Company Quick10K Filing
Illinois Tool Works
Price154.94 EPS8
Shares327 P/E20
MCap50,603 P/FCF23
Net Debt6,757 EBIT3,234
TEV57,360 TEV/EBIT18
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-02-12
10-Q 2020-09-30 Filed 2020-10-30
10-Q 2020-06-30 Filed 2020-08-06
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-02-14
10-Q 2019-09-30 Filed 2019-10-28
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-02-15
10-Q 2018-09-30 Filed 2018-11-01
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-30 Filed 2018-05-04
10-K 2017-12-31 Filed 2018-02-15
10-Q 2017-09-30 Filed 2017-10-27
10-Q 2017-06-30 Filed 2017-08-04
10-Q 2017-03-31 Filed 2017-05-05
10-K 2016-12-31 Filed 2017-02-10
10-Q 2016-09-30 Filed 2016-10-28
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-06
10-K 2015-12-31 Filed 2016-02-12
10-Q 2015-09-30 Filed 2015-10-30
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-02-13
10-Q 2014-09-30 Filed 2014-10-31
10-Q 2014-06-30 Filed 2014-08-08
10-Q 2014-03-31 Filed 2014-05-02
10-K 2013-12-31 Filed 2014-02-14
10-Q 2013-09-30 Filed 2013-11-01
10-Q 2013-06-30 Filed 2013-08-02
10-Q 2013-03-31 Filed 2013-05-03
10-K 2012-12-31 Filed 2013-02-19
10-Q 2012-09-30 Filed 2012-10-26
10-Q 2012-08-03 Filed 2012-08-03
10-Q 2012-05-03 Filed 2012-05-04
10-K 2011-12-31 Filed 2012-02-17
10-Q 2011-10-28 Filed 2011-10-28
10-Q 2011-08-05 Filed 2011-08-05
10-Q 2011-05-05 Filed 2011-05-06
10-K 2010-12-31 Filed 2011-02-28
10-Q 2010-10-29 Filed 2010-10-29
10-Q 2010-08-06 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-07
10-K 2009-12-31 Filed 2010-02-26
8-K 2020-10-23
8-K 2020-07-31
8-K 2020-05-08
8-K 2020-05-05
8-K 2020-02-05
8-K 2020-01-31
8-K 2019-10-25
8-K 2019-09-27
8-K 2019-07-26
8-K 2019-07-26
8-K 2019-06-10
8-K 2019-06-05
8-K 2019-05-29
8-K 2019-05-03
8-K 2019-04-25
8-K 2019-02-14
8-K 2019-02-01
8-K 2018-12-21
8-K 2018-10-24
8-K 2018-07-23
8-K 2018-05-04
8-K 2018-04-26
8-K 2018-01-24

ITW 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-21 itw-20201231xex21.htm
EX-23 itw-20201231xex23.htm
EX-24 itw-20201231xex24.htm
EX-31 itw-20201231xex31.htm
EX-32 itw-20201231xex32.htm

Illinois Tool Works Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
25201510502012201420172020
Assets, Equity
4.33.42.51.70.8-0.12012201420172020
Rev, G Profit, Net Income
3.22.21.10.1-1.0-2.02012201420172020
Ops, Inv, Fin

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number 1-4797
ILLINOIS TOOL WORKS INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware36-1258310
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
155 Harlem AvenueGlenviewIllinois60025
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code: (847724-7500
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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes       No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes      No  
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No  
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2020 was approximately $55.1 billion based on the New York Stock Exchange closing sales price as of June 30, 2020.
Shares of common stock outstanding at January 31, 2021: 316,662,263.
Documents Incorporated by Reference
Portions of the 2021 Proxy Statement for Annual Meeting of Stockholders to be held on May 7, 2021.Part III



Table of Contents




PART I

ITEM 1. Business

General

Illinois Tool Works Inc. (the "Company" or "ITW") was founded in 1912 and incorporated in 1915. The Company's ticker symbol is ITW. The Company is a global manufacturer of a diversified range of industrial products and equipment with 83 divisions in 52 countries. As of December 31, 2020, the Company employed approximately 43,000 people.

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

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

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

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.

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.

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.

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

adhesives for industrial, construction and consumer purposes;
chemical fluids which clean or add lubrication to machines;
epoxy and resin-based coating products for industrial applications;
hand wipes and cleaners for industrial applications;
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
fillers and putties for auto body repair; and
polyester coatings and patch and repair products for the marine industry.

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.

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

line integration, conveyor systems and line automation for the food and beverage industries;
plastic consumables that multi-pack cans and bottles and related equipment;
foil, film and related equipment used to decorate consumer products;
product coding and marking equipment and related consumables;
plastic and metal closures and components for appliances;
airport ground support equipment; and
components for medical devices.

The information set forth below is applicable to all segments of the Company unless otherwise noted.

The ITW Business Model

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

ITW's 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the "80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the "20"). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance;

Customer-back Innovation has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their "80" customers. ITW's innovation efforts are focused on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,500 granted and pending patents;

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ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.

Enterprise Strategy

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

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

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

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

Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2020 and continues to be a key contributor to the Company's ongoing enterprise strategy.

With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.

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

Path to Full Potential

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:

Portfolio discipline
80/20 Front-to-Back practice excellence
Full-potential organic growth
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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 to drive above-market organic growth over the long-term.

The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

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

The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. 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 in 2020, the Company has deferred any further significant divestiture activity until market conditions normalize. Refer to Note 3. Divestitures in Item 8. Financial Statements and Supplementary Data for more information regarding the Company's divestitures.

80/20 Front-to-Back Practice Excellence

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

ITW will continue 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 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. These efforts are just beginning to take hold and the Company expects them 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 will acquire the Test & Simulation business of MTS Systems Corporation ("MTS") following the closing of Amphenol's acquisition of MTS. Upon completion of this acquisition, this business will be reported within the Company's Test & Measurement and Electronics segment.

Current Year Developments

Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Distribution Methods

The Company's businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.

Backlog

Backlog generally is not considered a significant factor in the Company's businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of their products. Total backlog was $1.6 billion and $1.5 billion as of December 31, 2020 and 2019, respectively. Due to the predominately short-term nature of the Company's arrangements with its customers, backlog orders scheduled for shipment beyond calendar year 2021 were not material as of December 31, 2020.

Competition

With operations in 52 countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding segment competes globally with Lincoln Electric and ESAB.

In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product quality, brand preference and service delivery. Technical capability is also a competitive factor in most segments. The Company believes that each segment's primary competitive advantages derive from the ITW Business Model and decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational excellence utilizing the Company's 80/20 Front-to-Back process and leveraging its product innovation capabilities. The Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Automotive OEM segment.

Raw Materials

The Company uses raw materials of various types, primarily steel, resins and chemicals, that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, and no such problems are currently anticipated.

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Intellectual Property

The Company owns approximately 3,800 unexpired U.S. patents and 9,000 foreign patents covering articles, methods and machines. In addition, the Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and 4,200 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The Company maintains a patent group for the administration of patents and processing of patent applications.

The Company believes that many of its patents are valuable and important; however, the expiration of any one of the Company's patents would not have a material effect on the Company's results of operations or financial position. The Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.

In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks, which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW, which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the Automotive OEM segment; Hobart in the Food Equipment segment; Instron in the Test & Measurement and Electronics segment; Miller in the Welding segment; Rain-X and Permatex in the Polymers & Fluids segment; Paslode in the Construction Products segment; and Hi-Cone in the Specialty Products segment.

Government Regulations

The Company believes that its businesses and operations, including its manufacturing plants and equipment, are in substantial compliance with all applicable government laws and regulations, including those related to environmental, consumer protection, international trade, labor and employment, human rights, tax, anti-bribery and competition matters. Any additional measures to maintain compliance are not expected to materially affect the Company's capital expenditures (including expenditures for environmental control facilities), competitive position, financial position or results of operations.

Various legislative and administrative regulations applicable to the Company in the matters noted above have become effective or are under consideration in many parts of the world. To date, such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows. However, if new or amended laws or regulations impose significant operational restrictions and compliance requirements upon the Company or its products, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted. Refer to Item 1A. Risk Factors for further information.

Human Capital Management

As of December 31, 2020, the Company employed approximately 43,000 people, with approximately 16,000 people located in the United States and the remainder in multiple other countries where the Company's businesses operate. The Company strives to be a great employer through its demonstrated commitment to talent development, employee safety, workplace culture, compensation and benefits, and diversity and inclusion.

Talent Development. The Company's Great ITW Leader Framework defines the leadership capabilities and attributes that guide all leadership talent assessment, development and selection decisions. Great ITW Leaders are expected to be experts in the practice of the ITW Business Model, make great strategic choices, deliver great results, be great talent managers and provide strong leadership. Great ITW Leaders who have expertise in the ITW Business Model are the critical factor in translating the potential of the ITW Business Model into full performance. Because this expertise develops over time and through specific experiences, the Company focuses on developing and promoting its own talent to ensure the Company's sustained business success over the long term.

Employee Safety. The safety and well-being of ITW's colleagues around the world has been, and always will be, its top priority. Guided by the Company's Enterprise Safety Strategy and the philosophy that every accident is preventable, ITW strives every day to foster a proactive safety culture. ITW's Enterprise Safety Strategy is based on the following core principles: (i) a goal of zero accidents, (ii) shared ownership for safety (business and individual); (iii) proactive approach focused on accident prevention; and (iv) continuous improvement philosophy.

Consistent with these commitments, employee health and safety has been a top priority during the COVID-19 pandemic. 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 workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to
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minimize infection risk. Moreover, the Company's commitment to its employees was reinforced when the Company chose to leverage its strong financial foundation by continuing to employ all ITW colleagues through the entirety of the second quarter of 2020 when the economic effects of the pandemic were at their most widespread and severe. The Company also decided not to initiate any enterprise-wide employment reduction mandates or programs at any point in 2020.

Workplace Culture. The Company operates under a decentralized, entrepreneurial culture that is crucial to the Company's performance and is one of the three unique elements of the ITW Business Model. ITW believes its colleagues around the world thrive in this culture, as it allows them to experience significant autonomy, a sense of shared ownership with their colleagues, and a work atmosphere deeply rooted in the Company's core values of Integrity, Respect, Trust, Shared Risk and Simplicity.

Compensation and Benefits. As a global employer, the Company is committed to providing market-competitive compensation and benefits to attract and retain great talent across its global divisions. Specific compensation and benefits vary worldwide and are based on regional practices. In the U.S., the Company focuses on providing a comprehensive, competitive benefits package that supports the health and wellness, educational endeavors, community involvement and financial stability of its colleagues.

Diversity and Inclusion. ITW believes it is at its best when it brings together unique perspectives, experiences and ideas. Rooted in ITW’s core values of Respect and Integrity, the Company is committed to equal employment opportunity, fair treatment and creating diverse and inclusive workplaces where all ITW colleagues can perform to their full potential. ITW remains committed to achieving its diversity and inclusion goals and enhancing the diversity of its global leadership teams. ITW drives progress through a comprehensive enterprise Diversity and Inclusion Framework, which focuses on (i) leadership commitment and accountability; (ii) attracting and retaining global, diverse talent; (iii) creating inclusive workplaces; and (iv) striving to be a great employer.

Labor Relations. Less than three percent of the Company's U.S. employees are represented by a labor union, while outside the U.S., employees in certain countries are represented by an employee representative organization, such as a union, works council or employee association. The Company considers its employee relations to be excellent.

The Company's Corporate Social Responsibility Report, published annually and available on the Company's website (www.itw.com), contains more information about the Company's human capital and its programs, goals and progress. Information on the Company's website is not incorporated herein by reference.

9


Information About Our Executive Officers

The executive officers of the Company serve at the discretion of the Board of Directors. Set forth below is information regarding the principal occupations and employment and business experience over the past five years for each executive officer. Unless otherwise stated, employment is by the Company.

Executive Officers of the Company as of February 12, 2021 were as follows:
NameAgePresent PositionYear Elected to Present PositionOther Positions Held During 2016-2020
E. Scott Santi59Chairman & Chief Executive Officer2015
Axel Beck55Executive Vice President2020Vice President/General Manager, food equipment businesses, 2011-2016, Group President, food equipment businesses, 2016-2020
Kenneth Escoe45Executive Vice President2020Vice President/General Manager, welding businesses, 2014-2016, Vice President/General Manager, specialty products businesses, 2016-2019, Group President, specialty products businesses, 2019-2020
Norman D. Finch Jr.56Senior Vice President, General Counsel & Secretary2017Vice President, General Counsel and Secretary, Sealed Air Corporation, a global manufacturer of products related to food safety and security, facility hygiene and product protection, 2013-2017
John R. Hartnett60Executive Vice President2012
Michael M. Larsen52Senior Vice President & Chief Financial Officer2013
Mary K. Lawler55Senior Vice President & Chief Human Resources Officer2014
Steven L. Martindale64Executive Vice President2008
Christopher O'Herlihy57Vice Chairman2015
Randall J. Scheuneman53Vice President & Chief Accounting Officer2009
Lei Schlitz54Executive Vice President2015
Sharon Szafranski54Executive Vice President2020Vice President/General Manager, food equipment businesses, 2010-2016, Vice President/General Manager, test & measurement and electronics businesses, 2016-2019, Group President, test & measurement and electronics businesses, 2019-2020
Michael R. Zimmerman60Executive Vice President2015

Available Information

The Company electronically files reports with the Securities and Exchange Commission ("SEC"). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company's website (www.itw.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC. The Company's Code of Ethics for the CEO and key financial and accounting personnel is also posted on the Company's website.

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ITEM 1A. Risk Factors

The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.

Economic Risks

The COVID-19 pandemic has adversely affected the Company's business, financial condition and results of operations and could affect the Company's liquidity. The full and long-term extent of the effects of the COVID-19 pandemic on our business depend on future events that continue to be highly uncertain and cannot be predicted.

The COVID-19 pandemic and the continued measures taken globally to reduce its spread have negatively impacted the global economy, disrupted consumer/customer demand and global supply chains, and created significant volatility and disruption of financial markets. These measures and the continued volatility of the global economy adversely affected our results of operations for 2020, and while we expect that our results will continue to be adversely impacted beyond 2020, we are currently unable to quantify the full and long-term impact of the pandemic on our financial condition, results of operations and liquidity.

The Company has implemented numerous actions in order to focus on the needs of its colleagues and customers, such as redesigning production processes, adjusting shift schedules and assignments and implementing aggressive new workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk. Further actions may be required in response to evolving conditions such as renewed travel restrictions, quarantine, and stay-at-home orders as well as uncertainty regarding the timing of widespread availability of a vaccine. In addition, because the pandemic has decreased customer demand in certain of our end markets, some of our businesses are operating at reduced capacity. We cannot predict when or whether these businesses will resume full operations or whether there will be related or unrelated facility closures in the future.

The COVID-19 pandemic continues to have the potential to significantly and extendedly alter demand for our products and to disrupt our supply chain as a result of shifts in demand, illness, quarantine, travel restrictions or financial hardship. We have been able to procure the critical raw materials and components necessary to continue production, but there is no guarantee that we will be able to do so in the future. A prolonged extension of the conditions resulting from the pandemic could force both customer and supplier bankruptcies, which we expect would adversely impact our results; however, given the uncertainty around the continued duration and breadth of the COVID-19 pandemic, we cannot reasonably estimate the extent of these adverse effects on our operations.

The Company has sought to implement a differentiated strategy to manage through the pandemic, including a focus on thoughtful cost management and continued investment in areas of strategic importance in order to maintain optionality and fully participate in the recovery phase. Although some opportunities have already emerged from this strategy, the Company cannot estimate the extent or the timing of the benefits from this strategy, if any. If the Company's strategy does not generate the expected benefits, the Company's long-term financial results could be adversely impacted.

Furthermore, the COVID-19 pandemic has the potential to impact the proper functioning of financial and capital markets. If the economic recovery is protracted, we may not be able to access our short-term credit facilities and may be required to seek additional financing sources, which may not be available on reasonable terms or at all. If the Company suffers a liquidity shortage, we may be forced to reduce our workforce, decrease or suspend dividend payments to our stockholders or adopt other measures. We cannot predict the likelihood, timing or the consequences of a future liquidity shortage in our business.

The ultimate significance of the COVID-19 pandemic on our business will depend on events that are beyond our control and that we cannot predict. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, financial condition or results of operations.

The Company's results are impacted by global economic conditions. Downturns in the markets served by the Company could adversely affect its businesses, results of operations or financial condition.

The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial market instability, natural disasters, public health crises (such as the COVID-19 pandemic), high unemployment, government
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deficit reduction, sequestration and other austerity measures impacting the markets the Company serves can adversely affect the Company’s businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers, causing production delays, increasing order cancellations and the difficulty in collecting accounts receivable, increasing price competition, or increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.

The global nature of the Company's operations subjects it to political, economic and social risks that could adversely affect its business, results of operations or financial condition.

Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 52 countries. The risks inherent in the Company's global operations include:

fluctuation in currency exchange rates;
limitations on ownership or participation in local enterprises;
price controls, exchange controls and limitations on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
acts of terrorism;
the impact of widespread public health crises (such as the COVID-19 pandemic);
government embargoes or foreign trade restrictions;
the imposition of duties and tariffs and other trade barriers and retaliatory countermeasures;
government actions impacting international trade agreements, including the EU-UK Trade and Cooperation Agreement;
import and export controls;
social and labor unrest and current and changing regulatory environments;
the potential for expropriation or nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on its ability to enforce legal rights and remedies; and
potentially adverse tax consequences.

The recent global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies. Further changes in U.S. trade policy (including new or additional increases in duties or tariffs) and retaliatory actions by U.S. trade partners could result in a worsening of economic conditions. If the Company is unable to successfully manage the risks associated with managing and expanding its international businesses, the Company's business, results of operations or financial condition may be adversely impacted.

A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's operating income.

Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, and in particular, an increase in the value of the U.S. Dollar against foreign currencies, has had and could have an adverse effect on profitability and financial condition.

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Business and Operational Risks

The benefits from the Company's enterprise strategy may not be as expected and the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.

As the Company continues to execute on its enterprise strategy initiatives, it remains focused on the core principles of portfolio discipline, 80/20 Front-to-Back practice excellence, and organic growth. Product line and customer base simplification activities, which are core elements of the Company's 80/20 Front-to-Back process, continue to be applied by the Company's operating divisions and are active elements of the enterprise strategy. Although these activities are expected to improve future operating margins and organic revenue growth, they are also expected to have a negative impact on the Company's overall organic revenue growth in the short term. Additionally, other core activities of the enterprise strategy related to portfolio discipline and organic growth, including customer-back innovation and strategic sales excellence, may not have the desired impact on future operating results. If the Company is unable to realize the expected benefits from its enterprise strategy initiatives, the Company's financial results could be adversely impacted, or the Company may not meet its long-term financial performance targets.

The timing and amount of the Company's share repurchases are subject to a number of uncertainties.

Share repurchases, which the Company plans to resume in 2021 after they were temporarily suspended in March of 2020, constitute a significant component of the Company’s capital allocation strategy. The Company has historically funded its share repurchases with free cash flow and short-term borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment opportunities presented to the Company from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash.

If the Company is unable to successfully introduce new products, its future growth may be adversely affected.

The Company's ability to develop new products based on innovation can affect its competitive position and sometimes requires the investment of significant time and resources. Difficulties or delays in research, development, production or commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.

If the Company is unable to adequately protect its intellectual property, its competitive position and results of operations may be adversely impacted.

Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets, copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights or inability to preserve existing intellectual property rights could adversely impact the Company's competitive position and results of operations.

The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a material adverse impact on the Company's financial results.

The Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions. A number of factors may result in impairments to goodwill and other intangible assets, including significant negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of the assets. Impairment charges could adversely affect the Company's financial condition or results of operations in the periods recognized.

Raw material price increases and supply shortages could adversely affect results.

The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. Significant disruptions to the supply chain could adversely affect the Company's
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ability to meet commitments to customers. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company's results of operations and profit margins. In particular, changes in trade policies, the imposition of duties and tariffs, potential retaliatory countermeasures, public health crises (such as the COVID-19 pandemic) and severe weather events could adversely impact the price or availability of raw materials. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.

The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.

The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.

If the Company is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, or if there is a violation of data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.

The Company relies on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; hardware failures; computer viruses; employee error or malfeasance; and attacks by computer hackers, which have continued to increase on a global scale in both magnitude and frequency, taken on novel and unprecedented forms and become more difficult to detect. In addition, security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees, partners, customers or suppliers, which could cause reputational and legal harm as we are subject to data privacy laws, including the EU General Data Protection Regulation, in the various countries in which we operate. If our information technology systems suffer severe damage, disruption, or shutdown, and business continuity plans do not effectively resolve the issues in a timely manner, or if we violate data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.

Strategic Transaction Risks

The Company's acquisition of businesses could negatively impact its profitability and returns.

The Company has engaged in various acquisitions in the past, and could choose to acquire additional businesses in the future, such as the recently announced agreement with Amphenol Corporation ("Amphenol"), whereby the Company will acquire the Test & Simulation business of MTS Systems Corporation ("MTS") following the closing of Amphenol's acquisition of MTS. Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect the Company's profitability and returns:

The acquired business' inability to adapt to the ITW Business Model or otherwise perform in accordance with the Company's anticipated results or timetable, could cause it to under-perform relative to the Company's expectations and the price paid for it.
The acquired business could cause the Company's financial results to differ from expectations in any given fiscal period, or over the long term.
Acquisition-related earnings charges could adversely impact operating results.
The acquired business could place unanticipated demands on the Company's management, operational resources and financial and internal control systems.
The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the activities of the acquired business. The realization of any of these liabilities or deficiencies may increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial reporting obligations.
As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize charges relating to the impairment of these assets.
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Divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.

The Company had significant divestiture activity in 2012, 2013 and 2014 in accordance with its portfolio management initiative, and it divested additional businesses in 2019 as it continues portfolio refinements to maintain portfolio discipline. The Company has retained certain liabilities directly or through indemnifications made to the buyers against known and unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental matters, which could adversely affect the Company's financial results.

Tax, Legal and Regulatory Risks

Unfavorable tax law changes and tax authority rulings may adversely affect results.

The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.

Potential adverse outcomes in legal proceedings may adversely affect results.

The Company's businesses expose it to potential toxic tort and other types of product liability claims that are inherent in the design, manufacture and sale of its products and the products of third-party vendors. The Company currently maintains insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it maintains adequate insurance programs, claims could have a material adverse effect on the Company's financial condition, liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.

Uncertainty related to environmental regulation and industry standards, as well as physical risks of climate change, could impact the Company's results of operations and financial position.

Increased public awareness and concern regarding environmental risks, including global climate change, may result in more international, regional and/or federal requirements or industry standards to reduce or mitigate global warming and other environmental risks. These regulations or standards could mandate even more restrictive requirements, such as stricter limits on greenhouse gas emissions and production of single use plastics, than the voluntary commitments that the Company has made or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. In addition, the physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy, product demand and manufacturing and could increase insurance and other operating costs. If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational restrictions and compliance requirements upon the Company or its products, or the Company's operations are disrupted due to physical impacts of climate change, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted.

The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery, competition, export and import, environmental, human rights or other laws.

The Company has a decentralized operating structure under which its individual businesses are allowed significant decision-making autonomy within the Company's strategic framework and internal financial and compliance controls. The Company cannot ensure that its internal controls will always protect against reckless or criminal acts committed by its employees, agents or business partners that might violate U.S. and/or non-U.S. laws, including anti-bribery, competition, export and import, environmental and human rights laws. Any such improper actions could subject the Company to civil or criminal investigations, could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or could damage its reputation.

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Forward-Looking Statements

This Annual Report on Form 10-K 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," "plan," "intend," "may," "strategy," "prospects," "estimate," "will," "should," "could," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the 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 performance, economic and regulatory conditions in various geographic regions, the impact of foreign currency fluctuations, the timing and amount of benefits from the Company's enterprise strategy initiatives, the timing and amount of 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, 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 divested businesses, the impact of U.S. tax legislation and the estimated timing and amount related to the resolution of tax matters, the cost of compliance with environmental regulations, the impact of failure of the Company's employees to comply with applicable laws and regulations, and the outcome of outstanding legal proceedings. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include those risks described above. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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

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

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Due to the Company's decentralized operating structure and global operations, the Company operates out of a large number of facilities worldwide, none of which are individually significant to the Company or its segments. As of December 31, 2020, the Company operated approximately 440 plants and office facilities, excluding regional sales offices and warehouse facilities. Approximately 290 of the facilities were located outside of the United States. Principal foreign countries include China, Germany, France, and the United Kingdom.

The Company's properties are well suited for the purposes for which they were designed and are maintained in good operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the Company's businesses.

ITEM 3. 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 4. Mine Safety Disclosures

None.
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PART II

ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Data— The Company's common stock is listed on the New York Stock Exchange. There were approximately 5,245 holders of record of common stock as of January 31, 2021. This number does not include beneficial owners of the Company's securities held in the name of nominees.

itw-20201231_g1.jpg

*Assumes $100 invested on 12/31/15 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
Copyright© 2021 Standard & Poor's, a division of S&P Global. All rights reserved.

The 2020 Peer Group consists of the following 17 public companies:
3M CompanyEcolab Inc.Parker-Hannifin Corporation
Caterpillar Inc.Emerson Electric Co.PPG Industries, Inc.
Cummins Inc.Fortive CorporationRockwell Automation, Inc.
Deere & CompanyGeneral Dynamics CorporationStanley Black & Decker, Inc.
Dover CorporationHoneywell International Inc.Trane Technologies plc
Eaton Corporation plcJohnson Controls International plc

The Compensation Committee of the Board of Directors of the Company reviews the peer group annually and from time to time changes the composition of the peer group where changes are appropriate. In 2020, the Compensation Committee added Ecolab Inc. as it meets the Company's industry and size criteria, and Trane Technologies plc, which is the company resulting from the spin-off of Ingersoll-Rand plc and its combination with certain businesses of Gardner Denver, Inc. As a result, Ingersoll-Rand plc was removed, as well as Raytheon Company, which merged with United Technologies Corporation and no longer meets the Company's industry and size criteria. Although Fortive Corporation was added to the Company's peer group in 2017, it was excluded from the five year cumulative total return as there was insufficient historical data due to its spin-off from Danaher Corporation in 2016.
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Repurchases of Common Stock— On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of December 31, 2020, there were approximately $1.2 billion of authorized repurchases remaining under the 2018 program. Due to the COVID-19 pandemic, the Company temporarily suspended its share repurchase program starting in March 2020.

ITEM 6. Selected Financial Data

In millions except per share amounts20202019201820172016
Operating revenue$12,574 $14,109 $14,768 $14,314 $13,599 
Income from continuing operations2,109 2,521 2,563 1,687 2,035 
Income per share from continuing operations:
Basic6.66 7.78 7.65 4.90 5.73 
Diluted6.63 7.74 7.60 4.86 5.70 
Total assets at year-end15,612 15,068 14,870 16,780 15,201 
Long-term debt at year-end7,772 7,754 6,029 7,478 7,177 
Cash dividends declared per common share4.42 4.14 3.56 2.86 2.40 

In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.90 per diluted share, related to the enactment of the United States "Tax Cuts and Jobs Act" (the "Act") on December 22, 2017. The provisions of the Act significantly revised the U.S. corporate income tax rules. The additional tax expense recorded in the fourth quarter of 2017 primarily related to a one-time repatriation tax of $676 million on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries and $53 million of additional foreign withholding taxes related to the expected repatriation of foreign held cash and equivalents. These additional tax charges were partially offset by an $82 million one-time income tax benefit related to the remeasurement of deferred tax assets and liabilities in the fourth quarter of 2017 due to the reduction of the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018 under the Act.

Certain reclassifications of prior year data have been made to conform to current year reporting, including the adoption of new accounting guidance as discussed below.

In March 2016, the Financial Accounting Standards Board (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 that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized through income tax expense rather than directly in equity. Excess tax benefits recognized in equity under the prior guidance were $29 million for the year ended December 31, 2016. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $27 million, $28 million, $10 million and $50 million were included in Income taxes in the statement of income for the years ended December 31, 2020, 2019, 2018 and 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 period 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.

Additional information on the comparability of results is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

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

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

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

THE ITW BUSINESS MODEL

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

ITW's 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the "80") and eliminates cost, complexity and distractions associated with the less profitable opportunities (the "20"). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance;

Customer-back Innovation has fueled decades of profitable growth at ITW. The Company's unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their "80" customers. ITW's innovation efforts are focused on understanding customer needs, particularly those in "80" markets with solid long-term growth fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,500 granted and pending patents;

ITW's Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each business' customers and end markets.

ENTERPRISE STRATEGY

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

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

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

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

Step two, Business Structure Simplification, was implemented to simplify and scale up ITW's operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 83 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2020 and continues to be a key contributor to the Company's ongoing enterprise strategy.

With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.

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

PATH TO FULL POTENTIAL

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:

Portfolio discipline
80/20 Front-to-Back practice excellence
Full-potential organic growth

Portfolio Discipline

The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right "raw material" in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.

The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW's portfolio operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

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
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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 in 2020, the Company has deferred any further significant divestiture activity until market conditions normalize. Refer to Note 3. Divestitures in Item 8. Financial Statements and Supplementary Data for more information regarding the Company's divestitures.

80/20 Front-to-Back Practice Excellence

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

ITW will continue 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 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. These efforts are just beginning to take hold and the Company expects them 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.

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 will acquire the Test & Simulation business of MTS Systems Corporation ("MTS") following the closing of Amphenol's acquisition of MTS. Upon completion of this acquisition, this business will be reported within the Company's Test & Measurement and Electronics segment.

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TERMS USED BY ITW

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

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

Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year.

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.

The Company delivered solid financial results in 2020 despite the extraordinary challenges posed by the COVID-19 pandemic, as the Company experienced solid recovery progress in many of its end markets in the third and fourth quarters of 2020 versus the second quarter. The primary driver of the Company's financial performance is the continued successful execution of enterprise initiatives and continued focus on the highly differentiated ITW Business Model. In 2020, despite the decline in operating revenue of 10.9 percent, the Company generated operating income of $2.9 billion, operating margin was 22.9 percent, free cash flow was $2.6 billion and after-tax return on average invested capital was 26.2 percent. Additionally, all segments, other than the Food Equipment, Automotive OEM and Welding segments, which had more pronounced impacts from the COVID-19 pandemic, had operating margins that improved compared to the prior year. Refer to the Cash Flow and After-tax Return on Average Invested Capital sections of Liquidity and Capital Resources for a reconciliation of these non-GAAP measures.

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.

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.

22


While the vast majority of the Company's facilities remained open and operational during the pandemic in 2020, 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. A prolonged outbreak will continue to interrupt the operations of the Company and its customers and suppliers. A description of the risks relating to the impact of the COVID-19 outbreak on the Company's business, operations and financial condition is contained in Part I, Item 1A. Risk Factors.

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's consolidated results of operations for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$12,574 $14,109 (10.9)%(9.8)%(0.9)%— %(0.2)%(10.9)%
Operating income$2,882 $3,402 (15.3)%(16.0)%(0.3)%1.1 %(0.1)%(15.3)%
Operating margin %22.9 %24.1 %(120) bps(160) bps10 bps30 bps— (120) bps

Operating revenue decreased due to lower organic revenue, the impact of 2019 divestitures and the unfavorable effect of foreign currency translation.
Organic revenue decreased 9.8% primarily due to disruptions in the Company's global operations resulting from the COVID-19 pandemic as organic revenue declined in six of the seven segments. The Construction Products segment grew 1.5% primarily due to growth in North America. Product line simplification activities reduced the Company's organic revenue by 30 basis points.
North American organic revenue decreased 9.7% as a decline in six segments, primarily driven by the Automotive OEM, Food Equipment and Welding segments, was partially offset by growth in the Construction Products segment.
Europe, Middle East and Africa organic revenue decreased 13.8% as all seven segments had a decline in organic revenue primarily driven by the Automotive OEM and Food Equipment segments.
Asia Pacific organic revenue decreased 2.0% as a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments was offset by growth in the Automotive OEM, Test & Measurement and Electronics and Polymers & Fluids segments. China organic revenue grew 0.3% as an increase in the Automotive OEM, Polymers & Fluids and Test & Measurement and Electronics segments was partially offset by a decline in the Food Equipment, Welding, Specialty Products and Construction Products segments.
Operating income of $2.9 billion decreased 15.3% primarily due to lower organic revenue. Additionally, operating income for 2019 included $11.8 million related to the businesses divested in 2019.
Operating margin of 22.9% decreased 120 basis points primarily driven by negative operating leverage of 230 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives of 120 basis points and lower overhead expenses, such as travel and bonuses, and lower restructuring expenses.
The effective tax rate was 22.0% in 2020 compared to 23.3% in 2019. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." Additionally, the effective tax rates for 2020 and 2019 included $27 million and $28 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Diluted earnings per share (EPS) were $6.63 for 2020.
Free cash flow was $2.6 billion for 2020. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 4.2 million shares of its common stock in 2020 for approximately $706 million. The Company temporarily suspended its share repurchase program starting in March 2020 due to the COVID-19 pandemic.
23


The Company increased the quarterly dividend on common stock from $1.07 to $1.14 per share in 2020, or from $4.28 to $4.56 per share on an annualized basis. Total cash dividends of approximately $1.4 billion were paid in 2020.
After-tax return on average invested capital was 26.2% for 2020. Refer to the After-tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

2019 compared to 2018

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$14,109 $14,768 (4.5)%(1.9)%(0.3)%— %(2.3)%(4.5)%
Operating income$3,402 $3,584 (5.1)%(1.3)%(0.1)%(1.4)%(2.3)%(5.1)%
Operating margin %24.1 %24.3 %(20) bps10 bps— (30) bps— (20) bps

Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and divestitures.
Organic revenue decreased 1.9% primarily driven by a decline in the Automotive OEM, Specialty Products, Welding and Construction Products segments. Product line simplification activities reduced organic revenue by 60 basis points.
North American organic revenue decreased 1.8% as a decline in the Automotive OEM, Specialty Products, Welding and Polymers & Fluids segments was partially offset by growth in the Food Equipment, Test & Measurement and Electronics and Construction Products segments.
Europe, Middle East and Africa organic revenue decreased 2.2% as five segments declined, partially offset by growth in the Food Equipment and Construction Products segments.
Asia Pacific organic revenue declined 1.6% as a decrease in the Construction Products, Automotive OEM, Food Equipment and Test & Measurement and Electronics segments was partially offset by an increase in the Welding, Polymers & Fluids and Specialty Products segments.
Operating income of $3.4 billion decreased 5.1% primarily due to unfavorable foreign currency translation, higher restructuring expenses and lower organic revenue.
Operating margin of 24.1% decreased 20 basis points. Excluding the unfavorable impact of higher restructuring expenses of 30 basis points, operating margin increased 10 basis points primarily due to benefits from the Company's enterprise initiatives that contributed 120 basis points and favorable price/cost of 10 basis points, partially offset by negative operating leverage of 50 basis points, product mix and higher employee-related expenses.
The effective tax rate for 2019 was 23.3% compared to 24.5% in 2018. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22 million in the third quarter related to foreign tax credits. Additionally, the effective tax rates for 2019 and 2018 included $28 million and $10 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Diluted earnings per share (EPS) of $7.74, an increase of 1.8%, included a $0.09 gain in 2019 from the disposal of businesses.
Free cash flow was $2.7 billion for 2019. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 9.8 million shares of its common stock in 2019 for approximately $1.5 billion.
The Company increased the quarterly dividend by 7.0% in 2019. Total cash dividends of approximately $1.3 billion were paid in 2019.
After-tax return on average invested capital was 28.7% for 2019. Refer to the After-tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

24


RESULTS OF OPERATIONS BY SEGMENT

The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as follows:

Operating Revenue
In millions202020192018
Automotive OEM$2,571 $3,063 $3,338 
Food Equipment1,739 2,188 2,214 
Test & Measurement and Electronics1,963 2,121 2,171 
Welding1,384 1,638 1,691 
Polymers & Fluids1,622 1,669 1,724 
Construction Products1,652 1,625 1,700 
Specialty Products1,660 1,825 1,951 
Intersegment revenue(17)(20)(21)
Total$12,574 $14,109 $14,768 

Operating Income
In millions202020192018
Automotive OEM$457 $659 $751 
Food Equipment342 578 572 
Test & Measurement and Electronics507 542 523 
Welding376 453 474 
Polymers & Fluids402 381 369 
Construction Products421 383 414 
Specialty Products432 472 522 
Total Segments2,937 3,468 3,625 
Unallocated(55)(66)(41)
Total$2,882 $3,402 $3,584 

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

AUTOMOTIVE OEM

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

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

25


The results of operations for the Automotive OEM segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$2,571 $3,063 (16.1)%(16.0)%— %— %(0.1)%(16.1)%
Operating income$457 $659 (30.6)%(32.3)%— %1.5 %0.2 %(30.6)%
Operating margin %17.8 %21.5 %(370) bps(420) bps— 40 bps10 bps(370) bps

Operating revenue declined due to lower organic revenue.
Organic revenue declined 16.0% versus worldwide auto builds which decreased 16%. Product line simplification activities reduced organic revenue by 80 basis points.
North American organic revenue decreased 22.3% compared to North American auto builds which declined 20% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 23%.
European organic revenue was down 16.8% compared to European auto builds which decreased 22%.
Asia Pacific organic revenue increased 0.7%. China organic revenue grew 6.1% versus China auto builds which decreased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, decreased 8%.
Operating margin of 17.8% in 2020 decreased 370 basis points primarily due to negative operating leverage of 330 basis points, product mix and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives and lower restructuring expenses.

2019 compared to 2018

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$3,063 $3,338 (8.2)%(5.4)%— %— %(2.8)%(8.2)%
Operating income$659 $751 (12.2)%(7.0)%— %(2.6)%(2.6)%(12.2)%
Operating margin %21.5 %22.5 %(100) bps(40) bps— (60) bps— (100) bps

Operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.
Organic revenue declined 5.4% versus worldwide auto builds which decreased 6%. Auto builds for North America, Europe and China, where the Company has a higher concentration of revenue as compared to other geographic regions, declined 6%. Product line simplification activities reduced organic revenue by 120 basis points. Additionally, organic revenue was negatively impacted by approximately 100 basis points due to unexpected customer shutdowns in North America in the second half of 2019.
North American organic revenue decreased 7.8% compared to North American auto builds which were down 4% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 8%. Additionally, 2019 was negatively impacted by unexpected customer shutdowns.
European organic revenue declined 4.5% compared to European auto builds which declined 4% in 2019 due to customer mix.
Asia Pacific organic revenue declined 2.2% in 2019. China organic revenue declined 1.0% versus Chinese auto builds which declined 8% in 2019.
Operating margin was 21.5% in 2019. The decrease of 100 basis points was primarily due to negative operating leverage of 90 basis points, unfavorable price/cost of 60 basis points, higher restructuring expenses and product mix, partially offset by benefits from the Company's enterprise initiatives.

26


FOOD EQUIPMENT

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

warewashing equipment;
cooking equipment, including ovens, ranges and broilers;
refrigeration equipment, including refrigerators, freezers and prep tables;
food processing equipment, including slicers, mixers and scales;
kitchen exhaust, ventilation and pollution control systems; and
food equipment service, maintenance and repair.

The results of operations for the Food Equipment segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,739 $2,188 (20.5)%(20.6)%— %— %0.1 %(20.5)%
Operating income$342 $578 (40.9)%(41.1)%— %(0.1)%0.3 %(40.9)%
Operating margin %19.6 %26.4 %(680) bps(680) bps— — — (680) bps

Operating revenue declined due to lower organic revenue.
Organic revenue declined 20.6% as equipment and service organic revenue decreased 21.8% and 18.5%, respectively.
North American organic revenue declined 19.2% as equipment organic revenue decreased 20.4%, primarily driven by lower demand in the restaurant and institutional end markets, partially offset by growth in the food retail end markets. Service organic revenue decreased 17.3%.
International organic revenue decreased 22.5%. Equipment organic revenue declined 23.5% primarily due to lower demand in the European warewash, cooking and refrigeration end markets and lower demand in Asia. Service organic revenue decreased 20.4%.
Operating margin of 19.6% in 2020 decreased 680 basis points primarily due to negative operating leverage of 540 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 50 basis points.

2019 compared to 2018

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$2,188 $2,214 (1.2)%1.1 %— %— %(2.3)%(1.2)%
Operating income$578 $572 1.1 %4.5 %— %(1.2)%(2.2)%1.1 %
Operating margin %26.4 %25.8 %60 bps90 bps— (30) bps— 60 bps

Operating revenue declined due to the unfavorable effect of foreign currency translation, partially offset by higher organic revenue.
Organic revenue increased 1.1% as equipment organic revenue decreased 0.2% and service organic revenue increased 3.5%.
North American organic revenue grew 1.1%. Equipment organic revenue declined 0.4% primarily driven by lower demand in the restaurant and institutional end markets, partially offset by higher demand in food retail. Service organic revenue increased 3.6%.
27


International organic revenue grew 1.1% as equipment organic revenue increased 0.2% primarily due to higher demand in the European warewash, cooking and retail end markets, partially offset by lower demand in Asia. Service organic revenue increased 3.5%.
Operating margin of 26.4% in 2019 increased 60 basis points primarily driven by benefits from the Company's enterprise initiatives, favorable price/cost of 40 basis points and positive operating leverage of 30 basis points, partially offset by product mix, higher employee-related expenses and higher restructuring expenses.

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.

The results of operations for the Test & Measurement and Electronics segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,963 $2,121 (7.4)%(4.9)%(2.8)%— %0.3 %(7.4)%
Operating income$507 $542 (6.5)%(5.2)%(1.3)%(0.2)%0.2 %(6.5)%
Operating margin %25.8 %25.6 %20 bps(10) bps40 bps(10) bps— 20 bps

Operating revenue declined due to lower organic revenue and the impact of a 2019 divestiture, partially offset by the favorable effect of foreign currency translation.
Organic revenue decreased 4.9% in 2020.
Organic revenue for the test and measurement businesses decreased 7.2% primarily driven by the impact of a soft capital spending environment in North America and Europe, partially offset by higher semi-conductor demand in North America. Instron, where demand is more closely tied to the capital spending environment, had an organic revenue decline of 14.1% in 2020.
Electronics organic revenue declined 2.1%. The electronics assembly businesses decreased 6.9% primarily due to lower demand in North America. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 0.9% primarily due to an increase in North America, partially offset by a decrease in Europe and Asia Pacific.
Operating margin of 25.8% in 2020 increased 20 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, the impact of a 2019 divestiture and favorable price/cost of 30 basis points, partially offset by negative operating leverage of 130 basis points and the recapture of amortization and depreciation expense related to a business previously classified as held for sale.

28


2019 compared to 2018
For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$2,121 $2,171 (2.3)%(0.3)%(0.2)%— %(1.8)%(2.3)%
Operating income$542 $523 3.7 %5.7 %— %(0.2)%(1.8)%3.7 %
Operating margin %25.6 %24.1 %150 bps140 bps10 bps— — 150 bps

Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and a divestiture.
Operating revenue for 2019 included $58 million related to the business divested in 2019.
Organic revenue decreased 0.3% in 2019.
Organic revenue for the test and measurement businesses decreased 0.8% primarily driven by lower semi-conductor end market demand in North America. Excluding semi-conductor, the test and measurement businesses increased 3.5%. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 6.4%.
Electronics organic revenue grew 0.4%. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 1.5% primarily due to growth in North America and Asia, partially offset by a decline in Europe. The electronics assembly businesses decreased 1.4% primarily due to lower demand in Asia.
Operating margin of 25.6% in 2019 increased 150 basis points primarily driven by benefits from the Company's enterprise initiatives, lower intangible asset amortization expense and favorable price/cost of 50 basis points.

WELDING

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

arc welding equipment; and
metal arc welding consumables and related accessories.

The results of operations for the Welding segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/
Divestiture
RestructuringForeign CurrencyTotal
Operating revenue$1,384 $1,638 (15.5)%(11.8)%(3.7)%— %— %(15.5)%
Operating income$376 $453 (17.1)%(16.8)%(1.6)%1.4 %(0.1)%(17.1)%
Operating margin %27.1 %27.7 %(60) bps(160) bps60 bps40 bps— (60) bps

Operating revenue decreased due to lower organic revenue and the impact of a 2019 divestiture.
Organic revenue declined 11.8% driven by decreases in equipment of 12.2% and consumables of 11.2%, primarily due to lower demand in the industrial end markets.
North American organic revenue decreased 10.8% primarily due to a decline in the industrial end markets of 19.8%, partially offset by growth in the commercial end markets of 2.1%.
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International organic revenue decreased 16.4% primarily due to a decline in the European oil and gas end markets.
Operating margin of 27.1% in 2020 decreased 60 basis points primarily driven by negative operating leverage of 220 basis points and product mix, partially offset by benefits from the Company's enterprise initiatives, the impact of a 2019 divestiture and lower restructuring expenses.

2019 compared to 2018

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,638 $1,691 (3.1)%(1.2)%(1.1)%— %(0.8)%(3.1)%
Operating income$453 $474 (4.4)%(2.1)%(0.4)%(1.7)%(0.2)%(4.4)%
Operating margin %27.7 %28.0 %(30) bps(20) bps20 bps(50) bps20 bps(30) bps

Operating revenue decreased due to lower organic revenue, the impact of divestiture activity and the unfavorable effect of foreign currency translation.
Operating revenue for 2019 included $62 million related to the business divested in 2019.
Organic revenue decreased 1.2% as equipment declined 2.6%, partially offset by growth in consumables of 0.8%.
North American organic revenue declined 1.1% as a decrease in the industrial end markets was partially offset by growth in the commercial and oil and gas end markets.
International organic revenue decreased 1.6% primarily due to a decline in Europe, partially offset by higher demand in Asia in the oil and gas end markets.
Operating margin of 27.7% decreased 30 basis points compared to the prior year primarily driven by higher restructuring expenses of 50 basis points, product mix, negative operating leverage of 20 basis points and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 70 basis points.

POLYMERS & FLUIDS

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

adhesives for industrial, construction and consumer purposes;
chemical fluids which clean or add lubrication to machines;
epoxy and resin-based coating products for industrial applications;
hand wipes and cleaners for industrial applications;
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
fillers and putties for auto body repair; and
polyester coatings and patch and repair products for the marine industry.

The results of operations for the Polymers & Fluids segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,622 $1,669 (2.8)%(1.4)%— %— %(1.4)%(2.8)%
Operating income$402 $381 5.6 %5.2 %— %1.5 %(1.1)%5.6 %
Operating margin %24.8 %22.8 %200 bps150 bps— 40 bps10 bps200 bps
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Operating revenue decreased due to lower organic revenue and the unfavorable effect of foreign currency translation.
Organic revenue declined 1.4% in 2020. Product line simplification activities reduced organic revenue by 50 basis points.
Organic revenue for the polymers businesses decreased 5.3% primarily driven by a decline in the heavy industrial end markets in North America and Europe.
Organic revenue for the automotive aftermarket businesses declined 0.5% primarily driven by a decrease in the car care and body repair businesses in North America and the additives businesses in Europe, partially offset by growth in the tire and engine repair businesses in North America.
Organic revenue for the fluids businesses grew 3.3% primarily due to an increase in the industrial maintenance, repair, and operations end markets in Europe and North America.
Operating margin of 24.8% in 2020 increased 200 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, favorable price/cost of 50 basis points and lower restructuring expenses, partially offset by negative operating leverage of 30 basis points.

2019 compared to 2018

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20192018Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,669 $1,724 (3.2)%— %(0.4)%— %(2.8)%(3.2)%
Operating income$381 $369 3.1 %7.9 %(0.1)%(1.5)%(3.2)%3.1 %
Operating margin %22.8 %21.4 %140 bps170 bps— (30) bps— 140 bps

Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation.
Organic revenue was flat as growth in the polymers businesses was offset by declines in the automotive aftermarket and fluids businesses.
Organic revenue for the automotive aftermarket businesses declined 0.7% primarily due to lower demand in the tire repair businesses in North America and the additives businesses in Europe, partially offset by stronger demand in the car care businesses in North America.
Organic revenue for the polymers businesses increased 2.4% primarily driven by growth in Asia and North America, primarily in the heavy industrial end markets.
Organic revenue for the fluids businesses decreased 2.0% primarily due to a decline in the industrial maintenance, repair, and operations end markets in North America.
Operating margin of 22.8% increased 140 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, partially offset by higher restructuring expenses.

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.

31


The results of operations for the Construction Products segment for 2020, 2019 and 2018 were as follows:

2020 compared to 2019

For the Years Ended
Dollars in millionsDecember 31,Components of Increase (Decrease)
20202019Inc (Dec)OrganicAcquisition/DivestitureRestructuringForeign CurrencyTotal
Operating revenue$1,652 $1,625 1.7