Illinois Tool Works (ITW) 10-K risk factor changes: FY2018 vs FY2017

Slower economic growth, financial market instability, [added: natural disasters, public health crises,] high unemployment, government deficit reduction, sequestration and other austerity measures impacting the markets 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, [added: causing production delays,] increasing order cancellations and the difficulty in collecting accounts 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 imposition of duties and tariffs and other trade [removed: barriers;] [added: barriers and retaliatory countermeasures;] |

[removed: As] [added: With] the [removed: Company has substantially completed its] [added: initial] Enterprise Strategy initiatives of portfolio management and business structure [removed: simplification, its] [added: simplification largely complete, the Company's] focus has pivoted to organic revenue growth and continued margin improvement.

[removed: Product line and] customer base simplification activities, which are core elements of the Company’s 80/20 [removed: front to back] [added: Front-to-Back] process, continue to be applied to the Company’s scaled up operating divisions and remain active elements of the Enterprise Strategy.

Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment [added: opportunities presented to us from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash.]

| • | 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 activities of the acquired business. The realization of any of these liabilities or deficiencies may [added: increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations.] |

[removed: Though the] [added: The Company's] divestiture [removed: element of] [added: activity increased in 2012, 2013 and 2014 in accordance with] its portfolio management [removed: initiative is essentially complete,] [added: initiative, and] the Company has retained certain liabilities directly or through indemnifications made to the [removed: buyer] [added: buyers] against known and unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental [removed: matters.][added: matters, which could adversely affect the Company's financial results.]

Impairment charges could [removed: result that] adversely affect the Company's financial condition or results of operations in the periods recognized.

[removed: The] [added: In December 2017, the] U.S. government [removed: has recently] enacted comprehensive tax legislation that [removed: includes] [added: included] significant changes to the taxation of business entities.

If the Company is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, [added: or if] there [added: is a violation of data privacy laws, there] could be a negative impact on operating results or the Company may suffer financial or reputational damage.

If [removed: these] [added: our] information technology systems suffer severe damage, disruption, or shutdown, and business continuity plans do not effectively resolve the issues in a timely manner, [added: or if we violate data privacy laws,] there could be a negative impact on operating results or the Company may suffer financial or reputational damage.

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 performance of acquired businesses and impact of divested businesses, [added: the impact of tariffs and raw material cost inflation,] economic [added: and regulatory] conditions in various geographic regions, the timing and amount of share repurchases, the timing and amount of benefits from the Company's [removed: Enterprise Strategy,] [added: enterprise initiatives,] 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 impact of the recently enacted U.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, 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 [added: fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters.]

Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 55 countries.

| • | government actions impacting international trade agreements; |

In addition, the current global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies.

Further changes in U.S. trade policy (including new or additional increases in duties or tariffs), additional retaliatory actions by U.S. trade partners, or worsening of economic conditions could have a material adverse effect on the Company's business, results of operations or financial condition.

Product line and

| | |

| --- | --- |

In particular, changes in trade policies, the imposition of duties and tariffs and potential retaliatory countermeasures could adversely impact the price or availability of raw materials.

The Company’s accounting for the tax effects of the Act may be subject to change due to subsequent clarification of the tax law which could adversely affect the Company's operating results or financial condition.

We are also subject to data privacy laws, including the EU General Data Protection Regulation, in the various countries in which we operate.

The Company currently operates in 56 countries.

opportunities presented to us from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash.

increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations.

The Company's divestiture activity increased in 2012, 2013 and 2014 in accordance with its portfolio management initiative.

The Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax, however the ultimate impact of this tax reform is uncertain due to subsequent clarification of the tax law and refinement of estimated amounts and the Company's business and financial condition could be adversely affected.

fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the 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: 85] [added: 87] divisions in [removed: 56] [added: 55] countries.

As of December 31, [removed: 2017,] [added: 2018,] the Company employed approximately [removed: 50,000] [added: 48,000] people.

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

| • | Customer-back [removed: innovation] [added: Innovation] has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on insight gathered from the 80/20 [removed: front to back] [added: Front-to-Back] 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 subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of [removed: more than 17,000] [added: approximately 18,000] granted and pending patents; |

| • | ITW’s [removed: decentralized, entrepreneurial culture] [added: Decentralized, Entrepreneurial Culture] enables 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 specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services [added: and solutions] adapted to each business' customers and end markets. |

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

| • | Step two, Business Structure Simplification, was implemented to simplify and scale-up ITW’s operating structure to support increased engineering, marketing, and sales resources, and, at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has [removed: 85] [added: 87] scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. |

| • | The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through [removed: 2017] [added: 2018] and is on track to do the same in [removed: 2018.] [added: 2019.] |

| • | With the [added: initial] portfolio realignment and scale-up work largely complete, the Company [added: has] shifted its focus to preparing for and [removed: accelerating,] [added: accelerating] organic growth, reapplying [added: the] 80/20 [added: Front-to-Back process] 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. |

Refer to Note [removed: 2.][added: 1.]

The Company’s consolidated results of operations for [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] are summarized as follows:

| | For the Years Ended | | | | | | | | | | | | | | | | | | | | | [removed: | |]

| Dollars in millions | December 31, | | | | | | | | | | | Components of Increase (Decrease) | | | | | | | | | | [removed: | |]

| | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | Inc (Dec) | | | Organic | | Acq/Div | | Restructuring | | Impairment | | Foreign Currency | | Total | |

| Operating margin % | [removed: 24.4] [added: 22.5] | | % | | [removed: 22.5] [added: 22.8] | | % | | [removed: 190] [added: (30)] bps | | | [removed: 210] [added: (40)] bps | | [removed: (30) bps] [added: —] | | 10 bps | | — | | [removed: — | | 190] [added: (30)] bps | |

| • | In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income. Refer to Note [removed: 3.] [added: 4.] Legal Settlement in Item 8. Financial Statements and Supplementary Data for further information on the confidential legal settlement. |

| • | Operating income of $3.5 billion increased [removed: 14.0%.] [added: 14.1%.] Excluding the favorable impact of the confidential legal settlement, operating income would have increased [removed: 10.9%.] [added: 11.0%.] |

| • | Operating margin of [removed: 24.4%] [added: 24.3%] increased [removed: 190] [added: 180] basis points. Excluding the [removed: 70] [added: 60] basis points of favorability from the confidential legal settlement, operating margin of 23.7% increased 120 basis points primarily driven by the benefits of the Company's enterprise initiatives of 120 basis points. In addition, positive operating leverage of 70 basis points was offset by unfavorable price/cost of 40 basis points and the dilutive impact of 30 basis points from the EF&C acquisition. |

| • | On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly [removed: revise] [added: revised] the U.S. corporate income tax rules. As [removed: of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made] a [removed: reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. As a] result, the Company recorded a one-time income tax charge of $658 million during the fourth quarter of 2017. [removed: The provisional amounts recorded reflect the Company's best estimate based on information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement of estimated amounts.] Refer to Note [removed: 5.] [added: 6.] Income Taxes in Item 8. Financial Statements and Supplementary Data for further information. |

| • | Diluted earnings per share (EPS) of $4.86 [removed: includes] [added: included] the unfavorable impact of $1.90 for the previously discussed one-time tax charge and the favorable impact of $0.17 for the confidential legal settlement. Excluding these two items, EPS of $6.59 increased 15.6%. |

| • | Free cash flow was $2.1 billion for 2017 and [removed: includes] [added: included] the impact from an additional discretionary pension contribution of $115 million in the second quarter of 2017. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |

| • | Adjusted after-tax return on average invested capital was [removed: 24.4%,] [added: 24.3%,] an increase of [removed: 230] [added: 220] 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. |

| | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | Inc (Dec) | | | Organic | | Acquisition/Divestiture | | Restructuring | | Foreign Currency | | Total | |

| Operating margin % | [removed: 22.5] [added: 21.4] | | % | | [removed: 21.4] [added: 20.7] | | % | | [removed: 110] [added: 70] bps | | | [removed: 140] [added: 20] bps | | [removed: (30) bps] [added: —] | | [removed: 10] [added: 40] bps | | [removed: (10)] [added: 10] bps | | [removed: 110] [added: 70] bps | |

| • | Operating revenue increased due to [removed: growth in] [added: the EF&C acquisition, higher] organic [added: revenue] and [removed: acquisition revenues, partially offset by] the [removed: unfavorable] [added: favorable] effect of foreign currency translation. |

| ◦ | Asia Pacific organic revenue [removed: increased 2.7%] [added: grew 0.4%] primarily [removed: due to] [added: driven by] growth in the [removed: Automotive OEM, Specialty Products, Construction Products, Food Equipment, and] [added: Welding,] Test & Measurement and [removed: Electronics] [added: Electronics, Food Equipment and Polymers & Fluids] segments, partially offset by a decline in the [removed: Welding] [added: Specialty Products, Automotive OEM] and [removed: Polymers & Fluids] [added: Construction Products] segments. |

| • | Operating margin [removed: of] [added: was] 22.5% [removed: increased 110 basis points.] [added: in 2018.] The [removed: primary driver of the operating margin improvement was 130 basis points from the benefit of the Company's enterprise initiatives. Positive operating leverage] [added: decrease] of 30 basis points [removed: and favorable] [added: was primarily due to unfavorable] price/cost of [removed: 10] [added: 130] basis [removed: points were] [added: points,] partially offset by [removed: the dilutive impact of 30 basis points] [added: benefits] from the [removed: EF&C acquisition and additional investment in the business.] [added: Company's enterprise initiatives.] |

[removed: | • | In 2016, the Company received] [added: The income in 2017 is lower than 2016 primarily due to foreign currency translation losses and] a [added: $54 million pre-tax gain recorded in 2016 resulting from a] $167 million [removed: cash] dividend distribution from Wilsonart [removed: which] [added: that] exceeded the [removed: Company’s] equity investment [removed: balance and resulted in a $54 million pre-tax gain,] [added: balance,] partially offset by $30 million of pre-tax losses [added: in 2016] related to the disposals of businesses and the disposal of a partnership investment. [removed: Refer to Note 4. Other Income (Expense) in Item 8. Financial Statements and Supplementary Data for further information on the Wilsonart equity investment. |]

| • | Free cash flow was [removed: $2.0] [added: $2.4] billion [removed: in 2016.] [added: for 2018.] Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure. |

| • | The Company repurchased approximately [removed: 18.7] [added: 13.9] million shares of its common stock in [removed: 2016] [added: 2018] for approximately $2.0 billion. |

| • | Adjusted after-tax return on average invested capital was [removed: 22.1%,] [added: 28.2%,] an increase of [removed: 170] [added: 390] basis [removed: points.] [added: points, primarily due to the new U.S. tax rules and regulations.] 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: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Automotive OEM | $ | [removed: 3,271] [added: 3,338] | | | $ | [removed: 2,864] [added: 3,271] | | | $ | [removed: 2,529] [added: 2,864] | |

| Food Equipment | [removed: 2,123] [added: 2,214] | | | | [removed: 2,110] [added: 2,123] | | | | [removed: 2,096] [added: 2,110] | | |

| Test & Measurement and Electronics | [removed: 2,069] [added: 2,171] | | | | [removed: 1,974] [added: 2,069] | | | | [removed: 1,969] [added: 1,974] | | |

| Welding | [removed: 1,538] [added: 1,691] | | | | [removed: 1,486] [added: 1,538] | | | | [removed: 1,650] [added: 1,486] | | |

| Polymers & Fluids | 1,724 | | | | [removed: 1,691] [added: 1,724] | | | | [removed: 1,712] [added: 1,691] | | |

| Construction Products | [removed: 1,672] [added: 1,700] | | | | [removed: 1,609] [added: 1,672] | | | | [removed: 1,587] [added: 1,609] | | |

| Specialty Products | [removed: 1,938] [added: 1,951] | | | | [removed: 1,885] [added: 1,938] | | | | 1,885 | | |

| Intersegment revenue | (21 | | ) | | [removed: (20] [added: (21] | | ) | | [removed: (23] [added: (20] | | ) |

Since then, ITW has made considerable progress in its path to full potential.

PATH TO FULL POTENTIAL - FINISHING THE JOB

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential.

The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential over the next five years, every one of its divisions must also be operating at its full potential.

To do so, the Company remains focused on three key areas to finish the job of positioning ITW to perform to its full potential:

| • | Portfolio discipline |

| • | 80/20 Front-to-Back practice excellence |

| • | Full-potential organic growth |

Portfolio Discipline

The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model.

ITW businesses have the right “raw material” in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.

The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions.

ITW’s portfolio operates in diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

80/20 Front-to-Back Practice Excellence

The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth.

The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.

ITW will continue its efforts to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day.

Full-potential Organic Growth

Reaching full potential means that every division is positioned for sustainable, high-quality organic growth.

The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division.

At the same time, the Company consistently reviews its portfolio, assesses businesses that are growth-challenged and evaluates if further portfolio refinements may be needed.

The Company is currently exploring options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion.

If a decision is made to divest any of these businesses, the Company expects that earnings per share dilution would be offset by incremental share repurchases.

The Company delivered solid financial results in 2018 despite some near-term market challenges in the second half of the year.

While overall market conditions in North America were solid, auto production in Europe and China and demand levels in various international end markets served by the Specialty Products segment softened during the second half of the year.

The primary driver of the Company's financial performance is the continued successful execution of enterprise initiatives and continued focus on the highly differentiated ITW Business Model.

In 2018, five of seven segments achieved worldwide organic revenue growth while two segments were flat.

All segments had operating margin above 21% for 2018.

The Company does not believe that recently imposed tariffs in 2018 have had a material impact on its operating results.

However, the impact of tariffs and global trade policies could increase in the future.

The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of raw material cost increases resulting from these tariffs.

2018 compared to 2017

| Operating income | 3,584 | | | | 3,485 | | | | 2.8 | % | | 1.2 | % | — | % | 0.5 | % | — | % | 1.1 | % | 2.8 | % |

| • | Organic revenue grew 2.2% primarily due to penetration gains, higher end market demand and product innovation. Product line simplification activities reduced organic revenue growth by 70 basis points. |

| ◦ | North American organic revenue increased 4.0% as all seven segments had revenue growth. |

| ◦ | Europe, Middle East and Africa organic revenue decreased 0.2% primarily driven by the Automotive OEM, Specialty Products and Polymers & Fluids segments. |

| • | In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income. |

| • | Operating income of $3.6 billion increased 2.8%. Excluding the favorable impact of the 2017 confidential legal settlement, operating income would have increased 5.7%. |

| • | Operating margin of 24.3% was flat with the prior year. Excluding the 60 basis points of favorability from the 2017 confidential legal settlement, operating margin increased 60 basis points primarily due to the benefits of the Company's enterprise initiatives that contributed 110 basis points and positive operating leverage of 50 basis points, partially offset by unfavorable price/cost of 50 basis points and higher freight and employee-related expenses. |

| • | The effective tax rate was 24.5% and 48.4% for 2018 and 2017, respectively. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the enactment of the "Tax Cuts and Jobs Act" in the United States. Excluding the tax charge of $658 million, the 2017 effective tax rate would have been 28.3%. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information. |

Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past five years.

With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the product line simplification work is returning to more normalized levels.

With this first phase of the strategy nearing completion, the Company will look ahead to the next five years and delivering differentiated performance on a sustained basis.

SUSTAINED DIFFERENTIATED PERFORMANCE

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.

The second phase of the strategic framework is focused on delivering differentiated performance on a sustained basis, with consistent above market organic growth.

Moving forward, the Company remains committed to the four strategic principles that have served as the foundation of its progress over the past five years and that the Company believes best positions ITW to deliver continued differentiated performance over the next five years:

| • | The ITW Business Model is the Company's competitive advantage |

| • | Focus on quality growth |

| • | "Do what we say" execution is a critical differentiator |

| • | Invest only where ITW has a competitive advantage |

The ITW Business Model is the Company's Competitive Advantage

The ITW Business Model is the combination of a set of strategic, operational, and cultural approaches and practices that is applied to every ITW business.

The Business Model has existed inside the Company for over 30 years and is truly ITW's differentiating competitive advantage.

The ITW Business Model is comprised of three elements:

- 80/20 Front to Back Process = How the Company Operates

- Customer-Back Innovation Approach = How the Company Innovates

- Decentralized Entrepreneurial Culture = How the Company Executes

Focus on Quality Growth

ITW prioritizes high-quality revenue growth and, as such, the Company’s primary growth focus is organic.

Leveraging the Business Model and the 80/20 front to back process provides a clear view of where to focus for high- quality growth.

The Company targets differentiated end-markets and customers with critical needs and challenging pain points.

ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.

The Company only invests and operates in industries and businesses that have the right “raw material” to generate high quality organic growth through the application of the ITW Business Model.

ITW’s current portfolio of seven segments offers solid growth potential and a high degree of diversification in terms of geographic and end market exposures, enabling the Company to deliver consistent high-quality growth in an increasingly volatile and competitive global market environment.

"Do What We Say" Execution is a Critical Differentiator

ITW’s commitment to execution is a key differentiator for ITW.

Living up to the Company’s commitments - “do what we say” execution - is a deeply embedded core element of the culture.

The culture is the engine that translates ITW's strategy into action, and action into results.

All divisions function within a “framework” that defines how the culture operates and defines the Company’s values, business model and strategy to ensure all divisions are working toward our common set of goals.

Business leaders have the flexibility to define the actions and customize their approach to meet those goals.

This “flexibility within the framework” establishes an entrepreneurial environment where decisions are made “bottom up” by those with the greatest knowledge, capability and proximity to the customer, which enables our businesses to be nimble and react quickly to market conditions and customer requirements.

ITW is simple, straightforward and transparent in everything it does.

The Company sets clear performance expectations and financial targets, executes against these at the appropriate pace, and establishes the freedom to define how to achieve results within the construct of the Business Model.

Invest Only Where ITW Has a Competitive Advantage

The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business Model into compelling and sustainable competitive advantage.

Investments to support organic growth and sustain its highly differentiated core businesses, such as new product innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment priority.

The Company's strong financial results in 2017 demonstrate the combination of ITW's high-quality business portfolio with continued focus on leveraging the powerful and highly differentiated ITW Business Model.

Meaningful progress on accelerating organic revenue growth and strong execution on enterprise initiatives resulted in all seven segments achieving worldwide organic revenue growth and having operating margin above 20% for 2017.

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.

Refer to Note [removed: 8.][added: 9.]

The Company operates in the U.S. and [removed: 55] [added: 54] foreign countries.

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

The cumulative unrealized [added: pre-tax] gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was [removed: $81] [added: $187] million and [removed: $375] [added: $81] million as of December 31, [removed: 2017] [added: 2018] and [removed: December 31, 2016,] [added: 2017,] respectively.

The Company is a global manufacturer of a diversified range of industrial products and equipment with [removed: 85] [added: 87] divisions in [removed: 56] [added: 55] countries.

As of December 31, [removed: 2017,] [added: 2018,] the Company employed approximately [removed: 50,000] [added: 48,000] people.

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

| • | pressure sensitive adhesives and components for [removed: telecommunications,] electronics, [removed: medical and] [added: medical,] transportation [added: and telecommunications] applications. |

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

| • | plastic and metal [removed: fasteners] [added: closures] and components for appliances; |

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

| • | Customer-back [removed: innovation] [added: Innovation] has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on insight gathered from the 80/20 [removed: front to back] [added: Front-to-Back] 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 subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of [removed: more than 17,000] [added: approximately 18,000] granted and pending patents; |

| • | ITW’s [removed: decentralized, entrepreneurial culture] [added: Decentralized, Entrepreneurial Culture] enables 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 specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services [added: and solutions] adapted to each business' customers and end markets. |

In late 2012, ITW began [removed: the first phase of] its strategic framework transitioning the Company on its current [removed: strategic] path to fully leverage the compelling performance potential of the ITW Business Model.

| • | Step two, Business Structure Simplification, was implemented to simplify and scale-up ITW’s operating structure to support increased engineering, marketing, and sales resources, and, at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has [removed: 85] [added: 87] scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation. |

| • | The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through [removed: 2017] [added: 2018] and is on track to do the same in [removed: 2018.] [added: 2019.] |

| • | With the [added: initial] portfolio realignment and scale-up work largely complete, the Company [added: has] shifted its focus to preparing for and [removed: accelerating,] [added: accelerating] organic growth, reapplying [added: the] 80/20 [added: Front-to-Back process] 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. |

Backlog by segment as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] was as follows:

| In millions | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | |

| Automotive OEM | $ | [removed: 462] [added: 500] | | | $ | [removed: 452] [added: 462] | |

| Food [added: &] Equipment | [removed: 204] [added: 215] | | | | [removed: 188] [added: 204] | | |

| Test & Measurement and Electronics | [removed: 342] [added: 378] | | | | [removed: 298] [added: 342] | | |

| Welding | [removed: 90] [added: 93] | | | | [removed: 67] [added: 90] | | |

| Polymers & Fluids | [removed: 57] [added: 67] | | | | [removed: 62] [added: 57] | | |

| Construction Products | [removed: 39] [added: 30] | | | | [removed: 29] [added: 39] | | |

| Specialty Products | [removed: 243] [added: 280] | | | | [removed: 217] [added: 243] | | |

| Total | $ | [removed: 1,437] [added: 1,563] | | | $ | [removed: 1,313] [added: 1,437] | |

Due to the predominately short term nature of the Company's arrangements with its customers, backlog orders scheduled for shipment beyond calendar year [removed: 2018] [added: 2019] were not material as of December 31, [removed: 2017.][added: 2018.]

With operations in [removed: 56] [added: 55] countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area.

[added: The] Company believes that each segment's primary competitive advantages derive from the Company's business model and decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics.

This structure enables the Company's businesses to drive operational excellence utilizing the Company's 80/20 [removed: front to back] [added: Front-to-Back] process and leveraging its product innovation capabilities.

The Company owns approximately [removed: 3,600] [added: 3,500] unexpired U.S. patents and [removed: 8,000] [added: 8,400] foreign patents covering articles, methods and machines.

In addition, the Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and [removed: 4,600] [added: 4,200] applications pending in foreign patent offices.

The Company employed approximately [removed: 50,000] [added: 48,000] people as of December 31, [removed: 2017] [added: 2018] and considers its employee relations to be excellent.

Executive Officers of the Company as of February 15, [removed: 2018] [added: 2019] were as follows:

| E. Scott Santi | [added: 57 |] Chairman & Chief Executive Officer | [removed: 56] [added: 2015] | [added: President and Chief Executive Officer, 2012-2015] |

| John R. Hartnett | [added: 58 |] Executive Vice President | [removed: 57] [added: 2012] | |

| Michael M. Larsen | [added: 50 |] Senior Vice President & Chief Financial Officer | [removed: 49] [added: 2013] | |

| Mary K. Lawler | [added: 53 |] Senior Vice President & Chief Human Resources Officer | [removed: 52] [added: 2014] | [added: Executive Vice President, Human Resources, GATX Corporation, a rail car leasing company, 2013-2014] |

| Steven L. Martindale | [added: 62 |] Executive Vice President | [removed: 61] [added: 2008] | |

| Sundaram Nagarajan | [added: 56 |] Executive Vice President | [removed: 55] [added: 2010] | |

| Christopher O’Herlihy | [added: 55 |] Vice Chairman | [removed: 54] [added: 2015] | [added: Executive Vice President, 2010-2015] |

| Randall J. Scheuneman | [added: 51 |] Vice President & Chief Accounting Officer | [removed: 50] [added: 2009] | |

| Lei Schlitz | [added: 52 |] Executive Vice President | [removed: 51] [added: 2015] | [added: Group President, food equipment businesses, 2011-2015] |

Since then, ITW has made considerable progress in its path to full potential.

Path to Full Potential - Finishing the Job

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential.

The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential over the next five years, every one of its divisions must also be operating at its full potential.

To do so, the Company remains focused on three key areas to finish the job of positioning ITW to perform to its full potential:

| • | Portfolio discipline |

| • | 80/20 Front-to-Back practice excellence |

| • | Full-potential organic growth |

Portfolio Discipline

The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model.

ITW businesses have the right “raw material” in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.

The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions.

ITW’s portfolio operates in diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

80/20 Front-to-Back Practice Excellence

The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth.

The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.

ITW will continue its efforts to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day.

Full-potential Organic Growth

Reaching full potential means that every division is positioned for sustainable, high-quality organic growth.

The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division.

At the same time, the Company consistently reviews its portfolio, assesses businesses that are growth-challenged and evaluates if further portfolio refinements may be needed.

The Company is currently exploring options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion.

If a decision is made to divest any of these businesses, the Company expects that earnings per share dilution would be offset by incremental share repurchases.

| | | | | |

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

| | | | | |

| Name | Age | Present Position | Year Elected to Present Position | Other Positions Held During 2014-2018 |

| Andrew Mines | 47 | Executive Vice President | 2018 | Group President, construction businesses 2013-2018 |

| • | Corporate Social Responsibility Report; |

| • | Anti-Human Trafficking Disclosure; |

Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past five years.

With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the product line simplification work is returning to more normalized levels.

With this first phase of the strategy nearing completion, the Company will look ahead to the next five years and delivering differentiated performance on a sustained basis.

Sustained Differentiated Performance

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.

The second phase of the strategic framework is focused on delivering

differentiated performance on a sustained basis, with consistent above market organic growth.

Moving forward, the Company remains committed to the four strategic principles that have served as the foundation of its progress over the past five years and that the Company believes best positions ITW to deliver continued differentiated performance over the next five years:

| • | The ITW Business Model is the Company's competitive advantage |

| • | Focus on quality growth |

| • | "Do what we say" execution is a critical differentiator |

| • | Invest only where ITW has a competitive advantage |

The ITW Business Model is the Company's Competitive Advantage

The ITW Business Model is the combination of a set of strategic, operational, and cultural approaches and practices that is applied to every ITW business.

The Business Model has existed inside the Company for over 30 years and is truly ITW's differentiating competitive advantage.

The ITW Business Model is comprised of three elements:

- 80/20 Front to Back Process = How the Company Operates

- Customer-Back Innovation Approach = How the Company Innovates

- Decentralized Entrepreneurial Culture = How the Company Executes

Focus on Quality Growth

ITW prioritizes high-quality revenue growth and, as such, the Company’s primary growth focus is organic.

Leveraging the Business Model and the 80/20 front to back process provides a clear view of where to focus for high- quality growth.

The Company targets differentiated end-markets and customers with critical needs and challenging pain points.

ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.

The Company only invests and operates in industries and businesses that have the right “raw material” to generate high quality organic growth through the application of the ITW Business Model.

ITW’s current portfolio of seven segments offers solid growth potential and a high degree of diversification in terms of geographic and end market exposures, enabling the Company to deliver consistent high-quality growth in an increasingly volatile and competitive global market environment.

"Do What We Say" Execution is a Critical Differentiator

ITW’s commitment to execution is a key differentiator for ITW.

Living up to the Company’s commitments - “do what we say” execution - is a deeply embedded core element of the culture.

The culture is the engine that translates ITW's strategy into action, and action into results.

All divisions function within a “framework” that defines how the culture operates and defines the Company’s values, business model and strategy to ensure all divisions are working toward our common set of goals.

Business leaders have the flexibility to define the actions and customize their approach to meet those goals.

This “flexibility within the framework” establishes an entrepreneurial environment where decisions are made “bottom up” by those with the greatest knowledge, capability and proximity to the customer, which enables our businesses to be nimble and react quickly to market conditions and customer requirements.

ITW is simple, straightforward and transparent in everything it does.

The Company sets clear performance expectations and financial targets, executes against these at the appropriate pace, and establishes the freedom to define how to achieve results within the construct of the Business Model.

Invest Only Where ITW Has a Competitive Advantage

The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business Model into compelling and sustainable competitive advantage.

Investments to support organic growth and sustain its highly differentiated core businesses, such as new product innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment priority.

Refer to Item 7.

Financial Information about Segments

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated [removed: filer or] [added: filer,] a smaller reporting [added: company, or an emerging growth] company.

| Non-accelerated filer | o [removed: (Do not check if a smaller reporting company)] | Smaller reporting company | o |

| [removed: | |] Emerging growth company | o | [added: | |]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, [removed: 2017] [added: 2018] was approximately [removed: $45.9] [added: $43.5] billion based on the New York Stock Exchange closing sales price as of June 30, [removed: 2017.][added: 2018.]

| Portions of the [removed: 2018] [added: 2019] Proxy Statement for Annual Meeting of Stockholders to be held on May [removed: 4, 2018.] [added: 3, 2019.] | | Part III |

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| [Item [removed: 16.](#s9fbde6a7e1774c0ca69fd19b1812e460)] [added: 16.](#s46746CBB1405588DBA7D551C578FA25A)] | [Form 10-K [removed: Summary](#s9fbde6a7e1774c0ca69fd19b1812e460)] [added: Summary](#s46746CBB1405588DBA7D551C578FA25A)] | [removed: [78](#s9fbde6a7e1774c0ca69fd19b1812e460)] [added: [81](#s46746CBB1405588DBA7D551C578FA25A)] |

10-K 1 itw-20181231x10k.htm 10-K

Shares of Common Stock outstanding at January 31, 2019: 328,108,383.

| | [PART I](#s6038BC24A46258B0AEAFF92EE584593A) | |

| | [PART II](#s1CDD57435C3656EFAB8A070CE1FD259A) | |

| | [PART IV](#s3D2B7B21B4385FDE9F7DE7A242E113EF) | |

| | [Signatures](#s9E0AADA9DA575C7BA1F2BD6B0DF04C15) | [82](#s9E0AADA9DA575C7BA1F2BD6B0DF04C15) |

10-K 1 itw-20171231x10k.htm 10-K

Shares of Common Stock outstanding at January 31, 2018: 341,545,719.

| | [PART I](#s30362B7856AD5CCF9AD27CEB4505A9C6) | |

| | [PART II](#sAB43D5EBCDC055689189CC6BDFC4242B) | |

| | [PART IV](#s731A77315F3D5F4F8DEDAB66BF0C8175) | |

| [Signatures](#s1EBC4854B2825689887668AEA5D0120C) | | [79](#s1EBC4854B2825689887668AEA5D0120C) |

As of December 31, [removed: 2017,] [added: 2018,] the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:

| Automotive OEM | | [removed: 58] [added: 66] | | | [removed: 35] [added: 25] | | | [removed: 93] [added: 91] | |

| Food Equipment | | [removed: 25] [added: 26] | | | 19 | | | [removed: 44] [added: 45] | |

| Test & Measurement and Electronics | | 27 | | | [removed: 58] [added: 57] | | | [removed: 85] [added: 84] | |

| Welding | | [removed: 25] [added: 27] | | | [removed: 15] [added: 12] | | | [removed: 40] [added: 39] | |

| Polymers & Fluids | | 34 | | | [removed: 33] [added: 29] | | | [removed: 67] [added: 63] | |

| Construction Products | | [removed: 27] [added: 25] | | | [removed: 27] [added: 24] | | | [removed: 54] [added: 49] | |

| Specialty Products | | [removed: 45] [added: 49] | | | [removed: 37] [added: 29] | | | [removed: 82] [added: 78] | |

[removed: The Company adds production] capacity from time to time as required by increased demand.

The Company operated [removed: 301] [added: 288] plants and office facilities outside of the U.S. Principal countries include China, Germany, France and the United Kingdom.

| Total | | 255 | | | 204 | | | 459 | |

The Company adds production

| Total | | 242 | | | 233 | | | 475 | |

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

There were approximately [removed: 6,083] [added: 5,834] holders of record of common stock as of January 31, [removed: 2018.][added: 2019.]

[removed: ][added: ]

*Assumes $100 invested on [removed: 12/31/12] [added: 12/31/13] in stock or index, including reinvestment of dividends.

Copyright© [removed: 2018] [added: 2019] S&P, a division of McGraw Hill Financial.

The [removed: 2017] [added: 2018] peer group consists of the following 17 public companies, consistent with the peer group included in the Company's Proxy statement:

Although Fortive Corporation was added to the Company’s peer group in 2017, it was excluded from the five year cumulative total return as there was insufficient historical data due to its [removed: recent] spin-off from Danaher Corporation in 2016.

As of December 31, [removed: 2017,] [added: 2018,] there were approximately [removed: $2.4 billion] [added: $446 million] of authorized repurchases remaining under the 2015 Program.

Share repurchase activity under the Company's share repurchase [removed: program] [added: programs] for the fourth quarter of [removed: 2017] [added: 2018] was as follows:

| 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 [removed: Program] [added: Programs] | | |

On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the buyback of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program").

As of December 31, 2018, there were $3.0 billion of authorized repurchases remaining under the 2018 program.

| October 2018 | 2.0 | | | $ | 126.43 | | | 2.0 | | | $ | 3,690 | |

| November 2018 | 0.7 | | | $ | 131.50 | | | 0.7 | | | $ | 3,595 | |

| December 2018 | 1.2 | | | $ | 131.92 | | | 1.2 | | | $ | 3,446 | |

| Total | 3.9 | | | | | | | 3.9 | | | | | |

Quarterly market price and dividend data for 2017 and 2016 were as shown below:

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

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

| | Market Price Per Share | | | | | | | | Dividends Declared Per Share | | |

| | High | | | | Low | | | | | | |

| 2017: | | | | | | | | | | | |

| Fourth quarter | $ | 169.69 | | | $ | 147.96 | | | $ | 0.78 | |

| Third quarter | 148.28 | | | | 135.07 | | | | 0.78 | | |

| Second quarter | 150.29 | | | | 130.17 | | | | 0.65 | | |

| First quarter | 136.03 | | | | 120.06 | | | | 0.65 | | |

| 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 | | |

In 2017, Fortive Corporation, General Dynamics Corporation, Raytheon Company and Rockwell Automation, Inc. were added, as they meet the Company’s industry and size criteria.

BorgWarner Inc., Masco Corporation and Textron Inc. were removed because they are consistently below the Company’s cut-off for market capitalization.

Additionally, E.I. du Pont de Nemours and Company was removed due to its merger with Dow Chemical Company, and Pentair plc was removed due to the spin-off of its electrical business.

| October 2017 | 0.6 | | | $ | 153.31 | | | 0.6 | | | $ | 2,596 | |

| November 2017 | 0.6 | | | $ | 157.32 | | | 0.6 | | | $ | 2,504 | |

| December 2017 | 0.4 | | | $ | 165.58 | | | 0.4 | | | $ | 2,446 | |

| Total | 1.6 | | | | | | | 1.6 | | | | | |

| In millions except per share amounts | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Operating revenue | $ | [removed: 14,314] [added: 14,768] | | | $ | [removed: 13,599] [added: 14,314] | | | $ | [removed: 13,405] [added: 13,599] | | | $ | [removed: 14,484] [added: 13,405] | | | $ | [removed: 14,135] [added: 14,484] | |

| Income from continuing operations | [removed: 1,687] [added: 2,563] | | | | [removed: 2,035] [added: 1,687] | | | | [removed: 1,899] [added: 2,035] | | | | [removed: 1,890] [added: 1,899] | | | | [removed: 1,630] [added: 1,890] | | |

| Basic | [removed: 4.90] [added: 7.65] | | | | [removed: 5.73] [added: 4.90] | | | | [removed: 5.16] [added: 5.73] | | | | [removed: 4.70] [added: 5.16] | | | | [removed: 3.65] [added: 4.70] | | |

| Diluted | [removed: 4.86] [added: 7.60] | | | | [removed: 5.70] [added: 4.86] | | | | [removed: 5.13] [added: 5.70] | | | | [removed: 4.67] [added: 5.13] | | | | [removed: 3.63] [added: 4.67] | | |

| Total assets at year-end | [removed: 16,780] [added: 14,870] | | | | [removed: 15,201] [added: 16,780] | | | | [removed: 15,729] [added: 15,201] | | | | [removed: 17,465] [added: 15,729] | | | | [removed: 19,599] [added: 17,465] | | |

| Long-term debt at year-end | [removed: 7,478] [added: 6,029] | | | | [removed: 7,177] [added: 7,478] | | | | [removed: 6,896] [added: 7,177] | | | | [removed: 5,943] [added: 6,896] | | | | [removed: 2,771] [added: 5,943] | | |

| Cash dividends declared per common share | [removed: 2.86] [added: 3.56] | | | | [removed: 2.40] [added: 2.86] | | | | [removed: 2.07] [added: 2.40] | | | | [removed: 1.81] [added: 2.07] | | | | [removed: 1.60] [added: 1.81] | | |

In 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.90 per diluted share, related to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note [removed: 5.][added: 6.]

Certain reclassifications of prior year data have been made to conform to current year reporting, including [removed: discontinued operations and] [added: the] adoption of new accounting guidance as discussed below.

There were no discontinued operations [removed: during 2017, 2016 or 2015] [added: subsequent to 2014] under this new accounting guidance.

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

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

In March 2016, the FASB issued authoritative guidance that [removed: includes] [added: included] several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows.

[removed: Additionally, the income tax effects related to excess tax benefits] should be presented within operating cash flows in the statement of cash flows rather than as a financing activity.

Excess tax benefits recognized in equity under the prior guidance were $29 million, $20 [removed: million, $33] million and [removed: $24] [added: $33] million for the years ended December 31, 2016, 2015, [removed: 2014 and 2013,] [added: 2014,] respectively.

Excess tax benefits of [added: $10 million and] $50 million were included in Income taxes in the statement of income for the [removed: year] [added: years] ended December 31, [removed: 2017.][added: 2018 and 2017, respectively.]

Additionally, the income tax effects related to excess tax benefits

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

In April 2015, the FASB issued authoritative guidance to simplify the balance sheet presentation of long-term debt issuance costs.

Under the new guidance, long-term debt issuance costs are presented as a reduction of the carrying amount of the related long-term debt.

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

ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2017.][added: 2018.]

Based on our assessment we believe that, as of December 31, [removed: 2017,] [added: 2018,] 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: 2017] [added: 2018] 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 15, [removed: 2018] [added: 2019] | | /s/ Michael M. Larsen Michael M. Larsen Senior Vice President & Chief Financial Officer February 15, [removed: 2018] [added: 2019] |

We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the "Company") as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] the related consolidated statements of income, comprehensive income, changes in [removed: shareholders'] [added: stockholders'] equity, and cash flows, for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] and the related notes (collectively referred to as the [removed: “financial statements”).][added: "financial statements").]

We also have audited the Company’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] 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: 2017,] [added: 2018,] based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

| In millions except per share amounts | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Operating Revenue | $ | [removed: 14,314] [added: 14,768] | | | $ | [removed: 13,599] [added: 14,314] | | | $ | [removed: 13,405] [added: 13,599] | |

| Selling, administrative, and research and development expenses | [removed: 2,400] [added: 2,391] | | | | [removed: 2,415] [added: 2,412] | | | | [removed: 2,417] [added: 2,411] | | |

| Legal settlement (income) | [removed: (95] [added: —] | | [removed: )] | | [removed: —] [added: (95] | | [added: )] | | — | | |

| Amortization and impairment of intangible assets | [removed: 206] [added: 189] | | | | [removed: 224] [added: 206] | | | | [removed: 233] [added: 224] | | |

| Interest expense | [removed: (260] [added: (257] | | ) | | [removed: (237] [added: (260] | | ) | | [removed: (226] [added: (237] | | ) |

| Other income (expense) | [removed: 36] [added: 67] | | | | [removed: 81] [added: 45] | | | | [removed: 78] [added: 89] | | |

| Income Before Taxes | [removed: 3,270] [added: 3,394] | | | | [removed: 2,908] [added: 3,270] | | | | [removed: 2,719] [added: 2,908] | | |

| Income taxes | [removed: 1,583] [added: 831] | | | | [removed: 873] [added: 1,583] | | | | [removed: 820] [added: 873] | | |

| Net Income | $ | [removed: 1,687] [added: 2,563] | | | $ | [removed: 2,035] [added: 1,687] | | | $ | [removed: 1,899] [added: 2,035] | |

| Basic | $ | [removed: 4.90] [added: 7.65] | | | $ | [removed: 5.73] [added: 4.90] | | | $ | [removed: 5.16] [added: 5.73] | |

| Diluted | $ | [removed: 4.86] [added: 7.60] | | | $ | [removed: 5.70] [added: 4.86] | | | $ | [removed: 5.13] [added: 5.70] | |

| In millions | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Foreign currency translation adjustments, net of tax | [removed: 406] [added: (328] | | [added: )] | | [removed: (277] [added: 406] | | [removed: )] | | [removed: (860] [added: (277] | | ) |

| Pension and other postretirement benefit adjustments, net of tax | [removed: 114] [added: (17] | | [added: )] | | [removed: (26] [added: 114] | | [removed: )] | | [removed: 14] [added: (26] | | [added: )] |

| Comprehensive Income | $ | [removed: 2,207] [added: 2,218] | | | $ | [removed: 1,732] [added: 2,207] | | | $ | [removed: 1,053] [added: 1,732] | |

| In millions except per share amounts | [added: | 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and equivalents | $ | [removed: 3,094] [added: 1,504] | | | $ | [removed: 2,472] [added: 3,094] | |

| Trade receivables | [removed: 2,628] [added: 2,622] | | | | [removed: 2,357] [added: 2,628] | | |

| Inventories | [removed: 1,220] [added: 1,318] | | | | [removed: 1,076] [added: 1,220] | | |

| Prepaid expenses and other current assets | [removed: 336] [added: 334] | | | | [removed: 218] [added: 336] | | |

| Total current assets | [removed: 7,278] [added: 5,778] | | | | [removed: 6,123] [added: 7,278] | | |

| Net plant and equipment | [removed: 1,778] [added: 1,791] | | | | [removed: 1,652] [added: 1,778] | | |

| Goodwill | [removed: 4,752] [added: 4,633] | | | | [removed: 4,558] [added: 4,752] | | |

| Intangible assets | [removed: 1,272] [added: 1,084] | | | | [removed: 1,463] [added: 1,272] | | |

| Deferred income taxes | [removed: 505] [added: 554] | | | | [removed: 449] [added: 505] | | |

| Other assets | [removed: 1,195] [added: 1,030] | | | | [removed: 956] [added: 1,195] | | |

| [added: Total] | [added: |] $ | [added: 14,870 | | | $ |] 16,780 | | | $ | 15,201 | |

| Short-term debt | $ | [removed: 850] [added: 1,351] | | | $ | [removed: 652] [added: 850] | |

| Accounts payable | [removed: 590] [added: 524] | | | | [removed: 511] [added: 590] | | |

| Accrued expenses | [removed: 1,258] [added: 1,271] | | | | [removed: 1,202] [added: 1,258] | | |

| Cash dividends payable | [removed: 266] [added: 328] | | | | [removed: 226] [added: 266] | | |

| Cost of revenue | 8,604 | | | | 8,306 | | | | 7,908 | | |

| Operating Income | 3,584 | | | | 3,485 | | | | 3,056 | | |

| | $ | 14,870 | | | $ | 16,780 | |

| | $ | 14,870 | | | $ | 16,780 | |

| Adoption of new accounting guidance | — | | | — | | | (370 | | ) | — | | | (45 | | ) | — | | | (415 | | ) |

| Balance at December 31, 2018 | $ | 6 | | $ | 1,253 | | $ | 21,217 | | $ | (17,545 | ) | $ | (1,677 | ) | $ | 4 | | $ | 3,258 | |

| Net income | $ | 2,563 | | | $ | 1,687 | | | $ | 2,035 | |

| Amortization and impairment of intangible assets | 189 | | | | 206 | | | | 224 | | |

Effective January 1, 2018, the Company adopted new revenue recognition guidance.

Under this new guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed.

The Company's sales arrangements with customers are predominantly short-term in nature involving a single performance obligation related to the delivery of products and generally provide for transfer of control at the time of shipment.

In these circumstances, operating revenue may be recognized over time as the service is provided to the customer or deferred until all significant obligations have been completed.

The amount of operating revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods or services and may include adjustments for customer allowances and rebates.

Shipping and handling charges billed to customers are included in revenue and are recognized along with the related product revenue as they are considered a fulfillment cost.

Sales commissions are expensed when incurred, which is generally at the time of revenue recognition.

Contract liabilities associated with sales arrangements primarily relate to deferred revenue on equipment sales and prepaid service contracts.

Total deferred revenue and customer deposits were $215 million and $205 million for the years ended December 31, 2018 and 2017, respectively, and are short-term in nature.

For additional information regarding the Company's operating revenue, see New Accounting Pronouncements below and Note 3.

Operating Revenue.

liabilities given the provisions of the enacted tax laws.

Trade receivables— Trade receivables are net of allowances for doubtful accounts.

Prior to 2018, the allowance for doubtful accounts included reserves for uncollectible accounts and customer credits.

Under the new revenue guidance adopted on January 1, 2018, the reserve for customer credits is reported as a liability and included in "Other accrued expenses" in Note 14.

Other Balance Sheet Information.

Accordingly, after January 1, 2018, the allowance for doubtful accounts comprises of reserves for uncollectible accounts.

| Adoption of new revenue recognition guidance | | (23 | | ) | | — | | | | — | | |

| In millions | | 2018 | | | | 2017 | | |

| In millions | | 2018 | | | | 2017 | | |

flows rather than as a financing activity.

As such, the timing of revenue recognition under both the prior and new guidance is the same for the majority of the Company’s transactions.

Effective January 1, 2018, the Company adopted the new revenue recognition guidance under the modified retrospective method and recorded a cumulative-effect adjustment reducing retained earnings by $9 million as of January 1, 2018.

The Company updated its revenue recognition accounting policy to reflect the requirements of the new guidance and included additional disclosures regarding the Company's revenue transactions.

Refer to the Company’s operating revenue accounting policy above and Note 3.

Operating Revenue for additional information.

For the year ended December 31, 2018, the impact of the new guidance on the Company's effective income tax rate was not material.

Refer to Note 10.

Pension and Other Postretirement Benefits for additional information.

In February 2018, the FASB issued authoritative guidance which allows for an optional one-time reclassification of the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") from accumulated other comprehensive income ("AOCI") to retained earnings.

The Company elected to early adopt this guidance as of January 1, 2018 and to reclassify the stranded tax effects related to the Act, which resulted in an increase of $45 million to both retained earnings and accumulated other comprehensive loss.

Refer to Note 12.

February 15, 2018

| Cost of revenue | 8,309 | | | | 7,896 | | | | 7,888 | | |

| Operating Income | 3,494 | | | | 3,064 | | | | 2,867 | | |

| Balance at December 31, 2014 | $ | 6 | | $ | 1,096 | | $ | 17,173 | | $ | (10,798 | ) | $ | (658 | ) | $ | 5 | | $ | 6,824 | |

| Tax benefits related to stock options | — | | | 20 | | | — | | | — | | | — | | | — | | | 20 | | |

| Tax benefits related to defined contribution plans | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | | |

| Noncontrolling interest | — | | | (2 | | ) | — | | | — | | | — | | | (1 | | ) | (3 | | ) |

Typical sales arrangements are for standard products and provide for transfer of ownership and risk of loss at the time of shipment.

Trade receivables— Trade receivables are net of allowances for doubtful accounts which includes reserves for uncollectible accounts, customer credits and cash discounts.

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.

As a result of adopting the guidance, the Company expects to record a cumulative-effect adjustment reducing retained earnings as of January 1, 2018 by approximately $10 million related to certain transactions that were impacted by the new guidance.

Effective January 1, 2018, the Company adopted the new guidance and will apply the newly adopted guidance to intra-entity asset transfers on or after the date of adoption.

Pension and Other Postretirement Benefits for further information regarding the Company’s net periodic benefit cost.

Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease.

In addition, several new disclosures will be required.

While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.

EF&C had operating revenue of $517 million for the year ended December 31, 2017 and $245 million for the six months ended December 31,

2016, which was reported within the Company’s Automotive OEM segment.

The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of the amounts recorded at December 31, 2017.

| • | Taxation of certain global intangible low-taxed income entities ("GILTI") beginning in 2018. This provision does not impact the Company in 2017, but will impact the Company in subsequent years and is expected to partially offset the benefit of the lower U.S. corporate tax rate discussed above. |

The provisional amounts recorded for the year ended December 31, 2017 reflect the Company’s best estimate based on information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement of estimated amounts.

| Net operating loss carryforwards | | 507 | | | | — | | | | 610 | | | | — | | |

| 2018 | $ | 15 | |

| 2025-2037 | 17 | | |

Final decision by the tax court is expected in 2018.

Although the court's final decision cannot be predicted with certainty, the Company believes its position continues to be supportable.

Accordingly, no reserve has been recorded related to this matter.

| Balance, December 31, 2015 | $ | 277 | | | $ | 1,355 | | | $ | 259 | | | $ | 894 | | | $ | 261 | | | $ | 516 | | | $ | 877 | | | $ | 4,439 | |

| 2016 activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

The 2017 and 2016 assessments resulted in no impairment charges.

In 2015, the Company recorded a $2 million indefinite-lived intangible asset impairment charge related to a brand in the Polymers & Fluids segment which had a fair value of $24 million and a carrying value of $26 million.

The 2015 impairment was included in Amortization and impairment of intangible assets in the statement of income.

| 2018 | $ | 185 | |

As of December 31, 2016, Short-term debt included $650 million related to the 0.90% notes due February 25, 2017, which were repaid on the due date.

This agreement replaced the previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0 billion line of credit agreement with a termination date of August 15, 2018.

| 0.90% notes due February 25, 2017 | | 0.95% | | $ | — | | | $ | — | | | $ | 650 | | | $ | 650 | |

| 2018 | $ | 1 | |

| 2022 | 595 | | |

| Total | $ | 7,479 | |

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: 2017.][added: 2018.]

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: 2017,] [added: 2018,] 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: 2017] [added: 2018] were identified that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Information regarding the Directors of the Company is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

Information regarding the Audit Committee and its Financial Experts is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Board of Directors and Its Committees" and "Audit Committee Report" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] 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 "Proposal 1 - Election of Directors - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] 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 "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the captions "NEO Compensation," "Proposal 1 - Election of Directors - Director Compensation," and "Compensation Discussion and Analysis" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Ownership of ITW Stock" and "NEO Compensation - Equity Compensation Plan Information" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

Information regarding certain relationships and related transactions is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Ownership of ITW Stock," "Certain Relationships and Related Party Transactions" and "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

Information regarding director independence is incorporated by reference from the information under the captions "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" and "Appendix A - Categorical Standards for Director Independence" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

This information is incorporated by reference from the information under the caption "Proposal 2 - Ratification of the Appointment of Independent Registered Public Accounting Firm" in the Company’s Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders.

| [3(a)(ii)](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex3aii.htm) | | [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 [added: Current Report on] Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex3aii.htm) |

| [3(b)](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex3bi.htm) | | [By-laws of Illinois Tool Works Inc., as amended and restated as of May 6, 2016, filed as Exhibit 3(b)(i) to the Company’s [added: Current Report on] Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex3bi.htm) |

| [4(d)](http://www.sec.gov/Archives/edgar/data/49826/000004982611000059/exhibit43.htm) | | [Officers’ Certificate dated August 31, 2011, establishing the terms, and setting forth the forms, of the 3.375% Notes due 2021 and the 4.875% Notes due 2041, filed as Exhibit 4.3 to the Company’s [added: Current Report on] Form 8-K filed on September 1, 2011 (Commission File No. 001-04797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982611000059/exhibit43.htm) |

| [4(f)](http://www.sec.gov/Archives/edgar/data/49826/000004982614000055/exhibit41.htm) | | [Officers’ Certificate dated February 25, 2014, establishing the terms, and setting forth the forms, of the 0.9% Notes due 2017, the 1.95% Notes due 2019, and the 3.5% Notes due 2024, filed as Exhibit 4.1 to the Company’s [added: Current Report on] Form 8-K filed on February 26, 2014 (Commission File No. 001-04797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982614000055/exhibit41.htm) |

| [4(g)](http://www.sec.gov/Archives/edgar/data/49826/000004982614000099/itwexhibit41.htm) | | [Officers’ Certificate dated May 20, 2014, establishing the terms, and setting forth the forms, of the 1.75% Euro Notes due 2022 and the 3.0% Euro Notes due 2034, filed as Exhibit 4.1 to the Company’s [added: Current Report on] Form 8-K filed on May 22, 2014 (Commission File No. 001-04797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982614000099/itwexhibit41.htm) |

| [4(h)](http://www.sec.gov/Archives/edgar/data/49826/000119312515198771/d930210dex41.htm) | | [Officers’ Certificate dated May 19, 2015, establishing the terms, and setting forth the forms, of the 1.25% Euro Notes due 2023 and the 2.125% Euro Notes due 2030, filed as Exhibit 4.1 to the Company’s [added: Current Report on] Form 8-K filed on May 22, 2015 (Commission File No. 001-04797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000119312515198771/d930210dex41.htm) |

| [4(i)](http://www.sec.gov/Archives/edgar/data/49826/000004982616000277/exhibit41.htm) | | [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 [added: Current Report on] Form 8-K filed on November 10, 2016 (Commission File No. 001-04797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000277/exhibit41.htm) |

| [removed: [10(f)*](http://www.sec.gov/Archives/edgar/data/49826/000004982609000013/exhibit991.htm)] [added: [10(f)*](http://www.sec.gov/Archives/edgar/data/49826/000129993311000437/exhibit1.htm)] | | [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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982609000013/exhibit991.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000129993311000437/exhibit1.htm)] |

| [removed: [10(g)*](http://www.sec.gov/Archives/edgar/data/49826/000129993311000437/exhibit1.htm)] [added: [10(g)*](http://www.sec.gov/Archives/edgar/data/49826/000004982612000012/itw8k991awardagreement.htm)] | | [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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000129993311000437/exhibit1.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982612000012/itw8k991awardagreement.htm)] |

| [removed: [10(h)*](http://www.sec.gov/Archives/edgar/data/49826/000004982612000012/itw8k991awardagreement.htm)] [added: [10(h)*](http://www.sec.gov/Archives/edgar/data/49826/000004982614000019/ex991universaloptiongrant.htm)] | | [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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982612000012/itw8k991awardagreement.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982614000019/ex991universaloptiongrant.htm)] |

| [removed: [10(i)*](http://www.sec.gov/Archives/edgar/data/49826/000004982614000019/ex991universaloptiongrant.htm)] [added: [10(i)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit991stockoptionterms.htm)] | | [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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982614000019/ex991universaloptiongrant.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit991stockoptionterms.htm)] |

| [removed: [10(j)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit991stockoptionterms.htm)] [added: [10(m)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex991awardsagrmnt4q2016.htm)] | | [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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit991stockoptionterms.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex991awardsagrmnt4q2016.htm)] |

| [removed: [10(k)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit992rsugrantterms.htm)] [added: [10(j)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit992rsugrantterms.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit992rsugrantterms.htm) |

| [removed: [10(l)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit993prsugrantterms.htm)] [added: [10(k)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit993prsugrantterms.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit993prsugrantterms.htm) |

| [removed: [10(m)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit994lticashgrantterms.htm)] [added: [10(l)*](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit994lticashgrantterms.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000004982616000135/exhibit994lticashgrantterms.htm) |

| [removed: [10(n)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex991awardsagrmnt4q2016.htm)] [added: [10(n)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex992awardsagrmnt4q2016.htm)] | | [Form of [added: restricted] stock [removed: option] [added: unit] terms filed as Exhibit [removed: 99.1] [added: 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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex991awardsagrmnt4q2016.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex992awardsagrmnt4q2016.htm)] |

| [removed: [10(o)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex992awardsagrmnt4q2016.htm)] [added: [10(o)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex993awardsagrmnt4q2016.htm)] | | [Form of [removed: restricted stock] [added: performance share] unit terms filed as Exhibit [removed: 99.2] [added: 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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex992awardsagrmnt4q2016.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex993awardsagrmnt4q2016.htm)] |

| [removed: [10(p)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex993awardsagrmnt4q2016.htm)] [added: [10(p)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex994awardsagrmnt4q2016.htm)] | | [Form of performance [removed: share unit terms] [added: cash grant] filed as Exhibit [removed: 99.3] [added: 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 [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex993awardsagrmnt4q2016.htm)] [added: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex994awardsagrmnt4q2016.htm)] |

| [removed: [10(q)*](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex994awardsagrmnt4q2016.htm)] [added: [10(s)*](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a9932019universalperforman.htm)] | | [Form of [removed: Performance Cash Grant] [added: performance cash terms] filed as Exhibit [removed: 99.4] [added: 99.3] to the [removed: Company's] [added: Company’s] Current Report on Form 8-K filed on February [removed: 9, 2017] [added: 14, 2019] (Commission File No. 1-4797) and incorporated herein by [removed: reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982617000019/ex994awardsagrmnt4q2016.htm)] [added: reference](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a9932019universalperforman.htm)] |

| [removed: [10(r)*](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit1.htm)] [added: [10(t)*](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit1.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit1.htm) |

| [removed: [10(s)*](http://www.sec.gov/Archives/edgar/data/49826/000004982609000096/exhibit10.htm)] [added: [10(u)*](http://www.sec.gov/Archives/edgar/data/49826/000004982609000096/exhibit10.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000004982609000096/exhibit10.htm) |

| [removed: [10(t)*](http://www.sec.gov/Archives/edgar/data/49826/000095013709001368/c48856exv10wxpy.htm)] [added: [10(v)*](http://www.sec.gov/Archives/edgar/data/49826/000095013709001368/c48856exv10wxpy.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000095013709001368/c48856exv10wxpy.htm) |

| [removed: [10(u)*](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit3.htm)] [added: [10(w)*](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit3.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000129993310004465/exhibit3.htm) |

| [removed: [10(v)*](http://www.sec.gov/Archives/edgar/data/49826/000004982614000130/itw_exhibit101.htm)] [added: [10(x)*](http://www.sec.gov/Archives/edgar/data/49826/000004982614000130/itw_exhibit101.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000004982614000130/itw_exhibit101.htm) |

| [removed: [10(w)*](http://www.sec.gov/Archives/edgar/data/49826/000129993311001474/exhibit2.htm)] [added: [10(y)*](http://www.sec.gov/Archives/edgar/data/49826/000129993311001474/exhibit2.htm)] | | [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.](http://www.sec.gov/Archives/edgar/data/49826/000129993311001474/exhibit2.htm) |

| [removed: [10(x)*](http://www.sec.gov/Archives/edgar/data/49826/000004982613000024/itwexhibit102.htm)] [added: [10(z)*](http://www.sec.gov/Archives/edgar/data/49826/000004982613000024/itwexhibit102.htm)] | | [First Amendment to the ITW Executive Contributory Retirement Income Plan dated February 15, 2013, filed as Exhibit 10.2 to the Company’s [removed: Current] [added: Quarterly Report on] Form 10-Q [removed: filed on May 3,] [added: for the quarterly period ended March 31,] 2013 (Commission File No. 1-4797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982613000024/itwexhibit102.htm) |

| [removed: [10(y)](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex10a.htm)] [added: [10(aa)](http://www.sec.gov/Archives/edgar/data/49826/000004982613000024/itwexhibit102.htm)] | | [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 [added: Current Report on] Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference.](http://www.sec.gov/Archives/edgar/data/49826/000119312516588819/d192476dex10a.htm) |

| [removed: [21](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex21.htm)] [added: [21](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex21.htm)] | | [Subsidiaries and Affiliates of the [removed: Company.](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex21.htm)] [added: Company.](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex21.htm)] |

| [removed: [23](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex23.htm)] [added: [23](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex23.htm)] | | [Consent of Independent Registered Public Accounting [removed: Firm.](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex23.htm)] [added: Firm.](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex23.htm)] |

| [removed: [24](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex24.htm)] [added: [24](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex24.htm)] | | [Powers of [removed: Attorney.](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex24.htm)] [added: Attorney.](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex24.htm)] |

| [removed: [31](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex31.htm)] [added: [31](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex31.htm)] | | [Rule 13a-14(a) [removed: Certifications.](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex31.htm)] [added: Certifications.](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex31.htm)] |

| [removed: [32](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex32.htm)] [added: [32](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex32.htm)] | | [Section 1350 [removed: Certification.](https://www.sec.gov/Archives/edgar/data/49826/000004982618000017/itw-20171231xex32.htm)] [added: Certification.](https://www.sec.gov/Archives/edgar/data/49826/000004982619000021/itw-20181231xex32.htm)] |

| | The following financial information from Illinois Tool Works Inc.'s Annual Report on Form 10-K for the year ended December 31, [removed: 2017,] [added: 2018,] 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. |

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: 2017,] [added: 2018,] with the exception of the Officers' Certificates related to 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 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(c) through (i) in the Exhibit Index.

| [10(q)*](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a9912019universaloptionagr.htm) | | [Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a9912019universaloptionagr.htm) |

| [10(r)*](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a992universalpsuagreementf.htm) | | [Form of performance share unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference](http://www.sec.gov/Archives/edgar/data/49826/000004982619000017/a992universalpsuagreementf.htm) |

| [10(ab)*](http://www.sec.gov/Archives/edgar/data/49826/000004982618000053/itw1q18-exhibit10.htm) | | [Offer of Employment Letter from Illinois Tool Works Inc. to Norman D. Finch dated January 4, 2017, filed as exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 (Commission File No. 1-4797) and incorporated by reference.](http://www.sec.gov/Archives/edgar/data/49826/000004982618000053/itw1q18-exhibit10.htm) |

| | | |

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

| | | |

| Exhibit Number | | Description |

| | | |

| | | |

| | | |

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 15th day of February [removed: 2018.][added: 2019.]

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 15th day of February [removed: 2018.][added: 2019.]