UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



x☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2017~~2019



o☐	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.~~INC.

(Exact Name of Registrant as Specified in its Charter)



Delaware				36-1258310
(State or Other Jurisdiction of Incorporation or Organization)				(I.R.S. Employer Identification No.)

155 Harlem Avenue	Glenview	Illinois	60025
(Address of Principal Executive Offices)				(Zip Code)

Registrant’s telephone number, including area code: ~~(847)~~ (847) 724-7500

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	ITW	New York Stock Exchange
1.75% Euro Notes due 2022	ITW22	New York Stock Exchange
1.25% Euro Notes due 2023	ITW23	New York Stock Exchange
0.250% Euro Notes due 2024	ITW24A	New York Stock Exchange
0.625% Euro Notes due 2027	ITW27	New York Stock Exchange
2.125% Euro Notes due 2030	ITW30	New York Stock Exchange
1.00% Euro Notes due 2031	ITW31	New York Stock Exchange
3.00% Euro Notes due 2034	ITW34	New 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.

Yesx☒ No o☐

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 o☐Nox☒

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.

Yesx☒ No o☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files).

Yesx☒ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 filer	x☒	Accelerated filer	o☐
Non-accelerated filer	o ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	o☐
		Emerging growth company	o☐

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. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o☐ No x☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, ~~2017~~2019 was approximately ~~$45.9~~$45.6 billion based on the New York Stock Exchange closing sales price as of June 30, ~~2017.~~2019.

Shares of Common Stock outstanding at January 31, ~~2018: 341,545,719.~~2020: 318,864,237.

Documents Incorporated by Reference



Portions of the ~~2018~~2020 Proxy Statement for Annual Meeting of Stockholders to be held on May ~~4, 2018.~~8, 2020.		Part III



	Table of Contents

	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	119
Item 1B.	Unresolved Staff Comments	1514
Item 2.	Properties	1514
Item 3.	Legal Proceedings	1514
Item 4.	Mine Safety Disclosures	1514

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 6.	~~Selected Financial Data~~7.	17
~~Item 7.~~	Management's Discussion and Analysis of Financial Condition and Results of Operations	1917
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4138
Item 8.	Financial Statements and Supplementary Data	4239
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	7376
Item 9A.	Controls and Procedures	7376
Item 9B.	Other Information	7376

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	7477
Item 11.	Executive Compensation	7477
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	7477
Item 13.	Certain Relationships and Related Transactions, and Director Independence	7477
Item 14.	Principal Accounting Fees and Services	7477

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	75
~~Item 16.~~	~~Form 10-K Summary~~	78
~~Signatures~~Item 16.	79Form 10-K Summary	81
	Signatures	82

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 8584 divisions in 5653 countries. As of December 31, ~~2017,~~2019, the Company employed approximately ~~50,000~~45,000 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.

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

~~warewashing equipment;~~


•	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.

~~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, industrial capital goods, 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 and related consumable solder materials;~~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.

~~static control equipment and consumables used for contamination control in clean room environments; and~~

~~pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation 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; and~~accessories.

~~metal jacketing and other insulation products.~~

Polymers & Fluids— This segment is a ~~highly~~ 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;~~


•	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~~


•	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;~~


•	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.

~~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, general industrial, consumer durables, ~~general~~ industrial capital goods and printing and publishing ~~and industrial capital goods~~ 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 fasteners and components for appliances;~~


•	plastic and metal closures and components for appliances;

airport ground support equipment; and


•	components for medical devices.

~~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. ~~This business model~~The ITW Business Model is the Company’s competitive advantage and defines how ITW creates value for its ~~shareholders and comprises~~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 18,000 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.

~~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 subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000 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 adapted to each business' customers and end markets.

Enterprise Strategy

In late 2012, ITW began ~~the first phase of~~ its strategic framework transitioning the Company on its current ~~strategic~~ path to fully leverage the compelling performance potential of the ITW Business Model. ~~Since then, ITW has made considerable progress, as evidenced by the Company’s strong financial performance over the past five years.~~

The ~~roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when the~~ Company undertook a complete review of its ~~performance. Focusing~~performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, ~~ITW developed~~and developing a strategy to replicate that performance across its operations.

~~Based on this rigorous evaluation,~~ ITW determined that solid and consistent above-market organic growth ~~must be~~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~~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~~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’~~businesses' largest / most profitable customers and product lines. With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the product line simplification work is returning to more normalized levels.

Step two, Business Structure Simplification, was implemented to simplify and ~~scale-up~~scale up ITW’s operating structure to support increased engineering, marketing, and sales resources, and ~~at the same time,~~ improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 8584 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. The Company’s 80/20-enabled sourcing organization has delivered~~ITW, delivering an average of one percent reduction in spend each year from 2013 through ~~2017~~2019 and ~~is on track~~continues to dobe a key contributor to the ~~same in 2018.~~

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. ~~With this first phase~~

Path to Full Potential - Finishing the Job

Since the launch of the enterprise strategy, ~~nearing completion, the Company will look ahead to the next five years and delivering differentiated performance on a sustained basis.~~

~~Sustained Differentiated Performance~~

~~While~~ the Company has made considerable progress ~~and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement. The second phase of the strategic framework is focused on delivering~~

~~differentiated performance on a sustained basis, with consistent above market organic growth. Moving forward, the Company remains committed~~ to ~~the four strategic principles that have served as the foundation of its progress over the past five years and that the Company believes best positions ITW~~position itself to ~~deliver continued differentiated performance over the next five years:~~

reach full potential. The ITW Business Model isand unique set of capabilities are a source of strong and enduring competitive advantage, but for the ~~Company's competitive advantage~~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:

~~Focus on quality~~

Portfolio discipline

80/20 Front-to-Back practice excellence

Full-potential organic growth

~~"Do what we say" execution is a critical differentiator~~

~~Invest only where ITW has a competitive advantage~~

~~The ITW Business Model is the Company's Competitive Advantage~~

Portfolio Discipline

The ITW Business Model is the combination of a set of strategic, operational, and cultural approaches and practices that is applied to every ITW business. The Business Model has existed inside the Company for over 30 years and is truly ITW's differentiating competitive advantage. The ITW Business Model is comprised of three elements:

•~~80/20 Front to Back Process = How the Company Operates~~

•~~Customer-Back Innovation Approach = How the Company Innovates~~

•~~Decentralized Entrepreneurial Culture = How the Company Executes~~

~~Focus on Quality Growth~~

~~ITW prioritizes~~ ~~high-quality revenue growth~~ ~~and, as such, the Company’s primary growth focus is organic.~~

Leveraging the Business Model and the 80/20 front to back process provides a clear view of where to focus for high- quality growth. The Company targets differentiated end-markets and customers with critical needs and challenging pain points. ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.

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

As part of its agenda to finish the job, 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. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 2. Divestitures in Item 8. Financial Statements and Supplementary Data for more information regarding 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 its efforts to finish the job and 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.

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. ITW’s current portfolio of seven segments offers solid~~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 ~~high degree~~continuous flow of ~~diversification~~differentiated new products to its key customers

Strategic Sales Excellence - deploying a high-performance sales function in ~~terms of geographic and end market exposures, enabling~~every division

As the Company continues to ~~deliver consistent high-quality growth in an increasingly volatile and competitive global market environment.~~

~~"Do What We Say" Execution is a Critical Differentiator~~

~~ITW’s commitment~~make progress toward its full potential, the Company will explore opportunities to ~~execution is a key differentiator for ITW. Living up to~~reinforce or further expand the Company’s commitments - “do what we say” execution - is a deeply embedded core element of the culture. The culture is the engine that translates ITW's strategy into action, and action into results.

All divisions function within a “framework” that defines how the culture operates and defines the Company’s values, business model and strategy to ensure all divisions are working toward our common set of goals. Business leaders have the flexibility to define the actions and customize their approach to meet those goals. This “flexibility within the framework” establishes an entrepreneurial environment where decisions are made “bottom up” by those with the greatest knowledge, capability and proximity to the customer, which enables our businesses to be nimble and react quickly to market conditions and customer requirements.

ITW is simple, straightforward and transparent in everything it does. The Company sets clear performance expectations and financial targets, executes against these at the appropriate pace, and establishes the freedom to define how to achieve results within the construct of the Business Model.

~~Invest Only Where ITW Has a Competitive Advantage~~

~~The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business Model into compelling and sustainable competitive advantage.~~

~~Investments to support~~long-term organic growth ~~and sustain its highly differentiated core businesses, such as new product innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment priority.~~potential of ITW through the addition of selective high-quality acquisitions.

~~Divestiture Activity~~

~~Divestiture of the Industrial Packaging Segment~~— In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented this segment as part of its continuing operations.

On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations.

Current Year Developments

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

~~Financial Information about Segments~~

Segment information is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 14. Segment Information in Item 8. Financial Statements and Supplementary Data.

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. ~~Backlog by segment~~Total backlog was $1.5 billion and $1.6 billion as of December 31, ~~2017~~2019 and ~~2016 was as follows:~~

In millions 2017 2016
Automotive OEM $ 462
$ 452
Food Equipment 204
188
Test & Measurement and Electronics 342
298
Welding 90
67
Polymers & Fluids 57
62
Construction Products 39
29
Specialty Products 243
217
Total $ 1,437
$ 1,313

2018, respectively. Due to the predominately ~~short term~~short-term nature of the Company's arrangements with its customers, backlog orders scheduled for shipment beyond calendar year ~~2018~~2020 were not material as of December 31, ~~2017.~~2019.

Competition

With operations in 5653 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 Company's 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~~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.

~~Research and Development~~

Developing new and improved products, broadening the application of established products, and continuing efforts to improve and develop new methods, processes and equipment all contribute to the Company's organic growth. Many new products are designed to reduce customers' costs by eliminating steps in their manufacturing processes, reducing the number of parts in an assembly or improving the quality of customers' assembled products. Typically, the development of such products is accomplished by working closely with customers on specific applications. Research and development expenses were $225 million, $223 million and $218 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Intellectual Property

The Company owns approximately 3,600 unexpired U.S. patents and ~~8,000~~8,700 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 ~~4,600~~4,300 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.

Environmental

The Company believes that its manufacturing plants and equipment are in substantial compliance with all applicable environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s capital expenditures, competitive position, financial position or results of operations.

Various legislative and administrative regulations concerning environmental issues have become effective or are under consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date, such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows.

Employees

The Company employed approximately ~~50,000~~45,000 people as of December 31, ~~2017~~2019 and considers its employee relations to be excellent.

~~International~~

The Company's international operations include subsidiaries and joint ventures in 55 foreign countries on six continents. These operations serve such end markets as automotive OEM/tiers, automotive aftermarket, commercial food equipment, construction, general industrial, and others on a worldwide basis. The Company's revenues from sales to customers outside the U.S. were approximately 56% of revenues, 55% of revenues and 54% of revenues for the years ended December 31, 2017, 2016 and 2015, respectively.

~~Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 14. Segment~~ Information in Item 8. Financial Statements and Supplementary Data for additional information on international activities. International operations are subject to certain potential risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and fluctuations in currency exchange rates. Additional risks of the Company's international operations are described under Item 1A. Risk Factors.

About Our Executive Officers

~~Executive Officers of the Company as of February 15, 2018 were as follows:~~



~~Name~~	~~Office~~	~~Age~~
~~E. Scott Santi~~	~~Chairman & Chief Executive Officer~~	56
~~Norman D. Finch Jr.~~	~~Senior Vice President, General Counsel & Secretary~~	53
~~John R. Hartnett~~	~~Executive Vice President~~	57
~~Michael M. Larsen~~	~~Senior Vice President & Chief Financial Officer~~	49
~~Mary K. Lawler~~	~~Senior Vice President & Chief Human Resources Officer~~	52
~~Roland M. Martel~~	~~Executive Vice President~~	63
~~Steven L. Martindale~~	~~Executive Vice President~~	61
~~Sundaram Nagarajan~~	~~Executive Vice President~~	55
~~Christopher O’Herlihy~~	~~Vice Chairman~~	54
~~Randall J. Scheuneman~~	~~Vice President & Chief Accounting Officer~~	50
~~Lei Schlitz~~	~~Executive Vice President~~	51
~~Juan Valls~~	~~Executive Vice President~~	56
~~Michael R. Zimmerman~~	~~Executive Vice President~~	57

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.

~~Mr. Santi is the Chairman~~Executive Officers of the ~~Board and Chief Executive Officer~~Company as of ~~the Company. He was elected Chairman of the Board in 2015 after having served~~February 14, 2020 were as President and Chief Executive Officer, as well as a director, since November 2012. In October 2012, he was elected President and Chief Operating Officer. Mr. Santi served as Vice Chairman from 2008 to October 2012.follows:



Name	Age	Present Position	Year Elected to Present Position	Other Positions Held During 2015-2019
E. Scott Santi	58	Chairman & Chief Executive Officer	2015	President and Chief Executive Officer, 2012-2015
Axel Beck	54	Executive Vice President	2020	Vice President/General Manager, food equipment businesses, 2011-2016, Group President, food equipment businesses, 2016-2020
Kenneth Escoe	44	Executive Vice President	2020	Vice 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.	55	Senior Vice President, General Counsel & Secretary	2017	Vice 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. Hartnett	59	Executive Vice President	2012
Michael M. Larsen	51	Senior Vice President & Chief Financial Officer	2013
Mary K. Lawler	54	Senior Vice President & Chief Human Resources Officer	2014
Steven L. Martindale	63	Executive Vice President	2008
Christopher O’Herlihy	56	Vice Chairman	2015	Executive Vice President, 2010-2015
Randall J. Scheuneman	52	Vice President & Chief Accounting Officer	2009
Lei Schlitz	53	Executive Vice President	2015	Group President, food equipment businesses, 2011-2015
Sharon Szafranski	53	Executive Vice President	2020	Vice 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. Zimmerman	59	Executive Vice President	2015	Group President, welding businesses, 2010-2015

Mr. Finch joined the Company in January 2017 and was elected Senior Vice President, General Counsel and Secretary in February 2017. From 2013 to January 2017, he served as Vice President, General Counsel and Secretary of Sealed Air Corporation, a global manufacturer of products related to food safety and security, facility hygiene and product protection. Prior thereto, he served as Vice President, Associate General Counsel and Chief Compliance Officer of Zimmer Holdings, Inc. (now Zimmer Biomet Holdings), a global medical device company.

Mr. Hartnett was elected Executive Vice President in 2012. Prior to that, he held various management positions of increasing responsibility. Most recently, he served as Group President of the automotive aftermarket businesses.

Mr. Larsen joined the Company and was elected Senior Vice President and Chief Financial Officer in September 2013. From October 2010 to August 2013, he served as Vice President and Chief Financial Officer of Gardner Denver, Inc., a global manufacturer of highly engineered compressors, blowers, pumps and other fluid transfer equipment. In addition, he served as

~~interim CEO of Gardner Denver from July 2012 to November 2012, and as President, Chief Executive Officer and a director of that company from November 2012 to July 2013.~~

Ms. Lawler joined the Company and was elected Senior Vice President and Chief Human Resources Officer in October 2014. From June 2013 to October 2014, she served as Executive Vice President, Human Resources, at GATX Corporation, a rail car leasing company. Prior to that, she served as Senior Vice President, Human Resources, at GATX Corporation, from May 2008 to May 2013.

~~Mr. Martel has served in his present position since 2006.~~

~~Mr. Martindale has served in his present position since 2008.~~

~~Mr. Nagarajan has served in his present position since 2010.~~

~~Mr. O’Herlihy was elected Vice Chairman in 2015. Prior to that, he served as Executive Vice President from 2010 to 2015.~~

~~Mr. Scheuneman has served in his present position since 2009.~~

Ms. Schlitz was elected Executive Vice President in 2015. Prior to that, she held various management positions of increasing responsibility. Most recently, she served as a Group President within the food equipment businesses since 2011.

~~Mr. Valls has served in his present position since 2007.~~

Mr. Zimmerman was elected Executive Vice President in 2015. Prior to that, he held various management positions of increasing responsibility. Most recently, he served as a Group President within the welding businesses since 2010.

Available Information

The Company electronically files reports with the Securities and Exchange Commission ("SEC"). The public may read and copy any materials the Company has filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, 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, and are available in print to any shareholder who requests them. The Company will furnish any exhibit not contained herein upon the payment of a fee representing the reasonable cost to the Company of furnishing the exhibit. Requests for exhibits may be sent to Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL 60025, Attention: Secretary. Also posted on the Company’s website are the following:

Statement of Principles of Conduct;

Code of Ethics for CEO and key financial and accounting personnel;

Charters of the Audit, Corporate Governance and Nominating, and Compensation Committees of the Board of Directors;

Corporate Governance Guidelines;

Global Anti-Corruption Policy;

Corporate ~~Citizenship Statement;~~Social Responsibility Reports;

Anti-Human Trafficking Disclosure;

Conflict Minerals Policy Statement;

Supplier Code of Conduct; ~~and~~

Government Affairs ~~Information.~~Information;

Environmental & Sustainability Policy;

Human Rights Policy;

Safety Policy; and

United Kingdom Tax Policy Document.

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.

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, high unemployment, government 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 and economic risks that could adversely affect its business, results of operations or financial condition.

~~The~~Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 5653 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;

government embargoes or foreign trade restrictions;

the imposition of duties and tariffs and other trade ~~barriers;~~barriers and retaliatory countermeasures;

government actions impacting international trade agreements;

import and export controls;

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 current 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 additional retaliatory actions by U.S. trade partners could result in a worsening of economic conditions. Additionally, in early 2020, an outbreak of the coronavirus occurred in China and other jurisdictions. The extent of the outbreak and its impact on the markets served by the Company and on its operations is uncertain. A prolonged outbreak could interrupt the operations of the Company and its customers and suppliers. If the Company is unable to successfully manage these and other risks associated with managing and expanding its international businesses, the risks could have a material adverse effect on the Company's business, results of operations or financial condition.

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

As the Company ~~has substantially completed~~continues to execute on its Enterprise Strategy initiatives, it remains focused on the core principles of portfolio ~~management~~discipline, 80/20 Front-to-Back practice excellence, and ~~business structure simplification, its focus has pivoted to~~ organic ~~revenue growth and continued margin improvement.~~growth. Product line and customer base simplification activities, which are core elements of the Company’s 80/20 ~~front to back~~Front-to-Back process, continue to be applied toby the Company’s ~~scaled up~~ operating divisions and ~~remain~~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.~~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 constitute a significant component of the Company’s capital allocation strategy. The Company funds 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 usthe Company from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash.

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 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, and environmental 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.

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.

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'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. 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 could under-perform relative to the Company’s expectations and the price paid for it, or not perform in accordance with the Company’s anticipated timetable.

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.

~~Past divestitures~~Divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.

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

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 ~~result that~~ adversely affect the Company's financial condition or results of operations in the periods recognized.

Disruptions or volatility in global financial markets or changes in the Company's credit ratings could increase the Company's funding costs or reduce the availability of credit.

Global economic conditions may cause volatility and disruptions in the financial markets. The Company’s continued ability to meet its cash requirements requires substantial liquidity and access to the financial markets. In addition, the Company’s borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. If conditions in the financial markets decline or the Company’s credit ratings are negatively impacted, its funding costs could be increased or the availability of credit could be diminished.

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. 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 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.

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.

~~The~~In December 2017, the U.S. government ~~has recently~~ enacted comprehensive tax legislation that ~~includes~~included significant changes to the taxation of business entities. The ~~Company made a reasonable estimate~~Company’s accounting for the tax effects of the ~~effects on the existing deferred tax balances and one-time transition tax, however the ultimate impact of this tax reform is uncertain~~Act may be subject to change due to subsequent clarification of the tax law ~~and refinement of estimated amounts and~~which could adversely affect the Company's ~~business and~~operating results or financial ~~condition could be adversely affected.~~condition.

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.

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 ~~climate change~~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 ~~these~~other environmental risks. These regulations or standards could mandate even more restrictive ~~standards,~~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. 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, ~~they could negatively impact~~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.~~position could be negatively impacted.

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; attacks by computer hackers; computer viruses; employee error or malfeasance. In addition, security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees, partners, customers or suppliers. We are also subject to data privacy laws, including the EU General Data Protection Regulation, in the various countries in which we operate. If ~~these~~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.

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," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance," "forecast," and other similar words, including, without limitation, statements regarding the expected performance of acquired businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory conditions in various geographic regions, the timing and amount of share repurchases, the timing and amount of benefits from the Company's ~~Enterprise Strategy,~~enterprise initiatives, 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 impact of the recently enacted U.S. tax legislation, the cost and availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency

fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. 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~~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 number of facilities worldwide, none of which are individually significant to the Company or its segments. As of December 31, ~~2017,~~2019, the Company operated ~~the following~~approximately 440 plants and office facilities, excluding regional sales offices and warehouse ~~facilities:~~facilities. Approximately 280 of the facilities were located outside of the United States. Principal foreign countries include China, Germany, the United Kingdom and France.

Number Of Properties
Owned Leased Total
Automotive OEM 58
35
93
Food Equipment 25
19
44
Test & Measurement and Electronics 27
58
85
Welding 25
15
40
Polymers & Fluids 34
33
67
Construction Products 27
27
54
Specialty Products 45
37
82
Corporate 1
9
10
Total 242
233
475

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.

~~The Company operated 301 plants and office facilities outside of the U.S. Principal countries include China, Germany, France and the United Kingdom.~~

ITEM 3.Legal Proceedings

None.

ITEM 4.Mine Safety Disclosures

None.

PART II

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

Common Stock ~~Price and Dividend~~ Data— The Company's common stock is listed on the New York Stock Exchange. ~~Quarterly market price and dividend data for 2017 and 2016 were as shown below:~~

Market Price Per Share
Dividends
Declared
Per Share
High Low
2017:
Fourth quarter $ 169.69
$ 147.96
$ 0.78
Third quarter 148.28
135.07
0.78
Second quarter 150.29
130.17
0.65
First quarter 136.03
120.06
0.65

2016:
Fourth quarter $ 127.99
$ 111.50
$ 0.65
Third quarter 123.50
103.08
0.65
Second quarter 109.54
98.32
0.55
First quarter 102.98
79.15
0.55

There were approximately ~~6,083~~5,513 holders of record of common stock as of January 31, ~~2018.~~2020. This number does not include beneficial owners of the Company's securities held in the name of nominees.

*Assumes $100 invested on 12/31/1214 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.

The ~~2017~~2019 peer group consists of the following 17 public companies, consistent with the peer group included in the Company's Proxy statement:



3M Company	Emerson Electric Co.	Parker-Hannifin Corporation
Caterpillar Inc.	Fortive Corporation	PPG Industries, Inc.
Cummins Inc.	General Dynamics Corporation	Raytheon Company
Deere & Company	Honeywell International Inc.	Rockwell Automation, Inc.
Dover Corporation	Ingersoll-Rand plc	Stanley Black & Decker, Inc.
Eaton Corporation plc	Johnson Controls, Inc.

The Compensation Committee of the Board of Directors of the Company reviews the peer group annually and from time to time it changes the composition of the Company’s peer group where changes are appropriate. In 2017, Fortive Corporation, General Dynamics Corporation, Raytheon Company and Rockwell Automation, Inc. were added, as they meet the Company’s industry and size criteria. BorgWarner Inc., Masco Corporation and Textron Inc. were removed because they are consistently below the Company’s cut-off for market capitalization. Additionally, E.I. du Pont de Nemours and Company was removed due to its merger with Dow Chemical Company, and Pentair plc was removed due to the spin-off of its electrical business. 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 ~~recent~~ spin-off from Danaher Corporation in 2016.

Repurchases of Common Stock— On February 13, 2015, the Company’s Board of Directors authorized a stock repurchase program which ~~provides~~provided for the repurchase of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program"). The 2015 Program was completed in the second quarter of 2019.

On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of December 31, ~~2017,~~2019, there were approximately ~~$2.4~~$1.9 billion of authorized repurchases remaining under the ~~2015 Program.~~ 2018 program.

Share repurchase activity under the Company's share repurchase program for the fourth quarter of ~~2017~~2019 was as follows:


In millions except per share amounts	In millions except per share amounts						In millions except per share amounts
Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Value of Shares That May Yet Be Purchased Under Program		Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Value of Shares That May Yet Be Purchased Under Programs
October 2017	0.6	$	153.31	0.6	$	2,596
November 2017	0.6	$	157.32	0.6	$	2,504
December 2017	0.4	$	165.58	0.4	$	2,446
October 2019							0.1	$	167.78	0.1	$	2,301
November 2019							0.3	$	173.98	0.3	$	2,256
December 2019							1.8	$	175.67	1.8	$	1,946
Total	1.6			1.6			2.2			2.2

ITEM 6.Selected Financial Data


In millions except per share amounts	2017		2016		2015		2014		2013		2019		2018		2017		2016		2015
Operating revenue	$	14,314	$	13,599	$	13,405	$	14,484	$	14,135	$	14,109	$	14,768	$	14,314	$	13,599	$	13,405
Income from continuing operations	1,687		2,035		1,899		1,890		1,630		2,521		2,563		1,687		2,035		1,899
Income per share from continuing operations:	Income per share from continuing operations:										Income per share from continuing operations:
Basic	4.90		5.73		5.16		4.70		3.65		7.78		7.65		4.90		5.73		5.16
Diluted	4.86		5.70		5.13		4.67		3.63		7.74		7.60		4.86		5.70		5.13
Total assets at year-end	16,780		15,201		15,729		17,465		19,599		15,068		14,870		16,780		15,201		15,729
Long-term debt at year-end	7,478		7,177		6,896		5,943		2,771		7,754		6,029		7,478		7,177		6,896
Cash dividends declared per common share	2.86		2.40		2.07		1.81		1.60		4.14		3.56		2.86		2.40		2.07

In 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." Refer to Note 5.6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

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

In April 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations. The Company adopted this new guidance effective January 1, 2015. The new guidance applies prospectively to new disposals and new classifications of disposal groups held for sale after such date. There were no discontinued operations during 2017, 2016 or 2015 under this new accounting guidance. For businesses reported as discontinued operations in the statement of income prior to adoption, all related prior period income statement information has been restated. Income from discontinued operations was $1.1 billion and $49 million for the years 2014 and 2013, respectively.

In April 2015, the FASB issued authoritative guidance to simplify the balance sheet presentation of long-term debt issuance costs. Under the new guidance, long-term debt issuance costs are presented as a reduction of the carrying amount of the related long-term debt. The Company early adopted this guidance in the fourth quarter of 2015 and restated $38 million and $22 million of deferred long-term debt issuance costs from Other assets to Long-term debt in the years 2014 and 2013, respectively.

In November 2015, the FASB issued authoritative guidance to simplify the presentation of deferred taxes. Under the new guidance, all deferred tax assets and liabilities are presented as noncurrent in the statement of financial position. Early adoption of this guidance in the fourth quarter of 2015 decreased total assets by $175 million and $345 million in the years 2014 and 2013, respectively.

In March 2016, the FASB issued authoritative guidance that ~~includes~~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. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million ~~$20 million, $33 million~~ and ~~$24~~$20 million for the years ended December 31, 2016 ~~2015, 2014~~ and ~~2013,~~2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $28 million, $10 million and $50 million were included in Income taxes in the statement of income for the ~~year~~years ended December 31, ~~2017.~~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.

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 8584 divisions in 5653 countries. As of December 31, ~~2017,~~2019, the Company employed approximately ~~50,000~~45,000 people.

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

•

~~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;

•

ENTERPRISE STRATEGY

•

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 84 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 2019 and continues to be a key contributor to the Company's ongoing enterprise strategy.

With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the product line simplification work is returning to more normalized levels.

~~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, at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 85 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. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through 2017 and is on track to do the same in 2018.

~~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.

PATH TO FULL POTENTIAL - FINISHING THE JOB

Since the launch of the enterprise strategy, ~~nearing completion, the Company will look ahead to the next five years and delivering differentiated performance on a sustained basis.~~

~~SUSTAINED DIFFERENTIATED PERFORMANCE~~

~~While~~ the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement. The second phase of the strategic framework is focused on delivering differentiated performance on a sustained basis, with consistent above market organic growth. Moving forward, the Company remains committed to ~~the four strategic principles that have served as the foundation of its progress over the past five years and that the Company believes best positions ITW~~position itself to ~~deliver continued differentiated performance over the next five years:~~

reach full potential. The ITW Business Model ~~is the Company's competitive advantage~~

~~Focus on quality growth~~

~~"Do what we say" execution is a critical differentiator~~

~~Invest only where ITW has a competitive advantage~~

~~The ITW Business Model is the Company's Competitive Advantage~~

~~The ITW Business Model is the combination of a~~and unique set of ~~strategic, operational,~~capabilities are a source of strong and ~~cultural approaches and practices that is applied to every ITW business. The Business Model has existed inside~~enduring competitive advantage, but for the Company ~~for over 30 years~~to truly finish the job and ~~is truly ITW's differentiating competitive advantage. The ITW Business Model is comprised~~reach its full potential, every one of ~~three elements:~~

•~~80/20 Front to Back Process = How~~its divisions must also be operating at its full potential. To do so, the Company ~~Operates~~remains focused on its core principles to position ITW to perform to its full potential:

•~~Customer-Back Innovation Approach = How the Company Innovates~~


•	Portfolio discipline

•~~Decentralized Entrepreneurial Culture = How the Company Executes~~

~~Focus on Quality Growth~~

~~ITW prioritizes~~ ~~high-quality revenue growth~~ ~~and, as such, the Company’s primary growth focus is organic.~~

~~Leveraging the Business Model and the~~ 80/20 front to back process provides a clear view of where to focus for high- quality growth. The Company targets differentiated end-markets and customers with critical needs and challenging pain points. ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.Front-to-Back practice excellence


•	Full-potential organic growth

Portfolio Discipline

80/20 Front-to-Back Practice Excellence

Full-potential Organic Growth

"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

Strategic Sales Excellence - deploying a high-performance sales function in ~~terms of geographic and end market exposures, enabling~~every division

As the Company continues to ~~deliver consistent high-quality growth in an increasingly volatile and competitive global market environment.~~

~~"Do What We Say" Execution is a Critical Differentiator~~

~~Invest Only Where ITW Has a Competitive Advantage~~

~~The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business Model into compelling and sustainable competitive advantage.~~

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.

~~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

The ~~Company's strong~~Company delivered solid financial results in ~~2017 demonstrate~~2019 despite a contracting industrial demand environment. With the ~~combination of ITW's~~Company's diversified high-quality business portfolio, ~~with continued focus on leveraging the powerful and~~ highly differentiated ITW Business ~~Model. Meaningful progress on accelerating organic revenue growth~~Model and continued strong execution on enterprise initiatives ~~resulted~~throughout the year, the Company grew diluted earnings per share and returned approximately $2.8 billion to shareholders in the form of dividends and share repurchases in 2019. Additionally, all ~~seven~~ segments ~~achieving worldwide organic revenue growth and having~~had operating margin at or above ~~20%~~21.5% for ~~2017.~~2019.

~~On July 1, 2016,~~

The Company does not believe that tariffs imposed in the past year 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.

In early 2020, an outbreak of the coronavirus occurred in China and other jurisdictions. The extent of the outbreak and its impact on the markets served by the Company ~~completed~~and on its operations is uncertain. A prolonged outbreak could interrupt the ~~acquisition~~operations of the ~~Engineered Fasteners~~Company and ~~Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. EF&C had operating revenue of $517 million in 2017~~its customers and $245 million for the last six months of 2016. EF&C diluted the Company's operating margin in 2017 and 2016 due to lower operating margin and acquisition related expenses. The Company expects EF&C's operating margin to improve in later years through the application of the Company's 80/20 front to back process. The operating results of EF&C are reported within the Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented. Refer to Note 2. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information.suppliers.

The Company presents certain financial measures in fiscal year 2017 excluding the $658 million tax charge related to the "Tax Cuts and Jobs Act" and the benefit of a favorable $95 million legal settlement. These non-GAAP measures are consistent with the way management analyzes and assesses the Company's operating performance. The Company believes these non-GAAP measures enhance investors' understanding of the Company's underlying financial performance, as well as their ability to compare the Company's financial results and overall performance to that of its peers.

The Company’s consolidated results of operations for 2019, 2018 and 2017 ~~2016 and 2015 are summarized~~were as follows:

~~2017~~2019 compared to ~~2016~~2018


	For the Years Ended																				For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)												December 31,								Components of Increase (Decrease)
	2017			2016			Inc (Dec)		Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total		2019			2018			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	14,314		$	13,599		5.3	%	2.9	%	1.8	%	—	%	—	%	0.6	%	5.3	%	$	14,109		$	14,768		(4.5	)%	(1.9	)%	(0.3	)%	—	%	(2.3	)%	(4.5	)%
Operating income	3,494			3,064			14.0	%	12.5	%	0.7	%	0.1	%	0.1	%	0.6	%	14.0	%	$	3,402		$	3,584		(5.1	)%	(1.3	)%	(0.1	)%	(1.4	)%	(2.3	)%	(5.1	)%
Operating margin %	24.4		%	22.5		%	190 bps		210 bps		(30) bps		10 bps		—		—		190 bps		24.1		%	24.3		%	(20) bps		10 bps		—		(30) bps		—		(20) bps

Operating revenue ~~increased~~declined due to ~~growth in organic and acquisition revenues and~~ the ~~favorable~~unfavorable effect of foreign currency ~~translation.~~translation, lower organic revenue and divestitures.

Organic revenue ~~grew 2.9% as all seven segments achieved growth.~~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 ~~grew 1.6%. Growth in five segments was partially offset by~~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 ~~increased 3.5%~~decreased 2.2% as ~~growth in~~ five segments ~~was~~declined, partially offset by ~~a decline~~growth in the ~~Welding~~Food Equipment and ~~Polymers & Fluids~~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 and 2018 effective tax rates benefited from the lower U.S. corporate federal tax rate and discrete items. 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 rate 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.

Adjusted after-tax return on average invested capital was 28.7% for 2019. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	14,768		$	14,314		3.2	%	2.2	%	(0.1	)%	—	%	1.1	%	3.2	%
Operating income	$	3,584		$	3,485		2.8	%	1.2	%	—	%	0.5	%	1.1	%	2.8	%
Operating margin %	24.3		%	24.3		%	—		(20) bps		—		10 bps		10 bps		—

Operating revenue increased due to an increase in organic revenue and the favorable effect of foreign currency translation.

Organic revenue grew 2.2% primarily due to penetration gains, higher end market demand and product innovation. Product line simplification activities reduced organic revenue growth by 70 basis points.


◦	North American organic revenue increased ~~6.8%~~4.0% as all seven segments had revenue growth.


◦	Asia Pacific organic revenue grew 0.4% primarily driven by growth in ~~five~~the Welding, Test & Measurement and Electronics, Food Equipment and Polymers & Fluids segments, ~~was~~ partially offset by a decline in the ~~Welding~~Specialty Products, Automotive OEM and ~~Food Equipment~~Construction Products segments.


◦	Europe, Middle East and Africa organic revenue decreased 0.2% primarily driven by the Automotive OEM, Specialty Products and Polymers & Fluids segments.

In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income. ~~Refer to Note 3. Legal Settlement in Item 8. Financial Statements and Supplementary Data for further information on the confidential legal settlement.~~

Operating income of ~~$3.5~~$3.6 billion increased ~~14.0%~~2.8%. Excluding the favorable impact of the 2017 confidential legal settlement, operating income would have increased ~~10.9%~~5.7%.

Operating margin of ~~24.4% increased 190 basis points.~~24.3% was flat with the prior year. Excluding the 7060 basis points of favorability from the 2017 confidential legal settlement, operating margin ~~of 23.7%~~ increased ~~120~~60 basis points primarily ~~driven by~~due to the benefits of the Company's enterprise initiatives ~~of 120~~that contributed 110 basis ~~points. In addition,~~points and positive operating leverage of 7050 basis points, ~~was~~partially offset by unfavorable price/cost of 4050 basis points and higher freight and employee-related expenses.

The effective tax rate was 24.5% and 48.4% for 2018 and 2017, respectively. Included in the ~~dilutive impact~~effective tax rate for 2017 was a one-time additional income tax expense of ~~30 basis points from~~$658 million related to the ~~EF&C acquisition.~~

~~On December 22, 2017,~~enactment of the "Tax Cuts and Jobs Act" ~~(the “Act”) was enacted~~ in the United States. ~~The provisions of~~Excluding the Act significantly revise the U.S. corporate income tax rules. As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. As a result, the Company recorded a one-time income tax charge of $658 million, ~~during~~ the fourth quarter of 2017. The provisional amounts recorded reflect the Company's best estimate based on information currently available and are subject to future changes due to subsequent clarification of the2017 effective tax ~~law and refinement of estimated amounts.~~rate would have been 28.3%. Refer to Note 5.6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

Diluted earnings per share (EPS) of ~~$4.86 includes~~$7.60 increased 56.4%. Excluding the 2017 unfavorable impact of $1.90 for the previously discussed one-time tax charge and the favorable impact of $0.17 for the confidential legal ~~settlement. Excluding these two items,~~settlement, EPS ~~of $6.59~~ increased ~~15.6%~~15.3%.

Free cash flow was ~~$2.1~~$2.4 billion for ~~2017 and includes the impact from an additional discretionary pension contribution of $115 million in the second quarter of 2017.~~2018. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

The Company repurchased approximately ~~7.1~~13.9 million shares of its common stock in ~~2017~~2018 for approximately ~~$1.0~~$2.0 billion.

The Company increased the quarterly dividend by ~~20.0%~~28.2% in ~~2017.~~2018. Total cash dividends of ~~$941 million~~approximately $1.1 billion were paid in ~~2017.~~2018.

Adjusted after-tax return on average invested capital was ~~24.4%~~28.2%, an increase of ~~230~~390 basis ~~points.~~points, primarily due to the new U.S. tax rules and regulations. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 13,599
$ 13,405
1.4 % 1.2 % 1.7 % — % (1.5 )% 1.4 %
Operating income $ 3,064
$ 2,867
6.9 % 8.1 % 0.6 % 0.1 % (1.9 )% 6.9 %
Operating margin % 22.5 % 21.4 % 110 bps
140 bps
(30) bps
10 bps
(10) bps
110 bps

~~Operating revenue increased due to growth in organic and acquisition revenues, partially offset by the unfavorable effect of foreign currency translation.~~

Organic revenue grew 1.2% as six of seven segments had worldwide organic revenue growth primarily due to penetration gains, higher end market demand and product innovation. Organic revenue declined in the Welding segment primarily due to lower capital spending in the industrial end markets and sluggish demand in the oil and gas end market.


◦	~~PLS activities associated with the portfolio management component of the Company's Enterprise Strategy reduced organic revenue growth by approximately one percentage point.~~


◦	~~North American organic revenue increased 0.7% and European organic revenue increased 2.3% as growth in six segments for both regions was partially offset by a decline in the Welding segment.~~


◦	Asia Pacific organic revenue increased 2.7% primarily due to growth in the Automotive OEM, Specialty Products, Construction Products, Food Equipment, and Test & Measurement and Electronics segments, partially offset by a decline in the Welding and Polymers & Fluids segments.

Operating margin of 22.5% increased 110 basis points. The primary driver of the operating margin improvement was 130 basis points from the benefit of the Company's enterprise initiatives. Positive operating leverage of 30 basis points and favorable price/cost of 10 basis points were partially offset by the dilutive impact of 30 basis points from the EF&C acquisition and additional investment in the business.

In 2016, the Company received a $167 million cash dividend distribution from Wilsonart which exceeded the Company’s equity investment balance and resulted in a $54 million pre-tax gain, partially offset by $30 million of pre-tax losses related to the disposals of businesses and the disposal of a partnership investment. Refer to Note 4. Other Income (Expense) in Item 8. Financial Statements and Supplementary Data for further information on the Wilsonart equity investment.

~~Diluted earnings per share (EPS) of $5.70 increased 11.1%.~~

~~Free cash flow was $2.0 billion in 2016. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.~~

~~The Company repurchased approximately 18.7 million shares of its common stock in 2016 for approximately $2.0 billion.~~

~~Total cash dividends of $821 million were paid in 2016.~~

Adjusted after-tax return on average invested capital was 22.1%, an increase of 170 basis points. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

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									Operating Revenue
In millions	2017			2016			2015			2019			2018			2017
Automotive OEM	$	3,271		$	2,864		$	2,529		$	3,063		$	3,338		$	3,271
Food Equipment	2,123			2,110			2,096			2,188			2,214			2,123
Test & Measurement and Electronics	2,069			1,974			1,969			2,121			2,171			2,069
Welding	1,538			1,486			1,650			1,638			1,691			1,538
Polymers & Fluids	1,724			1,691			1,712			1,669			1,724			1,724
Construction Products	1,672			1,609			1,587			1,625			1,700			1,672
Specialty Products	1,938			1,885			1,885			1,825			1,951			1,938
Intersegment revenue	(21		)	(20		)	(23		)	(20		)	(21		)	(21		)
Total	$	14,314		$	13,599		$	13,405		$	14,109		$	14,768		$	14,314


	Operating Income								Operating Income
In millions	2017		2016			2015			2019			2018			2017
Automotive OEM	$	747	$	690		$	613		$	659		$	751		$	747
Food Equipment	556		537			498			578			572			556
Test & Measurement and Electronics	464		372			322			542			523			464
Welding	415		370			415			453			474			415
Polymers & Fluids	357		343			335			381			369			357
Construction Products	399		361			316			383			414			399
Specialty Products	527		482			439			472			522			527
Total Segments	3,465		3,155			2,938			3,468			3,625			3,465
Unallocated	29		(91		)	(71		)	(66		)	(41		)	20
Total	$	3,494	$	3,064		$	2,867		$	3,402		$	3,584		$	3,485

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. Unallocated in 2017 includes the favorable impact from the previously discussed confidential legal settlement.

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.

The results of operations for the Automotive OEM segment for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018


	For the Years Ended																		For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)										December 31,								Components of Increase (Decrease)
	2017			2016			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total		2019			2018			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,271		$	2,864		14.2	%	4.1	%	8.9	%	—	%	1.2	%	14.2	%	$	3,063		$	3,338		(8.2	)%	(5.4	)%	—	%	—	%	(2.8	)%	(8.2	)%
Operating income	$	747		$	690		8.2	%	5.7	%	3.2	%	(1.6	)%	0.9	%	8.2	%	$	659		$	751		(12.2	)%	(7.0	)%	—	%	(2.6	)%	(2.6	)%	(12.2	)%
Operating margin %	22.8		%	24.1		%	(130) bps		30 bps		(120) bps		(40) bps		—		(130) bps		21.5		%	22.5		%	(100) bps		(40) bps		—		(60) bps		—		(100) bps

Operating revenue ~~increased~~declined due to ~~the EF&C acquisition and higher~~lower organic revenue and the ~~favorable~~unfavorable effect of foreign currency translation.

Organic revenue ~~grew 4.1%~~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 ~~a result~~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 ~~penetration gains, exceeding auto build growth of 2%.~~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 ~~growth of 8.3% exceeded~~declined 4.5% compared to European auto builds which ~~grew 3%.~~declined 4% in 2019 due to customer mix.


◦	Asia Pacific organic revenue ~~increased 9.5%.~~declined 2.2% in 2019. China organic revenue ~~growth of 16.6% exceeded~~declined 1.0% versus Chinese ~~auto build growth of 2%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, grew 5%.~~


◦	~~North American organic revenue decreased 1.1% versus total North American~~ auto builds which declined ~~4%. Auto build growth for the Detroit 3, where the Company has higher content, declined 7%.~~8% in 2019.

Operating margin was 21.5% in 2019. The decrease of ~~22.8% decreased 130~~100 basis points was primarily ~~driven by the dilutive impact~~due to negative operating leverage of ~~120~~90 basis points, ~~from the EF&C acquisition,~~ unfavorable price/cost of ~~120~~60 basis points, ~~and~~ higher restructuring expenses and product mix, partially offset by ~~positive operating leverage of 60 basis points and the net~~ benefits from the Company's enterprise ~~initiatives and cost management of 90 basis points.~~initiatives.

~~2016~~2018 compared to ~~2015~~2017


	For the Years Ended																		For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)										December 31,								Components of Increase (Decrease)
	2016			2015			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total		2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,864		$	2,529		13.3	%	5.1	%	9.7	%	—	%	(1.5	)%	13.3	%	$	3,338		$	3,271		2.0	%	—	%	—	%	—	%	2.0	%	2.0	%
Operating income	$	690		$	613		12.6	%	10.7	%	2.6	%	0.7	%	(1.4	)%	12.6	%	$	751		$	747		0.5	%	(2.0	)%	—	%	0.6	%	1.9	%	0.5	%
Operating margin %	24.1		%	24.2		%	(10) bps		130 bps		(160) bps		20 bps		—		(10) bps		22.5		%	22.8		%	(30) bps		(40) bps		—		10 bps		—		(30) bps

Operating revenue increased due to the ~~EF&C acquisition and higher organic revenue, partially offset by the unfavorable~~favorable effect of foreign currency translation.

Organic revenue ~~grew 5.1%~~was flat compared to worldwide auto builds which declined 1%. Product line simplification activities reduced organic revenue growth by 120 basis points.


◦	North American organic revenue ~~grew 3.4% versus total~~increased 3.0% compared to North American auto ~~build growth of 2%~~builds which declined 1%. Auto ~~build growth~~builds for the Detroit 3, where the Company has higher content, ~~declined 1%.~~were flat.


◦	European organic revenue ~~growth of 6.0% exceeded~~declined 2.7% compared to European auto builds which ~~grew 3%.~~declined 1% due to customer mix. Organic revenue was negatively impacted by the new emissions testing requirements in Europe which disrupted auto production in the second half of 2018.

◦

Asia Pacific organic revenue ~~increased 10.9% driven by product penetration gains in China due to new product launches in 2016.~~decreased 0.7%. China organic revenue ~~growth of 22.7% exceeded~~grew 2.6% versus Chinese auto ~~build growth of 14%. Auto~~ builds ~~of foreign automotive manufacturers~~which declined 4%, as auto production in China ~~where~~softened during the ~~Company has higher content, grew 11%.~~second half of 2018.

On July 1, 2016, the Company completed the acquisition of the EF&C business from ZF TRW. EF&C had operating revenue of $245 million for the six months ended December 31, 2016, and increased Automotive OEM operating revenue by 9.7%.

Operating margin was 22.5% in 2018. The decrease of ~~24.1% decreased 10~~30 basis points was primarily due to ~~the dilutive impact of 160 basis points from the EF&C acquisition and~~ unfavorable price/cost of 40130 basis points, partially offset by ~~positive operating leverage of 80 basis points, the net~~ benefits from the Company's enterprise ~~initiatives and cost management of 90 basis points and lower restructuring expenses.~~initiatives.

FOOD EQUIPMENT

This segment is a highly focused and branded ~~industry-leader~~industry leader in commercial food equipment differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food institutional/restaurant and food retail 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 ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018


	For the Years Ended																		For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)										December 31,								Components of Increase (Decrease)
	2017			2016			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total		2019			2018			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,123		$	2,110		0.6	%	0.5	%	—	%	—	%	0.1	%	0.6	%	$	2,188		$	2,214		(1.2	)%	1.1	%	—	%	—	%	(2.3	)%	(1.2	)%
Operating income	$	556		$	537		3.6	%	2.2	%	—	%	1.2	%	0.2	%	3.6	%	$	578		$	572		1.1	%	4.5	%	—	%	(1.2	)%	(2.2	)%	1.1	%
Operating margin %	26.2		%	25.4		%	80 bps		50 bps		—		30 bps		—		80 bps		26.4		%	25.8		%	60 bps		90 bps		—		(30) bps		—		60 bps

Operating revenue ~~increased primarily~~declined due to the unfavorable effect of foreign currency translation, partially offset by higher organic ~~revenue growth.~~revenue.

Organic revenue increased ~~0.5%~~1.1% as equipment organic revenue decreased 0.2% and service organic revenue ~~grew 0.2% and 0.8%, respectively.~~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%.


◦	International organic revenue grew ~~2.3%. International~~1.1% as equipment organic revenue increased ~~2.6%~~0.2% primarily due to higher demand in the European ~~refrigeration~~warewash, cooking and ~~warewash~~retail end ~~markets. International service~~markets, partially offset by lower demand in Asia. Service organic revenue ~~grew 1.7%.~~


◦	North American organic revenue decreased 1.0%. Equipment organic revenue, which had a challenging comparable in the prior year period of 6.6% growth, decreased 1.8% primarily due to lower end market demand in the retail, restaurant and institutional end markets. Service revenue in North America increased ~~0.3%~~3.5%.

Operating margin of ~~26.2%~~26.4% in 2019 increased 8060 basis points primarily driven by ~~lower restructuring expenses, positive operating leverage and favorable price/cost of 20 basis points each, and the net~~ benefits offrom the Company's enterprise initiatives, favorable price/cost of 40 basis points and ~~cost management.~~positive operating leverage of 30 basis points, partially offset by product mix, higher employee-related expenses and higher restructuring expenses.

~~2016~~2018 compared to ~~2015~~2017


	For the Years Ended																		For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)										December 31,								Components of Increase (Decrease)
	2016			2015			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total		2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,110		$	2,096		0.7	%	2.8	%	—	%	—	%	(2.1	)%	0.7	%	$	2,214		$	2,123		4.3	%	2.8	%	—	%	—	%	1.5	%	4.3	%
Operating income	$	537		$	498		7.8	%	8.7	%	—	%	1.1	%	(2.0	)%	7.8	%	$	572		$	556		2.9	%	1.0	%	—	%	0.3	%	1.6	%	2.9	%
Operating margin %	25.4		%	23.7		%	170 bps		140 bps		—		30 bps		—		170 bps		25.8		%	26.2		%	(40) bps		(50) bps		—		10 bps		—		(40) bps

Operating revenue increased due to higher organic revenue ~~growth, partially offset by~~and the ~~unfavorable~~favorable effect of foreign currency translation.

Organic revenue increased 2.8% as equipment and service organic revenue ~~grew 3.9%~~increased 3.2% and ~~0.8%~~2.1%, respectively.


◦	North American organic revenue increased ~~4.3%~~3.5%. ~~North American equipment~~Equipment organic revenue ~~increased 6.6% primarily due to strong~~grew 4.6% as higher end market demand in ~~the retail,~~cooking, refrigeration and warewash ~~and cooking businesses.~~was offset by lower end market demand in food retail. Service organic revenue ~~in North America increased 0.8%~~grew 1.9%.


◦	International organic revenue increased 1.9%. Equipment organic revenue grew ~~0.8%. International equipment~~1.8% primarily due to higher demand in the European warewash and cooking end markets, partially offset by lower end market demand in refrigeration. Service organic revenue increased ~~0.8% primarily due to growth in Europe and Asia. International service organic revenue grew 0.9%~~2.4%.

Operating margin of ~~25.4% increased 170~~25.8% in 2018 declined 40 basis points ~~driven~~primarily due to the unfavorable impact of product mix and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and positive operating leverage of 60 basis ~~points, the net benefits of the Company's enterprise initiatives and cost management of 40 basis points, favorable price/cost of 40 basis points and lower restructuring expenses.~~points.

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, industrial capital goods, 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 and related consumable solder materials;~~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 ~~telecommunications,~~ electronics, medical, transportation and ~~transportation~~telecommunications applications.

The results of operations for the Test & Measurement and Electronics segment for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2019			2018			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
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 bps		140 bps		10 bps		—		—		150 bps

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2017 2016 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 2,069
$ 1,974
4.8 % 4.8 % — % — % — % 4.8 %
Operating income $ 464
$ 372
24.7 % 24.0 % — % 0.7 % — % 24.7 %
Operating margin % 22.4 % 18.9 % 350 bps
340 bps
—
10 bps
—
350 bps

Operating revenue ~~increased~~declined due to the unfavorable effect of foreign currency translation, lower organic revenue ~~growth.~~and a divestiture.

Operating revenue for 2019 included $58 million related to the business divested in 2019.

Organic revenue ~~increased 4.8%.~~decreased 0.3% in 2019.

◦

Organic revenue for the test and measurement businesses ~~increased 7.2%~~decreased 0.8% primarily ~~due to higher~~driven by lower semi-conductor end market demand in North ~~America~~America. Excluding semi-conductor, the test and ~~Asia.~~measurement businesses increased 3.5%. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of ~~5.1%~~6.4%.

◦

Electronics organic revenue ~~which had a challenging comparable in the prior year period of 4.9% growth, increased 2.2%~~grew 0.4%. ~~The electronics assembly businesses declined 1.1% primarily due to a decrease in North America.~~ The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew ~~4.7%~~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.

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,171		$	2,069		4.9	%	3.5	%	—	%	—	%	1.4	%	4.9	%
Operating income	$	523		$	464		12.7	%	11.3	%	—	%	—	%	1.4	%	12.7	%
Operating margin %	24.1		%	22.4		%	170 bps		170 bps		—		—		—		170 bps

Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.

Organic revenue increased 3.5% in 2018.


◦	Organic revenue for the test and measurement businesses increased 5.5% with growth in all major regions primarily due to higher semi-conductor end market demand. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 7.1%.


◦	Electronics organic revenue grew 1.2%. The electronics assembly businesses declined 4.3% due to lower demand across North America and Europe. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 5.0% primarily due to higher semi-conductor end market demand in North America.

Operating margin was 24.1% in 2018. The increase of ~~22.4% increased 350~~170 basis points was primarily driven by ~~the net~~positive operating leverage of 90 basis points and benefits ~~resulting~~ from the Company's enterprise ~~initiatives and cost management of 130 basis points, positive operating leverage of 130 basis points and favorable price/cost of 30 basis points.~~initiatives.

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,974
$ 1,969
0.3 % 1.8 % — % — % (1.5 )% 0.3 %
Operating income $ 372
$ 322
15.6 % 17.4 % — % 0.4 % (2.2 )% 15.6 %
Operating margin % 18.9 % 16.3 % 260 bps
250 bps
—
10 bps
—
260 bps

~~Operating revenue increased due to organic revenue growth, partially offset by the unfavorable effect of foreign currency translation.~~

~~Organic revenue increased 1.8%.~~


◦	Electronics organic revenue increased 4.9%. Organic revenue grew 11.6% in the electronics assembly businesses primarily driven by higher demand from electronics equipment manufacturers and by the solar and semi-conductor end markets. Other electronics businesses grew 0.5% primarily due to strength in Europe, partially offset by PLS activities in Asia Pacific.


◦	Organic revenue for the test and measurement businesses decreased 0.9% primarily due to the impact of a weak capital spending environment in North America and Europe and continued softness in the oil and gas related end markets.

Operating margin of 18.9% increased 260 basis points primarily driven by the net benefits resulting from the Company's enterprise initiatives and cost management of 170 basis points, positive operating leverage of 60 basis points and favorable price/cost of 20 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; and~~accessories.

~~metal jacketing and other insulation products.~~

The results of operations for the Welding segment for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018


	For the Years Ended																		For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)										December 31,								Components of Increase (Decrease)
	2017			2016			Inc (Dec)		Organic		Restructuring		Impairment		Foreign Currency		Total		2019			2018			Inc (Dec)		Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,538		$	1,486		3.5	%	3.2	%	—	%	—	%	0.3	%	3.5	%	$	1,638		$	1,691		(3.1	)%	(1.2	)%	(1.1	)%	—	%	(0.8	)%	(3.1	)%
Operating income	$	415		$	370		12.1	%	9.6	%	1.5	%	0.8	%	0.2	%	12.1	%	$	453		$	474		(4.4	)%	(2.1	)%	(0.4	)%	(1.7	)%	(0.2	)%	(4.4	)%
Operating margin %	27.0		%	24.9		%	210 bps		160 bps		30 bps		20 bps		—		210 bps		27.7		%	28.0		%	(30) bps		(20) bps		20 bps		(50) bps		20 bps		(30) bps

Operating revenue ~~increased~~decreased due to ~~higher~~lower organic revenue, the impact of divestiture activity and the ~~favorable~~unfavorable effect of foreign currency translation.

Operating revenue for 2019 included $62 million related to the business divested in 2019.

Organic revenue ~~grew 3.2%~~decreased 1.2% as equipment ~~grew 6.5%~~declined 2.6%, partially offset by ~~a decrease~~growth in consumables of ~~1.0%~~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.

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,691		$	1,538		9.9	%	9.7	%	—	%	—	%	0.2	%	9.9	%
Operating income	$	474		$	415		14.3	%	13.1	%	—	%	1.0	%	0.2	%	14.3	%
Operating margin %	28.0		%	27.0		%	100 bps		80 bps		—		20 bps		—		100 bps

Operating revenue increased primarily due to higher organic revenue.

Organic revenue grew 9.7% driven by growth in ~~consumables.~~equipment of 11.0% and consumables of 7.9%. Organic revenue grew primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining, ~~and~~ in the commercial end markets related to construction, light fabrication and farm and ranch ~~customers.~~customers, and in the oil and gas end markets.


◦	North American organic revenue ~~grew 6.2%~~increased 10.6% primarily ~~driven by 7.2%~~due to 14.7% and 5.8% growth in the industrial and commercial end markets, ~~and 4.8% growth in the commercial end markets.~~respectively.


◦	International organic revenue ~~decreased 8.0%~~increased 5.7% primarily due to ~~weaker end market~~higher demand in the ~~European and Asian~~ oil and gas end markets.

Operating margin was 28.0% in 2018. The increase of ~~27.0% increased 210~~100 basis points was primarily due to ~~the net~~positive operating leverage of 150 basis points and benefits offrom the Company's enterprise initiatives, ~~and cost management of 150 basis points, positive operating leverage of 70 basis points and lower restructuring expenses of 30 basis points,~~ partially offset by ~~unfavorable price/cost of 60 basis points. In addition, the prior year period was negatively impacted by an intangible asset impairment charge of 20 basis points.~~higher freight and employee-related expenses.

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Restructuring Impairment Foreign Currency Total
Operating revenue $ 1,486
$ 1,650
(10.0 )% (9.1 )% — % — % (0.9 )% (10.0 )%
Operating income $ 370
$ 415
(10.8 )% (8.0 )% (1.4 )% (0.7 )% (0.7 )% (10.8 )%
Operating margin % 24.9 % 25.2 % (30) bps
20 bps
(30) bps
(20) bps
—
(30) bps

~~Operating revenue decreased due to the decline in organic revenue and the unfavorable effect of foreign currency translation.~~

Organic revenue decreased 9.1% due to lower demand in the oil and gas and industrial end markets and the impact of a soft capital spending environment. Organic revenue declined 10% and 8% for equipment and consumables, respectively.


◦	North American organic revenue declined 8.0% driven by decreases across the oil and gas end markets and industrial end markets primarily related to heavy equipment for agriculture, infrastructure and mining.


◦	~~International organic revenue decreased 12.9% primarily due to weak oil and gas end markets in Europe and Asia Pacific.~~

Operating margin of 24.9% declined 30 basis points due to negative operating leverage of 190 basis points, higher restructuring expenses, the unfavorable impact of intangible asset impairment, partially offset by the net benefits of the Company's enterprise initiatives and cost management of 180 basis points and favorable price/cost of 30 basis points.

POLYMERS & FLUIDS

This segment is a ~~highly~~ 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 ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018


	For the Years Ended																				For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)												December 31,								Components of Increase (Decrease)
	2017			2016			Inc (Dec)		Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total		2019			2018			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,724		$	1,691		2.0	%	1.0	%	—	%	—	%	—	%	1.0	%	2.0	%	$	1,669		$	1,724		(3.2	)%	—	%	(0.4	)%	—	%	(2.8	)%	(3.2	)%
Operating income	$	357		$	343		4.1	%	4.7	%	—	%	(1.1	)%	—	%	0.5	%	4.1	%	$	381		$	369		3.1	%	7.9	%	(0.1	)%	(1.5	)%	(3.2	)%	3.1	%
Operating margin %	20.7		%	20.3		%	40 bps		80 bps		—		(30) bps		—		(10) bps		40 bps		22.8		%	21.4		%	140 bps		170 bps		—		(30) bps		—		140 bps

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Acq/Div Restructuring Impairment Foreign Currency Total
Operating revenue $ 1,691
$ 1,712
(1.2 )% 1.3 % (0.2 )% — % — % (2.3 )% (1.2 )%
Operating income $ 343
$ 335
2.5 % 4.9 % (0.3 )% (0.1 )% 0.7 % (2.7 )% 2.5 %
Operating margin % 20.3 % 19.6 % 70 bps
70 bps
—
(10) bps
20 bps
(10) bps
70 bps

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,724		$	1,724		—	%	1.0	%	(0.4	)%	—	%	(0.6	)%	—	%
Operating income	$	369		$	357		3.3	%	2.1	%	(0.2	)%	1.7	%	(0.3	)%	3.3	%
Operating margin %	21.4		%	20.7		%	70 bps		20 bps		—		40 bps		10 bps		70 bps

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:

The results of operations for the Construction Products segment for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,700		$	1,672		1.6	%	1.2	%	—	%	—	%	0.4	%	1.6	%
Operating income	$	414		$	399		3.6	%	3.1	%	—	%	0.3	%	0.2	%	3.6	%
Operating margin %	24.3		%	23.9		%	40 bps		40 bps		—		10 bps		(10) bps		40 bps

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,609
$ 1,587
1.4 % 3.0 % (0.2 )% — % (1.4 )% 1.4 %
Operating income $ 361
$ 316
14.1 % 16.2 % (0.3 )% (0.3 )% (1.5 )% 14.1 %
Operating margin % 22.4 % 19.9 % 250 bps
260 bps
—
(10) bps
—
250 bps

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, general industrial, consumer durables, ~~general~~ industrial capital goods and printing and publishing ~~and industrial capital goods~~ markets. Products in this segment include:

The results of operations for the Specialty Products segment for ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:

~~2017~~2019 compared to ~~2016~~2018

~~2016 compared to 2015~~

For the Years Ended
Dollars in millions December 31, Components of Increase (Decrease)
2016 2015 Inc (Dec) Organic Acquisition/Divestiture Restructuring Foreign Currency Total
Operating revenue $ 1,885
$ 1,885
— % 1.2 % (0.1 )% — % (1.1 )% — %
Operating income $ 482
$ 439
9.7 % 11.2 % 0.1 % (0.1 )% (1.5 )% 9.7 %
Operating margin % 25.6 % 23.3 % 230 bps
230 bps
10 bps
(10) bps
—
230 bps

2018 compared to 2017



	For the Years Ended
Dollars in millions	December 31,								Components of Increase (Decrease)
	2018			2017			Inc (Dec)		Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,951		$	1,938		0.7	%	(0.4	)%	(0.1	)%	—	%	1.2	%	0.7	%
Operating income	$	522		$	527		(0.8	)%	(2.5	)%	(0.1	)%	0.6	%	1.2	%	(0.8	)%
Operating margin %	26.8		%	27.2		%	(40) bps		(60) bps		—		20 bps		—		(40) bps

OTHER FINANCIAL HIGHLIGHTS

NEW ACCOUNTING PRONOUNCEMENTS

~~Effective January 1, 2017~~

~~In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the~~Information regarding new 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. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million and $20 million for the years ended December 31, 2016 and 2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $50 million werepronouncements is included in ~~Income taxes~~Note 1. Description of Business and Summary of Significant Accounting Policies in the statement of income for the year ended December 31, 2017. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each periodItem 8. Financial Statements 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.~~Supplementary Data.

~~Effective January 1, 2018~~

In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new guidance is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. The Company's sales arrangements with customers are predominately short term in nature and generally provide for transfer of control and revenue recognition at the time of product shipment or delivery of service. In limited circumstances, arrangements may include service performed over time, or there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance. Effective January 1, 2018, the Company adopted this new guidance under the modified retrospective method which requires the new guidance to be applied prospectively to revenue transactions completed on or after the effective date. Given the nature of the Company’s revenue transactions, the new guidance is not expected to have a material impact on the Company’s operating revenue, results of operations, or financial position. As a result of adopting the guidance, the Company expects to record a cumulative-effect adjustment reducing retained earnings as of January 1, 2018 by approximately $10 million related to certain transactions that were impacted by the new guidance. Additionally, the Company expects to provide the required additional disclosures in periods subsequent to adoption.

In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, including interest cost, expected return on assets, settlements, curtailments, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. Effective January 1, 2018, the Company adopted the new guidance and will apply the new

presentation of net periodic benefit cost in future periods and expects to restate prior periods for comparability. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows. For the years ended December 31, 2017, 2016 and 2015, the other components of net periodic benefit cost were income of $9 million, income of $8 million, and expense of $1 million, respectively. Refer to Note 9. Pension and Other Postretirement Benefits for further information regarding the Company’s net periodic benefit cost.

~~Effective January 1, 2019~~

In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases, including operating leases, with a lease term greater than twelve months in the statement of financial position. Subsequent measurement, including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or operating lease. In addition, several new disclosures will be required. This guidance is effective for the Company beginning January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are free cash flow and short-term credit facilities. In addition, the Company had ~~$3.1~~$2.0 billion of cash and equivalents on hand atas of December 31, ~~2017~~2019 and also maintains strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:

The Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could readily obtain additional financing, if necessary.

Cash Flow

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 is 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. Summarized cash flow information for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~2017 was as follows:


In millions	2017			2016			2015			2019			2018			2017
Net cash provided by operating activities	$	2,402		$	2,302		$	2,299		$	2,995		$	2,811		$	2,402
Additions to plant and equipment	(297		)	(273		)	(284		)	(326		)	(364		)	(297		)
Free cash flow	$	2,105		$	2,029		$	2,015		$	2,669		$	2,447		$	2,105

Cash dividends paid	$	(941	)	$	(821	)	$	(742	)	$	(1,321	)	$	(1,124	)	$	(941	)
Repurchases of common stock	(1,000		)	(2,000		)	(2,002		)	(1,500		)	(2,000		)	(1,000		)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates	(3		)	(453		)	(6		)
Dividend distribution from equity investment in Wilsonart	—			167			—
Net proceeds from debt	197			465			151
Acquisition of businesses (excluding cash and equivalents)										(4		)	—			(3		)
Proceeds from sale of operations and affiliates										120			1			2
Net proceeds (repayments) of debt										422			(851		)	197
Other	119			128			147			100			49			117
Effect of exchange rate changes on cash and equivalents	145			(133		)	(463		)	(9		)	(112		)	145
Net increase (decrease) in cash and equivalents	$	622		$	(618	)	$	(900	)	$	477		$	(1,590	)	$	622

Free cash flow for the year ended December 31, 2017 included the impact of an additional $115 million discretionary pension contribution related to the U.S. primary pension plan.

Stock Repurchase Programs

On ~~August 2, 2013,~~February 13, 2015, the ~~Company’s~~Company's Board of Directors authorized a stock repurchase program which provided for the ~~buyback~~repurchase of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2013 Program"). Under the 2013 Program, the Company repurchased approximately 14.9 million shares of its common stock at an average price of $96.84 during 2015. As of December 31, 2015, there were no authorized repurchases remaining under the 2013 Program.

~~On February 13, 2015, the Company's Board of Directors authorized a new stock repurchase program, which provided for the buyback of up to an additional~~ $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of $91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of $107.17 per share during 2016, ~~and~~ approximately 7.1 million shares of its common stock at an average price of $140.56 per share during ~~2017.~~2017, approximately 13.9 million shares of its common stock at an average price of $143.66 per share during 2018 and approximately 3.1 million shares of its common stock at an average price of $143.23 per share during 2019. The 2015 Program was completed in the second quarter of 2019.

On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019. As of December 31, ~~2017,~~2019, there were approximately ~~$2.4~~$1.9 billion of authorized repurchases remaining under the ~~2015 Program.~~2018 program.

Adjusted After-Tax Return on Average Invested Capital

The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. 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 ROIC. For comparability, the Company excluded the third quarter discrete tax benefit of $21 million from the effective tax rate for the year ended December 31, 2019. Additionally, the Company excluded the third quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. The Company also excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. ~~Adjusted average~~Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's ~~operations, as well as the Company's equity investment in the Wilsonart business (formerly the Decorative Surfaces segment).~~operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC for the years ended December 31, ~~2017, 2016,~~2019, 2018, and ~~2015~~2017 was as follows:

ROIC increased ~~230~~50 basis points for the ~~year~~twelve month period ended December 31, ~~2017~~2019 compared to the prior year period as a result of a ~~13.7% improvement~~5.3% decrease in average invested capital versus a 3.9% decrease in after-tax operating ~~income versus a 3.3% increase in adjusted average invested capital. The discrete tax benefits related to share-based compensation improved after-tax~~income. ROIC ~~by 50~~increased 390 basis points in ~~2017. ROIC increased 170 basis points in 2016~~2018 versus ~~2015~~2017 primarily related to the new U.S. tax rules and regulations.

A reconciliation of the 2019 effective tax rate excluding the third quarter discrete tax benefit of $21 million is as ~~a result of a 7.1% improvement in after-tax operating income and a 1.3% decrease in adjusted average invested capital.~~follows:



	Twelve Months Ended
	December 31, 2019
Dollars in millions	Income Taxes		Tax Rate
As reported	$	767	23.3	%
Discrete tax benefit related to third quarter	21		0.7	%
As adjusted	$	788	24.0	%

A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million is as follows:



	Twelve Months Ended
	December 31, 2018
Dollars in millions	Income Taxes		Tax Rate
As reported	$	831	24.5	%
Net discrete tax benefit related to third quarter	15		0.4	%
As adjusted	$	846	24.9	%

A reconciliation of the 2017 effective tax rate excluding the discrete tax charge of $658 million related to the 2017 U.S. tax legislation is as follows:

Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the discrete tax items noted above.

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital atas of December 31, ~~2017~~2019 and ~~2016~~2018 is summarized as follows:

The increase in net working capital atas of December 31, ~~2017~~2019 was primarily driven by ~~higher cash~~lower short-term debt. See Note 10. Debt in Item 8. Financial Statements and ~~equivalents.~~Supplementary Data for further information.

~~Cash and equivalents totaled approximately $3.1 billion as~~As of December 31, ~~2017~~2019, approximately half of the Company's cash and ~~$2.5 billion as of December 31, 2016, primarily all of which~~equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. ~~A portion of the cash~~Cash and equivalents ~~balances~~ held internationally isare typically used for international operating needs or reinvested to fund expansion of existing international ~~businesses,~~businesses. International funds may also be used to fund ~~new~~ international acquisitions or, ~~used~~if not considered

permanently invested, may be repatriated to ~~repay debt~~the U.S. The Company has accrued for foreign withholding taxes related to foreign held ~~internationally.~~ cash and equivalents that are not permanently invested.

In the U.S., the Company utilizes cash flows from ~~domestic~~ operations to fund domestic cash needs ~~which primarily consist~~and the Company's capital allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company may also ~~uses~~use its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated ~~domestically~~by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revise the U.S. corporate income tax rules, including a one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act which, among other items, included the one-time deemed repatriation tax. As a result of the one-time repatriation provisions of the Act, the Company has provided for substantially all U.S. taxes on the undistributed earnings of its foreign subsidiaries and expects to repatriate approximately $2 billion of foreign held cash and equivalents. See Note 5. Income Taxes in Item 8. Financial Statements and Supplementary Data.

Total debt atas of December 31, ~~2017~~2019 and ~~2016~~2018 was as follows:

As of December 31, ~~2017, Short-term~~2019, short-term debt included ~~commercial paper of $849 million.~~$4 million related to the 4.88% notes due December 31, 2020. As of December 31, ~~2016, Short-term~~2018, short-term debt included $650 million related to the ~~0.90%~~1.95% notes due ~~February 25, 2017,~~March 1, 2019 and $700 million related to the 6.25% notes due April 1, 2019, both of which were repaid on the due date. There was no commercial paper outstanding as of December 31, ~~2016.~~2019 and December 31, 2018.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the ~~second~~third quarter of ~~2016,~~2019, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of ~~May 9, 2021~~September 27, 2024 to support the potential issuances of commercial paper. This agreement replaced the ~~previously~~ existing ~~$1.5~~$2.5 billion line of credit agreement with a termination date of ~~June 8, 2017 and the $1.0 billion line of credit agreement with a termination date of August 15, 2018.~~May 9, 2021. No amounts were outstanding under the ~~new~~ line of credit agreement at December 31, ~~2017.~~2019. The maximum outstanding commercial paper balance during ~~2017~~2019 was ~~$1.1~~$1.5 billion, while the average daily balance was ~~$691~~$306 million.

As of December 31, ~~2017,~~2019, the Company's foreign operations had authorized credit facilities with unused capacity of $206 million.

In ~~November 2016,~~June 2019, the Company issued ~~$1.0 billion~~€600 million of ~~2.65%~~0.25% Euro notes due ~~November 15, 2026~~December 5, 2024 at ~~99.685%~~99.662% of face value, €500 million of 0.625% Euro notes due December 5, 2027 at 99.343% of face value and €500 million of 1.00% Euro notes due June 5, 2031 at 98.982% of face value. Net proceeds from the ~~November 2016 debt issuance~~issuances were used to repay commercial paper and for general corporate purposes.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA toas a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income ~~from continuing operations~~ before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of ~~goodwill and other~~ intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~2017 was as follows:

Stockholders’ Equity

The changes to stockholders’ equity during ~~2017~~2019 and ~~2016~~2018 were as follows:


In millions	2017			2016			2019			2018
Beginning balance	$	4,259		$	5,228		$	3,258		$	4,589
Net income	1,687			2,035			2,521			2,563
Adoption of new accounting guidance							—			(415		)
Cash dividends declared	(982		)	(846		)	(1,335		)	(1,186		)
Repurchases of common stock	(1,000		)	(2,000		)	(1,500		)	(2,000		)
Currency translation adjustments	406			(277		)
Foreign currency translation adjustments							(2		)	(328		)
Other	219			119			88			35
Ending balance	$	4,589		$	4,259		$	3,030		$	3,258

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company's significant contractual obligations as of December 31, ~~2017~~2019 were as follows:

As of December 31, ~~2017,~~2019, the Company had recorded noncurrent liabilities for unrecognized tax benefits of ~~$167~~$168 million. The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits. The Company did not have any significant off-balance sheet commitments at December 31, ~~2017.~~2019.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has ~~six~~three accounting policies that it believes are most important to the Company’s financial condition and results of operations, and which require the Company to make estimates about matters that are inherently uncertain. Management bases its estimates on historical experience, and in some cases on observable market information. Various assumptions are also used that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company's critical accounting policies are as follows:

~~Realizability of Inventories~~— Inventories are stated at the lower of cost or net realizable value. Generally, the Company’s businesses perform an analysis of the historical sales usage of the individual inventory items on hand and a reserve is recorded to adjust inventory cost to net realizable value based on the following usage criteria:



~~Usage Classification~~	~~Criteria~~	~~Reserve %~~
~~Active~~	~~Quantity on hand is less than prior 6 months of usage~~	0	%
~~Slow-moving~~	~~Some usage in last 12 months, but quantity on hand exceeds prior 6 months of usage~~	50	%
~~Obsolete~~	~~No usage in the last 12 months~~	90	%

In addition, for approximately 21% of total inventories, the Company has elected to use the last-in, first-out ("LIFO") method of inventory costing. Generally, this method results in a lower inventory value than the first-in, first-out ("FIFO") method due to the effects of inflation.

~~Collectibility of Accounts Receivable~~— The Company estimates the allowance for uncollectible accounts based on the greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In addition, reserves for customer credits and cash discounts are estimated based on past experience.

~~Depreciation of Plant and Equipment~~— ~~The Company’s U.S. businesses primarily compute depreciation on an accelerated basis, as follows:~~



~~Buildings and improvements~~	~~150% declining balance~~
~~Machinery and equipment~~	~~200% declining balance~~

~~The majority of the Company's international businesses compute depreciation on a straight-line basis.~~

Income Taxes— The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense, assets and liabilities recognized by the Company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the Company’s various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.

Goodwill and Intangible Assets— The Company’s business acquisitions typically result in recording goodwill and other intangible assets, which are a significant portion of the Company’s total assets and affect the amount of amortization expense and impairment charges that the Company could incur in future periods. The Company follows the guidance prescribed in the accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if triggering events occur, the Company compares the estimated fair value of its reporting units to the carrying value of each reporting unit to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit’s goodwill. In calculating the fair value of the reporting units or specific intangible assets, management relies on a number of factors, including business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill and other intangible assets.

As of December 31, ~~2017,~~2019, the Company had total goodwill and intangible assets of approximately ~~$6.0~~$5.3 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the Company’s 80/20 ~~front to back~~Front-to-Back process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately ~~$45~~$167 million to ~~$1.3~~$1.2 billion, with the average amount equal to ~~$546~~$533 million. Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment charges related to one or more reporting units could occur in future periods.

Pension and Other Postretirement Benefits— The Company has various company-sponsored defined benefit retirement plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 9.11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.

The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be

effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately ~~$40~~$41 million. ~~Beginning in 2017, the~~The Company ~~changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method provides a more precise measure of~~estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 9.11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.

The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment allocations among asset classes. For the U.S. primary pension plan, a 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately $4 million.

ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain market risks that exist as part of its ongoing business operations, including fluctuations in currency exchange rates, price volatility for certain commodities and changes in interest rates. The Company does not engage in speculative or leveraged transactions and does not hold or issue financial instruments for trading purposes.

The Company’s exposure to market risk for changes in interest rates relates primarily to the fair value of the Company’s fixed rate debt. Refer to Note 8.10. Debt in Item 8. Financial Statements and Supplemental Data for details related to the fair value of the Company's debt instruments.

Foreign Currency Risk

The Company operates in the U.S. and 5552 foreign countries. The funding for the foreign manufacturing operations is provided primarily through the permanent investment of equity capital. The Company’s products are typically manufactured and sold within the same ~~country.~~country or economic union. Therefore, the Company's manufacturing operations generally do not have significant assets or liabilities denominated in currencies other than their functional currencies.

The Company designated the €1.0 billion of Euro notes issued in May 2014, ~~and~~the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was ~~$81~~$239 million and ~~$375~~$187 million as of December 31, ~~2017~~2019 and ~~December 31, 2016,~~2018, respectively.

ITEM 8.Financial Statements and Supplementary Data

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Illinois Tool Works Inc. (the "Company" or "ITW") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2017.~~2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we believe that, as of December 31, ~~2017,~~2019, the Company’s internal control over financial reporting is effective based on those criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2017~~2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.



/s/ E. Scott Santi E. Scott Santi Chairman & Chief Executive Officer February ~~15, 2018~~14, 2020		/s/ Michael M. Larsen Michael M. Larsen Senior Vice President & Chief Financial Officer February ~~15, 2018~~14, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors ~~and Stockholders~~ of Illinois Tool Works Inc.

~~Glenview, Illinois~~

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the "Company") as of December 31, ~~2017~~2019 and ~~2016,~~2018, the related consolidated statements of income, comprehensive income, changes in ~~shareholders'~~stockholders' equity, and cash flows, for each of the three years in the period ended December 31, ~~2017,~~2019, and the related notes (collectively referred to as the ~~“financial statements”~~"financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, ~~2017,~~2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2019 and ~~2016,~~2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2017,~~2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control ~~over~~Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Income Taxes-Refer to Note 6 to the financial statements

Critical Audit Matter Description

The Company’s income tax expense is recognized and measured based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions, which requires significant judgment. When calculating income tax expense management makes estimates and assumptions, including determination of the completeness of book income in each jurisdiction, calculation of taxable income through identification and classification of book to tax differences (either temporary or permanent items), consideration of applicable tax deductions or credits, and the identification of uncertain tax positions.

The evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position. Management evaluates uncertain tax positions identified and a liability is established for unrecognized tax benefits when there is a more than 50% likelihood that its tax position will not be sustained upon examination by taxing authorities. There is additional judgment to determine the amount of the liability for the underlying tax position. The Company’s income tax expense for 2019 was $767 million and the liability recorded for unrecognized tax benefits as of December 31, 2019, was $296 million.

Given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings, certain audit matters required a high degree of auditor judgment and increased extent of effort, including the need to involve our income tax specialists. These matters included the auditing of income tax expense, identification of uncertain tax positions, measurement of unrecognized tax benefits, and certain planning transactions with income tax expense implications.

How the Critical Audit Matter Was Addressed in the Audit

With the assistance of our income tax specialists, our principal audit procedures related to income tax expense included the following, among others:

We tested the effectiveness of management’s controls over income taxes, including those over income tax expense, unrecognized tax benefits, and certain planning transactions with income tax expense implications.

We evaluated management’s significant estimates and judgments incorporated into the calculation of income tax expense by:

Selecting a sample of book to tax differences (temporary and permanent) and testing the accuracy, completeness, and classification of the selections, including evaluating that all impacts of significant transactions with income tax expense implications are considered.

Developing an expectation over the foreign income tax expense by jurisdiction and comparing it to the recorded balance.

Testing the accuracy of the income tax expense calculation.

We evaluated management’s significant judgments regarding the identification of uncertain tax positions by:

Evaluating the reasonableness of a selection of certain planning transactions with income tax expense implications, including the completeness and accuracy of the underlying data supporting the transactions.

Assessing management’s methods and assumptions used in identifying uncertain tax positions.

Comparing results of prior tax audits to ongoing and anticipated tax audits by tax authorities.

Evaluating external information, including applicable tax law, new interpretations, and related changes to assess the completeness and reasonableness of management’s considerations.

Determining if there was additional information not considered in management’s assessment.

We evaluated a sample of the liabilities recorded for unrecognized tax benefits to assess the establishment and amount of the liability for the specific underlying tax position.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

February ~~15, 2018~~14, 2020

We have served as the Company's auditor since 2002.

Statement of Income

Illinois Tool Works Inc. and Subsidiaries


	For the Years Ended December 31									For the Years Ended December 31
In millions except per share amounts	2017			2016			2015			2019			2018			2017
Operating Revenue	$	14,314		$	13,599		$	13,405		$	14,109		$	14,768		$	14,314
Cost of revenue	8,309			7,896			7,888			8,187			8,604			8,306
Selling, administrative, and research and development expenses	2,400			2,415			2,417			2,361			2,391			2,412
Legal settlement (income)	(95		)	—			—			—			—			(95		)
Amortization and impairment of intangible assets	206			224			233			159			189			206
Operating Income	3,494			3,064			2,867			3,402			3,584			3,485
Interest expense	(260		)	(237		)	(226		)	(221		)	(257		)	(260		)
Other income (expense)	36			81			78			107			67			45
Income Before Taxes	3,270			2,908			2,719			3,288			3,394			3,270
Income taxes	1,583			873			820			767			831			1,583
Net Income	$	1,687		$	2,035		$	1,899		$	2,521		$	2,563		$	1,687

Net Income Per Share:
Basic	$	4.90		$	5.73		$	5.16		$	7.78		$	7.65		$	4.90
Diluted	$	4.86		$	5.70		$	5.13		$	7.74		$	7.60		$	4.86

The Notes to Financial Statements are an integral part of this statement.

Statement of Comprehensive Income

Illinois Tool Works Inc. and Subsidiaries


	For the Years Ended December 31								For the Years Ended December 31
In millions	2017		2016			2015			2019			2018			2017
Net Income	$	1,687	$	2,035		$	1,899		$	2,521		$	2,563		$	1,687
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax	406		(277		)	(860		)	(2		)	(328		)	406
Pension and other postretirement benefit adjustments, net of tax	114		(26		)	14			(26		)	(17		)	114
Comprehensive Income	$	2,207	$	1,732		$	1,053		$	2,493		$	2,218		$	2,207

The Notes to Financial Statements are an integral part of this statement.

Statement of Financial Position

Illinois Tool Works Inc. and Subsidiaries

Issued- 550.0 shares in 2017 and 2016

Outstanding- 341.5 shares in 2017 and 346.9 shares in 2016

Issued- 550.0 shares in 2019 and 2018

Outstanding- 319.8 shares in 2019 and 328.1 shares in 2018

The Notes to Financial Statements are an integral part of this statement.

Statement of Changes in Stockholders' Equity

Illinois Tool Works Inc. and Subsidiaries

The Notes to Financial Statements are an integral part of this statement.

Statement of Cash Flows

Illinois Tool Works Inc. and Subsidiaries

The Notes to Financial Statements are an integral part of this statement.

Notes to Financial Statements

(1) Description of Business and Summary of Significant Accounting Policies

Description of business— Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with approximately 8584 divisions in 5653 countries. The Company primarily serves the automotive OEM/tiers, commercial food equipment, construction, general industrial, and automotive aftermarket end markets.

Consolidation and translation— The financial statements include the Company and its majority-owned subsidiaries. The Company follows the equity method of accounting for investments where the Company has a significant influence but not a controlling interest. Intercompany transactions are eliminated from the financial statements. Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates for the period. Translation adjustments are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Reclassifications— Certain reclassifications of prior year data have been made to conform to current year reporting.

Use of estimates— The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to financial statements. Actual results could differ from those estimates.

Acquisitions— The Company accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition.

Operating revenue— ~~Operating~~Prior to 2018, the Company recognized revenue ~~is recognized~~ when persuasive evidence of an arrangement ~~exists,~~existed, product ~~has~~had shipped and the risks and rewards of ownership ~~have~~had transferred or services ~~have~~had been rendered, the price to the customer iswas fixed or determinable, and ~~collectibility is~~collectability was reasonably assured, which is generally occurred at the time of product shipment. ~~Typical~~Effective January 1, 2018, the Company adopted new revenue recognition guidance. Under this new guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. The Company's sales arrangements with customers are ~~for standard~~predominantly short-term in nature involving a single performance obligation related to the delivery of products and generally provide for transfer of ~~ownership and risk of loss~~control at the time of shipment. In limited circumstances, ~~where~~arrangements may include service performed over time, or there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving installation of equipment and customer ~~acceptance,~~acceptance. In these circumstances, operating revenue ~~recognition~~may be recognized over time as the service is provided to the customer or deferred until ~~such~~all significant obligations have been completed. The amount of operating revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods or services and may include adjustments for customer allowances and rebates. Customer allowances and rebates ~~consisting~~consist primarily of volume discounts and other short-term incentive programs, which are estimated at the time of sale based on historical experience and ~~known trends~~anticipated trends. Shipping and handling charges billed to customers are included in revenue and are ~~recorded~~recognized along with the related product revenue as they are considered a ~~reduction~~fulfillment cost. Sales commissions are expensed when incurred, which is generally at the time of revenue recognition. Contract liabilities associated with sales arrangements primarily relate to deferred revenue on equipment sales and prepaid service contracts. Total deferred revenue and customer deposits were $188 million and $215 million as of December 31, 2019 and 2018, respectively, and are short-term in ~~reported revenues.~~nature. For additional information regarding the Company's operating revenue, see New Accounting Pronouncements below and Note 3. Operating Revenue.

Research and development expenses— Research and development expenses are recorded as expense in the year incurred. These costs were ~~$225~~$221 million, ~~$223~~$233 million and ~~$218~~$225 million for the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were ~~$53~~$48 million, ~~$58~~$50 million and ~~$58~~$53 million for the years ended December 31, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

Income taxes— The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and

liabilities given the provisions of the enacted tax laws. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

Cash and equivalents— Cash and equivalents include cash on hand and instruments having original maturities of three months or less. Cash and equivalents are stated at cost, which approximates fair value.

Trade receivables— Trade receivables are net of allowances for doubtful accounts. Prior to 2018, the allowance for doubtful accounts ~~which includes~~included reserves for uncollectible accounts and customer credits. Under the new revenue guidance adopted on January 1, 2018, the reserve for customer credits is reported as a liability and ~~cash discounts. The Company estimates~~included in Accrued expenses in the Statement of Financial Position. Accordingly, after January 1, 2018, the allowance for ~~uncollectible~~doubtful accounts ~~based on the greater~~was comprised of ~~a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In addition,~~ reserves for ~~customer credits and cash discounts are estimated based on past experience.~~uncollectible accounts. The changes in the allowance for doubtful accounts for the years ended ~~2017, 2016~~December 31, 2019, 2018 and ~~2015~~2017 were as follows:



In millions	2019			2018			2017
Beginning balance	$	21		$	43		$	43
Adoption of new revenue recognition guidance	—			(23		)	—
Provision charged to expense	6			5			3
Write-offs, net of recoveries	(4		)	(3		)	(6		)
Transfer to assets held for sale	(2		)	—			—
Foreign currency translation	(1		)	(1		)	3
Ending balance	$	20		$	21		$	43

In millions 2017 2016 2015
Beginning balance $ 43
$ 42
$ 43
Provision charged to expense 3
7
7
Write-offs, net of recoveries (6 ) (6 ) (5 )
Acquisitions and divestitures —
1
—
Foreign currency translation 3
(1 ) (3 )
Ending balance $ 43
$ 43
$ 42

Inventories— Inventories are stated at the lower of cost or net realizable value and include material, labor and factory overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at LIFO were approximately ~~21% and 22%~~23% of total inventories as of December 31, ~~2017~~2019 and ~~2016, respectively.~~2018. If the FIFO method was used for all inventories, total inventories would have been approximately $89 million and ~~$86~~$97 million higher than reported at December 31, ~~2017~~2019 and ~~2016,~~2018, respectively. The major classes of inventory at December 31, ~~2017~~2019 and ~~2016~~2018 were as follows:



In millions	2019			2018
Raw material	$	452		$	523
Work-in-process	131			161
Finished goods	670			731
LIFO reserve	(89		)	(97		)
Total inventories	$	1,164		$	1,318

In millions 2017 2016
Raw material $ 465
$ 407
Work-in-process 141
126
Finished goods 703
629
LIFO reserve (89 ) (86 )
Total inventories $ 1,220
$ 1,076

Net plant and equipment— Net plant and equipment are stated at cost, less accumulated depreciation. Renewals and improvements that increase the useful life of plant and equipment are capitalized. Maintenance and repairs are charged to expense as incurred. Net plant and equipment consisted of the following at December 31, ~~2017~~2019 and ~~2016:~~2018:



In millions	2019			2018
Land	$	186		$	194
Buildings and improvements	1,357			1,368
Machinery and equipment	3,551			3,517
Construction in progress	133			154
Gross plant and equipment	5,227			5,233
Accumulated depreciation	(3,498		)	(3,442		)
Net plant and equipment	$	1,729		$	1,791

In millions 2017 2016
Land $ 203
$ 186
Buildings and improvements 1,370
1,297
Machinery and equipment 3,301
3,036
Equipment leased to others 164
160
Construction in progress 123
104
Gross plant and equipment 5,161
4,783
Accumulated depreciation (3,383 ) (3,131 )
Net plant and equipment $ 1,778
$ 1,652

The Company’s U.S. businesses primarily compute depreciation on an accelerated basis. The majority of the Company's international businesses compute depreciation on a straight-line basis. The ranges of useful lives used to depreciate plant and equipment are as follows:



Buildings and improvements	5—50 years
Machinery and equipment	3—12 years
~~Equipment leased to others~~	~~Term of lease~~

Depreciation was ~~$256~~$267 million, ~~$246~~$272 million and ~~$244~~$256 million for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively.

Goodwill and intangible assets— Goodwill represents the excess cost over fair value of the net assets of acquired businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.

The Company performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units, including discounting estimated future cash flows based on a detailed cash flow forecast prepared by the relevant reporting unit and market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit's goodwill.

The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these intangible assets are determined based on a Level 3 valuation method using a relief-from-royalty income approach derived from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible asset.

Accrued warranties— The Company accrues for product warranties based on historical experience. The changes in accrued warranties for the years ended December 31, ~~2017, 2016~~2019, 2018 and ~~2015~~2017 were as follows:



In millions	2019			2018			2017
Beginning balance	$	45		$	45		$	45
Charges	(44		)	(49		)	(45		)
Provision charged to expense	44			50			43
Foreign currency translation	—			(1		)	2
Ending balance	$	45		$	45		$	45

In millions 2017 2016 2015
Beginning balance $ 45
$ 46
$ 49
Charges (45 ) (41 ) (37 )
Provision charged to expense 43
42
36
Acquisitions and divestitures —
1
—
Foreign currency translation 2
(3 ) (2 )
Ending balance $ 45
$ 45
$ 46

New Accounting Pronouncements

Effective January 1, ~~2017~~2018

In ~~March 2016,~~May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance that includes 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. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million and $20 million for the years ended December 31, 2016 and 2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $50 million were included in Income taxes in the statement of income for the year ended December 31, 2017. 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.

~~Effective January 1, 2018~~

~~In May 2014, the FASB~~ issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new guidance is that revenue should be recognized to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ~~several new~~expanded revenue ~~recognition~~ disclosures ~~will be~~are required. The Company's sales arrangements with customers are ~~predominately short term~~predominantly short-term in nature and generally provide for transfer of control and ~~revenue recognition~~risks and rewards of ownership at the time of product shipment or delivery of service. ~~In limited circumstances, arrangements may include service performed over time, or there may be significant obligations to~~As such, the ~~customer that are unfulfilled at~~timing of revenue recognition under both the ~~time~~prior and new guidance is the same for the majority of ~~shipment, typically involving installation of equipment and customer acceptance.~~the Company’s transactions. Effective January 1, 2018, the Company adopted ~~this~~the new revenue recognition guidance under the modified retrospective method ~~which requires~~and recorded a cumulative-effect adjustment reducing retained earnings by $9 million as of January 1, 2018. Under the modified

retrospective method of adoption, prior periods are not restated and the new guidance ~~to be~~is applied prospectively to revenue transactions completed on or after ~~the effective date.~~January 1, 2018. Given the nature of the Company’s revenue transactions, the new guidance ~~is not expected to have a material~~had an immaterial impact on the ~~Company’s~~Company's operating revenue, results of operations, orand financial ~~position. As a result~~position for the year ended December 31, 2018. The Company updated its revenue recognition accounting policy to reflect the requirements of adopting the guidance, the Company expects to record a cumulative-effect adjustment reducing retained earnings as of January 1, 2018 by approximately $10 million related to certain transactions that were impacted by the new ~~guidance. Additionally, the Company expects to provide the required~~guidance and included additional disclosures ~~in periods subsequent~~regarding the Company's revenue transactions. Refer to ~~adoption.~~the Company’s operating revenue accounting policy above and Note 3. Operating Revenue for additional information.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the ~~current~~prior guidance. ~~Effective January 1, 2018, the Company adopted~~The provisions of the new guidance ~~and will apply the newly adopted guidance~~are being applied prospectively to intra-entity asset transfers on or after ~~the date~~January 1, 2018 and may result in future tax rate volatility. Upon adoption of ~~adoption. As a result of adopting~~ the new guidance on January 1, 2018, the Company ~~expects to record~~recorded a cumulative-effect adjustment reducing deferred tax assets and retained earnings by ~~approximately $400~~$406 million. ~~Additionally, intra-entity asset transfers may result in future~~For the years ended December 31, 2019 and 2018, the impact of the new guidance on the Company's effective income tax rate ~~volatility under the new guidance.~~was not material.

In ~~March 2017,~~February 2018, the FASB issued authoritative guidance which ~~changes the income statement presentation~~allows for an optional one-time reclassification of the ~~components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary~~stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the ~~new~~"Tax Cuts and Jobs Act" (the "Act") from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance ~~is that only the service cost component~~was effective January 1, 2019, with early adoption permitted. The Company elected to early adopt this guidance as of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, including interest cost, expected return on assets, settlements, curtailments, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. Effective January 1, 2018 and to reclassify the ~~Company adopted~~stranded tax effects related to the ~~new guidance~~Act, which resulted in an increase of $45 million to both retained earnings and will apply the new presentation of net periodic benefit cost in future periods and expects to restate prior periods for comparability. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows. For the years ended December 31, 2017, 2016 and 2015, theaccumulated other ~~components of net periodic benefit cost were income of $9 million, income of $8 million, and expense of $1 million, respectively.~~comprehensive loss. Refer to Note ~~9. Pension and Other Postretirement Benefits~~13. Stockholders' Equity for ~~further information regarding the Company’s net periodic benefit cost.~~additional information.

Effective January 1, 2019

In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. ~~Under~~The primary change under the new guidance is that a lessee ~~will be~~is required to recognize a lease liability and ~~lease~~corresponding right-of-use asset for its operating leases. The new guidance also requires additional disclosures. Effective January 1, 2019, the Company adopted the new guidance prospectively for all ~~leases, including~~ operating ~~leases,~~lease transactions as of and after the effective date with a noncancellable lease term greater than ~~twelve months in~~one year. Upon adoption, the ~~statement~~Company recorded a lease liability of ~~financial position. Subsequent measurement, including presentation~~$205 million and a corresponding right-of-use asset. The new guidance did not have a material impact on the results of ~~expenses and~~operations or cash flows ~~will depend~~for the year ended December 31, 2019. Refer to Note 9. Leases for additional information regarding the Company’s lease transactions.

In August 2017, the FASB issued authoritative guidance which included targeted improvements to simplify the application of hedge accounting and improve financial reporting of hedging activities. Effective January 1, 2019, the Company adopted the new guidance which did not have a material impact on the ~~classification~~Company's results of operations, financial position or cash flows for the year ended December 31, 2019.

Effective January 1, 2020

In June 2016, the FASB issued authoritative guidance which changes the methodology used to measure credit losses for certain financial instruments. Under current guidance, credit loss reserves are estimated based on historical information. The new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the ~~lease as either a financing or operating lease. In addition, several~~financial asset. This new ~~disclosures will be required. This~~ guidance is effective for the Company prospectively beginning January 1, ~~2019, with early adoption permitted. While the Company has~~2020 and is not ~~yet completed its evaluation of the~~expected to have a material impact ~~the new lease accounting guidance will have~~ on the consolidated financial statements and related disclosures, the Company expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon adoption.

~~(2) Acquisitions~~

~~Net cash paid for acquisitions during 2017, 2016 and 2015 was $3 million, $453 million and $6 million, respectively. Acquisitions, individually and in the aggregate, did not materially affect~~ the Company's results of operations or financial ~~position~~position.

In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for ~~any period presented.~~impairment. Under current guidance, when the estimated fair value of a reporting unit is less than its carrying value, the fair value of the goodwill must be determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the amount that the carrying value of the reporting unit exceeds its fair value. This new guidance is effective for the Company prospectively beginning January 1, 2020 and will be applied by the Company during its annual assessment of goodwill in the third quarter, or earlier if a triggering event occurs. The adoption of this new accounting guidance is not expected to have a material impact on the Company's results of operations or financial position.

The Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further portfolio refinements may be needed. The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1 billion. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the business.

In the second quarter of 2019, the Company approved plans to divest 6 businesses, including 2 businesses in the Test & Measurement and Electronics segment, 1 business in the Automotive OEM segment, 1 business in the Welding segment, and 2 businesses in the Specialty Products segment. These 6 businesses were classified as held for sale beginning in the second quarter of 2019. In the fourth quarter of 2019, the Company divested 3 of the held for sale businesses which included 1 business in the Test & Measurement and Electronics segment, 1 business in the Welding segment, and 1 business in the Specialty Products segment.

For the twelve months ended December 31, 2019, the Company recorded net ~~cash paid~~pre-tax gains on disposal of businesses of $44 million ($30 million after-tax, or $0.09 per diluted share) which was primarily due to the 3 divestitures of held for ~~acquisitions~~sale businesses discussed above. The net pre-tax gain was included in ~~2016 primarily~~Other income (expense) in the Statement of Income. Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the twelve months ended December 31, 2019, 2018 and 2017, was as follows:



In millions	2019		2018		2017
Operating revenue	$	134	$	194	$	202

The operating revenue for the twelve months ended December 31, 2019 of $134 million related to the ~~acquisition~~businesses divested in 2019 included $62 million in the Welding segment, $58 million in the Test & Measurement and Electronics segment, and $14 million in the Specialty Products segment.

As of December 31, 2019, 3 of the ~~Engineered Fasteners~~businesses discussed above continued to be held for sale, including 1 business in the Test & Measurement and ~~Components ("EF&C")~~Electronics segment, 1 business ~~from ZF TRW on July 1, 2016 for a purchase price of approximately $450 million. EF&C had operating revenue of $517 million for~~in the ~~year ended December 31, 2017 and $245 million for the six months ended December 31,~~

~~2016, which was reported within the Company’s~~ Automotive OEM segment, and 1 business in the Specialty Products segment. ~~As a result~~All of the EF&C transaction, the Company recorded $187 million of goodwill and $134 million of amortizable intangible assets primarily related to customer relationships and technology. Approximately $104 million of the acquired goodwill balance is tax deductible. The fair values of the intangible assets were estimated based on discounted cash flow and market-based valuation models using Level 2 and Level 3 inputs and assumptions. The intangible assetsthese businesses are expected to be ~~amortized~~sold within one year. The assets and liabilities related to the held for sale businesses were included in assets and liabilities held for sale in the Statement of Financial Position as of December 31, 2019, as follows:



In millions
Trade receivables	$	81
Inventories	28
Net plant and equipment	48
Goodwill and intangible assets	166
Other	28
Total assets held for sale	$	351

Accounts payable	$	21
Accrued expenses	17
Other	33
Total liabilities held for sale	$	71

Operating revenue related to the 3 businesses held for sale as of December 31, 2019 that was included in the Company's results of operations for the twelve months ended December 31, 2019, 2018 and 2017, was as follows:



In millions	2019		2018		2017
Operating revenue	$	373	$	393	$	397

(3) Operating Revenue

The Company's 84 diversified operating divisions are organized and managed based on similar product categories and end markets, and are reported to senior management as the following 7 segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating revenue by product category, which is consistent with the Company's segment presentation, for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:



In millions	2019			2018			2017
Automotive OEM	$	3,063		$	3,338		$	3,271
Food Equipment	2,188			2,214			2,123
Test & Measurement and Electronics	2,121			2,171			2,069
Welding	1,638			1,691			1,538
Polymers & Fluids	1,669			1,724			1,724
Construction Products	1,625			1,700			1,672
Specialty Products	1,825			1,951			1,938
Intersegment revenue	(20		)	(21		)	(21		)
Total	$	14,109		$	14,768		$	14,314

Prior to 2018, the Company recognized revenue when persuasive evidence of an arrangement existed, product had shipped and the risks and rewards of ownership had transferred or services had been rendered, the price to the customer was fixed or determinable, and collectability was reasonably assured, which generally occurred at the time of product shipment. Effective January 1, 2018, the Company adopted new revenue recognition guidance. Under this new guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. Given the nature of the Company’s revenue transactions, the new guidance had an immaterial impact on the Company's operating revenue, results of operations, and financial position for the twelve months ended December 31, 2019 and 2018. See Note 1. Description of Business and Summary of Significant Accounting Policies for additional information. The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's 7 segments:

Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.

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 institutional/restaurant and food retail markets. Products in this segment include:

Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over ~~their estimated useful lives ranging from 4~~the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.

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, automotive original equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment include:

Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to ~~17 years,~~the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed.

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 ~~weighted average amortization period~~wide array of ~~16 years.~~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:

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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;

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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, general industrial, consumer durables, industrial capital goods and printing and publishing markets. Products in this segment include:

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.

~~(3)~~(4) Legal Settlement

~~(4)~~(5) Other Income (Expense)

Other income (expense) for the twelve months ended December 31, 2019, 2018 and 2017 consisted of the following:



In millions	2019			2018			2017
Gain (loss) on disposal of operations and affiliates	$	44		$	(2	)	$	1
Interest income	29			35			45
Other net periodic benefit income	24			20			9
Income (loss) from investments	15			9			16
Equity income in Wilsonart	—			—			—
Gain (loss) on foreign currency transactions, net	(10		)	(1		)	(25		)
Other, net	5			6			(1		)
Total other income (expense)	$	107		$	67		$	45

In millions 2017 2016 2015
Interest income $ 45
$ 38
$ 52
Income (loss) from investments 16
(13 ) 4
Gain (loss) on disposal of operations and affiliates 1
(12 ) 16
Equity income (loss) in Wilsonart —
61
(4 )
Gain (loss) on foreign currency transactions, net (25 ) 9
5
Other, net (1 ) (2 ) 5
Total other income (expense) �� $ 36
$ 81
$ 78

Refer to Note 2. Divestitures for further information regarding the Gain (loss) on disposal of operations and affiliates of $44 million for the twelve months ended December 31, 2019.

In the fourth quarter of 2012, the Company divested a 51% majority interest in its former Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). As a result of the transaction, the Company owns common units (the "Common Units") of Wilsonart International Holdings LLC ("Wilsonart") initially representing approximately 49% (on an as-converted basis) of the total outstanding equity. CD&R owns cumulative convertible participating preferred units (the "Preferred Units") of Wilsonart representing approximately 51% (on an as-converted basis) of the total outstanding equity. The Preferred Units rank senior to the Common Units as to dividends and liquidation preference, and accrue dividends at a rate of 10% per annum. The ownership interest in Wilsonart is reported using the equity

method of accounting. The Company's proportionate share in income (loss) of Wilsonart is reported in Other income (expense) in the ~~consolidated statement~~Statement of ~~income.~~Income. As the Company's investment in Wilsonart is structured as a partnership for U.S. tax purposes, U.S. taxes are recorded separately from the equity investment. ~~Equity income (loss) in Wilsonart for~~In 2016, the ~~year ended December 31, 2016 included a $54 million pre-tax gain resulting from~~Company received a $167 million ~~cash~~ dividend distribution from Wilsonart which exceeded the Company's equity investment ~~balance.~~balance and resulted in a $54 million pre-tax gain in 2016. As a result of the dividend distribution, the equity investment balance in Wilsonart was reduced to ~~zero~~0 and any subsequent equity investment income will not be recognized until the gain is recaptured.

~~(5)~~(6) Income Taxes

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly ~~revise~~revised the U.S. corporate income tax rules. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of the amounts recorded at December 31, 2017.

In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as follows:

~~A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries.~~

•

A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can be paid in installments over eight years. The noncurrent income taxes payable related to the one-time repatriation tax was $462 million and $495 million as of December 31, 2019 and 2018, respectively. Additionally, as a result of the one-time repatriation provisions of the Act, the Company recorded additional foreign withholding taxes of $53 million in the fourth quarter of 2017 related to the expected repatriation of foreign held cash and equivalents.

•

A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018. Although the lower tax rate took effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. In the fourth quarter of 2017, the Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.


•	Deductibility of certain executive compensation. In the fourth quarter of 2017, the Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.

At December 31, 2017, the Company had not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate which was recorded in the fourth quarter of 2017. ~~A portion~~During 2018, the Company revised its initial estimates which did not result in material changes to the provisional amounts recorded at December 31, 2017, or the effective tax rate for 2018. As of December 31, 2018, the Company had completed its accounting related to the tax effects of enactment of the ~~resulting income taxes payable can be paid in installments over eight years and, as such, $614 million was recorded as noncurrent income taxes payable in~~Act. The Company’s ongoing accounting for the ~~statement of financial position. Additionally, as a result of the one-time repatriation provisions~~tax effects of the Act are based on the ~~Company expects to repatriate approximately $2 billion~~Company's current understanding of ~~foreign held cash and equivalents and recorded additional foreign withholding taxes of $53 million~~the changes in the ~~fourth quarter of 2017.~~

~~A reduction in~~tax law under the ~~U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018.~~ ~~Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should~~Act, but may be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. The Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.

~~Deductibility of certain executive compensation.~~ ~~The Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.~~

~~Taxation of certain global intangible low-taxed income entities ("GILTI") beginning in 2018~~. This provision does not impact the Company in 2017, but will impact the Company in subsequent years and is expected to partially offset the benefit of the lower U.S. corporate tax rate discussed above.

~~The provisional amounts recorded for the year ended December 31, 2017 reflect the Company’s best estimate based on information currently available and are subject to future changes~~impacted due to ~~subsequent~~issuance of final regulations or further clarification of the tax ~~law and refinement of estimated amounts.~~law.

Provision for income taxes— The components of the provision for income taxes for the twelve months ended December 31, 2019, 2018 and 2017 were as follows:



In millions	2019			2018			2017
U.S. federal income taxes:
Current	$	356		$	373		$	1,117
Deferred	(26		)	(15		)	(10		)
Total U.S. federal income taxes	330			358			1,107
Foreign income taxes:
Current	302			358			296
Deferred	53			49			102
Total foreign income taxes	355			407			398
State income taxes:
Current	77			66			106
Deferred	5			—			(28		)
Total state income taxes	82			66			78
Total provision for income taxes	$	767		$	831		$	1,583


Dollars in millions	2017			2016			2015			2019			2018			2017
Operating income	$	3,494		$	3,064		$	2,867		$	3,402		$	3,584		$	3,485
Less: Legal settlement income	(95		)	—			—			—			—			(95		)
Adjusted operating income	3,399			3,064			2,867			3,402			3,584			3,390
Tax rate	28.3		%	30.0		%	30.1		%
Adjusted tax rate										24.0		%	24.9		%	28.3		%
Income taxes	(961		)	(919		)	(864		)	(815		)	(893		)	(958		)
Operating income after taxes	$	2,438		$	2,145		$	2,003		$	2,587		$	2,691		$	2,432

Invested capital:
Trade receivables	$	2,628		$	2,357		$	2,203		$	2,461		$	2,622		$	2,628
Inventories	1,220			1,076			1,086			1,164			1,318			1,220
Net assets held for sale										280			—			—
Net plant and equipment	1,778			1,652			1,577			1,729			1,791			1,778
Goodwill and intangible assets	6,024			6,021			5,999			5,343			5,717			6,024
Accounts payable and accrued expenses	(1,848		)	(1,713		)	(1,585		)	(1,689		)	(1,795		)	(1,848		)
Other, net	21			223			280			(481		)	(519		)	21
Total invested capital	$	9,823		$	9,616		$	9,560		$	8,807		$	9,134		$	9,823

Average invested capital	$	10,005		$	9,780		$	9,943		$	9,028		$	9,533		$	10,005
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)	—			(91		)	(123		)
Adjusted average invested capital	$	10,005		$	9,689		$	9,820
Adjusted return on average invested capital	24.4		%	22.1		%	20.4		%
Adjusted after-tax return on average invested capital										28.7		%	28.2		%	24.3		%


Dollars in millions	2017		2016		Increase (Decrease)			2019		2018		Increase (Decrease)
Current Assets:
Cash and equivalents	$	3,094	$	2,472	$	622		$	1,981	$	1,504	$	477
Trade receivables	2,628		2,357		271			2,461		2,622		(161		)
Inventories	1,220		1,076		144			1,164		1,318		(154		)
Other	336		218		118
Prepaid expenses and other current assets								296		334		(38		)
Assets held for sale								351		—		351
	7,278		6,123		1,155			6,253		5,778		475
Current Liabilities:
Short-term debt	850		652		198			4		1,351		(1,347		)
Accounts payable and accrued expenses	1,848		1,713		135			1,689		1,795		(106		)
Liabilities held for sale								71		—		71
Other	355		395		(40		)	390		396		(6		)
	3,053		2,760		293			2,154		3,542		(1,388		)
Net Working Capital	$	4,225	$	3,363	$	862		$	4,099	$	2,236	$	1,863



	Number Of Properties
	Owned	Leased	Total
Automotive OEM	58	35	93
Food Equipment	25	19	44
Test & Measurement and Electronics	27	58	85
Welding	25	15	40
Polymers & Fluids	34	33	67
Construction Products	27	27	54
Specialty Products	45	37	82
Corporate	1	9	10
Total	242	233	475



	Market Price Per Share				Dividends Declared Per Share
	High		Low		Dividends Declared Per Share
2017:
Fourth quarter	$	169.69	$	147.96	$	0.78
Third quarter	148.28		135.07		0.78
Second quarter	150.29		130.17		0.65
First quarter	136.03		120.06		0.65

2016:
Fourth quarter	$	127.99	$	111.50	$	0.65
Third quarter	123.50		103.08		0.65
Second quarter	109.54		98.32		0.55
First quarter	102.98		79.15		0.55


◦	Organic revenue for the automotive aftermarket businesses ~~increased 0.6%~~declined 0.7% primarily ~~driven~~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 ~~and tire repair~~ businesses in North America.


◦	Organic revenue for the ~~fluids~~polymers businesses ~~grew 2.9%~~increased 2.4% primarily ~~due to an increase~~driven by growth in Asia and North America, primarily in the heavy industrial ~~maintenance, repair, and operations~~ end ~~markets in North America and Europe.~~markets.


◦	Organic revenue for the ~~polymers~~fluids businesses ~~was flat as increases in Asia and South America were offset by a decline in Europe.~~


◦	Organic revenue for the polymers businesses increased 0.9% primarily driven by an increase in North America and South America, partially offset by a decline in Europe.


◦	Organic revenue for the fluids businesses declined 1.1% primarily due to decreased demand in Europe and South America, partially offset by growth in the industrial maintenance, repair, and operations end markets in North America.


◦	North American organic revenue was flat as an increase of 1.9% in the United States residential end markets was offset by a decline of 3.2% in the commercial end markets and a decline in Canada.


◦	International organic revenue declined 1.8%. Asia Pacific organic revenue decreased 5.1% primarily due to a decline in Australia and New Zealand across all end markets. European organic revenue increased 1.3% driven by growth in continental Europe.


◦	North American organic revenue grew 1.6% as growth in the residential end markets of 3.2% was partially offset by a decline in the commercial end markets of 5.7%.


◦	~~North American organic revenue grew 3.3% driven by growth in residential and commercial end markets.~~


◦	~~International organic revenue increased 7.3% driven by growth in the appliance and consumer packaging businesses across all major regions.~~


◦	North American organic revenue ~~increased 1.3% driven by growth~~decreased 3.1% primarily due to a decrease in the ~~consumer packaging, medical~~specialty films, labels and appliance businesses, partially offset by ~~a decline~~growth in the ground support equipment business and ~~gluing system~~consumer packaging businesses.


◦	International organic revenue ~~increased 2.3% driven by growth~~decreased 5.6% primarily due to a decline in the specialty films, graphics, appliance ~~foils~~ and ~~gluing system~~foils businesses in ~~Asia Pacific.~~Europe.


◦	North American organic revenue grew 1.8% primarily due to increased ~~0.6% driven by growth~~demand in the consumer packaging and ~~medical~~ground support businesses, partially offset by a decline in the ~~brand identification~~labels, appliance and plastic films businesses.


	Twelve Months Ended					Twelve Months Ended
	December 31, 2017					December 31, 2017
	Income Taxes			Tax Rate
Dollars in millions						Income Taxes			Tax Rate
As reported	$	1,583		48.4	%	$	1,583		48.4	%
Discrete tax charge related to 2017 U.S. tax legislation	(658		)	(20.1	)%	(658		)	(20.1	)%
As adjusted	$	925		28.3	%	$	925		28.3	%


	December 31						December 31
In millions except per share amounts	2017			2016			2019			2018
Assets
Current Assets:
Cash and equivalents	$	3,094		$	2,472		$	1,981		$	1,504
Trade receivables	2,628			2,357			2,461			2,622
Inventories	1,220			1,076			1,164			1,318
Prepaid expenses and other current assets	336			218			296			334
Assets held for sale							351			—
Total current assets	7,278			6,123			6,253			5,778

Net plant and equipment	1,778			1,652			1,729			1,791
Goodwill	4,752			4,558			4,492			4,633
Intangible assets	1,272			1,463			851			1,084
Deferred income taxes	505			449			516			554
Other assets	1,195			956			1,227			1,030
	$	16,780		$	15,201		$	15,068		$	14,870

Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt	$	850		$	652		$	4		$	1,351
Accounts payable	590			511			472			524
Accrued expenses	1,258			1,202			1,217			1,271
Cash dividends payable	266			226			342			328
Income taxes payable	89			169			48			68
Liabilities held for sale							71			—
Total current liabilities	3,053			2,760			2,154			3,542
Noncurrent Liabilities:
Long-term debt	7,478			7,177			7,754			6,029
Deferred income taxes	164			134			668			707
Noncurrent income taxes payable	614			—			462			495
Other liabilities	882			871			1,000			839
Total noncurrent liabilities	9,138			8,182			9,884			8,070
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2017 and 2016 Outstanding- 341.5 shares in 2017 and 346.9 shares in 2016	6			6
Issued- 550.0 shares in 2019 and 2018 Outstanding- 319.8 shares in 2019 and 328.1 shares in 2018							6			6
Additional paid-in-capital	1,218			1,188			1,304			1,253
Retained earnings	20,210			19,505			22,403			21,217
Common stock held in treasury	(15,562		)	(14,638		)	(18,982		)	(17,545		)
Accumulated other comprehensive income (loss)	(1,287		)	(1,807		)	(1,705		)	(1,677		)
Noncontrolling interest	4			5			4			4
Total stockholders’ equity	4,589			4,259			3,030			3,258
	$	16,780		$	15,201		$	15,068		$	14,870


In millions except per share amounts	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total			Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
Balance at December 31, 2014	$	6	$	1,096		$	17,173		$	(10,798	)	$	(658	)	$	5		$	6,824
Net income	—		—			1,899			—			—			—			1,899
Common stock issued for share-based compensation	—		(21		)	—			69			—			—			48
Stock-based compensation expense	—		39			—			2			—			—			41
Tax benefits related to stock options	—		20			—			—			—			—			20
Tax benefits related to defined contribution plans	—		3			—			—			—			—			3
Repurchases of common stock	—		—			—			(2,002		)	—			—			(2,002		)
Dividends declared ($2.07 per share)	—		—			(756		)	—			—			—			(756		)
Pension and other postretirement benefit adjustments	—		—			—			—			14			—			14
Currency translation adjustment	—		—			—			—			(860		)	—			(860		)
Noncontrolling interest	—		(2		)	—			—			—			(1		)	(3		)
Balance at December 31, 2015	6		1,135			18,316			(12,729		)	(1,504		)	4			5,228
Net income	—		—			2,035			—			—			—			2,035
Common stock issued for share-based compensation	—		(18		)	—			91			—			—			73
Stock-based compensation expense	—		39			—			—			—			—			39
Tax benefits related to stock options	—		29			—			—			—			—			29
Tax benefits related to defined contribution plans	—		3			—			—			—			—			3
Repurchases of common stock	—		—			—			(2,000		)	—			—			(2,000		)
Dividends declared ($2.40 per share)	—		—			(846		)	—			—			—			(846		)
Pension and other postretirement benefit adjustments	—		—			—			—			(26		)	—			(26		)
Currency translation adjustment	—		—			—			—			(277		)	—			(277		)
Noncontrolling interest	—		—			—			—			—			1			1
Balance at December 31, 2016	6		1,188			19,505			(14,638		)	(1,807		)	5			4,259			$	6	$	1,188		$	19,505		$	(14,638	)	$	(1,807	)	$	5		$	4,259
Net income	—		—			1,687			—			—			—			1,687			—		—			1,687			—			—			—			1,687
Common stock issued for share-based compensation	—		(4		)	—			76			—			—			72
Common stock issued for stock-based compensation																					—		(4		)	—			76			—			—			72
Stock-based compensation expense	—		36			—			—			—			—			36			—		36			—			—			—			—			36
Repurchases of common stock	—		—			—			(1,000		)	—			—			(1,000		)	—		—			—			(1,000		)	—			—			(1,000		)
Dividends declared ($2.86 per share)	—		—			(982		)	—			—			—			(982		)	—		—			(982		)	—			—			—			(982		)
Pension and other postretirement benefit adjustments	—		—			—			—			114			—			114			—		—			—			—			114			—			114
Currency translation adjustment	—		—			—			—			406			—			406
Currency translation adjustments																					—		—			—			—			406			—			406
Noncontrolling interest	—		(2		)	—			—			—			(1		)	(3		)	—		(2		)	—			—			—			(1		)	(3		)
Balance at December 31, 2017	$	6	$	1,218		$	20,210		$	(15,562	)	$	(1,287	)	$	4		$	4,589		6		1,218			20,210			(15,562		)	(1,287		)	4			4,589
Net income																					—		—			2,563			—			—			—			2,563
Adoption of new accounting guidance																					—		—			(370		)	—			(45		)	—			(415		)
Common stock issued for stock-based compensation																					—		(5		)	—			17			—			—			12
Stock-based compensation expense																					—		40			—			—			—			—			40
Repurchases of common stock																					—		—			—			(2,000		)	—			—			(2,000		)
Dividends declared ($3.56 per share)																					—		—			(1,186		)	—			—			—			(1,186		)
Pension and other postretirement benefit adjustments																					—		—			—			—			(17		)	—			(17		)
Currency translation adjustments																					—		—			—			—			(328		)	—			(328		)
Balance at December 31, 2018																					6		1,253			21,217			(17,545		)	(1,677		)	4			3,258
Net income																					—		—			2,521			—			—			—			2,521
Common stock issued for stock-based compensation																					—		11			—			63			—			—			74
Stock-based compensation expense																					—		41			—			—			—			—			41
Repurchases of common stock																					—		—			—			(1,500		)	—			—			(1,500		)
Dividends declared ($4.14 per share)																					—		—			(1,335		)	—			—			—			(1,335		)
Pension and other postretirement benefit adjustments																					—		—			—			—			(26		)	—			(26		)
Currency translation adjustments																					—		—			—			—			(2		)	—			(2		)
Noncontrolling interest																					—		(1		)	—			—			—			—			(1		)
Balance at December 31, 2019																					$	6	$	1,304		$	22,403		$	(18,982	)	$	(1,705	)	$	4		$	3,030



	Gross Carryforwards Related
In millions	to Net Operating Losses
2020	$	86
2021	80
2022	25
2023	7
2024	49
2025-2045	117
Do not expire	1,378
Total gross carryforwards related to net operating losses	$	1,742



Jurisdiction		Open Tax Years
United States – Federal		~~2014-2017~~2016-2019
United Kingdom		~~2016-2017~~2017-2019
Germany		~~2012-2017~~2012-2019
France		~~2014-2017~~2016-2019
Australia		~~2013-2017~~2013-2019



	Pension									Other Postretirement Benefits
In millions	2019			2018			2017			2019			2018			2017
Components of net periodic benefit cost:
Service cost	$	52		$	60		$	63		$	7		$	8		$	9
Interest cost	78			72			72			20			18			19
Expected return on plan assets	(121		)	(126		)	(133		)	(22		)	(25		)	(23		)
Amortization of actuarial (gain) loss	21			43			57			(1		)	(2		)	(1		)
Amortization of prior service cost	1			—			—			—			—			—
Total net periodic benefit cost	$	31		$	49		$	59		$	4		$	(1	)	$	4



In millions	1 Percentage-Point Increase		1 Percentage-Point Decrease
Change in service cost and interest cost for 2019	$	—	$	(1	)
Change in postretirement benefit obligation at December 31, 2019	$	2	$	(3	)



Shares in millions	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested, January 1, 2019	0.5		$121.24
Granted	0.2		144.43
Vested	(0.2	)	87.28
Unvested, December 31, 2019	0.5		144.92



In millions except exercise price and contractual terms	Number of Shares		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Under option, January 1, 2019	4.6		$90.56
Granted	0.5		144.21
Exercised	(1.3	)	64.51
Canceled or expired	(0.1	)	144.55
Under option, December 31, 2019	3.7		106.57	5.9	$271
Exercisable, December 31, 2019	2.4		89.55	4.8	$220



	Three Months Ended
	March 31				June 30				September 30				December 31
In millions except per share amounts	2019		2018		2019		2018		2019		2018		2019		2018
Operating revenue	$	3,552	$	3,744	$	3,609	$	3,831	$	3,479	$	3,613	$	3,469	$	3,580
Cost of revenue	2,059		2,181		2,099		2,231		2,007		2,096		2,022		2,096
Operating income	839		903		871		932		868		889		824		860
Net income	597		652		623		666		660		638		641		607
Net income per share:
Basic	$	1.82	$	1.92	$	1.92	$	1.98	$	2.05	$	1.91	$	2.00	$	1.84
Diluted	1.81		1.90		1.91		1.97		2.04		1.90		1.99		1.83



Exhibit Number		Description
2.1(a)		Investment Agreement, dated as of August 15, 2012, among CD&R Wimbledon Holdings III, L.P., a Cayman Islands limited partnership; Illinois Tool Works Inc.; ITW DS Investments Inc., a Delaware corporation; and Wilsonart International Holdings LLC, a Delaware limited liability company, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 17, 2012 (Commission File No. 1-4797) and incorporated herein by reference. (Certain of the schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but the Company undertakes to furnish a copy of the schedules or similar attachments to the Securities and Exchange Committee upon request.)

2.1(b)		Stock Purchase Agreement, dated as of February 6, 2014, between Illinois Tool Works Inc. and certain of its subsidiaries and Vault Bermuda Holding Co. Ltd., filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 12, 2014. (Commission File No. 1-4797) and incorporated herein by reference. (Certain of the schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but the Company undertakes to furnish a copy of the schedules or similar attachments to the Securities and Exchange Commission upon request).

3(a)(i)		Amended and Restated Certificate of Incorporation of Illinois Tool Works Inc., filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (Commission File No. 1-4797) and incorporated herein by reference.

3(a)(ii)		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Illinois Tool Works Inc., filed as Exhibit 3(a)(ii) to the Company’s Current Report on Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference.

3(b)		By-laws of Illinois Tool Works Inc., as amended and restated as of May 6, 2016, filed as Exhibit 3(b)(i) to the Company’s Current Report on Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and incorporated herein by reference.

4(a)		Indenture between Illinois Tool Works Inc. and The First National Bank of Chicago, as Trustee, dated as of November 1, 1986, filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed on January 15, 1999 (Commission File No. 333-70691) and incorporated herein by reference.

4(b)		First Supplemental Indenture between Illinois Tool Works Inc. and Harris Trust and Savings Bank, as Trustee, dated as of May 1, 1990, filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-3 filed on January 15, 1999 (Commission File No. 333-70691) and incorporated herein by reference.

4(c)		Officers’ Certificate dated March 26, 2009 establishing the terms, and setting forth the forms, of the 5.15% Notes due 2014 and the 6.25% Notes due 2019, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 27, 2009 (Commission File No. 1-4797) and incorporated herein by reference.

~~4(d)~~		Officers’ Certificate dated August 31, 2011, establishing the terms, and setting forth the forms, of the 3.375% Notes due 2021 and the 4.875% Notes due 2041, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on September 1, 2011 (Commission File No. 001-04797) and incorporated herein by reference.



~~Exhibit~~ ~~Number~~		~~Description~~
~~4(e)~~4(d)		Officers' Certificate dated August 28, 2012, establishing the terms, and setting forth the forms, of the 3.9% Notes due 2042, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 28, 2012 (Commission File No. 001-4797) and incorporated herein by reference.



Exhibit Number		Description

~~4(f)~~4(e)		Officers’ Certificate dated February 25, 2014, establishing the terms, and setting forth the forms, of the 0.9% Notes due 2017, the 1.95% Notes due 2019, and the 3.5% Notes due 2024, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 26, 2014 (Commission File No. 001-04797) and incorporated herein by reference.

~~4(g)~~4(f)		Officers’ Certificate dated May 20, 2014, establishing the terms, and setting forth the forms, of the 1.75% Euro Notes due 2022 and the 3.0% Euro Notes due 2034, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 22, 2014 (Commission File No. 001-04797) and incorporated herein by reference.

~~4(h)~~4(g)		Officers’ Certificate dated May 19, 2015, establishing the terms, and setting forth the forms, of the 1.25% Euro Notes due 2023 and the 2.125% Euro Notes due 2030, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 22, 2015 (Commission File No. 001-04797) and incorporated herein by reference.

~~4(i)~~4(h)		Officer’s Certificate dated November 7, 2016, establishing the terms, and setting forth the forms, of the 2.65% Notes due 2026, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 10, 2016 (Commission File No. 001-04797) and incorporated herein by reference.

10(a)*4(i)		~~Illinois Tool Works Inc. 2006 Stock Incentive Plan~~Officers’ Certificate dated ~~February 10, 2006, as amended on May~~June 5, ~~2006,~~2019, establishing the terms, and setting forth the forms, of the 0.250% Notes due 2024, the 0.625% Notes due 2027 and the 1.000% Notes due 2031, filed as Exhibit ~~10(a)~~4.1 to the Company’s ~~Quarterly~~Current Report on Form ~~10-Q for the quarterly period ended March 31, 2006~~8-K filed on June 5, 2019 (Commission File No. ~~1-4797)~~001-04797) and incorporated herein by reference.

10(b)*4(j)		~~Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 8, 2008, filed as Exhibit 10(q) to~~Description of the Company’s ~~Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (Commission File No. 1-4797) and incorporated herein by reference.~~common stock.

10(c)*4(k)		~~Second Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 13, 2009, filed as Exhibit 10(d) to~~Description of the ~~Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797)~~1.75% Euro Notes due 2022 and ~~incorporated herein by reference.~~3.00% Euro Notes due 2034.

10(d)*4(l)		Description of the 1.25% Euro Notes due 2023 and 2.125% Euro Notes due 2030.

4(m)		Description of the 0.250% Euro Notes due 2024, 0.625% Euro Notes due 2027 and 1.00% Euro Notes due 2031.

10(a)*		Illinois Tool Works Inc. 2011 Long-Term Incentive Plan, filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(e)~~10(b)*		Illinois Tool Works Inc. 2015 Long-Term Incentive Plan effective May 8, 2015, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(f)~~10(c)*		~~Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 5, 2009 (Commission File No. 1-4797) and incorporated herein by reference.~~

10(g)*		Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 9, 2011 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(h)~~10(d)*		Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 7, 2012 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(i)~~10(e)*		Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 13, 2014 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(j)~~10(f)*		Form of stock option terms filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(k)~~10(g)*		~~Form of restricted stock unit terms filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference.~~

10(l)*		Form of performance restricted stock unit terms filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference.

10(m)*		~~Form of Long-Term Incentive Cash Grant filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on February 9, 2016 (Commission File No. 1-4797) and incorporated herein by reference.~~

10(n)*		Form of stock option terms filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(o)~~10(h)*		Form of restricted stock unit terms filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.



~~Exhibit~~ ~~Number~~		~~Description~~
~~10(p)~~10(i)*		Form of performance share unit terms filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(q)~~10(j)*		Form of ~~Performance Cash Grant~~performance cash grant filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.

~~10(r)~~10(k)*		Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference

10(l)*		Form of performance share unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference



*	Management contract or compensatory plan or arrangement.
**	The following financial information from Illinois Tool Works Inc.'s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2019, formatted in ~~XBRL (Extensible~~iXBRL (Inline Extensible Business Reporting Language): (i) Statement of Income, (ii) Statement of Comprehensive Income, (iii) Statement of ~~Income Reinvested~~Changes in ~~the Business~~Stockholders' Equity (iv) Statement of Financial Position, (v) Statement of Cash Flows and (vi) related Notes to Financial Statements.