Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2021, the Company employed approximately 45,000 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. It is the Company's competitive advantage and defines how ITW creates value for its shareholders. The ITW Business Model 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 19,300 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 2021 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 customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

The Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW's long-term growth potential.

The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. However, due to the COVID-19 pandemic, the Company chose to defer any further significant divestiture activity to a later date. The Company is reinitiating the divestiture process in 2022 for certain businesses with combined annual revenues of approximately $0.5 billion, subject to approval by the Company's Board of Directors.

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 to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of divisions and additional structural margin expansion at the enterprise level.

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, with specific focus on:

"80" focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships
Customer-back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers
Strategic Sales Excellence - deploying a high-performance sales function in every division

As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions, such as the acquisition of the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol Corporation on December 1, 2021. The operating results of the MTS Test & Simulation business were reported within the Company's Test & Measurement and Electronics segment. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.

TERMS USED BY ITW

Management uses the following terms to describe the financial results of operations of the Company:

Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.
Operating leverage** - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period.
Price/cost** - represents the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers.
Product line simplification (PLS)** - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. In the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.

Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year. The following discussion of operating results should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2021 Annual Report on Form 10-K.

CONSOLIDATED RESULTS OF OPERATIONS

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 spread and impacted the countries in which the Company operates and the markets the Company serves.

For the duration of the COVID-19 pandemic, the Company is focusing on the following priorities: (1) protect the health and support the well-being of ITW's colleagues; (2) continue to serve the Company's customers with excellence to the best of its

ability; (3) maintain financial strength, liquidity and strategic optionality; and (4) leverage the Company's strengths to position it to fully participate in the recovery. To support ITW's colleagues, among its many actions and initiatives, the Company redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs, and implemented aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. To support its customers, the Company has worked diligently to keep its facilities open and operating safely. The Company has adapted customer service systems and practices to seamlessly serve its customers under "work from home" requirements in many parts of the world.

In areas around the world where governments issued stay-at-home or similar orders, the vast majority of ITW's businesses were designated as critical or essential businesses and, as such, they remained open and operational. In some cases, this is because the Company's products directly impact the COVID-19 response effort. In other cases, the Company's businesses are designated as critical because they play a vital role in serving and supporting industries that are deemed essential to the physical and economic health of our communities.

While the vast majority of the Company's facilities have remained open and operational during the pandemic, many of these facilities were operating at a reduced capacity at various times since the outset of the pandemic. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations and financial position 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. The pandemic and resurgence of outbreaks could continue to adversely impact the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part I - Item 1A - Risk Factors in the Company's 2021 Annual Report on Form 10-K.

During the first quarter of 2022, Russian military forces invaded Ukraine. In response, the United States and several other countries imposed economic and other sanctions on Russia. Sales to customers in Russia represent less than one percent of ITW’s total consolidated revenue and are not material to the Company’s results of operations or financial position.

In a challenging and dynamic environment, the Company delivered strong financial results in the first quarter of 2022 primarily due to the continued successful execution of enterprise initiatives, including the "Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business Model. Despite rising raw material costs and a challenging global supply chain environment, the Company generated operating revenue growth of 11.2 percent in the first quarter as six of seven segments had organic revenue growth, while the Automotive OEM segment continued to be impacted by auto production reductions associated with the supply chain challenges affecting its customers. Operating income was $895 million and operating margin was 22.7 percent in the first quarter of 2022.

The Company's consolidated results of operations for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,939		$	3,544		11.2	%	10.6	%	2.8	%	—	%	(2.2)	%	11.2	%
Operating income	$	895		$	905		(1.1)	%	2.1	%	(0.3)	%	(0.7)	%	(2.2)	%	(1.1)	%
Operating margin %	22.7		%	25.5		%	(280) bps		(190) bps		(70) bps		(20) bps		—		(280) bps

Operating revenue increased due to higher organic revenue and the MTS Test & Simulation acquisition, which was completed on December 1, 2021, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue grew 10.6% as an increase in six segments was partially offset by a decline in the Automotive OEM segment. Additionally, product line simplification activities reduced organic revenue by 20 basis points.

◦North American organic revenue increased 13.5% due to growth in all segments, primarily driven by the Construction Products, Food Equipment, Welding and Polymers & Fluids segments.

◦Europe, Middle East and Africa organic revenue increased 7.4% as growth in five segments was partially offset by a decline in the Automotive OEM and Specialty Products segments.

◦Asia Pacific organic revenue increased 6.3% due to growth in five segments, partially offset by a decline in the Specialty Products and Polymers & Fluids segments. China organic revenue increased 1.1% as growth in the Automotive OEM, Test & Measurement and Electronics and Welding segments was partially offset by a decline in the Specialty Products, Construction Products, Polymers & Fluids and Food Equipment segments.

Operating income of $895 million decreased slightly compared to the prior year primarily due to unfavorable foreign currency translation and higher restructuring expenses.
Operating margin of 22.7% decreased 280 basis points primarily driven by unfavorable price/cost of 250 basis points, the dilutive impact of 70 basis points from the MTS Test & Simulation acquisition, higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 200 basis points and benefits from the Company's enterprise initiatives of 90 basis points.
The Company's effective tax rate for the first quarter of 2022 and 2021 was 23.1% and 22.4%, respectively. The effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $8 million and $9 million for the first quarter of 2022 and 2021, respectively.
Diluted earnings per share (EPS) were $2.11 for the first quarter of 2022.
The Company repurchased approximately 1.8 million shares of its common stock in the first quarter of 2022 for approximately $375 million.

RESULTS OF OPERATIONS BY SEGMENT

Total operating revenue and operating income for the first quarter of 2022 and 2021 were as follows:


	Three Months ended March 31,
Dollars in millions	Operating Revenue				Operating Income
	2022		2021		2022		2021
Automotive OEM	$	760	$	783	$	138	$	189
Food Equipment	566		451		126		96
Test & Measurement and Electronics	685		552		149		157
Welding	450		401		139		121
Polymers & Fluids	481		435		118		112
Construction Products	551		469		136		130
Specialty Products	452		457		120		126
Intersegment revenue	(6)		(4)		—		—
Unallocated	—		—		(31)		(26)
Total	$	3,939	$	3,544	$	895	$	905

Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.

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.

The results of operations for the Automotive OEM segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	760		$	783		(2.9)	%	(0.7)	%	—	%	—	%	(2.2)	%	(2.9)	%
Operating income	$	138		$	189		(27.2)	%	(21.0)	%	—	%	(4.4)	%	(1.8)	%	(27.2)	%
Operating margin %	18.1		%	24.1		%	(600) bps		(490) bps		—		(110) bps		—		(600) bps

Operating revenue declined due to the unfavorable effect of foreign currency translation and lower organic revenue.
Organic revenue decreased 0.7% primarily due to the impact of Automotive OEM customers adjusting production schedules to account for the shortage of semiconductor chips and other components in 2022. Worldwide auto builds declined 4%.

◦European organic revenue declined 10.5% compared to European auto builds which decreased 18%.

◦Asia Pacific organic revenue increased 10.8%. China organic revenue grew 11.9% versus China auto builds which increased 6%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, declined 7%.

◦North American organic revenue increased 3.1% compared to North American auto builds which declined 2%.

Operating margin of 18.1% decreased 600 basis points primarily driven by unfavorable price/cost of 320 basis points, higher overhead costs, including employee-related expenses, and higher restructuring expenses, partially offset by benefits from the Company's enterprise initiatives.

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.

The results of operations for the Food Equipment segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	566		$	451		25.3	%	28.2	%	—	%	—	%	(2.9)	%	25.3	%
Operating income	$	126		$	96		31.8	%	35.5	%	—	%	(0.2)	%	(3.5)	%	31.8	%
Operating margin %	22.3		%	21.2		%	110 bps		120 bps		—		—		(10) bps		110 bps

Operating revenue grew due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue increased 28.2% as equipment and service organic revenue grew 29.0% and 25.8%, respectively.

◦North American organic revenue increased 22.7%. Equipment organic revenue grew 23.5% primarily due to growth in the restaurant and institutional end markets, partially offset by a decline in the food retail end market. Service organic revenue increased 21.3%.

◦International organic revenue increased 36.3%. Equipment organic revenue grew 36.4% primarily due to higher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 34.7%.

Operating margin of 22.3% increased 110 basis points primarily due to positive operating leverage of 560 basis points and benefits from the Company's enterprise initiatives, partially offset by higher operating expenses, including higher employee-related expenses, and unfavorable price/cost of 110 basis points.

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, automotive original equipment manufacturers and tiers, industrial capital goods, 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.

The results of operations for the Test & Measurement and Electronics segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	685		$	552		24.0	%	7.9	%	18.1	%	—	%	(2.0)	%	24.0	%
Operating income	$	149		$	157		(4.8)	%	(1.8)	%	(2.0)	%	0.5	%	(1.5)	%	(4.8)	%
Operating margin %	21.8		%	28.4		%	(660) bps		(260) bps		(420) bps		20 bps		—		(660) bps

Operating revenue grew due to the MTS Test & Simulation acquisition and higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue increased 7.9%.

◦Organic revenue for the test and measurement businesses increased 10.1% primarily driven by higher semiconductor demand in North America and the impact of a stronger capital spending environment. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 6.0%.

◦Electronics organic revenue increased 5.6% driven by higher demand in the semiconductor end market. The electronics assembly businesses grew 9.0% due to higher demand in Asia Pacific and North America. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, increased 3.9% with growth in Asia Pacific and Europe, partially offset by a decline in North America.

Operating margin of 21.8% decreased 660 basis points driven by the dilutive impact of 420 basis points from the MTS Test & Simulation acquisition, unfavorable price/cost of 200 basis points and higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 160 basis points and benefits from the Company's enterprise initiatives.

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.

The results of operations for the Welding segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	450		$	401		12.2	%	12.9	%	—	%	—	%	(0.7)	%	12.2	%
Operating income	$	139		$	121		14.4	%	15.2	%	—	%	(0.4)	%	(0.4)	%	14.4	%
Operating margin %	30.8		%	30.3		%	50 bps		60 bps		—		(10) bps		—		50 bps

Operating revenue grew due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue increased 12.9% driven by growth in equipment of 10.4% and consumables of 17.0% primarily due to higher demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining and in the commercial end markets related to construction, light fabrication and farm and ranch customers.

◦North American organic revenue increased 12.0% due to growth in the industrial and commercial end markets of 14.5% and 8.8%, respectively.

◦International organic revenue grew 17.2% primarily due to higher equipment demand in the oil and gas end markets in Europe and Asia.

Operating margin of 30.8% increased 50 basis points primarily driven by positive operating leverage of 180 basis points and benefits from the Company's enterprise initiatives, partially offset by unfavorable price/cost of 150 basis points and higher operating expenses, including employee-related expenses.

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.

The results of operations for the Polymers & Fluids segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	481		$	435		10.5	%	12.8	%	—	%	—	%	(2.3)	%	10.5	%
Operating income	$	118		$	112		5.3	%	7.7	%	—	%	0.1	%	(2.5)	%	5.3	%
Operating margin %	24.5		%	25.7		%	(120) bps		(120) bps		—		—		—		(120) bps

Operating revenue grew due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue grew 12.8% driven by an increase in North America and Europe, partially offset by a decline in Asia Pacific. Additionally, product line simplification activities reduced organic revenue by 30 basis points.

◦Organic revenue for the automotive aftermarket businesses increased 16.5% primarily driven by an increase in the car care, tire repair and body repair businesses in North America and growth in the European additives businesses.

◦Organic revenue for the polymers businesses increased 11.2% with growth in Europe and North America, partially offset by a decline in Asia Pacific.

◦Organic revenue for the fluids businesses grew 6.2% due to an increase in the industrial maintenance, repair and operations end markets in Europe and North America.

Operating margin of 24.5% decreased 120 basis points primarily driven by unfavorable price/cost of 210 basis points and higher operating expenses, including employee-related expenses and freight costs, partially offset by positive operating leverage of 240 basis points, benefits from the Company's enterprise initiatives and lower intangible asset amortization expense.

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.

The results of operations for the Construction Products segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	551		$	469		17.4	%	21.3	%	—	%	—	%	(3.9)	%	17.4	%
Operating income	$	136		$	130		4.9	%	7.5	%	—	%	0.5	%	(3.1)	%	4.9	%
Operating margin %	24.7		%	27.6		%	(290) bps		(310) bps		—		10 bps		10 bps		(290) bps

Operating revenue grew due to higher organic revenue, partially offset by the unfavorable effect of foreign currency translation.
Organic revenue increased 21.3% with growth across all major regions. Additionally, product line simplification activities reduced organic revenue by 30 basis points.

◦North American organic revenue grew 32.1% driven by higher demand in the United States residential and commercial end markets of 36.2% and 14.5%, respectively.

◦International organic revenue increased 13.0%. European organic revenue grew 16.0% primarily driven by higher demand in the commercial and residential end markets. Asia Pacific organic revenue increased 8.9% primarily due to higher demand in the Australia and New Zealand residential end markets.

Operating margin of 24.7% decreased 290 basis points primarily driven by unfavorable price/cost of 620 basis points and higher operating expenses, including employee-related expenses, partially offset by positive operating leverage of 310 basis points and benefits from the Company's enterprise initiatives.

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.

The results of operations for the Specialty Products segment for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
Dollars in millions	March 31,						Components of Increase (Decrease)
	2022			2021			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	452		$	457		(1.1)	%	0.6	%	—	%	—	%	(1.7)	%	(1.1)	%
Operating income	$	120		$	126		(4.5)	%	(3.9)	%	—	%	1.0	%	(1.6)	%	(4.5)	%
Operating margin %	26.6		%	27.6		%	(100) bps		(130) bps		—		30 bps		—		(100) bps

Operating revenue declined due to the unfavorable effect of foreign currency translation, partially offset by higher organic revenue.
Organic revenue increased 0.6%. Consumable sales grew 5.1% primarily due to higher demand in North America and Europe, partially offset by a decrease in Asia Pacific. Equipment sales declined 16.1% with lower demand across all major regions. Additionally, product line simplification activities reduced organic revenue by 50 basis points.

◦North American organic revenue increased 6.5% primarily driven by growth in the consumer packaging businesses, partially offset by a decline in the ground support equipment and appliance businesses.

◦International organic revenue decreased 9.0% primarily due to a decline in the ground support equipment, consumer packaging and appliance businesses in Europe and the strength film and appliance businesses in Asia Pacific, partially offset by growth in the specialty films and filter medical businesses in Europe.

Operating margin of 26.6% decreased 100 basis points primarily driven by unfavorable price/cost of 70 basis points, higher overhead costs, including employee-related expenses, and higher freight costs, partially offset by benefits from the Company's enterprise initiatives and lower restructuring expenses.

OTHER FINANCIAL HIGHLIGHTS

Interest expense was $48 million in the first quarter of 2022 versus $52 million in the first quarter of 2021. Interest expense in 2022 was $4 million lower than 2021 primarily due to the repayment of notes due September 15, 2021 and May 20, 2022. Refer to Note 8. Debt in Item 1. Financial Statements for further information regarding the repayment of notes.
Other income (expense) was income of $14 million in the first quarter of 2022, an increase of $2 million compared to the first quarter of 2021 primarily due to higher other net periodic benefit income in 2022, partially offset by foreign currency translation losses in 2022 compared to foreign currency translation gains in 2021.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity are free cash flow and short-term credit facilities. As of March 31, 2022, the Company had $1.3 billion of cash and equivalents on hand and no outstanding borrowings under its $2.5 billion revolving credit facility. The Company also has maintained strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:

internal investments to support organic growth and sustain core businesses;
payment of an attractive dividend to shareholders; and
external investments in selective strategic acquisitions that support the Company's organic growth focus, such as the recently completed acquisition of the MTS Test & Simulation business, and an active share repurchase program. Refer to Note 3. MTS Test & Simulation Acquisition in Item 1. Financial Statements for further information regarding this acquisition.

The Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could readily obtain additional financing, if necessary.

Cash Flow

The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the first quarter of 2022 and 2021 was as follows:


	Three Months Ended
	March 31,
In millions	2022		2021
Net cash provided by operating activities	$	323	$	609
Additions to plant and equipment	(74)		(68)
Free cash flow	$	249	$	541

Cash dividends paid	$	(382)	$	(361)
Repurchases of common stock	(375)		(250)
Acquisition of businesses (excluding cash and equivalents)	(2)		—
Net proceeds from (repayments of) debt with original maturities of three months or less	564		—
Proceeds from debt with original maturities of more than three months	357		—
Repayments of debt with original maturities of more than three months	(656)		—
Other, net	6		20
Effect of exchange rate changes on cash and equivalents	8		(30)
Net increase (decrease) in cash and equivalents	$	(231)	$	(80)

Free cash flow decreased in the first quarter of 2022 due to higher working capital investments to support revenue growth, including increased inventory levels to help mitigate supply chain risk and sustain customer service levels.

Stock Repurchase Program

On August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provided 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"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019, approximately 4.2 million shares of its common stock at an average price of $167.69 per share during 2020, approximately 1.2 million shares of its common stock at an average price of $211.50 in the first quarter of 2021, approximately 1.1 million shares of its common stock at an average price of $233.29 in the second quarter of 2021, approximately 1.0 million shares of its common stock at an average price of $229.03 in the third quarter of 2021, approximately 1.1 million shares of its common stock at an average price of $237.11 in the fourth quarter of 2021, and approximately 1.2 million shares of its common stock at an average price of $216.62 in the first quarter of 2022. The 2018 Program was completed in the first quarter of 2022.

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"). Under the 2021 Program, the Company repurchased approximately 0.6 million shares of its common stock at an average price of $209.29 in the first quarter of 2022. As of March 31, 2022, there were $2.9 billion of authorized repurchases remaining under the 2021 Program.

After-tax Return on Average Invested Capital

The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. The Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income after taxes is a non-GAAP measure consisting of net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. Total invested capital represents the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company's operations. The most comparable GAAP measure to operating income after taxes is net income. Net income to average invested capital and After-tax ROIC for the first quarter of 2022 and 2021 were as follows:


	Three Months Ended
	March 31,
Dollars in millions	2022			2021
Numerator:
Net Income	$	662		$	671
Interest expense, net of tax (1)	37			40
Other (income) expense, net of tax (1)	(11)			(9)
Operating income after taxes	$	688		$	702

Denominator:
Invested capital:
Cash and equivalents	$	1,296		$	2,484
Trade receivables	3,126			2,662
Inventories	1,883			1,292
Net plant and equipment	1,795			1,746
Goodwill and intangible assets	5,883			5,379
Accounts payable and accrued expenses	(2,237)			(1,850)
Debt	(7,858)			(7,949)
Other, net	(306)			(488)
Total net assets (stockholders' equity)	3,582			3,276
Cash and equivalents	(1,296)			(2,484)
Debt	7,858			7,949
Total invested capital	$	10,144		$	8,741

Average invested capital (2)	$	9,966		$	8,740

Net income to average invested capital (3)	26.6		%	30.7		%
After-tax return on average invested capital (3)	27.6		%	32.1		%

(1) Effective tax rate used for interest expense and other (income) expense for the three months ended March 31, 2022 and 2021 was 23.1% and 22.4%, respectively.

(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of the periods presented.

(3) Returns for the three months ended March 31, 2022 and 2021 were converted to an annual rate by multiplying the calculated return by 4.

Working Capital

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of March 31, 2022 and December 31, 2021 is summarized as follows:


In millions	March 31, 2022		December 31, 2021		Increase/ (Decrease)
Current assets:
Cash and equivalents	$	1,296	$	1,527	$	(231)
Trade receivables	3,126		2,840		286
Inventories	1,883		1,694		189
Other	377		313		64
Total current assets	6,682		6,374		308
Current liabilities:
Short-term debt	1,041		778		263
Accounts payable and accrued expenses	2,237		2,233		4
Other	580		459		121
Total current liabilities	3,858		3,470		388
Net working capital	$	2,824	$	2,904	$	(80)

As of March 31, 2022, a significant portion of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. Cash and equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered permanently invested, may be repatriated to the U.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested.

In the U.S., the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by a long-term credit facility, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

Debt

Total debt as of March 31, 2022 and December 31, 2021 was as follows:


In millions	March 31, 2022		December 31, 2021
Short-term debt	$	1,041	$	778
Long-term debt	6,817		6,909
Total debt	$	7,858	$	7,687

Short-term debt included commercial paper of $1.0 billion and $210 million as of March 31, 2022 and December 31, 2021, respectively. The weighted-average interest rate on commercial paper as of March 31, 2022 and December 31, 2021 was 0.51% and 0.14%, respectively. As of December 31, 2021, Short-term debt also included $568 million related to the 1.75% Euro notes due May 20, 2022, which were redeemed in full at face value on February 22, 2022.

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 March 31, 2022 or December 31, 2021.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the trailing twelve month periods ended March 31, 2022 and December 31, 2021 was as follows:


Dollars in millions	March 31, 2022		December 31, 2021
Total debt	$	7,858	$	7,687

Net income	$	2,685	$	2,694
Add:
Interest expense	198		202
Other income	(53)		(51)
Income taxes	637		632
Depreciation	282		277
Amortization and impairment of intangible assets	134		133
EBITDA	$	3,883	$	3,887
Total debt to EBITDA ratio	2.0		2.0

Stockholders' Equity

The changes to stockholders' equity during the three months ended March 31, 2022 were as follows:


In millions
Total stockholders' equity, December 31, 2021	$	3,626
Net income	662
Repurchases of common stock	(375)
Dividends declared	(380)
Foreign currency translation adjustments, net of tax	26
Other, net	23
Total stockholders' equity, March 31, 2022	$	3,582

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe," "expect," "plans," "intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, and may include, without limitation, statements regarding the duration and potential effects of the COVID-19 pandemic and global supply chain challenges, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, free cash flow, economic and regulatory conditions in various geographic regions, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of dividends and share repurchases, the protection of the Company's intellectual property, the likelihood of future goodwill or intangible asset impairment charges, the impact of adopting new accounting pronouncements, the adequacy of internally generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the U.S., the cost and availability of additional financing, the availability of raw materials and energy and the impact of raw material cost inflation, enterprise initiatives, the Company's portion of future benefit payments related to pension and other postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of divested businesses, the impact of U.S. and global tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental

regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) the COVID-19 pandemic, related government actions and the Company's strategy in response thereto, (2) weaknesses or downturns in the markets served by the Company, (3) changes or deterioration in international and domestic political and economic conditions, such as the Russian invasion of Ukraine and the impact of related economic and other sanctions imposed on Russia, (4) the unfavorable impact of foreign currency fluctuations, (5) the timing and amount of benefits from the Company's enterprise strategy initiatives and their impact on organic revenue growth, (6) market conditions and availability of financing to fund the Company's share repurchases, (7) a delay or decrease in the introduction of new products into the Company's product lines, (8) any failure to protect the Company's intellectual property, (9) potential negative impact of impairments to goodwill and other intangible assets on the Company's return on invested capital, financial condition or results of operations, (10) raw material price increases and supply shortages or delays, (11) financial market risks to the Company's obligations under its defined benefit pension plans, (12) negative effects of service interruptions, data corruption, cyber-based attacks, network security breaches, or violations of data privacy laws, (13) the potential negative impact of acquisitions on the Company's profitability and returns, (14) potential negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (15) impact of tax legislation and regulatory action and changing tax rates, (16) potential adverse outcomes in legal proceedings, (17) uncertainties related to environmental regulation and the physical risks of climate change, and (18) potential failure of the Company's employees, agents or business partners to comply with anti-corruption, import/export, human rights and other laws. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Investors should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

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