Illinois Tool Works 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended			September 30, 2021
			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934
			For the transition period from _______________ to _______________

Commission File Number: 1-4797

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)

Delaware															36-1258310
(State or other jurisdiction of incorporation or organization)															(I.R.S. Employer Identification Number)
			155 Harlem Avenue			Glenview			IL						60025
(Address of principal executive offices)															(Zip Code)

(Registrant's telephone number, including area code) 847-724-7500

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class			Trading Symbol(s)			Name of Each Exchange on Which Registered
Common Stock			ITW			New York Stock Exchange
1.75% Euro Notes due 2022			ITW22			New York Stock Exchange
1.25% Euro Notes due 2023			ITW23			New York Stock Exchange
0.250% Euro Notes due 2024			ITW24A			New York Stock Exchange
0.625% Euro Notes due 2027			ITW27			New York Stock Exchange
2.125% Euro Notes due 2030			ITW30			New York Stock Exchange
1.00% Euro Notes due 2031			ITW31			New York Stock Exchange
3.00% Euro Notes due 2034			ITW34			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer			x			Accelerated filer			o
Non-accelerated filer			o			Smaller reporting company			☐
						Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of registrant's common stock, $0.01 par value, outstanding at September 30, 2021: 313,880,725

			Table of Contents
			PART I - Financial Information
Item 1.			Financial Statements			3
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			13
Item 4.			Controls and Procedures			32
			PART II - Other Information
Item 1.			Legal Proceedings			33
Item 1A.			Risk Factors			33
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6.			Exhibits			34
Signatures						35

PART I – FINANCIAL INFORMATION

Illinois Tool Works Inc. and Subsidiaries

Statement of Income (Unaudited)

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
In millions except per share amounts			2021						2020						2021						2020
Operating Revenue			$	3,556					$	3,307					$	10,776					$	9,099
Cost of revenue			2,096						1,910						6,298						5,375
Selling, administrative, and research and development expenses			581						560						1,735						1,606
Amortization and impairment of intangible assets			34						48						100						119
Operating Income			845						789						2,643						1,999
Interest expense			(49)						(52)						(153)						(154)
Other income (expense)			10						2						44						35
Income Before Taxes			806						739						2,534						1,880
Income Taxes			167						157						449						413
Net Income			$	639					$	582					$	2,085					$	1,467
Net Income Per Share:
Basic			$	2.03					$	1.84					$	6.61					$	4.63
Diluted			$	2.02					$	1.83					$	6.58					$	4.61
Shares of Common Stock Outstanding During the Period:
Average			314.6						316.5						315.6						316.9
Average assuming dilution			315.9						317.9						316.9						318.3

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												Nine Months Ended
			September 30,												September 30,
In millions			2021						2020						2021						2020
Net Income			$	639					$	582					$	2,085					$	1,467
Foreign currency translation adjustments, net of tax			(59)						63						(29)						(160)
Pension and other postretirement benefit adjustments, net of tax			11						9						33						28
Other comprehensive income (loss)			(48)						72						4						(132)
Comprehensive Income			$	591					$	654					$	2,089					$	1,335

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			September 30, 2021						December 31, 2020
Assets
Current Assets:
Cash and equivalents			$	1,987					$	2,564
Trade receivables			2,729						2,506
Inventories			1,524						1,189
Prepaid expenses and other current assets			337						264
Total current assets			6,577						6,523
Net plant and equipment			1,744						1,777
Goodwill			4,610						4,690
Intangible assets			683						781
Deferred income taxes			580						533
Other assets			1,323						1,308
			$	15,517					$	15,612
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt			$	579					$	350
Accounts payable			565						534
Accrued expenses			1,399						1,284
Cash dividends payable			383						361
Income taxes payable			70						60
Total current liabilities			2,996						2,589
Noncurrent Liabilities:
Long-term debt			6,972						7,772
Deferred income taxes			633						588
Noncurrent income taxes payable			365						413
Other liabilities			1,058						1,068
Total noncurrent liabilities			9,028						9,841
Stockholders' Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2021 and 2020 Outstanding- 313.9 shares in 2021 and 316.7 shares in 2020			6						6
Additional paid-in-capital			1,416						1,362
Retained earnings			24,098						23,114
Common stock held in treasury			(20,390)						(19,659)
Accumulated other comprehensive income (loss)			(1,638)						(1,642)
Noncontrolling interest			1						1
Total stockholders' equity			3,493						3,182
			$	15,517					$	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 September 30, 2021
Balance at June 30, 2021			$	6		$	1,402		$	23,842		$	(20,140)		$	(1,590)		$	1		$	3,521
Net income			—			—			639			—			—			—			639
Common stock issued for stock-based compensation			—			—			—			—			—			—			—
Stock-based compensation expense			—			14			—			—			—			—			14
Repurchases of common stock			—			—			—			(250)			—			—			(250)
Dividends declared ($1.22 per share)			—			—			(383)			—			—			—			(383)
Other comprehensive income (loss)			—			—			—			—			(48)			—			(48)
Balance at September 30, 2021			$	6		$	1,416		$	24,098		$	(20,390)		$	(1,638)		$	1		$	3,493
Three Months Ended September 30, 2020
Balance at June 30, 2020			$	6		$	1,317		$	22,612		$	(19,669)		$	(1,909)		$	1		$	2,358
Net income			—			—			582			—			—			—			582
Common stock issued for stock-based compensation			—			15			—			17			—			—			32
Stock-based compensation expense			—			14			—			—			—			—			14
Dividends declared ($1.14 per share)			—			—			(361)			—			—			—			(361)
Other comprehensive income (loss)			—			—			—			—			72			—			72
Balance at September 30, 2020			$	6		$	1,346		$	22,833		$	(19,652)		$	(1,837)		$	1		$	2,697
Nine Months Ended September 30, 2021
Balance at December 31, 2020			$	6		$	1,362		$	23,114		$	(19,659)		$	(1,642)		$	1		$	3,182
Net income			—			—			2,085			—			—			—			2,085
Common stock issued for stock-based compensation			—			13			—			19			—			—			32
Stock-based compensation expense			—			41			—			—			—			—			41
Repurchases of common stock			—			—			—			(750)			—			—			(750)
Dividends declared ($3.50 per share)			—			—			(1,101)			—			—			—			(1,101)
Other comprehensive income (loss)			—			—			—			—			4			—			4
Balance at September 30, 2021			$	6		$	1,416		$	24,098		$	(20,390)		$	(1,638)		$	1		$	3,493
Nine Months Ended September 30, 2020
Balance at December 31, 2019			$	6		$	1,304		$	22,403		$	(18,982)		$	(1,705)		$	4		$	3,030
Net income			—			—			1,467			—			—			—			1,467
Common stock issued for stock-based compensation			—			12			—			36			—			—			48
Stock-based compensation expense			—			31			—			—			—			—			31
Repurchases of common stock			—			—			—			(706)			—			—			(706)
Dividends declared ($3.28 per share)			—			—			(1,037)			—			—			—			(1,037)
Other comprehensive income (loss)			—			—			—			—			(132)			—			(132)
Noncontrolling interest			—			(1)			—			—			—			(3)			(4)
Balance at September 30, 2020			$	6		$	1,346		$	22,833		$	(19,652)		$	(1,837)		$	1		$	2,697

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Cash Flows (Unaudited)

			Nine Months Ended
			September 30,
In millions			2021						2020
Cash Provided by (Used for) Operating Activities:
Net income			$	2,085					$	1,467
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			206						203
Amortization and impairment of intangible assets			100						119
Change in deferred income taxes			(79)						19
Provision for uncollectible accounts			—						5
(Income) loss from investments			(28)						(6)
(Gain) loss on sale of plant and equipment			—						1
(Gain) loss on sale of operations and affiliates			—						(1)
Stock-based compensation expense			41						31
Other non-cash items, net			8						6
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in-
Trade receivables			(270)						42
Inventories			(365)						50
Prepaid expenses and other assets			(63)						50
Increase (decrease) in-
Accounts payable			44						23
Accrued expenses and other liabilities			133						29
Income taxes			(30)						(6)
Other, net			1						2
Net cash provided by operating activities			1,783						2,034
Cash Provided by (Used for) Investing Activities:
Additions to plant and equipment			(217)						(168)
Proceeds from investments			37						10
Proceeds from sale of plant and equipment			6						8
Other, net			(2)						(1)
Net cash provided by (used for) investing activities			(176)						(151)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid			(1,080)						(1,019)
Issuance of common stock			42						60
Repurchases of common stock			(750)						(706)
Net proceeds from (repayments of) debt with original maturities of three months or less			1						—
Repayments of debt with original maturities of more than three months			(350)						—
Other, net			(10)						(16)
Net cash provided by (used for) financing activities			(2,147)						(1,681)
Effect of Exchange Rate Changes on Cash and Equivalents			(37)						(14)
Cash and Equivalents:
Increase (decrease) during the period			(577)						188
Beginning of period			2,564						1,981
End of period			$	1,987					$	2,169
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest			$	178					$	175
Cash Paid During the Period for Income Taxes, Net of Refunds			$	558					$	399

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 three quarters 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 nine months ended September 30, 2021 and 2020 was as follows:

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
In millions			2021						2020						2021						2020
Automotive OEM			$	647					$	714					$	2,137					$	1,771
Food Equipment			544						449						1,509						1,268
Test & Measurement and Electronics			552						489						1,710						1,429
Welding			425						346						1,228						1,016
Polymers & Fluids			456						438						1,357						1,185
Construction Products			478						456						1,465						1,222
Specialty Products			459						420						1,387						1,221
Intersegment revenue			(5)						(5)						(17)						(13)
Total operating revenue			$	3,556					$	3,307					$	10,776					$	9,099

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 September 30, 2021 and 2020 was 20.8% and 21.3%, respectively, and 17.7% and 22.0% for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rate for the three and nine months ended September 30, 2021 included a discrete income tax benefit of $21 million in the third quarter of 2021 related to the utilization of capital losses. The effective tax rate for the nine months ended September 30, 2021 also benefited from a discrete income tax benefit of $112 million in the second quarter of 2021 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 $1 million and $7 million for the three months ended September 30, 2021 and 2020, respectively, and $14 million and $20 million for the nine months ended September 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) Goodwill and Intangible Assets

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarters of 2021 and 2020. The assessments resulted in no impairment charges in either 2021 or 2020.

(6) Inventories

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

In millions			September 30, 2021						December 31, 2020
Raw material			$	614					$	454
Work-in-process			176						136
Finished goods			850						681
LIFO reserve			(116)						(82)
Total inventories			$	1,524					$	1,189

(7) Pension and Other Postretirement Benefits

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

			Three Months Ended																								Nine Months Ended
			September 30,																								September 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			$	13					$	14					$	2					$	2					$	40					$	41					$	6					$	6
Interest cost			10						15						3						4						30						45						8						12
Expected return on plan assets			(26)						(28)						(7)						(6)						(77)						(84)						(20)						(18)
Amortization of actuarial loss (gain)			14						11						—						—						40						35						—						—
Amortization of prior service cost			—						1						—						—						1						1						—						—
Total net periodic benefit cost			$	11					$	13					$	(2)					$	—					$	34					$	38					$	(6)					$	—

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 September 30, 2021, contributions of $22 million to pension plans and $3 million to other postretirement benefit plans have been made.

(8) Debt

There was no commercial paper outstanding as of September 30, 2021 and December 31, 2020. Short-term debt as of September 30, 2021 included $578 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. On September 22, 2021, due to the anticipated LIBOR transition, the Company agreed to suspend its right to borrow in Euro, British Pounds Sterling and Japanese Yen currencies under the revolving credit facility, effective December 31, 2021. The Company may continue to borrow in U.S. Dollars under the credit facility. This change is not expected to have a significant impact on the Company’s liquidity or its commercial paper program. No amounts were outstanding under the $2.5 billion revolving credit facility as of September 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 September 30, 2021 and December 31, 2020 were as follows:

In millions			September 30, 2021						December 31, 2020
Fair value			$	8,451					$	9,412
Carrying value			7,551						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.

(9) Accumulated Other Comprehensive Income (Loss)

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

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
In millions			2021						2020						2021						2020
Beginning balance			$	(1,590)					$	(1,909)					$	(1,642)					$	(1,705)
Foreign currency translation adjustments during the period			(35)						22						22						(203)
Foreign currency translation adjustments reclassified to income			—						—						4						—
Income taxes			(24)						41						(55)						43
Total foreign currency translation adjustments, net of tax			(59)						63						(29)						(160)
Pension and other postretirement benefit adjustments reclassified to income			14						12						41						36
Income taxes			(3)						(3)						(8)						(8)
Total pension and other postretirement benefit adjustments, net of tax			11						9						33						28
Ending balance			$	(1,638)					$	(1,837)					$	(1,638)					$	(1,837)

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 7. 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 $1.8 billion, $1.2 billion and $1.1 billion, respectively, as of September 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 $108 million as of September 30, 2021 and a loss of $120 million as of December 31, 2020.

As of September 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 $298 million and $362 million, respectively.

(10) 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.

(11) 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.

INTRODUCTION

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As of December 31, 2020, the Company employed approximately 43,000 people.

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.

Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.

THE ITW BUSINESS MODEL

The powerful and highly differentiated ITW Business Model is the Company's core source of value creation. The ITW Business Model is the Company's competitive advantage and defines how ITW creates value for its shareholders. It is comprised of three unique elements:

• ITW's 80/20 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 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 Innovation** has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 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 creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,500 granted and pending patents;

• ITW's 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 and solutions adapted to each business' customers and end markets.

ENTERPRISE STRATEGY

In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. The Company undertook a complete review of its performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, and developing a strategy to replicate that performance across its operations.

ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach.

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

As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines.

• 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 improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 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, delivering an average of one percent reduction in spend each year from 2013 through 2020 and continues to be a key contributor to the Company's ongoing enterprise strategy.

• With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 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.

ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company's operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.

PATH TO FULL POTENTIAL

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, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position 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

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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 September 30, 2021. Based on such evaluation, the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of September 30, 2021, 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 September 30, 2021 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

None. The Company's threshold for disclosing environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.

The Company's business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary materially from recent results or from anticipated future results. Refer to the description of the Company's risk factors previously disclosed in Part I - Item 1A - Risk Factors in the Company's 2020 Annual Report on Form 10-K. There have been no material changes to the risk factors described therein.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of September 30, 2021, there were $490 million of authorized repurchases remaining under the 2018 Program.

On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of September 30, 2021, there were $3.0 billion of authorized repurchases remaining under the 2021 Program.

Share repurchase activity for the third quarter of 2021 was as follows:

In millions except per share amounts
Period						Total Number of Shares Purchased						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Programs						Maximum Value of Shares That May Yet Be Purchased Under Programs
July 2021						—						$	—					—						$	3,740
August 2021						0.7						$	230.38					0.7						$	3,561
September 2021						0.3						$	225.69					0.3						$	3,490
Total						1.0												1.0

ITEM 6. Exhibits

Exhibit Index

Exhibit Number						Exhibit Description
10.1						Suspension of Rights Agreement dated September 22, 2021 between Illinois Tool Works Inc. and JPMorgan Chase Bank, N.A., as Agent, under the Five Year Credit Agreement dated as of September 27, 2019, among Illinois Tool Works Inc., as Borrower, and JPMorgan Chase Bank, N.A., as Agent, and the Lenders thereto (as amended or otherwise modified from time to time).
31						Rule 13a-14(a) Certifications.
32						Section 1350 Certification.
101						The following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is formatted in Inline Extensible Business Reporting Language (iXBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (vi) related Notes to Financial Statements.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements 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.

						ILLINOIS TOOL WORKS INC.
Dated:			October 28, 2021			By:			/s/ Randall J. Scheuneman
									Randall J. Scheuneman
									Vice President & Chief Accounting Officer
									(Principal Accounting Officer and Duly Authorized Officer)