itw-20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended	March 31, 2021

	OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______________ to _______________

Commission File Number: 1-4797

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)

Delaware

36-1258310

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

155 Harlem Avenue

Glenview

60025

(Address of principal executive offices)

(Zip Code)

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

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


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

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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


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

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

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

Yes ☐ No x

The number of shares of registrant's common stock, $0.01 par value, outstanding at March 31, 2021: 315,882,732


	Table of Contents

	PART I - Financial Information
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 4.	Controls and Procedures	28

	PART II - Other Information

Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30

Signatures		31

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Illinois Tool Works Inc. and Subsidiaries

Statement of Income (Unaudited)


	Three Months Ended
	March 31,
In millions except per share amounts	2021		2020
Operating Revenue	$	3,544	$	3,228
Cost of revenue	2,039		1,871
Selling, administrative, and research and development expenses	566		560
Amortization and impairment of intangible assets	34		36
Operating Income	905		761
Interest expense	(52)		(51)
Other income (expense)	12		25
Income Before Taxes	865		735
Income Taxes	194		169
Net Income	$	671	$	566

Net Income Per Share:
Basic	$	2.12	$	1.78
Diluted	$	2.11	$	1.77

Shares of Common Stock Outstanding During the Period:
Average	316.6		318.3
Average assuming dilution	317.9		319.7

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Comprehensive Income (Unaudited)


	Three Months Ended
	March 31,
In millions	2021		2020
Net Income	$	671	$	566

Foreign currency translation adjustments, net of tax	(7)		(287)
Pension and other postretirement benefit adjustments, net of tax	11		9
Other comprehensive income (loss)	4		(278)

Comprehensive Income	$	675	$	288

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Financial Position (Unaudited)


In millions except per share amounts	March 31, 2021		December 31, 2020
Assets
Current Assets:
Cash and equivalents	$	2,484	$	2,564
Trade receivables	2,662		2,506
Inventories	1,292		1,189
Prepaid expenses and other current assets	266		264
Total current assets	6,704		6,523

Net plant and equipment	1,746		1,777
Goodwill	4,632		4,690
Intangible assets	747		781
Deferred income taxes	519		533
Other assets	1,315		1,308
	$	15,663	$	15,612

Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt	$	350	$	350
Accounts payable	589		534
Accrued expenses	1,261		1,284
Cash dividends payable	360		361
Income taxes payable	120		60
Total current liabilities	2,680		2,589

Noncurrent Liabilities:
Long-term debt	7,599		7,772
Deferred income taxes	637		588
Noncurrent income taxes payable	413		413
Other liabilities	1,058		1,068
Total noncurrent liabilities	9,707		9,841

Stockholders' Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2021 and 2020 Outstanding- 315.9 shares in 2021 and 316.7 shares in 2020	6		6
Additional paid-in-capital	1,378		1,362
Retained earnings	23,425		23,114
Common stock held in treasury	(19,897)		(19,659)
Accumulated other comprehensive income (loss)	(1,638)		(1,642)
Noncontrolling interest	2		1
Total stockholders' equity	3,276		3,182
	$	15,663	$	15,612

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Changes in Stockholders' Equity (Unaudited)


In millions except per share amounts	Common Stock		Additional Paid-in Capital		Retained Earnings		Common Stock Held in Treasury		Accumulated Other Comprehensive Income (Loss)		Non-controlling Interest		Total

Three Months Ended March 31, 2021
Balance at December 31, 2020	$	6	$	1,362	$	23,114	$	(19,659)	$	(1,642)	$	1	$	3,182
Net income	—		—		671		—		—		—		671
Common stock issued for stock-based compensation	—		5		—		12		—		—		17
Stock-based compensation expense	—		11		—		—		—		—		11
Repurchases of common stock	—		—		—		(250)		—		—		(250)
Dividends declared ($1.14 per share)	—		—		(360)		—		—		—		(360)
Other comprehensive income (loss)	—		—		—		—		4		—		4
Noncontrolling interest	—		—		—		—		—		1		1
Balance at March 31, 2021	$	6	$	1,378	$	23,425	$	(19,897)	$	(1,638)	$	2	$	3,276

Three Months Ended March 31, 2020
Balance at December 31, 2019	$	6	$	1,304	$	22,403	$	(18,982)	$	(1,705)	$	4	$	3,030
Net income	—		—		566		—		—		—		566
Common stock issued for stock-based compensation	—		(3)		—		8		—		—		5
Stock-based compensation expense	—		9		—		—		—		—		9
Repurchases of common stock	—		—		—		(706)		—		—		(706)
Dividends declared ($1.07 per share)	—		—		(338)		—		—		—		(338)
Other comprehensive income (loss)	—		—		—		—		(278)		—		(278)
Noncontrolling interest	—		(1)		—		—		—		(3)		(4)
Balance at March 31, 2020	$	6	$	1,309	$	22,631	$	(19,680)	$	(1,983)	$	1	$	2,284

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

Illinois Tool Works Inc. and Subsidiaries

Statement of Cash Flows (Unaudited)


	Three Months Ended
	March 31,
In millions	2021		2020
Cash Provided by (Used for) Operating Activities:
Net income	$	671	$	566
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	66		68
Amortization and impairment of intangible assets	34		36
Change in deferred income taxes	21		17
Provision for uncollectible accounts	—		2
(Income) loss from investments	(1)		(3)

(Gain) loss on sale of operations and affiliates	—		(1)
Stock-based compensation expense	11		9
Other non-cash items, net	3		2
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in-
Trade receivables	(192)		10
Inventories	(122)		(48)
Prepaid expenses and other assets	(21)		(10)
Increase (decrease) in-
Accounts payable	65		17
Accrued expenses and other liabilities	(13)		(93)
Income taxes	88		46
Other, net	(1)		(4)
Net cash provided by operating activities	609		614
Cash Provided by (Used for) Investing Activities:

Additions to plant and equipment	(68)		(60)
Proceeds from investments	1		7
Proceeds from sale of plant and equipment	2		3

Other, net	—		(3)
Net cash provided by (used for) investing activities	(65)		(53)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid	(361)		(342)
Issuance of common stock	26		17
Repurchases of common stock	(250)		(706)



Other, net	(9)		(16)
Net cash provided by (used for) financing activities	(594)		(1,047)
Effect of Exchange Rate Changes on Cash and Equivalents	(30)		(65)
Cash and Equivalents:
Increase (decrease) during the period	(80)		(551)
Beginning of period	2,564		1,981
End of period	$	2,484	$	1,430
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest	$	56	$	56
Cash Paid During the Period for Income Taxes, Net of Refunds	$	86	$	106

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

Illinois Tool Works Inc. and Subsidiaries

Notes to Financial Statements (Unaudited)

(1) Significant Accounting Policies

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

(2) Novel Coronavirus (COVID-19)

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

(3) Operating Revenue

The Company's 83 diversified operating divisions are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating revenue by product category, which is consistent with the Company's segment presentation, for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended
	March 31,
In millions	2021		2020
Automotive OEM	$	783	$	696
Food Equipment	451		483
Test & Measurement and Electronics	552		485
Welding	401		372
Polymers & Fluids	435		393
Construction Products	469		390
Specialty Products	457		414
Intersegment revenue	(4)		(5)
Total operating revenue	$	3,544	$	3,228

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

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

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

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

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

•warewashing equipment;

•cooking equipment, including ovens, ranges and broilers;

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

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

•kitchen exhaust, ventilation and pollution control systems; and

•food equipment service, maintenance and repair.

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

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

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

•electronic assembly equipment;

•electronic components and component packaging;

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

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

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

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

•arc welding equipment; and

•metal arc welding consumables and related accessories.

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

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

•adhesives for industrial, construction and consumer purposes;

•chemical fluids which clean or add lubrication to machines;

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

•hand wipes and cleaners for industrial applications;

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

•fillers and putties for auto body repair; and

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

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

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

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

•anchors, fasteners and related tools for concrete applications;

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

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

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

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

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

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

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

•product coding and marking equipment and related consumables;

•plastic and metal closures and components for appliances;

•airport ground support equipment; and

•components for medical devices.

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

(4) Income Taxes

The Company's effective tax rate for the three months ended March 31, 2021 and 2020 was 22.4% and 23.0%, respectively. The effective tax rate for the three months ended March 31, 2021 and 2020 benefited from discrete income tax benefits of $9 million and $7 million, respectively, related to excess tax benefits from stock-based compensation.

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 $99 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.

(5) Inventories

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


In millions	March 31, 2021		December 31, 2020
Raw material	$	495	$	454
Work-in-process	159		136
Finished goods	722		681
LIFO reserve	(84)		(82)
Total inventories	$	1,292	$	1,189

(6) Pension and Other Postretirement Benefits

Pension and other postretirement benefit costs for the three months ended March 31, 2021 and 2020 were as follows:


	Three Months Ended
	March 31,
	Pension				Other Postretirement Benefits
In millions	2021		2020		2021		2020
Components of net periodic benefit cost:
Service cost	$	13	$	14	$	2	$	2
Interest cost	10		15		3		4
Expected return on plan assets	(25)		(28)		(7)		(6)
Amortization of actuarial loss (gain)	13		12		—		—

Total net periodic benefit cost	$	11	$	13	$	(2)	$	—

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

The Company expects to contribute approximately $28 million to its pension plans and $4 million to its other postretirement benefit plans in 2021. As of March 31, 2021, contributions of $14 million to pension plans and $2 million to other postretirement benefit plans have been made.

(7) Debt

There was no commercial paper outstanding as of March 31, 2021 and December 31, 2020. Short-term debt as of March 31, 2021 and December 31, 2020 included $350 million related to the 3.375% notes due September 15, 2021. The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional

liquidity, including to support the potential issuances of commercial paper. No amounts were outstanding under the $2.5 billion revolving credit facility as of March 31, 2021 or December 31, 2020.

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


In millions	March 31, 2021		December 31, 2020
Fair value	$	8,880	$	9,412
Carrying value	7,949		8,122

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

(8) Accumulated Other Comprehensive Income (Loss)

The following table summarizes changes in Accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020:


	Three Months Ended
	March 31,
In millions	2021		2020
Beginning balance	$	(1,642)	$	(1,705)

Foreign currency translation adjustments during the period	33		(272)
Foreign currency translation adjustments reclassified to income	2		—
Income taxes	(42)		(15)
Total foreign currency translation adjustments, net of tax