Item 1. Financial Statements

Illinois Tool Works Inc. and Subsidiaries

Statement of Income (Unaudited)

			Three Months Ended												Six Months Ended
			June 30,												June 30,
In millions except per share amounts			2021						2020						2021						2020
Operating Revenue			$	3,676					$	2,564					$	7,220					$	5,792
Cost of revenue			2,163						1,594						4,202						3,465
Selling, administrative, and research and development expenses			588						486						1,154						1,046
Amortization and impairment of intangible assets			32						35						66						71
Operating Income			893						449						1,798						1,210
Interest expense			(52)						(51)						(104)						(102)
Other income (expense)			22						8						34						33
Income Before Taxes			863						406						1,728						1,141
Income Taxes			88						87						282						256
Net Income			$	775					$	319					$	1,446					$	885
Net Income Per Share:
Basic			$	2.46					$	1.01					$	4.58					$	2.79
Diluted			$	2.45					$	1.01					$	4.56					$	2.78
Shares of Common Stock Outstanding During the Period:
Average			315.6						316.1						316.1						317.2
Average assuming dilution			316.9						317.4						317.4						318.6

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Comprehensive Income (Unaudited)

			Three Months Ended												Six Months Ended
			June 30,												June 30,
In millions			2021						2020						2021						2020
Net Income			$	775					$	319					$	1,446					$	885
Foreign currency translation adjustments, net of tax			37						64						30						(223)
Pension and other postretirement benefit adjustments, net of tax			11						10						22						19
Other comprehensive income (loss)			48						74						52						(204)
Comprehensive Income			$	823					$	393					$	1,498					$	681

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Financial Position (Unaudited)

In millions except per share amounts			June 30, 2021						December 31, 2020
Assets
Current Assets:
Cash and equivalents			$	2,058					$	2,564
Trade receivables			2,786						2,506
Inventories			1,400						1,189
Prepaid expenses and other current assets			265						264
Total current assets			6,509						6,523
Net plant and equipment			1,767						1,777
Goodwill			4,658						4,690
Intangible assets			716						781
Deferred income taxes			613						533
Other assets			1,317						1,308
			$	15,580					$	15,612
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt			$	592					$	350
Accounts payable			607						534
Accrued expenses			1,326						1,284
Cash dividends payable			358						361
Income taxes payable			77						60
Total current liabilities			2,960						2,589
Noncurrent Liabilities:
Long-term debt			7,056						7,772
Deferred income taxes			617						588
Noncurrent income taxes payable			365						413
Other liabilities			1,061						1,068
Total noncurrent liabilities			9,099						9,841
Stockholders' Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2021 and 2020 Outstanding- 315.0 shares in 2021 and 316.7 shares in 2020			6						6
Additional paid-in-capital			1,402						1,362
Retained earnings			23,842						23,114
Common stock held in treasury			(20,140)						(19,659)
Accumulated other comprehensive income (loss)			(1,590)						(1,642)
Noncontrolling interest			1						1
Total stockholders' equity			3,521						3,182
			$	15,580					$	15,612

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Changes in Stockholders' Equity (Unaudited)

In millions except per share amounts			Common Stock			Additional Paid-in Capital			Retained Earnings			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total
Three Months Ended June 30, 2021
Balance at March 31, 2021			$	6		$	1,378		$	23,425		$	(19,897)		$	(1,638)		$	2		$	3,276
Net income			—			—			775			—			—			—			775
Common stock issued for stock-based compensation			—			8			—			7			—			—			15
Stock-based compensation expense			—			16			—			—			—			—			16
Repurchases of common stock			—			—			—			(250)			—			—			(250)
Dividends declared ($1.14 per share)			—			—			(358)			—			—			—			(358)
Other comprehensive income (loss)			—			—			—			—			48			—			48
Noncontrolling interest			—			—			—			—			—			(1)			(1)
Balance at June 30, 2021			$	6		$	1,402		$	23,842		$	(20,140)		$	(1,590)		$	1		$	3,521
Three Months Ended June 30, 2020
Balance at March 31, 2020			$	6		$	1,309		$	22,631		$	(19,680)		$	(1,983)		$	1		$	2,284
Net income			—			—			319			—			—			—			319
Common stock issued for stock-based compensation			—			—			—			11			—			—			11
Stock-based compensation expense			—			8			—			—			—			—			8
Dividends declared ($1.07 per share)			—			—			(338)			—			—			—			(338)
Other comprehensive income (loss)			—			—			—			—			74			—			74
Balance at June 30, 2020			$	6		$	1,317		$	22,612		$	(19,669)		$	(1,909)		$	1		$	2,358
Six Months Ended June 30, 2021
Balance at December 31, 2020			$	6		$	1,362		$	23,114		$	(19,659)		$	(1,642)		$	1		$	3,182
Net income			—			—			1,446			—			—			—			1,446
Common stock issued for stock-based compensation			—			13			—			19			—			—			32
Stock-based compensation expense			—			27			—			—			—			—			27
Repurchases of common stock			—			—			—			(500)			—			—			(500)
Dividends declared ($2.28 per share)			—			—			(718)			—			—			—			(718)
Other comprehensive income (loss)			—			—			—			—			52			—			52
Noncontrolling interest			—			—			—			—			—			—			—
Balance at June 30, 2021			$	6		$	1,402		$	23,842		$	(20,140)		$	(1,590)		$	1		$	3,521
Six Months Ended June 30, 2020
Balance at December 31, 2019			$	6		$	1,304		$	22,403		$	(18,982)		$	(1,705)		$	4		$	3,030
Net income			—			—			885			—			—			—			885
Common stock issued for stock-based compensation			—			(3)			—			19			—			—			16
Stock-based compensation expense			—			17			—			—			—			—			17
Repurchases of common stock			—			—			—			(706)			—			—			(706)
Dividends declared ($2.14 per share)			—			—			(676)			—			—			—			(676)
Other comprehensive income (loss)			—			—			—			—			(204)			—			(204)
Noncontrolling interest			—			(1)			—			—			—			(3)			(4)
Balance at June 30, 2020			$	6		$	1,317		$	22,612		$	(19,669)		$	(1,909)		$	1		$	2,358

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Cash Flows (Unaudited)

			Six Months Ended
			June 30,
In millions			2021						2020
Cash Provided by (Used for) Operating Activities:
Net income			$	1,446					$	885
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			136						133
Amortization and impairment of intangible assets			66						71
Change in deferred income taxes			(87)						22
Provision for uncollectible accounts			1						4
(Income) loss from investments			(24)						(5)
(Gain) loss on sale of operations and affiliates			—						(1)
Stock-based compensation expense			27						17
Other non-cash items, net			7						4
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in-
Trade receivables			(300)						302
Inventories			(222)						(14)
Prepaid expenses and other assets			(20)						23
Increase (decrease) in-
Accounts payable			80						(76)
Accrued expenses and other liabilities			41						(96)
Income taxes			13						80
Other, net			—						2
Net cash provided by operating activities			1,164						1,351
Cash Provided by (Used for) Investing Activities:
Additions to plant and equipment			(146)						(116)
Proceeds from investments			30						10
Proceeds from sale of plant and equipment			3						5
Other, net			(1)						(2)
Net cash provided by (used for) investing activities			(114)						(103)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid			(721)						(680)
Issuance of common stock			42						28
Repurchases of common stock			(500)						(706)
Repayments of debt with original maturities of more than three months			(350)						—
Other, net			(10)						(17)
Net cash provided by (used for) financing activities			(1,539)						(1,375)
Effect of Exchange Rate Changes on Cash and Equivalents			(17)						(42)
Cash and Equivalents:
Increase (decrease) during the period			(506)						(169)
Beginning of period			2,564						1,981
End of period			$	2,058					$	1,812
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest			$	128					$	119
Cash Paid During the Period for Income Taxes, Net of Refunds			$	355					$	153

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

Illinois Tool Works Inc. and Subsidiaries

Notes to Financial Statements (Unaudited)

(1) Significant Accounting Policies

Financial Statements— The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company's 2020 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

(2) Novel Coronavirus (COVID-19)

In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) occurred in China and other jurisdictions. The COVID-19 outbreak was subsequently declared a global pandemic by the World Health Organization on March 11, 2020. In response to the outbreak, governments around the globe have taken various actions to reduce its spread, including travel restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders. The COVID-19 pandemic and the measures taken globally to reduce its spread have negatively impacted the global economy, causing significant disruptions in the Company's global operations starting primarily in the latter part of the first quarter of 2020 as COVID-19 continued to spread and impact the countries in which the Company operates and the markets the Company serves. In the first half of 2021, the Company experienced solid recovery progress in many of its end markets; however, the disruptions caused by the COVID-19 pandemic continue to have an adverse impact on the Company's global operations. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations continues to be highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions and spikes in infections (including the spread of variants) also being experienced. A prolonged outbreak could continue to interrupt the operations of the Company and its customers and suppliers.

(3) Operating Revenue

The Company's 83 diversified operating divisions are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating revenue by product category, which is consistent with the Company's segment presentation, for the three and six months ended June 30, 2021 and 2020 was as follows:

			Three Months Ended												Six Months Ended
			June 30,												June 30,
In millions			2021						2020						2021						2020
Automotive OEM			$	707					$	361					$	1,490					$	1,057
Food Equipment			514						336						965						819
Test & Measurement and Electronics			606						455						1,158						940
Welding			402						298						803						670
Polymers & Fluids			466						354						901						747
Construction Products			518						376						987						766
Specialty Products			471						387						928						801
Intersegment revenue			(8)						(3)						(12)						(8)
Total operating revenue			$	3,676					$	2,564					$	7,220					$	5,792

The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's seven segments:

Automotive OEM**—** This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:

• plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.

Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.

Food Equipment**—** This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food retail and food institutional/restaurant markets. Products in this segment include:

• warewashing equipment;

• cooking equipment, including ovens, ranges and broilers;

• refrigeration equipment, including refrigerators, freezers and prep tables;

• food processing equipment, including slicers, mixers and scales;

• kitchen exhaust, ventilation and pollution control systems; and

• food equipment service, maintenance and repair.

Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.

Test & Measurement and Electronics**—** This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, energy and consumer durables markets. Products in this segment include:

• equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;

• electronic assembly equipment;

• electronic components and component packaging;

• static control equipment and consumables used for contamination control in clean room environments; and

• pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications applications.

Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed.

Welding**—** This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:

• arc welding equipment; and

• metal arc welding consumables and related accessories.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

Polymers & Fluids**—** This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets. Products in this segment include:

• adhesives for industrial, construction and consumer purposes;

• chemical fluids which clean or add lubrication to machines;

• epoxy and resin-based coating products for industrial applications;

• hand wipes and cleaners for industrial applications;

• fluids, polymers and other supplies for auto aftermarket maintenance and appearance;

• fillers and putties for auto body repair; and

• polyester coatings and patch and repair products for the marine industry.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

Construction Products**—** This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel and commercial construction markets. Products in this segment include:

• fasteners and related fastening tools for wood and metal applications;

• anchors, fasteners and related tools for concrete applications;

• metal plate truss components and related equipment and software; and

• packaged hardware, fasteners, anchors and other products for retail.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

Specialty Products**—** This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing markets. Products in this segment include:

• line integration, conveyor systems and line automation for the food and beverage industries;

• plastic consumables that multi-pack cans and bottles and related equipment;

• foil, film and related equipment used to decorate consumer products;

• product coding and marking equipment and related consumables;

• plastic and metal closures and components for appliances;

• airport ground support equipment; and

• components for medical devices.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.

(4) Income Taxes

The Company's effective tax rate for the three months ended June 30, 2021 and 2020 was 10.1% and 21.3%, respectively, and 16.3% and 22.4% for the six months ended June 30, 2021 and 2020, respectively. The effective tax rate for the three months ended June 30, 2021 included a discrete income tax benefit of $112 million related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. Additionally, the effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $4 million and $5 million for the three months ended June 30, 2021 and 2020, respectively, and $13 million and $12 million for the six months ended June 30, 2021 and 2020, respectively.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions, including the Internal Revenue Service ("IRS"), Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $55 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.

(5) Inventories

Inventories as of June 30, 2021 and December 31, 2020 were as follows:

In millions			June 30, 2021						December 31, 2020
Raw material			$	546					$	454
Work-in-process			166						136
Finished goods			779						681
LIFO reserve			(91)						(82)
Total inventories			$	1,400					$	1,189

(6) Pension and Other Postretirement Benefits

Pension and other postretirement benefit costs for the three and six months ended June 30, 2021 and 2020 were as follows:

			Three Months Ended																								Six Months Ended
			June 30,																								June 30,
			Pension												Other Postretirement Benefits												Pension												Other Postretirement Benefits
In millions			2021						2020						2021						2020						2021						2020						2021						2020
Components of net periodic benefit cost:
Service cost			$	14					$	13					$	2					$	2					$	27					$	27					$	4					$	4
Interest cost			10						15						2						4						20						30						5						8
Expected return on plan assets			(26)						(28)						(6)						(6)						(51)						(56)						(13)						(12)
Amortization of actuarial loss (gain)			13						12						—						—						26						24						—						—
Amortization of prior service cost			1						—						—						—						1						—						—						—
Total net periodic benefit cost			$	12					$	12					$	(2)					$	—					$	23					$	25					$	(4)					$	—

The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the Statement of Income while the other components of net periodic benefit cost are presented within Other income (expense).

The Company expects to contribute approximately $28 million to its pension plans and $4 million to its other postretirement benefit plans in 2021. As of June 30, 2021, contributions of $18 million to pension plans and $2 million to other postretirement benefit plans have been made.

(7) Debt

There was no commercial paper outstanding as of June 30, 2021 and December 31, 2020. Short-term debt as of June 30, 2021 included $592 million related to the 1.75% Euro notes due May 20, 2022, which were reclassified from Long-term debt to Short-term debt in the second quarter of 2021. Short-term debt as of December 31, 2020 included $350 million related to the 3.375% notes due September 15, 2021, which were redeemed in full on June 15, 2021. The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the $2.5 billion revolving credit facility as of June 30, 2021 or December 31, 2020.

The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of June 30, 2021 and December 31, 2020 were as follows:

In millions			June 30, 2021						December 31, 2020
Fair value			$	8,649					$	9,412
Carrying value			7,648						8,122

The approximate fair values of the Company's long-term debt, including current maturities, were based on a valuation model using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.

(8) Accumulated Other Comprehensive Income (Loss)

The following table summarizes changes in Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020:

			Three Months Ended												Six Months Ended
			June 30,												June 30,
In millions			2021						2020						2021						2020
Beginning balance			$	(1,638)					$	(1,983)					$	(1,642)					$	(1,705)
Foreign currency translation adjustments during the period			24						47						57						(225)
Foreign currency translation adjustments reclassified to income			2						—						4						—
Income taxes			11						17						(31)						2
Total foreign currency translation adjustments, net of tax			37						64						30						(223)
Pension and other postretirement benefit adjustments reclassified to income			14						12						27						24
Income taxes			(3)						(2)						(5)						(5)
Total pension and other postretirement benefit adjustments, net of tax			11						10						22						19
Ending balance			$	(1,590)					$	(1,909)					$	(1,590)					$	(1,909)

Foreign currency translation adjustments reclassified to income related to the exit of immaterial foreign operations. Pension and other postretirement benefit adjustments reclassified to income represented the amortization of actuarial losses and prior service cost. Refer to Note 6. Pension and Other Postretirement Benefits for additional information.

The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The carrying values of the 2019, 2015 and 2014 Euro notes were $1.9 billion, $1.2 billion and $1.2 billion, respectively, as of June 30, 2021. The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was a gain of $9 million as of June 30, 2021 and a loss of $120 million as of December 31, 2020.

As of June 30, 2021 and 2020, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.3 billion and $1.5 billion, respectively, and after-tax unrecognized pension and other postretirement benefits cost of $309 million and $371 million, respectively.

(9) Segment Information

The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.

(10) Acquisition Agreement

The Company has entered into an agreement with Amphenol Corporation ("Amphenol"), whereby the Company intends to acquire the Test & Simulation business of MTS Systems Corporation (“MTS”) from Amphenol for $750 million, subject to certain post-closing adjustments and excluding transaction-related expenses. The acquisition of the Test & Simulation business of MTS from Amphenol is expected to close following the receipt of all required regulatory approvals and the satisfaction of other customary closing conditions. Upon completion of this acquisition, the Test & Simulation business of MTS will be reported within the Company's Test & Measurement and Electronics segment.