I L L I N O I S T O O L W O R K S I N C .
1 5 5 H A R L E M A V E N U E
G L E N V I E W , I L L I N O I S 6 0 0 2 5
W W W . I T W . C O M
Diff erentiated
Business Model
Diff erentiated
Performance
2015 ANNUAL REPORT
ITW2015AR_COVER.indd 1-3
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About ITW
Founded in 1912, ITW (NYSE: ITW) is a global industrial company
centered on a differentiated and proprietary business model.
The company’s seven industry-leading segments leverage the
ITW Business Model to generate solid growth with best-in-class
margins and returns in markets where highly innovative, customer-
focused solutions are required. ITW’s more than 48,000 dedicated
colleagues around the world thrive in our decentralized, entrepreneurial
culture. In 2015, the company achieved revenues of $13.4 billion,
with roughly half coming from outside North America.
To learn more, please visit www.itw.com.
CONTENTS
1 L E T T E R T O S H A R E H O L D E R S 5 2 0 1 5 F I N A N C I A L H I G H L I G H T S A N D E N T E R P R I S E S T R A T E G Y P E R F O R M A N C E P R O G R E S S
6 I T W B U S I N E S S M O D E L 7 C U S T O M E R - B A C K I N N O V A T I O N 8 O V E R V I E W O F I T W ’ S B U S I N E S S S E G M E N T S
12 C O R P O R A T E E X E C U T I V E S A N D B O A R D O F D I R E C T O R S INSIDE BACK COVER S H A R E H O L D E R I N F O R M A T I O N
SHAREHOLDER INFORMATION
T R A N S F E R AG E N T
A N D R E G I S T R A R
Questions regarding stock ownership, dividend
payments or change of address should be directed
to the company’s transfer agent:
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842-3170
www.computershare.com/investor
Phone Toll Free: 888.829.7424
International: +1.312.360.5155
C O M M O N S T O C K
New York Stock Exchange
Symbol: ITW
T R A D E M A R K S
Certain trademarks in this publication
are owned or licensed by Illinois Tool
Works Inc. or its wholly owned subsidiaries.
C O N TAC T I N V E S T O R
R E L AT I O N S
For additional assistance, including media inquiries:
224.661.7427 or investorrelations@itw.com
V I S I T U S O N T H E W E B
www.itw.com
C O M M I T T E D T O
S O C I A L R E S P O N S I B I L I T Y
Learn about our CSR activities and
goals in our 2015 report:
workingtogether.itw-csr.com
S T O C K A N D D I V I D E N D AC T I O N
Effective with the October 6, 2015 payment, the quarterly
cash dividend on ITW common stock was increased to
55 cents per share. ITW’s annual dividend payment has
increased for more than 50 consecutive years, except
during a period of government controls in 1971.
The ITW Common Stock Dividend Reinvestment Plan
enables registered shareholders to reinvest the ITW
dividends they receive in additional shares of common
stock of the company at no additional cost. Participation in
the plan is voluntary, and shareholders may join or withdraw
at any time. The plan also allows for additional voluntary
cash investments in any amount from $100 to $10,000 per
month. For a brochure and full details of the program,
please direct inquiries to the company’s transfer agent,
Computershare Trust Company, N.A.
ANNUAL MEETING
Friday, May 6, 2016, 9:00 a.m.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
The patent wall at
ITW’s corporate
headquarters displays
a subset of our more
than 16,000 patents.
ITW2015AR_COVER.indd 4-6
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TO OUR FELLOW SHAREHOLDERS
ITW delivered another year of strong
financial performance in 2015.
espite a challenging macro-economic environment,
Best-in-Class Margins and Returns on Capital
we grew earnings per share 10 percent, 19 percent
excluding the impact of foreign currency translation.
We improved operating margin by 150 basis
points to an all-time high of 21.4 percent and
increased after-tax return on invested capital to
a record 20.4 percent. Once again in 2015, ITW
generated strong free cash fl ow, which we utilized to support
the reinvestment of approximately $560 million in our core
businesses for growth and productivity. In addition, we were
able to return more than $2.7 billion of surplus capital to our
shareholders through dividends and share repurchases.
Differentiated Business Model =
Differentiated Performance
ITW is built around a set of highly powerful and proprietary
business practices and capabilities that we refer to as the
ITW Business Model. (A description of the elements of
We believe that operating margin is a key indicator of both
the magnitude of a company’s competitive advantages and
the effi ciency with which it leverages them. It is, in our view,
a compelling indicator of the strength and competitiveness of
our company, and it is a key performance metric for every ITW
business. Through the execution of our Enterprise Strategy,
ITW’s operating margin has increased by over 500 basis
points over the past three years.
Another important metric that is central to how we run ITW
is after-tax return on invested capital. We believe that ITW’s
robust returns on capital are a meaningful indicator of our
highly disciplined approach to the choices we make when
investing our shareholders’ capital. At ITW, disciplined capital
allocation means that (1) we invest capital only in areas of
opportunity where we have the potential to leverage the
ITW Business Model to create compelling and sustainable
the ITW Business Model can be found on page 6.) The ITW
competitive advantage, and (2) we choose to return surplus
Business Model is the source of our competitive advantage.
capital to our shareholders, through a combination of an
It drives our ability to win with customers and deliver
differentiated long-term returns for our shareholders. It
is ITW’s “secret sauce,” and through the execution of our
Enterprise Strategy, we are focused on leveraging it to its full
potential. By doing so, we are positioning the company to
attractive dividend and an active share repurchase program,
rather than pursue lower-return opportunities that reside
outside our core strengths and competitive advantages.
As a result, ITW’s after-tax return on invested capital has
increased by over 500 basis points since the launch of our
deliver solid growth with best-in-class margins and returns
Enterprise Strategy.
on capital … consistently and sustainably. The strong results
that we delivered in 2015 and the signifi cant progress we have
Solid Growth
made since the launch of our Enterprise Strategy in 2012
give us confi dence that we are on the right track.
We believe that solid and consistent above-market organic
growth must be the core growth engine that drives our
company forward. Our goal is to achieve enterprise-level
organic growth of 200 basis points or more above market
by the end of 2017 and beyond. Over the course of the past
three years, we have made signifi cant progress in executing
a multistep process to position the company to deliver on
this key Enterprise Strategy objective.
I L L I N O I S T O O L W O R K S I N C . 1
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Step 1 > Align Our Portfolio with
Our Organic Growth Focus
(2013-2016)
Step 3 > Prepare for Accelerated Organic Growth
(2014-2016)
Delivering high-quality revenue growth consistently and
We have repositioned our business portfolio by exiting
sustainably requires a strong foundation of operational and
businesses operating in low-growth commoditized markets.
fi nancial performance. All ITW businesses must demonstrate
As a result, ITW is now focused on seven core segments that
that they are serving their existing customers with excellence
each have strong sustainable competitive advantages and
and delivering acceptable fi nancial performance for the
favorable long-term growth fundamentals. An overview of
company before they are deemed to be “ready to grow.”
these seven industry-leading businesses can be found on
Through the reapplication of ITW’s 80/20 management
pages 8 to 11.
ITW’s current business portfolio is both highly profi table and
highly diversifi ed. We are very well balanced in terms of our
end-market and geographic exposures. As a result, ITW is
process at all of our 84 scaled-up global divisions, we are
ensuring that every one of our businesses is in the best
position possible to fully leverage its growth investments
and long-term growth potential.
well-positioned to perform at a high level across a wide range
In 2015, 60 percent of our businesses achieved “ready to
of external market conditions and economic scenarios. Our
grow” status and 45 percent grew organic revenue at an
diversifi ed portfolio, best-in-class operating margins and
average of 6 percent despite a very challenging external
proven track record of strong cash generation through the
economic environment. We are encouraged by these results,
cycle give us the ability to weather any economic storm and
and we expect to have 85 percent or more of our businesses
continue to invest for the long term.
After executing more than 30 divestitures over the past
few years, we are now in the fi nal stages of our portfolio
repositioning efforts as our businesses complete the process
of exiting slower-growth product lines and begin to transition
their focus to accelerating organic growth.
Step 2 > Scale-Up Our Operating Structure
(2013-2014)
We have scaled-up our operating structure in order to
better leverage and focus our organic growth investments
and resources and to improve the global reach and
competitiveness of our businesses. By consolidating over
800 regional business units into 84 global divisions, we
have made ITW a much simpler, more focused and more
growth-enabled company.
in “ready to grow” status by the end of 2016.
Step 4 > Accelerate Organic Growth
(2016+)
In 2016, we expect to deliver meaningful progress on our
path to accelerated organic growth and our long-term
organic growth goal of 200 basis points or more above
market. Through our signifi cantly more differentiated
The strong results that we delivered
in 2015 and the significant progress
we have made since the launch of
our Enterprise Strategy in 2012
give us confidence that we are on
the right track.
2 2 0 1 5 A N N U A L R E P O R T
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business portfolio, scaled-up operating structure and growth
proprietary business model to generate solid growth with
investments, our strong foundation of operational execution
best-in-class margins and returns on capital. With this
and fi nancial performance, and a tight focus on our most
objective fi rmly in mind, we are committed to achieving the
compelling long-term growth opportunities, we are confi dent
that ITW is well-positioned to deliver on our growth goal.
Step 5 > Bolt-On Acquisitions That Support
Our Organic Growth Focus
(2016+)
In alignment with both our Enterprise Strategy and our
disciplined approach to capital allocation, we will use bolt-
on acquisitions selectively to reinforce and further enhance
following performance goals by the end of 2017 and beyond:
1 > Organic growth at 200 basis points or more
above the market
20+ percent after-tax return on invested capital
23+ percent operating margin
2 >
3 >
4 > Free cash fl ow of 100+ percent of net income
5 >
12 to 14 percent total shareholder returns
the organic growth potential of our seven core segments.
While we are pleased with our progress to date, we remain
In early 2016, we announced an agreement to acquire the
focused on executing the work that we have ahead of us to
Engineered Fasteners and Components (EF&C) business from
deliver on ITW’s full performance potential.
ZF TRW. EF&C is a highly complementary addition to our fast-
growing Automotive OEM segment, with annual revenues
of approximately $470 million. This acquisition will expand
the growth potential of our Automotive OEM business and,
through the application of our 80/20 business management
system at EF&C, we expect to generate after-tax return on
invested capital of 16 to 20 percent by year seven.
ITW’s Performance Goals
As noted above, the core imperative of our Enterprise
Strategy is to position the company to fully leverage the
performance power of ITW’s highly differentiated and
Management Team Developments
ITW’s deep and experienced management team has
always been one of the keys to ITW’s success. Composed
of experts in the practice of the ITW Business Model with
deep knowledge of their industries and end markets, ITW’s
senior management team has an average tenure of 19 years
of company service.
In 2015, we were pleased to elect Christopher A. O’Herlihy as
vice chairman. Chris is a proven ITW leader and an expert
in the practice of the ITW Business Model. He joined the
company in 1989 and most recently served as executive
ITW PERFORMANCE GOALS
Through the execution of our strategy, we are structuring ITW to exit 2017
well-positioned to deliver best-in-class fi nancial performance and generate
compelling long-term value for our shareholders.
23%+
Operating
margin
20%+
After-tax
ROIC
100%+
Free cash fl ow
as percent of
net income
12-14%
Total
shareholder
returns*
200+ bps
Organic
revenue growth
above the
market
* Assumes 3 percent market growth
I L L I N O I S T O O L W O R K S I N C . 3
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vice president of our Food Equipment segment. In addition,
Lastly, on behalf of your Board of Directors, your management
we welcomed two seasoned ITW leaders to our executive
team and all of us at ITW, we thank you, our shareholders,
leadership team: Dr. Lei Zhang Schlitz as executive vice
for your continued support.
president of our Food Equipment segment and Michael R.
Zimmerman as executive vice president of our Construction
Sincerely,
Products segment.
We would also like to recognize two members of our Board
of Directors, Don H. Davis, Jr. and Robert C. McCormack,
E. Scott Santi
who both retired in 2015 after serving on our Board for
15 and 31 years, respectively. We thank them for their
valuable insights and many contributions to the company
Chairman & Chief Executive Officer
and our Board.
Closing Remarks
In 2015, we took another solid step forward in positioning
ITW to deliver solid growth with best-in-class margins
and returns, and we remain firmly on track to achieve our
enterprise performance goals by the end of 2017. For that,
we offer our deepest thanks to our more than 48,000 ITW
colleagues around the world who, through their hard work
and dedication, continue to serve our customers and
Christopher A. O’Herlihy
Vice Chairman
David C. Parry
Vice Chairman
execute our Enterprise Strategy with excellence.
March 23, 2016
Christopher A. O’Herlihy
E. Scott Santi
David C. Parry
4 2 0 1 5 A N N U A L R E P O R T
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2015
Financial
Highlights
Earnings
per share (diluted)
$5.13
Operating
margin
21.4%
After-tax ROIC1
20.4%
+9.9% VS. 2014
+150BPS VS. 2014
+140BPS VS. 2014
Revenues
$13.4 billion
Free cash fl ow
conversion1
Dividend increase
vs. 2014
Cash returned to shareholders
(dividends + share repurchases)
106% +13.4% $2.7 billion
ENTERPRISE STRATEGY PERFORMANCE PROGRESS
AFTER-TAX ROIC 1
OPERATING MARGIN
+550
bps
21.4%
15.9% 2
+590
bps
20.4%
14.5%
EARNINGS PER SHARE
17%
CAGR
$5.13
$3.211
2012
2015
2012
2015
2012
2015
ORGANIC GROWTH
2015 organic
revenue growth
+6%
(5)%
(6)%
Percentage of 2015 revenue
45%
40%
15%
Ready to grow
and growing
Ready to grow
and not growing*
Preparing
for growth
* Primarily due to exposure to oil and gas-related end markets
1 After-tax return on average invested capital (ROIC), free cash fl ow conversion and 2012 adjusted EPS are non-GAAP measures. Refer to Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the 2015 Annual Report on Form 10-K and the appendix included in this Annual Report for information regarding these
non-GAAP measures, including reconciliations to the most comparable GAAP measure.
2 As reported in the 2012 Annual Report on Form 10-K.
I L L I N O I S T O O L W O R K S I N C . 5
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Diff erentiated
Business Model
= Diff erentiated Performance
ITW is built around a powerful and highly differentiated business model.
The ITW Business Model is composed of three elements:
THE ITW 80/20 MANAGEMENT PROCESS is a proprietary operating system that
we apply in every ITW business. Through the application of our 80/20 management
process, we structure and focus our businesses to uniquely satisfy the needs of
their largest and most profi table customers and eliminate the costs, complexity and
distractions associated with serving smaller, less profi table customers. As a result,
our businesses consistently deliver solid growth with best-in-class total cost
productivity by concentrating their efforts, investments and resources on the key
customers and products that are best positioned for profi table organic growth.
80/20
Management
Process
Customer-
Back
Innovation
ITW
BUSINESS
MODEL
Decentralized,
Entrepreneurial
Culture
CUSTOMER-BACK INNOVATION has fueled decades of
profi table growth at ITW. In every market in which we
operate, our businesses work hard to position themselves
as the “go-to” problem solver for their key customers.
Inventing inspired solutions for our customers to help them
address diffi cult technical challenges or improve their
business performance has been the central focus of ITW’s
approach to innovation all the way back to the founding of
our company over 100 years ago … and it is very much alive
and well today as evidenced by our portfolio of over
16,000 granted and pending patents and the more than
1,900 new patent applications that we fi led in 2015.
OUR DECENTRALIZED, ENTREPRENEURIAL CULTURE allows us to be fast, focused
and responsive. Our people are clear about what is expected of them with regard
to our business model, our strategy and our values. Within the confi nes of this
framework, we empower our business teams to make decisions and customize
their approach in order to maximize the relevance and impact of the ITW Business
Model with regard to their specifi c customers and end markets. Our people thrive
in ITW’s “fl exibility within the framework” culture; they think and act like
entrepreneurs, they are accountable and they deliver.
6 2 0 1 5 A N N U A L R E P O R T
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Driving
Organic
Growth through Customer-Back Innovation
Inventing inspired solutions for our customers to help them address
diffi cult technical challenges or improve their business performance
has been the central focus of ITW’s approach to innovation all the way
back to the founding of our company over 100 years ago.
EXAMPLES OF RECENT ITW CUSTOMER-BACK INNOVATION
AUTOMOTIVE OEM WaveShearTM
• The Challenge: Smaller, fuel-effi cient engines
generate higher levels of noise and vibration
•
ITW Solution: Patented invention that dampens
sound and lowers vibration across a wide
temperature range
FOOD EQUIPMENT
Click & Collect
• The Challenge:
Getting groceries ordered
online to customers who do not want home
delivery wait time
•
ITW Solution: Temperature-controlled lockers
in strategic proximity to customers for the
convenience of fl exible pick-up
CONSTRUCTION PRODUCTS
Cordless Framing Nailer
• The Challenge: Poor tool performance
in cold weather
•
ITW Solution: New ITW technology delivers
improved drivability and performance
down to 14°F
ITW’S PATENT PORTFOLIO
10,600
granted
patents
6,000
pending patent
applications
1,900
new patent
applications
in 2015
ITW2015AR_TEXT.indd 7
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I L L I N O I S T O O L W O R K S I N C . 7
ITW’s
Diff erentiated Business Portfolio
ITW’s business portfolio criteria:
(cid:31) Strong and sustainable competitive advantages
(cid:31) End markets with robust differentiation attributes and positive
long-term growth fundamentals
(cid:31) Signifi cant customer-back innovation potential to drive organic growth
(cid:31) Ability to leverage the ITW Business Model to generate consistent
best-in-class margins and returns
ITW’S SEVEN OPERATING SEGMENTS:
AUTOMOTIVE OEM
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s t
t
s
r
e
2015 revenues
$2.5 billion
2015 operating
margin 24.2%
Organic revenue CAGR of
8% since 2012
Courtesy of Ford
8 2 0 1 5 A N N U A L R E P O R T
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FOOD EQUIPMENT
Industry-leading global positions
through differentiated innovation
in ware wash, cooking, refrigeration
and integrated service offerings
2015 revenues
$2.1 billion
2015 operating
margin 23.7%
Operating margin improvement of
660 basis points
since 2012
Courtesy of Chick-fi l-A
TEST & MEASUREMENT AND ELECTRONICS
Specialized test and measurement
solutions with leading technology
that improve effi ciency and
quality for a diverse set
of customers operating in
demanding environments
2015 revenues
$2.0 billion
2015 operating
margin 16.3%
Revenue CAGR of
14% since 2005
ITW2015AR_TEXT.indd 9
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I L L I N O I S T O O L W O R K S I N C . 9
WELDING
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2015 revenues
$1.7 billion
2015 operating
margin 25.2%
Revenue CAGR of
8% since 1993
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2015 revenues
$1.7 billion
2015 operating
margin 19.6%
Operating margin improvement of
380 basis points
since 2012
1 0 2 0 1 5 A N N U A L R E P O R T
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CONSTRUCTION PRODUCTS
Innovative engineered
fastening systems and specialty
consumables and software
for residential, commercial
and renovation construction
2015 revenues
$1.6 billion
2015 operating
margin 19.9%
Operating margin improvement of
830 basis points
since 2012
Value-added solutions
for consumer packaging,
brand identifi cation and
other niche applications
2015 revenues
$1.9 billion
2015 operating
margin 23.3%
Operating margin improvement of
380 basis points
since 2012
SPECIALTY PRODUCTS
ITW2015AR_TEXT.indd 11
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I L L I N O I S T O O L W O R K S I N C . 1 1
CORPORATE EXECUTIVES
PICTURED
LEFT TO RIGHT:
Juan Valls, Steven L. Martindale, Sundaram Nagarajan, Roland M. Martel, John R. Hartnett, Mary K. Lawler,
David C. Parry, E. Scott Santi, Christopher A. O’Herlihy, Michael M. Larsen, Michael R. Zimmerman, Lei Zhang Schlitz
E. Scott Santi
Chairman & Chief Executive Offi cer
Christopher A. O’Herlihy
Vice Chairman
David C. Parry
Vice Chairman
Michael M. Larsen
Senior Vice President &
Chief Financial Offi cer
Mary K. Lawler
Senior Vice President &
Chief Human Resources Offi cer
John R. Hartnett
Executive Vice President,
Welding
Roland M. Martel
Executive Vice President,
Specialty Products
Steven L. Martindale
Executive Vice President,
Test & Measurement and Electronics
Sundaram Nagarajan
Executive Vice President,
Automotive OEM
Lei Zhang Schlitz
Executive Vice President,
Food Equipment
Juan Valls
Executive Vice President,
Polymers & Fluids
Michael R. Zimmerman
Executive Vice President,
Construction Products
BOARD OF DIRECTORS
Daniel J. Brutto
Retired Senior Vice President,
United Parcel Service, Inc.
Retired President,
UPS International
Susan Crown
Chairman & Chief Executive Offi cer,
Owl Creek Partners, LLC
James W. Griffi th
Retired President &
Chief Executive Offi cer,
The Timken Company
Richard H. Lenny
Non-Executive Chairman,
Information Resources, Inc.
Robert S. Morrison, Lead Director
Retired Vice Chairman,
PepsiCo, Inc.
Retired Chairman, President &
Chief Executive Offi cer,
The Quaker Oats Company
E. Scott Santi
Chairman & Chief Executive Offi cer,
Illinois Tool Works Inc.
James A. Skinner
Retired Vice Chairman & Chief Executive Offi cer,
McDonald’s Corporation
David B. Smith, Jr.
Executive Vice President for Policy & Legal Affairs
and General Counsel,
Mutual Fund Directors Forum
Pamela B. Strobel
Retired Executive Vice President &
Chief Administrative Offi cer,
Exelon Corporation
Kevin M. Warren
President, Commercial Business Group,
Xerox Corporation
Anré D. Williams
President, Global Merchant Services & Loyalty Group,
American Express Company
1 2 2 0 1 5 A N N U A L R E P O R T
ITW2015AR_TEXT.indd 12
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
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.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
155 Harlem Avenue, Glenview, Illinois
(Address of Principal Executive Offices)
36-1258310
(I.R.S. Employer
Identification No.)
60025
(Zip Code)
Registrant’s telephone number, including area code: (847) 724-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
1.75% Euro Notes due 2022
1.25% Euro Notes due 2023
2.125% Euro Notes due 2030
3.00% Euro Notes due 2034
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes
No
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
No
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.
Yes
No
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).
Yes
No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2015 was approximately $26.7 billion based on the
New York Stock Exchange closing sales price as of June 30, 2015.
Shares of Common Stock outstanding at January 31, 2016: 363,766,897.
Documents Incorporated by Reference
Portions of the 2016 Proxy Statement for Annual Meeting of Stockholders to be held on May 6, 2016.
Part III
Table of Contents
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Signatures
Exhibit Index
3
10
14
14
14
14
15
16
18
39
40
71
71
71
72
72
72
72
72
73
74
75
ITEM 1. Business
General
PART I
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 84
divisions in 57 countries. As of December 31, 2015, the Company employed approximately 48,000 persons.
The Company's operations are organized and managed based on similar product offerings and similar end markets, and are
reported to senior management as the following seven segments: Automotive OEM; Test & Measurement and Electronics;
Food Equipment; Polymers & Fluids; Welding; 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.
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, 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;
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 and transportation
applications.
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 institutional/restaurant, food
service 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.
Polymers & Fluids: This segment is a highly branded supplier to niche markets that require value-added, differentiated
products. Businesses in this segment produce 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
3
•
polyester coatings and patch and repair products for the marine industry.
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, MRO, construction, and industrial capital goods
markets. Products in this segment include:
arc welding equipment;
•
• metal arc welding consumables and related accessories; and
• metal jacketing and other insulation products.
Construction Products: This segment is a branded supplier of innovative engineered fastening systems and solutions. This
segment primarily serves the residential construction, renovation/remodel construction 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;
•
•
• metal plate truss components and related equipment and software; and
packaged hardware, fasteners, anchors and other products for retail.
•
Specialty Products: This segment is focused on diversified niche market opportunities that deliver strong operating results
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,
consumer durables, general industrial, 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;
airport ground support equipment; and
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 is the Company’s competitive advantage and defines how ITW creates value for its shareholders and comprises three
unique elements:
•
•
ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially introduced
as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded 80/20 into a
proprietary, holistic business management process that generates significant value for the Company. Through the
application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the
“80”) and eliminates complexity associated with the less profitable opportunities (the “20”). 80/20 enables ITW
businesses to consistently deliver world-class operational excellence in regards to 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 the insight gathered from the 80/20 management 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 then 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 16,000 granted and pending patents;
4
•
ITW’s decentralized, entrepreneurial culture allows 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 customers. ITW colleagues are clear about what is expected of them with regard to ITW’s
business model, strategy, and values. This leads to a focused and simple organizational structure that, combined with
outstanding execution, delivers operational excellence adapted to their specific customers and end markets.
Enterprise Strategy
In 2013, ITW began the process of transitioning the Company onto 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 three years.
The roots of ITW’s Enterprise Strategy began in 2011-2012, when the Company undertook a complete review of its
performance. ITW gathered deep insights from its businesses that were delivering consistent above-market growth with best-
in-class margins and returns, and defined a strategy to replicate that performance throughout the Company.
Based on this rigorous and thorough evaluation, ITW determined two paths to deliver world-class financial performance and
compelling long-term returns for its shareholders. One, ITW needed to shift the Company's primary growth engine to organic;
and two, the Company needed to leverage the ITW Business Model to deliver best-in-class margins and returns.
Shift the Company’s Core Growth Engine to Organic
In order to pivot to fully focus on organic growth, the Company needed to first accomplish several preparatory steps.
These key initiatives were a major focus of the Company in 2012-2015, which included portfolio management, business
structure simplification and strategic sourcing.
The first step, portfolio management, was to construct and maintain a business portfolio capable of delivering consistent
above-market organic growth. As part of this initiative to realign the portfolio, 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 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 margins
and generate price/cost increases. This was achieved through product line simplification which focuses 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. Most of this initiative is complete and ITW businesses are
demonstrating notably improved financial performance; the Company expects the remaining product line simplification
work to largely be accomplished in 2016.
The second step, business structure simplification, was to scale-up ITW’s operating structure to support increased
engineering, marketing, and sales resources, and to improve global reach and competitiveness, all of which were critical
to ITW’s ability to drive 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.
With the portfolio realignment and scale-up work largely complete, the Company is now able to shift its focus to
preparing for, and accelerating, organic growth.
As a third preparatory step, ITW is currently in the process of reapplying 80/20 to optimize its newly scaled-up divisions
for growth. This process involves first using 80/20 to build a foundation of operational excellence, and then applying
80/20-driven insights to identify the best opportunities to drive organic growth.
Once the business is operationally excellent and has identified the right growth opportunities, the final step is to accelerate
organic growth. The process of preparing for accelerated organic growth generally takes 18 to 24 months.
Based on the financial performance of the divisions that are further along in this process, the Company believes that this
framework is capable of delivering above market organic growth in all ITW segments. Many ITW divisions are ready to
grow and growing above their respective markets, while the rest of the Company’s divisions are at various phases of
5
preparing to grow. ITW management is fully aligned on this plan and very focused on executing it. By the end of 2016,
the Company expects approximately 85 percent of its businesses to be ready to grow.
Leverage the ITW Business Model to Deliver Best-in-Class Margins and Returns
The Company’s work to deliver best-in-class margins and returns is focused on two key areas of ongoing activity. The
first is strategic sourcing, where the Company seeks to benefit from its size and scale in procurement processes. Sourcing
is now a core strategic and operational capability and this improved competitiveness supports ITW’s organic growth
framework. The Company’s 80/20-enabled sourcing organization has delivered an average of 1 percent reduction in spend
each year in 2013-2015 and is on track to do the same in 2016 and 2017.
The second element of the margins and returns area of focus is to better leverage the full power of the ITW Business
Model through a much more consistent and focused approach to 80/20 best practice implementation across the Company.
ITW has clearly defined what excellence in the practice of ITW’s 80/20 management process looks like and the result is
significant opportunity to create meaningful incremental improvement in margins and returns as evidenced by the
Company’s improvement in both operating margin and after-tax return on invested capital. These 80/20 initiatives can
result in restructuring initiatives that reduce costs and improve profitability and returns.
Divestiture of Majority Interest in Former Decorative Surfaces Segment
On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment. Accordingly, the
Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49%
ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49%
interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective November 1,
2012, Decorative Surfaces was no longer a reportable segment of the Company.
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.
See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for further discussion of this
transaction.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financial Information about Segments
Segment and operating results are included in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Segment Information note 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.
6
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 as of December 31, 2015 and 2014
was as follows:
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Test & Measurement and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
403
289
203
53
68
34
237
1,287
$
$
414
301
237
60
84
28
263
1,387
Backlog orders scheduled for shipment beyond calendar year 2016 were not material as of December 31, 2015.
Competition
With operations in 57 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, service delivery and price. 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 management 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, chemicals and paper, 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 $218
million in 2015, $227 million in 2014 and $240 million in 2013.
Intellectual Property
The Company owns approximately 3,400 unexpired U.S. patents and 7,200 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
7
4,500 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; Instron in the Test & Measurement and Electronics segment; Hobart in the Food Equipment
segment; Permatex and Wynn's in the Polymers & Fluids segment; Miller in the Welding 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 48,000 persons as of December 31, 2015 and considers its employee relations to be
excellent.
International
The Company's international operations include subsidiaries and joint ventures in 56 foreign countries on six continents. These
operations serve such end markets as automotive OEM/tiers, automotive aftermarket, general industrial, commercial food
equipment, construction, and others on a worldwide basis. The Company's revenues from sales to customers outside the U.S.
were approximately 54% of revenues in 2015 and 57% of revenues in 2014 and 2013.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Segment
Information note 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.
8
Executive Officers
Executive Officers of the Company as of February 11, 2016 were as follows:
Name
E. Scott Santi. . . . . . . . . . . . . . . . . . . Chairman & Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office
John R. Hartnett . . . . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael M. Larsen . . . . . . . . . . . . . . Senior Vice President & Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . . . .
Mary K. Lawler. . . . . . . . . . . . . . . . . Senior Vice President & Chief Human Resources Officer . . . . . . . . . . . . . . . .
Roland M. Martel . . . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steven L. Martindale. . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sundaram Nagarajan . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher O’Herlihy . . . . . . . . . . . Vice Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David C. Parry. . . . . . . . . . . . . . . . . . Vice Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Randall J. Scheuneman . . . . . . . . . . . Vice President & Chief Accounting Officer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lei Schlitz . . . . . . . . . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Juan Valls . . . . . . . . . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael R. Zimmerman . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Age
54
55
47
50
61
59
53
52
62
48
49
54
55
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 of the Board and Chief Executive Officer of the Company. He was elected Chairman of the Board in
2015 after having served 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.
Mr. Hartnett was elected Executive Vice President in 2012. He joined Signode in 1980, which was acquired by ITW in 1986,
and has 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. Prior to joining Gardner Denver, he was Chief Financial Officer at
General Electric Water & Process Technologies, a global provider of water treatment and process solutions. His previous
experience includes more than 15 years with General Electric, where he held a number of global finance leadership roles with
increasing responsibility.
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. Parry has served in his present position since 2010.
9
Mr. Scheuneman has served in his present position since 2009.
Ms. Schlitz was elected Executive Vice President in 2015. She joined the Company in 2008 and has held various operational,
management and leadership positions of increasing responsibility. Most recently, she served as Group President of 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. He joined Permatex in 1999, which was acquired by ITW in
2005, and has held various management positions of increasing responsibility. Most recently, he served as Group President of
the welding businesses.
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;
Conflict Minerals Policy Statement; and
Government Affairs Information.
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, high unemployment, government deficit reduction, sequestration and other austerity measures impacting
the markets we serve 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, increasing order cancellations and the difficulty in
collecting accounts receivable, increasing price competition, and 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 Company currently operates in 57 countries. The risks inherent in the Company's global operations include:
•
fluctuation in currency exchange rates;
10
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
government embargoes or foreign trade restrictions;
the imposition of duties and tariffs and other trade barriers;
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.
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 timing and amount of benefits from the Company’s enterprise initiatives may not be as expected and the
Company's financial results could be adversely impacted.
The Company’s enterprise strategy and associated initiatives include portfolio management, business structure simplification
and strategic sourcing. The portfolio management initiative, which included divesting businesses no longer aligned with the
Company’s long-term objectives, is essentially complete; however, product line and customer base simplification, which is a
core element of the Company’s 80/20 management process, is being reapplied to the Company’s scaled up operating
divisions and remains an active element of this initiative. 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. The Company's business structure simplification initiative is also essentially completed,
although efforts to realize efficiencies in structure are continuous. In addition, the Company continues to seek to benefit from
its size and scale in the procurement process through its strategic sourcing initiatives, and the leveraging of purchasing power
across businesses involves some execution risk. Also, as its portfolio and 80/20 management activities have positioned its
businesses for profitable growth, the Company has shifted its focus to organic growth and has expressed its belief that organic
growth will be 200 basis points above global GDP by the end of 2017. If the Company is unable to achieve the expected
benefits from these initiatives or is unable to complete these initiatives without material disruption to its businesses, the
timing and amount of benefits from these initiatives may not be as expected and the Company's financial results could be
adversely impacted.
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 us 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.
11
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 or adequately protect its intellectual property, 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.
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.
Recent divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.
The Company's divestiture activity increased in 2012, 2013 and 2014 in accordance with its portfolio management initiative.
Though the divestiture element of its portfolio management initiative is essentially complete, the Company has retained
certain liabilities directly or through indemnifications made to the buyer against known and unknown contingent liabilities
such as lawsuits, tax liabilities, product liability claims and environmental matters.
The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a
material adverse impact on our financial results.
In the past 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 our credit ratings could increase our 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. Due to
pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts
12
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 and other taxes are 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 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.
If the Company is unable to protect its information technology infrastructure against service interruptions, data
corruption, cyber-based attacks or network security breaches, there could be a negative impact on operating results or
the Company may suffer financial or reputational
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; or computer viruses. In addition, security breaches could result in unauthorized disclosure
of confidential information. If these information technology systems suffer severe damage, disruption, or shutdown, and
business continuity plans do not effectively resolve the issues in a timely manner, 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 acquisition or disposition
of businesses, economic conditions in various geographic regions, the timing and amount of share repurchases, the
Company's Enterprise Strategy and its ability to manage its strategic business initiatives and the timing and amount of
benefits therefrom, 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 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
13
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 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
Not applicable.
ITEM 2. Properties
Due to the Company’s decentralized operating structure, 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, 2015, the Company operated the following plants and office facilities, excluding regional sales offices
and warehouse facilities:
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number Of Properties
Leased
Total
Owned
53
24
19
26
25
32
44
1
38
73
18
46
22
24
47
10
91
97
37
72
47
56
91
11
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
224
278
502
The Company’s properties are highly suitable 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 314 plants and office facilities outside of the U.S. Principal countries include China, France,
Germany and the United Kingdom.
ITEM 3. Legal Proceedings
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
14
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 2015 and 2014 were as shown below:
2015:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Price Per Share
Low
High
Dividends
Declared
Per Share
$
$
95.00
94.33
99.92
100.14
97.79
89.58
89.50
84.12
$
$
80.16
78.79
91.41
90.43
79.06
81.72
80.80
76.25
0.55
0.55
0.485
0.485
0.485
0.485
0.42
0.42
There were approximately 6,822 holders of record of common stock as of January 31, 2016. This number does not include
beneficial owners of the Company's securities held in the name of nominees.
*Assumes $100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.
Copyright© 2016 S&P, a division of McGraw Hill Financial. All rights reserved.
15
In 2015, the Company replaced the S&P Industrial Conglomerates index with the following group of 19 public companies
which represents the Company's peer group:
3M Company
BorgWarner Inc.
Caterpillar Inc.
Cummins Inc.
E.I. du Pont de Nemours and Company
Masco Corporation
Eaton Corporation plc
Emerson Electric Co.
Parker-Hannifin Corporation
PPG Industries, Inc.
Honeywell International Inc.
Pentair plc
Danaher Corporation
Ingersoll-Rand plc
Stanley Black & Decker, Inc.
Deere & Company
Dover Corporation
Johnson Controls, Inc.
Textron Inc.
Repurchases of Common Stock—On February 13, 2015, the Company’s Board of Directors authorized a stock repurchase
program which provides 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"). As of December 31, 2015, there were approximately $5.4 billion of authorized repurchases
remaining under the 2015 Program. There was no share repurchase activity under the Company's share repurchase program
for the fourth quarter of 2015.
ITEM 6. Selected Financial Data
In millions except per share amounts
Operating revenue. . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations . . . . . . . . . .
Income per share from continuing operations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at year-end. . . . . . . . . . . . . . . . . . . .
Long-term debt at year-end. . . . . . . . . . . . . . . . .
Cash dividends declared per common share. . . .
2015
2014
2013
2012
2011
$
13,405
1,899
$
14,484
1,890
$
14,135
1,630
$
14,791
2,233
5.16
5.13
15,729
6,896
2.07
4.70
4.67
17,465
5,943
1.81
3.65
3.63
19,599
2,771
1.60
4.75
4.72
19,138
4,564
1.48
14,515
1,775
3.61
3.59
17,946
3,471
1.40
Certain reclassifications of prior year data have been made to conform to current year reporting, including discontinued
operations and adoption of new accounting guidance as discussed below.
On October 31, 2012, the Company divested a 51% majority interest in its Decorative Surfaces segment. Accordingly, the
Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its
49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its
49% interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective
November 1, 2012, Decorative Surfaces was no longer a reportable segment of the Company.
In April 2014, the Financial Accounting Standards Board ("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. In addition, disclosure of the pre-tax income
attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required.
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 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, $49 million, $637 million, and $296 million in the years 2014, 2013, 2012, and 2011, respectively. Refer to the
Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's
discontinued operations.
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, $22
16
million, $26 million, and $17 million of deferred long-term debt issuance costs from Other assets to Long-term debt in the
years 2014, 2013, 2012, and 2011, respectively. Refer to the Debt note in Item 8. Financial Statements and Supplementary
Data for further information.
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, $345 million, $145 million,
and $21 million in the years 2014, 2013, 2012, and 2011, respectively. Refer to the Income Taxes note in Item 8. Financial
Statements and Supplementary Data for further information.
Additional information on the comparability of results is included in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
17
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 84 divisions in 57 countries. As of December 31, 2015, the Company employed approximately 48,000
persons.
The Company's operations are organized and managed based on similar product offerings and similar end markets, and are
reported to senior management as the following seven segments: Automotive OEM; Test & Measurement and Electronics;
Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
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
The powerful and highly differentiated ITW Business Model is the Company’s core source of value creation. This business
model is the Company’s competitive advantage and defines how ITW creates value for its shareholders and comprises three
unique elements:
•
•
•
ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially
introduced as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded
80/20 into a proprietary, holistic business management process that generates significant value for the Company.
Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best
opportunities (the “80”) and eliminates complexity associated with the less profitable opportunities (the “20”). 80/20
enables ITW businesses to consistently deliver world-class operational excellence in regards to 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 the insight gathered from the 80/20 management 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 then 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 16,000 granted and pending patents;
ITW’s decentralized, entrepreneurial culture allows 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 customers. ITW colleagues are clear about what is expected of them with regard to ITW’s
business model, strategy, and values. This leads to a focused and simple organizational structure that, combined with
outstanding execution, delivers operational excellence adapted to their specific customers and end markets.
ENTERPRISE STRATEGY
In 2013, ITW began the process of transitioning the Company onto 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 three years.
The roots of ITW’s Enterprise Strategy began in 2011-2012, when the Company undertook a complete review of its
performance. ITW gathered deep insights from its businesses that were delivering consistent above-market growth with best-
in-class margins and returns, and defined a strategy to replicate that performance throughout the Company.
18
Based on this rigorous and thorough evaluation, ITW determined two paths to deliver world-class financial performance and
compelling long-term returns for its shareholders. One, ITW needed to shift the Company's primary growth engine to
organic; and two, the Company needed to leverage the ITW Business Model to deliver best-in-class margins and returns.
Shift the Company’s Core Growth Engine to Organic
In order to pivot to fully focus on organic growth, the Company needed to first accomplish several preparatory steps.
These key initiatives were a major focus of the Company in 2012-2015, which included portfolio management, business
structure simplification and strategic sourcing.
The first step, portfolio management, was to construct and maintain a business portfolio capable of delivering consistent
above-market organic growth. As part of this initiative to realign the portfolio, 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 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
margins and generate price/cost increases. This was achieved through product line simplification which focuses 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. Most of this initiative is complete and
ITW businesses are demonstrating notably improved financial performance; the Company expects the remaining product
line simplification work to largely be accomplished in 2016.
The second step, business structure simplification, was to scale-up ITW’s operating structure to support increased
engineering, marketing, and sales resources, and to improve global reach and competitiveness, all of which were critical
to ITW’s ability to drive 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.
With the portfolio realignment and scale-up work largely complete, the Company is now able to shift its focus to
preparing for, and accelerating, organic growth.
As a third preparatory step, ITW is currently in the process of reapplying 80/20 to optimize its newly scaled-up divisions
for growth. This process involves first using 80/20 to build a foundation of operational excellence, and then applying
80/20-driven insights to identify the best opportunities to drive organic growth.
Once the business is operationally excellent and has identified the right growth opportunities, the final step is to
accelerate organic growth. The process of preparing for accelerated organic growth generally takes 18 to 24 months.
Based on the financial performance of the divisions that are further along in this process, the Company believes that this
framework is capable of delivering above market organic growth in all ITW segments. Many ITW divisions are ready to
grow and growing above their respective markets, while the rest of the Company’s divisions are at various phases of
preparing to grow. ITW management is fully aligned on this plan and very focused on executing it. By the end of 2016,
the Company expects approximately 85 percent of its businesses to be ready to grow.
Leverage the ITW Business Model to Deliver Best-in-Class Margins and Returns
The Company’s work to deliver best-in-class margins and returns is focused on two key areas of ongoing activity. The
first is strategic sourcing, where the Company seeks to benefit from its size and scale in procurement processes. Sourcing
is now a core strategic and operational capability and this improved competitiveness supports ITW’s organic growth
framework. The Company’s 80/20-enabled sourcing organization has delivered an average of 1 percent reduction in
spend each year in 2013-2015 and is on track to do the same in 2016 and 2017.
The second element of the margin and return area of focus is to better leverage the full power of the ITW Business
Model through a much more consistent and focused approach to 80/20 best practice implementation across the Company.
ITW has clearly defined what excellence in the practice of ITW’s 80/20 management process looks like and the result is
significant opportunity to create meaningful incremental improvement in margins and returns as evidenced by the
19
Company’s improvement in both operating margin and after-tax return on invested capital. These 80/20 initiatives can
result in restructuring initiatives that reduce costs and improve profitability and returns.
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.
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
In 2015, the Company delivered solid financial results driven by the continued successful execution of enterprise initiatives
despite foreign currency translation headwinds and challenging end market conditions.
The Company’s consolidated results of operations for 2015, 2014 and 2013 are summarized as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
2015
2014
Inc (Dec)
Organic
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
Operating revenue
$ 13,405
$ 14,484
Operating income
2,867
2,888
(7.4)%
(0.7)%
(0.4)%
5.8 %
Operating margin %
21.4%
19.9%
150 bps
130 bps
(0.2)%
(0.3)%
—
—%
1.2%
(6.8)%
(7.4)%
Total
(7.4)%
(0.7)%
20 bps
—
150 bps
•
•
Operating revenue decreased 7.4% primarily due to the unfavorable effect of foreign currency translation as the U.S.
Dollar strengthened against most major currencies.
Organic revenue decreased 0.4% in 2015 as compared to the prior year.
Automotive OEM, Food Equipment and Construction Products had solid worldwide organic revenue growth
primarily due to penetration gains, higher market demand and product innovation. Organic revenue declined
in the Welding and Test & Measurement and Electronics segments primarily due to lower demand in the oil
and gas end markets and a challenging capital spending environment.
PLS activities reduced organic revenue growth by approximately one percentage point.
North American organic revenue decreased 0.5% as a decline in the Welding and Test & Measurement and
Electronics segments was partially offset by growth in the Automotive OEM, Food Equipment and
Construction Products segments.
European organic revenue increased 1.2%. Double-digit growth in the Automotive OEM segment was
partially offset by a decline in the Polymers & Fluids, Test & Measurement and Electronics and Welding
segments.
Asia Pacific organic revenue decreased 1.4% primarily due to a decline in the Welding and Test &
Measurement and Electronics segments, partially offset by growth in the Construction Products segment.
•
Operating income of $2.9 billion decreased 0.7%. Excluding the negative impact from foreign currency translation of
7.4%, operating income would have increased 6.7%.
20
•
•
•
•
•
•
Record operating margin of 21.4% increased 150 basis points primarily due to the benefit of the Company's enterprise
initiatives related to business structure simplification and strategic sourcing that contributed 110 basis points. Lower
restructuring expenses and favorable price/cost each contributed 20 basis points of operating margin expansion.
Diluted earnings per share (EPS) from continuing operations of $5.13 increased 9.9%. Excluding the negative impact
from foreign currency of approximately $0.41 per diluted share, EPS would have increased 18.6%.
Free cash flow was $2.0 billion in 2015. Refer to the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
The Company repurchased approximately 21.0 million shares of its common stock in 2015 for approximately $2.0
billion.
Total cash dividends of $742 million were paid in 2015.
Adjusted after-tax return on average invested capital was 20.4%, an increase of 140 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.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
2014
2013
Inc (Dec)
Organic
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
Operating revenue
$ 14,484
$ 14,135
Operating income
$ 2,888
$ 2,514
2.5%
14.9%
2.6%
14.5%
0.6%
0.2%
—%
0.9%
(0.7)%
(0.7)%
Total
2.5%
14.9%
Operating margin %
19.9%
17.8%
210 bps
200 bps
(10) bps
20 bps
—
210 bps
•
•
•
•
•
•
•
•
Operating revenue increased $349 million, or 2.5%, due to an increase in organic and acquisition revenue, partially
offset by the unfavorable effect of currency translation which primarily occurred in the fourth quarter. Acquisitions
primarily included the purchase of a European consumer packaging equipment business and a Chinese food equipment
business in the third quarter of 2013.
Organic revenue increased 2.6% in 2014 as compared to 2013.
Growth in the Automotive OEM and the Food Equipment segments was partially offset by modest declines in
the Polymers & Fluids and Specialty Products segments.
PLS activities reduced organic revenue growth by approximately one percentage point.
European organic revenue increased 2.4% primarily driven by the Automotive OEM, Food Equipment and
Test & Measurement and Electronics segments, partially offset by the Welding, Polymers & Fluids and
Construction Products segments.
Asia Pacific organic revenue increased 4.9% primarily due to growth in the Automotive OEM segment in
China and the Construction Products segment in Australia.
North American organic revenue increased 2.3% primarily due to growth in the Automotive OEM, Welding
and Food Equipment segments.
Operating margin of 19.9% increased 210 basis points primarily due to the benefit of the Company's enterprise
initiatives related to business structure simplification and strategic sourcing that contributed 120 basis points and
positive operating leverage of 60 basis points. Lower restructuring expenses of 20 basis points, favorable price/cost of
10 basis points and lower operating expenses also contributed to the increase in operating margin. Operating expenses
in 2014 included the impact of lower employee benefit expenses, offset by costs related to continued investment in the
business.
Diluted EPS from continuing operations of $4.67 increased 28.7%.
Free cash flow was $1.3 billion in 2014. The 2014 net cash provided by operating activities included $724 million of
tax payments related to the disposition of the Industrial Packaging business. Refer to the Cash Flow section of
Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
The Company repurchased approximately 50.4 million shares of its common stock in 2014 for approximately $4.3
billion.
Total cash dividends of $711 million were paid in 2014.
Adjusted after-tax return on average invested capital was 19.0%, an increase of 260 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.
21
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as
follows:
In millions
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Test & Measurement and Electronics . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenue . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Test & Measurement and Electronics . . . . . . . . . . . .
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Revenue
2015
2014
2013
2,529
1,969
2,096
1,712
1,650
1,587
1,885
(23)
13,405
$
$
2,590
2,204
2,177
1,927
1,850
1,707
2,055
(26)
14,484
$
$
Operating Income
2015
2014
2013
$
613
322
498
335
415
316
439
2,938
(71)
2,867
$
$
600
340
453
357
479
289
440
2,958
(70)
2,888
$
2,396
2,176
2,047
1,993
1,837
1,717
2,007
(38)
14,135
490
321
385
335
464
238
408
2,641
(127)
2,514
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.
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.
22
The results of operations for the Automotive OEM segment for 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2015
2,529
613
2014
2,590
600
$
$
Inc (Dec)
(2.4)%
2.1 %
Components of Increase (Decrease)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
— %
(0.3)%
(8.0)%
(7.9)%
Total
(2.4)%
2.1 %
5.8%
10.4%
(0.2)%
(0.1)%
10 bps
Operating margin %
24.2%
23.2% 100 bps
100 bps
(10) bps
—
100 bps
•
Operating revenue decreased primarily due to the unfavorable effect of currency translation, partially offset by organic
revenue growth.
• Worldwide automotive organic revenue grew 5.8% as a result of product innovation and penetration gains, exceeding
worldwide auto build growth of 1%.
European organic revenue growth of 11.1% exceeded auto builds which grew 4%.
North American organic revenue growth of 4.2% exceeded auto build growth of 3%.
Asia Pacific organic revenue increased 0.5%. China organic revenue grew 7.9%, as Chinese auto builds
increased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher
content, were flat for 2015.
•
•
Operating income of $613 million increased 2.1%. Excluding the negative impact of foreign currency translation of
7.9%, operating income would have increased 10.0%.
Operating margin was 24.2%. The increase of 100 basis points was primarily driven by 80 basis points of operating
leverage, the net benefits from the Company's enterprise initiatives and favorable price/cost of 10 basis points.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2014
2,590
600
2013
2,396
490
$
$
Inc (Dec)
8.1%
22.5%
Components of Increase (Decrease)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
—%
2.9%
(0.7)%
(0.6)%
Total
8.1%
22.5%
8.9%
20.2%
(0.1)%
— %
—
Operating margin %
23.2%
20.5% 270 bps
220 bps
50 bps
—
270 bps
•
•
•
Operating revenue increased 8.1% primarily due to an increase in organic revenue, partially offset by the unfavorable
effect of currency translation.
As a result of product innovation and penetration gains, worldwide automotive organic revenue grew 8.9%, exceeding
auto builds which grew 3%.
European organic revenue growth of 10.8% exceeded auto build growth of 3%.
North American automotive organic revenue grew 7.6% as auto builds increased 5%.
Organic revenue for Asia Pacific increased 12.1% primarily due to revenue growth in China of 17.2%, which
exceeded Chinese auto build growth of 8%.
Operating margin increased 270 basis points to 23.2% primarily driven by positive operating leverage of 140 basis
points, the net benefits of the Company's enterprise initiatives and lower restructuring expenses, partially offset by
unfavorable price/cost of 30 basis 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
23
serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, 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;
• 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 and transportation applications.
The results of operations for the Test & Measurement and Electronics segment for 2015, 2014 and 2013 were as follows:
2015 compared to 2014
For the Years Ended
Dollars in millions
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
Operating margin %
2015
$ 1,969
$ 322
2014
$ 2,204
$ 340
16.3%
15.4%
Inc (Dec)
(10.7)%
(5.1)%
90 bps
Organic
Acq/Div Restructuring Impairment
Foreign
Exchange
Total
(5.2)%
(2.5)%
40 bps
—%
—%
—
—%
3.1%
40 bps
—%
(5.5)% (10.7)%
0.5%
10 bps
(6.2)%
—
(5.1)%
90 bps
•
Operating revenue decreased 10.7% due to the unfavorable effect of currency translation and the decrease in organic
revenue.
• Worldwide organic revenue decreased 5.2% in 2015.
Organic revenue for the worldwide test and measurement businesses decreased 5.9% primarily due to the impact
of a weak capital spending environment in North America and Europe.
Worldwide electronics organic revenue declined 4.3% primarily due to the decrease in the electronic assembly
businesses across all major regions. Organic revenue for the other electronics businesses increased 0.3%
primarily driven by the contamination and static control businesses.
•
•
Operating income of $322 million decreased 5.1%. Excluding the negative impact of foreign currency translation of 6.2%,
operating income would have increased 1.1%.
Operating margin was 16.3%. The increase of 90 basis points was primarily driven by the net benefits resulting from the
Company's enterprise initiatives and cost management of 190 basis points, lower restructuring expenses, and favorable
price/cost of 20 basis points, partially offset by negative operating leverage of 170 basis points.
2014 compared to 2013
Dollars in millions
December 31,
Components of Increase (Decrease)
For the Years Ended
Organic
Acq/Div Restructuring Impairment
Foreign
Exchange
Total
Operating revenue
Operating income
2014
$ 2,204
$ 340
2013
$ 2,176
$ 321
Inc (Dec)
1.3%
5.8%
1.5%
7.9%
(0.1)%
0.1 %
— %
(2.4)%
Operating margin %
15.4%
14.8%
60 bps
90 bps
—
(30) bps
Operating revenue increased 1.3% in 2014 primarily due to the increase in organic revenue.
•
• Worldwide organic revenue increased 1.5% in 2014.
—%
0.2%
—
(0.1)%
— %
1.3%
5.8%
—
60 bps
Organic revenue for the worldwide test and measurement businesses increased 1.8% primarily due to strength in
the Instron business.
Worldwide electronics organic revenue increased 1.2% primarily due to a 2.0% increase in the other electronics
businesses, which was driven by growth in the contamination control businesses, resulting primarily from
increased demand across all major regions, the pressure sensitive adhesives businesses, primarily due to higher
market demand in Europe, and the static control businesses, primarily due to increased sales to the industrial end
market in Asia and North America. Organic revenue for the electronic assembly businesses declined 0.7% but
showed improvement in the second half of the year.
24
•
Operating margin increased 60 basis points to 15.4% primarily due to the benefits resulting from the Company's
enterprise initiatives and positive operating leverage of 40 basis points, partially offset by the impact of a discrete claim
recovery in 2013 of 30 basis points and higher restructuring expenses.
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 institutional/restaurant, food service 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 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2015
2,096
498
2014
2,177
453
$
$
Inc (Dec)
Organic
(3.7)%
9.8 %
3.4%
17.7%
Operating margin %
23.7%
20.8%
290 bps
290 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
—%
—%
—
— %
(0.3)%
—
(7.1)%
(7.6)%
Total
(3.7)%
9.8 %
—
290 bps
•
Operating revenue decreased 3.7% due to the unfavorable effect of currency translation, partially offset by organic
revenue growth.
• Worldwide organic revenue increased 3.4% in 2015.
North American organic revenue increased 5.6%. North American equipment revenue increased 6.6% primarily
due to product innovation and improved market penetration in the warewash and refrigeration businesses.
Service revenue in North America increased 4.1%.
International organic revenue increased 1.0%. International equipment organic revenue increased 0.9% primarily
due to growth in the refrigeration business, partially offset by difficult year-over-year comparisons in the cooking
and retail businesses. International service organic revenue increased 1.3%.
•
Operating margin was 23.7%. The 290 basis point improvement was primarily driven by the benefits of the Company's
enterprise initiatives, partially offset by additional investment in the business that contributed 160 basis points, positive
operating leverage of 80 basis points and favorable price/cost of 30 basis points.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
2014
2,177
453
2013
2,047
385
$
$
6.4%
18.0%
4.7%
16.0%
1.7%
1.0%
Operating margin %
20.8%
18.8%
200 bps
200 bps
(20) bps
—%
1.0%
20 bps
—%
—%
—
Total
6.4%
18.0%
200 bps
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
•
Operating revenue increased 6.4% due to an increase in organic and acquisition revenue. The increase in revenue from
acquisitions was due to the purchase of a Chinese food equipment business in the third quarter of 2013.
• Worldwide organic revenue increased 4.7% in 2014.
25
North American organic revenue increased 5.1% as North American equipment revenue increased 5.3%,
primarily due to product innovation and penetration gains in refrigeration and cooking. North American service
revenue increased 4.0%.
International organic revenue increased 4.6% as equipment revenue increased 6.4% primarily due to growth in
warewash and refrigeration businesses and product innovation. International service revenue growth of 0.6% was
impacted by slower demand in southern Europe.
•
Operating margin increased 200 basis points to 20.8% primarily due to positive operating leverage of 120 basis points, the
benefits of the Company's enterprise initiatives, favorable price/cost of 20 basis points and lower restructuring expenses.
POLYMERS & FLUIDS
This segment is a highly branded supplier to niche markets that require value-added, differentiated products. Businesses in this
segment produce 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 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
December 31,
Components of Increase (Decrease)
For the Years Ended
Operating revenue
Operating income
2015
$ 1,712
$ 335
2014
$ 1,927
$ 357
Inc (Dec)
(11.2)%
(6.3)%
Organic
(2.0)%
1.8 %
Acq/Div Restructuring Impairment
— %
(1.0)%
—%
Foreign
Exchange
Total
(8.2)% (11.2)%
(2.3)%
1.7%
(0.4)%
(7.1)%
(6.3)%
Operating margin %
19.6%
18.5% 110 bps
80 bps
(20) bps
30 bps
(10) bps
30 bps
110 bps
•
Operating revenue decreased primarily due to the unfavorable effect of currency translation and the decrease in organic
revenue.
• Worldwide organic revenue declined 2.0% primarily due to lower demand in Europe and North America.
Organic revenue for the worldwide fluids businesses decreased 3.8% primarily driven by a decline in the
industrial maintenance, repair and operations end markets in Europe and North America. Worldwide polymers
businesses decreased 2.6% primarily due to the organic revenue decline in the European wind energy business,
partially offset by growth in China and South America. Organic revenue for the worldwide automotive
aftermarket businesses was essentially flat as a decline in North America was offset by growth in South America.
Operating income of $335 million decreased 6.3%. Excluding the negative impact of foreign currency translation of 7.1%,
operating income would have increased 0.8%.
Operating margin was 19.6%. The 110 basis point improvement was primarily driven by the net benefits of the
Company's enterprise initiatives and cost management of 150 basis points and lower restructuring expenses, partially
offset by lower variable margins due to product mix and negative operating leverage of 40 basis points.
•
•
26
2014 compared to 2013
Dollars in millions
December 31,
Components of Increase (Decrease)
For the Years Ended
Operating revenue
Operating income
2014
$ 1,927
$ 357
2013
$ 1,993
$ 335
Inc (Dec)
(3.3)%
6.3 %
Organic
(1.2)%
7.0 %
Operating margin %
18.5%
16.8% 170 bps
140 bps
Acq/Div Restructuring Impairment
— %
—%
—%
1.7%
(0.3)%
Foreign
Exchange
(2.1)%
(2.1)%
Total
(3.3)%
6.3 %
30 bps
—
—
170 bps
—%
—
•
Operating revenue decreased 3.3% in 2014 due to the unfavorable effect of currency translation and lower organic
revenue.
• Worldwide organic revenue declined 1.2% as ongoing PLS activities negatively impacted organic revenue by
approximately two percentage points.
Organic revenue decreases in North America and Europe were partially offset by growth in China and South
America. Worldwide polymers organic revenue decreased 3.8% primarily due to revenue declines in North
America and Europe, partially offset by growth in China and Brazil. Worldwide fluids organic revenue decreased
0.4% primarily due to a decrease in revenue in Europe, partially offset by growth in Brazil. Automotive
aftermarket organic revenue declined 0.2% driven by a decrease in revenue in North America, partially offset by
growth in Asia Pacific and South America.
•
Operating margin improved 170 basis points to 18.5% primarily due to lower operating expenses driven by the benefits of
the Company's enterprise initiatives and lower restructuring expenses, partially offset by negative operating leverage of 30
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, MRO, construction, and industrial capital goods markets. Products in this segment
include:
• arc welding equipment;
• metal arc welding consumables and related accessories; and
• metal jacketing and other insulation products.
The results of operations for the Welding segment for 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2015
1,650
415
2014
1,850
479
$
$
Inc (Dec)
Organic
(10.8)%
(13.4)%
(7.6)%
(12.1)%
Operating margin %
25.2%
25.9%
(70) bps
(130) bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
(0.1)%
— %
—
—%
0.3%
(3.1)%
(1.6)%
Total
(10.8)%
(13.4)%
10 bps
50 bps
(70) bps
•
Operating revenue decreased primarily due to the decrease in organic revenue and the unfavorable effect of currency
translation.
• Worldwide organic revenue decreased 7.6% due to lower demand in the oil and gas end markets, the impact of a soft
capital spending environment and continued PLS activities.
North American organic revenue declined 5.1% primarily due to decreases across the oil and gas and industrial
end markets.
International organic revenue decreased 14.5% primarily due to weak oil and gas end markets across all regions.
27
•
Operating margin was 25.2%. The decline of 70 basis points was primarily due to negative operating leverage of 130
basis points and lower variable margins due to product mix from lower sales of higher margin equipment, partially offset
by favorable price/cost of 50 basis points and the net benefits of the Company's enterprise initiatives.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
2014
1,850
479
2013
1,837
464
$
$
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
0.7%
3.2%
1.2%
4.3%
0.3%
—%
— %
(0.5)%
Operating margin %
25.9%
25.3%
60 bps
80 bps
(10) bps
(10) bps
(0.8)%
(0.6)%
—
Total
0.7%
3.2%
60 bps
•
Operating revenue increased 0.7% due to the increase in organic and acquisition revenue, partially offset by the
unfavorable effect of currency translation. The increase from acquisition revenue was due to the purchase of a European
supplier of welding consumables in the first quarter of 2013.
• Worldwide welding organic revenue increased 1.2%.
North American welding organic revenue increased 6.0% primarily due to strength in equipment sales to general
industrial and commercial customers.
International organic revenue decreased 10.4% primarily due to a delay in China oil and gas pipeline projects
and continued PLS activities in Europe.
•
Operating margin increased 60 basis points to 25.9% primarily due to the benefits of the Company's enterprise initiatives,
favorable price/cost of 40 basis points and favorable operating leverage of 20 basis points, partially offset by higher
overhead expenses driven by continued investment in product innovation.
CONSTRUCTION PRODUCTS
This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the
residential construction, renovation/remodel construction 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;
• metal plate truss components and related equipment and software; and
• packaged hardware, fasteners, anchors and other products for retail.
The results of operations for the Construction Products segment for 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2015
1,587
316
2014
1,707
289
$
$
Inc (Dec)
Organic
(7.0)%
8.8 %
3.7%
17.0%
Operating margin %
19.9%
17.0%
290 bps
220 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
(0.5)%
(0.2)%
10 bps
—%
3.8%
(10.2)%
(11.8)%
Total
(7.0)%
8.8 %
60 bps
—
290 bps
•
Operating revenue decreased primarily due to the unfavorable effect of currency translation, partially offset by organic
revenue growth.
• Worldwide organic revenue increased 3.7%.
North American organic revenue increased 7.1% primarily due to an increase in demand in the renovation/
remodel end markets.
28
International organic revenue increased 1.8%. Asia Pacific organic revenue increased 4.0% primarily due to
growth in Australia and New Zealand. European organic revenue decreased 0.3% primarily due to ongoing PLS
activities.
•
•
Operating income of $316 million increased 8.8%. Excluding the negative impact of foreign currency translation of
11.8%, operating income would have increased 20.6%.
Operating margin improved 290 basis points to 19.9% primarily due to the net benefits of the Company's enterprise
initiatives and cost management of 150 basis points, positive operating leverage of 100 basis points and lower
restructuring expenses.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2014
1,707
289
2013
1,717
238
$
$
Inc (Dec)
Organic
(0.6)%
21.3 %
2.2%
22.5%
Operating margin %
17.0%
13.9%
310 bps
280 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
(0.9)%
(0.7)%
10 bps
—%
2.4%
(1.9)%
(2.9)%
Total
(0.6)%
21.3 %
30 bps
(10) bps
310 bps
•
Operating revenue decreased 0.6% primarily due to the negative impact of currency translation and divestitures, partially
offset by an increase in organic revenue.
• Worldwide organic revenue increased 2.2%. Ongoing PLS activities negatively impacted organic revenue by
approximately one percentage point.
International organic revenue increased 2.2% as Asia Pacific increased 7.0% primarily due to strong end market
growth in Australia and New Zealand. European organic revenue declined 2.1% primarily due to lower end
market demand in the region and PLS activities.
North American organic revenue increased 2.1% primarily due to U.S. renovation organic revenue growth of
4.6%, driven by increased sales to big box retailers, partially offset by a decrease in organic revenue in Canada,
primarily due to lower demand in the residential market.
•
Operating margin of 17.0% increased 310 basis points primarily driven by the benefits of the Company's enterprise
initiatives, positive operating leverage of 60 basis points, lower restructuring expenses and favorable price/cost of 20 basis
points.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities that deliver strong operating results 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, consumer durables, general
industrial, 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;
• airport ground support equipment; and
• components for medical devices.
29
The results of operations for the Specialty Products segment for 2015, 2014 and 2013 were as follows:
2015 compared to 2014
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
2015
1,885
439
2014
2,055
440
$
$
Inc (Dec)
Organic
(8.3)%
(0.4)%
(2.3)%
4.2 %
Operating margin %
23.3%
21.4%
190 bps
150 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
—%
—%
—
—%
1.8%
(6.0)%
(6.4)%
Total
(8.3)%
(0.4)%
40 bps
—
190 bps
Operating revenue decreased due to the unfavorable effect of currency translation and the decrease in organic revenue.
•
• Worldwide organic revenue declined 2.3%.
Growth in the consumer packaging businesses, driven by strong food and beverage end market demand, and in
the brand identification businesses, due to increased medical, credit card, and automotive end market demand,
was more than offset by the impact of a challenging capital spending environment and ongoing PLS activities.
North American organic revenue decreased 3.2% as growth in the consumer packaging and brand identification
businesses was more than offset by a decline in the ground support equipment and the appliance businesses.
International organic revenue decreased 0.9% primarily due to a decline in the ground support equipment
businesses, partially offset by growth in the consumer packaging businesses.
•
•
Operating income of $439 million decreased 0.4%. Excluding the negative impact of foreign currency translation of 6.4%,
operating income would have increased 6.0%.
Operating margin improved 190 basis points to 23.3% primarily due to the net benefits of the Company's enterprise
initiatives and cost management of 150 basis points, favorable price/cost of 50 basis points and lower restructuring
expenses, partially offset by negative operating leverage of 50 basis points.
2014 compared to 2013
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
2014
2,055
440
2013
2,007
408
$
$
2.4%
8.0%
(0.3)%
6.7 %
2.7%
0.7%
Operating margin %
21.4%
20.3%
110 bps
140 bps
(40) bps
—%
0.5%
10 bps
—%
0.1%
—
Total
2.4%
8.0%
110 bps
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Exchange
•
Operating revenue increased 2.4% in 2014 due to an increase in acquisition revenue, partially offset by the decrease in
organic revenue. Acquisition revenue was primarily due to the purchase of a European consumer packaging equipment
business in the third quarter of 2013.
• Worldwide organic revenue declined 0.3%.
Worldwide consumer packaging organic revenue decreased 1.0% driven by lower equipment revenue in North
America. Worldwide ground support equipment organic revenue increased 5.3% primarily due to higher end
market demand in North America. Worldwide appliance organic revenue increased 0.7% primarily due to
penetration gains in the North American home appliance sector.
•
Operating margin of 21.4%, an increase of 110 basis points, was primarily due to the benefits of the Company's enterprise
initiatives, partially offset by unfavorable price/cost of 30 basis points. Acquisitions diluted total operating margin by 40
basis points primarily due to lower operating margins and the impact of intangible asset amortization expense.
OTHER FINANCIAL HIGHLIGHTS
•
Interest expense was $226 million in 2015, a decrease from $250 million in 2014, due to debt issuances in 2014 and
2015 at lower rates compared to prior debt obligations. Higher interest expense in 2014 versus $239 million in 2013
was due to interest expense on notes issued in February 2014 and the Euro notes issued in May 2014.
30
•
•
•
Other income (expense) was income of $78 million in 2015, $61 million in 2014 and $72 million in 2013. The
increase in income in 2015 versus 2014 was primarily due to a $15 million gain on the sale of a business in the first
quarter of 2015. The decrease in income in 2014 versus 2013 was primarily due to a pre-tax gain of $30 million
recorded in 2013 related to the acquisition of the controlling interest in an existing equity investment, partially offset
by higher interest income ($65 million in 2014 versus $50 million in 2013).
The effective tax rate was 30.1% in 2015, 30.0% in 2014, and 30.6% in 2013. The effective tax rate for 2013 was
unfavorably impacted by a $40 million discrete tax charge in the third quarter of 2013 related to the tax treatment of
intercompany financing transactions that impact the taxability of foreign earnings.
The impact of the Euro and other foreign currencies against the U.S. Dollar decreased operating revenue by
approximately $995 million in 2015 versus 2014 and $110 million in 2014 versus 2013. Additionally, the impact of
foreign currencies against the U.S. Dollar decreased income from continuing operations by approximately $153
million in 2015 versus 2014 and $14 million in 2014 versus 2013.
DISCONTINUED OPERATIONS
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.
In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business
previously included in the Construction Products segment and a specialty coatings business previously included in the
Polymers & Fluids segment. The construction distribution and specialty coatings businesses were classified as held for sale
beginning in the third quarter of 2013.
In the first quarter of 2013, the Company committed to plans for the divestiture of two transportation related businesses and a
machine components business previously included in the Specialty Products segment, two construction distribution
businesses previously included in the Construction Products segment, and a chemical manufacturing business previously
included in the Polymers & Fluids segment. These businesses were classified as held for sale beginning in the first quarter of
2013.
The operating results of the businesses discussed above are reported as discontinued operations in the statement of income for
all periods presented. As of the second quarter of 2014, the Company had completed the divestiture of all of the businesses
previously classified as discontinued operations.
Income from discontinued operations was $1.1 billion in 2014 and $49 million in 2013. Income from discontinued operations
in 2014 included the after-tax gain of $1.1 billion on the disposal of the Industrial Packaging business in the second quarter of
2014. Income from discontinued operations in 2013 included after-tax losses on disposals of $72 million and goodwill
impairment of $42 million related to various divested businesses. Refer to the Discontinued Operations note in Item 8.
Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board ("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, with expanded disclosures. In addition,
disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a
discontinued operation is required. 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. As a result, this
guidance did not have any impact on the Company's financial statements or related disclosures upon adoption.
In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the
new standard 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
31
addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning
January 1, 2018. The Company is currently assessing the potential impact the guidance will have upon adoption.
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 applied it retrospectively
to all periods presented. As of December 31, 2014, the Company restated $38 million of deferred long-term debt issuance
costs from Other assets to Long-term debt. Refer to the Other Assets and Debt notes in Item 8. Financial Statements and
Supplementary Data for further information.
In May 2015, the FASB issued authoritative guidance removing investments measured at net asset value from the fair value
hierarchy disclosures as a practical expedient. The Company early adopted this guidance in the fourth quarter of 2015 and
applied it retrospectively to all periods presented. Adoption of this guidance resulted in changes to the fair value disclosures
related to the Company's plan assets for pension and other postretirement benefits. Refer to the Pension and Other
Postretirement Benefits note in Item 8. Financial Statements and Supplementary Data for further information.
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. The
Company early adopted this guidance in the fourth quarter of 2015 and applied it retrospectively to all periods presented. Due
to the restatement of current deferred tax assets and liabilities to noncurrent, adoption of this guidance resulted in an increase
of noncurrent deferred tax assets of $37 million and a decrease of noncurrent deferred tax liabilities of $167 million as of
December 31, 2014. Refer to the Income Taxes note in Item 8. Financial Statements and Supplementary Data for further
information.
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 billion of cash on hand at December 31, 2015 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:
•
•
•
internal investments to support organic growth and sustain core businesses;
payment of an attractive dividend to shareholders; and
external investments in selective strategic acquisitions that support organic growth focus and an active share
repurchase program.
In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial
Packaging business. 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. As to the impact of this divestiture on the
Company’s income per share from continuing operations and capital structure going forward, the Company also indicated
that it intended to repurchase approximately 50 million shares through a program utilizing its existing share repurchase
authorization to offset the full amount of divestiture-related dilution of income per share from continuing operations through
a combination of sale proceeds, free cash flow and additional leverage. The Company completed this program in the second
quarter of 2014. Under this program, the Company repurchased approximately 14.0 million shares of its common stock in the
fourth quarter of 2013 and approximately 35.7 million shares of its common stock in the first half of 2014.
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.
A portion of the proceeds was used to fund share repurchases under the program noted above.
The Company believes that, based on its revenues, operating margins, current 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
32
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, 2015, 2014 and 2013 was as follows:
In millions
Net cash provided by operating activities . . . . . . . . . . . . . . . . . .
Additions to plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses (excluding cash and equivalents)
and additional interest in affiliates. . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of discontinued operations. . . . . . . . . . .
Net proceeds from (repayment of) debt. . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and equivalents . . . . . .
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . .
$
$
$
$
2015
2014
2013
2,299
(284)
2,015
$
$
(742) $
(2,002)
(6)
—
151
147
(463)
(900) $
1,616
(361)
1,255
$
$
(711) $
(4,346)
(45)
3,191
1,339
224
(535)
372
$
2,528
(368)
2,160
(528)
(2,106)
(369)
206
1,264
305
(93)
839
The 2014 net cash provided by operating activities included $724 million of tax payments related to the disposition of the
Industrial Packaging business. Cash dividends paid during 2013 do not include the dividend payment of $174 million
originally scheduled to be paid in January 2013, which was accelerated and paid in December 2012.
Stock Repurchase Programs
On May 6, 2011, the Company’s Board of Directors authorized a stock repurchase program, which provided for the buyback
of up to $4.0 billion of the Company’s common stock over an open-ended period of time (the "2011 Program"). Under the
2011 Program, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $43.20
per share during 2011, approximately 35.5 million shares of its common stock at an average price of $56.93 per share during
2012 and approximately 26.4 million shares of its common stock at an average price of $71.89 per share during 2013. As of
December 31, 2013, there were no authorized repurchases remaining under the 2011 Program.
On August 2, 2013, 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 "2013
Program"). Under the 2013 Program, the Company repurchased approximately 3.3 million shares of its common stock at an
average price of $81.62 per share during 2013, approximately 50.4 million shares of its common stock at an average price of
$84.92 per share during 2014, and 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 provides 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. As of December 31, 2015, there was approximately $5.4 billion of authorized
repurchases remaining under the 2015 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. Adjusted 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 net investment in the former Industrial Packaging segment and the equity investment in
33
the Wilsonart business (formerly the Decorative Surfaces segment). 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, 2015, 2014, and 2013 was as follows:
Dollars in millions
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
2,867
$
2,888
$
Tax rate (as adjusted in 2013) . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income after taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Invested capital:
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . .
$
$
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total invested capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average invested capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustment for Wilsonart (formerly the Decorative
Surfaces segment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for Industrial Packaging . . . . . . . . . . . . . . . . . . .
Adjusted average invested capital. . . . . . . . . . . . . . . . . . . . . . $
Adjusted return on average invested capital . . . . . . . . . . . . . .
30.1%
(864)
2,003
2,203
1,086
—
1,577
5,999
(1,585)
280
9,560
9,943
(123)
—
$
$
$
$
9,820
$
20.4%
30.0%
(866)
2,022
2,293
1,180
—
1,686
6,466
(1,799)
427
10,253
11,215
(154)
(424)
10,637
19.0%
$
$
$
$
$
2,514
28.8%
(724)
1,790
2,365
1,247
1,519
1,709
6,885
(1,906)
593
12,412
12,581
(169)
(1,477)
10,935
16.4%
ROIC increased 140 basis points in 2015 versus 2014 as a result of a decrease in adjusted average invested capital of 7.7%.
ROIC increased 260 basis points in 2014 versus 2013 as a result of improvement in after-tax operating income of 13.0% and
a decrease in adjusted average invested capital of 2.7%.
The 2013 effective tax rate included a discrete tax charge of $40 million related to the tax treatment of intercompany
financing transactions that impact the taxability of foreign earnings.
A reconciliation of the 2013 effective tax rate to the adjusted tax rate excluding the discrete tax item is as follows:
Dollars in millions
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discrete tax charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As adjusted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Year Ended December 31, 2013
Income Taxes
Tax Rate
717
(40)
677
30.6%
(1.8)
28.8%
34
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital at
December 31, 2015 and 2014 is summarized as follows:
Dollars in millions
Current Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Current Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2015
2014
Increase
(Decrease)
3,090
2,203
1,086
341
6,720
526
1,585
257
2,368
4,352
$
$
3,990
2,293
1,180
401
7,864
1,476
1,799
250
3,525
4,339
$
$
(900)
(90)
(94)
(60)
(1,144)
(950)
(214)
7
(1,157)
13
Net working capital increased slightly at December 31, 2015 as lower short-term debt levels were partially offset by lower
cash and equivalents resulting from repayments of commercial paper.
Cash and equivalents totaled approximately $3.1 billion as of December 31, 2015 and $4.0 billion as of December 31, 2014,
primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to
U.S. income taxes and foreign withholding taxes if repatriated to the U.S. Cash and equivalents balances held internationally
are typically used for international operating needs, reinvested to fund expansion of existing international businesses, used to
fund new international acquisitions, or used to repay debt held internationally. In the U.S., the Company utilizes cash flows
from domestic operations to fund domestic cash needs, which primarily consist of dividend payments, share repurchases,
acquisitions, servicing of domestic debt obligations and general corporate needs. The Company also uses its commercial
paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash
generated domestically and liquidity provided by the Company's commercial paper program will continue to be sufficient to
fund cash requirements in the U.S.
Debt
Total debt at December 31, 2015 and 2014 was as follows:
In millions
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2014
526
6,896
7,422
$
$
1,476
5,943
7,419
$
$
Increase
(Decrease)
(950)
953
3
Short-term debt as of December 31, 2015 and December 31, 2014 included commercial paper of $0.5 billion and $1.4 billion,
respectively.
In May 2015, the Company issued €500 million of 1.25% Euro notes due May 22, 2023 at 99.239% of face value and €500
million of 2.125% Euro notes due May 22, 2030 at 99.303% of face value. Net proceeds from the May 2015 debt issuances
were used to repay commercial paper and for general corporate purposes.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized
acquisitions. The Company has committed lines of credit of $2.5 billion in the U.S. to support the potential issuances of
commercial paper. Of this amount, $1.5 billion is provided under a line of credit agreement with a termination date of June 8,
35
2017 and $1.0 billion is provided under a line of credit agreement with a termination date of August 15, 2018. No amounts
were outstanding under these two facilities at December 31, 2015. The maximum outstanding commercial paper balance
during 2015 was $2.4 billion, while the average daily balance was $1.4 billion.
As of December 31, 2015, the Company's foreign operations had authorized credit facilities with unused capacity of $296
million.
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA to measure 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 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, 2015, 2014 and 2013 was as follows:
Dollars in millions
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Add:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and impairment of goodwill and other intangible assets . . .
EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total debt to EBITDA ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ Equity
The changes to stockholders’ equity during 2015 and 2014 were as follows:
2015
2014
2013
7,422
1,899
$
$
7,419
1,890
$
$
226
(78)
820
244
233
250
(61)
809
262
245
3,344
$
3,395
$
2.2
2.2
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2014
6,824
1,899
(756)
(2,002)
(860)
123
5,228
$
$
36
6,322
1,630
239
(72)
717
270
252
3,036
2.1
9,709
2,946
(716)
(4,283)
(939)
107
6,824
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company's significant contractual obligations as of December 31, 2015 were as follows:
In millions
Total long-term debt . . . . . . . . . .
Interest payments on notes . . . . .
Minimum lease payments . . . . . .
2016
2017
2018
2019
2020
$
$
1
217
98
316
$
$
650
214
69
933
$
$
— $
212
47
259
$
1,350
183
31
1,564
$
$
2021 and
Future Years
4,977
2,078
29
7,084
$
$
4
167
23
194
As of December 31, 2015, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $171 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, 2015.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has six 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
Active . . . . . . . . . . . Quantity on hand is less than prior 6 months of usage . . . . . . . . . . . . . . . . . . . . . . . . . . .
Slow-moving . . . . . . Some usage in last 12 months, but quantity on hand exceeds prior 6 months of usage . .
Obsolete. . . . . . . . . . No usage in the last 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Criteria
Reserve %
0%
50%
90%
In addition, for approximately 22% 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,
the allowance for uncollectible accounts includes reserves for customer credits and cash discounts, which are also 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150% declining balance
200% declining balance
The majority of the Company's international businesses compute depreciation on a straight-line basis.
37
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, 2015, the Company had total goodwill and intangible assets of $6.0 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 management process. The amount of goodwill and other intangible assets allocated to individual reporting
units ranges from approximately $58 million to $1.5 billion, with the average amount equal to $428 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 substantial portion 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 the Pension and Other
Postretirement Benefits note 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 $37 million.
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. See the Pension and Other Postretirement
Benefits note in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other
postretirement benefit plans and related assumptions.
38
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
Interest Rate Risk
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. The following table presents the Company’s debt for which fair value is subject to changing market interest rates:
0.90%
Notes
Due
1.95%
Notes
Due
6.25%
Notes
Due
4.88%
Notes
Due
thru
3.375%
Notes
Due
1.75%
Euro
Notes
Due
1.25%
Euro
Notes
Due
3.50%
Notes
Due
2.125%
Euro
Notes
Due
3.00%
Euro
Notes
Due
4.875%
Notes
Due
3.9%
Notes
Due
In millions
As of December 31, 2015:
Feb 25,
2017
Mar 1,
2019
Apr 1,
2019
Dec 31,
2020
Sep 15,
2021
May 20,
2022
May 22,
2023
Mar 1,
2024
May 22,
2030
May 19,
2034
Sep 15,
2041
Sep 1,
2042
Estimated cash outflow by year of principal maturity
2016 . . . . . $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ —
2017 . . . . .
—
650
—
—
—
—
—
—
—
—
—
—
2018 . . . . .
2019 . . . . .
2020 . . . . .
2021 and
thereafter. .
Estimated fair
value . . . . . . . .
Carrying value .
—
—
— 650
—
—
649
649
—
—
655
647
—
700
—
—
790
698
As of December 31, 2014:
Total estimated
cash outflow. . . $ 650
Estimated fair
value . . . . . . . .
648
Carrying value .
648
$ 650
$ 700
$
651
647
817
697
Foreign Currency Risk
—
—
4
—
4
4
5
6
5
—
—
—
350
362
347
—
—
—
543
564
536
—
—
—
—
—
—
543
700
538
536
727
695
—
—
—
543
530
536
—
—
—
—
—
—
—
—
—
543
650
1,100
569
528
708
635
1,051
1,080
$ 350
$ 605
$ — $ 700
$ — $ 605
$ 650
$1,100
369
347
640
597
— 735
— 694
—
—
702
588
746
635
1,110
1,079
The Company operates in the U.S. and 56 foreign countries. The initial funding for the foreign manufacturing operations was
provided primarily through the permanent investment of equity capital from the U.S. parent company. The Company’s
products are primarily manufactured and sold within the same country. Therefore, the Company's manufacturing operations
do not have significant assets or liabilities denominated in currencies other than their functional currencies.
The Company designated €1.0 billion of Euro notes issued in May 2014 and €1.0 billion of Euro notes issued in May 2015 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 gain recorded in Accumulated other comprehensive income (loss)
related to the net investment hedge was $308 million and $158 million as of December 31, 2015 and December 31, 2014,
respectively.
39
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,
2015. 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, 2015, 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, 2015 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 11, 2016
/s/ Michael M. Larsen
Michael M. Larsen
Senior Vice President & Chief Financial Officer
February 11, 2016
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Illinois Tool Works Inc.
Glenview, Illinois
We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries
(the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive
income, income reinvested in the business, and cash flows for each of the three years in the period ended December 31, 2015.
We also have audited the Company's internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. 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 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. 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.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Illinois Tool Works Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, based on the criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 11, 2016
41
Statement of Income
Illinois Tool Works Inc. and Subsidiaries
In millions except per share amounts
Operating Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, administrative, and research and development
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and other intangible assets . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Income Taxes . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . .
Income from Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income Per Share from Continuing Operations:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income Per Share from Discontinued Operations:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Income Per Share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31
2014
2013
2015
13,405
$
14,484
$
7,888
2,417
231
2
2,867
(226)
78
2,719
820
1,899
—
8,673
2,678
242
3
2,888
(250)
61
2,699
809
1,890
1,056
1,899
$
2,946
$
5.16
5.13
$
$
— $
— $
5.16
5.13
$
$
4.70
4.67
2.63
2.61
7.33
7.28
$
$
$
$
$
$
14,135
8,554
2,815
250
2
2,514
(239)
72
2,347
717
1,630
49
1,679
3.65
3.63
0.11
0.11
3.76
3.74
The Notes to Financial Statements are an integral part of this statement.
42
Statement of Comprehensive Income
Illinois Tool Works Inc. and Subsidiaries
In millions
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax . . . . . . . . . . . . .
Pension and other postretirement benefit adjustments, net of tax . . .
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31
2015
2014
2013
1,899
$
2,946
$
1,679
(860)
14
1,053
$
(939)
(103)
1,904
$
(193)
284
1,770
Statement of Income Reinvested in the Business
Illinois Tool Works Inc. and Subsidiaries
In millions
Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31
2015
2014
2013
17,173
1,899
(756)
18,316
$
$
14,943
2,946
(716)
17,173
$
$
13,973
1,679
(709)
14,943
The Notes to Financial Statements are an integral part of these statements.
43
Statement of Financial Position
Illinois Tool Works Inc. and Subsidiaries
In millions except shares
Assets
Current Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent Liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ Equity:
Common stock:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued- 550,035,604 shares in 2015 and 2014
Outstanding- 363,710,073 in 2015 and 383,196,213 in 2014 . . . . . . . . . . . .
Additional paid-in-capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income reinvested in the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31
2015
2014
$
$
$
3,090
2,203
1,086
341
6,720
1,577
4,439
1,560
346
1,087
15,729
526
449
1,136
200
57
2,368
6,896
256
981
8,133
6
1,135
18,316
(12,729)
(1,504)
4
5,228
15,729
$
3,990
2,293
1,180
401
7,864
1,686
4,667
1,799
338
1,111
17,465
1,476
512
1,287
186
64
3,525
5,943
171
1,002
7,116
6
1,096
17,173
(10,798)
(658)
5
6,824
17,465
The Notes to Financial Statements are an integral part of this statement.
44
Statement of Cash Flows
Illinois Tool Works Inc. and Subsidiaries
In millions
Cash Provided by (Used for) Operating Activities:
For the Years Ended December 31
2013
2014
2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided by operating activities:
1,899
$
2,946
$
1,679
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and impairment of goodwill and other intangible assets . . . . . . . . . . . . .
Change in deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Income) loss from investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of operations and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on acquisition of controlling interest in an equity investment . . . . . . . . . . . . . . .
Other non-cash items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in—
Trade receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in—
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in
affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of operations and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) investing activities . . . . . . . . . . . . . . . . . . . . .
Cash Provided by (Used for) Financing Activities:
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from (repayments of) debt with original maturities of three months or less
Proceeds from debt with original maturities of more than three months . . . . . . . . . . . . . .
Repayments of debt with original maturities of more than three months. . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . .
Effect of Exchange Rate Changes on Cash and Equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Equivalents:
244
233
(11)
7
(4)
1
—
(16)
41
—
12
(42)
25
24
(30)
(56)
(27)
(1)
2,299
(6)
(284)
22
30
—
29
(1)
(210)
(742)
59
(2,002)
(946)
1,099
(2)
20
(12)
(2,526)
(463)
Increase (decrease) during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(900)
3,990
3,090
Supplementary Cash Flow Information:
Cash Paid During the Year for Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Paid During the Year for Income Taxes, Net of Refunds . . . . . . . . . . . . . . . . . . . . . $
Liabilities Assumed from Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
200
775
1
$
$
$
$
262
245
55
7
(8)
2
(1,718)
6
39
—
11
(70)
(10)
(98)
(20)
5
33
(71)
1,616
(45)
(361)
28
28
3,191
18
(17)
2,842
(711)
148
(4,346)
(239)
3,329
(1,751)
33
(14)
(3,551)
(535)
372
3,618
3,990
236
1,502
4
$
$
$
$
299
314
6
3
(12)
(1)
91
5
37
(30)
20
(83)
24
226
8
161
(176)
(43)
2,528
(369)
(368)
40
38
206
2
(5)
(456)
(528)
206
(2,106)
1,267
3
(6)
24
—
(1,140)
(93)
839
2,779
3,618
240
602
145
The Notes to Financial Statements are an integral part of this statement.
45
Notes to Financial Statements
The Notes to Financial Statements furnish additional information on items in the financial statements. The notes have been
arranged in the same order as the related items appear in the statements.
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and
equipment with approximately 84 divisions in 57 countries. The Company primarily serves the automotive OEM/tiers,
automotive aftermarket, general industrial, commercial food equipment, and construction end markets.
Significant accounting principles and policies of the Company are in italics. Certain reclassifications of prior year data have
been made to conform to current year reporting.
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. The significant estimates included in the preparation of
the financial statements are related to inventories, trade receivables, plant and equipment, income taxes, goodwill and
intangible assets, product liability matters, litigation, product warranties, pensions, other postretirement benefits,
environmental matters and stock-based compensation.
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.
Discontinued Operations
In April 2014, the Financial Accounting Standards Board ("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. In addition, disclosure of the pre-tax income
attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required.
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 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.
Third Quarter 2013 Discontinued Operations-In February 2013, the Company announced that it was initiating a review
process to explore strategic alternatives for its 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 its 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.
In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business
previously included in the Construction Products segment and a specialty coatings business previously included in the
Polymers & Fluids segment. These businesses were classified as held for sale beginning in the third quarter of 2013. The
specialty coatings business was sold in the fourth quarter of 2013. The construction distribution business was sold in the
second quarter of 2014.
First Quarter 2013 Discontinued Operations-In the first quarter of 2013, the Company committed to plans for the divestiture
of two transportation related businesses and a machine components business previously included in the Specialty Products
segment, two construction distribution businesses previously included in the Construction Products segment, and a chemical
manufacturing business previously included in the Polymers & Fluids segment. These businesses were classified as held for
sale beginning in the first quarter of 2013.
46
In the second quarter of 2013, the Company divested one of the held for sale transportation related businesses, the machine
components business, and the chemical manufacturing business. In the third quarter of 2013, the Company divested the
second held for sale transportation related business. In the fourth quarter of 2013, the Company divested one construction
distribution business and the remaining construction distribution business was sold in the second quarter of 2014.
The operating results of the businesses discussed above are reported as discontinued operations in the statement of income for
all periods presented. Results of the discontinued operations for the years ended December 31, 2014 and 2013 were as
follows:
In millions
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
$
$
$
798
1,805
(749)
1,056
$
$
$
2,769
186
(137)
49
Included in income before income taxes from discontinued operations are net gain on disposal of $1.7 billion in 2014 and net
losses on disposal of $91 million in 2013. The net gain in 2014 included a pre-tax gain of $1.7 billion ($1.1 billion after-tax)
on the sale of the Industrial Packaging business. The net losses in 2013 included a $39 million pre-tax loss related to the sale
of one of the construction distribution businesses and a $20 million pre-tax loss related to the sale of one of the transportation
related businesses. Also included in income before income taxes from discontinued operations in 2013 was a $42 million
goodwill impairment charge recorded in connection with the anticipated sale of one of the transportation related businesses.
In 2014, income tax expense from discontinued operations included $175 million of U.S. income tax expense related to the
repatriation of approximately $1.3 billion of international proceeds from the sale of the Industrial Packaging business. In
2013, income tax expense from discontinued operations included $42 million of tax expense related to the legal restructuring
of the Industrial Packaging business.
There were no businesses classified as held for sale as of December 31, 2015 and 2014.
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. Acquisitions, individually and in the
aggregate, did not materially affect the Company’s results of operations or financial position for any period presented. Net
cash paid for acquisitions during 2015, 2014, and 2013 was $6 million, $45 million, and $369 million, respectively.
The premium over tangible net assets recorded for acquisitions based on purchase price allocations during 2015, 2014 and
2013 was as follows:
In millions except weighted-average lives (years)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortizable intangible assets:
Patents and proprietary technology . . . .
Trademarks and brands . . . . . . . . . . . . .
Customer lists and relationships . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total amortizable intangible assets . . . . . . . .
Indefinite-lived intangible assets:
Trademarks and brands . . . . . . . . . . . . .
Total premium recorded . . . . . . . . . . . . . . . .
2015
2014
2013
Weighted-
Average
Life
Premium
Recorded
2
$
Weighted-
Average
Life
Premium
Recorded
18
$
Weighted-
Average
Life
Premium
Recorded
247
$
2
—
—
—
2
—
4
6.4
—
—
—
6.4
$
47
15.4
12.9
11.4
—
12.9
$
8
3
12
—
23
—
41
9.8
15.5
11.2
5.0
11.4
$
34
35
100
12
181
—
428
No goodwill recorded for acquisitions during 2015 will be tax deductible. Of the total goodwill recorded for acquisitions in
2014 and 2013, the Company expects goodwill of $14 million and $25 million, respectively, will be tax deductible.
Operating Revenue is recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and
rewards of ownership have transferred or services have been rendered, the price to the customer is fixed or determinable, and
collectibility is reasonably assured, which is generally at the time of product shipment. Typical sales arrangements are for
standard products and provide for transfer of ownership and risk of loss at the time of shipment. In limited circumstances
where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation and
customer acceptance, revenue recognition is deferred until such obligations have been completed. Customer allowances and
rebates, consisting primarily of volume discounts and other short-term incentive programs, are estimated at the time of sale
based on historical experience and known trends and are recorded as a reduction in reported revenues.
In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the
new standard 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. This guidance is effective for the Company beginning
January 1, 2018. The Company is currently assessing the potential impact the guidance will have upon adoption.
Research and Development Expenses are recorded as expense in the year incurred. These costs were $218 million in 2015,
$227 million in 2014 and $240 million in 2013.
Rental Expense was $117 million in 2015, $130 million in 2014 and $138 million in 2013. Future minimum lease payments
under non-cancelable leases for the years ending December 31 are as follows:
In millions
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
98
69
47
31
23
29
297
Advertising Expenses are recorded as expense in the year incurred. These costs were $58 million in 2015, $66 million in
2014 and $67 million in 2013.
Other Income (Expense) consisted of the following:
In millions
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on disposal of operations and affiliates . . . . . . . . . . . . . . .
Gain (loss) on foreign currency transactions, net . . . . . . . . . . . . . . . .
Income from investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on acquisition of controlling interest in an equity investment . .
Equity income (loss) in Wilsonart . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2014
2013
52
16
5
4
—
(4)
5
78
$
$
65
(6)
8
8
—
(9)
(5)
61
$
$
50
(5)
(5)
12
30
(14)
4
72
On January 31, 2013, the Company acquired the controlling interest of an existing consumer packaging business in the
Specialty Products segment previously accounted for under the equity method. The Company recorded a pre-tax gain of $30
million in Other income (expense) in the first quarter of 2013 as a result of remeasuring the Company's existing equity interest
to fair value by determining the implied equity value using a Level 3 valuation method.
48
Equity income (loss) in Wilsonart is related to the Company's 49% ownership interest in Wilsonart International Holdings
LLC accounted for under the equity method of accounting. Refer to the Other Assets note for further information regarding
this investment.
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. The components of the provision for income taxes were as shown
below:
In millions
U.S. federal income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit of net operating loss carryforwards . . . . . . . . . . . . . . . .
State income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
503
$
8
511
310
(11)
(48)
251
66
(8)
58
$
413
121
534
163
66
(13)
216
50
9
59
Income from continuing operations before income taxes for domestic and foreign operations was as follows:
$
820
$
809
$
410
84
494
153
35
(13)
175
64
(16)
48
717
In millions
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
$
$
1,660
1,059
2,719
$
$
1,669
1,030
2,699
$
$
1,444
903
2,347
The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:
U.S. federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of U.S. federal tax benefit . . . . . . . . . . . . . . . .
Differences between U.S. federal statutory and foreign tax rates. . . . .
Nontaxable foreign interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of foreign dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax relief for U.S. manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
35.0%
1.4
(3.1)
(3.3)
2.8
(1.6)
(1.1)
30.1%
35.0%
1.6
(3.5)
(3.6)
2.1
(1.5)
(0.1)
30.0%
35.0%
1.8
(3.4)
(3.5)
2.4
(1.3)
(0.4)
30.6%
Deferred U.S. federal income taxes and foreign withholding taxes have not been provided on the remaining undistributed
earnings of certain international subsidiaries as these earnings are considered permanently invested. Undistributed earnings
of these subsidiaries were approximately $8.7 billion and $7.1 billion as of December 31, 2015 and 2014, respectively. Upon
repatriation of these earnings to the U.S. in the form of dividends or other distribution of earnings, the Company may be
subject to U.S. income taxes and foreign withholding taxes. The actual U.S. tax cost would depend on income tax laws and
circumstances at the time of distribution. Determination of the related tax liability is not practicable because of the
complexities associated with the hypothetical calculation.
49
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. The
Company early adopted this guidance in the fourth quarter of 2015 and applied it retrospectively to all periods presented. Due
to the restatement of current deferred tax assets and liabilities to noncurrent, adoption of this guidance resulted in an increase
of noncurrent deferred tax assets of $37 million and a decrease of noncurrent deferred tax liabilities of $167 million as of
December 31, 2014.
The components of deferred income tax assets and liabilities at December 31, 2015 and 2014 were as follows:
In millions
Goodwill and intangible assets. . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves, capitalized tax cost and LIFO inventory.
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and reserves . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit accruals . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowances for uncollectible accounts. . . . . . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred intercompany deductions . . . . . . . . . . . . . . . . . . . .
Unrealized loss (gain) on foreign debt instruments
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred income tax assets (liabilities) . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets (liabilities) . . . . . . . . . . . .
$
$
2015
2014
Asset
Liability
Asset
Liability
282
42
25
28
79
314
216
643
39
13
13
—
—
109
1,803
(467)
1,336
$
$
(734) $
(5)
(298)
(84)
—
—
—
—
—
—
—
—
(115)
(10)
(1,246)
—
(1,246) $
277
48
31
26
73
324
195
670
80
11
11
14
—
123
1,883
(530)
1,353
$
$
(758)
(1)
(273)
(85)
—
—
—
—
—
—
—
—
(59)
(10)
(1,186)
—
(1,186)
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. The valuation allowances recorded at December 31, 2015 and 2014 related primarily to certain net
operating loss carryforwards and capital loss carryforwards.
At December 31, 2015, the Company had net operating loss carryforwards available to offset future taxable income in the
U.S. and certain foreign jurisdictions, which expire as follows:
In millions
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023-2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Do not expire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Gross Carryforwards Related
to Net Operating Losses
1
11
8
10
80
75
21
52
2,104
2,362
The Company has foreign tax credit carryforwards of $216 million as of December 31, 2015 that are available for use by the
Company between 2016 and 2025.
50
The changes in the amount of unrecognized tax benefits during 2015, 2014 and 2013 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2014
2013
218
39
54
(41)
(6)
(5)
259
$
$
268
23
12
(59)
(18)
(8)
218
$
$
249
26
40
(21)
(27)
1
268
Included in the balance at December 31, 2015 were approximately $227 million of unrecognized tax benefits that, if
recognized, would impact the Company’s effective tax rate.
During the third quarter of 2013, the Company recorded a discrete tax charge of $40 million related to the tax treatment of
intercompany financing transactions that impact the taxability of foreign earnings.
The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax
returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, Her Majesty's
Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these
audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the
ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the
Company's unrecognized tax benefits may be decreased by approximately $113 million related predominantly to various
intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. The
following table summarizes the open tax years for the Company’s major jurisdictions:
Jurisdiction
United States – Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open Tax Years
2012-2015
2012-2015
2009-2015
2013-2015
2011-2015
The Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest
and penalties as of December 31, 2015 and 2014 was $32 million and $30 million, respectively.
On February 18, 2014, the Company received a Notice of Deficiency ("NOD") from the IRS asserting that a non-taxable
return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70
million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court
to challenge the NOD. The Company's petition was subsequently denied and the case will proceed to court with trial set for
the third quarter of 2016. Although the outcome of this process cannot be predicted with certainty, the Company believes it
will be successful in defending its positions. Accordingly, no reserve has been recorded related to this matter.
51
Income Per Share from Continuing Operations is computed by dividing income from continuing operations by the
weighted-average number of shares outstanding for the period. Income from continuing operations per diluted share is
computed by dividing income from continuing operations by the weighted-average number of shares assuming dilution for
stock options and restricted stock units. Dilutive shares reflect the potential additional shares that would be outstanding if the
dilutive stock options outstanding were exercised and the unvested restricted stock units vested during the period. The
computation of income per share from continuing operations was as follows:
In millions except per share amounts
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . .
Income per share from continuing operations—Basic:
Weighted-average common shares. . . . . . . . . . . . . . . . . . . .
Income per share from continuing operations—Basic. . . . .
Income per share from continuing operations—Diluted:
Weighted-average common shares. . . . . . . . . . . . . . . . . . . .
Effect of dilutive stock options and restricted stock units . .
Weighted-average common shares assuming dilution. . . . .
Income per share from continuing operations—Diluted . . .
$
$
$
2015
2014
2013
1,899
$
1,890
$
367.9
5.16
367.9
2.2
370.1
5.13
$
$
401.7
4.70
401.7
2.9
404.6
4.67
$
$
1,630
446.2
3.65
446.2
3.1
449.3
3.63
Options that were considered antidilutive were not included in the computation of diluted income per share from continuing
operations. There were 0.6 million antidilutive options outstanding as of December 31, 2015. There were no antidilutive
options outstanding as of December 31, 2014 and 0.1 million antidilutive options outstanding as of December 31, 2013.
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 are net of allowances for uncollectible accounts, including reserves for customer credits and cash
discounts. The changes in the allowances for uncollectible accounts during 2015, 2014 and 2013 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to assets held for sale . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Inventories at December 31, 2015 and 2014 were as follows:
2015
2014
2013
(43) $
(7)
5
—
3
—
(42) $
(46) $
(7)
7
—
3
—
(43) $
In millions
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
$
$
415
130
622
(81)
1,086
$
$
(65)
(3)
14
(1)
1
8
(46)
458
133
677
(88)
1,180
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 the 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 22% of total inventories as of both December 31, 2015 and 2014. If the FIFO method was used for all
inventories, total inventories would have been approximately $81 million and $88 million higher than reported at December
31, 2015 and 2014, respectively.
52
Prepaid Expenses and Other Current Assets as of December 31, 2015 and 2014 were as follows:
In millions
Income tax refunds receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value-added-tax receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vendor advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
$
$
147
48
22
124
341
$
$
129
50
30
192
401
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. Depreciation
of plant and equipment is primarily computed on an accelerated basis for U.S. businesses and on a straight-line basis for a
majority of the international businesses.
Depreciation was $244 million in 2015, $262 million in 2014 and $270 million in 2013. There was no depreciation included
in Income from discontinued operations in 2015 and 2014. Depreciation included in Income from discontinued operations in
2013 was $29 million.
Net plant and equipment consisted of the following at December 31, 2015 and 2014:
In millions
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2014
179
1,272
2,972
156
76
4,655
(3,078)
1,577
$
$
177
1,200
3,034
158
230
4,799
(3,113)
1,686
The ranges of useful lives used to depreciate plant and equipment are as follows:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5—50 years
3—12 years
Term of lease
Goodwill and Intangible Assets—Goodwill represents the excess cost over fair value of the net assets of purchased
businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. 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.
53
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-of-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.
Amortization and impairment of goodwill and other intangible assets for the years ended December 31, 2015, 2014 and 2013
were as follows:
In millions
Goodwill:
2015
2014
2013
Impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $
Intangible Assets:
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231
2
233
$
242
3
245
$
$
—
250
2
252
Income from discontinued operations included intangible asset amortization of $20 million in 2013.
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third
quarter of 2015, 2014 and 2013. In the third quarter of 2015, these assessments resulted in no goodwill impairment charges
and an indefinite-lived intangible asset charge of $2 million related to a brand in the Polymers & Fluids segment. In the third
quarter of 2014, these assessments resulted in no goodwill impairment charges and indefinite-lived intangible asset charges of
$3 million related to certain brands in the Polymers & Fluids and Test & Measurement and Electronics segments. In 2013,
these assessments resulted in no goodwill impairment charges and an indefinite-lived intangible asset impairment charge of
$2 million related to a brand in the Test & Measurement and Electronics segment.
A summary of indefinite-lived intangible assets that were adjusted to fair value and the related impairment charges for the
years ended December 31, 2015, 2014, and 2013 is as follows:
2015
2014
2013
In millions
Indefinite-lived intangible assets . .
Carrying
Value
26
$
Fair
Value
$ 24
Total
Impairment
Charges
Carrying
Value
$
2
$
11
Fair
Value
8
$
Total
Impairment
Charges
$
3
Carrying
Value
42
$
Fair
Value
$ 40
Total
Impairment
Charges
$
2
54
The changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 were as follows:
In millions
Balance, December 31, 2013 . $
2014 activity:
Acquisitions & divestitures. . .
Impairment charges. . . . . . . . .
Foreign currency translation . .
Balance, December 31, 2014 .
2015 activity:
Acquisitions & divestitures. . .
Impairment charges. . . . . . . . .
Foreign currency translation . .
Balance, December 31, 2015 . $
Cumulative goodwill
impairment charges,
December 31, 2015 . . . . . . . $
Automotive
OEM
Test &
Measurement
and Electronics
Food
Equipment
Polymers &
Fluids
Welding
Construction
Products
Specialty
Products
Total
320
$
1,426
$
294
$
1,021
$
294
$
561
$
970
$
4,886
(3)
—
(23)
294
—
—
(17)
—
—
(36)
1,390
—
—
(35)
—
—
(18)
276
—
—
(17)
3
—
(60)
964
(6)
—
(64)
—
—
(17)
277
1
—
(17)
8
—
(27)
542
—
—
(26)
—
—
(46)
924
—
—
8
—
(227)
4,667
(5)
—
(47)
(223)
277
$
1,355
$
259
$
894
$
261
$
516
$
877
$
4,439
24
$
83
$
60
$
15
$
5
$
7
$
46
$
240
Income from discontinued operations included a goodwill impairment of $42 million in 2013.
Intangible assets as of December 31, 2015 and 2014 were as follows:
In millions
Amortizable intangible assets:
$
Customer lists and relationships . . . .
Trademarks and brands . . . . . . . . . . .
Patents and proprietary technology. .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total amortizable intangible assets. . . . . .
Indefinite-lived intangible assets:
2015
Accumulated
Amortization
Cost
Net
Cost
2014
Accumulated
Amortization
$
1,630
724
618
475
3,447
(943) $
(298)
(397)
(446)
(2,084)
$
687
426
221
29
1,363
$
1,638
707
622
471
3,438
(820) $
(249)
(354)
(430)
(1,853)
Net
818
458
268
41
1,585
Trademarks and brands . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . .
$
197
3,644
$
—
(2,084) $
197
1,560
$
214
3,652
$
—
(1,853) $
214
1,799
Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.
The estimated amortization expense of intangible assets for the future years ending December 31 is as follows:
In millions
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217
196
175
153
134
Other Assets - 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 applied it
retrospectively to all periods presented. As of December 31, 2014, the Company restated $38 million of deferred debt
issuance costs from Other assets to Long-term debt.
55
Other assets as of December 31, 2015 and 2014 consisted of the following:
In millions
Cash surrender value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investment in Wilsonart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
428
191
113
99
88
168
1,087
$
$
418
165
141
110
96
181
1,111
$
$
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. Due to the Company's continuing involvement through its 49%
ownership interest in Wilsonart, the former Decorative Surfaces segment was not presented as discontinued operations. 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 of 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.
Accrued Expenses as of December 31, 2015 and 2014 consisted of the following accruals:
In millions
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rebates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of pension and other postretirement benefit obligations . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
363
169
125
46
15
418
1,136
$
$
441
194
128
49
14
461
1,287
$
$
The Company accrues for product warranties based on historical experience. The changes in accrued warranties during
2015, 2014 and 2013 were as follows:
In millions
Beginning balance
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to liabilities held for sale. . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
49
(37)
36
—
(2)
—
46
$
$
50
(41)
43
—
(3)
—
49
$
$
51
(44)
43
2
1
(3)
50
$
$
56
Debt
Short-term debt represents obligations with a maturity date of one year or less and is stated at cost which approximates
fair value. Short-term debt also includes current maturities of long-term debt. Short-term debt as of December 31, 2015
and 2014 consisted of the following:
In millions
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
498
25
1
2
526
$
$
1,413
62
1
—
1,476
$
$
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-
sized acquisitions. The Company has committed lines of credit of $2.5 billion in the U.S. to support the potential issuances
of commercial paper. Of this amount, $1.0 billion is provided under a line of credit agreement with a termination date of
August 15, 2018 and $1.5 billion is provided under a line of credit agreement with a termination date of June 8, 2017. No
amounts were outstanding under these two facilities at December 31, 2015. As of December 31, 2015, the Company was in
compliance with the financial covenants of these line of credit agreements, which include a minimum interest coverage
ratio. The weighted-average interest rate on commercial paper was 0.1% at both December 31, 2015 and 2014.
As of December 31, 2015, the Company had unused capacity of approximately $296 million under international debt
facilities.
Long-term debt represents obligations with a maturity date greater than one year, and excludes current maturities that
have been reclassified to short-term debt.
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 applied it
retrospectively to all periods presented. As of December 31, 2014, the Company restated $38 million of deferred long-term
debt issuance costs from Other assets to Long-term debt.
Long-term debt at carrying value and fair value as of December 31, 2015 and 2014 consisted of the following:
2015
2014
In millions
0.90% notes due February 25, 2017 . . . . . . .
1.95% notes due March 1, 2019 . . . . . . . . . .
6.25% notes due April 1, 2019 . . . . . . . . . . .
4.88% notes due thru December 31, 2020. . .
3.375% notes due September 15, 2021 . . . . .
1.75% Euro notes due May 20, 2022 . . . . . .
1.25% Euro notes due May 22, 2023 . . . . . .
3.50% notes due March 1, 2024 . . . . . . . . . .
2.125% Euro notes due May 22, 2030 . . . . .
3.0% Euro notes due May 19, 2034 . . . . . . .
4.875% notes due September 15, 2041 . . . . .
3.9% notes due September 1, 2042 . . . . . . . .
Other borrowings. . . . . . . . . . . . . . . . . . . . . .
Current maturities . . . . . . . . . . . . . . . . . . . . .
Effective
Interest Rate
0.95%
1.98%
6.25%
4.96%
3.43%
1.86%
1.35%
3.54%
2.18%
3.13%
4.97%
3.96%
Fair Value
649
655
790
4
362
564
538
727
530
569
708
1,051
6
7,153
$
$
Carrying Value
649
$
647
698
4
347
536
536
695
536
528
635
1,080
6
6,897
(1)
6,896
$
$
57
Fair Value
648
651
817
6
369
640
—
735
—
702
746
1,110
7
6,431
$
$
Carrying Value
648
$
647
697
5
347
597
—
694
—
588
635
1,079
7
5,944
(1)
5,943
$
$
The approximate fair values of the Company’s long-term debt, including current maturities, were based on a Level 2
valuation model, using observable inputs, which included market rates for comparable instruments as of December 31,
2015 and 2014.
All of the Company's notes listed above represent senior unsecured obligations ranking equal in right of payment.
In 2005, the Company issued $54 million of 4.88% notes due through December 31, 2020 at 100% of face value.
In 2007, the Company, through a wholly-owned European subsidiary, issued €750 million of 5.25% Euro notes due
October 1, 2014 at 99.874% of face value. The €750 million of 5.25% Euro notes due October 1, 2014 were repaid on the
due date.
In 2009, the Company issued $800 million of 5.15% redeemable notes due April 1, 2014 at 99.92% of face value and $700
million of 6.25% redeemable notes due April 1, 2019 at 99.98% of face value. The $800 million of 5.15% redeemable
notes due April 1, 2014 were repaid on the due date.
In 2011, the Company issued $350 million of 3.375% notes due September 15, 2021 at 99.552% of face value and $650
million of 4.875% notes due September 15, 2041 at 98.539% of face value.
In 2012, the Company issued $1.1 billion of 3.9% notes due September 1, 2042 at 99.038% of face value.
In February 2014, the Company issued $650 million of 0.9% notes due February 25, 2017 at 99.861% of face value, $650
million of 1.95% notes due March 1, 2019 at 99.871% of face value, and $700 million of 3.5% notes due March 1, 2024 at
99.648% of face value. Net proceeds from the February 2014 debt issuances were used to repay commercial paper.
In May 2014, the Company issued €500 million of 1.75% Euro notes due May 20, 2022 at 99.16% of face value and €500
million of 3.0% Euro notes due May 19, 2034 at 98.089% of face value. Net proceeds from the May 2014 debt issuances
were used for general corporate purposes.
In May 2015, the Company issued €500 million of 1.25% Euro notes due May 22, 2023 at 99.239% of face value and €500
million of 2.125% Euro notes due May 22, 2030 at 99.303% of face value. Net proceeds from the May 2015 debt issuances
were used to repay commercial paper and for general corporate purposes.
The Company designated the €1.0 billion of Euro notes issued in May 2015 and the €1.0 billion of Euro notes issued in
May 2014 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. Refer to the Accumulated Other Comprehensive Income (Loss)
note for additional information regarding the net investment hedge.
Scheduled maturities of long-term debt, including current maturities of long-term debt, for the future years ending
December 31 are as follows:
In millions
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
649
—
1,346
4
4,897
6,897
Pension and Other Postretirement Benefits—The Company has both funded and unfunded defined benefit pension and
other postretirement benefit plans, predominately in the U.S.
The U.S. primary pension plan provides benefits based on years of service and final average salary. The U.S. primary
postretirement health care plan is contributory with the participants’ contributions adjusted annually. The U.S. primary
postretirement life insurance plan is noncontributory.
58
Beginning January 1, 2007, the U.S. primary pension and other postretirement benefit plans were closed to new participants.
Newly hired employees and employees from acquired businesses that are not participating in these plans are eligible for
additional Company contributions under the existing U.S. primary defined contribution retirement plans. The Company’s
expense related to defined contribution plans was $77 million in 2015, $78 million in 2014, and $72 million in 2013.
In addition to the U.S. plans, the Company also has defined benefit pension plans in certain other countries, mainly the United
Kingdom, Germany, Canada and Switzerland.
Summarized information regarding the Company’s significant defined benefit pension and other postretirement benefit plans
related to both continuing and discontinued operations is as follows:
In millions
Components of net periodic benefit cost:
2015
Pension
2014
2013
Other Postretirement Benefits
2013
2014
2015
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . .
Amortization of actuarial (gain) loss. . . . . .
Amortization of prior service cost. . . . . . . .
Settlement/curtailment (gain) loss. . . . . . . .
$
70
92
(151)
60
1
—
72
$
80
$
87
$
11
$
103
(159)
48
1
1
100
(157)
65
—
49
$
74
$
144
$
24
(25)
(1)
1
—
10
$
10
$
24
(25)
(4)
1
(9)
(3) $
12
24
(22)
1
1
—
16
Net periodic benefit cost was included in the statement of income as follows:
In millions
Income from continuing operations . . . . . . . . . . $
Income from discontinued operations . . . . . . . .
$
2015
Pension
2014
2013
Other Postretirement Benefits
2013
2014
2015
72
—
72
$
$
69
5
74
$
$
131
13
144
$
$
10
—
10
$
$
$
6
(9)
(3) $
14
2
16
The pension settlement charges in 2013 included $45 million tied primarily to higher lump sum pension payments resulting
from the exit of Decorative Surfaces employees from the Company's U.S. primary pension plan. These charges were included
in Income from continuing operations. Refer to the Other Assets note for further details regarding the Decorative Surfaces
transaction.
In addition, the Company recognized a $9 million curtailment gain on the U.S. primary postretirement plan in the second
quarter of 2014 and a $2 million curtailment charge on the U.S. primary pension plan in the third quarter of 2013 related to the
Company's sale of the Industrial Packaging business and the reclassification of the Industrial Packaging business to
discontinued operations, respectively. These curtailments were included in Income from discontinued operations.
During 2014, the Society of Actuaries released a new mortality table, referred to as RP-2014, which is believed to better
reflect mortality improvements. The Company used the RP-2014 mortality table to measure its U.S. pension and other
postretirement obligations as of December 31, 2014 which resulted in additional actuarial losses of $76 million for pension
and $46 million for other postretirement benefits. In 2015, the Company used the updated MP-2015 mortality improvement
scale to measure its U.S. pension and other postretirement obligations as of December 31, 2015, which did not have a
significant impact.
59
The following tables provide a rollforward of the plan benefit obligations, plan assets and a reconciliation of funded status for
the years ended December 31, 2015 and 2014 for continuing and discontinued operations:
In millions
Change in benefit obligation:
Benefit obligation at January 1 . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . .
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare subsidy received. . . . . . . . . . . . . . . . . .
Settlement/curtailment (gain) loss . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Benefit obligation at December 31 . . . . . . . . . . . . . . .
In millions
Change in plan assets:
Fair value of plan assets at January 1. . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . .
Acquisitions/divestitures . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Fair value of plan assets at December 31 . . . . . . . . . .
Funded status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other immaterial plans . . . . . . . . . . . . . . . . . . . . . . . .
Net liability at December 31 . . . . . . . . . . . . . . . . . . . .
The amounts recognized in the statement of financial
position as of December 31 consist of:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . .
Net liability at end of year. . . . . . . . . . . . . . . . . . . . . .
The pre-tax amounts recognized in accumulated
other comprehensive income consist of:
Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . .
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . .
Plans with accumulated benefit obligation in excess
of plan assets as of December 31:
Projected benefit obligation . . . . . . . . . . . . . . . . .
Accumulated benefit obligation. . . . . . . . . . . . . .
Fair value of plan assets. . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Pension
Other Postretirement Benefits
2015
2014
2015
2014
$
$
$
591
11
24
13
—
(43)
—
(46)
2
—
—
552
$
$
519
10
24
13
—
97
(18)
(46)
2
(10)
—
591
Other Postretirement Benefits
2015
2014
$
372
(3)
6
13
—
(46)
—
342
$
(210) $
(5)
(215) $
— $
(4)
(211)
(215) $
(20) $
(1)
(21) $
370
28
7
13
—
(46)
—
372
(219)
(5)
(224)
—
(4)
(220)
(224)
(6)
(1)
(7)
2,607
70
92
3
1
(82)
—
(169)
—
—
(60)
2,462
$
$
2,545
80
103
3
(5)
240
(97)
(192)
—
(2)
(68)
2,607
Pension
2015
2014
$
2,557
16
97
3
—
(169)
(63)
2,441
$
(21) $
(50)
(71) $
2,487
264
127
3
(65)
(192)
(67)
2,557
$
(50) $
(52)
(102) $
$
191
(11)
(251)
(71) $
631
—
631
2,297
164
152
25
$
$
$
$
$
$
60
$
165
(10)
(257)
(102) $
$
$
638
1
639
2,361
168
154
26
Assumptions
The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:
2015
Pension
2014
2013
Other Postretirement Benefits
2013
2014
2015
Assumptions used to determine benefit
obligations at December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
3.95%
3.72%
3.70%
3.72%
4.32%
3.72%
4.55%
—%
4.15%
—%
4.95%
—%
Assumptions used to determine net periodic
benefit cost for years ended December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
3.70%
6.54%
3.72%
4.32%
7.02%
3.72%
3.85%
7.28%
3.86%
4.15%
7.00%
—%
4.95%
7.00%
—%
4.15%
7.00%
—%
The expected long-term rates of return for pension and other postretirement benefit plans were developed using historical asset
class returns while factoring in current market conditions such as inflation, interest rates and asset class performance. Assumed
health care cost trend rates have an effect on the amounts reported for the postretirement health care benefit plans. The
assumed health care cost trend rates used to determine the postretirement benefit obligation at December 31 were as follows:
Health care cost trend rate assumed for the next year . . . . . . . . . . . . . .
Ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year the rate reaches the ultimate trend rate. . . . . . . . . . . . . . . . . . . . . .
6.00%
4.50%
2021
8.00%
4.50%
2022
8.00%
5.00%
2020
2015
2014
2013
A one percentage-point change in assumed health care cost trend rates would have the following impact:
In millions
Change in service cost and interest cost for 2015. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in postretirement benefit obligation at December 31, 2015 . . . . . . . . . . .
$
$
1 Percentage-
Point Increase
1 Percentage-
Point Decrease
— $
$
7
(1)
(14)
Plan Assets
The Company’s overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of
growing plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessary
risk, the pension funds are diversified across several asset classes, securities and investment managers. The target allocations
for plan assets are 30% to 50% equity securities, 45% to 60% fixed income securities and 0% to 10% in other types of
investments. The Company does not use derivatives for the purpose of speculation, leverage, circumventing investment
guidelines or taking risks that are inconsistent with specified guidelines.
The assets in the Company’s postretirement health care plan are primarily invested in life insurance policies. The Company’s
overall investment strategy for the assets in the postretirement health care fund is to invest in assets that provide a reasonable
tax exempt rate of return while preserving capital.
The following tables present the fair value of the Company’s pension and other postretirement benefit plan assets at
December 31, 2015 and 2014, by asset category and valuation methodology. Level 1 assets are valued using unadjusted quoted
prices for identical assets in active markets. Level 2 assets are valued using quoted prices or other observable inputs for similar
assets. Level 3 assets are valued using unobservable inputs, but reflect the assumptions market participants would be expected
to use in pricing the assets. Each financial instrument’s categorization is based on the lowest level of input that is significant to
the fair value measurement.
61
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Equity securities:
$
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
Government securities. . . . . . . . . . . . . . . . .
Corporate debt securities. . . . . . . . . . . . . . .
Investment contracts with insurance
companies . . . . . . . . . . . . . . . . . . . . . . . .
Commingled funds:
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . .
Collective trust funds . . . . . . . . . . . . . . . . .
Partnerships/private equity interests . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Postretirement Benefit Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Life insurance policies . . . . . . . . . . . . . . . . . . . .
$
$
$
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Equity securities:
$
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
Government securities. . . . . . . . . . . . . . . . .
Corporate debt securities. . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Investment contracts with insurance
companies . . . . . . . . . . . . . . . . . . . . . . . .
Commingled funds:
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . .
Collective trust funds . . . . . . . . . . . . . . . . .
Partnerships/private equity interests . . . . . .
Other
Other Postretirement Benefit Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Life insurance policies . . . . . . . . . . . . . . . . . . . .
$
$
$
Total
Level 1
Level 2
Level 3
2015
53
$
53
$
— $
1
62
285
483
1
145
1,347
66
(2)
2,441
8
334
342
$
$
$
1
62
—
—
—
145
—
261
8
8
$
$
$
—
—
285
483
—
—
(2)
766
$
— $
— $
Total
Level 1
Level 2
Level 3
2014
164
$
164
$
— $
1
72
286
378
8
1
317
1,252
77
1
2,557
11
361
372
$
$
$
1
72
—
—
—
—
317
—
554
11
11
$
$
$
—
—
286
378
8
—
—
—
672
$
— $
— $
—
—
—
—
—
1
—
—
1
—
—
—
—
—
—
—
—
1
—
1
2
—
—
Cash and equivalents include cash on hand and instruments with original maturities of three months or less and are valued at
cost, which approximates fair value. Equity securities primarily include common and preferred equity securities covering a
wide range of industries and geographies that are traded in active markets and are valued based on quoted prices. Fixed
income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities, asset-
62
backed securities and investment contracts. The majority of the assets in this category are valued by evaluating bid prices
provided by independent financial data services. For securities where market data is not readily available, unobservable
market data is used to value the security. Mutual funds are traded in active markets and are valued based on quoted prices. The
underlying investments include small-cap equity, international equity and long- and short-term fixed income instruments.
Other primarily includes derivative instruments such as interest rate swaps used by fixed income investment managers to
offset interest rate sensitivity.
In May 2015, the FASB issued authoritative guidance removing investments measured at net asset value from the fair value
hierarchy disclosures as a practical expedient. The Company early adopted this guidance in the fourth quarter of 2015 and
applied it retrospectively to all periods presented. Adoption of this guidance resulted in the removal of $1.7 billion of pension
and other postretirement plan assets from the Company's fair value hierarchy disclosures as of December 31, 2014. These
investments include collective trust funds, partnerships/private equity interests and life insurance policies. Collective trust
funds are private funds that are valued at net asset value based on the value of the underlying investments which can be
redeemed on a daily basis. The underlying investments include both passively and actively managed U.S. and foreign large-
and mid-cap equity funds and short-term investment funds. Partnerships/private equity interests are investments in
partnerships where the benefit plan is a limited partner. The investments are valued by the investment managers on a periodic
basis using pricing models that use market, income and cost valuation methods. Distributions are received from these funds on
a periodic basis through the liquidation of the underlying assets of the fund. Life insurance policies are used to fund other
postretirement benefits in order to obtain favorable tax treatment and are valued based on the cash surrender value of the
underlying policies. The Company has selected the funds which these assets are invested in and may elect to withdraw funds
with proper notice to the insurance company or maintain the policies and receive death benefits as determined by the
contracts.
Cash Flows
The Company generally funds its pension and other postretirement benefit plans as required by law or to the extent such
contributions are tax deductible. The Company expects to contribute approximately $73 million to its pension plans and $5
million to its other postretirement benefit plans in 2016.
The Company’s portion of the benefit payments that are expected to be paid during the years ending December 31 is as
follows:
In millions
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2021-2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Pension
Other Postretirement
Benefits
$
173
176
178
180
178
872
35
37
38
39
39
199
Other Noncurrent Liabilities at December 31, 2015 and 2014 consisted of the following:
In millions
Pension benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
251
211
519
981
$
$
257
220
525
1,002
$
$
Commitments and Contingencies—The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business, including those involving environmental, product liability (including toxic tort) and general
liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs
can be reasonably estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of
these matters and its experience in contesting, litigating and settling other similar matters. The Company believes resolution of
these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position,
liquidity or future operations.
63
Preferred Stock, without par value, of which 0.3 million shares are authorized and unissued, is issuable in series. The Board
of Directors is authorized to fix by resolution the designation and characteristics of each series of preferred stock. The
Company has no present commitment to issue its preferred stock.
Common Stock, with a par value of $0.01, Additional Paid-In-Capital and Common Stock Held in Treasury transactions
during 2015, 2014, and 2013 are shown below.
In millions
Balance, December 31, 2012 . . . . . . . . . . . . . .
During 2013-
Shares issued for stock options. . . . . . . . .
Shares withheld for taxes . . . . . . . . . . . . .
Shares issued for stock compensation and
vesting of restricted stock . . . . . . . . . . .
Stock compensation expense . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . .
Tax benefits related to stock options . . . .
Tax benefits related to defined
contribution plans . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . .
Balance, December 31, 2013
During 2014-
Shares issued for stock options. . . . . . . . .
Shares withheld for taxes . . . . . . . . . . . . .
Shares issued for stock compensation and
vesting of restricted stock . . . . . . . . . . .
Stock compensation expense . . . . . . . . . .
Tax benefits related to stock options . . . .
Tax benefits related to defined
contribution plans . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . .
Balance, December 31, 2014 . . . . . . . . . . . . . .
During 2015-
Shares issued for stock options. . . . . . . . .
Shares withheld for taxes . . . . . . . . . . . . .
Shares issued for stock compensation and
vesting of restricted stock . . . . . . . . . . .
Stock compensation expense . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . .
Tax benefits related to stock options . . . .
Tax benefits related to defined
contribution plans . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . .
Balance, December 31, 2015 . . . . . . . . . . . . . .
Authorized, December 31, 2015 . . . . . . . . . . .
Common Stock
Shares
Amount
Additional
Paid-In-
Capital
Amount
Common Stock Held in Treasury
Shares
Amount
549.6
$
5
$
1,012
(94.5) $
(4,722)
0.4
—
—
—
—
—
—
—
550.0
—
—
—
—
—
—
—
550.0
—
—
—
—
—
—
—
—
550.0
700.0
$
1
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
6
9
—
(28)
36
(8)
23
2
—
1,046
—
—
(26)
39
33
4
—
1,096
(2)
—
(19)
39
(2)
20
4.0
(0.2)
0.6
—
—
—
—
(29.7)
(119.8)
3.0
(0.1)
0.5
—
—
—
(50.4)
(166.8)
1.2
(0.1)
0.4
—
—
—
198
(11)
28
1
—
—
—
(2,170)
(6,676)
148
(14)
26
—
—
1
(4,283)
(10,798)
61
(11)
19
2
—
—
3
—
1,135
$
—
(21.0)
(186.3) $
—
(2,002)
(12,729)
On May 6, 2011, the Company’s Board of Directors authorized a stock repurchase program, which provided for the repurchase
of up to $4.0 billion of the Company’s common stock over an open-ended period of time (the "2011 Program"). Under the
2011 Program, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $43.20
per share during 2011, approximately 35.5 million shares of its common stock at an average price of $56.93 per share during
64
2012 and approximately 26.4 million shares of its common stock at an average price of $71.89 per share during 2013. As of
December 31, 2013, there were no authorized repurchases remaining under the 2011 Program.
On August 2, 2013, the Company’s Board of Directors authorized a new stock repurchase program, which provided for the
repurchase of up to an additional $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 3.3 million shares of its common stock at an
average price of $81.62 per share during 2013, approximately 50.4 million shares of its common stock at an average price of
$84.92 per share during 2014, and 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 provides for the
repurchase 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. As of December 31, 2015, there was approximately $5.4 billion of authorized
repurchases remaining under the 2015 Program.
Cash Dividends declared were $2.07 per share in 2015, $1.81 per share in 2014 and $1.60 per share in 2013. Cash dividends
paid were $2.005 per share in 2015, $1.745 per share in 2014 and $1.18 per share in 2013. Cash dividends paid during 2013
do not include the dividend payment of $0.38 per share originally scheduled to be paid in January 2013, which was
accelerated and paid in December 2012.
Accumulated Other Comprehensive Income (Loss)—In March 2013, new accounting guidance was issued which clarifies
that an entity should release cumulative translation adjustments into net income when the entity ceases to have a controlling
financial interest in a subsidiary or group of assets that is a business within a foreign entity, which is consistent with the
Company's prior accounting policy. The new guidance became effective for the Company on January 1, 2014 and did not have
any impact on the Company's financial statements.
The changes in accumulated other comprehensive income (loss) during 2015, 2014 and 2013 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
$
(658) $
384
$
293
Foreign currency translation adjustments during the period . . . . . . . . . . . . . . . .
Foreign currency translation adjustments reclassified to income . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and other postretirement benefit adjustments during the period . . . . . .
Pension and other postretirement benefit adjustments reclassified to income . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension and other postretirement benefit adjustments. . . . . . . . . . . . . . .
(800)
—
(60)
(860)
(41)
61
(6)
14
(806)
(133)
—
(939)
(224)
54
67
(103)
(200)
7
—
(193)
327
122
(165)
284
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,504) $
(658) $
384
Foreign currency translation adjustments reclassified to income are primarily related to the disposal of certain discontinued
operations and were included in the related gain or loss upon disposal. Refer to the Discontinued Operations note for
additional information regarding the sale of the Company's discontinued operations.
Pension and other postretirement benefit adjustments reclassified to income represent the amortization of actuarial losses and
prior service cost, and settlement and curtailment charges recognized in net periodic benefit cost. Refer to the Pension and
Other Postretirement Benefits note for the amounts included in net periodic benefit cost. Pension and other postretirement
benefit adjustments reclassified to income also include the reclass of deferred losses of $6 million for each of the years ended
December 31, 2014 and 2013 related to the disposal of certain discontinued operations. Refer to the Discontinued Operations
note for additional information regarding the sale of the Company's discontinued operations.
65
The Company designated €1.0 billion of Euro notes issued in May 2014 and €1.0 billion of Euro notes issued in May 2015 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 gain recorded in Accumulated other comprehensive income (loss) related to the net
investment hedge was $308 million and $158 million as of December 31, 2015 and December 31, 2014, respectively.
As of December 31, 2015 and 2014, the ending balance of Accumulated other comprehensive income (loss) consisted of
cumulative translation adjustment losses of $1.1 billion and $265 million, respectively, and unrecognized pension and other
postretirement benefits costs of $379 million and $393 million, respectively. The estimated unrecognized benefit cost that will
be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost in 2016 is $43 million for
pension and other postretirement benefits.
Stock-Based Compensation—On May 8, 2015 (the "Effective Date"), the 2015 Long-Term Incentive Plan (the "2015 Plan")
was approved by shareholders. As of the Effective Date, no additional awards will be granted to employees under the 2011
Long-Term Incentive Plan (the "2011 Plan"). The significant terms of stock options and restricted stock units ("RSUs") were
not changed under the 2015 Plan. Stock options and RSUs have been issued to officers and other management employees
under these plans. Stock options generally vest over a four-year period and have a maturity of ten years from the issuance date.
RSUs generally "cliff" vest after a three-year period and include units with and without performance criteria. RSUs with
performance criteria provide for full "cliff" vesting after three years if the Compensation Committee certifies that the
performance goals have been met. Upon vesting, the holder will receive one share of common stock of the Company for each
vested RSU.
Prior to February 2013, the Company generally issued new shares from its authorized but unissued share pool to cover the
exercised options and vested RSUs. Commencing in February 2013, the Company began issuing shares from treasury stock.
As of December 31, 2015, approximately 17 million shares of ITW common stock were reserved for issuance under these
plans.
The Company records compensation expense for the grant date fair value of stock awards over the remaining service periods
of those awards. The following table summarizes the Company’s stock-based compensation expense:
In millions
Pre-tax compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense, net of tax . . . . . . . . . . .
$
$
2015
2014
2013
35
(12)
23
$
$
34
(12)
22
$
$
30
(10)
20
There was no pre-tax stock-based compensation expense included in income from discontinued operations in 2015. Pre-tax
stock-based compensation expense included in Income from discontinued operations was $5 million in 2014 and $6 million in
2013.
The following table summarizes activity related to non-vested RSUs during 2015:
Shares in millions
Unvested, January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
1.0
0.3
(0.4)
(0.1)
0.8
Weighted-Average
Grant-
Date Fair Value
$60.68
92.44
52.11
70.96
73.58
66
The following table summarizes stock option activity for the year ended December 31, 2015:
In millions except exercise price and contractual terms
Under option, January 1, 2015 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired. . . . . . . . . . . . . . . . . . . . . .
Under option, December 31, 2015 . . . . . . . . . .
Exercisable, December 31, 2015 . . . . . . . . . . . .
Number of
Shares
7.1
0.6
(1.2)
(0.1)
6.4
4.5
Weighted-Average
Exercise Price
$56.25
98.26
49.41
71.41
61.44
54.19
Weighted-Average
Remaining
Contractual Term
Aggregate Intrinsic
Value
5.7
4.7
$201
$175
The fair value of RSUs is determined by reducing the closing market price on the date of the grant by the present value of
projected dividends over the vesting period. Stock option exercise prices are equal to the common stock fair market value on
the date of grant. The Company uses a binomial option pricing model to estimate the fair value of the stock options granted.
The following summarizes the assumptions used in the models:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected years until exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
0.23-2.25%
23.0%
2.11%
6.9-8.0
2014
0.16-2.83%
22.9%
2.46%
6.7-7.9
2013
0.2-2.9%
21.1%
2.72%
6.6-7.6
Lattice-based option valuation models, such as the binomial option pricing model, incorporate ranges of assumptions for
inputs. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S.
government instrument over the contractual term of the equity instrument. Expected volatility is based on implied volatility
from traded options on the Company’s stock and historical volatility of the Company’s stock. The Company uses historical
data to estimate option exercise timing and employee termination rates within the valuation model. The weighted-average
dividend yield is based on historical information. The expected term of options granted is derived from the output of the
option valuation model and represents the period of time that options granted are expected to be outstanding. The ranges
presented result from separate groups of employees assumed to exhibit different behavior.
The weighted-average grant-date fair value of stock options granted during 2015, 2014 and 2013 was $20.58, $15.14 and
$10.06 per share, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31,
2015, 2014 and 2013 was $55 million, $115 million and $108 million, respectively. As of December 31, 2015, there was $12
million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over
a weighted-average period of 1.7 years. Exercise of stock options during the years ended December 31, 2015, 2014 and 2013
resulted in cash receipts of $59 million, $148 million and $206 million, respectively. The total fair value of vested stock option
awards during the years ended December 31, 2015, 2014 and 2013 was $13 million, $16 million and $16 million, respectively.
As of December 31, 2015, there was $18 million of total unrecognized compensation cost related to unvested RSUs. That cost
is expected to be recognized over a weighted-average remaining contractual life of 1.5 years. The total fair value of vested
RSU awards during the years ended December 31, 2015, 2014 and 2013 was $20 million, $27 million and $23 million,
respectively.
Segment Information—The Company's operations are organized and managed based on similar product offerings and similar
end markets, and are reported to senior management as the following seven segments: Automotive OEM; Test & Measurement
and Electronics; Food Equipment; Polymers & Fluids; Welding; 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.
67
Test & Measurement and Electronics—This segment is a branded and innovative producer of test and measurement and
electronic manufacturing and 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.
Food Equipment—This segment is a highly focused and branded industry-leader in commercial food equipment differentiated
by innovation and integrated service offerings.
Polymers & Fluids—This segment is a highly branded supplier to niche markets that require value-added, differentiated
products. Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for
auto aftermarket maintenance and appearance.
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.
Construction Products—This segment is a branded supplier of innovative engineered fastening systems and solutions.
Specialty Products—This segment is focused on diversified niche market opportunities that deliver strong operating results
with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking
equipment and consumables, and appliance components and fasteners.
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.
68
2015
2014
2013
Segment information for 2015, 2014 and 2013 was as follows:
In millions
Operating revenue:
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income:
$
$
2,529
1,969
2,096
1,712
1,650
1,587
1,885
(23)
13,405
$
613
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
322
Test & Measurement and Electronics . . . . . . . . . . . . . . .
498
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
335
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
316
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
439
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,938
Total Segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(71)
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,867
Depreciation and amortization and impairment of goodwill and intangible assets:
76
110
48
95
37
36
75
477
—
477
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment additions:
$
$
$
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets:
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
106
32
37
20
23
26
40
284
—
284
1,419
2,448
1,054
2,034
747
1,129
1,659
10,490
5,239
—
15,729
$
$
$
$
$
$
$
$
$
$
2,590
2,204
2,177
1,927
1,850
1,707
2,055
(26)
14,484
600
340
453
357
479
289
440
2,958
(70)
2,888
79
115
52
99
38
43
81
507
—
507
96
56
47
28
36
41
54
358
3
361
1,454
2,615
1,123
2,257
879
1,249
1,798
11,375
6,090
—
17,465
$
$
$
$
$
$
$
$
$
$
2,396
2,176
2,047
1,993
1,837
1,717
2,007
(38)
14,135
490
321
385
335
464
238
408
2,641
(127)
2,514
80
119
50
103
37
49
84
522
91
613
119
39
37
28
35
32
47
337
31
368
1,571
2,772
1,184
2,420
936
1,309
1,939
12,131
5,632
1,836
19,599
Identifiable assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash
and equivalents, investments and other general corporate assets.
69
Enterprise-wide information for 2015, 2014 and 2013 was as follows:
In millions
Operating Revenue by Geographic Region:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East and Africa. . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
$
$
6,167
928
7,095
3,725
2,197
388
13,405
$
$
6,191
993
7,184
4,319
2,427
554
14,484
$
$
6,030
973
7,003
4,162
2,366
604
14,135
Operating revenue by geographic region is based on the customers' locations. Long-lived assets in any single country outside
of the U.S. did not exceed 10% of the Company's total long-lived assets. No single customer accounted for more than 5% of
consolidated revenues in 2015, 2014 or 2013. Additionally, the Company has thousands of product lines within its businesses;
therefore, providing operating revenue by product line is not practicable.
QUARTERLY AND COMMON STOCK DATA (UNAUDITED)
Quarterly Financial Data
The unaudited quarterly financial data included as supplementary data reflects all adjustments that are, in the opinion of
management, necessary for a fair statement of the results for the interim periods presented.
In millions except per share amounts
Operating revenue . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . .
Income from continuing operations. . .
Income (loss) from discontinued
Three Months Ended
March 31
June 30
September 30
December 31
2015
$ 3,342
1,970
697
458
2014
$ 3,569
2,158
667
428
2015
$ 3,434
2,024
730
480
2014
$ 3,719
2,219
763
494
2015
$ 3,354
1,953
761
511
2014
$ 3,692
2,182
772
507
2015
$ 3,275
1,941
679
450
2014
$ 3,504
2,114
686
461
operations. . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . .
Income per share from continuing operations:
—
458
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
1.22
1.21
1.22
1.21
45
473
1.01
1.01
1.12
1.11
—
480
1.31
1.30
1.31
1.30
998
1,492
1.22
1.21
3.69
3.66
—
511
1.40
1.39
1.40
1.39
24
531
1.29
1.28
1.35
1.34
—
450
1.24
1.23
1.24
1.23
(11)
450
1.19
1.18
1.17
1.16
In the second quarter of 2014, the Company recorded an after-tax gain of $1.1 billion, or $2.82 per diluted share, related to
the sale of the Industrial Packaging business, which was included in Income (loss) from discontinued operations.
70
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A. Controls and Procedures
Controls and Procedures
The Company’s management, with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice
President & Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) as of December 31, 2015. Based on such evaluation, the Company’s Chairman &
Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of December 31, 2015,
the Company’s disclosure controls and procedures were effective.
Management Report on Internal Control over Financial Reporting
The Management Report on Internal Control over Financial Reporting and the Report of Independent Registered Public
Accounting Firm are found in Item 8. Financial Statements and Supplementary Data.
In connection with the evaluation by management, including the Company’s Chairman & Chief Executive Officer and Senior
Vice President & Chief Financial Officer, no changes in the Company’s internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2015 were identified that have materially affected or
are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B. Other Information
Not applicable.
71
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding the Directors of the Company is incorporated by reference from the information under the captions
"Election of Directors" and "Corporate Governance Policies and Practices" in the Company’s Proxy Statement for the 2016
Annual Meeting of Stockholders.
Information regarding the Audit Committee and its Financial Experts is incorporated by reference from the information under
the captions "Board of Directors and Its Committees" and "Audit Committee Report" in the Company’s Proxy Statement for
the 2016 Annual Meeting of Stockholders.
Information regarding the Executive Officers of the Company can be found in Part I of this Annual Report on Form 10-K
under the caption "Executive Officers."
Information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from the information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company’s Proxy Statement for the
2016 Annual Meeting of Stockholders.
Information regarding the Company’s code of ethics that applies to the Company’s Chairman & Chief Executive Officer,
Senior Vice President & Chief Financial Officer, and key financial and accounting personnel is incorporated by reference
from the information under the caption "Corporate Governance Policies and Practices" in the Company’s Proxy Statement for
the 2016 Annual Meeting of Stockholders.
ITEM 11. Executive Compensation
This information is incorporated by reference from the information under the captions "NEO Compensation," "Director
Compensation," "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Company’s Proxy
Statement for the 2016 Annual Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information is incorporated by reference from the information under the captions "Ownership of ITW Stock" and
"Equity Compensation Plan Information" in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions is incorporated by reference from the information under
the captions "Ownership of ITW Stock," "Certain Relationships and Related Transactions" and "Corporate Governance
Policies and Practices" in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
Information regarding director independence is incorporated by reference from the information under the captions "Corporate
Governance Policies and Practices" and "Categorical Standards for Director Independence" in the Company’s Proxy
Statement for the 2016 Annual Meeting of Stockholders.
ITEM 14. Principal Accounting Fees and Services
This information is incorporated by reference from the information under the captions "Ratification of the Appointment of
Independent Registered Public Accounting Firm" and "Audit Fees" in the Company’s Proxy Statement for the 2016 Annual
Meeting of Stockholders.
72
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
The following information is included as part of Item 8. Financial Statements and Supplementary Data:
Management Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Statement of Income
Statement of Comprehensive Income
Statement of Income Reinvested in the Business
Statement of Financial Position
Statement of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
Not applicable.
(3) Exhibits
(i) See the Exhibit Index within this Annual Report on Form 10-K.
(ii) Pursuant to Regulation S-K, Item 601(b)(4)(iii), the Company has not filed with Exhibit 4 any debt instruments
for which the total amount of securities authorized thereunder is less than 10% of the total assets of the Company
and its subsidiaries on a consolidated basis as of December 31, 2015, with the exception of the Officers'
Certificates related to the 0.90% Notes due 2017, the 1.95% Notes due 2019, the 6.25% Notes due 2019, the
3.375% Notes due 2021, the 1.75% Euro Notes due 2022, the 1.25% Euro Notes due 2023, the 3.50% Notes due
2024, the 2.125% Euro Notes due 2030, the 3.00% Euro Notes due 2034, the 4.875% Notes due 2041, and the
3.90% Notes due 2042, which are described as Exhibit numbers 4(a) through (h) in the Exhibit Index. The
Company agrees to furnish a copy of the agreement related to the debt instruments which have not been filed with
Exhibit 4 to the Securities and Exchange Commission upon request.
73
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of February 2016.
SIGNATURES
ILLINOIS TOOL WORKS INC.
By:
/s/ E. SCOTT SANTI
E. Scott Santi
Chairman & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities indicated on this 11th day of February 2016.
Signatures
Title
/s/ E. SCOTT SANTI
E. Scott Santi
Chairman & Chief Executive Officer, Director
(Principal Executive Officer)
/s/ MICHAEL M. LARSEN
Michael M. Larsen
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ RANDALL J. SCHEUNEMAN
Randall J. Scheuneman
Vice President & Chief Accounting Officer
(Principal Accounting Officer)
DANIEL J. BRUTTO
SUSAN CROWN
JAMES W. GRIFFITH
RICHARD H. LENNY
ROBERT S. MORRISON
JAMES A. SKINNER
DAVID B. SMITH, JR.
PAMELA B. STROBEL
KEVIN M. WARREN
ANRÉ D. WILLIAMS
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
By: /s/ E. SCOTT SANTI
(E. Scott Santi, as Attorney-in-Fact)
Original powers of attorney authorizing E. Scott Santi to sign the Company’s Annual Report on Form 10-K and amendments
thereto on behalf of the above-named directors of the registrant have been filed with the Securities and Exchange Commission
as part of this Annual Report on Form 10-K (Exhibit 24).
74
Exhibit Index
Annual Report on Form 10-K
2015
Exhibit
Number
2.1(a)
2.1(b)
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
10(a)*
10(b)*
Description
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.)
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).
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.
By-laws of Illinois Tool Works Inc., as amended and restated as of December 11, 2015, filed as Exhibit 3(b)(ii)
to the Company’s Form 8-K filed on December 17, 2015 (Commission File No. 1-4797) and incorporated
herein by reference.
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.
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.
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.
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 Form 8-K filed on
September 1, 2011 (Commission File No. 001-04797) and incorporated herein by reference.
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.
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 Form 8-K filed on February 26, 2014 (Commission File No. 001-04797) and incorporated herein
by reference.
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 Form 8-K filed on
May 22, 2014 (Commission File No. 001-04797) and incorporated herein by reference.
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 Form 8-K filed on
May 22, 2015 (Commission File No. 001-04797) and incorporated herein by reference.
Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 10, 2006, as amended on May 5, 2006, filed
as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2006 (Commission File No. 1-4797) and incorporated herein by reference.
Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 8, 2008, filed as Exhibit 10
(q) to 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.
75
Exhibit
Number
10(c)*
10(d)*
10(e)*
10(f)*
10(g)*
10(h)*
10(i)*
10(j)*
10(k)*
10(l)*
Description
Second Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 13, 2009, filed as
Exhibit 10(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008
(Commission File No. 1-4797) and incorporated herein by reference.
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.
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 March 31, 2015 (Commission File
No. 1-4797) and incorporated herein by reference.
Form of stock option terms filed as Exhibit 10(o) to 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.
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.
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.
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.
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.
Form of restricted stock unit terms filed as Exhibit 99.2 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.
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 13, 2014 (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 13, 2014 (Commission File No. 1-4797) and incorporated herein by reference.
10(n)*
10(o)*
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
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.
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.
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.
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.
Illinois Tool Works Inc. 2011 Executive Incentive Plan, filed as Exhibit 99.1 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.
Illinois Tool Works Inc. Executive Contributory Retirement Income Plan as amended and restated, effective
January 1, 2010, filed as exhibit 10 to the Company’s Current Report on Form 8-K filed on November 5, 2009
(Commission File No. 1-4797) and incorporated herein by reference.
Illinois Tool Works Inc. Nonqualified Pension Plan, effective January 1, 2008, as amended and approved by
the Board of Directors on December 22, 2008, filed as Exhibit 10(p) to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797) and incorporated herein by
reference.
Illinois Tool Works Inc. 2011 Change-in-Control Severance Compensation Policy, filed as Exhibit 99.3 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.
Illinois Tool Works Inc. Amended and Restated Directors’ Deferred Fee Plan effective May 2, 2014, filed as
Exhibit 10.1 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.
10(w)*
Illinois Tool Works Inc. 2011 Cash Incentive Plan, filed as Exhibit 99.1 to the Company’s Form 8-K filed on
May 12, 2011 (Commission File No. 1-4797) and incorporated herein by reference.
76
Exhibit
Number
10(x)*
21
23
24
31
32
99(a)
Description
First Amendment to the ITW Contributory Retirement Income Plan dated February 15, 2013, filed as Exhibit
10.2 to the Company’s Current Form 10-Q filed on May 3, 2013 (Commission File No. 1-4797) and
incorporated herein by reference.
Subsidiaries and Affiliates of the Company.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Rule 13a-14(a) Certifications.
Section 1350 Certification.
Description of the capital stock of Illinois Tool Works Inc., filed as Exhibit 99(a) to the Company’s Annual
Report on Form 10-K filed on February 26, 2010 (Commission File No. 1-4797) and incorporated herein by
reference.
101.INS
XBRL Instance Document**
101.SCH
XBRL Taxonomy Extension Schema**
101.CAL
XBRL Taxonomy Extension Calculation Linkbase**
101.DEF
XBRL Taxonomy Extension Definition Linkbase**
101.LAB
XBRL Taxonomy Extension Label Linkbase**
101.PRE
XBRL Taxonomy Extension Presentation Linkbase**
*
**
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, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Statement of Income, (ii)
Statement of Comprehensive Income, (iii) Statement of Income Reinvested in the Business (iv) Statement of
Financial Position, (v) Statement of Cash Flows and (vi) related Notes to Financial Statements.
77
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP TO NON-GAAP RECONCILIATIONS (UNAUDITED)
2015 FREE CASH FLOW CONVERSION (UNAUDITED)
ANNUAL REPORT APPENDIX
Dollars in millions
Net cash provided by operating activities
Less: Additions to plant and equipment
Free cash flow
Net income
Free Cash Flow Conversion
2012 ADJUSTED AFTER-TAX RETURN ON AVERAGE INVESTED CAPITAL (UNAUDITED)
Dollars in millions
Operating income
Adjustment for Decorative Surfaces
Adjusted operating income
Tax rate (as adjusted for discrete tax charge)
Income taxes
Adjusted operating income after taxes
Invested capital:
Trade receivables
Inventories
Net plant and equipment
Goodwill and intangible assets
Accounts payable and accrued expenses
Other, net
Total invested capital
Average invested capital
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)
Adjustment for Industrial Packaging
Adjusted average invested capital
Twelve Months Ended
December 31, 2015
2,299
$
(284)
2,015
$
$
1,899
106%
Twelve Months Ended
December 31, 2012
2,475
$
(143)
2,332
29.2%
(681)
1,651
$
$
2,742
1,585
1,994
7,788
(2,068)
773
12,814
13,140
(274)
(1,504)
11,362
$
$
$
Annualized adjusted after-tax return on average invested capital
14.5%
A reconciliation of the effective tax rate to the adjusted tax rate excluding the 2012 discrete tax item is as follows:
Twelve Months Ended
December 31, 2012
Dollars in millions
As reported
Discrete tax charge
As adjusted
Income Taxes
$
$
973
(36)
937
2012 ADJUSTED INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED (UNAUDITED)
As reported
Decorative Surfaces net gain
Decorative Surfaces equity interest
Decorative Surfaces operating results
As adjusted for the Decorative Surfaces business
Tax Rate
30.3%
(1.1)
29.2%
Twelve Months Ended
December 31, 2012
4.72
$
1.34
(0.04)
0.21
3.21
$
About ITW
Founded in 1912, ITW (NYSE: ITW) is a global industrial company
centered on a differentiated and proprietary business model.
The company’s seven industry-leading segments leverage the
ITW Business Model to generate solid growth with best-in-class
margins and returns in markets where highly innovative, customer-
focused solutions are required. ITW’s more than 48,000 dedicated
colleagues around the world thrive in our decentralized, entrepreneurial
culture. In 2015, the company achieved revenues of $13.4 billion,
with roughly half coming from outside North America.
To learn more, please visit www.itw.com.
CONTENTS
1 L E T T E R T O S H A R E H O L D E R S 5 2 0 1 5 F I N A N C I A L H I G H L I G H T S A N D E N T E R P R I S E S T R A T E G Y P E R F O R M A N C E P R O G R E S S
6 I T W B U S I N E S S M O D E L 7 C U S T O M E R - B A C K I N N O V A T I O N 8 O V E R V I E W O F I T W ’ S B U S I N E S S S E G M E N T S
12 C O R P O R A T E E X E C U T I V E S A N D B O A R D O F D I R E C T O R S INSIDE BACK COVER S H A R E H O L D E R I N F O R M A T I O N
SHAREHOLDER INFORMATION
T R A N S F E R AG E N T
A N D R E G I S T R A R
Questions regarding stock ownership, dividend
payments or change of address should be directed
to the company’s transfer agent:
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842-3170
www.computershare.com/investor
Phone Toll Free: 888.829.7424
International: +1.312.360.5155
C O M M O N S T O C K
New York Stock Exchange
Symbol: ITW
T R A D E M A R K S
Certain trademarks in this publication
are owned or licensed by Illinois Tool
Works Inc. or its wholly owned subsidiaries.
C O N TAC T I N V E S T O R
R E L AT I O N S
For additional assistance, including media inquiries:
224.661.7427 or investorrelations@itw.com
V I S I T U S O N T H E W E B
www.itw.com
C O M M I T T E D T O
S O C I A L R E S P O N S I B I L I T Y
Learn about our CSR activities and
goals in our 2015 report:
workingtogether.itw-csr.com
S T O C K A N D D I V I D E N D AC T I O N
Effective with the October 6, 2015 payment, the quarterly
cash dividend on ITW common stock was increased to
55 cents per share. ITW’s annual dividend payment has
increased for more than 50 consecutive years, except
during a period of government controls in 1971.
The ITW Common Stock Dividend Reinvestment Plan
enables registered shareholders to reinvest the ITW
dividends they receive in additional shares of common
stock of the company at no additional cost. Participation in
the plan is voluntary, and shareholders may join or withdraw
at any time. The plan also allows for additional voluntary
cash investments in any amount from $100 to $10,000 per
month. For a brochure and full details of the program,
please direct inquiries to the company’s transfer agent,
Computershare Trust Company, N.A.
ANNUAL MEETING
Friday, May 6, 2016, 9:00 a.m.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
The patent wall at
ITW’s corporate
headquarters displays
a subset of our more
than 16,000 patents.
ITW2015AR_COVER.indd 4-6
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I L L I N O I S T O O L W O R K S I N C .
1 5 5 H A R L E M A V E N U E
G L E N V I E W , I L L I N O I S 6 0 0 2 5
W W W . I T W . C O M
Diff erentiated
Business Model
Diff erentiated
Performance
2015 ANNUAL REPORT
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