Illinois Tool Works Inc. (NYSE:ITW)

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Illinois Tool Works Inc., effective income tax rate (EITR) reconciliation

	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
U.S. federal statutory tax rate	21.00%	21.00%	21.00%	21.00%	35.00%
U.S. tax effect of foreign earnings	1.20%	1.00%	1.10%	1.50%	0.50%
Changes in tax law	-3.40%	-1.50%	0.00%	0.00%	0.00%
State income taxes, net of U.S. federal tax benefit	2.10%	1.90%	1.70%	1.60%	1.20%
Differences between U.S. federal statutory and foreign tax rates	1.90%	2.00%	2.00%	2.10%	-3.50%
Nontaxable foreign interest income	-1.60%	-2.00%	-1.40%	-1.70%	-1.70%
Tax effect of foreign dividends	0.60%	1.60%	0.20%	1.00%	0.40%
Foreign derived intangible income	-1.30%	-1.30%	-0.10%	-0.70%	0.00%
Tax relief for U.S. manufacturers	0.00%	0.00%	0.00%	0.00%	-1.40%
Excess tax benefits from stock-based compensation	-0.50%	-1.00%	-0.90%	-0.30%	-1.50%
Other, net	-1.00%	0.30%	-0.30%	0.10%	-0.70%
Effective tax rate, before tax effect of U.S. federal tax law change	19.00%	22.00%	23.30%	24.60%	28.30%
Tax effect of U.S. federal tax law change	0.00%	0.00%	0.00%	-0.10%	20.10%
Effective tax rate	19.00%	22.00%	23.30%	24.50%	48.40%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

The effective income tax rate exhibited a significant overall decline from 2017 to 2021, decreasing from 48.40% to 19.00%. This trajectory is characterized by a sharp reduction between 2017 and 2018, followed by a gradual and consistent downward trend in subsequent years.

U.S. Federal Statutory Rate Influence: A primary driver of the decreased tax burden was the reduction of the U.S. federal statutory tax rate, which fell from 35.00% in 2017 to 21.00% starting in 2018 and remaining constant through 2021.
Tax Law Adjustments and One-Time Effects: The effective tax rate in 2017 was disproportionately elevated by a 20.10% tax effect resulting from U.S. federal tax law changes. In contrast, more recent periods show tax law changes acting as a benefit, reducing the rate by 1.50% in 2020 and 3.40% in 2021.
Foreign Operations and Incentives: Various foreign tax components contributed to the lowering of the effective rate. Nontaxable foreign interest income provided a consistent benefit, averaging approximately -1.6% over the period. Additionally, Foreign Derived Intangible Income (FDII) emerged as a contributing factor starting in 2018, providing an increasing tax benefit that reached -1.30% by 2021.
Domestic and Other Adjustments: State income taxes, net of federal benefits, showed a steady increase from 1.20% in 2017 to 2.10% in 2021, partially offsetting other reductions. Excess tax benefits from stock-based compensation remained a persistent benefit, although the magnitude of this benefit diminished from -1.50% in 2017 to -0.50% in 2021.

The effective tax rate before the specific tax effect of U.S. federal tax law changes also demonstrated a consistent decline, moving from 28.30% in 2017 to 19.00% in 2021, indicating that the reduction in the overall tax burden was driven by both systemic statutory changes and the optimization of various tax benefits.

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Illinois Tool Works Inc., components of deferred tax assets and liabilities

US$ in millions

	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Goodwill and intangible assets	431)	292)	202)	194)	195)
Inventory reserves, capitalized tax cost and LIFO inventory	39)	31)	29)	30)	31)
Investments	17)	10)	16)	19)	15)
Plant and equipment	17)	16)	17)	17)	18)
Accrued expenses and reserves	39)	37)	42)	36)	45)
Employee benefit accruals	170)	168)	176)	186)	177)
Foreign tax credit carryforwards	11)	12)	7)	8)	13)
Net operating loss carryforwards	456)	418)	419)	451)	507)
Capital loss carryforwards	236)	88)	80)	89)	98)
Allowances for uncollectible accounts	11)	10)	9)	10)	9)
Unrealized (gain) loss on foreign debt instruments	—)	29)	—)	—)	—)
Deferred intercompany deductions	—)	—)	—)	—)	405)
Operating leases	49)	48)	45)	—)	—)
Other	52)	32)	32)	32)	99)
Gross deferred income tax assets	1,528)	1,191)	1,074)	1,072)	1,612)
Valuation allowances	(644)	(427)	(408)	(418)	(459)
Deferred income tax assets	884)	764)	666)	654)	1,153)
Goodwill and intangible assets	(534)	(476)	(453)	(484)	(506)
Inventory reserves, capitalized tax cost and LIFO inventory	(3)	(3)	(3)	(3)	(3)
Investments	(146)	(156)	(158)	(171)	(180)
Plant and equipment	(103)	(91)	(74)	(72)	(64)
Pension liabilities	(65)	(27)	(15)	(19)	(25)
Unrealized (gain) loss on foreign debt instruments	(44)	—)	(57)	(45)	(19)
Operating leases	(49)	(48)	(45)	—)	—)
Other	(42)	(18)	(13)	(13)	(15)
Deferred income tax liabilities	(986)	(819)	(818)	(807)	(812)
Net deferred income tax assets (liabilities)	(102)	(55)	(152)	(153)	341)

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

The net deferred income tax position shifted from a net asset of 341 million US dollars in 2017 to a net liability position for the remainder of the period, ending at 102 million US dollars in 2021. This transition was primarily driven by a significant reduction in gross deferred tax assets between 2017 and 2018, coinciding with the elimination of deferred intercompany deductions valued at 405 million US dollars.

Gross Deferred Tax Asset Trends: Gross deferred income tax assets experienced a sharp decline from 1,612 million US dollars in 2017 to 1,072 million US dollars in 2018, followed by a recovery to 1,528 million US dollars by 2021. A primary contributor to the growth in the latter years is the increase in goodwill and intangible assets, which rose from 195 million US dollars in 2017 to 431 million US dollars in 2021. Additionally, capital loss carryforwards showed a substantial spike in 2021, reaching 236 million US dollars compared to a range of 80 to 98 million US dollars in previous years.
Valuation Allowances: The valuation allowance against deferred tax assets increased over the period, moving from 459 million US dollars in 2017 to 644 million US dollars in 2021. The increase in this contra-asset account suggests a more conservative assessment regarding the realizability of certain deferred tax assets, effectively reducing the net deferred tax assets from 1,153 million US dollars in 2017 to 884 million US dollars in 2021.
Deferred Income Tax Liability Drivers: Deferred income tax liabilities remained relatively stable between 2017 and 2020, fluctuating around 810 million US dollars, before increasing to 986 million US dollars in 2021. This growth is attributed to several factors, including an increase in liabilities related to plant and equipment, which grew from 64 million US dollars in 2017 to 103 million US dollars in 2021, and a significant rise in pension liabilities, which increased from 27 million US dollars in 2020 to 65 million US dollars in 2021.
Net Position Analysis: Following the initial shift to a net liability in 2018, the net deferred tax liability narrowed to 55 million US dollars in 2020 before widening again to 102 million US dollars in 2021. The volatility in the net position is characterized by the competing trajectories of rising gross deferred tax assets—driven by intangibles and capital losses—and rising deferred tax liabilities linked to capital expenditures and pension obligations.

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Illinois Tool Works Inc., deferred tax assets and liabilities, classification

US$ in millions

		Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
	Deferred income tax assets	552)	533)	516)	554)	505)
	Deferred income tax liabilities	654)	588)	668)	707)	164)

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

The analysis of deferred income tax accounts from 2017 to 2021 reveals a significant shift in the net deferred tax position, characterized by a relatively stable asset base and a volatile liability profile.

Deferred Income Tax Assets: Deferred income tax assets exhibited a moderate degree of fluctuation, ranging from a low of 505 million USD in 2017 to a peak of 554 million USD in 2018. Following a decline to 516 million USD in 2019, the assets entered a steady recovery phase, increasing to 533 million USD in 2020 and ending the period at 552 million USD in 2021.
Deferred Income Tax Liabilities: A substantial increase in deferred income tax liabilities occurred between 2017 and 2018, where the balance rose from 164 million USD to 707 million USD. This elevated level persisted through 2021, despite periodic declines in 2019 and 2020, with a final balance of 654 million USD. The volatility in this account suggests significant timing differences between accounting and taxable income.
Net Deferred Tax Position: The net deferred tax position transitioned from a net asset of 341 million USD in 2017 to a net liability position starting in 2018. The net liability peaked in 2018 and 2019 at approximately 153 million USD and 152 million USD respectively, before narrowing to 55 million USD in 2020 and widening again to 102 million USD by the end of 2021.

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Illinois Tool Works Inc., Financial Data: Reported vs. Adjusted

Illinois Tool Works Inc., adjustments to financial statements

US$ in millions

	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Adjustment to Total Assets
Total assets (as reported)	16,077)	15,612)	15,068)	14,870)	16,780)
Less: Noncurrent deferred tax assets, net	552)	533)	516)	554)	505)
Total assets (adjusted)	15,525)	15,079)	14,552)	14,316)	16,275)
Adjustment to Total Liabilities
Total liabilities (as reported)	12,451)	12,430)	12,038)	11,612)	12,191)
Less: Noncurrent deferred tax liabilities, net	654)	588)	668)	707)	164)
Total liabilities (adjusted)	11,797)	11,842)	11,370)	10,905)	12,027)
Adjustment to Stockholders’ Equity Attributable To ITW
Stockholders’ equity attributable to ITW (as reported)	3,625)	3,181)	3,026)	3,254)	4,585)
Less: Net deferred tax assets (liabilities)	(102)	(55)	(152)	(153)	341)
Stockholders’ equity attributable to ITW (adjusted)	3,727)	3,236)	3,178)	3,407)	4,244)
Adjustment to Net Income
Net income (as reported)	2,694)	2,109)	2,521)	2,563)	1,687)
Add: Deferred income tax expense (benefit)	(148)	(30)	32)	34)	64)
Net income (adjusted)	2,546)	2,079)	2,553)	2,597)	1,751)

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

The financial data demonstrates the impact of removing deferred taxes from the reported balance sheet and income statements between 2017 and 2021. A consistent divergence exists between reported and adjusted figures, indicating that deferred tax accounts represent a material component of the company's financial position.

Total Assets Analysis: Adjusted total assets are consistently lower than reported total assets across the entire period. The difference remains relatively stable, ranging from 505 million US dollars in 2017 to 552 million US dollars in 2021. This suggests a constant level of deferred tax assets being removed from the valuation.
Total Liabilities Analysis: A downward adjustment is observed in total liabilities for all years. There is a significant shift in the magnitude of this adjustment after 2017; while the 2017 reduction was 164 million US dollars, the adjustment increased to a range of 588 million to 707 million US dollars between 2018 and 2021. This indicates a substantial increase in the removal of deferred tax liabilities during this timeframe.
Stockholders' Equity Analysis: The adjustment to stockholders' equity shows a reversal in trend. In 2017, adjusted equity was lower than reported equity by 341 million US dollars. From 2018 onward, adjusted equity became higher than reported equity, peaking with a 102 million US dollar increase in 2021. This shift implies that the removal of deferred tax liabilities began to outweigh the removal of deferred tax assets, thereby increasing the adjusted equity position.
Net Income Analysis: Adjusted net income exhibits fluctuating patterns relative to reported net income. From 2017 to 2019, adjustments resulted in an increase in net income. However, this trend reversed in 2020 and 2021, where adjusted net income became lower than reported figures. The most pronounced difference occurred in 2021, where adjusted net income was 148 million US dollars lower than the reported amount.

Overall, the removal of deferred taxes leads to a leaner balance sheet with lower assets and liabilities. The net effect on equity transitioned from negative to positive after 2017, while the effect on net income transitioned from positive to negative after 2019.

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Illinois Tool Works Inc., Financial Ratios: Reported vs. Adjusted

Illinois Tool Works Inc., adjusted financial ratios

	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
Net Profit Margin
Reported net profit margin	18.64%	16.77%	17.87%	17.36%	11.79%
Adjusted net profit margin	17.61%	16.53%	18.09%	17.59%	12.23%
Total Asset Turnover
Reported total asset turnover	0.90	0.81	0.94	0.99	0.85
Adjusted total asset turnover	0.93	0.83	0.97	1.03	0.88
Financial Leverage
Reported financial leverage	4.44	4.91	4.98	4.57	3.66
Adjusted financial leverage	4.17	4.66	4.58	4.20	3.83
Return on Equity (ROE)
Reported ROE	74.32%	66.30%	83.31%	78.76%	36.79%
Adjusted ROE	68.31%	64.25%	80.33%	76.23%	41.26%
Return on Assets (ROA)
Reported ROA	16.76%	13.51%	16.73%	17.24%	10.05%
Adjusted ROA	16.40%	13.79%	17.54%	18.14%	10.76%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

Between 2017 and 2021, a general trajectory of improvement in profitability and operational efficiency is observed. A significant expansion in margins and returns occurred between 2017 and 2018, followed by a period of relative stabilization with a slight decline in 2020 before recovering in 2021.

Profitability Analysis: Reported net profit margins demonstrated a steady increase from 11.79% in 2017 to 18.64% in 2021. Adjusted net profit margins mirrored this trend, though a divergence occurred in 2021 where the reported margin exceeded the adjusted margin (18.64% versus 17.61%). Return on Equity (ROE) showed the most significant volatility, with reported ROE surging from 36.79% in 2017 to a peak of 83.31% in 2019. Similarly, Return on Assets (ROA) trended upward, rising from a reported 10.05% in 2017 to 16.76% in 2021.
Efficiency and Leverage Trends: Total asset turnover peaked in 2018 at 0.99 for reported values and 1.03 for adjusted values, before stabilizing around 0.90 to 0.93 by 2021. Financial leverage experienced an upward trend from 2017 through 2019, with reported leverage increasing from 3.66 to 4.98, followed by a moderate reduction to 4.44 by the end of 2021.
Impact of Deferred Tax Adjustments: The removal of deferred taxes consistently results in a higher adjusted total asset turnover compared to reported figures, indicating that deferred tax accounts inflate the reported asset base. Conversely, adjusted financial leverage remained lower than reported leverage from 2018 through 2021, suggesting that deferred tax adjustments reduce the leverage ratio. In the case of ROE, the adjusted figure was higher than the reported figure in 2017 (41.26% vs 36.79%), but this relationship inverted from 2018 onwards, with reported ROE consistently exceeding adjusted ROE.

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	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
As Reported
Selected Financial Data (US$ in millions)
Net income	2,694)	2,109)	2,521)	2,563)	1,687)
Operating revenue	14,455)	12,574)	14,109)	14,768)	14,314)
Profitability Ratio
Net profit margin¹	18.64%	16.77%	17.87%	17.36%	11.79%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	2,546)	2,079)	2,553)	2,597)	1,751)
Operating revenue	14,455)	12,574)	14,109)	14,768)	14,314)
Profitability Ratio
Adjusted net profit margin²	17.61%	16.53%	18.09%	17.59%	12.23%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

¹ Net profit margin = 100 × Net income ÷ Operating revenue
= 100 × 2,694 ÷ 14,455 = 18.64%

² Adjusted net profit margin = 100 × Adjusted net income ÷ Operating revenue
= 100 × 2,546 ÷ 14,455 = 17.61%

Profitability metrics between 2017 and 2021 exhibit a general upward trend, characterized by a significant margin expansion after 2017 and a temporary contraction during 2020 followed by a recovery in 2021.

Net Income Trajectory: Reported net income grew from 1,687 million USD in 2017 to 2,694 million USD in 2021. This progression was marked by a sharp increase in 2018, relative stability through 2019, and a decline in 2020 to 2,109 million USD before returning to growth in the final period.
Adjusted Net Profit Margin Analysis: The adjusted net profit margin showed substantial growth from 12.23% in 2017, peaking at 18.09% in 2019. A contraction to 16.53% was observed in 2020, with a subsequent recovery to 17.61% by the end of 2021.
Variance Between Reported and Adjusted Performance: Between 2017 and 2019, adjusted net income and adjusted net profit margins were consistently higher than reported figures, suggesting the presence of non-recurring expenses. This relationship inverted in 2020 and 2021, where reported net income exceeded adjusted net income, and the reported net profit margin reached its five-year peak of 18.64% in 2021, surpassing the adjusted margin of 17.61%.

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	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
As Reported
Selected Financial Data (US$ in millions)
Operating revenue	14,455)	12,574)	14,109)	14,768)	14,314)
Total assets	16,077)	15,612)	15,068)	14,870)	16,780)
Activity Ratio
Total asset turnover¹	0.90	0.81	0.94	0.99	0.85
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Operating revenue	14,455)	12,574)	14,109)	14,768)	14,314)
Adjusted total assets	15,525)	15,079)	14,552)	14,316)	16,275)
Activity Ratio
Adjusted total asset turnover²	0.93	0.83	0.97	1.03	0.88

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

¹ Total asset turnover = Operating revenue ÷ Total assets
= 14,455 ÷ 16,077 = 0.90

² Adjusted total asset turnover = Operating revenue ÷ Adjusted total assets
= 14,455 ÷ 15,525 = 0.93

The financial data reveals a fluctuating trend in asset utilization and base valuation between 2017 and 2021. A notable contraction in both reported and adjusted total assets occurred between 2017 and 2018, followed by a period of consistent growth through the end of 2021.

Asset Base Dynamics: Reported total assets decreased from 16,780 million US$ in 2017 to 14,870 million US$ in 2018. Following this decline, assets grew steadily, reaching 16,077 million US$ by December 31, 2021. Adjusted total assets mirrored this trajectory, falling from 16,275 million US$ to 14,316 million US$ in 2018 before climbing to 15,525 million US$ by 2021.
Asset Turnover Efficiency: The adjusted total asset turnover ratio experienced significant volatility over the five-year period. After an initial increase from 0.88 in 2017 to a peak of 1.03 in 2018, the ratio declined for two consecutive years, reaching a low of 0.83 in 2020. A recovery was observed in 2021, with the ratio rising back to 0.93.
Impact of Asset Adjustments: A consistent variance is observed between reported and adjusted turnover ratios. The adjusted total asset turnover remained higher than the reported ratio in every year analyzed. This indicates that the adjustments applied to the total asset base reduced the denominator, thereby enhancing the perceived efficiency of asset utilization relative to the reported figures.

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	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
As Reported
Selected Financial Data (US$ in millions)
Total assets	16,077)	15,612)	15,068)	14,870)	16,780)
Stockholders’ equity attributable to ITW	3,625)	3,181)	3,026)	3,254)	4,585)
Solvency Ratio
Financial leverage¹	4.44	4.91	4.98	4.57	3.66
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted total assets	15,525)	15,079)	14,552)	14,316)	16,275)
Adjusted stockholders’ equity attributable to ITW	3,727)	3,236)	3,178)	3,407)	4,244)
Solvency Ratio
Adjusted financial leverage²	4.17	4.66	4.58	4.20	3.83

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

¹ Financial leverage = Total assets ÷ Stockholders’ equity attributable to ITW
= 16,077 ÷ 3,625 = 4.44

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity attributable to ITW
= 15,525 ÷ 3,727 = 4.17

An analysis of the balance sheet structure between 2017 and 2021 reveals a period of volatility in equity levels followed by a gradual recovery, which significantly influenced the company's financial leverage. Total assets experienced a decline in 2018, falling from 16,780 million US$ to 14,870 million US$, before entering a steady growth trajectory to reach 16,077 million US$ by 2021. During the same period, stockholders' equity attributable to the company saw a sharp contraction from 4,585 million US$ in 2017 to a low of 3,026 million US$ in 2019, before trending upward to 3,625 million US$ by the end of 2021.

Reported Financial Leverage Trends: The reported financial leverage ratio exhibited a significant increase during the first three years of the period, rising from 3.66 in 2017 to a peak of 4.98 in 2019. This escalation was primarily driven by the reduction in reported stockholders' equity. Following the 2019 peak, the ratio began a downward trend, decreasing to 4.91 in 2020 and further to 4.44 in 2021, indicating a reduction in the reliance on debt relative to equity.
Adjusted Financial Leverage Trends: The adjusted financial leverage ratio followed a similar trajectory but demonstrated less volatility than the reported figures. Starting at 3.83 in 2017, the ratio climbed steadily to a peak of 4.66 in 2020. Unlike the reported leverage which peaked in 2019, the adjusted leverage peaked one year later before declining to 4.17 in 2021. The adjusted figures suggest a more moderated view of the company's leverage profile across the five-year span.
Comparative Analysis of Reported and Adjusted Metrics: A divergence is observed between reported and adjusted leverage, particularly between 2018 and 2021. In 2019 and 2021, the adjusted financial leverage was lower than the reported leverage, suggesting that the adjustments to stockholders' equity effectively lowered the perceived risk associated with the company's capital structure. The gap between reported and adjusted equity narrowed over time, though the adjusted equity remained consistently higher than the reported equity from 2018 through 2021, thereby tempering the leverage ratios during the period of equity contraction.

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	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
As Reported
Selected Financial Data (US$ in millions)
Net income	2,694)	2,109)	2,521)	2,563)	1,687)
Stockholders’ equity attributable to ITW	3,625)	3,181)	3,026)	3,254)	4,585)
Profitability Ratio
ROE¹	74.32%	66.30%	83.31%	78.76%	36.79%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	2,546)	2,079)	2,553)	2,597)	1,751)
Adjusted stockholders’ equity attributable to ITW	3,727)	3,236)	3,178)	3,407)	4,244)
Profitability Ratio
Adjusted ROE²	68.31%	64.25%	80.33%	76.23%	41.26%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

¹ ROE = 100 × Net income ÷ Stockholders’ equity attributable to ITW
= 100 × 2,694 ÷ 3,625 = 74.32%

² Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity attributable to ITW
= 100 × 2,546 ÷ 3,727 = 68.31%

Financial performance between 2017 and 2021 is characterized by a significant expansion in return on equity, driven by a combination of increased net income and a substantial reduction in stockholders' equity. While profitability experienced a temporary contraction in 2020, the overall trajectory reflects a high-leverage approach to generating shareholder returns.

Net Income Trends: Reported net income experienced a sharp increase from 1,687 million USD in 2017 to 2,563 million USD in 2018, maintaining relative stability through 2019. A decline occurred in 2020, with reported income falling to 2,109 million USD, before recovering to a period peak of 2,694 million USD in 2021. Adjusted net income followed a similar trajectory, although it remained consistently lower than reported figures from 2018 through 2021.
Stockholders' Equity Dynamics: A pronounced downward trend in equity is observed between 2017 and 2019. Reported stockholders' equity dropped from 4,585 million USD to 3,026 million USD during this window, representing a contraction of approximately 34%. Adjusted equity showed a similar decline, falling from 4,244 million USD in 2017 to a low of 3,178 million USD in 2019. A gradual recovery in equity levels began in 2020 and continued through 2021, reaching 3,625 million USD on a reported basis.
Return on Equity (ROE) Analysis: The ROE exhibited a dramatic escalation between 2017 and 2019, with reported ROE rising from 36.79% to a peak of 83.31%. This surge is attributable to the simultaneous increase in net income and the reduction of the equity base. A correction occurred in 2020, where reported ROE fell to 66.30%, followed by a rebound to 74.32% in 2021. Adjusted ROE mirrored these movements but generally remained lower than reported ROE from 2018 onwards, with the variance widening in 2021 to a gap of 6.01 percentage points.

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	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019	Dec 31, 2018	Dec 31, 2017
As Reported
Selected Financial Data (US$ in millions)
Net income	2,694)	2,109)	2,521)	2,563)	1,687)
Total assets	16,077)	15,612)	15,068)	14,870)	16,780)
Profitability Ratio
ROA¹	16.76%	13.51%	16.73%	17.24%	10.05%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	2,546)	2,079)	2,553)	2,597)	1,751)
Adjusted total assets	15,525)	15,079)	14,552)	14,316)	16,275)
Profitability Ratio
Adjusted ROA²	16.40%	13.79%	17.54%	18.14%	10.76%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

¹ ROA = 100 × Net income ÷ Total assets
= 100 × 2,694 ÷ 16,077 = 16.76%

² Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × 2,546 ÷ 15,525 = 16.40%

The financial performance between 2017 and 2021 demonstrates a period of significant volatility in asset efficiency and profitability, marked by a sharp improvement in returns starting in 2018, a contraction in 2020, and a subsequent recovery in 2021.

Net Income Trends: Reported net income grew substantially from US$ 1,687 million in 2017 to US$ 2,563 million in 2018. While profitability remained relatively stable through 2019, a decline to US$ 2,109 million occurred in 2020 before rebounding to a peak of US$ 2,694 million in 2021. Adjusted net income followed a nearly identical trajectory, though it remained slightly lower than reported net income in the final year of the period.
Asset Base Evolution: A notable reduction in the asset base occurred between 2017 and 2018, with reported total assets decreasing from US$ 16,780 million to US$ 14,870 million. Following this contraction, assets entered a period of steady incremental growth, reaching US$ 16,077 million by December 31, 2021. Adjusted total assets consistently mirrored this trend, maintaining a lower valuation than reported assets throughout the period.
Return on Assets (ROA) Analysis: The Reported ROA experienced a significant surge from 10.05% in 2017 to 17.24% in 2018, driven by the simultaneous increase in net income and the reduction of the asset base. A downward trend was observed in 2020, where the ratio fell to 13.51%, before recovering to 16.76% in 2021. Adjusted ROA remained higher than reported ROA from 2017 through 2020, peaking at 18.14% in 2018. However, by 2021, the Adjusted ROA of 16.40% fell slightly below the Reported ROA, indicating a shift in the impact of the adjustments applied to the financial statements.

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