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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 endedSeptember 30, 2020
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)
Delaware36-1258310
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
155 Harlem AvenueGlenviewIL60025
(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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockITWNew York Stock Exchange
1.75% Euro Notes due 2022ITW22New York Stock Exchange
1.25% Euro Notes due 2023ITW23New York Stock Exchange
0.250% Euro Notes due 2024ITW24ANew York Stock Exchange
0.625% Euro Notes due 2027ITW27New York Stock Exchange
2.125% Euro Notes due 2030ITW30New York Stock Exchange
1.00% Euro Notes due 2031ITW31New York Stock Exchange
3.00% Euro Notes due 2034ITW34New 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 filerxAccelerated filero
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 x

The number of shares of registrant’s common stock, $0.01 par value, outstanding at September 30, 2020: 316,520,261.



Table of Contents
PART I - Financial Information
PART II - Other Information


2


PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Illinois Tool Works Inc. and Subsidiaries
Statement of Income (Unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
In millions except per share amounts2020201920202019
Operating Revenue$3,307 $3,479 $9,099 $10,640 
Cost of revenue1,910 2,007 5,375 6,165 
Selling, administrative, and research and development expenses560 566 1,606 1,775 
Amortization and impairment of intangible assets48 38 119 122 
Operating Income789 868 1,999 2,578 
Interest expense(52)(52)(154)(170)
Other income (expense)2 26 35 49 
Income Before Taxes739 842 1,880 2,457 
Income Taxes157 182 413 577 
Net Income$582 $660 $1,467 $1,880 
Net Income Per Share:
Basic
$1.84 $2.05 $4.63 $5.79 
Diluted
$1.83 $2.04 $4.61 $5.76 
Shares of Common Stock Outstanding During the Period:
Average
316.5 322.3 316.9 324.8 
Average assuming dilution
317.9 324.0 318.3 326.6 

The Notes to Financial Statements are an integral part of this statement.
3


Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
In millions2020201920202019
Net Income$582 $660 $1,467 $1,880 
Foreign currency translation adjustments, net of tax63 (105)(160)(134)
Pension and other postretirement benefit adjustments, net of tax9 4 28 13 
Other comprehensive income (loss)72 (101)(132)(121)
Comprehensive Income$654 $559 $1,335 $1,759 

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

4


Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)
In millions except per share amountsSeptember 30, 2020December 31, 2019
Assets
Current Assets:
Cash and equivalents$2,169 $1,981 
Trade receivables2,494 2,461 
Inventories1,149 1,164 
Prepaid expenses and other current assets219 296 
Assets held for sale 351 
Total current assets6,031 6,253 
Net plant and equipment1,736 1,729 
Goodwill4,591 4,492 
Intangible assets814 851 
Deferred income taxes509 516 
Other assets1,259 1,227 
$14,940 $15,068 
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$353 $4 
Accounts payable521 472 
Accrued expenses1,263 1,217 
Cash dividends payable361 342 
Income taxes payable42 48 
Liabilities held for sale 71 
Total current liabilities2,540 2,154 
Noncurrent Liabilities:
Long-term debt7,592 7,754 
Deferred income taxes671 668 
Noncurrent income taxes payable413 462 
Other liabilities1,027 1,000 
Total noncurrent liabilities9,703 9,884 
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2020 and 2019
Outstanding- 316.5 shares in 2020 and 319.8 shares in 2019
6 6 
Additional paid-in-capital1,346 1,304 
Retained earnings22,833 22,403 
Common stock held in treasury(19,652)(18,982)
Accumulated other comprehensive income (loss)(1,837)(1,705)
Noncontrolling interest1 4 
Total stockholders’ equity2,697 3,030 
$14,940 $15,068 

The Notes to Financial Statements are an integral part of this statement.
5


Illinois Tool Works Inc. and Subsidiaries
Statement of Changes in Stockholders' Equity (Unaudited)
In millions except per share amountsCommon StockAdditional Paid-in CapitalRetained EarningsCommon Stock Held in TreasuryAccumulated Other Comprehensive Income (Loss)Non-controlling
Interest
Total
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 
Three Months Ended September 30, 2019
Balance at June 30, 2019$6 $1,270 $21,788 $(18,276)$(1,697)$4 $3,095 
Net income— — 660 — — — 660 
Common stock issued for stock-based
compensation
— 6 — 19 — — 25 
Stock-based compensation expense— 10 — — — — 10 
Repurchases of common stock— — — (375)— — (375)
Dividends declared ($1.07 per share)
— — (344)— — — (344)
Other comprehensive income (loss)— — — — (101)— (101)
Balance at September 30, 2019$6 $1,286 $22,104 $(18,632)$(1,798)$4 $2,970 
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 
Nine months ended September 30, 2019
Balance at December 31, 2018$6 $1,253 $21,217 $(17,545)$(1,677)$4 $3,258 
Net income— — 1,880 — — — 1,880 
Common stock issued for stock-based
compensation
— 1 — 38 — — 39 
Stock-based compensation expense— 32 — — — — 32 
Repurchases of common stock— — — (1,125)— — (1,125)
Dividends declared ($3.07 per share)
— — (993)— — — (993)
Other comprehensive income (loss)— — — — (121)— (121)
Balance at September 30, 2019$6 $1,286 $22,104 $(18,632)$(1,798)$4 $2,970 

The Notes to Financial Statements are an integral part of this statement.
6


Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)
Nine Months Ended
September 30,
In millions20202019
Cash Provided by (Used for) Operating Activities:
Net income$1,467 $1,880 
Adjustments to reconcile net income to cash provided by operating activities:  
Depreciation203 199 
Amortization and impairment of intangible assets119 122 
Change in deferred income taxes19 47 
Provision for uncollectible accounts5 3 
(Income) loss from investments(6)(12)
(Gain) loss on sale of plant and equipment1 (8)
(Gain) loss on sale of operations and affiliates(1)6 
Stock-based compensation expense31 32 
Other non-cash items, net6 7 
Change in assets and liabilities, net of acquisitions and divestitures:  
(Increase) decrease in-  
Trade receivables42 (38)
Inventories50 31 
Prepaid expenses and other assets50 21 
Increase (decrease) in-  
Accounts payable23 15 
Accrued expenses and other liabilities29 (68)
Income taxes(6)(21)
Other, net2 5 
Net cash provided by operating activities2,034 2,221 
Cash Provided by (Used for) Investing Activities:  
Acquisition of businesses (excluding cash and equivalents) (4)
Additions to plant and equipment(168)(244)
Proceeds from investments10 16 
Proceeds from sale of plant and equipment8 22 
Proceeds from sales of operations and affiliates 5 
Other, net(1)(15)
Net cash provided by (used for) investing activities(151)(220)
Cash Provided by (Used for) Financing Activities:  
Cash dividends paid(1,019)(977)
Issuance of common stock60 50 
Repurchases of common stock(706)(1,125)
Net proceeds from (repayments of) debt with original maturities of three months or less (1)
Proceeds from debt with original maturities of more than three months 1,774 
Repayments of debt with original maturities of more than three months (1,350)
Other, net(16)(12)
Net cash provided by (used for) financing activities(1,681)(1,641)
Effect of Exchange Rate Changes on Cash and Equivalents(14)(39)
Cash and Equivalents:  
Increase (decrease) during the period188 321 
Beginning of period1,981 1,504 
End of period$2,169 $1,825 
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest$175 $207 
Cash Paid During the Period for Income Taxes, Net of Refunds$399 $553 

The Notes to Financial Statements are an integral part of this statement.
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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 2019 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which changes the methodology used to measure credit losses for certain financial instruments. Under prior guidance, credit loss reserves were estimated based on historical information. The new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the financial asset. The Company adopted this new guidance effective January 1, 2020, which did not have a material impact on the Company's results of operations or financial position.

In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for impairment. Under prior guidance, when the estimated fair value of a reporting unit was less than its carrying value, the fair value of the goodwill was determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the amount that the carrying value of the reporting unit exceeds its fair value. Effective January 1, 2020, the Company adopted the new guidance prospectively and applied the new guidance during its annual assessment of goodwill in the third quarter of 2020. The adoption of this new accounting guidance had no impact on the Company's results of operations or financial position. Refer to Note 6. Goodwill and Intangible Assets for additional information regarding the Company's annual assessment of goodwill.

In December 2019, the FASB issued authoritative guidance which simplifies certain aspects of the accounting for income taxes, including the elimination of an exception to the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated full year loss. The Company early adopted this new guidance effective January 1, 2020, which did not have a material impact on the Company's results of operations or financial position.

(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. The Company expects the disruptions caused by the COVID-19 outbreak to continue to have an adverse impact on the Company's operating results in the fourth quarter of 2020. However, 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. A prolonged outbreak will continue to interrupt the operations of the Company and its customers and suppliers.

(3)    Divestitures

The Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further portfolio refinements may be needed. The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1 billion. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the business.

In the second quarter of 2019, the Company approved plans to divest six businesses, including two businesses in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, one business in the Welding segment, and two businesses in the Specialty Products segment. These six businesses were classified as held for sale beginning in the second quarter of 2019.
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In the fourth quarter of 2019, the Company divested three of the held for sale businesses which included one business in the Test & Measurement and Electronics segment, one business in the Welding segment, and one business in the Specialty Products segment. For the twelve months ended December 31, 2019, the Company recorded net pre-tax gains on disposal of businesses of $44 million ($30 million after-tax, or $0.09 per diluted share) which was primarily due to the three divestitures of held for sale businesses discussed above. The net pre-tax gain was included in Other income (expense) in the Statement of Income.

Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the three months ended September 30, 2019 was $36 million, which included $17 million in the Welding segment, $15 million in the Test & Measurement and Electronics segment, and $4 million in the Specialty Products segment. Operating revenue related to businesses divested in 2019 for the nine months ended September 30, 2019 was $109 million, which included $48 million in the Welding segment, $48 million in the Test & Measurement and Electronics segment, and $13 million in the Specialty Products segment.

As of December 31, 2019, three of the businesses discussed above continued to be held for sale, including one business in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, and one business in the Specialty Products segment.

In the first quarter of 2020, the Company concluded that the sales of the one business in the Automotive OEM segment and the one business in the Specialty Products segment previously held for sale were no longer probable of being completed within one year, primarily due to the disruptions and economic uncertainty resulting from the COVID-19 pandemic. In the third quarter of 2020, the Company concluded that the sale of the remaining held for sale business in the Test & Measurement and Electronics segment was no longer probable of being completed within one year due to delays in the sale process and ongoing economic uncertainty resulting from the COVID-19 pandemic. Accordingly, these businesses were no longer presented as held for sale in the Statement of Financial Position beginning in the first and third quarters of 2020, respectively. As of September 30, 2020, no businesses were presented as held for sale.

The assets and liabilities related to the held for sale businesses that were included in assets and liabilities held for sale in the Statement of Financial Position as of December 31, 2019, were as follows:

In millionsDecember 31, 2019
Trade receivables$81 
Inventories28 
Net plant and equipment48 
Goodwill and intangible assets166 
Other28 
Total assets held for sale$351 
Accounts payable$21 
Accrued expenses17 
Other33 
Total liabilities held for sale$71 


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(4)    Operating Revenue

The Company's 84 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, 2020 and 2019 was as follows:

Three Months EndedNine Months Ended
September 30,September 30,
In millions2020201920202019
Automotive OEM$714 $744 $1,771 $2,338 
Food Equipment449 551 1,268 1,617 
Test & Measurement and Electronics489 512 1,429 1,569 
Welding346 402 1,016 1,251 
Polymers & Fluids438 418 1,185 1,261 
Construction Products456 416 1,222 1,241 
Specialty Products420 441 1,221 1,379 
Intersegment revenue(5)(5)(13)(16)
Total operating revenue$3,307 $3,479 $9,099 $10,640 

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 institutional/restaurant and food retail 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.
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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.

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.

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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, general industrial, consumer durables, 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.

(5)    Income Taxes

The Company's effective tax rate for the three months ended September 30, 2020 and 2019 was 21.3% and 21.6%, respectively, and 22.0% and 23.5% for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $7 million for each of the three month periods ended September 30, 2020 and 2019, and $20 million and $16 million for the nine months ended September 30, 2020 and 2019, respectively. Additionally, the effective tax rate for the third quarter and year-to-date periods of 2019 benefited from a discrete tax benefit of $21 million in the third quarter of 2019 for the U.S. federal provision to return adjustment which primarily related to changes in estimates related to the "Tax Cuts and Jobs Act."

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 $67 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.

(6)    Goodwill and Intangible Assets

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarters of 2020 and 2019. The assessments resulted in no impairment charges in either 2020 or 2019.

(7)    Inventories

Inventories as of September 30, 2020 and December 31, 2019 were as follows:

In millionsSeptember 30, 2020December 31, 2019
Raw material$434 $452 
Work-in-process156 131 
Finished goods648 670 
LIFO reserve(89)(89)
Total inventories$1,149 $1,164 

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(8)    Pension and Other Postretirement Benefits

Pension and other postretirement benefit costs for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months EndedNine Months Ended
September 30,September 30,
PensionOther Postretirement BenefitsPensionOther Postretirement Benefits
In millions20202019202020192020201920202019
Components of net periodic benefit cost:
Service cost$14 $13 $2 $1 $41 $39 $6 $5 
Interest cost15 20 4 5 45 59 12 15 
Expected return on plan assets(28)(30)(6)(5)(84)(91)(18)(16)
Amortization of actuarial loss (gain)11 5   35 16  (1)
Amortization of prior service cost1    1 1   
Total net periodic benefit cost$13 $8 $ $1 $38 $24 $ $3 

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 $27 million to its pension plans and $5 million to its other postretirement benefit plans in 2020. As of September 30, 2020, contributions of $22 million to pension plans and $4 million to other postretirement benefit plans have been made.

(9)    Debt

There was no commercial paper outstanding as of September 30, 2020 and December 31, 2019. Short-term debt as of September 30, 2020 and December 31, 2019 included $4 million related to the 4.88% notes due through December 31, 2020. As of September 30, 2020, Short-term debt also included $349 million related to the 3.375% notes due September 15, 2021, which were reclassified from Long-term debt to Short-term debt in the third quarter of 2020. The Company has a $2.5 billion line of credit agreement 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 line of credit agreement as of September 30, 2020 or December 31, 2019.

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, 2020 and December 31, 2019 were as follows:

In millionsSeptember 30, 2020December 31, 2019
Fair value$9,151 $8,614 
Carrying value7,945 7,758 

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.

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(10)    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, 2020 and 2019:

Three Months EndedNine Months Ended
September 30,September 30,
In millions2020201920202019
Beginning balance$(1,909)$(1,697)$(1,705)$(1,677)
Foreign currency translation adjustments during the period22 (65)(203)(98)
Income taxes41 (40)43 (36)
Total foreign currency translation adjustments, net of tax63 (105)(160)(134)
Pension and other postretirement benefit adjustments reclassified to income
12 5 36 16 
Income taxes(3)(1)(8)(3)
Total pension and other postretirement benefit adjustments, net of tax
9 4 28 13 
Ending balance$(1,837)$(1,798)$(1,837)$(1,798)

Pension and other postretirement benefit adjustments reclassified to income related to the amortization of actuarial gains and losses and prior service cost. Refer to Note 8. Pension and Other Postretirement Benefits for additional information.

The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The carrying values of the 2019, 2015 and 2014 Euro notes were $1.9 billion, $1.2 billion and $1.2 billion, respectively, as of September 30, 2020. The cumulative unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $58 million and $239 million as of September 30, 2020 and December 31, 2019, respectively.

The ending balance of Accumulated other comprehensive income (loss) as of September 30, 2020 and 2019 consisted of cumulative translation adjustment losses, net of tax, of $1.5 billion and $1.4 billion, respectively, and unrecognized pension and other postretirement benefits costs, net of tax, of $362 million and $351 million, respectively.

(11)    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.

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 84 divisions in 53 countries. As of December 31, 2019, 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.
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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 18,000 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.

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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 84 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 2019 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 - FINISHING THE JOB

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and 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.

As part of its agenda to finish the job, 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. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 3. Divestitures in Item 1. Financial Statements for more information regarding divestitures.

80/20 Front-to-Back Practice Excellence

The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products.

ITW will continue its efforts to finish the job and 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,
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division by division, will produce further customer-facing performance improvement in a number of the Company's 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.

Near-term Priorities

There continues to be uncertainty around how severe the COVID-19 pandemic will be, how long its effects will last, or how quickly ITW’s customers and end markets will recover. The COVID-19 pandemic has impacted, and is expected to continue to impact, the Company's organic revenue and profitability. However, at this very uncertain time, ITW believes that the strength and resilience of ITW’s Business Model and its strong balance sheet continue to put the Company in a favorable position to deal with the crisis as it continues to unfold.

For the duration of the COVID-19 pandemic, the Company is focusing its efforts 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 phase.

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 2019 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
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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.

The Company experienced solid recovery progress in many of the end markets served by the Company in the third quarter of 2020, with operating revenue increasing sequentially 29 percent versus the second quarter of 2020, as demand levels in all segments improved sequentially from the second quarter of 2020, with year-over-year growth in the Construction Products and Polymers & Fluids segments. The COVID-19 pandemic continued to have more pronounced impacts in the Food Equipment and Welding segments. The strength and resilience of ITW's Business Model has resulted in the Company delivering solid financial performance. In the third quarter of 2020, operating revenue declined 4.9 percent, operating income was $789 million, operating margin was 23.8% and free cash flow was $631 million. In the year-to-date period of 2020, despite the decline in operating revenue of 14.5 percent, the Company generated $2.0 billion in operating income, operating margin was 22.0% and free cash flow was $1.9 billion.

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 phase. To support ITW’s colleagues, among other initiatives, the Company has 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 factories 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.

As of September 30, 2020, all of the Company's facilities are open and operational; however, many of these facilities are operating at a reduced capacity and the Company expects the customer demand disruptions caused by the COVID-19 outbreak to continue to have an adverse impact on the Company's operating results in the fourth quarter of 2020 and beyond. 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. A prolonged outbreak will continue to interrupt 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 II - Other Information, Item 1A. Risk Factors.

Separately, the Company does not believe that tariffs imposed in the prior year have had a material impact on its operating results. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.

The Company’s consolidated results of operations for the third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millionsSeptember 30,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign
Currency
Total
Operating revenue$3,307 $3,479 (4.9)%(4.6)%(1.0)%— %0.7 %(4.9)%
Operating income$789 $868 (9.1)%(6.9)%(0.5)%(2.1)%0.4 %(9.1)%
Operating margin %23.8 %25.0 %(120) bps(60) bps10 bps(60) bps(10) bps(120) bps

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Nine Months Ended
Dollars in millionsSeptember 30,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$9,099 $10,640 (14.5)%(12.7)%(1.0)%— %(0.8)%(14.5)%
Operating income$1,999 $2,578 (22.5)%(22.6)%(0.4)%1.1 %(0.6)%(22.5)%
Operating margin %22.0 %24.2 %(220) bps(270) bps20 bps30 bps— (220) bps

Operating revenue declined in the third quarter due to lower organic revenue and the impact of 2019 divestitures, partially offset by the favorable effect of foreign currency translation. In the year-to-date period, operating revenue decreased due to lower organic revenue, the impact of 2019 divestitures and the unfavorable effect of foreign currency translation.
Organic revenue decreased 4.6% and 12.7% in the third quarter and year-to-date periods, respectively, primarily due to disruptions in the Company's global operations resulting from the COVID-19 pandemic. Organic revenue declined in five of seven segments in the third quarter and all seven segments decreased in the year-to-date period. In the third quarter, Construction Products and Polymers & Fluids grew 7.6% and 5.8%, respectively, primarily due to growth in North America. Product line simplification activities reduced organic revenue by 30 basis points in the third quarter and 40 basis points in the year-to-date period.
North American organic revenue decreased 5.0% in the third quarter as a decrease in five segments was partially offset by growth in the Construction Products and Polymers & Fluids segments. In the year-to-date period, organic revenue decreased 12.0% as a decline in six segments, primarily driven by the Automotive OEM, Food Equipment and Welding segments, was partially offset by growth in the Construction Products segment.
Europe, Middle East and Africa organic revenue decreased 8.0% in the third quarter. A decline in the Food Equipment, Specialty Products, Automotive OEM, Test & Measurement and Electronics and Welding segments was partially offset by growth in the Construction Products and Polymers & Fluids segments. Organic revenue decreased 17.7% in the year-to-date period as all seven segments had a decline in organic revenue.
Asia Pacific organic revenue increased 3.4% in the third quarter as growth in the Automotive OEM, Specialty Products, Polymers & Fluids, Construction Products and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment and Welding segments. Organic revenue decreased 5.1% in the year-to-date period as all seven segments had a decline in organic revenue. China organic revenue grew 10.2% in the third quarter primarily due to an increase in the Automotive OEM, Polymers & Fluids, Specialty Products and Test & Measurement and Electronics segments, partially offset by a decline in the Food Equipment, Welding and Construction Products segments. In the year-to-date period, China organic revenue declined 3.8% as a decrease in the Food Equipment, Welding and Specialty Products segments, was partially offset by growth in the Polymers & Fluids, Test & Measurement and Electronics, Automotive OEM and Construction Products segments.
Operating income of $789 million and $2.0 billion in the third quarter and year-to-date periods, respectively, decreased 9.1% and 22.5% in the respective periods primarily due to lower organic revenue.
Operating margin was 23.8% in the third quarter. The decrease of 120 basis points was primarily driven by negative operating leverage of 100 basis points, higher restructuring expenses, product mix and the recapture of amortization and depreciation expense related to a business previously classified as held for sale, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and favorable price/cost of 10 basis points.
In the year-to-date period, operating margin of 22.0% decreased 220 basis points primarily driven by negative operating leverage of 300 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives of 120 basis points, lower restructuring expenses and favorable price/cost of 10 basis points.
The effective tax rate for the third quarter of 2020 and 2019 was 21.3% and 21.6%, respectively, and 22.0% and 23.5% for the year-to-date periods of 2020 and 2019, respectively. The effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $7 million for the third quarter of both 2020 and 2019, and $20 million and $16 million for the year-to-date periods of 2020 and 2019, respectively. Additionally, the effective tax rate for the third quarter and year-to-date periods of 2019 benefited from a discrete tax benefit of $21 million in the third quarter of 2019 for the U.S. federal provision to return adjustment which primarily related to changes in estimates related to the “Tax Cuts and Jobs Act.”
Diluted earnings per share (EPS) were $1.83 for the third quarter and $4.61 for the year-to-date period of 2020.
Free cash flow was $631 million and $1.9 billion for the third quarter and year-to-date periods of 2020, respectively. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 4.2 million shares of its common stock in the year-to-date period of 2020 for approximately $706 million. The Company did not repurchase any shares of its common stock in the third quarter of
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2020, as the Company temporarily suspended its share repurchase program starting in March 2020 due to the COVID-19 pandemic.
After-tax return on average invested capital was 29.6% for the third quarter and 24.4% for the year-to-date period of 2020. Refer to the After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

RESULTS OF OPERATIONS BY SEGMENT

Total operating revenue and operating income for the third quarter and year-to-date periods of 2020 and 2019 were as follows:

Three Months ended September 30,Nine Months Ended September 30,
Dollars in millionsOperating RevenueOperating IncomeOperating RevenueOperating Income
20202019202020192020201920202019
Automotive OEM$714 $744 $149 $164 $1,771 $2,338 $266 $505 
Food Equipment449 551 88 152 1,268 1,617 236 421 
Test & Measurement and Electronics489 512 116 130 1,429 1,569 354 387 
Welding346 402 96 113 1,016 1,251 269 355 
Polymers & Fluids438 418 116 101 1,185 1,261 291 287 
Construction Products456 416 128 105 1,222 1,241 309 298 
Specialty Products420 441 106 116 1,221 1,379 313 363 
Intersegment revenue(5)(5)— — (13)(16)— — 
Unallocated— — (10)(13)— — (39)(38)
Total $3,307 $3,479 $789 $868 $9,099 $10,640 $1,999 $2,578 

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 third quarter and year-to-date periods of 2020 and 2019 were as follows:
Three Months Ended
Dollars in millionsSeptember 30,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$714 $744 (4.1)%(4.8)%— %— %0.7 %(4.1)%
Operating income$149 $164 (9.5)%(3.3)%— %(6.3)%0.1 %(9.5)%
Operating margin %20.8 %22.1 %(130) bps30 bps— (150) bps(10) bps(130) bps

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Nine Months Ended
Dollars in millionsSeptember 30,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$1,771 $2,338 (24.2)%(23.3)%— %— %(0.9)%(24.2)%
Operating income$266 $505 (47.4)%(48.5)%— %1.7 %(0.6)%(47.4)%
Operating margin %15.0 %21.6 %(660) bps(710) bps— 50 bps— (660) bps

Operating revenue declined in the third quarter due to lower organic revenue, partially offset by the favorable effect of foreign currency translation. In the year-to-date period, operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.
Organic revenue declined 4.8% in the third quarter and 23.3% in the year-to-date period versus worldwide auto builds which decreased 3% in the third quarter and 23% in the year-to-date period due to customer and geographic region mix. Product line simplification activities reduced organic revenue by 80 basis points in both the third quarter and year-to-date periods.
North American organic revenue decreased 10.3% and 28.6% in the third quarter and year-to-date periods, respectively, compared to North American auto builds which grew 1% in the third quarter and declined 26% in the year-to-date periods. Auto builds for the Detroit 3, where the Company has higher content, decreased 1% and 28% in the third quarter and year-to-date periods, respectively.
European organic revenue was down 5.3% and 25.0% in the third quarter and year-to-date periods, respectively, compared to European auto builds which decreased 8% and 30% in the respective periods.
Asia Pacific organic revenue increased 10.5% in the third quarter and declined 6.1% in the year-to-date periods. China organic revenue grew 15.2% and 0.2% in the third quarter and year-to-date periods, respectively, versus China auto builds which increased 11% in the third quarter and decreased 9% in the year-to-date period.
Operating margin was 20.8% in the third quarter. The decrease of 130 basis points was primarily driven by higher restructuring expenses of 150 basis points, negative operating leverage of 90 basis points and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives.
In the year-to-date period, operating margin of 15.0% decreased 660 basis points primarily due to negative operating leverage of 530 basis points and product mix, partially offset by benefits from the Company’s enterprise initiatives and lower restructuring expenses.

FOOD EQUIPMENT

This segment is a highly focused and branded industry leader in commercial food equipment differentiated by innovation and integ