Illinois Tool Works Inc. (NYSE:ITW)

Current Income Tax Expense

The current income tax expense shows a general downward trend from 2017 to 2020, starting at 1,519 million US dollars in 2017 and decreasing steadily to 625 million US dollars in 2020. However, in 2021, there is a noticeable increase to 780 million US dollars, indicating a reversal of the previous decreasing trend.

Deferred Income Tax Expense

The deferred income tax expense remains positive and relatively stable from 2017 through 2019, with values of 64, 34, and 32 million US dollars respectively, showing a gradual decline. In 2020, the deferred tax expense turns negative, recording -30 million US dollars and further declines to -148 million US dollars in 2021. This shift from a positive to a negative deferred tax expense indicates a change in the timing or recognition of tax liabilities or assets.

Provision for Income Taxes

The overall provision for income taxes follows a similar pattern to the current tax expense, as expected. It decreases from 1,583 million US dollars in 2017 to 595 million US dollars in 2020, then increases slightly to 632 million US dollars in 2021. The declining provision from 2017 to 2020 corresponds with the reduction in the current tax expense, while the modest increase in 2021 aligns with the rise observed in the current tax component despite the negative deferred component.

Summary of Trends

The data indicate a significant decline in both current income tax expense and total tax provision over the 2017-2020 period, suggesting potentially reduced taxable income or changes in tax strategy during these years. The emergence of negative deferred tax expenses in 2020 and 2021 points to adjustments in deferred tax assets or liabilities that differ from prior periods. While the current tax expense increased in 2021, the larger negative deferred tax expense partially offsets the total tax provision, maintaining it at a relatively stable level compared to prior years.

U.S. Federal Statutory Tax Rate

The U.S. federal statutory tax rate showed a significant decrease from 35% in 2017 to 21% in 2018, maintaining that level through 2021.

U.S. Tax Effect of Foreign Earnings

This rate increased from 0.5% in 2017 to a peak of 1.5% in 2018, then generally stabilized around 1% to 1.2% from 2019 to 2021.

Changes in Tax Law

There were no recorded changes up to 2019; however, negative impacts appeared in 2020 and 2021 with -1.5% and -3.4%, respectively, indicating a tax benefit or reduction due to legislative adjustments in those years.

State Income Taxes, Net of U.S. Federal Tax Benefit

This tax component showed a steady increase over time, from 1.2% in 2017 up to 2.1% in 2021, suggesting rising state tax burdens or reduced federal offsets.

Differences Between U.S. Federal Statutory and Foreign Tax Rates

The values fluctuated, beginning with a negative -3.5% in 2017, then shifting to positive values around 2% from 2018 to 2021, reflecting evolving impacts of foreign tax jurisdictions compared to the U.S. rate.

Nontaxable Foreign Interest Income

This component remained negative throughout, with slight variability around -1.4% to -2%, indicating consistent reduction effects from nontaxable foreign interest.

Tax Effect of Foreign Dividends

Variations were observed, peaking at 1.6% in 2020 but generally fluctuating between 0.2% and 1%, implying inconsistent foreign dividend tax impacts.

Foreign Derived Intangible Income

This category emerged in 2018 with minor negative adjustments and became more pronounced at -1.3% in both 2020 and 2021, signifying increasing tax benefits related to foreign intangible income.

Tax Relief for U.S. Manufacturers

This factor was only present in 2017 with a -1.4% impact, after which it was not reported, suggesting a discontinued or one-time relief benefit.

Excess Tax Benefits from Stock-Based Compensation

The negative impact diminished after 2017, moving from -1.5% to less negative levels fluctuating between -0.3% and -1%, indicating smaller but consistent tax benefits from this source.

Other, Net

The "Other" category varied over the years, showing small positives and negatives, culminating in a significant negative -1% in 2021, which may reflect miscellaneous tax influences increasing in that year.

Effective Tax Rate Before Tax Effect of U.S. Federal Tax Law Change

A declining trend was apparent, dropping steadily from 28.3% in 2017 to 19% in 2021, indicative of overall effective tax rate reductions excluding the direct impact of U.S. federal tax law changes.

Tax Effect of U.S. Federal Tax Law Change

This effect was significant and positive in 2017 (20.1%), but negligible or absent in subsequent years, confirming that the major federal tax law change occurred chiefly in 2017.

Effective Tax Rate

The combined effective tax rate mirrored the above trend, starting very high at 48.4% in 2017 due to the tax law change effect, but lowered substantially to 19% by 2021, reflecting both statutory tax rate changes and other tax influences.

The financial data exhibits several notable trends in asset composition, liabilities, and deferred tax positions over the five-year period analyzed.

Goodwill and Intangible Assets

There is a marked increase in the gross goodwill and intangible assets from US$195 million in 2017 to US$431 million in 2021, indicating acquisitions or revaluations. Correspondingly, the related deferred tax liability also grows in magnitude, from −US$506 million to −US$534 million, suggesting a matching increase in tax obligations related to these assets.

Inventory Reserves, Capitalized Tax Cost and LIFO Inventory

These have remained relatively stable in gross terms, fluctuating slightly around the US$29 million to US$39 million range. The deferred tax liability on these items is consistently minor, at −US$3 million annually, indicating modest tax effects associated with inventory.

Investments

Investments show variability, starting at US$15 million, peaking at US$19 million in 2018, dipping to US$10 million in 2020, and rising again to US$17 million by 2021. The associated deferred tax liability gradually decreases from −US$180 million to −US$146 million, which may suggest realized losses or changes in tax bases.

Plant and Equipment

The gross value remains fairly steady, fluctuating around US$16–18 million, while the associated deferred tax liability increases significantly in magnitude from −US$64 million to −US$103 million by 2021, possibly reflecting accelerated depreciation or changes in tax treatment of fixed assets.

Accrued Expenses and Reserves

Accrued expenses and reserves show a slight decline from US$45 million in 2017 to US$39 million in 2021, indicating some moderation in outstanding liabilities or provisions.

Employee Benefit Accruals and Pension Liabilities

Employee benefit accruals exhibit a mild downward trend from US$177 million in 2017 to US$170 million in 2021. Pension liabilities, conversely, exhibit a significant increase in deferred tax liability from −US$25 million to −US$65 million, highlighting possible growth in pension-related obligations or changes in actuarial assumptions impacting tax positions.

Foreign Tax Credit and Net Operating Loss Carryforwards

Foreign tax credit carryforwards decline from US$13 million to US$11 million with some fluctuation, while net operating loss carryforwards decrease from US$507 million in 2017 to US$456 million in 2021 after peaking at just over US$451 million in 2018, indicating usage of losses or expiration.

Capital Loss Carryforwards

Capital loss carryforwards show a marked increase from US$98 million in 2017 to US$236 million in 2021, more than doubling, which could reflect realizations of capital losses leading to increased tax shield potential.

Allowances for Uncollectible Accounts

These allowances remain stable, with a small upward trend from US$9 million to US$11 million.

Unrealized Gains/Losses on Foreign Debt Instruments

This item appears sporadically, with a recorded loss (or a net gain reversal) of US$29 million in 2020 and a deferred tax liability that fluctuates between −US$19 million and −US$57 million before improving in the latest period, reflecting volatility in foreign debt valuations.

Operating Leases

Operating leases emerge in 2019 and rise modestly from US$45 million in 2019 to US$49 million in 2021, with matching deferred tax liabilities increasing in the negative (−US$45 million to −US$49 million), consistent with recognition of lease-related right-of-use assets and liabilities following accounting standard changes.

Other Items

The category labeled "Other" shows a decline from US$99 million in 2017 to US$32 million in 2018 and remains flat through 2020 before rising to US$52 million in 2021. Its corresponding deferred tax liabilities become more negative over the period, moving from −US$15 million to −US$42 million, indicating changes in miscellaneous deferred tax items.

Deferred Income Tax Assets and Valuation Allowances

Gross deferred income tax assets decline substantially from US$1,612 million in 2017 to US$1,072 million in 2018, then gradually recover to US$1,528 million by 2021. Valuation allowances fluctuate, starting at −US$459 million and reaching a considerably larger negative figure of −US$644 million in 2021, indicating increased skepticism regarding realizability of deferred tax assets.

Deferred Income Tax Liabilities

Deferred income tax liabilities show a slight increase in magnitude, moving from −US$812 million in 2017 to −US$986 million in 2021, contributing to the net deferred tax position becoming more negative (from a net asset of US$341 million in 2017 to a net liability of −US$102 million in 2021).

The overall picture reflects a growing complexity in deferred tax positions, with an increase in deferred tax liabilities outpacing deferred tax assets over time. The increase in goodwill and intangible assets alongside lease liabilities suggests significant asset acquisitions and adoption of new lease accounting standards. The shifts in valuation allowances highlight growing uncertainty in the recoverability of deferred tax assets. Additionally, the increase in capital loss carryforwards suggests tax planning strategies to mitigate taxable income. The net deferred tax asset position has deteriorated from a positive US$341 million to a negative US$102 million, signaling a change in the company’s future tax benefit outlook or timing differences.

Deferred Income Tax Assets

The deferred income tax assets exhibit a relatively stable trend over the five-year period. Starting at 505 million USD at the end of 2017, the amount increases slightly to 554 million USD in 2018, then decreases to 516 million USD in 2019. Following that, a modest rise is observed with 533 million USD in 2020, and a further slight increase to 552 million USD by the end of 2021. Overall, the values fluctuate within a narrow range with no significant upward or downward trajectory, indicating a stable recognition of deferred tax assets.

Deferred Income Tax Liabilities

The deferred income tax liabilities show more pronounced fluctuations during the same period. Beginning at a relatively low level of 164 million USD in 2017, there is a dramatic increase to 707 million USD in 2018. This is followed by a gradual decline in 2019 and 2020, with balances of 668 million USD and 588 million USD respectively. In 2021, the liabilities rise again to 654 million USD, though this is below the peak observed in 2018. These changes indicate variability in deferred tax obligations, possibly tied to changes in temporary differences or tax position adjustments.

Overall Insights

In summary, while deferred tax assets remain relatively stable, deferred tax liabilities exhibit considerable volatility with a significant spike in 2018 followed by fluctuations in subsequent years. This may suggest shifting tax strategies or operational changes affecting taxable temporary differences. The stable level of deferred tax assets contrasted against the variable liabilities could have implications for future tax expense recognition and cash flow forecasts.

Assets

Both reported and adjusted total assets display a general upward trend over the five-year period. Reported total assets decreased from 16,780 million USD in 2017 to 14,870 million USD in 2018 but then steadily increased each subsequent year, reaching 16,077 million USD in 2021. Adjusted total assets follow a similar pattern, declining from 16,275 million USD in 2017 to 14,316 million USD in 2018, then growing consistently to 15,525 million USD by 2021. This indicates a recovery and overall growth in asset base after a dip in 2018.

Liabilities

Reported total liabilities declined moderately from 12,191 million USD in 2017 to 11,612 million USD in 2018, increased to 12,038 million USD in 2019, and continued a gradual rise, ending at 12,451 million USD in 2021. Adjusted total liabilities show a more pronounced dip from 12,027 million USD in 2017 to 10,905 million USD in 2018, rising steadily thereafter to 11,797 million USD in 2021. The overall data suggest liabilities reduced notably in 2018 before gradually increasing but remaining below the initial 2017 levels on an adjusted basis.

Stockholders' Equity

Reported stockholders’ equity attributable to the company declined sharply from 4,585 million USD in 2017 to 3,254 million USD in 2018, then decreased further to 3,026 million USD in 2019. Subsequently, it showed signs of recovery, increasing to 3,181 million USD in 2020 and 3,625 million USD in 2021. Adjusted equity mirrors the reported trend but with slightly higher values overall, falling from 4,244 million USD in 2017 to 3,178 million USD in 2019, then recovering more notably to 3,727 million USD by 2021. This reflects significant equity contraction during 2018–2019, followed by a gradual restoration phase.

Net Income

Reported net income exhibited a strong increase from 1,687 million USD in 2017 to 2,563 million USD in 2018, maintaining a high level at 2,521 million USD in 2019. It then declined to 2,109 million USD in 2020 before rebounding to a peak of 2,694 million USD in 2021. Adjusted net income follows the same pattern, rising from 1,751 million USD in 2017 to 2,597 million USD in 2018, remaining steady at 2,553 million USD in 2019, dropping to 2,079 million USD in 2020, and recovering to 2,546 million USD in 2021. The data suggest volatility with a peak in 2018, a dip coincident with 2020, likely due to external factors, followed by recovery in profitability by 2021.

Net Profit Margins

The reported net profit margin displayed a general upward trend, increasing from 11.79% in 2017 to 18.64% in 2021, with a slight dip in 2020 to 16.77%. The adjusted net profit margin followed a similar pattern, rising steadily from 12.23% in 2017 to a peak of 18.09% in 2019 before decreasing in 2020 to 16.53%, and then recovering to 17.61% in 2021. These figures suggest overall improvement in profitability with a minor setback during 2020.

Total Asset Turnover

Reported total asset turnover increased from 0.85 in 2017 to 0.99 in 2018, then decreased slightly to 0.94 in 2019 and further dropped to 0.81 in 2020 before modestly recovering to 0.90 in 2021. Adjusted figures exhibited a comparable trend, starting at 0.88 in 2017, peaking at 1.03 in 2018, and decreasing thereafter with a low point in 2020 at 0.83, followed by an increase to 0.93 in 2021. This indicates fluctuating efficiency in asset utilization, with a notable dip around 2020.

Financial Leverage

Reported financial leverage showed a rising trend from 3.66 in 2017 to a maximum of 4.98 in 2019, before slightly declining to 4.44 in 2021. Adjusted financial leverage followed a similar pattern, increasing from 3.83 in 2017 to 4.66 in 2020, then decreasing to 4.17 in 2021. The data suggest an increased reliance on debt or liabilities to finance assets over the period, peaking before a moderate reduction in recent years.

Return on Equity (ROE)

The reported ROE experienced a significant increase from 36.79% in 2017 to 83.31% in 2019, followed by a decline to 74.32% in 2021. Adjusted ROE mirrored this trend, rising from 41.26% in 2017 to 80.33% in 2019 and then decreasing to 68.31% in 2021. These trends correspond with the increase in financial leverage and demonstrated high returns to shareholders, although a slight reduction is seen after 2019.

Return on Assets (ROA)

Reported ROA increased from 10.05% in 2017 to a peak of 17.24% in 2018, then declined to 16.73% in 2019 and fell further to 13.51% in 2020 before recovering to 16.76% in 2021. Adjusted ROA exhibited a similar trajectory, showing growth up to 18.14% in 2018, followed by decreases in subsequent years and a partial recovery in 2021. The pattern indicates variations in operational efficiency and asset profitability, with a pronounced dip during 2020.

Summary of Observations

Overall, profitability ratios such as net profit margin, ROE, and ROA improved from 2017 through 2019, peaked around this period, and then declined in 2020, likely impacted by economic or operational challenges. There was a notable recovery in 2021, though not all metrics returned to their peak levels. Asset turnover indicates fluctuating efficiency in asset use, with lower performance around 2020. Financial leverage increased significantly until 2019, suggesting higher debt usage, but then moderately decreased by 2021. Adjusted figures closely follow the reported metrics, confirming the robustness of these trends after tax adjustments.

Net Income Trends

The reported net income exhibited a general upward trend from 2017 to 2021, increasing from $1,687 million in 2017 to $2,694 million in 2021. There was a slight decline observed in 2020, with net income decreasing to $2,109 million from a peak of $2,563 million in 2018. The adjusted net income closely followed a similar pattern, starting at $1,751 million in 2017, peaking at $2,597 million in 2018, experiencing a dip to $2,079 million in 2020, and then rising again to $2,546 million in 2021.

Net Profit Margin Analysis

The reported net profit margin showed an overall increasing trend over the period, moving from 11.79% in 2017 to 18.64% in 2021. Notably, the profit margin increased considerably from 2017 to 2019, reaching 17.87%, then decreased slightly to 16.77% in 2020, before rising again in 2021. Adjusted net profit margin figures followed a similar trajectory, although generally reflecting slightly higher values than the reported margin in earlier years, starting at 12.23% in 2017 and peaking at 18.09% in 2019, before a decline to 16.53% in 2020 and a recovery to 17.61% in 2021.

Comparison of Reported and Adjusted Figures

The adjusted net income and adjusted net profit margin figures were consistently close to the reported figures throughout the analyzed period, suggesting that the impact of annual and deferred income tax adjustments was moderate. Adjusted net income values were marginally higher than reported net income in the earlier years, converging more closely in 2020 and 2021. Similarly, the adjusted net profit margin tended to slightly exceed the reported margin from 2017 to 2019 but showed a small relative reduction in 2020 and 2021.

Impact of External Factors

There was a noticeable dip in both reported and adjusted net income and net profit margins during 2020, likely reflecting the impact of external economic challenges in that year. However, the recovery seen in 2021 indicates an improvement in profitability and operational effectiveness following the disruption.

The analysis of the financial data reveals several notable trends over the five-year period ending in 2021. There is an observable gradual decrease in both reported and adjusted total assets from 2017 through 2018, followed by a steady increase from 2019 onwards. Specifically, reported total assets declined from 16,780 million US dollars in 2017 to 14,870 million US dollars in 2018, then increased to 16,077 million US dollars by 2021. Adjusted total assets follow a similar pattern, decreasing from 16,275 million US dollars in 2017 to 14,316 million US dollars in 2018, and subsequently rising to 15,525 million US dollars by 2021.

Regarding asset turnover ratios, both reported and adjusted figures suggest fluctuations that generally mirror the movements in total assets. The reported total asset turnover ratio increased from 0.85 in 2017 to 0.99 in 2018, decreased to 0.81 in 2020, and then rebounded to 0.90 in 2021. Adjusted total asset turnover ratios exhibit comparable changes, starting at 0.88 in 2017, peaking at 1.03 in 2018, declining to 0.83 in 2020, and ascending to 0.93 in 2021.

Assets Trend

Both reported and adjusted total assets show an initial decline between 2017 and 2018, followed by a recovery and gradual growth from 2019 through 2021.

Asset Turnover Ratios

Turnover ratios concurrently rise in 2018, indicating improved efficiency, but experience a dip in 2020 before recovering in 2021. Adjusted ratios consistently remain slightly higher than reported ratios, suggesting that adjustments for deferred taxes slightly improve the portrayal of asset efficiency.

Overall Observations

The data suggests the company underwent a period of contraction in asset base in 2018, which was accompanied by improved turnover ratios, potentially reflecting better asset utilization or divestment of underperforming assets. The dip in turnover ratios in 2020 might be indicative of operational challenges or asset additions that did not immediately translate to increased sales, with a recovery in 2021 signaling improved operational performance or market conditions.

The financial data reveals several notable trends over the five-year period ending December 31, 2021.

Total Assets

Reported total assets exhibit a fluctuating pattern, initially declining from 16,780 million US dollars in 2017 to 14,870 million in 2018, followed by a gradual recovery to 16,077 million by 2021. Adjusted total assets follow a similar trajectory but remain consistently lower than reported figures, decreasing from 16,275 million in 2017 to 14,316 million in 2018, and increasing steadily thereafter to reach 15,525 million in 2021. This suggests some recurring adjustments impacting asset values that temper the reported growth.

Stockholders’ Equity Attributable to ITW

Reported stockholders’ equity shows a significant decline from 4,585 million US dollars in 2017 to a low of 3,026 million in 2019, followed by a modest recovery to 3,625 million by 2021. Adjusted equity parallels this pattern but demonstrates less volatility, with a decrease from 4,244 million in 2017 to 3,178 million in 2019, and subsequent growth to 3,727 million in 2021. The narrower range of adjusted figures implies that certain factors affecting reported equity were smoothed out in the adjustments, providing a somewhat more stable equity base.

Financial Leverage

Reported financial leverage, defined as the ratio of total assets to stockholders’ equity, increases sharply from 3.66 in 2017 to a peak of 4.98 in 2019, indicating increased use of debt or liabilities relative to equity. After 2019, it decreases to 4.44 by 2021, suggesting partial deleveraging or improved equity capitalization. Adjusted financial leverage confirms this trend but with a less pronounced initial increase, rising from 3.83 in 2017 to 4.66 in 2020, then declining to 4.17 in 2021. This reflects that the adjusted figures moderate the leverage fluctuations observed in the reported data.

Overall, the analysis indicates an initial period of contraction in asset base and equity, with increased financial leverage peaking around 2019, followed by a recovery phase where both assets and equity improve and leverage ratios decline. Adjusted data provide a more conservative perspective, showing less extreme variations but confirming the underlying trends. The trends suggest responsive management actions to balance growth and financial risk after a phase of heightened leverage and equity contraction.

Net Income Trends

Reported net income experienced an overall increase from 1,687 million US dollars in 2017 to 2,694 million US dollars in 2021. There was a notable peak in 2018 at 2,563 million US dollars, followed by a slight decline in 2019 and 2020 before rebounding in 2021. Adjusted net income displayed a similar pattern, peaking in 2018 and gradually increasing again in 2021, although it remained slightly lower than the reported net income figure in 2021.

Stockholders' Equity Trends

The reported stockholders’ equity attributable to the company showed a declining trend from 4,585 million US dollars in 2017 to 3,026 million US dollars in 2019, before stabilizing and slightly increasing in 2020 and 2021. Adjusted stockholders’ equity followed a similar trajectory but exhibited less volatility, with values decreasing initially and then gradually increasing from 3,178 million US dollars in 2019 to 3,727 million US dollars in 2021.

Return on Equity (ROE) Trends

The reported ROE demonstrated high volatility, with an initial value of 36.79% in 2017, sharply rising to a peak of 83.31% in 2019. Subsequently, it declined to 66.3% in 2020, then increased again in 2021 to 74.32%. The adjusted ROE followed similar fluctuations, with consistently slightly lower values than the reported ROE, suggesting adjustments had a modest dampening effect on the estimated return efficiency.

Overall Insights

The data indicates strong profitability levels despite fluctuations over the five-year period. The decline in stockholders’ equity from 2017 to 2019 might have contributed to the elevated ROE figures during those years, reflecting higher returns relative to equity base at reduced equity levels. The stabilization and slight increase in equity from 2020 onwards correspond with a normalization of ROE values. The adjustments to income and equity figures tend to slightly moderate the reported values but preserve the overall trends. This suggests the adjustments, possibly related to deferred income tax accounting, smooth the financial indicators without fundamentally altering the company's performance profile.

Net Income Trends

The reported net income exhibited growth from 2017 through 2018, increasing from 1687 million USD to 2563 million USD. This was followed by a slight decline in 2019 to 2521 million USD and a more noticeable decrease in 2020 to 2109 million USD. In 2021, the reported net income rebounded to 2694 million USD, surpassing the previous highs.

The adjusted net income follows a similar pattern, starting at 1751 million USD in 2017, peaking in 2018 at 2597 million USD, slightly decreasing in 2019 to 2553 million USD, then dropping to 2079 million USD in 2020. It recovered in 2021 to 2546 million USD, though at a level slightly below the 2018 peak.

Total Assets Trends

Reported total assets showed a decline from 16,780 million USD in 2017 to 14,870 million USD in 2018. Thereafter, assets gradually increased each year through 2021, reaching 16,077 million USD, though not fully recovering to the 2017 level within the given period.

The adjusted total assets similarly decreased from 16,275 million USD in 2017 to 14,316 million USD in 2018, followed by steady increases through 2021, reaching 15,525 million USD. This trend mirrors that of reported total assets but consistently remains at slightly lower values due to adjustments.

Return on Assets (ROA) Trends

Reported ROA showed a strong increase from 10.05% in 2017 to a peak of 17.24% in 2018, then a modest decline to 16.73% in 2019. In 2020, ROA dropped more substantially to 13.51% before rising again to 16.76% in 2021, nearly reaching previous peak levels.

Adjusted ROA follows a comparable trajectory, increasing from 10.76% in 2017 to 18.14% in 2018, then decreasing to 17.54% in 2019 and falling further in 2020 to 13.79%. It recovers in 2021 to 16.4%, showing a similar performance pattern to the reported ROA but at slightly higher percentages overall.

Insight Summary

The data reveals a clear pattern of growth peaking in 2018 across net income and ROA, followed by a downturn in 2020, likely due to external pressures affecting profitability and asset base. The recovery in 2021 indicates a positive turnaround, with net income and ROA nearing or exceeding previous highs. Total assets experienced a dip initially and a slow recovery which has yet to fully reach 2017 levels by 2021. Adjusted figures closely parallel reported numbers, with adjustments causing minor downward revisions in asset totals and modest upward adjustments in ROA, potentially reflecting tax-related adjustments improving the assessment of operating performance.