ITWIllinois Tool Works

In connection with your year-over-year discussion of Free cash flow on pages 23-24, please present with equal or greater prominence, the most directly comparable liquidity measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP). Refer to Item 10(e)(1)(i)(A) of Regulation S-K.

In future filings, pursuant to Item 10(e)(1)(i)(A) of Regulation S-K, the Company will ensure that its year-over-year discussion of free cash flow includes a presentation of net cash provided by operating activities, which the Company believes is the most directly comparable liquidity measure calculated and presented in accordance with GAAP, with equal or greater prominence to the presentation of free cash flow. Read in the reply ↗

Please make clear what measures you deem as GAAP versus non-GAAP and provide the appropriate captions. Please reconcile the non-GAAP measure(s) to the most directly comparable financial measure(s) calculated and presented in accordance with GAAP. Refer to Item 10(e)(1)(i)(B) of Regulation S-K.

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Additionally, please disclose how you derived "Average invested capital" and "After-tax return on average invested capital." It appears that After-tax return is based on an annualized amount (i.e., TTM or similar).

In future filings, pursuant to Item 10(e)(1)(i)(B) of Regulation S-K, the Company will revise its disclosures to clarify that the amounts reported in the Company's financial statements are used to determine operating income and total invested capital. Additionally, the Company will disclose how it derived "Average invested capital" and "After-tax return on average invested capital," which is annualized for interim periods based on the period presented.

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The expanded disclosure is as follows, with the new disclosures underlined:

"The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's financial performance and may be different than the method used by other companies to calculate After-tax ROIC. Operating income and each of the invested capital balances are the GAAP amounts reported in the Company's financial statements. Operating income after taxes is a non-GAAP measure consisting of operating income as reported in the Company's financial statements less income taxes calculated based on the Company's effective tax rate for the period. For comparability, the Company excluded the second quarter discrete tax benefit of $112 million from the effective tax rate for the three and six month periods ended June 30, 2021. AverageTotal invested capital represents the net assets of the Company, excluding other than cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter within each of the periods presented. After-tax ROIC is calculated by dividing operating income after taxes by average invested capital for the period presented, and is annualized for interim periods."

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We note your presentation of Free cash flow to net income conversion rate. Please present with equal or greater prominence, the most directly comparable financial ratio calculated and presented in accordance with GAAP. Further disclose the reasons why you believe that presentation of the non-GAAP financial measure provides useful information to investors. Refer to Item 10(e)(1)(i)(A) and (C) of Regulation S-K.

Rest of the question

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

In future filings, the Company will include in its GAAP to Non-GAAP reconciliation a presentation of "Net cash provided by operating activities as a percentage of net income," which the Company believes is the most directly comparable GAAP financial measure, with equal or greater prominence to "Free cash flow to net income conversion rate," pursuant to Item 10(e)(1)(i)(A) of Regulation S-K.

Rest of the answer

Additionally, the Company will disclose the reasons why it believes that presentation of the non-GAAP financial measure provides useful information to investors pursuant to Item 10(e)(1)(i)(C) of Regulation S-K. The expanded disclosure is as follows, with the new disclosures underlined:

"The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure, along with free cash flow to net income conversion rate, isare useful to investors in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies."

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We note your response to comment 2. Since the numerator of the subject non-GAAP measure is an after-tax measure of profitability, the most comparable measure appears to be net income. However, it is unclear to us what the most comparable GAAP measure would be to the mix of net assets that you used to calculate average invested capital.

Rest of the question

Accordingly, please provide: • a reconciliation of each non-GAAP financial measure used in the calculation of the ROIC to its most comparable GAAP measure; and • the ratio as calculated using the most directly comparable GAAP financial measure. Refer to Item 10(e)(1)(i) of Regulation S-K and footnote 27 of the Final Rule: Conditions for Use of Non-GAAP Financial Measures.

In future filings, the Company will revise its disclosures to include a reconciliation of net income to operating income after taxes. The Company defines invested capital as the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company’s operations. Invested capital is a measure calculated using only GAAP-reported amounts directly from the Statement of Financial Position without adjustment.

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As a result of using only GAAP-reported amounts in the denominator, the Company believes that the most directly comparable ratio to After-tax ROIC calculated using GAAP measures is net income to average invested capital, and the Company will revise its disclosures in future filings to include the ratio of net income to average invested capital. The expanded disclosure using the After-tax ROIC disclosure from the Company's Form 10-Q for the quarter ended September 30, 2021 is as follows, with the new disclosures underlined:

"After-tax Return on Average Invested Capital

The Company uses after-tax return on average invested capital ("After-tax ROIC") to measure the effectiveness of its operations' use of invested capital to generate profits. After-tax ROIC is not defined under U.S. generally accepted accounting principles ("GAAP"). After-tax ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company's financial performance ability to generate returns from cash invested in its operations and may be different than the method used by other companies to calculate After-tax ROIC. The Company defines After-tax ROIC as operating income after taxes divided by average invested capital, which is annualized when presented in interim periods. Operating income and each of the invested capital balances are the GAAP amounts reported in the Company's financial statements. Operating income after taxes is a non-GAAP measure consisting of operating income as reported in the Company's financial statements less income taxes calculated based on the Company's effective rate for the period net income before interest expense and other income (expense), on an after-tax basis, which are excluded as they do not represent returns generated by the Company's operations. For comparability, the Company also excluded the discrete tax benefit of $21 million in the third quarter of 2021 and the discrete tax benefit of $112 million in the second quarter of 2021 from net income and the effective tax rate for the three and nine month periods ended September 30, 2021. Total invested capital represents the net assets of the Company, other than cash and equivalents and outstanding debt which do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter within each of the periods presented. After-tax ROIC is calculated by dividing operating income after taxes by average invested capital for the period presented, and is annualized for interim periods. The most comparable GAAP measure to operating income after taxes is net income. After-tax ROIC and net income to average invested capital for the third quarter and year-to-date periods of 2021 and 2020 was were as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Dollars in millions 2021 2020 2021 2020

Numerator:

Net income $ 639 $ 582 $ 2,085 $ 1,467

Discrete tax benefit related to the third quarter 2021 (21) — (21) —

Discrete tax benefit related to the second quarter 2021 — — (112) —

Interest expense, net of tax (1)

38 41 118 120

Other income, net of tax (1)

(9) (2) (34) (27)

Operating income after taxes $ 647 $ 621 $ 2,036 $ 1,560

Denominator:

Invested capital:

Cash and equivalents $ 1,987 $ 2,169 $ 1,987 $ 2,169

Trade receivables 2,729 2,494 2,729 2,494

Inventories 1,524 1,149 1,524 1,149

Net plant and equipment 1,744 1,736 1,744 1,736

Goodwill and intangible assets 5,293 5,405 5,293 5,405

Accounts payable and accrued expenses (1,964) (1,784) (1,964) (1,784)

Debt (7,551) (7,945) (7,551) (7,945)

Other, net (269) (527) (269) (527)

Total net assets (stockholders' equity) 3,493 2,697 3,493 2,697

Cash and equivalents (1,987) (2,169) (1,987) (2,169)

Debt 7,551 7,945 7,551 7,945

Total invested capital $ 9,057 $ 8,473 $ 9,057 $ 8,473

Average invested capital (2)

$ 9,084 $ 8,394 $ 8,912 $ 8,536

Net income to average invested capital (3)

28.1 % 27.7 % 31.2 % 22.9 %

After-tax return on average invested capital (3)

28.5 % 29.6 % 30.5 % 24.4 %

(1) Effective tax rate used for interest expense and other income (expense) for the three months ended September 30, 2021 and 2020 was 23.4% and 21.3%, respectively, and 22.9% and 22.0% for the nine months ended September 30, 2021 and 2020, respectively.

(2) Average invested capital is calculated using the total invested capital balances at the start of the period and at the end of each quarter within each of the periods presented.

(3) Returns for the three months ended September 30, 2021 and 2020 were converted to an annual rate by multiplying the calculated return by 4. Returns for the nine months ended September 30, 2021 and 2020 were converted to an annual rate by dividing the calculated return by 3 and multiplying by 4.

A reconciliation of the tax rate for the three and nine month periods ended September 30, 2021, excluding the third quarter 2021 discrete tax benefit of $21 million related to the utilization of capital losses and the second quarter 2021 discrete tax benefit of $112 million related to a change in the U.K. income tax rate, is as follows:

September 30, 2021 September 30, 2021

Dollars in millions Income Taxes Tax Rate Income Taxes Tax Rate

As reported $ 167 20.8 % $ 449 17.7 %

Discrete tax benefit related to the third quarter 2021 21 2.6 % 21 0.8 %

Discrete tax benefit related to the second quarter 2021 — — % 112 4.4 %

As adjusted $ 188 23.4 % $ 582 22.9 %

Refer to Note 4. Income Taxes in Item 1. Financial Statements for further information regarding the second and third quarter 2021 discrete tax benefits."

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