Annual Report 2020 Illinois Tool Works Inc. Works Tool Illinois Illinois Tool Works Inc. 2020 Annual Report About ITW Founded in 1912, ITW (NYSE: ITW) is a global industrial company built around a differentiated and proprietary business model. The company’s seven industry- leading segments leverage the ITW Business Model to generate solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required. ITW’s approximately 43,000 dedicated colleagues around the world thrive in the company’s decentralized, entrepreneurial culture. In 2020, the company achieved revenues of $12.6 billion, with roughly half coming from outside North America. To learn more, please visit www.itw.com. Contents 1 4 5 6 8 INSIDE BACK COVER Letter to Our Business Model Is Our ITW’s Performance Overview of ITW’s Corporate Executives Shareholder Shareholders Competitive Advantage Since the Launch Operating Segments and Board of Directors Information of Our Current Enterprise Strategy Please note all photography used in this report was taken prior to the COVID-19 pandemic. To Our Fellow Shareholders In an unprecedented year, we leveraged the power and leadership in support of these two key pandemic priorities. resilience of the ITW Business Model to navigate the Their dedication to keeping themselves and their colleagues challenges brought about by the global pandemic and deliver safe while continuing to deliver excellent service to our strong operational performance and continued progress in customers was truly inspiring. There is no question that the execution of our long-term enterprise strategy. we differentiated ourselves with many of our key customers as a result of our ability to sustain our best-in-class quality In the face of economic challenges that included temporary and delivery performance throughout 2020 thanks to customer shutdowns across many of our end markets, their efforts. the ITW team effectively leveraged our position of strength to deliver robust financial performance, including GAAP We also did our best to take full advantage of ITW’s position EPS of $6.63, operating margin of 22.9 percent, after-tax of strength as we thought through how we should manage ROIC of 26.2 percent1, and $2.6 billion in free cash flow1. the company through the pandemic. Throughout the year, ITW’s balance sheet and liquidity remained rock-solid. ...While Remaining Committed to Executing Our Strategy to Deliver Differentiated Leveraging the Strength and Resilience Performance Over the Long Term of the ITW Business Model to Navigate Back in the spring, as we analyzed and stress tested the the Unprecedented Challenges of the company’s financial performance across a wide range of Global Pandemic... pandemic scenarios, it became clear that the operational While it was the challenges brought about by the pandemic and competitive advantages that we had built up over that dominated our attention in 2020, it was the collection the past eight years had resulted in a very strong and of capabilities and competitive advantages that we have built highly resilient company. As a result, this was a unique and honed over the past eight years through the execution opportunity for ITW to react smartly and to stay focused of our enterprise strategy that provided us with the options on the long term. to respond to them as we did. The strength and resilience of ITW enabled us to make two Early on as the pandemic unfolded, we refocused the entire key decisions regarding how we were going to manage company on two core imperatives: the company through the pandemic crisis. First, we chose 1. Protect the health, safety, and well-being to leverage the strong financial foundation that we’d built of our people. over the last eight years to reinforce our commitment to our people. We provided full compensation and benefit support 2. Continue to serve our customers to all ITW colleagues through the entirety of the second with excellence. quarter when the economic effects of the pandemic were at Our people around the world executed extremely well on both. their most widespread and severe. We also decided that we Our manufacturing, supply chain and customer service teams would not initiate any enterprise-wide employment reduction deserve special recognition for their extraordinary efforts and mandates or programs at any point in 2020. These were 1 After-tax return on average invested capital (after-tax ROIC) and free cash flow are non-GAAP measures. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K for information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures. ILLINOIS TOOL WORKS INC. 1 ITW_AR 2020_Text.indd 1 3/26/21 9:07 AM not obvious or easy decisions given the unprecedented Looking Ahead circumstances we were confronting, but we believed In January 2021, we announced the acquisition of the that they were the right decisions for our company. Many MTS Test & Simulation business. This business is an companies, including ITW, often talk about the fact that excellent addition to our Test & Measurement and their people are their greatest asset. In our view, having Electronics segment that will further enhance ITW’s long- our people’s backs during one of the most challenging and term organic growth potential. We expect the acquisition uncertain periods we have ever experienced was a critical to close in 2021 and look forward to welcoming the opportunity for us to prove it. MTS Test & Simulation team to the ITW family. Second, we chose to leverage our position of strength As we ended 2020, demand levels had essentially returned by implementing our “Win the Recovery” agenda and to year-ago levels and ITW was once again delivering mindset across the company. “Win the Recovery” is not an record financial performance, indicating good momentum opportunistic new strategy. Rather, it is a commitment to heading into 2021. While significant uncertainty remains, the staying the course and continuing to prioritize the execution combined strengths of the ITW Business Model, our people, of our long-term enterprise strategy despite the unique and our dynamic, entrepreneurial culture put your company and unprecedented challenges brought about by the in a very strong position to deal with whatever lies ahead. global pandemic. Like many of you, we are hopeful for a return to somewhere “Win the Recovery” does not mean ignore the pandemic, in the vicinity of normal at some point in 2021 and with that, as across the company we have to continue to read and getting back to giving our full attention to executing our react to the realities of the near-term situation as we always long-term enterprise strategy. Speaking on behalf of the do. But it does mean that we are committed to protecting entire ITW team, we remain firmly committed to taking ITW key investments supporting the execution of our long-term all the way to the company’s considerable full potential and strategy and that we have, from very early on, given our in doing so, further solidifying ITW’s position as one of the divisional leadership teams the mandate to continue to world’s best performing, highest-quality, and most respected think long-term and to remain aggressive through the industrial companies. pandemic. As we move forward in 2021, our “Win the Recovery” posture and mindset continue on and serve as the key driver of the operating plans for every one of our divisions. ITW’s Long-Term Performance Targets ~28% ~40% 3-5% ~35% 7-10% 100+% ~50% Operating After-Tax Organic Incremental EPS Free Cash Flow Dividend Margin ROIC Growth Margin Growth as % of Payout Ratio Net Income 2 2020 ANNUAL REPORT ITW_AR 2020_Text.indd 2 3/22/21 1:46 PM E. Scott Santi Christopher A. O’Herlihy In closing, we thank all of our ITW colleagues around the world for their exceptional performance and dedication in the face of the most challenging and unprecedented circumstances of the past year. Their performance in 2020 Our CSR Commitment provides another proof point that ITW is a company that has the enduring competitive advantages, resilience, and Our commitment to corporate social agility necessary to deliver consistent top-tier performance responsibility (CSR) is a key component of our in any environment. aim to be one of the world’s best performing, We also thank you, our fellow shareholders, for your highest-quality, and most respected industrial continued support. companies. Through the execution of our holistic CSR strategy, we are dedicated to Sincerely, making a positive impact on our people, our communities, and the environment, while remaining grounded in sound governance and the highest ethical standards. E. Scott Santi Chairman & Chief Executive Officer We are working toward aggressively reducing our environmental footprint and we are also making an enhanced commitment to diversity and inclusion, including our “Do More” Agenda, which is focused on finding ways to make Christopher A. O’Herlihy meaningful and tangible contributions toward Vice Chairman achieving a more just and equitable society. Our full 2020 CSR Report can be found at March 26, 2021 www.itw.com/social-responsibility. ILLINOIS TOOL WORKS INC. 3 ITW_AR 2020_Text.indd 3 3/26/21 9:10 AM Our Business Model Is Our Competitive Advantage The ITW Business Model is comprised of three elements: 80/20 Front-to-Back defines how we operate. It is a unique set of proprietary tools and methodologies that our divisions use to structure and operate their businesses to (a) maximize the performance, execution, and value-add they provide to their largest and most profitable customers, and (b) minimize the costs, complexity, and distractions associated with serving small customers.