UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q10-Q/A
(Amendment No. 1)
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172021
OR
o☐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 Avenue Glenview, ILGlenviewIL60025
(Address of principal executive offices)(Zip Code)


(Registrant’sRegistrant'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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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  (Do not check if a smaller reporting company)
Smaller reporting companyo☐
Emerging growth companyo☐


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 o☐                      No x


The number of shares of registrant’sregistrant's common stock, $0.01 par value, outstanding at SeptemberJune 30, 2017: 342,598,985.


2021: 314,967,814


Explanatory Note

Illinois Tool Works Inc. is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, originally filed on August 5, 2021 (the “Original 10-Q”), solely for the purpose of adding conformed signatures to the certification filed as Exhibit 32 pursuant to Rule 13(a) under the Securities Exchange Act, as amended. The Original 10-Q is being re-filed in its entirety with the certifications of the registrant’s principal executive officer and principal financial officer being made as of the date of this Amendment. The conformed signatures were inadvertently omitted in the Original 10-Q.

Except as expressly set forth above, this Amendment does not modify or update disclosure in, or exhibits to, the Original 10-Q. Information not affected by this Amendment remains unchanged and reflects the disclosures made at the time the Original 10-Q was filed.

Table of Contents
Table of Contents
PART I - Financial Information
3
1113
2830
PART II - Other Information
2831
31
2931
3032
3133

2




PART I – FINANCIAL INFORMATION


ITEM 1. Financial Statements


Illinois Tool Works Inc. and Subsidiaries
Statement of Income (Unaudited)

Three Months EndedSix Months Ended
June 30,June 30,
In millions except per share amounts2021202020212020
Operating Revenue$3,676 $2,564 $7,220 $5,792 
Cost of revenue2,163 1,594 4,202 3,465 
Selling, administrative, and research and development expenses588 486 1,154 1,046 
Amortization and impairment of intangible assets32 35 66 71 
Operating Income893 449 1,798 1,210 
Interest expense(52)(51)(104)(102)
Other income (expense)22 8 34 33 
Income Before Taxes863 406 1,728 1,141 
Income Taxes88 87 282 256 
Net Income$775 $319 $1,446 $885 
Net Income Per Share:
Basic$2.46 $1.01 $4.58 $2.79 
Diluted$2.45 $1.01 $4.56 $2.78 
Shares of Common Stock Outstanding During the Period:
Average315.6 316.1 316.1 317.2 
Average assuming dilution316.9 317.4 317.4 318.6 

Three Months Ended
Nine Months Ended

September 30,
September 30,
In millions except per share amounts2017
2016
2017
2016
Operating Revenue$3,615

$3,495

$10,685

$10,200
Cost of revenue2,094

2,027

6,185

5,890
Selling, administrative, and research and development expenses589

604

1,795

1,818
Legal settlement (income)(80) —
 (95) —
Amortization and impairment of intangible assets51

56

156

170
Operating Income961

808

2,644

2,322
Interest expense(65)
(58)
(194)
(174)
Other income (expense)10

13

24

34
Income Before Taxes906

763

2,474

2,182
Income Taxes266

228

711

654
Net Income$640

$535

$1,763

$1,528












Net Income Per Share:










Basic$1.86

$1.51

$5.12

$4.28
Diluted$1.85

$1.50

$5.07

$4.25












Cash Dividends Per Share:










Paid$0.65

$0.55

$1.95

$1.65
Declared$0.78

$0.65

$2.08

$1.75












Shares of Common Stock Outstanding During the Period:










Average343.4

353.5

344.7

357.3
Average assuming dilution346.0

355.5

347.5

359.3

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


Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)

 Three Months Ended Nine Months Ended
 September 30, September 30,
In millions2017 2016 2017 2016
Net Income$640
 $535
 $1,763
 $1,528
Other Comprehensive Income (Loss):

  
 

 

Foreign currency translation adjustments, net of tax96
 (5) 367
 15
Pension and other postretirement benefit adjustments, net of tax13
 7
 33
 21
Comprehensive Income$749
 $537
 $2,163
 $1,564


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 EndedSix Months Ended
June 30,June 30,
In millions2021202020212020
Net Income$775 $319 $1,446 $885 
Foreign currency translation adjustments, net of tax37 64 30 (223)
Pension and other postretirement benefit adjustments, net of tax11 10 22 19 
Other comprehensive income (loss)48 74 52 (204)
Comprehensive Income$823 $393 $1,498 $681 

The Notes to Financial Statements are an integral part of this statement.
4

Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)

In millions except per share amountsJune 30, 2021December 31, 2020
Assets
Current Assets:
Cash and equivalents$2,058 $2,564 
Trade receivables2,786 2,506 
Inventories1,400 1,189 
Prepaid expenses and other current assets265 264 
Total current assets6,509 6,523 
Net plant and equipment1,767 1,777 
Goodwill4,658 4,690 
Intangible assets716 781 
Deferred income taxes613 533 
Other assets1,317 1,308 
$15,580 $15,612 
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt$592 $350 
Accounts payable607 534 
Accrued expenses1,326 1,284 
Cash dividends payable358 361 
Income taxes payable77 60 
Total current liabilities2,960 2,589 
Noncurrent Liabilities:
Long-term debt7,056 7,772 
Deferred income taxes617 588 
Noncurrent income taxes payable365 413 
Other liabilities1,061 1,068 
Total noncurrent liabilities9,099 9,841 
Stockholders' Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2021 and 2020
Outstanding- 315.0 shares in 2021 and 316.7 shares in 2020
6 6 
Additional paid-in-capital1,402 1,362 
Retained earnings23,842 23,114 
Common stock held in treasury(20,140)(19,659)
Accumulated other comprehensive income (loss)(1,590)(1,642)
Noncontrolling interest1 1 
Total stockholders' equity3,521 3,182 
$15,580 $15,612 
In millions except per share amountsSeptember 30, 2017
December 31, 2016
Assets 
 
Current Assets: 
 
Cash and equivalents$2,785

$2,472
Trade receivables2,672

2,357
Inventories1,225

1,076
Prepaid expenses and other current assets230

218
Total current assets6,912

6,123






Net plant and equipment1,759

1,652
Goodwill4,732

4,558
Intangible assets1,319

1,463
Deferred income taxes473

449
Other assets1,119

956
 $16,314

$15,201






Liabilities and Stockholders' Equity 

 
Current Liabilities: 

 
Short-term debt$698

$652
Accounts payable585

511
Accrued expenses1,231

1,202
Cash dividends payable267

226
Income taxes payable86

169
Total current liabilities2,867

2,760






Noncurrent Liabilities: 

 
Long-term debt7,439

7,177
Deferred income taxes112

134
Other liabilities870

871
Total noncurrent liabilities8,421

8,182






Stockholders’ Equity: 

 
Common stock (par value of $0.01 per share):


Issued- 550.0 shares in 2017 and 2016
Outstanding- 342.6 shares in 2017 and 346.9 shares in 2016
6

6
Additional paid-in-capital1,207

1,188
Retained earnings20,553

19,505
Common stock held in treasury(15,336)
(14,638)
Accumulated other comprehensive income (loss)(1,407)
(1,807)
Noncontrolling interest3

5
Total stockholders’ equity5,026

4,259
 $16,314

$15,201


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

5


Illinois Tool Works Inc. and Subsidiaries
Statement of Cash FlowsChanges in Stockholders' Equity (Unaudited)
 Nine Months Ended
 September 30,
In millions2017 2016
Cash Provided by (Used for) Operating Activities:   
Net income$1,763
 $1,528
Adjustments to reconcile net income to cash provided by operating activities: 
  
Depreciation188
 182
Amortization and impairment of intangible assets156
 170
Change in deferred income taxes55
 (228)
Provision for uncollectible accounts3
 7
(Income) loss from investments(13) (5)
(Gain) loss on sale of plant and equipment—
 2
(Gain) loss on sale of operations and affiliates—
 6
Stock-based compensation expense27
 31
Other non-cash items, net6
 (4)
Change in assets and liabilities, net of acquisitions and divestitures: 
  
(Increase) decrease in- 
  
Trade receivables(197) (198)
Inventories(93) (47)
Prepaid expenses and other assets(97) (30)
Increase (decrease) in- 
  
Accounts payable41
 23
Accrued expenses and other liabilities(56) (8)
Income taxes(76) 209
Net cash provided by operating activities1,707
 1,638
Cash Provided by (Used for) Investing Activities: 
  
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates(3) (456)
Additions to plant and equipment(219) (202)
Proceeds from investments25
 17
Proceeds from sale of plant and equipment8
 11
Proceeds from sales of operations and affiliates2
 1
Other, net(7) (8)
Net cash provided by (used for) investing activities(194) (637)
Cash Provided by (Used for) Financing Activities: 
  
Cash dividends paid(674) (593)
Issuance of common stock58
 74
Repurchases of common stock(750) (1,482)
Net proceeds from (repayments of) debt with original maturities of three months or less697
 188
Proceeds from debt with original maturities of more than three months—
 1
Repayments of debt with original maturities of more than three months(652) (1)
Excess tax benefits from stock-based compensation—
 25
Other, net(13) (11)
Net cash provided by (used for) financing activities(1,334) (1,799)
Effect of Exchange Rate Changes on Cash and Equivalents134
 7
Cash and Equivalents: 
  
Increase (decrease) during the period313
 (791)
Beginning of period2,472
 3,090
End of period$2,785
 $2,299
Supplementary Cash and Non-Cash Information:   
Cash Paid During the Period for Interest$208
 $198
Cash Paid During the Period for Income Taxes, Net of Refunds$732
 $648
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 June 30, 2021
Balance at March 31, 2021$6 $1,378 $23,425 $(19,897)$(1,638)$2 $3,276 
Net income— — 775 — — — 775 
Common stock issued for stock-based
compensation
— 8 — 7 — — 15 
Stock-based compensation expense— 16 — — — — 16 
Repurchases of common stock— — — (250)— — (250)
Dividends declared ($1.14 per share)— — (358)— — — (358)
Other comprehensive income (loss)— — — — 48 — 48 
Noncontrolling interest— — — — — (1)(1)
Balance at June 30, 2021$6 $1,402 $23,842 $(20,140)$(1,590)$1 $3,521 
Three Months Ended June 30, 2020
Balance at March 31, 2020$6 $1,309 $22,631 $(19,680)$(1,983)$1 $2,284 
Net income— — 319 — — — 319 
Common stock issued for stock-based
compensation
— — — 11 — — 11 
Stock-based compensation expense— 8 — — — — 8 
Dividends declared ($1.07 per share)— — (338)— — — (338)
Other comprehensive income (loss)— — — — 74 — 74 
Balance at June 30, 2020$6 $1,317 $22,612 $(19,669)$(1,909)$1 $2,358 
Six Months Ended June 30, 2021
Balance at December 31, 2020$6 $1,362 $23,114 $(19,659)$(1,642)$1 $3,182 
Net income— — 1,446 — — — 1,446 
Common stock issued for stock-based
compensation
— 13 — 19 — — 32 
Stock-based compensation expense— 27 — — — — 27 
Repurchases of common stock— — — (500)— — (500)
Dividends declared ($2.28 per share)— — (718)— — — (718)
Other comprehensive income (loss)— — — — 52 — 52 
Noncontrolling interest— — — — — — 0 
Balance at June 30, 2021$6 $1,402 $23,842 $(20,140)$(1,590)$1 $3,521 
Six Months Ended June 30, 2020
Balance at December 31, 2019$6 $1,304 $22,403 $(18,982)$(1,705)$4 $3,030 
Net income— — 885 — — — 885 
Common stock issued for stock-based
compensation
— (3)— 19 — — 16 
Stock-based compensation expense— 17 — — — — 17 
Repurchases of common stock— — — (706)— — (706)
Dividends declared ($2.14 per share)— — (676)— — — (676)
Other comprehensive income (loss)— — — — (204)— (204)
Noncontrolling interest— (1)— — — (3)(4)
Balance at June 30, 2020$6 $1,317 $22,612 $(19,669)$(1,909)$1 $2,358 


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

6


Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)
Six Months Ended
June 30,
In millions20212020
Cash Provided by (Used for) Operating Activities:
Net income$1,446 $885 
Adjustments to reconcile net income to cash provided by operating activities:  
Depreciation136 133 
Amortization and impairment of intangible assets66 71 
Change in deferred income taxes(87)22 
Provision for uncollectible accounts1 4 
(Income) loss from investments(24)(5)
(Gain) loss on sale of operations and affiliates0 (1)
Stock-based compensation expense27 17 
Other non-cash items, net7 4 
Change in assets and liabilities, net of acquisitions and divestitures:  
(Increase) decrease in-  
Trade receivables(300)302 
Inventories(222)(14)
Prepaid expenses and other assets(20)23 
Increase (decrease) in-  
Accounts payable80 (76)
Accrued expenses and other liabilities41 (96)
Income taxes13 80 
Other, net0 2 
Net cash provided by operating activities1,164 1,351 
Cash Provided by (Used for) Investing Activities:  
Additions to plant and equipment(146)(116)
Proceeds from investments30 10 
Proceeds from sale of plant and equipment3 5 
Other, net(1)(2)
Net cash provided by (used for) investing activities(114)(103)
Cash Provided by (Used for) Financing Activities:  
Cash dividends paid(721)(680)
Issuance of common stock42 28 
Repurchases of common stock(500)(706)
Repayments of debt with original maturities of more than three months(350)0 
Other, net(10)(17)
Net cash provided by (used for) financing activities(1,539)(1,375)
Effect of Exchange Rate Changes on Cash and Equivalents(17)(42)
Cash and Equivalents:  
Increase (decrease) during the period(506)(169)
Beginning of period2,564 1,981 
End of period$2,058 $1,812 
Supplementary Cash Flow Information:
Cash Paid During the Period for Interest$128 $119 
Cash Paid During the Period for Income Taxes, Net of Refunds$355 $153 

The Notes to Financial Statements are an integral part of this statement.
7

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”"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 2016Company's 2020 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.


New Accounting Pronouncements -
(2)    Novel Coronavirus (COVID-19)

In May 2014,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 Financial Accounting Standards Board (the "FASB") issued authoritative guidanceWorld Health Organization on March 11, 2020. In response to change the criteria for revenue recognition.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 core principleCOVID-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 new standard is that revenue should be recognizedfirst quarter of 2020 as COVID-19 continued to depictspread and impact the transfer of promised goods or services to customerscountries in an amount that reflects the consideration to which the entity expectsCompany operates and the markets the Company serves. In the first half of 2021, the Company experienced solid recovery progress in many of its end markets; however, the disruptions caused by the COVID-19 pandemic continue to have an adverse impact on the Company's global operations. The full extent of the COVID-19 outbreak and its impact on the markets served by the Company and on the Company's operations continues to be entitledhighly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. Under current guidance,certain regions and spikes in infections (including the spread of variants) also being experienced. A prolonged outbreak could continue to interrupt the operations of the Company generallyand 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 7 segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating revenue by product category, which is consistent with the Company's segment presentation, for the three and six months ended June 30, 2021 and 2020 was as follows:

Three Months EndedSix Months Ended
June 30,June 30,
In millions2021202020212020
Automotive OEM$707 $361 $1,490 $1,057 
Food Equipment514 336 965 819 
Test & Measurement and Electronics606 455 1,158 940 
Welding402 298 803 670 
Polymers & Fluids466 354 901 747 
Construction Products518 376 987 766 
Specialty Products471 387 928 801 
Intersegment revenue(8)(3)(12)(8)
Total operating revenue$3,676 $2,564 $7,220 $5,792 







8

The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's 7 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 when ownership and risk of loss are transferredas tooling is not considered a product offering central to the customer, whichCompany'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, or deliverytypically involving installation of service.equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed.





9

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 has completedtypically recognizes revenue for these products at the time of product shipment.

Polymers & Fluids— This segment is a review of revenue transactionsbranded 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 a significant portion of its businesses. Whileauto aftermarket maintenance and appearance. This segment primarily serves the review is not fully completed, the Company does not currently expect the adoption ofautomotive aftermarket, general industrial, MRO and construction markets. Products in this guidancesegment include:

•adhesives for industrial, construction and consumer purposes;
•chemical fluids which clean or add lubrication to have a material impact on its operating revenue, results of operations or financial position. However, the Company expects to provide additional disclosures in the notes to financial statements required under the new guidance. The new guidance will be effectivemachines;
•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 Company beginning January 1, 2018 and allows for either full or modified retrospective adoption methods.marine industry.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company expectstypically 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 adoptmeet anticipated customer demand. The Company typically recognizes revenue for these products at the newtime 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 accounting guidance utilizingfor these products at the modified retrospective method.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.


In February 2016,
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(4)    Income Taxes

The Company's effective tax rate for the FASB issued authoritative guidancethree months ended June 30, 2021 and 2020 was 10.1% and 21.3%, respectively, and 16.3% and 22.4% for the six months ended June 30, 2021 and 2020, respectively. The effective tax rate for the three months ended June 30, 2021 included a discrete income tax benefit of $112 million related to change the criteria for recognizing leasing transactions. Underremeasurement of net deferred tax assets due to the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases with a lease term greater than twelve months in the statement of financial position, including operating leases. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classificationenactment of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance will be effective forU.K. Finance Bill 2021, which increases the Company beginning January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.

In March 2016, the FASB issued authoritative guidance that included several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires theU.K. income tax effects associated withrate from 19% to 25% effective April 1, 2023. Additionally, the settlement of stock-based awards to be recognized througheffective tax rate included discrete income tax expense rather than directly in equity. Additionally, the income tax effectsbenefits related to excess tax benefits should be presented within operating cash flows in the statementfrom stock-based compensation of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $25$4 million and $5 million for the ninethree months ended SeptemberJune 30, 2016. The Company adopted the new guidance effective January 1, 20172021 and applied the newly adopted provisions prospectively. Excess tax benefits of $62020, respectively, and $13 million and $32 million were included in Income Taxes in the statement of income for the three and nine month periods ended September 30, 2017, respectively. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each quarter and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning January 1, 2018 and will be applied prospectively with the cumulative effect of adoption recorded directly to retained earnings. Although the Company is currently completing its assessment of the potential impact of this new guidance, the Company anticipates a cumulative-effect balance sheet adjustment reducing deferred tax assets and retained earnings upon adoption. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new guidance. The Company intends to complete its assessment in the fourth quarter of 2017.

In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is


eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting January 1, 2018 and will be applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The Company does not expect the adoption of this guidance to have a material impact on the results of operations or financial position. Refer to Note 6. Pension and Other Postretirement Benefits for further information information regarding the Company’s net periodic benefit cost.

(2)     Acquisition

On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. The acquisition of EF&C did not materially affect the Company’s results of operations or financial position for the periods presented.

EF&C had operating revenue of $382$12 million for the ninesix months ended SeptemberJune 30, 2017 which was reported within the Company’s Automotive OEM segment. As a result of the EF&C transaction, the Company recorded $187 million of goodwill2021 and $134 million of amortizable intangible assets primarily related to customer relationships and technology. The intangible assets will be amortized on a straight-line basis over their estimated useful lives ranging from 4 to 17 years, with a weighted average amortization period of 16 years.2020, respectively.


(3)    Income Taxes

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 $96$55 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues.


On February 18, 2014, the Company received a Notice of Deficiency (“NOD”) from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case proceeded to court with the trial taking place in the third quarter of 2016. Final decision by the tax court is expected in 2017 or 2018. Although the court's final decision cannot be predicted with certainty, the Company believes its position continues to be supportable. Accordingly, no reserve has been recorded related to this matter.

(4)(5)    Inventories


Inventories as of SeptemberJune 30, 20172021 and December 31, 20162020 were as follows:

In millions September 30, 2017 December 31, 2016In millionsJune 30, 2021December 31, 2020
Raw material$453
 $407
Raw material$546 $454 
Work-in-process148
 126
Work-in-process166 136 
Finished goods709
 629
Finished goods779 681 
LIFO reserve(85) (86)LIFO reserve(91)(82)
Total inventories$1,225
 $1,076
Total inventories$1,400 $1,189 


(5)    Goodwill and Intangible Assets

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarters of 2017 and 2016. The assessment resulted in no impairment charges in either 2017 or 2016.



(6)    Pension and Other Postretirement Benefits


Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic benefit cost related to pension and other postretirement benefit plans. The new method provides a more precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. The Company accounted for this change as a change in estimate prospectively. The change did not have a material impact on the 2017 net periodic pension and other postretirement benefit costs.

Pension and other postretirement benefit costs for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 were as follows:


Three Months EndedSix Months Ended
June 30,June 30,
PensionOther Postretirement BenefitsPensionOther Postretirement Benefits
In millions20212020202120202021202020212020
Components of net periodic benefit cost:
Service cost$14 $13 $2 $2 $27 $27 $4 $4 
Interest cost10 15 2 4 20 30 5 8 
Expected return on plan assets(26)(28)(6)(6)(51)(56)(13)(12)
Amortization of actuarial loss (gain)13 12 0 0 26 24 0 0 
Amortization of prior service cost1 0 0 0 1 0 0 0 
Total net periodic benefit cost$12 $12 $(2)$0 $23 $25 $(4)$0 
 Three Months Ended Nine Months Ended
 September 30, September 30,
 Pension Other Postretirement Benefits Pension Other Postretirement Benefits
In millions2017 2016 2017 2016 2017 2016 2017 2016
Components of net periodic benefit cost:               
Service cost$15
 $15
 $2
 $2
 $47
 $47
 $6
 $7
Interest cost18
 23
 5
 6
 54
 70
 15
 18
Expected return on plan assets(33) (36) (6) (6) (99) (109) (17) (17)
Amortization of actuarial loss15
 11
 —
 —
 43
 32
 (1) —
Amortization of prior service income
—
 —
 —
 —
 —
 —
 —
 (1)
Total net periodic benefit cost$15
 $13
 $1
 $2
 $45
 $40
 $3
 $7


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 $179$28 million to its pension plans and $6$4 million to its other postretirement benefit plans in 2017. During the nine months ended September2021. As of June 30, 2017, the Company made2021, contributions of $174$18 million to its pension plans and $2 million to other postretirement benefit plans have been made.
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(7)    Debt

There was 0 commercial paper outstanding as of June 30, 2021 and December 31, 2020. Short-term debt as of June 30, 2021 included $592 million related to the 1.75% Euro notes due May 20, 2022, which included an additional $115 million discretionary contribution madewere reclassified from Long-term debt to Short-term debt in the second quarter of 2017. Contributions of $5 million have been made to other postretirement plans during the nine months ended September 30, 2017.

(7)    Debt

Short-term debt as of September 30, 2017 included commercial paper of $688 million.2021. Short-term debt as of December 31, 20162020 included $650$350 million related to the 0.90%3.375% notes paiddue September 15, 2021, which were redeemed in full on June 15, 2021. The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the February 25, 2017 due date.potential issuances of commercial paper. NaN amounts were outstanding under the $2.5 billion revolving credit facility as of June 30, 2021 or December 31, 2020.


The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of SeptemberJune 30, 20172021 and December 31, 20162020 were as follows:


In millionsJune 30, 2021December 31, 2020
Fair value$8,649 $9,412 
Carrying value7,648 8,122 
In millionsSeptember 30, 2017 December 31, 2016
Fair value$7,958
 $8,281
Carrying value7,439
 7,827

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)    Legal Settlement

In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.



(9)    Accumulated Other Comprehensive Income (Loss)


The following table summarizes changes in Accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:


Three Months EndedSix Months Ended
June 30,June 30,
In millions2021202020212020
Beginning balance$(1,638)$(1,983)$(1,642)$(1,705)
Foreign currency translation adjustments during the period24 47 57 (225)
Foreign currency translation adjustments reclassified to income2 0 4 0 
Income taxes11 17 (31)2 
Total foreign currency translation adjustments, net of tax37 64 30 (223)
Pension and other postretirement benefit adjustments reclassified to income14 12 27 24 
Income taxes(3)(2)(5)(5)
Total pension and other postretirement benefit adjustments, net of tax11 10 22 19 
Ending balance$(1,590)$(1,909)$(1,590)$(1,909)
 Three Months Ended Nine Months Ended
 September 30, September 30,
In millions2017
2016 2017 2016
Beginning balance$(1,516) $(1,470) $(1,807) $(1,504)
        
Foreign currency translation adjustments during the period67
 (15) 271
 (15)
Foreign currency translation adjustments reclassified to income—
 —
 —
 1
Income taxes29
 10
 96
 29
Total foreign currency translation adjustments, net of tax96
 (5) 367
 15
        
Pension and other postretirement benefit adjustments during the period—
 —
 —
 1
Pension and other postretirement benefit adjustments reclassified to income15
 11
 42
 31
Income taxes(2) (4) (9) (11)
Total pension and other postretirement benefit adjustments, net of tax13
 7
 33
 21
        
Ending balance$(1,407) $(1,468) $(1,407) $(1,468)



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


The Company designateddesignated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.0€1.6 billion of Euro notesnotes issued in May 2014June 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. The carrying values of the 2015 and 2014 Euro notes were $1.2 billion and $1.2 billion, respectively, as of September 30, 2017. Changes in the value of this debt resulting fromfrom fluctuations in the Euro to U.S. dollarDollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The carrying values of the 2019, 2015 and 2014 Euro notes were $1.9 billion, $1.2 billion and $1.2 billion, respectively, as of June 30, 2021. The cumulative unrealized pre-tax gain (loss) recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $118 million and $375a gain of $9 million as of SeptemberJune 30, 20172021 and a loss of $120 million as of December 31, 2016, respectively.2020.

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TheAs of June 30, 2021 and 2020, the ending balance of Accumulated other comprehensive income (loss) asconsisted of September 30, 2017 and 2016 consisted ofafter-tax cumulative translation adjustment losses net of tax, of $1.0$1.3 billion and $1.1$1.5 billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs, netcost of tax, of $372$309 million and $358$371 million, respectively.


(10)(9)    Segment Information


The Company has seven reportableCompany's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following 7 segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. SeeRefer to Item 2 -2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenue and operating income for the Company's segments.




(10)    Acquisition Agreement

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

ITEM 2. Management’s 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 8583 divisions in 5752 countries. As of December 31, 2016,2020, the Company employed approximately 50,000 persons.43,000 people.


The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.


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


THE ITW BUSINESS MODEL


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


ITW’s •ITW's 80/20 managementFront-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-drivendata driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”"80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the “20”"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•Customer-Back Innovation has fueled decades of profitable growth at ITW. The Company’sCompany's unique innovation approach is built on insight gathered from the 80/20 managementFront-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80”"80" customers. ITW’sITW's innovation efforts are focused on understanding customer needs, particularly those in “80”"80" markets with solid long-term growth fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000approximately 18,500 granted and pending patents;
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ITW’s decentralized, entrepreneurial culture allows•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 the process ofits strategic framework transitioning the Company ontoon its current strategic path to fully leverage the compelling performance potential of the ITW Business Model. Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past four years.

The roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when the Company undertook a complete review of its performance. Focusingperformance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, ITW developedand developing a strategy to replicate that performance across its operations.




Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must beis 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’sITW'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’sITW'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’businesses' largest / most profitable customers and product lines. With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the significant product line simplification work is essentially finalized and will return to more normalized levels in 2017 and beyond.


•Step two, Business Structure Simplification,, was implemented to simplify and scale-up ITW’sscale up ITW's operating structure to support increased engineering, marketing, and sales resources, and at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 8583 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.


•The Strategic Sourcing initiative was established sourcing as a core capability to better leverage ITW’s scale and improve global competitiveness. Sourcing is now a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has deliveredITW, delivering an average of one percent reduction in spend each year from 2013 through 20162020 and is on trackcontinues to dobe a key contributor to the same in 2017 and 2018.
Company's ongoing enterprise strategy.


•With the initial portfolio realignment and scale-up work largely complete, the Company was able to shiftshifted its focus to preparing for and accelerating organic growth,. As a preparatory step, ITW is in reapplying the process of reapplying 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.


Once the business has achieved operational excellence and identified the right growth opportunities, the final step is to accelerate organic growth. The process of preparing for accelerated organic growth generally takes 18 to 24 months.

Based on the financial performance of the divisions that are further along in this process, the Company believes that its organic growth framework is capable of delivering above-market organic growth across all segments. Divisions are at various phases in preparation for growth and many are either ready to grow or already growing above their respective markets. ITW management is fully aligned with this plan and very focused on executing it. As of December 31, 2016, approximately 85 percent of the divisions were ready to grow.

PATH TO FULL POTENTIAL

While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement before it achieves full operating potential. In order to do so, ITW is focused on two key areas of opportunity, including: additional structural margin improvement and sustained above-market organic growth with strong incremental profitability.

Additional Structural Margin Improvement

To deliver on the additional structural margin improvement, the Company is implementing the following two levers: (1) further leveraging the 80/20 management process and (2) strategic sourcing.

The first lever, better leveraging the full power of the ITW Business Model, will be accomplished through a much more consistent and focused approach to 80/20 best practice implementation across the Company. The 80/20 management system has continuously been refined, improved and expanded into a unique holistic business management process of interconnected tools, which improves all aspects of the business and, when applied


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


The second lever, strategic sourcing, is a core elementPATH TO FULL POTENTIAL

Since the launch of ITW’s ongoing operationalthe enterprise strategy, and a sustainable enterprise-wide capability. Through the continued execution of this initiative, the Company expectshas made considerable progress to deliver additional margin improvement with the goalposition itself to reach full potential. The ITW Business Model and unique set of capabilities are a one percent reduction in spend in 2017source of strong and 2018.

Sustained Above-Market Organic Growth with Strong Incremental Profitability

ITW has done extensive work on its portfolio and operating structure to positionenduring competitive advantage, but for the Company to deliver sustainable above-market organic growth. The Company has narrowed the focus and significantly improved the growthtruly reach its full potential, of ITW’s business portfolio. With approximately 85%every one of its divisions ready to grow as of the end of 2016, ITW is well positioned for accelerated growth in 2017 and beyond.must also be operating at its full potential. To deliver on this accelerated growth, the divisions have been implementing the organic growth framework, which includes continued investment in customer-back innovation and a strengthened focus on market penetration. ITW continues to focus on growing its share of "80" products with existing customers with whomdo so, the Company has a resonant value proposition as well as targetremains 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

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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 new customers with similar pain points to existing customers. ITW has made strong progress on the Company’s pivot to organic growth and is well positioned to deliver on sustaineddrive 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. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. 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 has deferred any further significant divestiture activity until market conditions normalize.

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 the Company's divisions and additional structural margin expansion at the enterprise level.

Near-term Priorities

While it was the challenges brought about by the COVID-19 pandemic that dominated the Company's attention starting in 2020, it was the collection of capabilities and competitive advantages that have been built and honed over the past eight years through the execution of ITW's enterprise strategy that provided the Company with the options to respond. This, coupled with the proprietary and powerful ITW Business Model, diversified high-quality business portfolio and diligent execution put the Company in a position of strength in dealing with the global pandemic.

From the early days of the pandemic, the Company focused 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.

"Win the Recovery" is an execution component of the Company's enterprise strategy, not a separate initiative, with every one of the Company's divisions identifying specific opportunities presented by the pandemic to capture sustainable share gains that are aligned with the ITW long-term enterprise strategy. The Company expects these efforts to contribute meaningfully to accelerate its progress toward full-potential organic growth. The Company continues to focus on delivering strong results in any environment while executing its long-term strategy to achieve and sustain ITW's full potential performance.

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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 recently announced agreement with Amphenol Corporation ("Amphenol"), whereby the Company intends to acquire the Test & Simulation business of MTS Systems Corporation ("MTS") from Amphenol, which is expected to close following the receipt of all required regulatory approvals and the satisfaction of other customary closing conditions. Upon completion of this acquisition, the Test & Simulation business of MTS will be reported within the Company's Test & Measurement and Electronics segment.

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; inlines. 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 20162020 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 continued to spread and impact 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 phase. 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.
16

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. 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. A prolonged outbreak could 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 I - Item 1A - Risk Factors in the Company's 2020 Annual Report on Form 10-K.

Separately, the Company does not believe that tariffs imposed in recent years 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'sCompany delivered strong thirdfinancial results in the second quarter and year-to-date financial performance reflectedperiods of 2021 primarily due to the continued progress leveragingsuccessful execution of enterprise initiatives, including the powerful"Win the Recovery" actions initiated over the course of the past year, and continued focus on the highly differentiated ITW Business ModelModel. Despite rising raw material costs and executing enterprise initiatives. Six of seven segments achieved worldwide organica challenging global supply chain environment, the Company generated operating revenue growth of 43.4 percent in the thirdsecond quarter and all seven segments had organic revenue growth in the year-to-date period. All seven segments had operating margin at or above 21% in both respective periods.

On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. In 2017, EF&C had operating revenue of $126 million in the third quarter and $382 million in the year-to-date period. EF&C diluted the Company's operating margin by 40 basis points24.7 percent in the year-to-date period due to lower operating marginas all segments and acquisition related expenses. The Company expects EF&C's operating margin to improve in later years through the application of the Company's 80/20 business management process. The operating results of EF&C are reported within the Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented. Refer to Note 2. Acquisition in Item 1 - Financial Statements for further information regarding this acquisition.



The Company’s consolidated results of operations for the third quartermajor geographic regions achieved double-digit organic revenue growth. Operating income grew 99 percent and year-to-date periods were as follows:

 Three Months Ended       
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) Organic
Acq/DivRestructuringImpairmentForeign CurrencyTotal
Operating revenue$3,615
 $3,495
 3.5% 1.9%(0.2)%— %—%1.8%3.5%
Operating income$961
 $808
 19.0% 17.5%— %(0.2)%—%1.7%19.0%
Operating margin %26.6% 23.1% 350 bps
 350 bps
—
—
—
—
350 bps

 Nine Months Ended       
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) Organic
Acq/DivRestructuringImpairmentForeign CurrencyTotal
Operating revenue$10,685
 $10,200
 4.8% 2.7%2.3%—%—%(0.2)%4.8%
Operating income$2,644
 $2,322
 13.9% 13.2%0.9%—%0.1%(0.3)%13.9%
Operating margin %24.7% 22.8% 190 bps
 230 bps
(40) bps
—
—
—
190 bps

Operating revenue grew48.5 percent in the third quarter primarily due to an increase in organic revenue and the favorable effect of foreign currency translation. In the year-to-date period, operating revenue grew primarily due to an increase in organic and acquisition revenues.
Organic revenue grew 1.9% and 2.7% in the thirdsecond quarter and year-to-date periods, respectively. Six segments achieved worldwide organic revenue growth in the third quarter, and all seven segments achieved growth in the year-to-date period. In the third quarter, Food Equipment declined 0.4% primarily due to lower equipment demand in North America.
◦North American organic revenue was flat in the third quarter. Growth in the Welding, Specialty Products, Construction Products and Polymers & Fluids segments was offset by a decline in the Automotive OEM, Food Equipment and Test & Measurements and Electronics segments. In the year-to-date period, organic revenue grew 1.0%. Growth in five segments was partially offset by a decline in the Food Equipment and Automotive OEM segments.
◦Europe, Middle East and Africa organic revenue increased 2.4% in the third quarter as growth in the Automotive OEM, Food Equipment, Construction Products and Specialty Products segments was partially offset by a decline in the Welding, Polymers & Fluids and Test & Measurement and Electronics segments. Organic revenue increased 3.8% in the year-to-date period as growth in six segments was partially offset by a decline in the Welding segment.
◦Asia Pacific organic revenue increased 8.1% in the third quarter as all seven segments achieved organic revenue growth. In the year-to-date period, organic revenue grew 7.6% as growth in six segments was partially offset by a decline in the Welding segment.
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 millionOperating margin was 24.3 percent in the second quarter of 2017 and $80 million24.9 percent in the third quarter of 2017, which was included in operating income.
Operating income of $961 million and $2.6 billion in the third quarter and year-to-date periods, respectively, increased 19.0% and 13.9% in the respective periods. Excluding the favorable impact of the confidential legal settlement, operating income would have increased 9.1% and 9.8% in the third quarter and year-to-date periods, respectively.
Operating margin of 26.6% in the third quarter increased 350 basis points. Excluding the 220 basis points of favorability from the confidential legal settlement, operating margin of 24.4% increased 130 basis points primarily due to the benefits of the Company's enterprise initiatives that contributed 110 basis points. In addition, positive operating leverage of 50 basis points was partially offset by unfavorable price/cost of 40 basis points.
In the year-to-date period operatingas all segments achieved margin of 24.7% increased 190 basis points. Excluding the 80 basis points of favorability from the confidential legal settlement, operating margin of 23.9% increased 110 basis points primarily driven by the benefits of the Company's enterprise initiatives of 100 basis points. In addition, positive operating leverage of 50 basis points and improved overhead efficiencies were partially offset by the dilutive impact of 40 basis points from the EF&C acquisition and unfavorable price/cost of 40 basis points.


Diluted earnings per share (EPS) of $1.85 for the third quarter and $5.07 for the year-to-date period increased 23.3% and 19.3%, respectively. Excluding the favorable effect of the confidential legal settlement of $0.14 and $0.17 in the third quarter and year-to-date periods, respectively, EPS increased 14.0% and 15.3% inexpansion compared to the respective periods.
Free cash flow was $702 million and $1.5 billion for the third quarter and year-to-date periods, respectively. Free cash flow for the year-to-date period includes the impact from an additional discretionary pension contribution of $115 million in the second quarter of 2017. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 1.8 million and 5.5 million shares of its common stock in the third quarter and year-to-date periods, respectively, for approximately $250 million and $750 million, respectively.
The Company increased the quarterly dividend by 20.0% in the third quarter of 2017. Total cash dividends of $224 million and $674 million were paid in the third quarter and year-to-date periods of 2017, respectively.
Adjusted after-taxprior year period. After-tax return on average invested capital was 26.3% for30.8 percent and 31.3 percent in the third quarter. Excluding 220 basis points attributable to the confidential legal settlement, adjusted after-tax return on average invested capital was 24.1%, an increasesecond quarter and year-to-date periods of 110 basis points. In the year-to-date period, adjusted after-tax return on average invested capital was 25.0%, an increase of 270 basis points. Excluding 90 basis points attributable to the confidential legal settlement, adjusted after-tax return on average invested capital was 24.1%, an increase of 180 basis points.2021, respectively. Refer to the Adjusted After-TaxAfter-tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.


The Company's consolidated results of operations for the second quarter and year-to-date periods of 2021 and 2020 were as follows:

Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign
Currency		Total
Operating revenue$3,676 $2,564 43.4 %37.2 %— %— %6.2 %43.4 %
Operating income$893 $449 99.0 %90.5 %0.1 %(0.5)%8.9 %99.0 %
Operating margin %24.3 %17.5 %680 bps680 bps— — — 680 bps

Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign
Currency		Total
Operating revenue$7,220 $5,792 24.7 %19.9 %— %— %4.8 %24.7 %
Operating income$1,798 $1,210 48.5 %42.8 %— %(0.2)%5.9 %48.5 %
Operating margin %24.9 %20.9 %400 bps400 bps— — — 400 bps

•Operating revenue increased 43.4% in the second quarter and 24.7% in the year to date period due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue grew 37.2% and 19.9% in the second quarter and year-to-date periods, respectively, due to growth in all segments, as the Company saw continued improvement in both the breadth and pace of the recovery. Additionally, product line simplification activities reduced organic revenue by 20 basis points in the second quarter and year-to-date periods.
17

◦North American organic revenue grew 36.3% and 18.5% in the second quarter and year-to-date periods, respectively, due to growth in all segments primarily driven by the Automotive OEM, Test & Measurement and Electronics, Welding and Food Equipment segments.
◦Europe, Middle East and Africa organic revenue increased 49.6% in the second quarter and 20.3% in the year-to-date period due to growth in all segments primarily driven by Automotive OEM, Food Equipment, Construction Products and Specialty Products segments.
◦Asia Pacific organic revenue increased 20.0% and 23.4% in the second quarter and year-to-date periods, respectively, due to growth in all segments. China organic revenue grew 14.3% and 34.5% in the second quarter and year-to-date periods, respectively, due to growth in six segments, partially offset by a decline in the Construction Products segment.
•Operating income of $893 million and $1.8 billion in the second quarter and year-to-date periods, respectively, increased 99.0% and 48.5% in the respective periods.
•Operating margin was 24.3% in the second quarter. The increase of 680 basis points was primarily driven by positive operating leverage of 700 basis points and benefits from the Company's enterprise initiatives of 150 basis points, partially offset by unfavorable price/cost of 120 basis points and higher overhead expenses, including employee-related expenses.
•In the year-to-date period, operating margin of 24.9% increased 400 basis points primarily due to positive operating leverage of 390 basis points and benefits from the Company's enterprise initiatives of 130 basis points, partially offset by unfavorable price/cost of 90 basis points and higher overhead expenses, including employee-related expenses.
•The effective tax rate for the second quarter of 2021 and 2020 was 10.1% and 21.3%, respectively, and 16.3% and 22.4% for the respective year-to-date periods of 2021 and 2020. The effective tax rate for the second quarter of 2021 included a discrete income tax benefit of $112 million related to the remeasurement of net deferred tax assets due to the enactment of the U.K. Finance Bill 2021, which increases the U.K. income tax rate from 19% to 25% effective April 1, 2023. Additionally, the effective tax rate included discrete income tax benefits related to excess tax benefits from stock-based compensation of $4 million and $5 million for the second quarter of 2021 and 2020, respectively, and $13 million and $12 million for the respective year-to-date periods of 2021 and 2020.
•Diluted earnings per share (EPS) of $2.45 for the second quarter and $4.56 for the year-to-date period increased 142.6% and 64.0%, respectively. Excluding the favorable impact of the discrete income tax benefit of $0.35 related to the remeasurement of the U.K. net deferred tax assets, EPS increased 107.9% and 51.4% in the respective periods.
•Free cash flow was $477 million and $1.0 billion for the second quarter and year-to-date periods of 2021, respectively. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
•The Company repurchased approximately 1.1 million and 2.3 million shares of its common stock in the second quarter and year-to-date periods of 2021, respectively, for approximately $250 million and $500 million, respectively.
•After-tax return on average invested capital was 30.8% for the second quarter and 31.3% for the year-to-date period of 2021. 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 thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months ended June 30,Six Months Ended June 30,
Dollars in millionsOperating RevenueOperating IncomeOperating RevenueOperating Income
20212020202120202021202020212020
Automotive OEM$707 $361 $133 $(28)$1,490 $1,057 $322 $117 
Food Equipment514 336 113 31 965 819 209 148 
Test & Measurement and Electronics606 455 170 117 1,158 940 327 238 
Welding402 298 115 64 803 670 236 173 
Polymers & Fluids466 354 127 82 901 747 239 175 
Construction Products518 376 143 90 987 766 273 181 
Specialty Products471 387 128 98 928 801 254 207 
Intersegment revenue(8)(3)— — (12)(8)— — 
Unallocated— — (36)(5)— — (62)(29)
Total$3,676 $2,564 $893 $449 $7,220 $5,792 $1,798 $1,210 

18
 Three Months Ended September 30, Nine Months Ended September 30,
Dollars in millionsOperating Revenue Operating Income Operating Revenue Operating Income
 2017 2016 2017 2016 2017 2016 2017 2016
Automotive OEM$795
 $765
 $172
 $166
 $2,443
 $2,091
 $556
 $512
Food Equipment549
 544
 150
 149
 1,575
 1,578
 414
 405
Test & Measurement and Electronics525
 516
 127
 108
 1,524
 1,487
 337
 274
Welding378
 361
 100
 95
 1,150
 1,125
 312
 282
Polymers & Fluids434
 422
 90
 89
 1,297
 1,283
 272
 266
Construction Products440
 415
 112
 94
 1,260
 1,223
 303
 278
Specialty Products498
 477
 138
 125
 1,451
 1,429
 401
 373
Intersegment revenues(4) (5) —
 —
 (15) (16) —
 —
Unallocated—
 —
 72
 (18) —
 —
 49
 (68)
Total$3,615
 $3,495
 $961
 $808
 $10,685
 $10,200
 $2,644
 $2,322


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. Unallocated in 2017 includes the favorable impact from the previously discussed confidential legal settlement.


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 thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$707 $361 95.3 %83.5 %— %— %11.8 %95.3 %
Operating income$133 $(28)573.8 %547.8 %— %(3.1)%29.1 %573.8 %
Operating margin %18.8 %(7.8)%2660 bps2670 bps— (10) bps— 2660 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$795
 $765
 4.1% 1.3%—%— %2.8%4.1%
Operating income$172
 $166
 2.9% 1.0%—%(1.2)%3.1%2.9%
Operating margin %21.6% 21.8% (20) bps
 (10) bps
—
(20) bps
10 bps
(20) bps


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$1,490 $1,057 40.9 %33.6 %— %— %7.3 %40.9 %
Operating income$322 $117 175.0 %159.9 %— %0.6 %14.5 %175.0 %
Operating margin %21.6 %11.1 %1050 bps1050 bps— — — 1050 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$2,443
 $2,091
 16.9% 4.7%12.2%— %— %16.9%
Operating income$556
 $512
 8.4% 6.1%4.2%(1.7)%(0.2)%8.4%
Operating margin %22.7% 24.5% (180) bps
 30 bps
(160) bps
(40) bps
(10) bps
(180) bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue and the favorable effect of foreign currency translation and higher organic revenue. Operatingtranslation.
•Organic revenue increased 83.5%and 33.6% in the year-to-date period due to higher organic and acquisition revenues.
Organic revenue grew 1.3% and 4.7% in the thirdsecond quarter and year-to-date periods, respectively, as a result of penetration gains, exceeding auto build growth in every key geography.primarily due to demand recovery versus the prior year. Worldwide auto builds grew 2% and 3%49% in the thirdsecond quarter and 29% in the year-to-date period. Product line simplification activities reduced organic revenue by 20 basis points in the second quarter and 30 basis points in the year-to-date period. Additionally, the impact of Automotive OEM customers adjusting production schedules to account for the shortage of several components negatively impacted organic revenue in the second quarter and year-to-date periods of 2021.
◦North American organic revenue increased 102.1% and 29.1% in the second quarter and year-to-date periods, respectively, compared to North American auto builds which grew 132% in the second quarter and 32% in the year-to-date period. Auto builds for the Detroit 3, where the Company has higher content, increased 92% and 19% in the second quarter and year-to-date periods, respectively.
◦European organic revenue grew 7.8% and 8.8% in the third quarter and year-to-date periods, respectively, compared to European auto builds which increased 5% in the third quarter and 2% in the year-to-date period.
◦Asia Pacific organic revenue increased 9.0% and 12.2% in the third quarter and year-to-date periods, respectively. China organic revenue grew 10.3% and 17.9% in the third quarter and year-to-date periods, respectively, versus Chinese auto builds which increased 1% in the third quarter and 3% in the year-to-date period.
◦North American organic revenue declined 6.7% and 0.8% in the third quarter and year-to-date periods, respectively. North American auto builds declined 10% in the third quarter and 4% in the year-to-date period. Auto builds for the Detroit 3, where the Company has higher content, declined 14% in the third quarter and 7% in the year-to-date period.
◦European organic revenue increased 106.2% and 34.7% in the second quarter and year-to-date periods, respectively, compared to European auto builds which increased 86% in the second quarter and 28% in the year-to-date period.
◦Asia Pacific organic revenue increased 36.9% and 39.8% in the second quarter and year-to-date periods, respectively. China organic revenue grew 19.9% and 36.8% in the second quarter and year-to-date periods, respectively, versus China auto builds which declined 4% in the second quarter and increased 25% in the year-to-date period. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, declined 19% in the second quarter and increased 11% in the year-to-date period.
•Operating margin was 21.6%of 18.8% in the third quarter. The decrease of 20 basis points was primarily driven by unfavorable price/cost of 120 basis points and higher restructuring expenses, partially offset by the net benefits from the Company's enterprise initiatives and cost management of 80 basis points and positive operating leverage of 30 basis points.
In the year-to-date period, operating margin of 22.7% decreased 180second quarter increased 2,660 basis points primarily driven by the dilutive impact of 160 basis points from the EF&C acquisition, unfavorable price/cost of 110 basis points and higher restructuring expenses, partially offset by positive operating leverage of 801,700 basis points and the net benefits from the Company's enterprise initiatives and cost management, partially offset by unfavorable price/cost of 60240 basis points.

19

•In the year-to-date period, operating margin was 21.6%. The increase of 1,050 basis points was primarily driven by positive operating leverage of 630 basis points and the net benefits from the Company's enterprise initiatives and cost management, partially offset by unfavorable price/cost of 170 basis points.

FOOD EQUIPMENT


This segment is a highly focused and branded industry-leaderindustry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food institutional/restaurant,service, food serviceretail and food retailinstitutional/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 thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$514 $336 52.9 %46.0 %— %— %6.9 %52.9 %
Operating income$113 $31 265.6 %250.4 %— %(1.2)%16.4 %265.6 %
Operating margin %22.0 %9.2 %1280 bps1290 bps— (10) bps— 1280 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$549
 $544
 1.1% (0.4)%—%— %1.5%1.1%
Operating income$150
 $149
 0.6% 0.3 %—%(1.0)%1.3%0.6%
Operating margin %27.3% 27.4% (10) bps
 20 bps
—
(30) bps
—
(10) bps

Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$965 $819 17.9 %13.2 %— %— %4.7 %17.9 %
Operating income$209 $148 41.2 %35.9 %— %(0.1)%5.4 %41.2 %
Operating margin %21.6 %18.1 %350 bps360 bps— (10) bps— 350 bps
 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,575
 $1,578
 (0.2)% 0.7%—%—%(0.9)%(0.2)%
Operating income$414
 $405
 2.2 % 2.5%—%0.6%(0.9)%2.2 %
Operating margin %26.3% 25.7% 60 bps
 40 bps
—
20 bps
—
60 bps


•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue and the favorable effect of foreign currency translation, partially offset by a slight decline in organic revenue. Operatingtranslation.
•Organic revenue decreasedincreased 46.0% in the year-to-date period due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.
Organic revenue decreased 0.4% in the thirdsecond quarter as equipment and service organic revenue declined 0.5%grew 51.7% and 0.4%35.4%, respectively. In the year-to-date period, organic revenue increased 0.7%grew 13.2% as equipment and service organic revenue increased 0.8%grew 19.6% and 0.4%2.6%, respectively.
◦North American organic revenue declined 3.6% in the third quarter. Equipment organic revenue decreased 5.5% primarily due to lower end market demand in food services. Service organic revenue declined 0.3%. In the year-to-date period, North American organic revenue decreased 1.1%. Equipment organic revenue, which had a challenging comparable in the prior year period of 5.7% growth, decreased 1.8% primarily due to lower demand in the retail and restaurant end markets, partially offset by higher demand in the institutional end market. Service organic revenue was flat.
◦International organic revenue increased 4.0% and 3.2% in the third quarter and year-to-date periods, respectively. Equipment organic revenue grew 5.9% and 4.0% in the third quarter and year-to-date periods, respectively, primarily due to higher demand in the European refrigeration and warewash end markets. Service organic revenue decreased 0.5% in the third quarter and increased 1.3% in the year-to-date period.
◦North American organic revenue increased 38.6% and 12.7% in the second quarter and year-to-date periods, respectively. Equipment organic revenue grew 41.6% in the second quarter and 17.2% in the year-to-date period primarily due to growth in the restaurant, institutional and food retail end markets. Service organic revenue increased 33.4% in the second quarter and 5.9% in the year-to-date period.
◦International organic revenue increased 57.9% in the second quarter and 13.9% in the year-to-date period. Equipment organic revenue grew 65.5% and 22.7% in the second quarter and year-to-date periods, respectively, primarily due to higher demand in the European warewash, refrigeration and cooking end markets. Service organic revenue increased 39.2% in the second quarter and declined 3.0% in the year-to-date period.
•Operating margin of 27.3%22.0% in the thirdsecond quarter declined 10increased 1,280 basis points primarily due to product mixpositive operating leverage of 1001,010 basis points and higher restructuring expenses, partially offset by the net benefits offrom the Company's enterprise initiatives of 110 basis points and favorablecost management, partially offset by unfavorable price/cost of 1060 basis points.
•In the year-to-date period, operating margin was 21.6%. The increase of 26.3% increased 60350 basis points was primarily due todriven by positive operating leverage of 320 basis points and the net benefits offrom the Company's enterprise initiatives of 100 basis points and 20 basis points each for favorable price/cost positive operating leverage and lower restructuring expenses,management, partially offset by product mixunfavorable price/cost of 10040 basis points.


20

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 and related consumable solder materials;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 telecommunications, electronics, medical, transportation and transportationtelecommunications applications.



The results of operations for the Test & Measurement and Electronics segment for the thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$606 $455 33.0 %28.7 %— %— %4.3 %33.0 %
Operating income$170 $117 45.4 %40.2 %— %0.7 %4.5 %45.4 %
Operating margin %28.1 %25.7 %240 bps230 bps— 10 bps— 240 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$525
 $516
 1.8% 0.8%—%—%1.0%1.8%
Operating income$127
 $108
 16.9% 13.3%—%2.8%0.8%16.9%
Operating margin %24.1% 21.0% 310 bps
 260 bps
—
50 bps
—
310 bps


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$1,158 $940 23.2 %19.4 %— %— %3.8 %23.2 %
Operating income$327 $238 37.1 %32.8 %— %0.3 %4.0 %37.1 %
Operating margin %28.2 %25.4 %280 bps280 bps— — — 280 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,524
 $1,487
 2.5% 3.5%—%—%(1.0)%2.5%
Operating income$337
 $274
 22.8% 22.5%—%1.3%(1.0)%22.8%
Operating margin %22.1% 18.4% 370 bps
 340 bps
—
30 bps
—
370 bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue and the favorable effect of foreign currency translationtranslation.
•Organic revenue increased 28.7% in the second quarter and 19.4% in the year-to-date period.
◦Organic revenue for the test and measurement businesses increased 20.2% and 13.1% in the second quarter and year-to-date periods, respectively, primarily driven by higher semi-conductor demand in North America, the impact of a stronger capital spending environment, and higher demand in the aerospace and oil and gas end markets in North America. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth. Operatinggrowth of 10.8% in the second quarter and 11.3% in the year-to-date period.
◦Electronics organic revenue increased 37.9% and 26.9% in the second quarter and year-to-date periods, respectively, driven by higher demand in consumer electronics and automotive applications. The electronics assembly businesses grew 82.3% in the second quarter and 53.4% in the year-to-date period primarily due to organic revenue growth, partially offset byhigher demand in North America and Asia Pacific. The other electronics businesses, which include the unfavorable effect of foreign currency translation.
Organic revenuecontamination control, static control and pressure sensitive adhesives businesses, increased 0.8%17.4% and 3.5%14.8% in the thirdsecond quarter and year-to-date periods, respectively.respectively, with growth in all major regions.
◦Organic revenue for the test and measurement businesses increased 4.2% and 5.1% in the third quarter and year-to-date periods, respectively, primarily due to higher semi-conductor end market demand across all major regions. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 2.6% and 3.9% in the third quarter and year-to-date periods, respectively.
◦Electronics organic revenue, which had a challenging comparable in the prior year third quarter of 12.5% growth, decreased 2.6% in the third quarter and increased 1.8% in the year-to-date period. The electronics assembly businesses declined 12.8% and 2.2% in the third quarter and year-to-date periods, respectively, primarily due to a decrease in North America. The other electronics businesses grew 7.0% and 4.8% in the third quarter and year-to-date periods, respectively, due to higher semi-conductor end market demand.
•Operating margin was 24.1%of 28.1% in the third quarter. The increase of 310second quarter increased 240 basis points was primarily due to the netpositive operating leverage of 560 basis points and benefits resulting from the Company's enterprise initiatives, and cost management of 130 basis points, favorable price/cost of 50 basis points, lower restructuringpartially offset by higher overhead expenses and positive operating leverage of 20 basis points.product mix.
•In the year-to-date period, operating margin was 28.2%. The increase of 22.1% increased 370280 basis points was primarily driven by the netpositive operating leverage of 420 basis points and benefits resulting from the Company's enterprise initiatives, partially offset by higher overhead expenses and cost management of 130 basis points, positive operating leverage of 110 basis points and 30 basis points each of favorable price/cost and lower restructuring expenses.product mix.


21

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, construction,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; andaccessories.
metal jacketing and other insulation products.




The results of operations for the Welding segment for the thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$402 $298 35.2 %32.6 %— %— %2.6 %35.2 %
Operating income$115 $64 78.3 %75.5 %— %0.4 %2.4 %78.3 %
Operating margin %28.5 %21.6 %690 bps700 bps— 10 bps(20) bps690 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicRestructuringImpairmentForeign CurrencyTotal
Operating revenue$378
 $361
 4.8% 3.9%— %—%0.9%4.8%
Operating income$100
 $95
 5.4% 7.0%(2.2)%—%0.6%5.4%
Operating margin %26.6% 26.5% 10 bps
 80 bps
(60) bps
—
(10) bps
10 bps


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$803 $670 19.8 %17.9 %— %— %1.9 %19.8 %
Operating income$236 $173 36.6 %34.8 %— %0.5 %1.3 %36.6 %
Operating margin %29.4 %25.8 %360 bps370 bps— 10 bps(20) bps360 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicRestructuringImpairmentForeign CurrencyTotal
Operating revenue$1,150
 $1,125
 2.3% 2.2%—%—%0.1%2.3%
Operating income$312
 $282
 10.8% 7.4%2.3%1.1%—%10.8%
Operating margin %27.2% 25.1% 210 bps
 120 bps
60 bps
30 bps
—
210 bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue grew 3.9%32.6% in the thirdsecond quarter driven by growth in equipment of 6.5%37.8% and consumables of 0.5%24.9%. In the year-to-date period, organic revenue increased 2.2%grew 17.9% as equipment grew 4.6%, partially offset by a decrease of 0.8% in consumables.increased 22.3% and consumables increased 11.3%. In both periods, organic revenue grewgrowth was primarily due to increasedhigher 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 8.0% in the third quarter primarily due to 11.0% and 5.2% growth in the industrial and commercial end markets, respectively. North American organic revenue grew 4.8% in the year-to-date period primarily driven by approximately 5% growth in the industrial and commercial end markets.
◦International organic revenue decreased 11.2% and 7.3% in the third quarter and year-to-date periods, respectively, primarily due to weaker end market demand in the European and Asian oil and gas end markets.
Operating margin was 26.6%◦North American organic revenue increased 37.6% in the third quarter. The increase of 10 basis points wassecond quarter primarily due to 51.7% and 25.9% growth in the industrial and commercial ends markets, respectively. In the year-to-date period, organic revenue grew 20.0% primarily driven by 20.4% and 21.3% growth in the industrial and commercial end markets, respectively.
◦International organic revenue grew 13.0% and 8.4% in the second quarter and year-to-date periods, respectively, primarily due to higher equipment demand in the oil and gas end markets in Europe and Asia.
•Operating margin of 28.5% in the second quarter increased 690 basis points primarily driven by positive operating leverage of 480 basis points and the net benefits offrom the Company's enterprise initiatives and cost management of 80 basis points and positive operating leverage of 60 basis points, partially offset by 60 basis points each of unfavorable price/cost and higher restructuring expenses.management.
•In the year-to-date period, operating margin was 29.4%. The increase of 27.2% increased 210360 basis points due towas primarily driven by positive operating leverage of 280 basis points and the net benefits offrom the Company's enterprise initiatives and cost management of 140 basis points, lower restructuring expenses of 60 basis points and positive operating leverage of 40 basis points, partially offset by unfavorable price/cost of 60 basis points. In addition, the prior year period was negatively impacted by an intangible asset impairment charge of 30 basis points.management.


POLYMERS & FLUIDS


This segment is a highly 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;
22

•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 thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$466 $354 31.7 %27.6 %— %— %4.1 %31.7 %
Operating income$127 $82 56.1 %52.8 %— %(0.8)%4.1 %56.1 %
Operating margin %27.3 %23.1 %420 bps450 bps— (30) bps— 420 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$434
 $422
 2.6% 1.0%—%— %1.6%2.6%
Operating income$90
 $89
 2.5% 2.1%—%(0.9)%1.3%2.5%
Operating margin %21.0% 21.0% —
 20 bps
—
(20) bps
—
—


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$901 $747 20.6 %17.7 %— %— %2.9 %20.6 %
Operating income$239 $175 37.1 %33.9 %— %(0.1)%3.3 %37.1 %
Operating margin %26.6 %23.4 %320 bps320 bps— — — 320 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,297
 $1,283
 1.0% 0.5%—%— %0.5 %1.0%
Operating income$272
 $266
 2.5% 4.3%—%(1.6)%(0.2)%2.5%
Operating margin %21.0% 20.7% 30 bps
 80 bps
—
(30) bps
(20) bps
30 bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue and the favorable effect of foreign currency translation.
•Organic revenue grew 1.0% and 0.5%increased 27.6% in the thirdsecond quarter and 17.7% in the year-to-date period driven by higher demand across all major regions. Additionally, product line simplification activities reduced organic revenue by 70 basis points in the second quarter and 60 basis points in the year-to-date period.
◦Organic revenue for the automotive aftermarket businesses increased 33.1% and 20.2% in the second quarter and year-to-date periods, respectively, primarily driven by growth in the car care, tire repair, body repair and engine repair businesses in North America and the European additives businesses.
◦Organic revenue for the polymers businesses increased 33.9% in the second quarter and 24.3% in the year-to-date period with growth across all major regions.
◦Organic revenue for the fluids businesses increased 7.7% and 3.4% in the second quarter and year-to-date periods, respectively, primarily due to higher demandgrowth in the industrial maintenance, repair, and operations end markets in North American end markets.America.
◦Organic revenue for the automotive aftermarket businesses increased 0.6% in the third quarter primarily driven by growth in the tire repair businesses in North America. In the year-to-date period, organic revenue grew 0.3% as stronger demand in the car care, engine and tire repair businesses in North America was offset by a decline in the body repair and additives businesses in Asia Pacific.
◦Organic revenue for the fluids businesses grew 4.4% and 2.2% in the third quarter and year-to-date periods, respectively, primarily due to an increase in the industrial maintenance, repair, and operations end markets in Europe and North America.
◦Organic revenue for the polymers businesses decreased 1.3% in the third quarter primarily driven by a decline in Europe, partially offset by an increase in North America. In the year-to-date period, organic revenue declined 0.9% primarily driven by a decline in Europe and North America.
•Operating margin was 21.0%of 27.3% in the thirdsecond quarter and was flat compared to the prior year as the netincreased 420 basis points primarily driven by positive operating leverage of 520 basis points, benefits offrom the Company's enterprise initiatives, lower intangible asset amortization expense and cost management and positive operating leverage werea one-time benefit related to a recovery of indirect taxes in Brazil, partially offset by unfavorable price/cost of 30170 basis points and higher restructuring expenses.
•In the year-to-date period, operating margin was 26.6%. The increase of 21.0% increased 30320 basis points was primarily driven by the netdue to positive operating leverage of 360 basis points, benefits offrom the Company's enterprise initiatives, lower intangible asset amortization expense and cost managementa one-time benefit related to a recovery of 100 basis points,indirect taxes in Brazil, partially offset by 30 basis points each of unfavorable price/cost and higher restructuring expenses.of 140 basis points.


CONSTRUCTION PRODUCTS


This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential construction, renovation/remodel construction 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.

23



The results of operations for the Construction Products segment for the thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$518 $376 37.7 %28.2 %(0.1)%— %9.6 %37.7 %
Operating income$143 $90 60.3 %50.2 %0.3 %(1.2)%11.0 %60.3 %
Operating margin %27.6 %23.7 %390 bps410 bps— (20) bps— 390 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$440
 $415
 6.0% 3.5%—%—%2.5%6.0%
Operating income$112
 $94
 18.8% 9.0%—%7.2%2.6%18.8%
Operating margin %25.4% 22.6% 280 bps
 130 bps
—
150 bps
—
280 bps


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$987 $766 28.8 %20.3 %(0.1)%— %8.6 %28.8 %
Operating income$273 $181 50.9 %41.7 %0.1 %(0.6)%9.7 %50.9 %
Operating margin %27.6 %23.6 %400 bps420 bps— (20) bps— 400 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,260
 $1,223
 3.0% 2.7%—%—%0.3%3.0%
Operating income$303
 $278
 8.9% 5.6%—%2.7%0.6%8.9%
Operating margin %24.0% 22.7% 130 bps
 70 bps
—
60 bps
—
130 bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue growth and the favorable effect of foreign currency translation.
•Organic revenue increased 3.5%28.2% and 2.7%20.3% in the thirdsecond quarter and year-to-date periods, respectively, with growth across all major regions. Additionally, product line simplification activities reduced organic revenue by 40 basis points in the second quarter and 30 basis points in the year-to-date period.
◦North American organic revenue grew 20.1% in the second quarter driven by higher demand in the United States residential and commercial end markets of 16.3% and 25.7%, respectively, and growth in Canada. In the year-to-date period, organic revenue grew 15.9% due to higher demand in the United States residential and commercial end markets of 14.6% and 13.8%, respectively, and growth in Canada.
◦International organic revenue increased 36.0% and 24.3% in the second quarter and year-to-date periods, respectively. European organic revenue grew 61.0% in the second quarter and 37.4% in the year-to-date period primarily driven by higher demand in the commercial and residential end markets. Asia Pacific organic revenue increased 12.5% and 9.8% in the second quarter and year-to-date periods, respectively, primarily due to higher demand in Australia and New Zealand in the retail and residential end markets.
◦North American organic revenue grew 4.4% in the third quarter primarily due to 6.9% growth in the residential end markets, partially offset by a decline of 3.3% in the commercial end markets. North American organic revenue increased 1.9% in the year-to-date period primarily due to 2.6% growth in the residential end markets, partially offset by a decline of 0.4% in the commercial end markets.
◦International organic revenue increased 2.8% and 3.2% in the third quarter and year-to-date periods, respectively. Asia Pacific organic revenue increased 2.7% in both the third quarter and year-to-date periods primarily due to growth in the Australia and New Zealand retail end markets. European organic revenue increased 2.9% in the third quarter primarily due to growth in continental Europe and the Nordic countries. In the year-to-date period, European organic revenue grew 3.7% primarily due to growth in continental Europe, the United Kingdom and the Nordic countries.
•Operating margin was 25.4%of 27.6% in the third quarter. The increase of 280second quarter increased 390 basis points wasprimarily driven by lower restructuring expensespositive operating leverage of 150440 basis points the netand benefits offrom the Company's enterprise initiatives, and cost management of 130 basis points and positive operating leverage of 90 basis points, partially offset by unfavorable price/cost of 90120 basis points.
•In the year-to-date period, operating margin was 27.6%. The increase of 24.0% increased 130400 basis points driven by the netwas primarily due to positive operating leverage of 350 basis points and benefits offrom the Company's enterprise initiatives, and cost management of 90 basis points, positive operating leverage of 70 basis points and lower restructuring expenses of 60 basis points, partially offset by unfavorable price/cost of 9060 basis points.


SPECIALTY PRODUCTS


This segment is focused on diversified niche market opportunities that deliver strong operating results 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 and industrial capital goods 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 fastenersclosures and components for appliances;
•airport ground support equipment; and
•components for medical devices.



24


The results of operations for the Specialty Products segment for the thirdsecond quarter and year-to-date periods of 2021 and 2020 were as follows:


Three Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$471 $387 21.6 %17.2 %— %— %4.4 %21.6 %
Operating income$128 $98 30.4 %25.9 %— %(0.3)%4.8 %30.4 %
Operating margin %27.2 %25.4 %180 bps190 bps— (10) bps— 180 bps
 Three Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$498
 $477
 4.6% 4.5%(1.2)%— %1.3%4.6%
Operating income$138
 $125
 10.8% 13.6%(0.3)%(3.9)%1.4%10.8%
Operating margin %27.7% 26.1% 160 bps
 230 bps
30 bps
(100) bps
—
160 bps


Six Months Ended
Dollars in millionsJune 30,Components of Increase (Decrease)
20212020Inc (Dec)OrganicAcquisition/
Divestiture		RestructuringForeign CurrencyTotal
Operating revenue$928 $801 15.8 %12.1 %— %— %3.7 %15.8 %
Operating income$254 $207 22.8 %20.2 %— %(1.4)%4.0 %22.8 %
Operating margin %27.4 %25.9 %150 bps180 bps— (30) bps— 150 bps

 Nine Months Ended      
Dollars in millionsSeptember 30, Components of Increase (Decrease)
 2017 2016 Inc (Dec) OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,451
 $1,429
 1.5% 3.1%(1.1)%— %(0.5)%1.5%
Operating income$401
 $373
 7.6% 9.8%— %(1.8)%(0.4)%7.6%
Operating margin %27.6% 26.1% 150 bps
 170 bps
30 bps
(50) bps
—
150 bps

•Operating revenue increasedgrew in the thirdsecond quarter and year-to-date periods due to higher organic revenue growth and the favorable effect of foreign currency translation, partially offsettranslation.
•Organic revenue increased 17.2% in the second quarter driven by a divestiture. Forgrowth in consumables of 18.6% and equipment of 11.7%. In the year-to-date period, operatingorganic revenue grew 12.1% as consumables increased 12.8% and equipment increased 9.6%. In both periods, organic revenue increased for consumables and equipment sales due to higher demand across all major regions.
◦North American organic revenue growth, partially offset by a divestitureincreased 14.5% and 10.0% in the unfavorable effect of foreign currency translation.
Organic revenue increased 4.5% and 3.1% for the thirdsecond quarter and year-to-date periods, respectively, asprimarily driven by growth in the consumer packaging, businesses grew 3.6%appliance, product coding and 3.2% in each respective period. Consumable salesmarking, and strength film businesses.
◦International organic revenue increased 6.1% and 5.1%21.5% in the thirdsecond quarter and year-to-date periods, respectively. Equipment sales declined 1.3% and 4.4%15.4% in the third quarteryear-to-date period primarily due to an increase in the appliance businesses in Europe and year-to-date periods, respectively.Asia Pacific and the ground support equipment businesses in Europe.
◦North American organic revenue increased 3.0% in the third quarter primarily due to an increase in the brand identification, medical and consumer packaging businesses. In the year-to-date period, organic revenue grew 0.5% primarily due to growth in the medical, consumer packaging, appliance and brand identification businesses, partially offset by a decline in the equipment businesses.
◦International organic revenue increased 6.9% and 7.7% in the third quarter and year-to-date periods, respectively, primarily driven by growth in the consumer packaging and equipment businesses in Europe and Asia Pacific.
•Operating margin was 27.7% forof 27.2% in the third quarter. The increase of 160second quarter increased 180 basis points was primarily driven by the netpositive operating leverage of 330 basis points and benefits offrom the Company's enterprise initiatives, and cost management of 130 basis points, positive operating leverage of 90 basis points and the impact of a divestiture, partially offset by higher restructuring expenses of 100 basis points and unfavorable price/cost of 10230 basis points.
•In the year-to-date period, operating margin was 27.4%. The increase of 27.6% increased 150 basis points driven by the netwas primarily due to positive operating leverage of 230 basis points and benefits offrom the Company's enterprise initiatives, and partially offset by unfavorable price/cost management of 130 basis points, positive operating leverage of 70190 basis points and the impact of a divestiture, partially offset by higher restructuring expenses and unfavorable price/cost of 30 basis points.expenses.


OTHER FINANCIAL HIGHLIGHTS


•Interest expense of $65was $52 million and $194$104 million in the thirdsecond quarter and year-to-date periods of 2021, respectively, increased from $58versus $51 million and $174$102 million in the respective 2016 periods primarily due to the debt issuance in the fourth quarter of 2016.2020.
•Other income (expense) was income of $10$22 million in the thirdsecond quarter of 2017 and $242021 versus $8 million in the prior year period primarily driven by higher investment income, partially offset by higher foreign currency translation losses. Other income (expense) was income of $34 million in the year-to-date period a decrease compared toof 2021 versus $33 million in the prior year of $3 millionperiod as higher investment income in the third quarter and $10 million in the year-to-date period primarily driven2021 was partially offset by foreign currency translation losses.losses in 2021 versus gains in 2020.
The effective tax rate was 29.3% and 28.7% for the third quarter and year-to-date periods, respectively, compared to 30.0% in both respective periods of 2016. Included in the effective tax rate for 2017 was a discrete income tax benefit of $6 million in the third quarter and $32 million in the year-to-date period related to the adoption of the new stock-based compensation guidance. Excluding this discrete tax benefit, the Company's effective tax rate for the third quarter and year-to-date periods of 2017 would have been 30.0%. Refer to Note 1. Significant Accounting Policies in Item 1 - Financial Statements for further information.

25



NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. Under current guidance, the Company generally recognizes operating revenue when ownership and risk of loss are transferred to the customer, which is typically at the time of product shipment or delivery of service. The Company has completed a review of revenue transactions for a significant portion of its businesses. While the review is not fully completed, the Company does not currently expect the adoption of this guidance to have a material impact on its operating revenue, results of operations or financial position. However, the Company expects to provide additional disclosures in the notes to financial statements required under the new guidance. The new guidance will be effective for the Company beginning January 1, 2018 and allows for either full or modified retrospective adoption methods. The Company expects to adopt the new revenue accounting guidance utilizing the modified retrospective method.

In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases with a lease term greater than twelve months in the statement of financial position, including operating leases. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance will be effective for the Company beginning January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.

In March 2016, the FASB issued authoritative guidance that included several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires the income tax effects associated with the settlement of stock-based awards to be recognized through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $25 million for the nine months ended September 30, 2016. The Company adopted the new guidance effective January 1, 2017 and applied the newly adopted provisions prospectively. Excess tax benefits of $6 million and $32 million were included in Income Taxes in the statement of income for the three and nine month periods ended September 30, 2017, respectively. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each quarter and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning January 1, 2018 and will be applied prospectively with the cumulative effect of adoption recorded directly to retained earnings. Although the Company is currently completing its assessment of the potential impact of this new guidance, the Company anticipates a cumulative-effect balance sheet adjustment reducing deferred tax assets and retained earnings upon adoption. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new guidance. The Company intends to complete its assessment in the fourth quarter of 2017.

In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting January 1, 2018 and will be applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The Company does not expect the adoption of this guidance to have a material impact on the results of operations or financial position. Refer to Note 6. Pension and Other Postretirement Benefits in Item 1 - Financial Statements for further information information regarding the Company’s net periodic benefit cost.


LIQUIDITY AND CAPITAL RESOURCES


The Company’sCompany's primary sources of liquidity are free cash flow and short-term credit facilities. In addition,As of June 30, 2021, the Company had $2.8$2.1 billion of cash and equivalents on hand, at September 30, 2017no outstanding borrowings under its $2.5 billion revolving credit facility, and no commercial paper outstanding. The Company also maintainshas 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, and an active share repurchase program.


The Company believes that, based on its operating revenue, operating margin, current 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 thirdsecond quarter and year-to-date periods of 20172021 and 20162020 was as follows:


Three Months EndedSix Months Ended
June 30,June 30,
In millions2021202020212020
Net cash provided by operating activities$555 $737 $1,164 $1,351 
Additions to plant and equipment(78)(56)(146)(116)
Free cash flow$477 $681 $1,018 $1,235 
Cash dividends paid$(360)$(338)$(721)$(680)
Repurchases of common stock(250)— (500)(706)
Repayments of debt with original maturities of more than three months(350)— (350)— 
Other, net44 16 64 24 
Effect of exchange rate changes on cash and equivalents13 23 (17)(42)
Net increase (decrease) in cash and equivalents$(426)$382 $(506)$(169)
 Three Months Ended Nine Months Ended
 September 30, September 30,
In millions2017 2016 2017 2016
Net cash provided by operating activities$780
 $624
 $1,707
 $1,638
Additions to plant and equipment(78)
(81)
(219)
(202)
Free cash flow$702
 $543
 $1,488
 $1,436
        
Cash dividends paid$(224) $(195) $(674) $(593)
Repurchases of common stock(250) (482) (750) (1,482)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates—
 (454) (3) (456)
Net proceeds from (repayments of) debt with original maturities of three months or less6
 499
 697
 188
Net repayments of debt with original maturities of more than three months—
 —
 (652) —
Other19
 36
 73
 109
Effect of exchange rate changes on cash and equivalents36
 (3) 134
 7
Net increase (decrease) in cash and equivalents$289
 $(56) $313
 $(791)


Free cash flow for the nine months ended September 30, 2017 included an additional $115 million discretionary pension contribution made inIn the second quarter of 2017.2020, the Company elected to defer payment of U.S. income taxes of $158 million to the third quarter of 2020 in accordance with the Coronavirus Aid, Relief and Economic Security (CARES) Act.


Stock Repurchase Program


On February 13, 2015,August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provides for the buybackrepurchase of up to $6.0$3.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”"2018 Program"). Under the 20152018 Program, the Company repurchased approximately 5.32.0 million shares of its common stock at an average price of $94.07$149.04 in the firstsecond quarter of 2016,2019, approximately 4.82.4 million shares of its common stock at an average price of $104.54$150.97 in the secondthird quarter of 2016,2019, approximately 4.32.2 million shares of its common stock at an average price of $116.27$175.02 in the thirdfourth quarter of 2016,2019, and approximately 4.34.2 million shares of its common stock at an average price of $117.29$167.69 in the fourthfirst quarter of


2016, 2020. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting in March 2020. In February 2021, the Company resumed its share repurchase program and repurchased approximately 1.91.2 million shares of its common stock at an average price of $128.47$211.50 in the first quarter of 2017,2021, and approximately 1.81.1 million shares of its
26

common stock at an average price of $136.81$233.29 in the second quarter of 2017, and approximately 1.82021. As of June 30, 2021, there were $740 million shares of itsauthorized repurchases remaining under the 2018 Program.

On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock atover an average priceopen-ended period of $142.54 in the third quarter of 2017.time (the "2021 Program"). As of SeptemberJune 30, 2017,2021, there were approximately $2.7$3.0 billion of authorized repurchases remaining under the 20152021 Program.


Adjusted After-TaxAfter-tax Return on Average Invested Capital


The Company uses adjusted after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations’operations' use of invested capital to generate profits. After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’sCompany's financial performance and may be different than the method used by other companies to calculate After-tax ROIC. Adjusted averageAverage invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations, as well as the Company's equity investment in the Wilsonart business (formerly the Decorative Surfaces segment).operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. After-tax ROIC for the thirdsecond quarter and year-to-date periods of 20172021 and 20162020 was as follows:


Three Months EndedSix Months Ended
June 30,June 30,
Dollars in millions2021202020212020
Operating income$893 $449 $1,798 $1,210 
Tax rate23.0 %21.3 %22.7 %22.4 %
Income taxes(206)(96)(409)(271)
Operating income after taxes$687 $353 $1,389 $939 
Invested capital:
Trade receivables$2,786 $2,156 $2,786 $2,156 
Inventories1,400 1,167 1,400 1,167 
Net assets held for sale— 181 — 181 
Net plant and equipment1,767 1,711 1,767 1,711 
Goodwill and intangible assets5,374 5,244 5,374 5,244 
Accounts payable and accrued expenses(1,933)(1,508)(1,933)(1,508)
Other, net(283)(636)(283)(636)
Total invested capital$9,111 $8,315 $9,111 $8,315 
Average invested capital$8,926 $8,431 $8,864 $8,557 
After-tax return on average invested capital30.8 %16.8 %31.3 %22.0 %
 Three Months Ended Nine Months Ended

September 30, September 30,
Dollars in millions2017
2016 2017 2016
Operating income$961

$808

$2,644

$2,322
Tax rate29.3%
30.0%
28.7%
30.0%
Income taxes(282)
(243)
(759)
(697)
Operating income after taxes$679
 $565
 $1,885
 $1,625
        
Invested capital:       
Trade receivables$2,672

$2,496

$2,672

$2,496
Inventories1,225

1,167

1,225

1,167
Net plant and equipment1,759

1,702

1,759

1,702
Goodwill and intangible assets6,051

6,191

6,051

6,191
Accounts payable and accrued expenses(1,816)
(1,762)
(1,816)
(1,762)
Other, net487

393

487

393
Total invested capital$10,378
 $10,187
 $10,378
 $10,187
        
Average invested capital$10,354

$9,973

$10,051

$9,821
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)—

(116)
—

(114)
Adjusted average invested capital$10,354

$9,857

$10,051

$9,707
Adjusted return on average invested capital26.3%
23.0%
25.0%
22.3%


ROIC increased 330 basis points forA reconciliation of the three month period ended September 30, 2017 compared to the prior year period as a result of a 20.1% improvement in after-tax operating income versus a 5.0% increase in adjusted average invested capital. ROIC increased 270 basis points for the nine month period ended September 30, 2017 compared to the prior year period as a result of a 16.0% improvement in after-tax operating income versus a 3.5% increase in adjusted average invested capital.

ROIC was favorably impacted by 220 basis points and 90 basis pointstax rate for the three and ninesix month periods ended SeptemberJune 30, 2017, respectively,2021, excluding the second quarter 2021 discrete tax benefit of $112 million related to a confidential legal settlementchange in 2017. the U.K. income tax rate, is as follows:

Three Months EndedSix Months Ended
June 30, 2021June 30, 2021
Dollars in millionsIncome TaxesTax RateIncome TaxesTax Rate
As reported$88 10.1 %$282 16.3 %
Discrete tax benefit112 12.9 %112 6.4 %
As adjusted$200 23.0 %$394 22.7 %

Refer to Note 8. Legal Settlement4. Income Taxes in Item 1 -1. Financial Statements for further information regarding this settlement.

Thethe second quarter 2021 discrete tax benefit related to share-based compensation of $6 million and $32 million for the three and nine month periods ended September 30, 2017 improved after-tax ROIC by approximately 30 and 40 basis points, respectively. Refer to Note 1. Significant Accounting Policies in Item 1 - Financial Statements for further information.benefit.

27




Working Capital


Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of SeptemberJune 30, 20172021 and December 31, 20162020 is summarized as follows:


In millionsJune 30, 2021December 31, 2020Increase/
(Decrease)
Current assets:
Cash and equivalents$2,058 $2,564 $(506)
Trade receivables2,786 2,506 280 
Inventories1,400 1,189 211 
Other265 264 1 
Total current assets6,509 6,523 (14)
Current liabilities:
Short-term debt592 350 242 
Accounts payable and accrued expenses1,933 1,818 115 
Other435 421 14 
Total current liabilities2,960 2,589 371 
Net working capital$3,549 $3,934 $(385)
In millionsSeptember 30, 2017 December 31, 2016 
Increase/
(Decrease)
Current assets:     
Cash and equivalents$2,785
 $2,472
 $313
Trade receivables2,672
 2,357
 315
Inventories1,225
 1,076
 149
Other230
 218
 12
Total current assets6,912
 6,123
 789
Current liabilities:     
Short-term debt698
 652
 46
Accounts payable and accrued expenses1,816
 1,713
 103
Other353
 395
 (42)
Total current liabilities2,867
 2,760
 107
Net working capital$4,045
 $3,363
 $682


CashAs of June 30, 2021, a significant portion of the Company's cash and equivalents totaled approximately $2.8 billion as of September 30, 2017 and $2.5 billion as of December 31, 2016, primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to U.S. income taxes and foreign withholding taxes if repatriated to the U.S. Cash and equivalents balances held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses,businesses. International funds may also be used to fund new international acquisitions or, usedif not considered permanently invested, may be repatriated to repay debtthe U.S. The Company has accrued for foreign withholding taxes related to foreign held internationally. cash and equivalents that are not permanently invested.

In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs which primarily consistand 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 usesuse its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated domesticallyby 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 SeptemberJune 30, 20172021 and December 31, 20162020 was as follows:
In millionsSeptember 30, 2017 December 31, 2016
Short-term debt$698
 $652
Long-term debt7,439
 7,177
Total debt$8,137
 $7,829


In millionsJune 30, 2021December 31, 2020
Short-term debt$592 $350 
Long-term debt7,056 7,772 
Total debt$7,648 $8,122 

There was no commercial paper outstanding as of June 30, 2021 and December 31, 2020. Short-term debt as of SeptemberJune 30, 20172021 included commercial paper$592 million related to the 1.75% Euro notes due May 20, 2022, which were reclassified from Long-term debt to Short-term debt in the second quarter of $688 million.2021. Short-term debt as of December 31, 20162020 included $650$350 million related to the 0.90%3.375% notes paiddue September 15, 2021, which were redeemed in full on June 15, 2021. The Company has a $2.5 billion revolving credit facility with a termination date of September 27, 2024, which is available to provide additional liquidity, including to support the February 25, 2017 due date.potential issuances of commercial paper. No amounts were outstanding under the $2.5 billion revolving credit facility as of June 30, 2021 or December 31, 2020.





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
28

EBITDA is a meaningful metric to investors in evaluating the Company’sCompany's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. 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 SeptemberJune 30, 20172021 and December 31, 20162020 was as follows:


Dollars in millionsJune 30, 2021December 31, 2020
Total debt$7,648 $8,122 
Net income$2,670 $2,109 
Add:
Interest expense208 206 
Other income(29)(28)
Income taxes621 595 
Depreciation276 273 
Amortization and impairment of intangible assets149 154 
EBITDA$3,895 $3,309 
Total debt to EBITDA ratio2.0 2.5 

Dollars in millionsSeptember 30, 2017 December 31, 2016
Total debt$8,137
 $7,829
    
Net income$2,270
 $2,035
Add:   
Interest expense257
 237
Other income(71) (81)
Income taxes930
 873
Depreciation252
 246
Amortization and impairment of intangible assets210
 224
EBITDA$3,848
 $3,534
Total debt to EBITDA ratio2.1
 2.2

Stockholders’Stockholders' Equity


The changes to stockholders’stockholders' equity during 2017the six months ended June 30, 2021 were as follows:


In millions
Total stockholders' equity, December 31, 2020$3,182 
Net income1,446 
Repurchases of common stock(500)
Dividends declared(718)
Foreign currency translation adjustments, net of tax30 
Other, net81 
Total stockholders' equity, June 30, 2021$3,521 
In millions 
Total stockholders’ equity, December 31, 2016$4,259
Net income1,763
Repurchases of common stock(750)
Cash dividends declared(715)
Foreign currency translation adjustments, net of tax367
Stock option and restricted stock activity73
Other29
Total stockholders’ equity, September 30, 2017$5,026


FORWARD-LOOKING STATEMENTS


This documentQuarterly 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," "intends,"intend," "may," "strategy," "prospects," "estimate," “will,” “should,” “could,” "project," "target," "anticipate," "guidance," "forecast," and other similar words, including,and may include, without limitation, statements regarding the expectedduration and potential effects of the COVID-19 pandemic, related government actions and the Company's strategy in response thereto on the Company's business, future financial and operating performance, of acquired businessesfree cash flow, economic and impact of divested businesses, economicregulatory conditions in various geographic regions, the timing and amountimpact of share repurchases,foreign currency fluctuations, the timing and amount of benefits from the Company's Enterprise Strategy,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 tariffs and raw material cost inflation, product line simplification activities and enterprise initiatives, the Company's portion of future benefit payments related to pension and postretirement benefits, the Company's information technology infrastructure, potential acquisitions and divestitures and the expected performance of acquired businesses and impact of a change indivested businesses, the methodimpact of calculatingU.S. and global tax legislation and the serviceestimated timing and interest cost componentsamount related to the resolution of net periodic pension and other postretirement benefit costs to a specific spot rate approach, the availability of raw materials and energy, the expiration of any one of the Company's patents,tax matters, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations,and the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the


resolution of tax matters.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
29

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, (2)(3) changes or deterioration in international and domestic political and economic conditions, (3)(4) the unfavorable impact of foreign currency fluctuations, (5) the timing and amount of benefits from the Company’sCompany's enterprise strategy initiatives and their impact on organic revenue growth, (4)(6) market conditions and availability of financing to fund the Company's share repurchases, (5) the risk of intentional acts of the Company's employees, agents or business partners that violate anti-corruption and other laws, (6) the unfavorable impact of foreign currency fluctuations, (7) a delay or decrease in the introduction of new products into the Company’sCompany's product lines, or(8) any failure to protect the Company's intellectual property, (8) the potential negative impact of acquisitions on the Company’s profitability and returns, (9) negative effects of divestitures, including retained liabilities and unknown contingent liabilities, (10) potential negative impact of impairments to goodwill and other intangible assets on the Company’s profitability andCompany's return on invested capital, (11) increases in funding costsfinancial condition or decreases in credit availability due to market conditions or changes to the Company's credit ratings, (12)results of operations, (10) raw material price increases and supply shortages, (13) unfavorable tax law changes and tax authority rulings, (14)(11) financial market risks to the Company’sCompany's obligations under its defined benefit pension plans, (15) potential adverse outcomes in legal proceedings, and (16)(12) negative effects of service interruptions, data corruption, cyber-based attacks, or network security breaches.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, 2016.2020. 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 the CompanyITW speak only as of the date on which they are made. The CompanyITW 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.


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


ITEM 4. Controls and Procedures


The Company carried out an evaluation, under the supervision andCompany's management, with the participation of the Company’sCompany's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, ofhas evaluated the effectiveness of the Company’sCompany's disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of SeptemberJune 30, 2017.2021. Based on such evaluation, the Company’sCompany's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of SeptemberJune 30, 2017,2021, the Company’sCompany's disclosure controls and procedures were effective.


In connection with the evaluation by management, including the Company's Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended SeptemberJune 30, 20172021 were identified that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.


30

PART II – OTHER INFORMATION


ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors


The Company's business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary materially from recent results or from anticipated future results. Refer to the description of the Company's risk factors previously disclosed in Part I - Item 1A - Risk Factors in the Company's 20162020 Annual Report on Form 10-K. There have been no material changes to the risk factors described therein.




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


On February 13, 2015,August 3, 2018, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $6.0$3.0 billion of the Company's common stock over an open-ended period of time (the “2015 Program”"2018 Program"). As of SeptemberJune 30, 2017,2021, there were approximately $2.7$740 million of authorized repurchases remaining under the 2018 Program.

On May 7, 2021, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2021 Program"). As of June 30, 2021, there were $3.0 billion of authorized repurchases remaining under the 20152021 Program.

Share repurchase activity under the Company's share repurchase program for the thirdsecond quarter of 20172021 was as follows:


In millions except per share amounts
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced ProgramsMaximum Value of Shares That May Yet Be Purchased Under Programs
April 2021— $— — $990 
May 20210.9 $233.48 0.9 $3,784 
June 20210.2 $232.44 0.2 $3,740 
Total1.1 1.1 


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In millions except per share amounts      
         
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Value of Shares That May Yet Be Purchased Under Program
July 2017 0.6
 $142.97
 0.6
 $2,856
August 2017 0.7
 $140.35
 0.7
 $2,762
September 2017 0.5
 $145.15
 0.5
 $2,696
Total 1.8
   1.8
  




ITEM 6. Exhibits
Exhibit Index
Exhibit NumberExhibit Description
Exhibit NumberExhibit Description
101
The following financial and related information from the Illinois Tool Works Inc. Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20172021 is formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL) and submitted electronically herewith: (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of Financial Position, (iv) Statement of Changes in Stockholders' Equity, (v) Statement of Cash Flows, and (v)(vi) related Notes to Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ILLINOIS TOOL WORKS INC.
Dated:August 6, 2021By:
Dated:October 27, 2017By:/s/ Randall J. Scheuneman
Randall J. Scheuneman
Vice President & Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer)

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