business [removed: is operationally excellent and] has [added: achieved operational excellence and] identified the right growth opportunities, the final step is to accelerate organic growth.

Based on the financial performance of the divisions that are further along in this process, the Company believes that [removed: this] [added: its organic growth] framework is capable of delivering [removed: above market] [added: above-market] organic growth [removed: in] [added: across] all [removed: ITW] segments.

[removed: Many ITW divisions] [added: Divisions] are [added: at various phases in preparation for growth and many are either] ready to grow [removed: and] [added: or already] growing above their respective [removed: markets, while the rest of the Company’s divisions are at various phases of preparing to grow.][added: markets.]

ITW management is fully aligned [removed: on] [added: with] this plan and very focused on executing it.

[removed: By] [added: With] the [removed: end] [added: close] of 2016, [removed: the Company expects] approximately 85 percent of [removed: its businesses to be] [added: the divisions are] ready to grow.

[added: | • |] The [added: Strategic Sourcing initiative was established as a core capability to better leverage ITW’s scale and improve global competitiveness. Sourcing is now a core strategic and operational capability at ITW. The] Company’s 80/20-enabled sourcing organization has delivered an average of [removed: 1] [added: one] percent reduction in spend each year [removed: in 2013-2015] [added: from 2013 through 2016] and is on track to do the same in [removed: 2016] [added: 2017] and [removed: 2017.][added: 2018. |]

[added: | • |] The [removed: second element of the margin and return area of focus is to] [added: first lever,] better [removed: leverage] [added: leveraging] the full power of the ITW Business [removed: Model] [added: Model, will be accomplished] through a much more consistent and focused approach to 80/20 best practice implementation across the Company. [added: The 80/20 |]

[removed: Company’s] [added: ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental] improvement in [removed: both] [added: margins and returns as evidenced by the Company’s] operating margin and after-tax return on invested capital.

These 80/20 initiatives can [added: also] result in restructuring initiatives that reduce costs and improve profitability and returns.

The Company’s consolidated results of operations for [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013] [added: 2014] are summarized as follows:

| Operating income | [added: $ |] 2,867 | | | [added: $] | 2,888 | | | [removed: |] (0.7 | )% | | 5.8 | % | (0.3 | )% | 1.2 | % | (7.4 | )% | (0.7 | )% |

| ◦ | Automotive OEM, Food Equipment and Construction Products had solid [removed: worldwide] organic revenue growth primarily due to penetration gains, higher market demand and product innovation. Organic revenue declined in the Welding and Test & Measurement and Electronics segments primarily due to lower demand in the oil and gas end markets and a challenging capital spending environment. |

| ◦ | PLS activities [added: associated with the portfolio management component of the Company's Enterprise Strategy] reduced organic revenue growth by approximately one percentage point. |

| • | [removed: Record operating] [added: Operating] margin of 21.4% increased 150 basis points primarily due to the benefit of the Company's enterprise initiatives related to business structure simplification and strategic sourcing that contributed 110 basis points. Lower restructuring expenses and favorable price/cost each contributed 20 basis points of operating margin expansion. |

| | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | Inc (Dec) | | | Organic | | Acquisition/Divestiture | | Restructuring | | Foreign Currency | | Total | |

| Operating margin % | [removed: 19.9] [added: 22.4] | | % | | [removed: 17.8] [added: 19.9] | | % | | [removed: 210] [added: 250] bps | | | [removed: 200] [added: 260] bps | | [removed: (10) bps] [added: —] | | [removed: 20] [added: (10)] bps | | — | | [removed: 210] [added: 250] bps | |

| ◦ | [removed: Growth] [added: Asia Pacific organic revenue increased 2.7% primarily due to growth] in the Automotive [removed: OEM and the] [added: OEM, Specialty Products, Construction Products,] Food [removed: Equipment segments was] [added: Equipment, and Test & Measurement and Electronics segments,] partially offset by [removed: modest declines] [added: a decline] in the [added: Welding and] Polymers & Fluids [removed: and Specialty Products] segments. |

| • | Free cash flow was [removed: $1.3] [added: $2.0] billion in [removed: 2014. The 2014 net cash provided by operating activities included $724 million of tax payments related to the disposition of the Industrial Packaging business.] [added: 2016.] Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |

| • | The Company repurchased approximately [removed: 50.4] [added: 18.7] million shares of its common stock in [removed: 2014] [added: 2016] for approximately [removed: $4.3] [added: $2.0] billion. |

| • | Total cash dividends of [removed: $711] [added: $821] million were paid in [removed: 2014.] [added: 2016.] |

| • | Adjusted after-tax return on average invested capital was [removed: 19.0%,] [added: 22.1%,] an increase of [removed: 260] [added: 170] basis points. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |

| In millions | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

PATH TO FULL POTENTIAL

While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement before it achieves full operating potential.

In order to do so, ITW is focused on two key areas of opportunity, including: additional structural margin improvement and sustained above-market organic growth with strong incremental profitability.

Additional Structural Margin Improvement

To deliver on the additional structural margin improvement, the Company is implementing the following two levers: (1) further leveraging the 80/20 management process and (2) strategic sourcing.

management system has continuously been refined, improved and expanded into a unique holistic business management process of interconnected tools, which improves all aspects of the business and, when applied consistently and executed more effectively, will lead to additional margin improvement.

| • | The second lever, strategic sourcing, is a core element of ITW’s ongoing operational strategy and a sustainable enterprise-wide capability. Through the continued execution of this initiative, the Company expects to deliver additional margin improvement with the goal of a one percent reduction in spend in 2017 and 2018. |

Sustained Above-Market Organic Growth with Strong Incremental Profitability

ITW has done extensive work on its portfolio and operating structure to position the Company to deliver sustainable above-market organic growth.

The Company has narrowed the focus and significantly improved the growth potential of ITW’s business portfolio.

With approximately 85% of its divisions ready to grow as of the end of 2016, ITW is well positioned for accelerated growth in 2017 and beyond.

To deliver on this accelerated growth, the divisions have been implementing the organic growth framework, which includes continued investment in customer-back innovation and a strengthened focus on market penetration.

ITW continues to focus on growing its share of "80" products with existing customers with whom the Company has a resonant value proposition as well as target potential new customers with similar pain points to existing customers.

ITW has made strong progress on the Company’s pivot to organic growth and is well positioned to deliver on sustained above-market organic growth over the long-term.

Leveraging ITW's highly differentiated and proprietary business model, the Company delivered strong financial results in 2016 despite a challenging global macro environment and foreign currency translation headwinds.

With the solid execution of the Company's Enterprise Strategy initiatives, six of seven segments achieved worldwide organic revenue growth and five of seven segments had operating margin expansion.

On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million.

EF&C had operating revenue of $245 million for the six months ended December 31, 2016.

EF&C diluted the Company's operating margin in 2016 by 30 basis points due to lower operating margin and acquisition related expenses.

The Company expects EF&C to be slightly accretive to earnings in the first twelve months, but expects improved earnings and operating margin performance in later years through the application of the Company's 80/20 business management process.

The operating results of EF&C are reported within the Company's Automotive OEM segment.

The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented.

Refer to Note 3.

Acquisitions in Item 8.

2016 compared to 2015

| | 2016 | | | | 2015 | | | | Inc (Dec) | | | Organic | | Acquisition/Divestiture | | Restructuring | | Foreign Currency | | Total | |

| Operating revenue | $ | 13,599 | | | $ | 13,405 | | | 1.4 | % | | 1.2 | % | 1.7 | % | — | % | (1.5 | )% | 1.4 | % |

| Operating income | 3,064 | | | | 2,867 | | | | 6.9 | % | | 8.1 | % | 0.6 | % | 0.1 | % | (1.9 | )% | 6.9 | % |

| • | Operating revenue increased due to growth in organic and acquisition revenues, partially offset by the unfavorable effect of foreign currency translation. |

| • | Organic revenue grew 1.2% as six of seven segments had worldwide organic revenue growth primarily due to penetration gains, higher end market demand and product innovation. Organic revenue declined in the Welding segment primarily due to lower capital spending in the industrial end markets and sluggish demand in the oil and gas end market. |

| ◦ | North American organic revenue increased 0.7% and European organic revenue increased 2.3% as growth in six segments for both regions was partially offset by a decline in the Welding segment. |

| • | Operating margin of 22.5% increased 110 basis points. The primary driver of the operating margin improvement was 130 basis points from the benefit of the Company's enterprise initiatives. Positive operating leverage of 30 basis points and favorable price/cost of 10 basis points were partially offset by the dilutive impact of 30 basis points from the EF&C acquisition and additional investment in the business. |

| • | In 2016, the Company received a $167 million cash dividend distribution from Wilsonart which exceeded the Company’s equity investment balance and resulted in a $54 million pre-tax gain, partially offset by $30 million of pre-tax losses related to the disposals of businesses and the disposal of a partnership investment. Refer to Note 4. Other Income (Expense) in Item 8. Financial Statements and Supplementary Data for further information on the Wilsonart equity investment. |

| • | Diluted earnings per share (EPS) of $5.70 increased 11.1%. |

2016 compared to 2015

| | 2016 | | | | 2015 | | | | Inc (Dec) | | | Organic | | Acquisition/Divestiture | | Restructuring | | Foreign Currency | | Total | |

| Operating revenue | $ | 2,864 | | | $ | 2,529 | | | 13.3 | % | | 5.1 | % | 9.7 | % | — | % | (1.5 | )% | 13.3 | % |

| Operating income | $ | 690 | | | $ | 613 | | | 12.6 | % | | 10.7 | % | 2.6 | % | 0.7 | % | (1.4 | )% | 12.6 | % |

| Operating margin % | 24.1 | | % | | 24.2 | | % | | (10) bps | | | 130 bps | | (160) bps | | 20 bps | | — | | (10) bps | |

| • | Organic revenue grew 5.1%. |

One, ITW needed to shift the Company's primary growth engine to organic; and two, the Company needed to leverage the ITW Business Model to deliver best-in-class margins and returns.

In order to pivot to fully focus on organic growth, the Company needed to first accomplish several preparatory steps.

These key initiatives were a major focus of the Company in 2012-2015, which included portfolio management, business structure simplification and strategic sourcing.

The first step, portfolio management, was to construct and maintain a business portfolio capable of delivering consistent above-market organic growth.

This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.

ITW now has 84 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

As a third preparatory step, ITW is currently in the process of reapplying 80/20 to optimize its newly scaled-up divisions for growth.

This process involves first using 80/20 to build a foundation of operational excellence, and then applying 80/20-driven insights to identify the best opportunities to drive organic growth.

Leverage the ITW Business Model to Deliver Best-in-Class Margins and Returns

The Company’s work to deliver best-in-class margins and returns is focused on two key areas of ongoing activity.

The first is strategic sourcing, where the Company seeks to benefit from its size and scale in procurement processes.

Sourcing is now a core strategic and operational capability and this improved competitiveness supports ITW’s organic growth framework.

ITW has clearly defined what excellence in the practice of ITW’s 80/20 management process looks like and the result is significant opportunity to create meaningful incremental improvement in margins and returns as evidenced by the

In 2015, the Company delivered solid financial results driven by the continued successful execution of enterprise initiatives despite foreign currency translation headwinds and challenging end market conditions.

2014 compared to 2013

| Operating revenue | $ | 14,484 | | | $ | 14,135 | | | 2.5 | % | | 2.6 | % | 0.6 | % | — | % | (0.7 | )% | 2.5 | % |

| Operating income | $ | 2,888 | | | $ | 2,514 | | | 14.9 | % | | 14.5 | % | 0.2 | % | 0.9 | % | (0.7 | )% | 14.9 | % |

| • | Operating revenue increased $349 million, or 2.5%, due to an increase in organic and acquisition revenue, partially offset by the unfavorable effect of currency translation which primarily occurred in the fourth quarter. Acquisitions primarily included the purchase of a European consumer packaging equipment business and a Chinese food equipment business in the third quarter of 2013. |

| • | Organic revenue increased 2.6% in 2014 as compared to 2013. |

| ◦ | European organic revenue increased 2.4% primarily driven by the Automotive OEM, Food Equipment and Test & Measurement and Electronics segments, partially offset by the Welding, Polymers & Fluids and Construction Products segments. |

| ◦ | Asia Pacific organic revenue increased 4.9% primarily due to growth in the Automotive OEM segment in China and the Construction Products segment in Australia. |

| ◦ | North American organic revenue increased 2.3% primarily due to growth in the Automotive OEM, Welding and Food Equipment segments. |

| • | Operating margin of 19.9% increased 210 basis points primarily due to the benefit of the Company's enterprise initiatives related to business structure simplification and strategic sourcing that contributed 120 basis points and positive operating leverage of 60 basis points. Lower restructuring expenses of 20 basis points, favorable price/cost of 10 basis points and lower operating expenses also contributed to the increase in operating margin. Operating expenses in 2014 included the impact of lower employee benefit expenses, offset by costs related to continued investment in the business. |

| • | Diluted EPS from continuing operations of $4.67 increased 28.7%. |

| Operating revenue | $ | 2,590 | | | $ | 2,396 | | | 8.1 | % | | 8.9 | % | (0.1 | )% | — | % | (0.7 | )% | 8.1 | % |

| Operating income | $ | 600 | | | $ | 490 | | | 22.5 | % | | 20.2 | % | — | % | 2.9 | % | (0.6 | )% | 22.5 | % |

| Operating margin % | 23.2 | | % | | 20.5 | | % | | 270 bps | | | 220 bps | | — | | 50 bps | | — | | 270 bps | |

| • | As a result of product innovation and penetration gains, worldwide automotive organic revenue grew 8.9%, exceeding auto builds which grew 3%. |

| ◦ | North American automotive organic revenue grew 7.6% as auto builds increased 5%. |

| ◦ | Organic revenue for Asia Pacific increased 12.1% primarily due to revenue growth in China of 17.2%, which exceeded Chinese auto build growth of 8%. |

This segment primarily

| Operating revenue | $ | 2,204 | | | $ | 2,176 | | | 1.3 | % | | 1.5 | % | (0.1 | )% | — | % | — | % | (0.1 | )% | 1.3 | % |

| Operating income | $ | 340 | | | $ | 321 | | | 5.8 | % | | 7.9 | % | 0.1 | % | (2.4 | )% | 0.2 | % | — | % | 5.8 | % |

| • | Operating revenue increased 1.3% in 2014 primarily due to the increase in organic revenue. |

| ◦ | Organic revenue for the worldwide test and measurement businesses increased 1.8% primarily due to strength in the Instron business. |

| ◦ | Worldwide electronics organic revenue increased 1.2% primarily due to a 2.0% increase in the other electronics businesses, which was driven by growth in the contamination control businesses, resulting primarily from increased demand across all major regions, the pressure sensitive adhesives businesses, primarily due to higher market demand in Europe, and the static control businesses, primarily due to increased sales to the industrial end market in Asia and North America. Organic revenue for the electronic assembly businesses declined 0.7% but showed improvement in the second half of the year. |

| Operating revenue | $ | 2,177 | | | $ | 2,047 | | | 6.4 | % | | 4.7 | % | 1.7 | % | — | % | — | % | 6.4 | % |

| Operating income | $ | 453 | | | $ | 385 | | | 18.0 | % | | 16.0 | % | 1.0 | % | 1.0 | % | — | % | 18.0 | % |

| Operating margin % | 20.8 | | % | | 18.8 | | % | | 200 bps | | | 200 bps | | (20) bps | | 20 bps | | — | | 200 bps | |

| • | Operating revenue increased 6.4% due to an increase in organic and acquisition revenue. The increase in revenue from acquisitions was due to the purchase of a Chinese food equipment business in the third quarter of 2013. |

The following table presents the Company’s [added: fixed rate] debt for which [added: the] fair value is subject to changing market interest rates:

| | 0.90% Notes Due | | | | 1.95% Notes Due | | | | 6.25% Notes Due | | | | 4.88% Notes Due thru | | | | 3.375% Notes Due | | | | 1.75% Euro Notes Due | | | | 1.25% Euro Notes Due | | | | 3.50% Notes Due | | | | [added: 2.65% Notes Due | | | |] 2.125% Euro Notes Due | | | | 3.00% Euro Notes Due | | | | 4.875% Notes Due | | | | 3.9% Notes Due | | |

| In millions | Feb 25, 2017 | | | | Mar 1, 2019 | | | | Apr 1, 2019 | | | | Dec 31, 2020 | | | | Sep 15, 2021 | | | | May 20, 2022 | | | | May 22, 2023 | | | | Mar 1, 2024 | | | | [added: Nov 15, 2026 | | | |] May 22, 2030 | | | | May 19, 2034 | | | | Sep 15, 2041 | | | | Sep 1, 2042 | | |

| As of December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | [added: | | | |]

| Estimated cash outflow by year of principal maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | [added: | | | |]

| [removed: 2016] [added: As of December 31, 2016:] | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | | [removed: $] | [removed: —] | | [added: | | | |]

| 2017 | [added: $ |] 650 | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $] | — | | | [added: $ | — | |]

| 2018 | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | [added: | — | | |]

| 2019 | — | | | | 650 | | | | 700 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | [added: | — | | |]

| 2020 | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | [added: | — | | |]

| [removed: 2021] [added: 2022] and thereafter | — | | | | — | | | | — | | | | — | | | | [removed: 350] | | | | [removed: 543] [added: 526] | | | | [removed: 543] [added: 526] | | | | 700 | | | | [removed: 543] [added: 1,000] | | | | [removed: 543] [added: 526] | | | | [added: 526 | | | |] 650 | | | | 1,100 | | |

| Estimated fair value | 649 | | | | 655 | | | | 790 | | | | 4 | | | | 362 | | | | 564 | | | | 538 | | | | 727 | | | | [added: — | | | |] 530 | | | | 569 | | | | 708 | | | | 1,051 | | |

| Carrying value | 649 | | | | 647 | | | | 698 | | | | 4 | | | | 347 | | | | 536 | | | | 536 | | | | 695 | | | | [added: — | | | |] 536 | | | | 528 | | | | 635 | | | | 1,080 | | |

| [removed: Total estimated] [added: Estimated total] cash outflow | $ | 650 | | | $ | 650 | | | $ | 700 | | | $ | [removed: 5] [added: 4] | | | $ | 350 | | | $ | [removed: 605] [added: 543] | | | $ | [removed: —] [added: 543] | | | $ | 700 | | | $ | — | | | $ | [removed: 605] [added: 543] | | | $ | [added: 543 | | | $ |] 650 | | | $ | 1,100 | |

The [removed: initial] funding for the foreign manufacturing operations [removed: was] [added: is] provided primarily through the permanent investment of equity [removed: capital from the U.S. parent company.][added: capital.]

The Company’s products are [removed: primarily] [added: typically] manufactured and sold within the same country.

Therefore, the Company's manufacturing operations [added: generally] do not have significant assets or liabilities denominated in currencies other than their functional currencies.

Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other [removed: comprehensive income (loss).]

The cumulative unrealized gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was [removed: $308] [added: $375] million and [removed: $158] [added: $308] million as of December 31, [removed: 2015] [added: 2016] and December 31, [removed: 2014,] [added: 2015,] respectively.

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2021 | — | | | | — | | | | — | | | | — | | | | 350 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |

| Estimated fair value | 650 | | | | 656 | | | | 768 | | | | 4 | | | | 365 | | | | 565 | | | | 549 | | | | 728 | | | | 959 | | | | 565 | | | | 618 | | | | 734 | | | | 1,114 | | |

| Carrying value | 650 | | | | 648 | | | | 698 | | | | 4 | | | | 348 | | | | 520 | | | | 520 | | | | 695 | | | | 991 | | | | 519 | | | | 512 | | | | 636 | | | | 1,080 | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

comprehensive income (loss).

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| As of December 31, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Estimated fair value | 648 | | | | 651 | | | | 817 | | | | 6 | | | | 369 | | | | 640 | | | | — | | | | 735 | | | | — | | | | 702 | | | | 746 | | | | 1,110 | | |

| Carrying value | 648 | | | | 647 | | | | 697 | | | | 5 | | | | 347 | | | | 597 | | | | — | | | | 694 | | | | — | | | | 588 | | | | 635 | | | | 1,079 | | |

The Company is a global manufacturer of a diversified range of industrial products and equipment with [removed: 84] [added: 85] divisions in 57 countries.

As of December 31, [removed: 2015,] [added: 2016,] the Company employed approximately [removed: 48,000] [added: 50,000] persons.

The Company's operations are organized and managed based on similar product offerings and [removed: similar] end markets, and are reported to senior management as the following seven segments: Automotive OEM; [added: Food Equipment;] Test & Measurement and Electronics; [removed: Food Equipment;] [added: Welding;] Polymers & Fluids; [removed: Welding;] Construction Products; and Specialty Products.

Automotive [removed: OEM:] [added: OEM—] This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems.

Test & Measurement and [removed: Electronics:] [added: Electronics—] This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets.

Businesses in this segment produce equipment, consumables, and related software for testing and measuring [added: physical properties] of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics.

Food [removed: Equipment:] [added: Equipment—] This segment is a highly focused and branded industry-leader in commercial food equipment differentiated by innovation and integrated service offerings.

Polymers & [removed: Fluids:] [added: Fluids—] This segment is a highly branded supplier to niche markets that require value-added, differentiated products.

This segment primarily serves the automotive aftermarket, [added: MRO,] general industrial, [removed: MRO,] and construction markets.

[removed: Welding:] [added: Welding—] This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology.

This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, [removed: MRO,] construction, [added: MRO,] and industrial capital goods markets.

Construction [removed: Products:] [added: Products—] This segment is a branded supplier of innovative engineered fastening systems and solutions.

This segment primarily serves the [removed: residential construction, renovation/remodel] [added: residential/remodel] construction and commercial construction markets.

Specialty [removed: Products:] [added: Products—] This segment is focused on diversified niche market opportunities [removed: that deliver strong operating results] with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.

This segment primarily serves the food and beverage, [removed: consumer durables,] general industrial, [added: consumer durables,] printing and publishing and industrial capital goods markets.

| • | ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the [removed: Company.] [added: Company and its customers.] Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”) and eliminates [added: cost,] complexity [added: and distractions] associated with the less profitable opportunities (the “20”). 80/20 enables ITW businesses to consistently [removed: deliver] [added: achieve] world-class operational excellence in [removed: regards to] product availability, quality, and innovation, while generating superior financial performance; |

| • | Customer-back innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on [removed: the] insight gathered from the 80/20 management process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are focused on understanding customer needs, particularly those in “80” markets with solid long-term growth fundamentals, and [removed: then] [added: subsequently] creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than [removed: 16,000] [added: 17,000] granted and pending patents; |

| • | ITW’s decentralized, entrepreneurial culture allows ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their [removed: customers.] [added: specific customers' needs.] ITW colleagues [removed: are clear about what is expected of them with regard] [added: recognize their unique responsibilities] to [removed: ITW’s business model, strategy,] [added: execute the Company's strategy] and values. [removed: This leads to] [added: As] a [added: result, the Company maintains a] focused and simple organizational structure that, combined with outstanding execution, delivers [removed: operational excellence] [added: best-in-class services] adapted to [removed: their specific] [added: each business'] customers and end markets. |

In [removed: 2013,] [added: late 2012,] ITW began the process of transitioning the Company onto its current strategic path to fully leverage the compelling performance potential of the ITW Business Model.

Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past [removed: three] [added: four] years.

The roots of ITW’s Enterprise Strategy began in [removed: 2011-2012,] [added: late 2011 / early 2012,] when the Company undertook a complete review of its performance.

[removed: ITW gathered deep insights from] [added: Focusing on] its businesses [removed: that were] delivering consistent above-market growth with best-in-class margins and returns, [removed: and defined] [added: ITW developed] a strategy to replicate that performance [removed: throughout the Company.][added: across its operations.]

Based on this rigorous [removed: and thorough] evaluation, ITW determined [removed: two paths] [added: that solid and consistent above-market organic growth must be the core growth engine] to deliver world-class financial performance and compelling long-term returns for its shareholders.

[removed: Shift the Company’s Core Growth Engine] [added: To shift its primary growth engine] to [removed: Organic][added: organic, the Company began executing a multi-step approach.]

[added: | • | The first step was to narrow the focus and improve the quality of ITW’s business portfolio.] As part of [removed: this initiative to realign] the [removed: portfolio,] [added: Portfolio Management initiative,] ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. [added: This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions. |]

ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve [added: operating] margins and generate price/cost increases.

[removed: This was] [added: The Company] achieved [added: this] through product line [removed: simplification which focuses on] [added: simplification, or] eliminating the complexity and overhead costs associated with smaller product lines and customers, [removed: and focuses businesses on] [added: while] supporting and growing [removed: their] [added: the businesses’] largest [added: / most profitable] customers and product lines.

[removed: Most of this] [added: With the] initiative [removed: is] [added: nearly] complete and ITW businesses [removed: are] demonstrating notably improved financial [removed: performance;] [added: performance,] the Company [removed: expects] [added: believes that] the [removed: remaining] [added: significant] product line simplification work [added: is essentially finalized and will return] to [removed: largely be accomplished] [added: more normalized levels] in [removed: 2016.][added: 2017 and beyond.]

[removed: The second step, business structure simplification,] [added: | • | Step two, Business Structure Simplification,] was [added: implemented] to [added: simplify and] scale-up ITW’s operating structure to support increased engineering, marketing, and sales resources, [removed: and to] [added: and, at the same time,] improve global reach and competitiveness, all of which were critical to [removed: ITW’s ability to drive] [added: driving] accelerated organic growth. [added: ITW now has 85 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. |]

[added: | • |] With the portfolio realignment and scale-up work largely complete, the Company [removed: is now] [added: was] able to shift its focus to preparing [removed: for,] [added: for] and accelerating, organic growth. [added: As a preparatory step, ITW is in the process of reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth. |]

Once the business [removed: is operationally excellent and] has [added: achieved operational excellence and] identified the right growth opportunities, the final step is to accelerate organic growth.

Based on the financial performance of the divisions that are further along in this process, the Company believes that [removed: this] [added: its organic growth] framework is capable of delivering [removed: above market] [added: above-market] organic growth [removed: in] [added: across] all [removed: ITW] segments.

[removed: Many ITW divisions] are [added: at various phases in preparation for growth and many are either] ready to grow [removed: and] [added: or already] growing above their respective [removed: markets, while the rest of the Company’s divisions are at various phases of][added: markets.]

ITW management is fully aligned [removed: on] [added: with] this plan and very focused on executing it.

[removed: By] [added: With] the [removed: end] [added: close] of 2016, [removed: the Company expects] approximately 85 percent of [removed: its businesses to be] [added: the divisions are] ready to grow.

[added: | • |] The [added: Strategic Sourcing initiative was established as a core capability to better leverage ITW’s scale and improve global competitiveness. Sourcing is now a core strategic and operational capability at ITW. The] Company’s 80/20-enabled sourcing organization has delivered an average of [removed: 1] [added: one] percent reduction in spend each year [removed: in 2013-2015] [added: from 2013 through 2016] and is on track to do the same in [removed: 2016] [added: 2017] and [removed: 2017.][added: 2018. |]

Divestiture of Majority Interest in Former Decorative Surfaces [removed: Segment][added: Segment— On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment.]

[added: Divestiture of the Industrial Packaging Segment—] In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment.

[removed: See the] Discontinued Operations [removed: note] in Item 8.

Management's Discussion and Analysis of Financial Condition and Results of Operations and [removed: the Segment Information note in Item 8.][added: Note 14.]

Divisions

Path to Full Potential

While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement before it achieves full operating potential.

In order to do so, ITW is focused on two key areas of opportunity, including: additional structural margin improvement and sustained above-market organic growth with strong incremental profitability.

Additional Structural Margin Improvement

To deliver on the additional structural margin improvement, the Company is implementing the following two levers: (1) further leveraging the 80/20 management process and (2) strategic sourcing.

| • | The first lever, better leveraging the full power of the ITW Business Model, will be accomplished through a much more consistent and focused approach to 80/20 best practice implementation across the Company. The 80/20 management system has continuously been refined, improved and expanded into a unique holistic business management process of interconnected tools, which improves all aspects of the business and, when applied consistently and executed more effectively, will lead to additional margin improvement. ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company’s operating margin and after-tax return on invested capital. These 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns. |

| • | The second lever, strategic sourcing, is a core element of ITW’s ongoing operational strategy and a sustainable enterprise-wide capability. Through the continued execution of this initiative, the Company expects to deliver additional margin improvement with the goal of a one percent reduction in spend in 2017 and 2018. |

Sustained Above-Market Organic Growth with Strong Incremental Profitability

ITW has done extensive work on its portfolio and operating structure to position the Company to deliver sustainable above-market organic growth.

The Company has narrowed the focus and significantly improved the growth potential of ITW’s business portfolio.

With approximately 85% of its divisions ready to grow as of the end of 2016, ITW is well positioned for accelerated growth in 2017 and beyond.

To deliver on this accelerated growth, the divisions have been implementing the organic growth framework, which includes continued investment in customer-back innovation and a strengthened focus on market penetration.

ITW continues to focus on growing its share of "80" products with existing customers with whom the Company has a resonant value proposition as well as target potential new customers with similar pain points to existing customers.

ITW has made strong progress on the Company’s pivot to organic growth and is well positioned to deliver on sustained above-market organic growth over the long-term.

Divestiture Activity

See Note 2.

Segment information is included in Item 7.

Segment Information in Item 8.

Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 14.

Segment Information in Item 8.

International operations are subject to certain potential risks inherent in conducting business in foreign countries,

| Norman D. Finch Jr. | Senior Vice President, General Counsel & Secretary | 52 | |

Mr. Finch joined the Company in January 2017 and was elected Senior Vice President, General Counsel and Secretary in February 2017.

From 2013 to January 2017 he served as Vice President, General Counsel and Secretary of Sealed Air Corporation, a global manufacturer of products related to food safety and security, facility hygiene and product protection.

Prior thereto, he served as Vice President, Associate General Counsel and Chief Compliance Officer of Zimmer Holdings, Inc. (now Zimmer Biomet Holdings), a global medical device company.

Prior to that, he held various management positions of increasing responsibility.

Prior to that, he held various management positions of increasing responsibility.

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| --- | --- |

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| --- | --- |

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| --- | --- |

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| --- | --- |

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| --- | --- |

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| --- | --- |

One, ITW needed to shift the Company's primary growth engine to organic; and two, the Company needed to leverage the ITW Business Model to deliver best-in-class margins and returns.

In order to pivot to fully focus on organic growth, the Company needed to first accomplish several preparatory steps.

These key initiatives were a major focus of the Company in 2012-2015, which included portfolio management, business structure simplification and strategic sourcing.

The first step, portfolio management, was to construct and maintain a business portfolio capable of delivering consistent above-market organic growth.

This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.

ITW now has 84 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

As a third preparatory step, ITW is currently in the process of reapplying 80/20 to optimize its newly scaled-up divisions for growth.

This process involves first using 80/20 to build a foundation of operational excellence, and then applying 80/20-driven insights to identify the best opportunities to drive organic growth.

preparing to grow.

Leverage the ITW Business Model to Deliver Best-in-Class Margins and Returns

The Company’s work to deliver best-in-class margins and returns is focused on two key areas of ongoing activity.

The first is strategic sourcing, where the Company seeks to benefit from its size and scale in procurement processes.

Sourcing is now a core strategic and operational capability and this improved competitiveness supports ITW’s organic growth framework.

The second element of the margins and returns area of focus is to better leverage the full power of the ITW Business Model through a much more consistent and focused approach to 80/20 best practice implementation across the Company.

ITW has clearly defined what excellence in the practice of ITW’s 80/20 management process looks like and the result is significant opportunity to create meaningful incremental improvement in margins and returns as evidenced by the Company’s improvement in both operating margin and after-tax return on invested capital.

These 80/20 initiatives can result in restructuring initiatives that reduce costs and improve profitability and returns.

On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment.

Divestiture of the Industrial Packaging Segment

Segment and operating results are included in Item 7.

4,500 applications pending in foreign patent offices.

He joined Signode in 1980, which was acquired by ITW in 1986, and has held various management positions of increasing responsibility.

Prior to joining Gardner Denver, he was Chief Financial Officer at General Electric Water & Process Technologies, a global provider of water treatment and process solutions.

His previous experience includes more than 15 years with General Electric, where he held a number of global finance leadership roles with increasing responsibility.

He joined Permatex in 1999, which was acquired by ITW in 2005, and has held various management positions of increasing responsibility.

None.

Not applicable.

For the fiscal year ended December 31, [removed: 2015][added: 2016]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, [removed: 2015] [added: 2016] was approximately [removed: $26.7] [added: $30.4] billion based on the New York Stock Exchange closing sales price as of June 30, [removed: 2015.][added: 2016.]

| Portions of the [removed: 2016] [added: 2017] Proxy Statement for Annual Meeting of Stockholders to be held on May [removed: 6, 2016.] [added: 5, 2017.] | | Part III |

| Item 1. | [removed: Business] [added: [Business](#s56EAD444E49C93543EB28E06E216F2A1)] | [removed: [3](#sFBC4147A53F52962C45D2D717593E5DB)] [added: [3](#s56EAD444E49C93543EB28E06E216F2A1)] |

| Item 1A. | [removed: Risk Factors] [added: [Risk Factors](#sF717D2E3BE3AD9C645E18E06EFCC8355)] | [removed: [10](#sCD1D3C14C69B634693802D71986427E4)] [added: [10](#sF717D2E3BE3AD9C645E18E06EFCC8355)] |

| Item 1B. | [removed: Unresolved] [added: [Unresolved] Staff [removed: Comments] [added: Comments](#sACD3005A0F0848B2CC358E06EFE7F187)] | [removed: [14](#s2103B756B7B71FB164712D719887C2DD)] [added: [14](#sACD3005A0F0848B2CC358E06EFE7F187)] |

| Item 2. | [removed: Properties] [added: [Properties](#s96ECF7B3B352B6778C6E8E06DDAC2E3B)] | [removed: [14](#s1D0C3926C67F6D5E88D82D7179F47112)] [added: [15](#s96ECF7B3B352B6778C6E8E06DDAC2E3B)] |

| Item 3. | [removed: Legal Proceedings] [added: [Legal Proceedings](#sCFD4DFD212E314730EA88E06F03A811D)] | [removed: [14](#s0F7A3EFE45DA16F1534C2D7198DAFC49)] [added: [15](#sCFD4DFD212E314730EA88E06F03A811D)] |

| Item 4. | [removed: Mine] [added: [Mine] Safety [removed: Disclosures] [added: Disclosures](#sD19504EE31C5805A855E8E06F05CB6C3)] | [removed: [14](#s1A0F0F491093FC50D0B72D71990CE941)] [added: [15](#sD19504EE31C5805A855E8E06F05CB6C3)] |

| Item 5. | [removed: Market] [added: [Market] for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities] [added: Securities](#s65032B06845A57BA479F8E06DF4DF172)] | [removed: [15](#sCD9CD0489E85A894FAFE2D717A8261E9)] [added: [16](#s65032B06845A57BA479F8E06DF4DF172)] |

| Item 6. | [removed: Selected] [added: [Selected] Financial [removed: Data] [added: Data](#s08AE6D6C3829FFFF3B3B8E06DEFB7B9E)] | [removed: [16](#sEFD3A12EAC47433B5B1D2D719980C5B8)] [added: [17](#s08AE6D6C3829FFFF3B3B8E06DEFB7B9E)] |

| Item 7. | [removed: Management's] [added: [Management's] Discussion and Analysis of Financial Condition and Results of [removed: Operations] [added: Operations](#s08538BAE3F72DB57E5F68E06F10A7DAE)] | [removed: [18](#sBE53BF20A5CB91AFF6542D7199B3722E)] [added: [19](#s08538BAE3F72DB57E5F68E06F10A7DAE)] |

| Item 7A. | [removed: Quantitative] [added: [Quantitative] and Qualitative Disclosures About Market [removed: Risk] [added: Risk](#s1837700DE66EFA88F09C8E06F53D3017)] | [removed: [39](#s33964C708E134E343CDF2D719F3B26F1)] [added: [40](#s1837700DE66EFA88F09C8E06F53D3017)] |

| Item 8. | [removed: Financial] [added: [Financial] Statements and Supplementary [removed: Data] [added: Data](#s1A7C149AE8E59D8C97F18E06F5772F6B)] | [removed: [40](#s517FA2726840ABEE34992D719F5C2B25)] [added: [42](#s1A7C149AE8E59D8C97F18E06F5772F6B)] |

| Item 9. | [removed: Changes] [added: [Changes] in and Disagreements With Accountants on Accounting and Financial [removed: Disclosure] [added: Disclosure](#sBD15D1B6C5AE795B6EF08E06FD4B5730)] | [removed: [71](#sAE9C0023E263FA8536D22D71A640B93A)] [added: [73](#sBD15D1B6C5AE795B6EF08E06FD4B5730)] |

| Item 9A. | [removed: Controls] [added: [Controls] and [removed: Procedures] [added: Procedures](#s96C512ADDBE45EF297588E06FD53445E)] | [removed: [71](#s0ECE0BD21C9BD8B259A22D71A6668619)] [added: [73](#s96C512ADDBE45EF297588E06FD53445E)] |

| Item 9B. | [removed: Other Information] [added: [Other Information](#s0E98D5504F19780D9EAD8E06FD60D944)] | [removed: [71](#s7C7B1B052458463CFE622D71A6870B75)] [added: [73](#s0E98D5504F19780D9EAD8E06FD60D944)] |

| Item 10. | [removed: Directors,] [added: [Directors,] Executive Officers and Corporate [removed: Governance] [added: Governance](#s0EC0DE0DF5EB255B0B768E06FDB3C460)] | [removed: [72](#s98B7E8B3C55E8642BB192D71A6D8B7F7)] [added: [74](#s0EC0DE0DF5EB255B0B768E06FDB3C460)] |

| Item 11. | [removed: Executive Compensation] [added: [Executive Compensation](#s5CC61056DAC3EC336DE48E06FDE68788)] | [removed: [72](#sC3A7809735C1FE1AED632D71A70B32F6)] [added: [74](#s5CC61056DAC3EC336DE48E06FDE68788)] |

| Item 12. | [removed: Security] [added: [Security] Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters] [added: Matters](#sBB65E8DEDCBD19AAC0498E06FE08A9B3)] | [removed: [72](#s68C66C127A820D51070C2D71A72D7A38)] [added: [74](#sBB65E8DEDCBD19AAC0498E06FE08A9B3)] |

| Item 13. | [removed: Certain] [added: [Certain] Relationships and Related Transactions, and Director [removed: Independence] [added: Independence](#sE3DD84588C4D5AD2674B8E06FE3B6825)] | [removed: [72](#s276674C3321915DE12282D71A76002E6)] [added: [74](#sE3DD84588C4D5AD2674B8E06FE3B6825)] |

| Item 14. | [removed: Principal] [added: [Principal] Accounting Fees and [removed: Services] [added: Services](#s776342EDA7A5CFA73C9C8E06FE5A942B)] | [removed: [72](#sC8535A36F2E5CEE8F83C2D71A7808DC9)] [added: [74](#s776342EDA7A5CFA73C9C8E06FE5A942B)] |

| Item 15. | [removed: Exhibits] [added: [Exhibits] and Financial Statement [removed: Schedules] [added: Schedules](#s6F2ABCD6E8DDC14D3DD28E06FEAD6481)] | [removed: [73](#sDADCB8234E3AA75A05412D71A7D3E672)] [added: [75](#s6F2ABCD6E8DDC14D3DD28E06FEAD6481)] |

| [removed: Exhibit Index] [added: [Exhibit Index](#sC5DBE4AF2A05300AE7D88E06FF00124F)] | | [removed: [75](#sCA9AE4CC8CDCA6EFABE62D71A8260222)] [added: [77](#sC5DBE4AF2A05300AE7D88E06FF00124F)] |

10-K 1 itw-20161231x10k.htm 10-K

Shares of Common Stock outstanding at January 31, 2017: 346,550,685.

| [Signatures](#sBD3F9F93755B9D929B828E06FEEC7613) | | [76](#sBD3F9F93755B9D929B828E06FEEC7613) |

10-K 1 itw-20151231x10k.htm 10-K

Shares of Common Stock outstanding at January 31, 2016: 363,766,897.

| Signatures | | [74](#sCA5C9265B813940B66922D71A804BE64) |

None.

Not applicable.

As of December 31, [removed: 2015,] [added: 2016,] the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:

| Automotive OEM | | [removed: 53] [added: 59] | | | 38 | | | [removed: 91] [added: 97] | |

| Test & Measurement and Electronics | | [removed: 24] [added: 29] | | | [removed: 73] [added: 63] | | | [removed: 97] [added: 92] | |

| Food Equipment | | [removed: 19] [added: 24] | | | [removed: 18] [added: 17] | | | [removed: 37] [added: 41] | |

| Polymers & Fluids | | [removed: 26] [added: 37] | | | [removed: 46] [added: 32] | | | [removed: 72] [added: 69] | |

| Welding | | [removed: 25] [added: 26] | | | [removed: 22] [added: 18] | | | [removed: 47] [added: 44] | |

| Construction Products | | [removed: 32] [added: 28] | | | [removed: 24] [added: 28] | | | 56 | |

| Specialty Products | | [removed: 44] [added: 47] | | | [removed: 47] [added: 42] | | | [removed: 91] [added: 89] | |

| Corporate | | 1 | | | [removed: 10] [added: 12] | | | [removed: 11] [added: 13] | |

The Company operated [removed: 314] [added: 307] plants and office facilities outside of the U.S. Principal countries include China, [removed: France, Germany] [added: Germany, France] and the United Kingdom.

| Total | | 251 | | | 250 | | | 501 | |

| Total | | 224 | | | 278 | | | 502 | |

None.

Not applicable.

Common Stock Price and Dividend [removed: Data—The] [added: Data— The] Company's common stock is listed on the New York Stock Exchange.

Quarterly market price and dividend data for [removed: 2015] [added: 2016] and [removed: 2014] [added: 2015] were as shown below:

There were approximately [removed: 6,822] [added: 6,433] holders of record of common stock as of January 31, [removed: 2016.][added: 2017.]

[removed: ][added: ]

*Assumes $100 invested on [removed: 12/31/10] [added: 12/31/11] in stock or index, including reinvestment of dividends.

Fiscal [removed: year] [added: years] ended December 31.

Copyright© [removed: 2016] [added: 2017] S&P, a division of McGraw Hill Financial.

| [removed: Danaher Corporation] [added: Deere & Company] | Ingersoll-Rand plc | Stanley Black & Decker, Inc. |

| [removed: Deere & Company] [added: Dover Corporation] | Johnson Controls, Inc. | Textron Inc. |

Repurchases of Common [removed: Stock—On] [added: Stock— On] February 13, 2015, the Company’s Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program").

As of December 31, [removed: 2015,] [added: 2016,] there were approximately [removed: $5.4] [added: $3.4] billion of authorized repurchases remaining under the 2015 Program.

[removed: There was no share] [added: Share] repurchase activity under the Company's share repurchase program for the fourth quarter of [removed: 2015.][added: 2016 was as follows:]

| 2016: | | | | | | | | | | | |

| Fourth quarter | $ | 127.99 | | | $ | 111.50 | | | $ | 0.65 | |

| Third quarter | 123.50 | | | | 103.08 | | | | 0.65 | | |

| Second quarter | 109.54 | | | | 98.32 | | | | 0.55 | | |

| First quarter | 102.98 | | | | 79.15 | | | | 0.55 | | |

| | | | | | | | | | | | |

The 2016 peer group consists of the following 18 public companies, consistent with the peer group included in the Company's Proxy statement:

Danaher Corporation was removed from the Company's peer group in 2016 due to the spin-off of Fortive Corporation.

| | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | |

| In millions except per share amounts | | | | | | | | | | | | | |

| Period | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Program | | | Maximum Value of Shares That May Yet Be Purchased Under Program | | |

| October 2016 | 2.8 | | | $ | 114.89 | | | 2.8 | | | $ | 3,622 | |

| November 2016 | 1.1 | | | $ | 120.25 | | | 1.1 | | | $ | 3,498 | |

| December 2016 | 0.4 | | | $ | 126.26 | | | 0.4 | | | $ | 3,446 | |

| Total | 4.3 | | | | | | | 4.3 | | | | | |

| 2014: | | | | | | | | | | | |

| Fourth quarter | $ | 97.79 | | | $ | 79.06 | | | $ | 0.485 | |

| Third quarter | 89.58 | | | | 81.72 | | | | 0.485 | | |

| Second quarter | 89.50 | | | | 80.80 | | | | 0.42 | | |

| First quarter | 84.12 | | | | 76.25 | | | | 0.42 | | |

In 2015, the Company replaced the S&P Industrial Conglomerates index with the following group of 19 public companies which represents the Company's peer group:

| Dover Corporation | | |

| In millions except per share amounts | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| Operating revenue | $ | [removed: 13,405] [added: 13,599] | | | $ | [removed: 14,484] [added: 13,405] | | | $ | [removed: 14,135] [added: 14,484] | | | $ | [removed: 14,791] [added: 14,135] | | | $ | [removed: 14,515] [added: 14,791] | |

| Income from continuing operations | [removed: 1,899] [added: 2,035] | | | | [removed: 1,890] [added: 1,899] | | | | [removed: 1,630] [added: 1,890] | | | | [removed: 2,233] [added: 1,630] | | | | [removed: 1,775] [added: 2,233] | | |

| Basic | [removed: 5.16] [added: 5.73] | | | | [removed: 4.70] [added: 5.16] | | | | [removed: 3.65] [added: 4.70] | | | | [removed: 4.75] [added: 3.65] | | | | [removed: 3.61] [added: 4.75] | | |

| Diluted | [removed: 5.13] [added: 5.70] | | | | [removed: 4.67] [added: 5.13] | | | | [removed: 3.63] [added: 4.67] | | | | [removed: 4.72] [added: 3.63] | | | | [removed: 3.59] [added: 4.72] | | |

| Total assets at year-end | [removed: 15,729] [added: 15,201] | | | | [removed: 17,465] [added: 15,729] | | | | [removed: 19,599] [added: 17,465] | | | | [removed: 19,138] [added: 19,599] | | | | [removed: 17,946] [added: 19,138] | | |

| Long-term debt at year-end | [removed: 6,896] [added: 7,177] | | | | [removed: 5,943] [added: 6,896] | | | | [removed: 2,771] [added: 5,943] | | | | [removed: 4,564] [added: 2,771] | | | | [removed: 3,471] [added: 4,564] | | |

| Cash dividends declared per common share | [removed: 2.07] [added: 2.40] | | | | [removed: 1.81] [added: 2.07] | | | | [removed: 1.60] [added: 1.81] | | | | [removed: 1.48] [added: 1.60] | | | | [removed: 1.40] [added: 1.48] | | |

There were no discontinued operations during [added: 2016 or] 2015 under this new accounting guidance.

Income from discontinued operations was $1.1 billion, $49 million, [removed: $637 million,] and [removed: $296] [added: $637] million in the years 2014, 2013, [removed: 2012,] and [removed: 2011,] [added: 2012,] respectively.

[removed: Refer to the] Discontinued Operations [removed: note] in Item 8.

The Company early adopted this guidance in the fourth quarter of 2015 and restated $38 million, $22 [added: million, and $26 million of deferred long-term debt issuance costs from Other assets to Long-term debt in the years 2014, 2013, and 2012, respectively.]

Refer to [removed: the Debt note in Item 8.][added: Note 2.]

Early adoption of this guidance in the fourth quarter of 2015 decreased total assets by $175 million, $345 million, [removed: $145 million,] and [removed: $21] [added: $145] million in the years 2014, 2013, [removed: 2012,] and [removed: 2011,] [added: 2012,] respectively.

In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required.

million, $26 million, and $17 million of deferred long-term debt issuance costs from Other assets to Long-term debt in the years 2014, 2013, 2012, and 2011, respectively.

Financial Statements and Supplementary Data for further information.

Refer to the Income Taxes note in Item 8.

ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2015.][added: 2016.]

Based on our assessment we believe that, as of December 31, [removed: 2015,] [added: 2016,] the Company’s internal control over financial reporting is effective based on those criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2015] [added: 2016] has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.

| /s/ E. Scott Santi E. Scott Santi Chairman & Chief Executive Officer February [removed: 11, 2016] [added: 10, 2017] | | /s/ Michael M. Larsen Michael M. Larsen Senior Vice President & Chief Financial Officer February [removed: 11, 2016] [added: 10, 2017] |

We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the [removed: "Company")] [added: “Company”)] as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the related consolidated statements of income, comprehensive income, [removed: income reinvested] [added: changes] in [removed: the business,] [added: stockholders’ equity,] and cash flows for each of the three years in the period ended December 31, [removed: 2015.][added: 2016.]

We also have audited the [removed: Company's] [added: Company’s] internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal [removed: Control - Integrated] [added: Control-Integrated] Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Illinois Tool Works Inc. and subsidiaries as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015] and the results of their operations and their cash flows for each of the three years in the period ended December 31, [removed: 2015,] [added: 2016,] in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on the criteria established in Internal [removed: Control - Integrated] [added: Control-Integrated] Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

| In millions except per share amounts | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Operating Revenue | $ | [removed: 13,405] [added: 13,599] | | | $ | [removed: 14,484] [added: 13,405] | | | $ | [removed: 14,135] [added: 14,484] | |

| Cost of revenue | [removed: 7,888] [added: 7,896] | | | | [removed: 8,673] [added: 7,888] | | | | [removed: 8,554] [added: 8,673] | | |

| Selling, administrative, and research and development expenses | [removed: 2,417] [added: 2,415] | | | | [removed: 2,678] [added: 2,417] | | | | [removed: 2,815] [added: 2,678] | | |

[removed: | Impairment of goodwill] [added: (7) Goodwill] and [removed: other intangible assets | 2 | | | | 3 | | | | 2 | | |][added: Intangible Assets]

| Operating Income | [removed: 2,867] [added: 3,064] | | | | [removed: 2,888] [added: 2,867] | | | | [removed: 2,514] [added: 2,888] | | |

| Interest expense | [removed: (226] [added: (237] | | ) | | [removed: (250] [added: (226] | | ) | | [removed: (239] [added: (250] | | ) |

| Other income (expense) | [removed: 78] [added: 81] | | | | [removed: 61] [added: 78] | | | | [removed: 72] [added: 61] | | |

| Income from Continuing Operations Before Income Taxes | [removed: 2,719] [added: 2,908] | | | | [removed: 2,699] [added: 2,719] | | | | [removed: 2,347] [added: 2,699] | | |

| Income taxes | [removed: 820] [added: 873] | | | | [removed: 809] [added: 820] | | | | [removed: 717] [added: 809] | | |

| Income from Continuing Operations | [removed: 1,899] [added: 2,035] | | | | [removed: 1,890] [added: 1,899] | | | | [removed: 1,630] [added: 1,890] | | |

| Income from Discontinued Operations | — | | | | [removed: 1,056] [added: —] | | | | [removed: 49] [added: 1,056] | | |

| Net Income | $ | [removed: 1,899] [added: 2,035] | | | $ | [removed: 2,946] [added: 1,899] | | | $ | [removed: 1,679] [added: 2,946] | |

| Basic | $ | [removed: 5.16] [added: 5.73] | | | $ | [removed: 4.70] [added: 5.16] | | | $ | [removed: 3.65] [added: 4.70] | |

| Diluted | $ | [removed: 5.13] [added: 5.70] | | | $ | [removed: 4.67] [added: 5.13] | | | $ | [removed: 3.63] [added: 4.67] | |

| Basic | $ | — | | | $ | [removed: 2.63] [added: —] | | | $ | [removed: 0.11] [added: 2.63] | |

| Diluted | $ | — | | | $ | [removed: 2.61] [added: —] | | | $ | [removed: 0.11] [added: 2.61] | |

| Basic | $ | [removed: 5.16] [added: 5.73] | | | $ | [removed: 7.33] [added: 5.16] | | | $ | [removed: 3.76] [added: 7.33] | |

| Diluted | $ | [removed: 5.13] [added: 5.70] | | | $ | [removed: 7.28] [added: 5.13] | | | $ | [removed: 3.74] [added: 7.28] | |

| In millions | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Foreign currency translation adjustments, net of tax | [removed: (860] [added: (277] | | ) | | [removed: (939] [added: (860] | | ) | | [removed: (193] [added: (939] | | ) |

| Pension and other postretirement benefit adjustments, net of tax | [removed: 14] [added: (26] | | [added: )] | | [removed: (103] [added: 14] | | [removed: )] | | [removed: 284] [added: (103] | | [added: )] |

| Comprehensive Income | $ | [removed: 1,053] [added: 1,732] | | | $ | [removed: 1,904] [added: 1,053] | | | $ | [removed: 1,770] [added: 1,904] | |

| Beginning [removed: Balance] [added: balance] | [added: |] $ | [removed: 17,173] [added: 42] | | | $ | [removed: 14,943] [added: 43] | | | $ | [removed: 13,973] [added: 46] | |

| Net [removed: income] [added: Income] | [removed: 1,899] [added: $] | [added: 2,035] | | | [removed: 2,946] [added: $] | [added: 1,899] | | | [removed: 1,679] [added: $] | [added: 2,946] | |

| Ending [removed: Balance] [added: balance] | [added: |] $ | [removed: 18,316] [added: 43] | | | $ | [removed: 17,173] [added: 42] | | | $ | [removed: 14,943] [added: 43] | |

The Notes to Financial Statements are an integral part of [removed: these statements.][added: this statement.]

| In millions [removed: except shares] | [added: 2016 | | | |] 2015 | | | | 2014 | | |

| Cash and equivalents | $ | [removed: 3,090] [added: 2,472] | | | $ | [removed: 3,990] [added: 3,090] | |

| Trade receivables | [removed: 2,203] [added: 2,357] | | | | [removed: 2,293] [added: 2,203] | | |

| Inventories | [removed: 1,086] [added: 1,076] | | | | [removed: 1,180] [added: 1,086] | | |

| Prepaid expenses and other current assets | [removed: 341] [added: 218] | | | | [removed: 401] [added: 341] | | |

| | $ | 15,201 | | | $ | 15,729 | |

| Common stock (par value of $0.01 per share): | | | | | | | |

| Issued- 550.0 shares in 2016 and 2015 Outstanding- 346.9 shares in 2016 and 363.7 shares in 2015 | 6 | | | | 6 | | |

| Retained earnings | 19,505 | | | | 18,316 | | |

| | $ | 15,201 | | | $ | 15,729 | |

Statement of Changes in Stockholders' Equity

| | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | |

| In millions except per share amounts | Common Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Common Stock Held in Treasury | | | Accumulated Other Comprehensive Income (Loss) | | | Noncontrolling Interest | | | Total | | |

| Net income | — | | | — | | | 2,946 | | | — | | | — | | | — | | | 2,946 | | |

| Common stock issued for share-based awards | — | | | (26 | | ) | — | | | 160 | | | — | | | — | | | 134 | | |

| Dividends declared ($1.81 per share) | — | | | — | | | (716 | | ) | — | | | — | | | — | | | (716 | | ) |

| Currency translation adjustment | — | | | — | | | — | | | — | | | (939 | | ) | — | | | (939 | | ) |

| Net income | — | | | — | | | 1,899 | | | — | | | — | | | — | | | 1,899 | | |

| Common stock issued for share-based awards | — | | | (21 | | ) | — | | | 69 | | | — | | | — | | | 48 | | |

| Dividends declared ($2.07 per share) | — | | | — | | | (756 | | ) | — | | | — | | | — | | | (756 | | ) |

| Pension and other postretirement benefit adjustments | — | | | — | | | — | | | — | | | 14 | | | — | | | 14 | | |

| Currency translation adjustment | — | | | — | | | — | | | — | | | (860 | | ) | — | | | (860 | | ) |

| Net income | — | | | — | | | 2,035 | | | — | | | — | | | — | | | 2,035 | | |

| Common stock issued for share-based awards | — | | | (18 | | ) | — | | | 91 | | | — | | | — | | | 73 | | |

| Dividends declared ($2.40 per share) | — | | | — | | | (846 | | ) | — | | | — | | | — | | | (846 | | ) |

| Pension and other postretirement benefit adjustments | — | | | — | | | — | | | — | | | (26 | | ) | — | | | (26 | | ) |

| Currency translation adjustment | — | | | — | | | — | | | — | | | (277 | | ) | — | | | (277 | | ) |

| Noncontrolling interest | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | |

| Balance at December 31, 2016 | $ | 6 | | $ | 1,188 | | $ | 19,505 | | $ | (14,638 | ) | $ | (1,807 | ) | $ | 5 | | $ | 4,259 | |

| Net income | $ | 2,035 | | | $ | 1,899 | | | $ | 2,946 | |

| Amortization and impairment of intangible assets | 224 | | | | 233 | | | | 245 | | |

| Gain on dividend distribution from equity investment in Wilsonart | (54 | | ) | | — | | | | — | | |

| Income taxes | 187 | | | | (27 | | ) | | 33 | | |

| Dividend distribution from equity investment in Wilsonart | 167 | | | | — | | | | — | | |

The Notes to Financial Statements are an integral part of this statement.

(1) Description of Business and Summary of Significant Accounting Policies

The Company estimates the allowance for uncollectible accounts based on the greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years.

In addition, reserves for customer credits and cash discounts are estimated based on past experience.

The major classes of inventory at December 31, 2016 and 2015 were as follows:

| In millions | | 2016 | | | | 2015 | | |

| Total inventories | | $ | 1,076 | | | $ | 1,086 | |

| In millions | | 2016 | | | | 2015 | | |

The Company’s U.S. businesses primarily compute depreciation on an accelerated basis.

February 11, 2016

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | For the Years Ended December 31 | | | | | | | | | | |

| Amortization of intangible assets | 231 | | | | 242 | | | | 250 | | |

Statement of Income Reinvested in the Business

| Cash dividends declared | (756 | | ) | | (716 | | ) | | (709 | | ) |

| Issued- 550,035,604 shares in 2015 and 2014 Outstanding- 363,710,073 in 2015 and 383,196,213 in 2014 | 6 | | | | 6 | | |

| Income reinvested in the business | 18,316 | | | | 17,173 | | |

| Gain on acquisition of controlling interest in an equity investment | — | | | | — | | | | (30 | | ) |

The Notes to Financial Statements furnish additional information on items in the financial statements.

The notes have been arranged in the same order as the related items appear in the statements.

Significant accounting principles and policies of the Company are in italics.

The significant estimates included in the preparation of the financial statements are related to inventories, trade receivables, plant and equipment, income taxes, goodwill and intangible assets, product liability matters, litigation, product warranties, pensions, other postretirement benefits, environmental matters and stock-based compensation.

For businesses reported as discontinued operations in the statement of income prior to adoption, all related prior period income statement information has been restated.

The specialty coatings business was sold in the fourth quarter of 2013.

The construction distribution business was sold in the second quarter of 2014.

In the second quarter of 2013, the Company divested one of the held for sale transportation related businesses, the machine components business, and the chemical manufacturing business.

In the third quarter of 2013, the Company divested the second held for sale transportation related business.

In the fourth quarter of 2013, the Company divested one construction distribution business and the remaining construction distribution business was sold in the second quarter of 2014.

| | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

The net gain in 2014 included a pre-tax gain of $1.7 billion ($1.1 billion after-tax) on the sale of the Industrial Packaging business.

The net losses in 2013 included a $39 million pre-tax loss related to the sale of one of the construction distribution businesses and a $20 million pre-tax loss related to the sale of one of the transportation related businesses.

Also included in income before income taxes from discontinued operations in 2013 was a $42 million goodwill impairment charge recorded in connection with the anticipated sale of one of the transportation related businesses.

In 2013, income tax expense from discontinued operations included $42 million of tax expense related to the legal restructuring of the Industrial Packaging business.

There were no businesses classified as held for sale as of December 31, 2015 and 2014.

The premium over tangible net assets recorded for acquisitions based on purchase price allocations during 2015, 2014 and 2013 was as follows:

| | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| In millions except weighted-average lives (years) | | Weighted- Average Life | | | Premium Recorded | | | | Weighted- Average Life | | | Premium Recorded | | | | Weighted- Average Life | | Premium Recorded | | |

| Goodwill | | | | | $ | 2 | | | | | | $ | 18 | | | | | $ | 247 | |

| Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | |

| Patents and proprietary technology | | 6.4 | | | 2 | | | | 15.4 | | | 8 | | | | 9.8 | | 34 | | |

| Customer lists and relationships | | — | | | — | | | | 11.4 | | | 12 | | | | 11.2 | | 100 | | |

| Total amortizable intangible assets | | 6.4 | | | 2 | | | | 12.9 | | | 23 | | | | 11.4 | | 181 | | |

| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | |

| Trademarks and brands | | | | | — | | | | | | | — | | | | | | — | | |

| Total premium recorded | | | | | $ | 4 | | | | | | $ | 41 | | | | | $ | 428 | |

No goodwill recorded for acquisitions during 2015 will be tax deductible.

None.

Not applicable.

The Company’s management, with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of December 31, [removed: 2015.][added: 2016.]

Based on such evaluation, the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of December 31, [removed: 2015,] [added: 2016,] the Company’s disclosure controls and procedures were effective.

In connection with the evaluation by management, including the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, [removed: 2015] [added: 2016] were identified that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

None.

Not applicable.

Information regarding the Directors of the Company is incorporated by reference from the information under the captions [removed: "Election] [added: "Proposal 1 - Election] of Directors" [removed: and "Corporate Governance Policies and Practices"] in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

Information regarding the Audit Committee and its Financial Experts is incorporated by reference from the information under the captions [removed: "Board] [added: "Proposal 1 - Election] of Directors [added: - Board of Directors] and Its Committees" and "Audit Committee Report" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

Information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from the information under the caption [removed: "Section] [added: "Proposal 1 - Election of Directors - Section] 16(a) Beneficial Ownership Reporting Compliance" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

Information regarding the Company’s code of ethics that applies to the Company’s Chairman & Chief Executive Officer, Senior Vice President & Chief Financial Officer, and key financial and accounting personnel is incorporated by reference from the information under the caption [removed: "Corporate] [added: "Proposal 1 - Election of Directors - Corporate] Governance Policies and Practices" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the captions "NEO Compensation," [removed: "Director] [added: "Proposal 1 - Election of Directors - Director] Compensation," [added: and] "Compensation Discussion and Analysis" [removed: and "Compensation Committee Report"] in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the captions [removed: "Ownership] [added: "Proposal 1 - Election] of [added: Directors - Ownership of] ITW Stock" and [removed: "Equity] [added: "NEO] Compensation [added: - Equity Compensation] Plan Information" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

Information regarding certain relationships and related transactions is incorporated by reference from the information under the captions [removed: "Ownership] [added: "Proposal 1 - Election] of [added: Directors - Ownership of] ITW Stock," "Certain Relationships and Related [added: Party] Transactions" and [removed: "Corporate] [added: "Proposal 1 - Election of Directors - Corporate] Governance Policies and Practices" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

Information regarding director independence is incorporated by reference from the information under the captions [removed: "Corporate] [added: "Proposal 1 - Election of Directors - Corporate] Governance Policies and Practices" and [removed: "Categorical] [added: "Appendix A - Categorical] Standards for Director Independence" in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the [removed: captions "Ratification] [added: caption "Proposal 2 - Ratification] of the Appointment of Independent Registered Public Accounting Firm" [removed: and "Audit Fees"] in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

(ii) Pursuant to Regulation S-K, Item 601(b)(4)(iii), the Company has not filed with Exhibit 4 any debt instruments for which the total amount of securities authorized thereunder is less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis as of December 31, [removed: 2015,] [added: 2016,] with the exception of the Officers' Certificates related to the 0.90% Notes due 2017, the 1.95% Notes due 2019, the 6.25% Notes due 2019, the 3.375% Notes due 2021, the 1.75% Euro Notes due 2022, the 1.25% Euro Notes due 2023, the 3.50% Notes due 2024, the [added: 2.65% Notes due 2026, the] 2.125% Euro Notes due 2030, the 3.00% Euro Notes due 2034, the 4.875% Notes due 2041, and the 3.90% Notes due 2042, which are described as Exhibit numbers 4(a) through [removed: (h)] [added: (i)] in the Exhibit Index.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this [removed: 11th] [added: 10th] day of February [removed: 2016.][added: 2017.]

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this [removed: 11th] [added: 10th] day of February [removed: 2016.][added: 2017.]

| [removed: 3(a)] [added: 3(a)(i)] | | Amended and Restated Certificate of Incorporation of Illinois Tool Works Inc., filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (Commission File No. 1-4797) and incorporated herein by reference. |

| 3(b) | | By-laws of Illinois Tool Works Inc., as amended and restated as of [removed: December 11, 2015,] [added: May 6, 2016,] filed as Exhibit [removed: 3(b)(ii)] [added: 3(b)(i)] to the Company’s Form 8-K filed on [removed: December 17, 2015] [added: May 12, 2016] (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(f)* | | Form of stock option terms filed as Exhibit [removed: 10(o)] [added: 99.1] to the Company’s [removed: Annual] [added: Current] Report on Form [removed: 10-K for the fiscal year ended December 31, 2007] [added: 8-K filed on February 5, 2009] (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(g)* | | Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February [removed: 5, 2009] [added: 9, 2011] (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(h)* | | Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February [removed: 9, 2011] [added: 7, 2012] (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(i)* | | Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February [removed: 7, 2012] [added: 13, 2014] (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(j)*] [added: 10(m)*] | | Form of stock option terms filed as Exhibit 99.1 to the [removed: Company’s] [added: Company's] Current Report on Form 8-K filed on February [removed: 13, 2014] [added: 9, 2016] (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(k)*] [added: 10(j)*] | | Form of restricted stock unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on February 13, 2014 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(l)*] [added: 10(k)*] | | Form of performance restricted stock unit terms filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on February 13, 2014 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(m)*] [added: 10(l)*] | | Form of Long-Term Incentive Cash Grant filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on February 13, 2014 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(n)*] [added: 10(q)*] | | Form of stock option terms filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 9, [removed: 2016] [added: 2017] (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(o)*] [added: 10(n)*] | | Form of restricted stock unit terms filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(p)*] [added: 10(o)*] | | Form of performance restricted stock unit terms filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(q)*] [added: 10(p)*] | | Form of Long-Term Incentive Cash Grant filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(r)*] [added: 10(u)*] | | Illinois Tool Works Inc. 2011 Executive Incentive Plan, filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(s)*] [added: 10(v)*] | | Illinois Tool Works Inc. Executive Contributory Retirement Income Plan as amended and restated, effective January 1, 2010, filed as exhibit 10 to the Company’s Current Report on Form 8-K filed on November 5, 2009 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(t)*] [added: 10(w)*] | | Illinois Tool Works Inc. Nonqualified Pension Plan, effective January 1, 2008, as amended and approved by the Board of Directors on December 22, 2008, filed as Exhibit 10(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(u)*] [added: 10(x)*] | | Illinois Tool Works Inc. 2011 Change-in-Control Severance Compensation Policy, filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(v)*] [added: 10(y)*] | | Illinois Tool Works Inc. Amended and Restated Directors’ Deferred Fee Plan effective May 2, 2014, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(w)*] [added: 10(z)*] | | Illinois Tool Works Inc. 2011 Cash Incentive Plan, filed as Exhibit 99.1 to the Company’s Form 8-K filed on May 12, 2011 (Commission File No. 1-4797) and incorporated herein by reference. |

| [removed: 10(x)*] [added: 10(aa)*] | | First Amendment to the ITW Contributory Retirement Income Plan dated February 15, 2013, filed as Exhibit 10.2 to the Company’s Current Form 10-Q filed on May 3, 2013 (Commission File No. 1-4797) and incorporated herein by reference. |

| 99(a) | | [removed: Description] [added: A description] of the capital stock of Illinois Tool Works [removed: Inc., filed as Exhibit 99(a) to] [added: Inc. is included under Item 8.01 Other Events in] the [removed: Company’s Annual] [added: Company's] Report on Form [removed: 10-K] [added: 8-K] filed on February [removed: 26, 2010] [added: 9, 2017] (Commission File No. 1-4797) and incorporated herein by reference. |

| | The following financial information from Illinois Tool Works Inc.'s Annual Report on Form 10-K for the year ended December 31, [removed: 2015,] [added: 2016,] formatted in XBRL (Extensible Business Reporting Language): (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Income Reinvested in the Business (iv) Statement of Financial Position, (v) Statement of Cash Flows and (vi) related Notes to Financial Statements. |

Statement of Changes in Stockholders' Equity

None.

| JAY L. HENDERSON | | Director |

2016

| 3(a)(ii) | | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Illinois Tool Works Inc., filed as Exhibit 3(a)(ii) to the Company’s Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference. |

| 4(i) | | Officer’s Certificate dated November 7, 2016, establishing the terms, and setting forth the forms, of the 2.65% Notes due 2026, filed as Exhibit 4.1 to the Company’s Form 8-K filed on November 1, 2016 (Commission File No. 001-04797) and incorporated herein by reference. |

| 10(r)* | | Form of restricted stock unit terms filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(s)* | | Form of performance share unit terms filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(t)* | | Form of Performance Cash Grant filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference. |

| 10(bb) | | Five Year Credit Agreement dated as of May 9, 2016 among Illinois Tool Works Inc., the Lenders, JPMorgan Chase Bank, National Association, as Administrative Agent, and Citibank, N.A., as Syndication Agent filed as Exhibit 10(a) to the Company’s Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference. |

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Statement of Income Reinvested in the Business

Not applicable.

2015