Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
www.itw.com
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Illinois Tool Works Inc.
2017 Annual Report
Contents
Letter to Shareholders
2017 Financial Highlights and Shareholder Returns Since 2012
Our Differentiated Business Model = Our Competitive Advantage
ITW’s Capital Allocation Framework
Overview of ITW’s Operating Segments
Corporate Executives and Board of Directors
Shareholder Information
1
5
6
7
8
12
INSIDE
BACK
COVER
105 YEARS
OF ENDURING
PERFORMANCE
About ITW
Founded in 1912, ITW (NYSE: ITW) is a global industrial
company centered on a diff erentiated 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 approximately 50,000 dedicated colleagues
around the world thrive in our decentralized, entrepreneurial
culture. In 2017, the company achieved revenues of $14.3 billion,
with roughly half coming from outside North America. To learn
more, please visit www.itw.com.
SHAREHOLDER INFORMATION
ANNUAL MEETING
Friday, May 4, 2018, 10:00 a.m.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
TRANSFER AGENT AND REGISTRAR
Questions regarding stock ownership, dividend payments or change
of address should be directed to the company’s transfer agent:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
http://shareholder.broadridge.com/ITW
Phone Toll Free: 888.829.7424
International: +1.720.399.2177
COMMON STOCK
New York Stock Exchange
Symbol: ITW
TRADEMARKS
Certain trademarks in this publication are owned or licensed
by Illinois Tool Works Inc. or its wholly owned subsidiaries.
CONTACT INVESTOR RELATIONS
For additional assistance: 224.661.7433 or investorrelations@itw.com
VISIT US ON THE WEB
www.itw.com
COMMITTED TO SOCIAL RESPONSIBILITY
Learn about our CSR activities and goals in our
2017 report: http://www.itw-csr.com
STOCK AND DIVIDEND ACTION
Eff ective with the October 10, 2017 payment, the quarterly cash dividend on
ITW common stock was increased to 78 cents per share. ITW’s annual dividend
payment has increased for more than 54 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, Broadridge Corporate Issuer Solutions, Inc.
Located in the company’s corporate headquarters,
the Patent Wall proudly displays a subset of the more
than 17,000 granted and pending ITW patents.
TO OUR FELLOW SHAREHOLDERS
We are pleased to report that 2017 was another strong year for ITW:
• Non-GAAP Earnings Per Share of $6.59 (which excludes one-time tax and
legal items1), +16%
• Revenues of $14.3 billion, +5%
• Operating Income of $3.5 billion, +14% and an all-time record for the company
• Operating Margin of 24.4%, +190 basis points and an all-time record for
the company
• After-Tax Return on Invested Capital of 24.4%1, +230 basis points and
an all-time record for the company
These results refl ect continued progress in the execution of our strategy and are the
direct outcome of the eff orts and dedication of our approximately 50,000 ITW colleagues
around the world. We off er them our deepest thanks for all they do to serve our
customers and execute our strategy with excellence each and every day.
ITW’S STRATEGIC FRAMEWORK
In late 2012, we launched a strategy to position ITW to generate solid growth with
best-in-class margins and returns in the context of an increasingly competitive and
volatile global market environment. At its core, our strategy is centered squarely on
focusing the entire company on leveraging ITW’s highly diff erentiated and proprietary
Business Model2 to its full potential. In doing so, we are maximizing the company’s ability
to win with customers and deliver diff erentiated performance for our shareholders in any
market environment. Our goal is to be one of the world’s highest-performing and most
resilient global industrial companies. We are making progress.
Since launching our current strategy, we have increased ITW’s operating margin from
15.9% to 24.4% and after-tax return on invested capital from 14.5% to 24.4%1. We have
grown non-GAAP earnings per share at better than 15% annually and increased the annual
dividend we pay to ITW shareholders by over 100%. The company’s market capitalization
has increased approximately 150%.
These results give us confi dence that we are on the right track. Moving forward, we remain
committed to four strategic principles that have served as the foundation of our progress
over the past fi ve years and that we believe best position ITW to continue to deliver
diff erentiated performance over the next fi ve years.
ITW’s Four Strategic Principles
Our Business
Model Is Our
Competitive
Advantage
Growth:
Quality
Over
Quantity
“Do What We Say”
Execution Is
A Critical
Diff erentiator
Invest Only
Where We Have
Compelling
Competitive
Advantage
ITW’s Performance
Since 2012
Operating Margin
24.4%
+850
bps
15.9%
20123
2017
After-Tax ROIC1
24.4%
+990
bps
14.5%
2012
2017
Non-GAAP Earnings Per Share1 (diluted)
$6.59
15%
CAGR
$3.21
2012
2017
Annual Dividend
$3.12
15%
CAGR
$1.52
2012
2017
Market Capitalization4
(dollars in billions)
$57
$23
2012
2017
1 2012 and 2017 adjusted EPS and after-tax return on average invested capital (ROIC) are non-GAAP measures. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the 2017 Annual Report on Form 10-K and the appendix included in the Annual Report for information regarding these non-GAAP measures, including reconciliations to
the most comparable GAAP measure.
2 A description of the three elements of the ITW Business Model can be found on page 6.
3 As reported in the 2012 Form 10-K.
4 As of December 31 , 2012 and December 29, 2017.
I L L I N O I S T O O L W O R K S I N C . 1
1. OUR BUSINESS MODEL
IS OUR COMPETITIVE ADVANTAGE
The ITW Business Model is a unique and proprietary
combination of strategic, operational, and cultural
approaches and practices that we apply to every
ITW business. It has been in a state of continual
development and evolution inside the company for
over 30 years.
ITW’s Progress to
Sustained Above-Market
Organic Growth
3-5%
2.9%
1.2%
2015
The ITW Business Model drives how we operate, how
we innovate and how we execute. When properly
(0.4)%
2016
2017
2018-2022 Annual
Performance Goal
applied, it results in both best-in-class customer-facing
performance and best-in-class fi nancial results as
refl ected in the industry-leading performance we are
generating across all seven of our business segments1.
The ITW Business Model is ITW’s diff erentiating
competitive advantage – it is our “secret sauce.” It is
the value we add from being part of ITW and we are
committed to applying it with excellence everywhere
in the company every day.
2. GROWTH: QUALITY OVER QUANTITY
Generating consistent, high-quality, above-market
organic growth is a key element of ITW’s ability to
be both a high-performing and highly resilient global
industrial company. Over the last fi ve years, we have
done signifi cant work to focus our organization on and
align our business portfolio with this critical objective.
Today, ITW’s business portfolio is comprised of seven
highly diff erentiated businesses that operate in industries
where product performance matters most to the
Through the execution of our strategy, we are
customer and the best solution wins. In addition, across
seeking to maximize the quality of our growth, not
the company our teams are making solid progress in their
the quantity. For ITW, quality growth is growth that
eff orts to fully leverage the organic growth potential of
is built on our unique strengths: our diff erentiated
every ITW business. As a result of these eff orts, we have
business model, our diff erentiated products, and our
improved our core organic growth rate by over three
diff erentiated customer relationships. It is growth that
percentage points since 2015. That being said, we have
is both value-added and enduring, and it is growth that
more work to do in order to consistently deliver on our
generates returns that allow us to invest in building
full organic growth potential. Achieving this objective
and sustaining ITW for the long term.
is a major focus for us across the company.
ITW Business Model = ITW Competitive Advantage
ITW Segment Operating Margin vs. Peer Average2
ITW
Peers
26%
26%
25%
23%
22%
27%
27%
24%
18%
13%
14%
14%
15%
11%
Automotive OEM
Test & Measurement
and Electronics3
Food Equipment
Polymers & Fluids3
Welding
Construction Products
Specialty Products
1 A description of ITW’s seven segments can be found on pages 8-11.
2 See appendix for segment peer group defi nition.
3 Test & Measurement and Electronics and Polymers & Fluids exclude 320 bps and 410 bps, respectively, of unfavorable operating margin impact of amortization expense
related to intangible assets.
2 2 0 1 7 A N N U A L R E P O R T
3. ‘DO WHAT WE SAY’ EXECUTION
$3 billion in the growth and profitability of our core
IS A CRITICAL DIFFERENTIATOR
businesses, and returned $7 billion of surplus capital
Delivering on our commitments is a deeply embedded
element of ITW’s culture. At ITW, our culture is the engine
that translates our strategy into action and action into
results. We work hard to ensure that our leaders across
the company are clear about the “ITW Framework,”
which defines our expectations and goals regarding our
values, our business model, and our strategy. We teach
them and train them and then, truth be told, mostly we
just get out of their way.
At ITW, our leaders who are “in the arena” and closest
to the customer decide how best to apply our business
model, execute our strategy, and contribute to our
performance goals in the context of their businesses’
unique characteristics and opportunities. Our operating
plans and performance goals are built from the “bottom
up,” which ensures that they are rooted in reality and
executed with the necessary resources and at the right
pace. Our leaders run real businesses with full functional
control – no matrix structures here. Guided by the ITW
Framework, our leaders think and act like owners, they
generated from operations and $8 billion of divestiture
proceeds and overseas cash to our shareholders in the
form of dividends and share repurchases.
MANAGEMENT AND
GOVERNANCE DEVELOPMENTS
One of the hallmarks of ITW’s enduring performance
is our deep and experienced management team and
Board of Directors. We recognize Vice Chairman
David C. Parry, who retired in 2017 after 23 years
of service to the company. We thank David for his
leadership and for his many contributions to ITW’s
growth and success over the course of his career,
and we wish him the very best in his retirement. We
also recognize Robert S. Morrison, who retired after
serving as a member of our Board of Directors for
over 14 years, including three years as our Chairman
and six years as our Lead Director. We thank Bob for
all his guidance, insight, and many contributions to
ITW as a member of our board.
are accountable and they deliver.
SUSTAINING DIFFERENTIATED PERFORMANCE
4. INVEST ONLY WHERE WE HAVE
COMPELLING COMPETITIVE ADVANTAGE
We remain committed to being highly disciplined in
deploying capital and resources to only those areas
of opportunity that have the potential to leverage the
ITW Business Model to create compelling and enduring
competitive advantage and deliver differentiated financial
performance. Rather than pursue higher-risk, lower-return
opportunities that reside outside of our core strengths
and capabilities, we choose to return surplus capital to
our shareholders. Over the last five years, we invested
ITW’s 2018-2022 Annual Performance Goals
Moving forward, we are committed to continuing
to deliver differentiated performance and making
further progress on the path to ITW’s full potential, as
reflected in our recently updated annual performance
goals for 2018-2022:
• Operating Margin:
• After-Tax ROIC:
25%+
20%+
• Organic Growth:
3-5%
~35%
• Earnings Per Share Growth: 8-10%
Incremental Margin:
•
• Free Cash Flow:
• Dividend Payout Ratio:
+100% of Net Income
~50% (from 43% currently)
25%+
Operating
Margin
20%+
After-Tax
ROIC
3-5%
Organic
Growth
~35%
Incremental
Margin
8-10%
EPS
Growth
+100%
Free Cash Flow
as % of
Net Income
From
43% to
~50%
Dividend
Payout Ratio
I L L I N O I S T O O L W O R K S I N C . 3
E. Scott Santi
Christopher A. O’Herlihy
Over the past fi ve years, we have made signifi cant
ITW is well-positioned to be one of the world’s
progress in executing our strategy to position ITW to
highest performing and most resilient global industrial
generate solid growth with best-in-class margins and
companies for many years to come.
returns in the context of an increasingly competitive
and volatile global market environment. Today, we are
a company that:
On behalf of your Board of Directors and your
management team, we thank you, our fellow
shareholders, for your continued support.
•
Is built around the unique and proprietary
ITW Business Model, a proven source of strong,
Sincerely,
enduring and adaptable competitive advantage.
•
Is constructed of a high-quality, diversifi ed
business portfolio that can generate consistent
high-quality, above-market organic growth.
E. Scott Santi
• Has a strong track record of “do what we say”
execution. We set clear performance goals
aligned with our strategy and we deliver.
Chairman & Chief Executive Offi cer
• Generates high-quality earnings and is a highly
Christopher A. O’Herlihy
disciplined allocator of capital and resources.
Vice Chairman
We invest only where we have compelling
competitive advantage.
Through the combination of these now fi rmly
embedded core capabilities and attributes and the
continued commitment and dedication of our ITW
colleagues around the world, we are confi dent that
March 23, 2018
4 2 0 1 7 A N N U A L R E P O R T
2017 FINANCIAL HIGHLIGHTS
Non-GAAP Earnings Per Share1
Operating Margin
After-Tax ROIC1
$6.59
24.4%
24.4%
+16
VS. 2016
+190 bps VS. 2016
+230 bps VS. 2016
Revenue
Revenue Growth
Annual Dividend
$14.3
billion
+5%
$3.12
+20
VS. 2016
SHAREHOLDER RETURNS SINCE 2012
Share Price2
$166.85
Market Capitalization2
(dollars in billions)
$57
Total Shareholder Returns
205%
$60.81
$23
134%
108%
2012
2017
2012
2017
S&P 500
Proxy
Peer Group
Average3
ITW
1 2017 adjusted EPS and after-tax return on average invested capital (ROIC) are non-GAAP measures. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the 2017 Annual Report on Form 10-K and the appendix included in the Annual Report for information regarding these non-GAAP measures, including
reconciliations to the most comparable GAAP measure.
2 As of December 31, 2012 and December 29, 2017.
3 See appendix for proxy peer group defi nition.
I L L I N O I S T O O L W O R K S I N C . 5
OUR DIFFERENTIATED
BUSINESS MODEL
IS OUR COMPETITIVE
ADVANTAGE.
Customer-
Back
Innovation
80/20
Front to Back
Process
ITW
BUSINESS
MODEL
Decentralized,
Entrepreneurial
Culture
ITW’s key diff erentiator – our secret
sauce – is the ITW Business Model.
It is the powerful combination of a set
of strategic, operational, and cultural
practices that we apply to every
ITW business, and that has been in
existence inside the company for
over 30 years. It is the value-add
for being part of ITW.
Starting with the right “raw
material” (industries that
have a great fi t with our
business model) and driving
excellence in the practice
of the Business Model
everywhere in the
company, every day,
is how we maximize
ITW’s ability to
deliver Diff erentiated
Performance over
the long term.
1
Our 80/20 Front to Back Process – HOW WE OPERATE
ITW’s 80/20 Front to Back Process is a proprietary set of unique
business practices that we utilize as the core operating system in every
ITW business. We structure and focus our businesses to uniquely satisfy
the needs of our largest and most profi table customers, and minimize the
cost, complexity and distractions associated with serving small customers.
The application of our 80/20 Front to Back Process drives best-in-class
customer-facing execution, high-quality organic growth, and superior
profi tability performance per dollar of revenue generated and per dollar of
capital deployed.
2
Our Customer-Back Innovation Approach – HOW WE INNOVATE
Customer-Back Innovation enables our divisions to deliver a steady fl ow of
diff erentiated new products and solutions to their “80” customers. In every market
in which we operate, our businesses work hard to position themselves as the go-to
problem solver for their customers. Customer-Back Innovation is a key contributor
to ITW’s ability to deliver consistent above-market organic growth. Over the last fi ve
years, it has contributed roughly 1% of organic growth a year.
Customer-Back Innovation at ITW has fueled more than 17,000 granted and pending
patents, including more than 1,900 new patent applications in 2017. We estimate that
Our Business Model
is comprised of
three elements.
over half of our revenues are covered either by patents or trade secrets.
3
Our Decentralized, Entrepreneurial Culture – HOW WE EXECUTE
Our commitment to execution is deeply embedded in our decentralized entrepreneurial culture –
we do what we say. Our leaders are clear on what is expected of them with regard to our Business
Model, our values, and our strategy. Within 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 for their specifi c customers and end markets.
Guided by the ITW Framework, divisional goal setting and operational planning are done bottom-up,
not top-down. Our only requirement is that each division has a plan to improve performance year-over-
year, leveraging the ITW Business Model to drive continuous improvement. Our performance metrics
are simple, clear and consistent across the company – organic growth, operating margin, and return on
invested capital. In ITW terms, these “80” metrics are the performance focus for every one of our divisions.
Our people thrive in ITW’s “Flexibility Within a Framework” culture … and they deliver.
6 2 0 1 7 A N N U A L R E P O R T
HIGHLY FOCUSED AND DISCIPLINED
APPROACH TO CAPITAL ALLOCATION
Core to our strategy is a highly focused and disciplined approach to capital allocation. At ITW, investments are
focused only on areas of opportunity where we can leverage the ITW Business Model to create a compelling
competitive advantage and deliver sustained differentiated financial performance.
Internal investments to grow and support our highly profitable core businesses have always been priority
number one at ITW. As a result, every internal investment that fits our strategy and meets our return criteria is
fully funded. We allocate capital to discrete projects and strategies, not in lump sums to our businesses, which
ensures that every investment we make is aligned with our strategic and financial objectives.
Our second priority is an attractive dividend, a very important component of our total shareholder return
equation. We have increased our annual per share dividend for more than 54 consecutive years, including
a 20% increase in 2017. In early 2018, we committed to raising our dividend payout ratio from 43% to
50% of free cash flow.
When a compelling opportunity presents itself, we will supplement our organic growth agenda with
a highly targeted acquisition that expands the organic growth potential of one of our segments or
provides us with an entrée to a new industry that opens up a new avenue of long-term profitable
growth for the company.
After funding these three capital allocation priorities, we utilize an active share repurchase
program to return any surplus capital to our shareholders.
ITW Capital Allocation Priorities as a Percent of Operating Cash Flow
25-30%
INTERNAL INVESTMENTS to support
organic growth and sustain core businesses
35-40%
30-40%
An ATTRACTIVE DIVIDEND
EXTERNAL INVESTMENTS: Acquisitions
that expand ITW’s long-term organic growth
potential and an active share repurchase program
I L L I N O I S T O O L W O R K S I N C . 7
ITW’S DIFFERENTIATED
BUSINESS PORTFOLIO
ITW’s business portfolio criteria:
3 End markets with strong and
sustainable differentiation attributes
3 Positive long-term macro fundamentals
3 Strong and durable competitive
advantages with relevance to key
end market trends
3 Significant potential for ITW to drive
above-market organic growth
3 Ability to leverage the ITW Business
Model to generate consistent
best-in-class margins and returns
ITW’S SEVEN
OPERATING
SEGMENTS:
Automotive OEM
Highly focused, global,
niche supplier of solutions
to top-tier OEMs and
their suppliers
2017 revenues
$3.3 billion
2017 operating margin
22.8%
The Body and Fuel Division works closely with customers to
develop innovative solutions like the newly designed, exterior
Flush Door Handle for luxury vehicles.
8 2 0 1 7 A N N U A L R E P O R T
Food Equipment
Industry-leading global positions
through differentiated innovation
in ware wash, cooking, refrigeration,
retail and integrated service offerings
Test & Measurement and Electronics
Leading global supplier of production
and laboratory testing and assembly
equipment, accessories, consumables,
and aftermarket parts and service
2017 revenues
$2.1 billion
2017 operating margin
26.2%
2017 revenues
$2.1 billion
2017 operating margin
22.4%1
Hobart’s innovative scales and wrappers optimize grocers’
Instron offers the highest-quality testing equipment and services to
operations through advanced technologies including wireless
manufacturers and research professionals who use Instron’s testing
connectivity for remote diagnostics, industry-leading graphical
machines to evaluate the quality or service life of various materials,
user interface, and a vast range of data storage options.
components and structures.
1 Test & Measurement and Electronics includes 320 bps of unfavorable operating
margin impact of amortization expense related to intangible assets.
I L L I N O I S T O O L W O R K S I N C . 9
Polymers & Fluids
Specialized adhesives,
lubricants and additives for
industrial- and consumer-
related end markets
2017 revenues
$1.7 billion
2017 operating margin
20.7%1
Welding
Highly focused supplier of value-added
welding equipment and specialty
consumables for a variety of commercial,
industrial and infrastructure applications
2017 revenues
$1.5 billion
2017 operating margin
27.0%
A leader in the MRO industry, LPS® brand products are convenience-
Miller Welding delivers a portfolio of advanced solutions to improve
packaged maintenance chemicals formulated for superior
productivity, efficiency and quality for both the most demanding
performance, with an emphasis on user safety, for industrial,
industrial applications as well as the welding enthusiast.
aerospace, military and telecommunications customers.
1 Polymers & Fluids includes 410 bps of unfavorable operating margin impact
of amortization expense related to intangible assets.
1 0 2 0 1 7 A N N U A L R E P O R T
Construction Products
Global provider of innovative fastening
solutions that improve contractor
productivity and building quality in
residential and commercial construction
Specialty Products
Innovative value-added
solutions for consumer
packaging, product branding
and other niche applications
2017 revenues
$1.7 billion
2017 operating margin
23.9%
2017 revenues
$1.9 billion
2017 operating margin
27.2%
As the pioneer of fuel-powered cordless tool technology and
Zip-Pak provides “uniquely flexible” solutions through an extensive
patented fastener technology, Paslode is the premier manufacturer
technology portfolio of patented zipper profiles, package designs
of a broad range of performance-proven, high-quality fastening
and integration packages.
solutions and services.
As a leading supplier of plastic-based multipackaging systems,
Hi-Cone delivers exceptional quality, value and environmental
responsiveness with its LDPE photodegradable plastic.
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
Juan Valls, Sundaram Nagarajan, Lei Zhang Schlitz, Michael R. Zimmerman, Mary K. Lawler, Michael M. Larsen,
LEFT TO RIGHT
E. Scott Santi, Christopher A. O’Herlihy, Norman D. Finch Jr., John R. Hartnett, Steven L. Martindale, Roland M. Martel
E. Scott Santi
Chairman & Chief Executive Offi cer
Christopher A. O’Herlihy
Vice Chairman
Norman D. Finch Jr.
Senior Vice President,
General Counsel & Secretary
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
Jay L. Henderson
Retired Vice Chairman, Client Service
PricewaterhouseCoopers LLP
Richard H. Lenny
Non-Executive Chairman,
Information Resources, Inc.
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 Aff airs and General Counsel,
Mutual Fund Directors Forum
Pamela B. Strobel
Retired Executive Vice President &
Chief Administrative Offi cer,
Exelon Corporation
Kevin M. Warren
Executive Vice President & Chief Commercial Offi cer,
Xerox Corporation
Anré D. Williams
Group President, Global Merchant & Network Services,
American Express Company
1 2 2 0 1 7 A N N U A L R E P O R T
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4797
ILLINOIS TOOL WORKS INC.
(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.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of
"large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Non-accelerated filer
o (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
o
o
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017 was approximately $45.9 billion based on the New York Stock
Exchange closing sales price as of June 30, 2017.
Shares of Common Stock outstanding at January 31, 2018: 341,545,719.
Documents Incorporated by Reference
Portions of the 2018 Proxy Statement for Annual Meeting of Stockholders to be held on May 4, 2018.
Part III
Table of Contents
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Item 3.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
Selected Financial Data
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
PART IV
3
11
15
15
15
15
16
17
19
41
42
73
73
73
74
74
74
74
74
75
78
79
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 85
divisions in 56 countries. As of December 31, 2017, the Company employed approximately 50,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to
senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and
Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The following is a description of the
Company's seven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain
points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for
automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers
market. Products in this segment include:
•
plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
Food Equipment— This segment is a highly focused and branded industry-leader in commercial food equipment
differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food
institutional/restaurant and food retail markets. Products in this segment include:
•
•
•
•
•
•
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.
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.
Welding— This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and
leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array
of industrial and commercial applications. This segment primarily serves the general industrial market, which includes
fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment
manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
arc welding equipment;
•
• metal arc welding consumables and related accessories; and
• metal jacketing and other insulation products.
3
Polymers & Fluids— This segment is a highly branded supplier to niche markets that require value-added, differentiated
products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and
polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general
industrial, MRO and construction markets. Products in this segment include:
•
•
•
•
•
•
•
adhesives for industrial, construction and consumer purposes;
chemical fluids which clean or add lubrication to machines;
epoxy and resin-based coating products for industrial applications;
hand wipes and cleaners for industrial applications;
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
fillers and putties for auto body repair; and
polyester coatings and patch and repair products for the marine industry.
Construction Products— This segment is a branded supplier of innovative engineered fastening systems and solutions. This
segment primarily serves the residential construction, renovation/remodel and commercial construction markets. Products in
this segment include:
fasteners and related fastening tools for wood and metal applications;
anchors, fasteners and related tools for concrete applications;
•
•
• 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 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 front to back process is the operating system that is applied in every ITW business. Initially introduced
as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a
proprietary, holistic business management process that generates significant value for the Company and its
customers. Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest
and best opportunities (the “80”) and eliminates cost, complexity and distractions associated with the less profitable
opportunities (the “20”). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in
product availability, quality, and innovation, while generating superior financial performance;
Customer-back innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation
approach is built on insight gathered from the 80/20 front to back process. Working from the customer back, ITW
businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are
focused on understanding customer needs, particularly those in “80” markets with solid long-term growth
fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and
learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000 granted and pending
patents;
4
•
ITW’s decentralized, entrepreneurial culture enables ITW businesses to be fast, focused, and responsive. ITW
businesses have significant flexibility within the framework of the ITW Business Model to customize their approach
in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to
execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational
structure that, combined with outstanding execution, delivers best-in-class services adapted to each business'
customers and end markets.
Enterprise Strategy
In late 2012, ITW began the first phase of its strategic framework transitioning the Company on its current strategic path to
fully leverage the compelling performance potential of the ITW Business Model. Since then, ITW has made considerable
progress, as evidenced by the Company’s strong financial performance over the past five years.
The roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when the Company undertook a complete review of its
performance. Focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns,
ITW developed a strategy to replicate that performance across its operations.
Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must be the core
growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its
primary growth engine to organic, the Company began executing a multi-step approach.
•
•
•
The first step was to narrow the focus and improve the quality of ITW’s business portfolio. As part of the Portfolio
Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized
sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting
entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW
divisions.
As a result of this work, ITW’s business portfolio now has significantly higher organic growth potential. ITW
segments and divisions now possess attractive and differentiated product lines and end markets as they continue to
improve operating margins and generate price/cost increases. The Company achieved this through product line
simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers,
while supporting and growing the businesses’ largest / most profitable customers and product lines. With the initiative
nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes
that the product line simplification work is returning to more normalized levels.
Step two, Business Structure Simplification, was implemented to simplify and scale-up ITW’s operating structure
to support increased engineering, marketing, and sales resources, and, at the same time, improve global reach and
competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 85 scaled-up
divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back
innovation.
The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW. The
Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each
year from 2013 through 2017 and is on track to do the same in 2018.
• With the portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for
and accelerating, organic growth, reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to
build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in
margins and returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the
same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability
and returns. With this first phase of the strategy nearing completion, the Company will look ahead to the next five
years and delivering differentiated performance on a sustained basis.
Sustained Differentiated Performance
While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has
significant opportunity for further improvement. The second phase of the strategic framework is focused on delivering
5
differentiated performance on a sustained basis, with consistent above market organic growth. Moving forward, the Company
remains committed to the four strategic principles that have served as the foundation of its progress over the past five years
and that the Company believes best positions ITW to deliver continued differentiated performance over the next five years:
•
•
•
•
The ITW Business Model is the Company's competitive advantage
Focus on quality growth
"Do what we say" execution is a critical differentiator
Invest only where ITW has a competitive advantage
The ITW Business Model is the Company's Competitive Advantage
The ITW Business Model is the combination of a set of strategic, operational, and cultural approaches and practices that is
applied to every ITW business. The Business Model has existed inside the Company for over 30 years and is truly ITW's
differentiating competitive advantage. The ITW Business Model is comprised of three elements:
•
•
•
80/20 Front to Back Process = How the Company Operates
Customer-Back Innovation Approach = How the Company Innovates
Decentralized Entrepreneurial Culture = How the Company Executes
Focus on Quality Growth
ITW prioritizes high-quality revenue growth and, as such, the Company’s primary growth focus is organic.
Leveraging the Business Model and the 80/20 front to back process provides a clear view of where to focus for high-
quality growth. The Company targets differentiated end-markets and customers with critical needs and challenging pain
points. ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.
The Company only invests and operates in industries and businesses that have the right “raw material” to generate high
quality organic growth through the application of the ITW Business Model. ITW’s current portfolio of seven segments
offers solid growth potential and a high degree of diversification in terms of geographic and end market exposures,
enabling the Company to deliver consistent high-quality growth in an increasingly volatile and competitive global market
environment.
"Do What We Say" Execution is a Critical Differentiator
ITW’s commitment to execution is a key differentiator for ITW. Living up to the Company’s commitments - “do what we
say” execution - is a deeply embedded core element of the culture. The culture is the engine that translates ITW's strategy
into action, and action into results.
All divisions function within a “framework” that defines how the culture operates and defines the Company’s values,
business model and strategy to ensure all divisions are working toward our common set of goals. Business leaders have
the flexibility to define the actions and customize their approach to meet those goals. This “flexibility within the
framework” establishes an entrepreneurial environment where decisions are made “bottom up” by those with the greatest
knowledge, capability and proximity to the customer, which enables our businesses to be nimble and react quickly to
market conditions and customer requirements.
ITW is simple, straightforward and transparent in everything it does. The Company sets clear performance expectations
and financial targets, executes against these at the appropriate pace, and establishes the freedom to define how to achieve
results within the construct of the Business Model.
Invest Only Where ITW Has a Competitive Advantage
The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business
Model into compelling and sustainable competitive advantage.
Investments to support organic growth and sustain its highly differentiated core businesses, such as new product
innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment
priority.
6
Divestiture Activity
Divestiture of the Industrial Packaging Segment— In February 2013, the Company announced that it was initiating a review
process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company’s Board of
Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the
Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented this segment as
part of its continuing operations.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging
business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of
$1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financial Information about Segments
Segment information is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 14. Segment Information in Item 8. Financial Statements and Supplementary Data.
Distribution Methods
The Company’s businesses primarily distribute their products directly to industrial manufacturers and through independent
distributors.
Backlog
Backlog generally is not considered a significant factor in the Company’s businesses as relatively short delivery periods and
rapid inventory turnover are characteristic of most of their products. Backlog by segment as of December 31, 2017 and 2016
was as follows:
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
462
204
342
90
57
39
243
1,437
$
$
452
188
298
67
62
29
217
1,313
Due to the predominately short term nature of the Company's arrangements with its customers, backlog orders scheduled for
shipment beyond calendar year 2018 were not material as of December 31, 2017.
Competition
With operations in 56 countries, the Company offers a wide range of products in a myriad of markets, many of which are
fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area.
The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or
divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller
ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding
segment competes globally with Lincoln Electric and ESAB.
In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product
quality, brand preference and service delivery. Technical capability is also a competitive factor in most segments. The
7
Company believes that each segment's primary competitive advantages derive from the Company's business model and
decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its
businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational
excellence utilizing the Company's 80/20 front to back process and leveraging its product innovation capabilities. The
Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Automotive
OEM segment.
Raw Materials
The Company uses raw materials of various types, primarily steel, resins and chemicals, that are available from numerous
commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other
major problems, and no such problems are currently anticipated.
Research and Development
Developing new and improved products, broadening the application of established products, and continuing efforts to improve
and develop new methods, processes and equipment all contribute to the Company's organic growth. Many new products are
designed to reduce customers' costs by eliminating steps in their manufacturing processes, reducing the number of parts in an
assembly or improving the quality of customers' assembled products. Typically, the development of such products is
accomplished by working closely with customers on specific applications. Research and development expenses were $225
million, $223 million and $218 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Intellectual Property
The Company owns approximately 3,600 unexpired U.S. patents and 8,000 foreign patents covering articles, methods and
machines. In addition, the Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and
4,600 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The
Company maintains a patent group for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important; however, the expiration of any one of the
Company's patents would not have a material effect on the Company's results of operations or financial position. The
Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and
efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks,
which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW,
which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the
Automotive OEM segment; Hobart in the Food Equipment segment; Instron in the Test & Measurement and Electronics
segment; Miller in the Welding segment; Rain-X and Permatex in the Polymers & Fluids segment; Paslode in the Construction
Products segment; and Hi-Cone in the Specialty Products segment.
Environmental
The Company believes that its manufacturing plants and equipment are in substantial compliance with all applicable
environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s
capital expenditures, competitive position, financial position or results of operations.
Various legislative and administrative regulations concerning environmental issues have become effective or are under
consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date,
such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows.
Employees
The Company employed approximately 50,000 people as of December 31, 2017 and considers its employee relations to be
excellent.
8
International
The Company's international operations include subsidiaries and joint ventures in 55 foreign countries on six continents. These
operations serve such end markets as automotive OEM/tiers, automotive aftermarket, commercial food equipment,
construction, general industrial, and others on a worldwide basis. The Company's revenues from sales to customers outside the
U.S. were approximately 56% of revenues, 55% of revenues and 54% of revenues for the years ended December 31, 2017,
2016 and 2015, respectively.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 14.
Segment Information in Item 8. Financial Statements and Supplementary Data for additional information on international
activities. International operations are subject to certain potential risks inherent in conducting business in foreign countries,
including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and
other governmental action, and fluctuations in currency exchange rates. Additional risks of the Company's international
operations are described under Item 1A. Risk Factors.
Executive Officers
Executive Officers of the Company as of February 15, 2018 were as follows:
Office
Name
E. Scott Santi. . . . . . . . . . . . . . . . . . . Chairman & Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Norman D. Finch Jr. . . . . . . . . . . . . . Senior Vice President, General Counsel & Secretary . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
56
53
57
49
52
63
61
55
54
50
51
56
57
The executive officers of the Company serve at the discretion of the Board of Directors. Set forth below is information
regarding the principal occupations and employment and business experience over the past five years for each executive
officer. Unless otherwise stated, employment is by the Company.
Mr. Santi is the Chairman 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. Finch joined the Company in January 2017 and was elected Senior Vice President, General Counsel and Secretary in
February 2017. From 2013 to January 2017, he served as Vice President, General Counsel and Secretary of Sealed Air
Corporation, a global manufacturer of products related to food safety and security, facility hygiene and product protection.
Prior thereto, he served as Vice President, Associate General Counsel and Chief Compliance Officer of Zimmer Holdings, Inc.
(now Zimmer Biomet Holdings), a global medical device company.
Mr. Hartnett was elected Executive Vice President in 2012. Prior to that, he held various management positions of increasing
responsibility. Most recently, he served as Group President of the automotive aftermarket businesses.
Mr. Larsen joined the Company and was elected Senior Vice President and Chief Financial Officer in September 2013. From
October 2010 to August 2013, he served as Vice President and Chief Financial Officer of Gardner Denver, Inc., a global
manufacturer of highly engineered compressors, blowers, pumps and other fluid transfer equipment. In addition, he served as
9
interim CEO of Gardner Denver from July 2012 to November 2012, and as President, Chief Executive Officer and a director
of that company from November 2012 to July 2013.
Ms. Lawler joined the Company and was elected Senior Vice President and Chief Human Resources Officer in October 2014.
From June 2013 to October 2014, she served as Executive Vice President, Human Resources, at GATX Corporation, a rail car
leasing company. Prior to that, she served as Senior Vice President, Human Resources, at GATX Corporation, from May 2008
to May 2013.
Mr. Martel has served in his present position since 2006.
Mr. Martindale has served in his present position since 2008.
Mr. Nagarajan has served in his present position since 2010.
Mr. O’Herlihy was elected Vice Chairman in 2015. Prior to that, he served as Executive Vice President from 2010 to 2015.
Mr. Scheuneman has served in his present position since 2009.
Ms. Schlitz was elected Executive Vice President in 2015. Prior to that, she held various management positions of increasing
responsibility. Most recently, she served as a Group President within the food equipment businesses since 2011.
Mr. Valls has served in his present position since 2007.
Mr. Zimmerman was elected Executive Vice President in 2015. Prior to that, he held various management positions of
increasing responsibility. Most recently, he served as a Group President within the welding businesses since 2010.
Available Information
The Company electronically files reports with the Securities and Exchange Commission ("SEC"). The public may read and
copy any materials the Company has filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of
charge through the Company's website (www.itw.com), as soon as reasonably practicable after electronically filing with or
otherwise furnishing such information to the SEC, and are available in print to any shareholder who requests them. The
Company will furnish any exhibit not contained herein upon the payment of a fee representing the reasonable cost to the
Company of furnishing the exhibit. Requests for exhibits may be sent to Illinois Tool Works Inc., 155 Harlem Avenue,
Glenview, IL 60025, Attention: Secretary. Also posted on the Company’s website are the following:
•
•
•
•
•
•
•
•
•
Statement of Principles of Conduct;
Code of Ethics for CEO and key financial and accounting personnel;
Charters of the Audit, Corporate Governance and Nominating, and Compensation Committees of the Board of
Directors;
Corporate Governance Guidelines;
Global Anti-Corruption Policy;
Corporate Citizenship Statement;
Conflict Minerals Policy Statement;
Supplier Code of Conduct; and
Government Affairs Information.
10
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 the Company serves can adversely affect the Company’s businesses by reducing demand for the Company's
products and services, limiting financing available to the Company's customers, increasing order cancellations and the
difficulty in collecting accounts receivable, increasing price competition, or increasing the risk that counterparties to the
Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.
The global nature of the Company's operations subjects it to political and economic risks that could adversely affect
its business, results of operations or financial condition.
The Company currently operates in 56 countries. The risks inherent in the Company's global operations include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuation in currency exchange rates;
limitations on ownership or participation in local enterprises;
price controls, exchange controls and limitations on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
acts of terrorism;
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 benefits from the Company’s Enterprise Strategy may not be as expected and the Company's financial results
could be adversely impacted.
As the Company has substantially completed its Enterprise Strategy initiatives of portfolio management and business
structure simplification, its focus has pivoted to organic revenue growth and continued margin improvement. Product line and
customer base simplification activities, which are core elements of the Company’s 80/20 front to back process, continue to be
applied to the Company’s scaled up operating divisions and remain active elements of the Enterprise Strategy. Although these
activities are expected to improve future operating margins and organic revenue growth, they are also expected to have a
negative impact on the Company’s overall organic revenue growth in the short term. If the Company is unable to realize the
expected benefits from its Enterprise Strategy initiatives, 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
11
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.
A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's
operating income.
Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are
realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability
is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and
incurs expenses. Significant long-term fluctuations in relative currency values, and in particular, an increase in the value of
the U.S. Dollar against foreign currencies, has had and could have an adverse effect on profitability and financial condition.
If the Company is unable to successfully introduce new products, its future growth may be adversely affected.
The Company's ability to develop new products based on innovation can affect its competitive position and sometimes
requires the investment of significant time and resources. Difficulties or delays in research, development, production or
commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive
position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.
If the Company is unable to adequately protect its intellectual property, its competitive position and results of
operations may be adversely impacted.
Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets,
copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and
non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights may be
challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or
protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of
intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights or inability to
preserve existing intellectual property rights could adversely impact the Company's competitive position and results of
operations.
The Company's acquisition of businesses could negatively impact its profitability and returns.
The Company has engaged in various acquisitions in the past, and could choose to acquire additional businesses in the future.
Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the
following, any of which could adversely affect the Company's profitability and returns:
•
•
•
•
•
The acquired business could under-perform relative to the Company’s expectations and the price paid for it, or not
perform in accordance with the Company’s anticipated timetable.
The acquired business could cause the Company's financial results to differ from expectations in any given fiscal
period, or over the long term.
Acquisition-related earnings charges could adversely impact operating results.
The acquired business could place unanticipated demands on the Company's management, operational resources and
financial and internal control systems.
The Company may assume unknown liabilities, known contingent liabilities that become realized or known
liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions
resulting from the activities of the acquired business. The realization of any of these liabilities or deficiencies may
12
•
increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial
reporting obligations.
As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable
intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize
charges relating to the impairment of these assets.
Past divestitures 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 the Company's financial results.
The Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of
acquisitions. A number of factors may result in impairments to goodwill and other intangible assets, including significant
negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of
the assets. Impairment charges could result that adversely affect the Company's financial condition or results of operations in
the periods recognized.
Disruptions or volatility in global financial markets or changes in the Company's credit ratings could increase the
Company's funding costs or reduce the availability of credit.
Global economic conditions may cause volatility and disruptions in the financial markets. The Company’s continued ability
to meet its cash requirements requires substantial liquidity and access to the financial markets. In addition, the Company’s
borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. If conditions in the
financial markets decline or the Company’s credit ratings are negatively impacted, its funding costs could be increased or the
availability of credit could be diminished.
Raw material price increases and supply shortages could adversely affect results.
The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of
reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in
the past and significant increases could adversely affect the Company's results of operations and profit margins. Due to
pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts
prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of
operations and financial condition may be adversely affected.
Unfavorable tax law changes and tax authority rulings may adversely affect results.
The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax
liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be
adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the
valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes is subject to ongoing audits by
U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from
amounts recorded, future financial results may include unfavorable tax adjustments.
The U.S. government has recently enacted comprehensive tax legislation that includes significant changes to the taxation of
business entities. The Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time
transition tax, however the ultimate impact of this tax reform is uncertain due to subsequent clarification of the tax law and
refinement of estimated amounts and the Company's business and financial condition could be adversely affected.
13
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its
results of operations and cash flows.
The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit
pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on
plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
Potential adverse outcomes in legal proceedings may adversely affect results.
The Company's businesses expose it to potential toxic tort and other types of product liability claims that are inherent in the
design, manufacture and sale of its products and the products of third-party vendors. The Company currently maintains
insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established
limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance
programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or
more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it
maintains adequate insurance programs, claims could have a material adverse effect on the Company's financial condition,
liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.
Uncertainty related to climate change regulation and industry standards could impact the Company's results of
operations and financial position.
Increased public awareness and concern regarding global climate change may result in more international, regional and/or
federal requirements to reduce or mitigate global warming and these regulations could mandate even more restrictive
standards, such as stricter limits on greenhouse gas emissions, than the voluntary commitments that the Company has made
or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate legislation,
which creates economic and regulatory uncertainty. If environmental laws or regulations are either changed or adopted and
impose significant operational restrictions and compliance requirements upon the Company or its products, they could
negatively impact the Company’s business, capital expenditures, results of operations, financial condition and competitive
position.
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 damage.
The Company relies on information technology networks and systems, including the Internet, to process, transmit and store
electronic information, and to manage or support a variety of business processes and activities, including procurement,
manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage,
disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components;
power outages; hardware failures; attacks by computer hackers; computer viruses; employee error or malfeasance. In
addition, security breaches could result in unauthorized disclosure of confidential information or personal data belonging to
our employees, partners, customers or suppliers. 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 performance of acquired
businesses and impact of divested businesses, economic conditions in various geographic regions, the timing and amount of
share repurchases, the timing and amount of benefits from the Company's Enterprise Strategy, the adequacy of internally
generated funds and credit facilities to service debt and finance the Company's capital allocation priorities, the sufficiency of
U.S. generated cash to fund cash requirements in the U.S., the impact of the recently enacted U.S. tax legislation, the cost and
availability of additional financing, the Company's portion of future benefit payments related to pension and postretirement
benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of
compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the
impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency
14
fluctuations, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the
estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks,
uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks
that may influence future results include those risks described above. These risks are not all inclusive and given these and
other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a
prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation
to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new
information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates
with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-
public information or other confidential commercial information. Investors should not assume that ITW agrees with any
statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Due to the Company’s decentralized operating structure, the Company operates out of a number of facilities worldwide, none
of which are individually significant to the Company or its segments. As of December 31, 2017, the Company operated the
following plants and office facilities, excluding regional sales offices and warehouse facilities:
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number Of Properties
Leased
Total
Owned
58
25
27
25
34
27
45
1
35
19
58
15
33
27
37
9
93
44
85
40
67
54
82
10
242
233
475
The Company’s properties are well suited for the purposes for which they were designed and are maintained in good
operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat
flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production
capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of
time due to the nature of the Company’s businesses.
The Company operated 301 plants and office facilities outside of the U.S. Principal countries include China, Germany,
France and the United Kingdom.
ITEM 3. Legal Proceedings
None.
ITEM 4. Mine Safety Disclosures
None.
15
PART II
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Common Stock Price and Dividend Data— The Company's common stock is listed on the New York Stock Exchange.
Quarterly market price and dividend data for 2017 and 2016 were as shown below:
2017:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Price Per Share
Low
High
Dividends
Declared
Per Share
$
$
169.69
148.28
150.29
136.03
127.99
123.50
109.54
102.98
$
$
147.96
135.07
130.17
120.06
111.50
103.08
98.32
79.15
0.78
0.78
0.65
0.65
0.65
0.65
0.55
0.55
There were approximately 6,083 holders of record of common stock as of January 31, 2018. This number does not include
beneficial owners of the Company's securities held in the name of nominees.
*Assumes $100 invested on 12/31/12 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
Copyright© 2018 S&P, a division of McGraw Hill Financial. All rights reserved.
16
The 2017 peer group consists of the following 17 public companies, consistent with the peer group included in the
Company's Proxy statement:
3M Company
Caterpillar Inc.
Cummins Inc.
Deere & Company
Dover Corporation
Eaton Corporation plc
Emerson Electric Co.
Fortive Corporation
General Dynamics Corporation
Parker-Hannifin Corporation
PPG Industries, Inc.
Raytheon Company
Honeywell International Inc.
Rockwell Automation, Inc.
Ingersoll-Rand plc
Johnson Controls, Inc.
Stanley Black & Decker, Inc.
The Compensation Committee of the Board of Directors of the Company reviews the peer group annually and from time to
time it changes the composition of the Company’s peer group where changes are appropriate. In 2017, Fortive Corporation,
General Dynamics Corporation, Raytheon Company and Rockwell Automation, Inc. were added, as they meet the
Company’s industry and size criteria. BorgWarner Inc., Masco Corporation and Textron Inc. were removed because they are
consistently below the Company’s cut-off for market capitalization. Additionally, E.I. du Pont de Nemours and Company was
removed due to its merger with Dow Chemical Company, and Pentair plc was removed due to the spin-off of its electrical
business. Although Fortive Corporation was added to the Company’s peer group in 2017, it was excluded from the five year
cumulative total return as there was insufficient historical data due to its recent spin-off from Danaher Corporation in 2016.
Repurchases of Common Stock— On February 13, 2015, the Company’s Board of Directors authorized a stock repurchase
program which provides 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, 2017, there were approximately $2.4 billion of authorized repurchases
remaining under the 2015 Program. Share repurchase activity under the Company's share repurchase program for the fourth
quarter of 2017 was as follows:
In millions except per share amounts
Period
October 2017 . . . . . . . .
November 2017 . . . . . .
December 2017 . . . . . .
Total . . . . . . . . . . . . . . .
Total Number of
Shares Purchased
0.6
0.6
0.4
1.6
Average Price
Paid Per Share
153.31
$
157.32
$
165.58
$
ITEM 6. Selected Financial Data
Total Number of Shares
Purchased as Part of Publicly
Announced Program
Maximum Value of Shares
That May Yet Be Purchased
Under Program
$
$
$
0.6
0.6
0.4
1.6
2,596
2,504
2,446
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. . . .
2017
2016
2015
2014
2013
$
14,314
1,687
$
13,599
2,035
$
13,405
1,899
$
14,484
1,890
4.90
4.86
16,780
7,478
2.86
5.73
5.70
15,201
7,177
2.40
5.16
5.13
15,729
6,896
2.07
4.70
4.67
17,465
5,943
1.81
14,135
1,630
3.65
3.63
19,599
2,771
1.60
In 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.90 per diluted share, related
to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note 5. Income Taxes in Item 8. Financial Statements
and Supplementary Data for further information.
Certain reclassifications of prior year data have been made to conform to current year reporting, including discontinued
operations and adoption of new accounting guidance as discussed below.
17
In April 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria
for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's
operations and financial results should be reported as discontinued operations. The Company adopted this new guidance
effective January 1, 2015. The new guidance applies prospectively to new disposals and new classifications of disposal
groups held for sale after such date. There were no discontinued operations during 2017, 2016 or 2015 under this new
accounting guidance. For businesses reported as discontinued operations in the statement of income prior to adoption, all
related prior period income statement information has been restated. Income from discontinued operations was $1.1 billion
and $49 million for the years 2014 and 2013, respectively.
In April 2015, the FASB issued authoritative guidance to simplify the balance sheet presentation of long-term debt issuance
costs. Under the new guidance, long-term debt issuance costs are presented as a reduction of the carrying amount of the
related long-term debt. The Company early adopted this guidance in the fourth quarter of 2015 and restated $38 million and
$22 million of deferred long-term debt issuance costs from Other assets to Long-term debt in the years 2014 and 2013,
respectively.
In November 2015, the FASB issued authoritative guidance to simplify the presentation of deferred taxes. Under the new
guidance, all deferred tax assets and liabilities are presented as noncurrent in the statement of financial position. Early
adoption of this guidance in the fourth quarter of 2015 decreased total assets by $175 million and $345 million in the years
2014 and 2013, respectively.
In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-
based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and
classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires
that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized
through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits
should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax
benefits recognized in equity under the prior guidance were $29 million, $20 million, $33 million and $24 million for the
years ended December 31, 2016, 2015, 2014 and 2013, respectively. The Company adopted the new guidance effective
January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $50 million were included in Income
taxes in the statement of income for the year ended December 31, 2017. The expected effect on income tax expense or net
cash provided from operating activities related to future stock-based award settlements will vary each period and will depend
on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.
Additional information on the comparability of results is included in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
18
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 85 divisions in 56 countries. As of December 31, 2017, the Company employed approximately 50,000
people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported
to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and
Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
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:
•
•
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ITW’s 80/20 front to back process is the operating system that is applied in every ITW business. Initially
introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded
80/20 into a proprietary, holistic business management process that generates significant value for the Company and
its customers. Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its
largest and best opportunities (the “80”) and eliminates cost, complexity and distractions associated with the less
profitable opportunities (the “20”). 80/20 enables ITW businesses to consistently achieve world-class operational
excellence in product availability, quality, and innovation, while generating superior financial performance;
Customer-back innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation
approach is built on insight gathered from the 80/20 front to back process. Working from the customer back, ITW
businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are
focused on understanding customer needs, particularly those in “80” markets with solid long-term growth
fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and
learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000 granted and pending
patents;
ITW’s decentralized, entrepreneurial culture enables ITW businesses to be fast, focused, and responsive. ITW
businesses have significant flexibility within the framework of the ITW Business Model to customize their approach
in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to
execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational
structure that, combined with outstanding execution, delivers best-in-class services adapted to each business'
customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began the first phase of its strategic framework, transitioning the Company on its current strategic path to
fully leverage the compelling performance potential of the ITW Business Model. Since then, ITW has made considerable
progress, as evidenced by the Company’s strong financial performance over the past five years.
The roots of ITW’s Enterprise Strategy began in late 2011 / early 2012, when the Company undertook a complete review of its
performance. Focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns,
ITW developed a strategy to replicate that performance across its operations.
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Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must be the core
growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its
primary growth engine to organic, the Company began executing a multi-step approach.
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•
•
The first step was to narrow the focus and improve the quality of ITW’s business portfolio. As part of the Portfolio
Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized
sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting
entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW
divisions.
As a result of this work, ITW’s business portfolio now has significantly higher organic growth potential. ITW
segments and divisions now possess attractive and differentiated product lines and end markets as they continue to
improve operating margins and generate price/cost increases. The Company achieved this through product line
simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers,
while supporting and growing the businesses’ largest / most profitable customers and product lines. With the initiative
nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes
that the product line simplification work is returning to more normalized levels.
Step two, Business Structure Simplification, was implemented to simplify and scale-up ITW’s operating structure
to support increased engineering, marketing, and sales resources, and, at the same time, improve global reach and
competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 85 scaled-up
divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back
innovation.
The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW. The
Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each
year from 2013 through 2017 and is on track to do the same in 2018.
• With the portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for
and accelerating, organic growth, reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to
build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in
margins and returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the
same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability
and returns. With this first phase of the strategy nearing completion, the Company will look ahead to the next five
years and delivering differentiated performance on a sustained basis.
SUSTAINED DIFFERENTIATED PERFORMANCE
While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has
significant opportunity for further improvement. The second phase of the strategic framework is focused on delivering
differentiated performance on a sustained basis, with consistent above market organic growth. Moving forward, the Company
remains committed to the four strategic principles that have served as the foundation of its progress over the past five years
and that the Company believes best positions ITW to deliver continued differentiated performance over the next five years:
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The ITW Business Model is the Company's competitive advantage
Focus on quality growth
"Do what we say" execution is a critical differentiator
Invest only where ITW has a competitive advantage
The ITW Business Model is the Company's Competitive Advantage
The ITW Business Model is the combination of a set of strategic, operational, and cultural approaches and practices that is
applied to every ITW business. The Business Model has existed inside the Company for over 30 years and is truly ITW's
differentiating competitive advantage. The ITW Business Model is comprised of three elements:
•
•
80/20 Front to Back Process = How the Company Operates
Customer-Back Innovation Approach = How the Company Innovates
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•
Decentralized Entrepreneurial Culture = How the Company Executes
Focus on Quality Growth
ITW prioritizes high-quality revenue growth and, as such, the Company’s primary growth focus is organic.
Leveraging the Business Model and the 80/20 front to back process provides a clear view of where to focus for high-
quality growth. The Company targets differentiated end-markets and customers with critical needs and challenging pain
points. ITW generates high-quality growth through consistent customer-back innovation and customer service excellence.
The Company only invests and operates in industries and businesses that have the right “raw material” to generate high
quality organic growth through the application of the ITW Business Model. ITW’s current portfolio of seven segments
offers solid growth potential and a high degree of diversification in terms of geographic and end market exposures,
enabling the Company to deliver consistent high-quality growth in an increasingly volatile and competitive global market
environment.
"Do What We Say" Execution is a Critical Differentiator
ITW’s commitment to execution is a key differentiator for ITW. Living up to the Company’s commitments - “do what we
say” execution - is a deeply embedded core element of the culture. The culture is the engine that translates ITW's strategy
into action, and action into results.
All divisions function within a “framework” that defines how the culture operates and defines the Company’s values,
business model and strategy to ensure all divisions are working toward our common set of goals. Business leaders have
the flexibility to define the actions and customize their approach to meet those goals. This “flexibility within the
framework” establishes an entrepreneurial environment where decisions are made “bottom up” by those with the greatest
knowledge, capability and proximity to the customer, which enables our businesses to be nimble and react quickly to
market conditions and customer requirements.
ITW is simple, straightforward and transparent in everything it does. The Company sets clear performance expectations
and financial targets, executes against these at the appropriate pace, and establishes the freedom to define how to achieve
results within the construct of the Business Model.
Invest Only Where ITW Has a Competitive Advantage
The Company is highly focused and disciplined in its approach to invest only where it can leverage the ITW Business
Model into compelling and sustainable competitive advantage.
Investments to support organic growth and sustain its highly differentiated core businesses, such as new product
innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment
priority.
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.
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CONSOLIDATED RESULTS OF OPERATIONS
The Company's strong financial results in 2017 demonstrate the combination of ITW's high-quality business portfolio with
continued focus on leveraging the powerful and highly differentiated ITW Business Model. Meaningful progress on
accelerating organic revenue growth and strong execution on enterprise initiatives resulted in all seven segments achieving
worldwide organic revenue growth and having operating margin above 20% for 2017.
On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C")
from ZF TRW for a purchase price of approximately $450 million. EF&C had operating revenue of $517 million in 2017 and
$245 million for the last six months of 2016. EF&C diluted the Company's operating margin in 2017 and 2016 due to lower
operating margin and acquisition related expenses. The Company expects EF&C's operating margin to improve in later years
through the application of the Company's 80/20 front to back process. The operating results of EF&C are reported within the
Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations
or financial position for any period presented. Refer to Note 2. Acquisitions in Item 8. Financial Statements and Supplementary
Data for further information.
The Company presents certain financial measures in fiscal year 2017 excluding the $658 million tax charge related to the "Tax
Cuts and Jobs Act" and the benefit of a favorable $95 million legal settlement. These non-GAAP measures are consistent with
the way management analyzes and assesses the Company's operating performance. The Company believes these non-GAAP
measures enhance investors' understanding of the Company's underlying financial performance, as well as their ability to
compare the Company's financial results and overall performance to that of its peers.
The Company’s consolidated results of operations for 2017, 2016 and 2015 are summarized as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
Operating margin %
2017
$14,314
3,494
24.4%
2016
5.3%
$13,599
14.0%
3,064
22.5% 190 bps
Inc (Dec) Organic Acq/Div Restructuring Impairment
—%
1.8%
0.1%
0.7%
—
(30) bps
2.9%
12.5%
210 bps
—%
0.1%
10 bps
Total
Foreign
Currency
0.6%
5.3%
0.6% 14.0%
— 190 bps
•
•
•
•
•
Operating revenue increased due to growth in organic and acquisition revenues and the favorable effect of foreign
currency translation.
Organic revenue grew 2.9% as all seven segments achieved growth.
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◦
◦
North American organic revenue grew 1.6%. Growth in five segments was partially offset by a decline in the
Automotive OEM and Food Equipment segments.
Europe, Middle East and Africa organic revenue increased 3.5% as growth in five segments was partially
offset by a decline in the Welding and Polymers & Fluids segments.
Asia Pacific organic revenue increased 6.8% as growth in five segments was partially offset by a decline in
the Welding and Food Equipment segments.
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a
litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the
execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the
second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income. Refer to
Note 3. Legal Settlement in Item 8. Financial Statements and Supplementary Data for further information on the
confidential legal settlement.
Operating income of $3.5 billion increased 14.0%. Excluding the favorable impact of the confidential legal settlement,
operating income would have increased 10.9%.
Operating margin of 24.4% increased 190 basis points. Excluding the 70 basis points of favorability from the
confidential legal settlement, operating margin of 23.7% increased 120 basis points primarily driven by the benefits of
the Company's enterprise initiatives of 120 basis points. In addition, positive operating leverage of 70 basis points was
offset by unfavorable price/cost of 40 basis points and the dilutive impact of 30 basis points from the EF&C
acquisition.
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On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of
the Act significantly revise the U.S. corporate income tax rules. As of December 31, 2017, the Company has not
completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable
estimate of the effects on the existing deferred tax balances and one-time transition tax. As a result, the Company
recorded a one-time income tax charge of $658 million during the fourth quarter of 2017. The provisional amounts
recorded reflect the Company's best estimate based on information currently available and are subject to future
changes due to subsequent clarification of the tax law and refinement of estimated amounts. Refer to Note 5. Income
Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Diluted earnings per share (EPS) of $4.86 includes the unfavorable impact of $1.90 for the previously discussed one-
time tax charge and the favorable impact of $0.17 for the confidential legal settlement. Excluding these two items,
EPS of $6.59 increased 15.6%.
Free cash flow was $2.1 billion for 2017 and includes the impact from an additional discretionary pension contribution
of $115 million in the second quarter of 2017. Refer to the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
The Company repurchased approximately 7.1 million shares of its common stock in 2017 for approximately $1.0
billion.
The Company increased the quarterly dividend by 20.0% in 2017. Total cash dividends of $941 million were paid in
2017.
Adjusted after-tax return on average invested capital was 24.4%, an increase of 230 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.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
2016
$ 13,599
$ 3,064
2015
$ 13,405
$ 2,867
Operating margin %
22.5%
21.4%
Inc (Dec)
Organic
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
1.4%
6.9%
110 bps
1.2%
8.1%
140 bps
1.7%
0.6%
(30) bps
—%
0.1%
10 bps
(1.5)%
(1.9)%
(10) bps
Total
1.4%
6.9%
110 bps
•
•
•
•
•
•
Operating revenue increased due to growth in organic and acquisition revenues, partially offset by the unfavorable
effect of foreign currency translation.
Organic revenue grew 1.2% as six of seven segments had worldwide organic revenue growth primarily due to
penetration gains, higher end market demand and product innovation. Organic revenue declined in the Welding
segment primarily due to lower capital spending in the industrial end markets and sluggish demand in the oil and gas
end market.
◦
PLS activities associated with the portfolio management component of the Company's Enterprise Strategy
reduced organic revenue growth by approximately one percentage point.
North American organic revenue increased 0.7% and European organic revenue increased 2.3% as growth in
six segments for both regions was partially offset by a decline in the Welding segment.
Asia Pacific organic revenue increased 2.7% primarily due to growth in the Automotive OEM, Specialty
Products, Construction Products, Food Equipment, and Test & Measurement and Electronics segments,
partially offset by a decline in the Welding and Polymers & Fluids segments.
◦
◦
Operating margin of 22.5% increased 110 basis points. The primary driver of the operating margin improvement was
130 basis points from the benefit of the Company's enterprise initiatives. Positive operating leverage of 30 basis points
and favorable price/cost of 10 basis points were partially offset by the dilutive impact of 30 basis points from the
EF&C acquisition and additional investment in the business.
In 2016, the Company received a $167 million cash dividend distribution from Wilsonart which exceeded the
Company’s equity investment balance and resulted in a $54 million pre-tax gain, partially offset by $30 million of pre-
tax losses related to the disposals of businesses and the disposal of a partnership investment. Refer to Note 4. Other
Income (Expense) in Item 8. Financial Statements and Supplementary Data for further information on the Wilsonart
equity investment.
Diluted earnings per share (EPS) of $5.70 increased 11.1%.
Free cash flow was $2.0 billion in 2016. Refer to the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
23
•
•
•
The Company repurchased approximately 18.7 million shares of its common stock in 2016 for approximately $2.0
billion.
Total cash dividends of $821 million were paid in 2016.
Adjusted after-tax return on average invested capital was 22.1%, an increase of 170 basis points. Refer to the Adjusted
After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this
non-GAAP measure.
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as
follows:
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenue. . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Revenue
2017
2016
2015
$
$
$
$
$
$
3,271
2,123
2,069
1,538
1,724
1,672
1,938
(21)
14,314
747
556
464
415
357
399
527
2017
2,864
2,110
1,974
1,486
1,691
1,609
1,885
(20)
13,599
Operating Income
2016
690
537
372
370
343
361
482
3,465
29
3,494
$
3,155
(91)
3,064
$
2,529
2,096
1,969
1,650
1,712
1,587
1,885
(23)
13,405
613
498
322
415
335
316
439
2,938
(71)
2,867
2015
Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are
reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations
on a quarterly and annual basis. Unallocated in 2017 includes the favorable impact from the previously discussed confidential
legal settlement.
AUTOMOTIVE OEM
This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated
customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related
applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this
segment include:
•
plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
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The results of operations for the Automotive OEM segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2017
3,271
747
22.8%
$
$
2016
2,864
14.2%
690
8.2%
24.1% (130) bps
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
Total
4.1%
5.7%
30 bps
8.9%
3.2%
(120) bps
— %
(1.6)%
(40) bps
14.2%
1.2%
0.9%
8.2%
— (130) bps
•
•
•
Operating revenue increased due to the EF&C acquisition and higher organic revenue, and the favorable effect of
foreign currency translation.
Organic revenue grew 4.1% as a result of penetration gains, exceeding auto build growth of 2%.
◦
◦
◦
European organic revenue growth of 8.3% exceeded European auto builds which grew 3%.
Asia Pacific organic revenue increased 9.5%. China organic revenue growth of 16.6% exceeded Chinese auto
build growth of 2%. Auto builds of foreign automotive manufacturers in China, where the Company has higher
content, grew 5%.
North American organic revenue decreased 1.1% versus total North American auto builds which declined 4%.
Auto build growth for the Detroit 3, where the Company has higher content, declined 7%.
Operating margin of 22.8% decreased 130 basis points primarily driven by the dilutive impact of 120 basis points from
the EF&C acquisition, unfavorable price/cost of 120 basis points and higher restructuring expenses, partially offset by
positive operating leverage of 60 basis points and the net benefits from the Company's enterprise initiatives and cost
management of 90 basis points.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2016
2,864
690
24.1%
$
$
2015
2,529
Inc (Dec)
13.3%
12.6%
613
24.2% (10) bps
Components of Increase (Decrease)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
5.1%
10.7%
130 bps
9.7%
2.6%
(160) bps
—%
0.7%
20 bps
(1.5)%
(1.4)%
—
Total
13.3%
12.6%
(10) bps
•
•
•
•
Operating revenue increased due to the EF&C acquisition and higher organic revenue, partially offset by the
unfavorable effect of foreign currency translation.
Organic revenue grew 5.1%.
◦
◦
◦
North American organic revenue grew 3.4% versus total North American auto build growth of 2%. Auto build
growth for the Detroit 3, where the Company has higher content, declined 1%.
European organic revenue growth of 6.0% exceeded European auto builds which grew 3%.
Asia Pacific organic revenue increased 10.9% driven by product penetration gains in China due to new product
launches in 2016. China organic revenue growth of 22.7% exceeded Chinese auto build growth of 14%. Auto
builds of foreign automotive manufacturers in China, where the Company has higher content, grew 11%.
On July 1, 2016, the Company completed the acquisition of the EF&C business from ZF TRW. EF&C had operating
revenue of $245 million for the six months ended December 31, 2016, and increased Automotive OEM operating
revenue by 9.7%.
Operating margin of 24.1% decreased 10 basis points due to the dilutive impact of 160 basis points from the EF&C
acquisition and unfavorable price/cost of 40 basis points, partially offset by positive operating leverage of 80 basis
points, the net benefits from the Company's enterprise initiatives and cost management of 90 basis points and lower
restructuring expenses.
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FOOD EQUIPMENT
This segment is a highly focused and branded industry-leader in commercial food equipment differentiated by innovation and
integrated service offerings. This segment primarily serves the food service, food institutional/restaurant and food retail markets.
Products in this segment include:
• warewashing equipment;
• cooking equipment, including ovens, ranges and broilers;
• refrigeration equipment, including refrigerators, freezers and prep tables;
• food processing equipment, including slicers, mixers and scales;
• kitchen exhaust, ventilation and pollution control systems; and
• food equipment service, maintenance and repair.
The results of operations for the Food Equipment segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2017
2,123
556
26.2%
$
$
2016
2,110
537
25.4%
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
0.6%
3.6%
80 bps
0.5%
2.2%
50 bps
—%
—%
—
—%
1.2%
30 bps
0.1%
0.2%
—
Total
0.6%
3.6%
80 bps
•
•
•
Operating revenue increased primarily due to organic revenue growth.
Organic revenue increased 0.5% as equipment and service organic revenue grew 0.2% and 0.8%, respectively.
◦
◦
International organic revenue grew 2.3%. International equipment organic revenue increased 2.6% primarily due
to higher demand in the European refrigeration and warewash end markets. International service organic revenue
grew 1.7%.
North American organic revenue decreased 1.0%. Equipment organic revenue, which had a challenging
comparable in the prior year period of 6.6% growth, decreased 1.8% primarily due to lower end market demand
in the retail, restaurant and institutional end markets. Service revenue in North America increased 0.3%.
Operating margin of 26.2% increased 80 basis points primarily driven by lower restructuring expenses, positive operating
leverage and favorable price/cost of 20 basis points each, and the net benefits of the Company's enterprise initiatives and
cost management.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2016
2,110
537
25.4%
$
$
2015
2,096
498
23.7%
Inc (Dec)
Organic
0.7%
7.8%
170 bps
2.8%
8.7%
140 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
—%
1.1%
30 bps
(2.1)%
(2.0)%
—
Total
0.7%
7.8%
170 bps
•
•
Operating revenue increased due to organic revenue growth, partially offset by the unfavorable effect of foreign currency
translation.
Organic revenue increased 2.8% as equipment and service organic revenue grew 3.9% and 0.8%, respectively.
◦
◦
North American organic revenue increased 4.3%. North American equipment revenue increased 6.6% primarily
due to strong end market demand in the retail, refrigeration, warewash and cooking businesses. Service revenue
in North America increased 0.8%.
International organic revenue grew 0.8%. International equipment organic revenue increased 0.8% primarily due
to growth in Europe and Asia. International service organic revenue grew 0.9%.
26
•
Operating margin of 25.4% increased 170 basis points driven by positive operating leverage of 60 basis points, the net
benefits of the Company's enterprise initiatives and cost management of 40 basis points, favorable price/cost of 40 basis
points and lower restructuring expenses.
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.
The results of operations for the Test & Measurement and Electronics segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2017
2,069
464
22.4%
$
$
2016
1,974
372
18.9%
Inc (Dec)
Organic
4.8%
24.7%
350 bps
4.8%
24.0%
340 bps
•
•
Operating revenue increased due to organic revenue growth.
Organic revenue increased 4.8%.
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
—%
0.7%
10 bps
—%
—%
—
Total
4.8%
24.7%
350 bps
◦
◦
Organic revenue for the test and measurement businesses increased 7.2% primarily due to higher semi-conductor
end market demand in North America and Asia. Instron, where demand is more closely tied to the capital
spending environment, had organic revenue growth of 5.1%.
Electronics organic revenue, which had a challenging comparable in the prior year period of 4.9% growth,
increased 2.2%. The electronics assembly businesses declined 1.1% primarily due to a decrease in North
America. The other electronics businesses, which include the contamination control, static control and pressure
sensitive adhesives businesses, grew 4.7% primarily due to higher semi-conductor end market demand in North
America.
•
Operating margin of 22.4% increased 350 basis points primarily driven by the net benefits resulting from the Company's
enterprise initiatives and cost management of 130 basis points, positive operating leverage of 130 basis points and
favorable price/cost of 30 basis points.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2016
1,974
372
18.9%
2015
$ 1,969
322
$
16.3%
Inc (Dec)
Organic
0.3%
15.6%
260 bps
1.8%
17.4%
250 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
—%
0.4%
10 bps
(1.5)%
(2.2)%
—
Total
0.3%
15.6%
260 bps
27
•
•
•
Operating revenue increased due to organic revenue growth, partially offset by the unfavorable effect of foreign currency
translation.
Organic revenue increased 1.8%.
◦
◦
Electronics organic revenue increased 4.9%. Organic revenue grew 11.6% in the electronics assembly businesses
primarily driven by higher demand from electronics equipment manufacturers and by the solar and semi-
conductor end markets. Other electronics businesses grew 0.5% primarily due to strength in Europe, partially
offset by PLS activities in Asia Pacific.
Organic revenue for the test and measurement businesses decreased 0.9% primarily due to the impact of a weak
capital spending environment in North America and Europe and continued softness in the oil and gas related end
markets.
Operating margin of 18.9% increased 260 basis points primarily driven by the net benefits resulting from the Company's
enterprise initiatives and cost management of 170 basis points, positive operating leverage of 60 basis points and
favorable price/cost of 20 basis points.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology.
Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and
commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and
other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and
industrial capital goods markets. Products in this segment include:
• arc welding equipment;
• metal arc welding consumables and related accessories; and
• metal jacketing and other insulation products.
The results of operations for the Welding segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2017
1,538
415
27.0%
$
$
2016
1,486
370
24.9%
Inc (Dec)
Organic
3.5%
12.1%
210 bps
3.2%
9.6%
160 bps
Restructuring
—%
1.5%
30 bps
Impairment
Foreign
Currency
—%
0.8%
20 bps
0.3%
0.2%
—
Total
3.5%
12.1%
210 bps
•
•
•
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
Organic revenue grew 3.2% as equipment grew 6.5%, partially offset by a decrease of 1.0% in consumables. Organic
revenue grew primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture,
infrastructure and mining and in the commercial end markets related to construction, light fabrication and farm and ranch
customers.
◦
North American organic revenue grew 6.2% primarily driven by 7.2% growth in the industrial end markets and
4.8% growth in the commercial end markets.
International organic revenue decreased 8.0% primarily due to weaker end market demand in the European and
Asian oil and gas end markets.
◦
Operating margin of 27.0% increased 210 basis points primarily due to the net benefits of the Company's enterprise
initiatives and cost management of 150 basis points, positive operating leverage of 70 basis points and lower restructuring
expenses of 30 basis points, partially offset by unfavorable price/cost of 60 basis points. In addition, the prior year period
was negatively impacted by an intangible asset impairment charge of 20 basis points.
28
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2016
1,486
370
24.9%
$
$
2015
1,650
415
25.2%
Inc (Dec)
Organic
(10.0)%
(10.8)%
(30) bps
(9.1)%
(8.0)%
20 bps
Restructuring
— %
(1.4)%
(30) bps
Impairment
Foreign
Currency
— %
(0.7)%
(20) bps
(0.9)%
(0.7)%
—
Total
(10.0)%
(10.8)%
(30) bps
•
•
•
Operating revenue decreased due to the decline in organic revenue and the unfavorable effect of foreign currency
translation.
Organic revenue decreased 9.1% due to lower demand in the oil and gas and industrial end markets and the impact of a
soft capital spending environment. Organic revenue declined 10% and 8% for equipment and consumables, respectively.
◦
◦
North American organic revenue declined 8.0% driven by decreases across the oil and gas end markets and
industrial end markets primarily related to heavy equipment for agriculture, infrastructure and mining.
International organic revenue decreased 12.9% primarily due to weak oil and gas end markets in Europe and
Asia Pacific.
Operating margin of 24.9% declined 30 basis points due to negative operating leverage of 190 basis points, higher
restructuring expenses, the unfavorable impact of intangible asset impairment, partially offset by the net benefits of the
Company's enterprise initiatives and cost management of 180 basis points and favorable price/cost of 30 basis points.
POLYMERS & FLUIDS
This segment is a highly branded supplier to niche markets that require value-added, differentiated products. Businesses in this
segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket
maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction
markets. Products in this segment include:
•
•
•
•
•
•
•
adhesives for industrial, construction and consumer purposes;
chemical fluids which clean or add lubrication to machines;
epoxy and resin-based coating products for industrial applications;
hand wipes and cleaners for industrial applications;
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
fillers and putties for auto body repair; and
polyester coatings and patch and repair products for the marine industry.
The results of operations for the Polymers & Fluids segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
December 31,
Components of Increase (Decrease)
For the Years Ended
Operating revenue
Operating income
2017
$ 1,724
$ 357
2016
$ 1,691
$ 343
Operating margin %
20.7%
20.3%
Inc (Dec)
2.0%
4.1%
40 bps
Organic
1.0%
4.7%
80 bps
Acq/Div Restructuring Impairment
—%
—%
—
— %
(1.1)%
(30) bps
—%
—%
—
Foreign
Currency
1.0%
0.5%
(10) bps
Total
2.0%
4.1%
40 bps
•
•
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
Organic revenue grew 1.0% primarily due to higher demand in North American end markets.
◦
◦
Organic revenue for the automotive aftermarket businesses increased 0.6% primarily driven by stronger demand
in the car care and tire repair businesses in North America.
Organic revenue for the fluids businesses grew 2.9% primarily due to an increase in the industrial maintenance,
repair, and operations end markets in North America and Europe.
29
◦
Organic revenue for the polymers businesses was flat as increases in Asia and South America were offset by a
decline in Europe.
•
Operating margin of 20.7% increased 40 basis points primarily driven by the net benefits of the Company's enterprise
initiatives and cost management of 80 basis points and favorable operating leverage of 30 basis points, partially offset by
unfavorable price/cost of 30 basis points and higher restructuring expenses.
2016 compared to 2015
Dollars in millions
December 31,
Components of Increase (Decrease)
For the Years Ended
Operating revenue
Operating income
2016
$ 1,691
$ 343
2015
$ 1,712
$ 335
Operating margin %
20.3%
19.6%
Inc (Dec)
(1.2)%
2.5 %
70 bps
Organic
1.3%
4.9%
70 bps
Acq/Div Restructuring Impairment
—%
0.7%
20 bps
— %
(0.1)%
(10) bps
(0.2)%
(0.3)%
—
Foreign
Currency
(2.3)%
(2.7)%
(10) bps
Total
(1.2)%
2.5 %
70 bps
•
•
•
Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation, partially offset by
organic revenue growth.
Organic revenue increased 1.3% primarily due to stronger demand in the automotive aftermarket and polymers
businesses.
◦
Organic revenue for the automotive aftermarket businesses increased 2.1% primarily driven by an increase in car
care and tire repair in North America. Organic revenue for the polymers businesses increased 1.4% primarily
driven by an increase in South America and a modest increase in the European wind energy business, partially
offset by a decline in North America. Organic revenue for the fluids businesses was flat as growth in South
America was offset by a decline in the industrial maintenance, repair, and operations end markets in North
America.
Operating margin of 20.3% increased 70 basis points primarily driven by the net benefits of the Company's enterprise
initiatives and cost management of 60 basis points and favorable operating leverage of 30 basis points, partially offset by
unfavorable price/cost of 20 basis points.
CONSTRUCTION PRODUCTS
This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the
residential construction, renovation/remodel and commercial construction markets. Products in this segment include:
• fasteners and related fastening tools for wood and metal applications;
• anchors, fasteners and related tools for concrete applications;
• 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 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2017
1,672
399
23.9%
$
$
2016
1,609
361
22.4%
Inc (Dec)
Organic
3.9%
10.7%
150 bps
2.9%
7.5%
100 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
—%
2.0%
50 bps
1.0%
1.2%
—
Total
3.9%
10.7%
150 bps
•
•
Operating revenue increased due to organic revenue growth and the favorable effect of foreign currency translation.
Organic revenue increased 2.9%.
30
◦
◦
International organic revenue increased 3.6%. European organic revenue grew 4.0% primarily due to growth in
the United Kingdom and the Nordic countries. Asia Pacific organic revenue increased 3.1% primarily due to
growth in the Australia and New Zealand retail end markets.
North American organic revenue increased 1.9% primarily due to 2.1% growth in the residential end markets,
partially offset by a decline of 0.5% in the commercial end markets.
•
Operating margin of 23.9% increased 150 basis points driven by the net benefits of the Company's enterprise initiatives
and cost management of 110 basis points, positive operating leverage of 70 basis points and lower restructuring expenses
of 50 basis points, partially offset by unfavorable price/cost of 80 basis points.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2016
1,609
361
22.4%
$
$
2015
1,587
316
19.9%
Inc (Dec)
Organic
1.4%
14.1%
250 bps
3.0%
16.2%
260 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(0.2)%
(0.3)%
—
— %
(0.3)%
(10) bps
(1.4)%
(1.5)%
—
Total
1.4%
14.1%
250 bps
•
•
•
Operating revenue increased primarily due to organic revenue growth, partially offset by the unfavorable effect of foreign
currency translation.
Organic revenue increased 3.0%.
◦
◦
North American organic revenue grew 3.3% driven by growth in residential and commercial end markets.
International organic revenue increased 2.8%. Asia Pacific organic revenue increased 2.9% primarily due to
growth in Australia and New Zealand. European organic revenue increased 2.8% primarily due to growth in the
United Kingdom.
Operating margin of 22.4% increased 250 basis points primarily driven by the net benefits of the Company's enterprise
initiatives and cost management of 130 basis points, positive operating leverage of 80 basis points and favorable price/
cost of 50 basis points.
SPECIALTY PRODUCTS
This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging
equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.
This segment primarily serves the food and beverage, 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.
31
The results of operations for the Specialty Products segment for 2017, 2016 and 2015 were as follows:
2017 compared to 2016
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2017
1,938
527
27.2%
$
$
2016
1,885
482
25.6%
Inc (Dec)
Organic
2.8%
9.4%
160 bps
3.5%
10.0%
160 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(1.1)%
(0.1)%
30 bps
— %
(1.0)%
(30) bps
0.4%
0.5%
—
Total
2.8%
9.4%
160 bps
•
•
•
Operating revenue increased due to organic revenue growth and the favorable effect of foreign currency translation,
partially offset by a divestiture.
Organic revenue increased 3.5% primarily driven by growth of 4.2% in the consumer packaging businesses.
◦
◦
International organic revenue increased 7.3% driven by growth in the appliance and consumer packaging
businesses across all major regions.
North American organic revenue increased 1.3% driven by growth in the consumer packaging, medical and
appliance businesses, partially offset by a decline in the ground support equipment and gluing system businesses.
Operating margin of 27.2% increased 160 basis points primarily driven by the net benefits of the Company's enterprise
initiatives and cost management of 110 basis points and positive operating leverage of 70 basis points, partially offset by
unfavorable price/cost of 30 basis points and higher restructuring expenses.
2016 compared to 2015
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2016
1,885
482
25.6%
$
$
2015
1,885
439
23.3%
Inc (Dec)
Organic
—%
9.7%
230 bps
1.2%
11.2%
230 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(0.1)%
0.1 %
10 bps
— %
(0.1)%
(10) bps
(1.1)%
(1.5)%
—
Total
—%
9.7%
230 bps
•
•
•
Operating revenue was flat as an increase in organic revenue was offset primarily by the unfavorable effect of foreign
currency translation.
Organic revenue increased 1.2% primarily driven by growth in the consumer packaging, ground support equipment and
sports branding businesses.
◦
◦
International organic revenue increased 2.3% driven by growth in the appliance, foils and gluing system
businesses in Asia Pacific.
North American organic revenue increased 0.6% driven by growth in the consumer packaging and medical
businesses, partially offset by a decline in the brand identification businesses.
Operating margin of 25.6% increased 230 basis points primarily driven by the net benefits of the Company's enterprise
initiatives and cost management of 220 basis points and positive operating leverage of 30 basis points, partially offset by
unfavorable price/cost of 20 basis points.
OTHER FINANCIAL HIGHLIGHTS
•
•
Interest expense was $260 million in 2017, $237 million in 2016 and $226 million in 2015. The increased expense in
each respective period was primarily due to the November 2016 debt issuance.
Other income (expense) was income of $36 million in 2017, $81 million in 2016 and $78 million in 2015. The
income in 2017 is lower than the previous year primarily due to foreign currency translation losses and a $54 million
pre-tax gain recorded in 2016 resulting from a $167 million dividend distribution from Wilsonart that exceeded the
equity investment balance, partially offset by $30 million of pre-tax losses in 2016 related to the disposals of
businesses and the disposal of a partnership investment. The income in 2015 included a $15 million gain on the sale
of a business.
32
•
•
The effective tax rate was 48.4% in 2017, 30.0% in 2016, and 30.1% in 2015. Included in the effective tax rate for
2017 was a one-time additional income tax expense of $658 million related to the United States "Tax Cuts and Jobs
Act" and discrete income tax benefits of $50 million related to the new stock-based compensation guidance effective
January 1, 2017. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies and
Note 5. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.
The impact of the Euro and other foreign currencies against the U.S. Dollar increased operating revenue and income
before taxes by approximately $77 million and $13 million in 2017 versus 2016, respectively. The impact of the
Euro and other foreign currencies against the U.S. Dollar decreased operating revenue by approximately $210
million and income before taxes by approximately $41 million in 2016 versus 2015, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2017
In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-
based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and
classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires
that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized
through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits
should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax
benefits recognized in equity under the prior guidance were $29 million and $20 million for the years ended December 31,
2016 and 2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new
guidance prospectively. Excess tax benefits of $50 million were included in Income taxes in the statement of income for the
year ended December 31, 2017. The expected effect on income tax expense or net cash provided from operating activities
related to future stock-based award settlements will vary each period and will depend on inputs such as the stock price at the
time of settlement and the number of awards settled in the period presented.
Effective January 1, 2018
In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the
new guidance is that revenue should be recognized to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
addition, several new revenue recognition disclosures will be required. The Company's sales arrangements with customers are
predominately short term in nature and generally provide for transfer of control and revenue recognition at the time of
product shipment or delivery of service. In limited circumstances, arrangements may include service performed over time, or
there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving
installation of equipment and customer acceptance. Effective January 1, 2018, the Company adopted this new guidance under
the modified retrospective method which requires the new guidance to be applied prospectively to revenue transactions
completed on or after the effective date. Given the nature of the Company’s revenue transactions, the new guidance is not
expected to have a material impact on the Company’s operating revenue, results of operations, or financial position. As a
result of adopting the guidance, the Company expects to record a cumulative-effect adjustment reducing retained earnings as
of January 1, 2018 by approximately $10 million related to certain transactions that were impacted by the new guidance.
Additionally, the Company expects to provide the required additional disclosures in periods subsequent to adoption.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an
intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as
required under the current guidance. Effective January 1, 2018, the Company adopted the new guidance and will apply the
newly adopted guidance to intra-entity asset transfers on or after the date of adoption. As a result of adopting the new
guidance, the Company expects to record a cumulative-effect adjustment reducing deferred tax assets and retained earnings
by approximately $400 million. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new
guidance.
In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components
of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the
new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and
is eligible for capitalization as an asset. The other components of net periodic benefit cost, including interest cost, expected
return on assets, settlements, curtailments, and amortization of actuarial gains and losses and prior service cost, should be
presented below operating income. Effective January 1, 2018, the Company adopted the new guidance and will apply the new
33
presentation of net periodic benefit cost in future periods and expects to restate prior periods for comparability. The adoption
of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash
flows. For the years ended December 31, 2017, 2016 and 2015, the other components of net periodic benefit cost were
income of $9 million, income of $8 million, and expense of $1 million, respectively. Refer to Note 9. Pension and Other
Postretirement Benefits for further information regarding the Company’s net periodic benefit cost.
Effective January 1, 2019
In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under
the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases, including operating
leases, with a lease term greater than twelve months in the statement of financial position. Subsequent measurement,
including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or
operating lease. In addition, several new disclosures will be required. This guidance is effective for the Company beginning
January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the
new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company
expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon
adoption.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are free cash flow and short-term credit facilities. In addition, the Company had
$3.1 billion of cash on hand at December 31, 2017 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 the Company's organic growth focus and an
active share repurchase program.
The Company believes that, based on its operating revenue, operating margin, free cash flow, and credit ratings, it could
readily obtain additional financing if necessary.
34
Cash Flow
The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share
repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors
in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund
Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment.
Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows
and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the
years ended December 31, 2017, 2016 and 2015 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 . . . . . . . . . . . . . . . . . . . . . .
Dividend distribution from equity investment in Wilsonart . . . .
Net proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and equivalents . . . . . .
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . .
$
$
$
$
2017
2016
2015
2,402
(297)
2,105
$
$
2,302
(273)
2,029
$
$
(941) $
(1,000)
(821) $
(2,000)
(3)
—
197
119
145
622
$
(453)
167
465
128
(133)
(618) $
2,299
(284)
2,015
(742)
(2,002)
(6)
—
151
147
(463)
(900)
Free cash flow for the year ended December 31, 2017 included the impact of an additional $115 million discretionary pension
contribution related to the U.S. primary pension plan.
Stock Repurchase Programs
On August 2, 2013, the Company’s Board of Directors authorized a stock repurchase program, which provided for the
buyback of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2013 Program").
Under the 2013 Program, the Company repurchased approximately 14.9 million shares of its common stock at an average
price of $96.84 during 2015. As of December 31, 2015, there were no authorized repurchases remaining under the 2013
Program.
On February 13, 2015, the Company's Board of Directors authorized a new stock repurchase program, which provided for the
buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015
Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an
average price of $91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of
$107.17 per share during 2016, and approximately 7.1 million shares of its common stock at an average price of $140.56 per
share during 2017. As of December 31, 2017, there were approximately $2.4 billion of authorized repurchases remaining
under the 2015 Program.
35
Adjusted After-Tax Return on Average Invested Capital
The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its
operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a
meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used
by other companies to calculate ROIC. For comparability, the Company excluded the $658 million income tax charge from
the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended
December 31, 2017. Adjusted average invested capital represents the net assets of the Company, excluding cash and
equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's
operations, as well as the Company's equity investment in the Wilsonart business (formerly the Decorative Surfaces
segment). Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC
for the years ended December 31, 2017, 2016, and 2015 was as follows:
Dollars in millions
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Legal settlement income . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted average invested capital. . . . . . . . . . . . . . . . . . . . . .
Adjusted return on average invested capital . . . . . . . . . . . . . .
$
$
$
$
$
$
2017
2016
2015
$
$
$
$
$
$
3,494
(95)
3,399
28.3%
(961)
2,438
2,628
1,220
1,778
6,024
(1,848)
21
9,823
10,005
—
10,005
24.4%
3,064
$
—
3,064
30.0%
(919)
2,145
2,357
1,076
1,652
6,021
(1,713)
223
9,616
9,780
(91)
9,689
22.1%
$
$
$
$
$
2,867
—
2,867
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%
ROIC increased 230 basis points for the year ended December 31, 2017 compared to the prior year period as a result of a
13.7% improvement in after-tax operating income versus a 3.3% increase in adjusted average invested capital. The discrete
tax benefits related to share-based compensation improved after-tax ROIC by 50 basis points in 2017. ROIC increased 170
basis points in 2016 versus 2015 as a result of a 7.1% improvement in after-tax operating income and a 1.3% decrease in
adjusted average invested capital.
36
A reconciliation of the 2017 effective tax rate excluding the discrete tax charge related to the 2017 U.S. tax legislation is as
follows:
Twelve Months Ended
December 31, 2017
Income Taxes
Tax Rate
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discrete tax charge related to 2017 U.S. tax legislation. . . . . . . . . . . . . . . . . . . . . . .
As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,583
(658)
925
48.4 %
(20.1)%
28.3 %
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital at
December 31, 2017 and 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017
2016
Increase
(Decrease)
3,094
2,628
1,220
336
7,278
850
1,848
355
3,053
4,225
$
$
2,472
2,357
1,076
218
6,123
652
1,713
395
2,760
3,363
$
$
622
271
144
118
1,155
198
135
(40)
293
862
The increase in net working capital at December 31, 2017 was primarily driven by higher cash and equivalents.
Cash and equivalents totaled approximately $3.1 billion as of December 31, 2017 and $2.5 billion as of December 31, 2016,
primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to
foreign withholding taxes if repatriated to the U.S. A portion of the cash and equivalents balances held internationally is
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.
On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act
significantly revise the U.S. corporate income tax rules, including a one-time repatriation tax on the deemed repatriation of
post-1986 undistributed earnings of foreign subsidiaries. In the fourth quarter of 2017, the Company recorded a one-time
additional income tax expense of $658 million related to the enactment of the Act which, among other items, included the
one-time deemed repatriation tax. As a result of the one-time repatriation provisions of the Act, the Company has provided
for substantially all U.S. taxes on the undistributed earnings of its foreign subsidiaries and expects to repatriate approximately
$2 billion of foreign held cash and equivalents. See Note 5. Income Taxes in Item 8. Financial Statements and Supplementary
Data.
37
Debt
Total debt at December 31, 2017 and 2016 was as follows:
In millions
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
850
7,478
8,328
$
$
652
7,177
7,829
$
$
Increase
(Decrease)
198
301
499
As of December 31, 2017, Short-term debt included commercial paper of $849 million. As of December 31, 2016, Short-term
debt included $650 million related to the 0.90% notes due February 25, 2017, which were repaid on the due date. There was
no commercial paper outstanding as of December 31, 2016.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized
acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit agreement
with a termination date of May 9, 2021 to support the potential issuances of commercial paper. This agreement replaced the
previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0 billion line of
credit agreement with a termination date of August 15, 2018. No amounts were outstanding under the new line of credit
agreement at December 31, 2017. The maximum outstanding commercial paper balance during 2017 was $1.1 billion, while
the average daily balance was $691 million. As of December 31, 2017, the Company's foreign operations had authorized
credit facilities with unused capacity of $206 million.
In November 2016, the Company issued $1.0 billion of 2.65% notes due November 15, 2026 at 99.685% of face value. Net
proceeds from the November 2016 debt issuance were used to repay commercial paper and for general corporate purposes.
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA 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, 2017, 2016 and 2015 was as follows:
Dollars in millions
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Add:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and impairment of intangible assets . . . . . . . . . . . . . . . . . . .
EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total debt to EBITDA ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
8,328
1,687
$
$
7,829
2,035
$
$
260
(36)
1,583
256
206
237
(81)
873
246
224
3,956
$
3,534
$
2.1
2.2
7,422
1,899
226
(78)
820
244
233
3,344
2.2
38
Stockholders’ Equity
The changes to stockholders’ equity during 2017 and 2016 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
4,259
1,687
(982)
(1,000)
406
219
4,589
$
$
5,228
2,035
(846)
(2,000)
(277)
119
4,259
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company's significant contractual obligations as of December 31, 2017 were as follows:
In millions
Principal payments on debt . . . . . . . . . . .
Interest payments on debt . . . . . . . . . . . .
Noncurrent income taxes payable . . . . . .
Minimum lease payments . . . . . . . . . . . .
2018
2019
2020
2021
2022
$
$
1
243
53
88
385
$
$
1,350
215
53
63
1,681
$
$
4
186
53
45
288
$
$
350
186
53
31
620
$
$
600
174
53
25
852
2023 and
Future Years
5,254
$
1,925
403
61
7,643
$
As of December 31, 2017, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $167 million.
The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits.
The Company did not have any significant off-balance sheet commitments at December 31, 2017.
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 21% of total inventories, the Company has elected to use the last-in, first-out ("LIFO") method
of inventory costing. Generally, this method results in a lower inventory value than the first-in, first-out ("FIFO") method due
to the effects of inflation.
39
Collectibility of Accounts Receivable— The Company estimates the allowance for uncollectible accounts based on the
greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In
addition, reserves for customer credits and cash discounts are estimated based on past experience.
Depreciation of Plant and Equipment— The Company’s U.S. businesses primarily compute depreciation on an accelerated
basis, as follows:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150% declining balance
200% declining balance
The majority of the Company's international businesses compute depreciation on a straight-line basis.
Income Taxes— The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of
differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s
deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous
taxing jurisdictions. Income tax expense, assets and liabilities recognized by the Company also reflect its best estimates and
assumptions regarding, among other things, the level of future taxable income, the effect of the Company’s various tax
planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected
levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded
by the Company.
Goodwill and Intangible Assets— The Company’s business acquisitions typically result in recording goodwill and other
intangible assets, which are a significant portion of the Company’s total assets and affect the amount of amortization expense
and impairment charges that the Company could incur in future periods. The Company follows the guidance prescribed in the
accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if
triggering events occur, the Company compares the estimated fair value of its reporting units to the carrying value of each
reporting unit to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its
carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value
of the reporting unit’s goodwill. In calculating the fair value of the reporting units or specific intangible assets, management
relies on a number of factors, including business plans, economic projections, anticipated future cash flows, comparable
transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in
applying them in the impairment tests of goodwill and other intangible assets.
As of December 31, 2017, the Company had total goodwill and intangible assets of approximately $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 front to back process. The amount of goodwill and other intangible assets allocated to individual reporting
units ranges from approximately $45 million to $1.3 billion, with the average amount equal to $546 million. Fair value
determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent
uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment
charges related to one or more reporting units could occur in future periods.
Pension and Other Postretirement Benefits— The Company has various company-sponsored defined benefit retirement
plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit
expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each
participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in
determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan
assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the
amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 9. Pension and Other
Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial
assumptions used in determining pension and postretirement health care liabilities and expenses.
The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S.
primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be
40
effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed
income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would
increase the present value of the U.S. primary pension plan obligation by approximately $40 million. Beginning in 2017, the
Company changed the method used to estimate the service and interest cost components of net periodic pension and other
postretirement benefit costs. The new method provides a more precise measure of the service and interest cost components of
net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single
weighted-average rate. See Note 9. Pension and Other Postretirement Benefits in Item 8. Financial Statements and
Supplementary Data for information on the Company's pension and other postretirement benefit plans and related
assumptions.
The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment
allocations among asset classes. For the U.S. primary pension plan, a 25 basis point decrease in the expected return on plan
assets would increase the annual pension expense by approximately $4 million.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
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. Refer to Note 8. Debt in Item 8. Financial Statements and Supplemental Data for details related to the fair value of
Company's debt instruments.
Foreign Currency Risk
The Company operates in the U.S. and 55 foreign countries. The funding for the foreign manufacturing operations is
provided primarily through the permanent investment of equity capital. The Company’s products are typically manufactured
and sold within the same country. Therefore, the Company's manufacturing operations generally do not have significant
assets or liabilities denominated in currencies other than their functional currencies.
The Company designated €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 $81 million and $375 million as of December 31, 2017 and December 31, 2016,
respectively.
41
ITEM 8. Financial Statements and Supplementary Data
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Illinois Tool Works Inc. (the "Company" or "ITW") is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW’s internal
control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding
the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we believe that, as of
December 31, 2017, the Company’s internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.
/s/ E. Scott Santi
E. Scott Santi
Chairman & Chief Executive Officer
February 15, 2018
/s/ Michael M. Larsen
Michael M. Larsen
Senior Vice President & Chief Financial Officer
February 15, 2018
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Illinois Tool Works Inc.
Glenview, Illinois
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the
"Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes
(collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 15, 2018
We have served as the Company's auditor since 2002.
43
13,405
7,888
2,417
—
233
2,867
(226)
78
2,719
820
1,899
5.16
5.13
Statement of Income
Illinois Tool Works Inc. and Subsidiaries
For the Years Ended December 31
2016
2015
2017
In millions except per share amounts
Operating Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, administrative, and research and development
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal settlement (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and impairment of intangible assets . . . . . . . . . .
Operating Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,314
$
13,599
$
8,309
2,400
(95)
206
3,494
(260)
36
3,270
1,583
7,896
2,415
—
224
3,064
(237)
81
2,908
873
1,687
$
2,035
$
Net Income Per Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4.90
4.86
$
$
5.73
5.70
$
$
The Notes to Financial Statements are an integral part of this statement.
44
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
2017
2016
2015
1,687
$
2,035
$
1,899
406
114
2,207
$
(277)
(26)
1,732
$
(860)
14
1,053
The Notes to Financial Statements are an integral part of this statement.
45
Statement of Financial Position
Illinois Tool Works Inc. and Subsidiaries
In millions except per share amounts
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2017 and 2016
Outstanding- 341.5 shares in 2017 and 346.9 shares in 2016 . . . . . . . . . . . .
Additional paid-in-capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31
2017
2016
$
$
$
3,094
2,628
1,220
336
7,278
1,778
4,752
1,272
505
1,195
16,780
850
590
1,258
266
89
3,053
7,478
164
614
882
9,138
6
1,218
20,210
(15,562)
(1,287)
4
4,589
16,780
$
2,472
2,357
1,076
218
6,123
1,652
4,558
1,463
449
956
15,201
652
511
1,202
226
169
2,760
7,177
134
—
871
8,182
6
1,188
19,505
(14,638)
(1,807)
5
4,259
15,201
The Notes to Financial Statements are an integral part of this statement.
46
Statement of Changes in Stockholders' Equity
Illinois Tool Works Inc. and Subsidiaries
Additional
Paid-in
Capital
Retained
Earnings
Common
Stock Held
in Treasury
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
Common
Stock
6 $
1,096 $
17,173 $
(10,798) $
(658) $
5 $
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
(21)
39
20
3
—
—
—
—
(2)
1,135
—
(18)
39
29
3
—
—
—
—
—
1,899
—
—
—
—
—
(756)
—
—
—
18,316
2,035
—
—
—
—
—
(846)
—
—
—
1,188
—
19,505
1,687
(4)
36
—
—
—
—
(2)
—
—
—
(982)
—
—
—
—
69
2
—
—
(2,002)
—
—
—
—
(12,729)
—
91
—
—
—
(2,000)
—
—
—
—
(14,638)
—
76
—
(1,000)
—
—
—
—
—
—
—
—
—
—
—
14
(860)
—
(1,504)
—
—
—
—
—
—
—
(26)
(277)
—
(1,807)
—
—
—
—
—
114
406
—
—
—
—
—
—
—
—
—
—
(1)
4
—
—
—
—
—
—
—
—
—
1
5
—
—
—
—
—
—
—
(1)
6,824
1,899
48
41
20
3
(2,002)
(756)
14
(860)
(3)
5,228
2,035
73
39
29
3
(2,000)
(846)
(26)
(277)
1
4,259
1,687
72
36
(1,000)
(982)
114
406
(3)
In millions except per share amounts
Balance at December 31, 2014 . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for share-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Tax benefits related to stock options. . .
Tax benefits related to defined
contribution plans . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . .
Dividends declared ($2.07 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustment . . . . . .
Noncontrolling interest . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for share-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Tax benefits related to stock options. . .
Tax benefits related to defined
contribution plans . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . .
Dividends declared ($2.40 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustment . . . . . .
Noncontrolling interest . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for share-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Repurchases of common stock . . . . . . .
Dividends declared ($2.86 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustment . . . . . .
Noncontrolling interest . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . $
6 $
1,218 $
20,210 $
(15,562) $
(1,287) $
4 $
4,589
The Notes to Financial Statements are an integral part of this statement.
47
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
2015
2016
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided by operating activities:
1,687
$
2,035
$
1,899
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and impairment of 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 sale of operations and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on dividend distribution from equity investment in Wilsonart . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend distribution from equity investment in Wilsonart . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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:
Increase (decrease) during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
256
206
64
3
(16)
(1)
(1)
36
—
10
(138)
(81)
(121)
39
(42)
501
—
2,402
(3)
(297)
43
—
14
2
(10)
(251)
(941)
84
(1,000)
849
—
(652)
—
(14)
(1,674)
145
622
2,472
3,094
240
1,018
5
$
$
$
$
246
224
(263)
7
13
1
12
39
(54)
5
(132)
9
(63)
(3)
40
187
(1)
2,302
(453)
(273)
21
167
16
3
(13)
(532)
(821)
84
(2,000)
(526)
992
(1)
29
(12)
(2,255)
(133)
(618)
3,090
2,472
212
920
150
$
$
$
$
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)
(900)
3,990
3,090
200
775
1
The Notes to Financial Statements are an integral part of this statement.
48
(1)
Description of Business and Summary of Significant Accounting Policies
Notes to Financial Statements
Description of business— Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified
range of industrial products and equipment with approximately 85 divisions in 56 countries. The Company primarily serves
the automotive OEM/tiers, commercial food equipment, construction, general industrial, and automotive aftermarket end
markets.
Consolidation and translation— The financial statements include the Company and its majority-owned subsidiaries. The
Company follows the equity method of accounting for investments where the Company has a significant influence but not a
controlling interest. Intercompany transactions are eliminated from the financial statements. Foreign subsidiaries’ assets and
liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates
for the period. Translation adjustments are reported as a component of accumulated other comprehensive income (loss) in
stockholders’ equity.
Reclassifications— Certain reclassifications of prior year data have been made to conform to current year reporting.
Use of estimates— The preparation of the Company’s financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and the notes to financial statements. Actual results could differ from those estimates.
Acquisitions— The Company accounts for acquisitions under the acquisition method, in which assets acquired and liabilities
assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included
in the Company’s consolidated financial statements from the date of acquisition.
Operating revenue— Operating 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.
Research and development expenses— Research and development expenses are recorded as expense in the year incurred.
These costs were $225 million, $223 million and $218 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $53 million,
$58 million and $58 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Income taxes— The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes
are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and
liabilities given the provisions of the enacted tax laws. Valuation allowances are established when it is estimated that it is
more likely than not that the tax benefit of the deferred tax asset will not be realized.
Cash and equivalents— Cash and equivalents include cash on hand and instruments having original maturities of three
months or less. Cash and equivalents are stated at cost, which approximates fair value.
49
Trade receivables— Trade receivables are net of allowances for doubtful accounts which includes reserves for uncollectible
accounts, customer credits and cash discounts. The Company estimates the allowance for uncollectible accounts based on the
greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In
addition, reserves for customer credits and cash discounts are estimated based on past experience. The changes in the
allowance for doubtful accounts for the years ended 2017, 2016 and 2015 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
43
3
(6)
—
3
43
$
$
42
7
(6)
1
(1)
43
$
$
43
7
(5)
—
(3)
42
Inventories— Inventories are stated at the lower of cost or net realizable value and include material, labor and factory
overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The
first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at
LIFO were approximately 21% and 22% of total inventories as of December 31, 2017 and 2016, respectively. If the FIFO
method was used for all inventories, total inventories would have been approximately $89 million and $86 million higher
than reported at December 31, 2017 and 2016, respectively. The major classes of inventory at December 31, 2017 and 2016
were as follows:
In millions
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
465
141
703
(89)
1,220
$
$
407
126
629
(86)
1,076
Net plant and equipment— Net plant and equipment are stated at cost, less accumulated depreciation. Renewals and
improvements that increase the useful life of plant and equipment are capitalized. Maintenance and repairs are charged to
expense as incurred. Net plant and equipment consisted of the following at December 31, 2017 and 2016:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
203
1,370
3,301
164
123
5,161
(3,383)
1,778
$
$
186
1,297
3,036
160
104
4,783
(3,131)
1,652
The Company’s U.S. businesses primarily compute depreciation on an accelerated basis. The majority of the Company's
international businesses compute depreciation on a straight-line basis. The ranges of useful lives used to depreciate plant and
equipment are as follows:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5—50 years
3—12 years
Term of lease
50
Depreciation was $256 million, $246 million and $244 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Goodwill and intangible assets— Goodwill represents the excess cost over fair value of the net assets of acquired
businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. Amortizable intangible
assets are being amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.
The Company performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more
frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants.
When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting
units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The
Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units, including
discounting estimated future cash flows based on a detailed cash flow forecast prepared by the relevant reporting unit and
market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an
impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting
unit's goodwill.
The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these
intangible assets are determined based on a Level 3 valuation method using a relief-from-royalty income approach derived
from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying
value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible
asset.
Accrued warranties— The Company accrues for product warranties based on historical experience. The changes in accrued
warranties for the years ended December 31, 2017, 2016 and 2015 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
45
(45)
43
—
2
45
$
$
46
(41)
42
1
(3)
45
$
$
49
(37)
36
—
(2)
46
New Accounting Pronouncements
Effective January 1, 2017
In March 2016, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance that includes several
changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures,
statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more
significant changes, the new guidance requires that the income tax effects associated with the settlement of stock-based
awards after adoption of the guidance be recognized through income tax expense rather than directly in equity. Additionally,
the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash
flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million
and $20 million for the years ended December 31, 2016 and 2015, respectively. The Company adopted the new guidance
effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $50 million were included in
Income taxes in the statement of income for the year ended December 31, 2017. The expected effect on income tax expense
or net cash provided from operating activities related to future stock-based award settlements will vary each period and will
depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.
51
Effective January 1, 2018
In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the
new guidance is that revenue should be recognized to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
addition, several new revenue recognition disclosures will be required. The Company's sales arrangements with customers are
predominately short term in nature and generally provide for transfer of control and revenue recognition at the time of
product shipment or delivery of service. In limited circumstances, arrangements may include service performed over time, or
there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving
installation of equipment and customer acceptance. Effective January 1, 2018, the Company adopted this new guidance under
the modified retrospective method which requires the new guidance to be applied prospectively to revenue transactions
completed on or after the effective date. Given the nature of the Company’s revenue transactions, the new guidance is not
expected to have a material impact on the Company’s operating revenue, results of operations, or financial position. As a
result of adopting the guidance, the Company expects to record a cumulative-effect adjustment reducing retained earnings as
of January 1, 2018 by approximately $10 million related to certain transactions that were impacted by the new guidance.
Additionally, the Company expects to provide the required additional disclosures in periods subsequent to adoption.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an
intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as
required under the current guidance. Effective January 1, 2018, the Company adopted the new guidance and will apply the
newly adopted guidance to intra-entity asset transfers on or after the date of adoption. As a result of adopting the new
guidance, the Company expects to record a cumulative-effect adjustment reducing deferred tax assets and retained earnings
by approximately $400 million. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new
guidance.
In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components
of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the
new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and
is eligible for capitalization as an asset. The other components of net periodic benefit cost, including interest cost, expected
return on assets, settlements, curtailments, and amortization of actuarial gains and losses and prior service cost, should be
presented below operating income. Effective January 1, 2018, the Company adopted the new guidance and will apply the new
presentation of net periodic benefit cost in future periods and expects to restate prior periods for comparability. The adoption
of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash
flows. For the years ended December 31, 2017, 2016 and 2015, the other components of net periodic benefit cost were
income of $9 million, income of $8 million, and expense of $1 million, respectively. Refer to Note 9. Pension and Other
Postretirement Benefits for further information regarding the Company’s net periodic benefit cost.
Effective January 1, 2019
In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. Under
the new guidance, a lessee will be required to recognize a lease liability and lease asset for all leases, including operating
leases, with a lease term greater than twelve months in the statement of financial position. Subsequent measurement,
including presentation of expenses and cash flows, will depend on the classification of the lease as either a financing or
operating lease. In addition, several new disclosures will be required. This guidance is effective for the Company beginning
January 1, 2019, with early adoption permitted. While the Company has not yet completed its evaluation of the impact the
new lease accounting guidance will have on the consolidated financial statements and related disclosures, the Company
expects to recognize right of use assets and liabilities for its operating leases in the statement of financial position upon
adoption.
(2)
Acquisitions
Net cash paid for acquisitions during 2017, 2016 and 2015 was $3 million, $453 million and $6 million, respectively.
Acquisitions, individually and in the aggregate, did not materially affect the Company's results of operations or financial
position for any period presented.
The net cash paid for acquisitions in 2016 primarily related to the acquisition of the Engineered Fasteners and Components
("EF&C") business from ZF TRW on July 1, 2016 for a purchase price of approximately $450 million. EF&C had operating
revenue of $517 million for the year ended December 31, 2017 and $245 million for the six months ended December 31,
52
2016, which was reported within the Company’s Automotive OEM segment. As a result of the EF&C transaction, the
Company recorded $187 million of goodwill and $134 million of amortizable intangible assets primarily related to customer
relationships and technology. Approximately $104 million of the acquired goodwill balance is tax deductible. The fair values
of the intangible assets were estimated based on discounted cash flow and market-based valuation models using Level 2 and
Level 3 inputs and assumptions. The intangible assets are expected to be amortized on a straight-line basis over their
estimated useful lives ranging from 4 to 17 years, with a weighted average amortization period of 16 years.
(3)
Legal Settlement
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a
litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution
of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of
2017 and $80 million in the third quarter of 2017, which was included in operating income.
(4)
Other Income (Expense)
Other income (expense) consisted of the following:
In millions
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on disposal of operations and affiliates . . . . . . . . . . . . . . .
Equity income (loss) in Wilsonart . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on foreign currency transactions, net . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
45
16
1
—
(25)
(1)
36
$
$
38
(13)
(12)
61
9
(2)
81
$
$
52
4
16
(4)
5
5
78
In the fourth quarter of 2012, the Company divested a 51% majority interest in its former Decorative Surfaces segment to
certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). As a result of the transaction, the Company owns
common units (the "Common Units") of Wilsonart International Holdings LLC ("Wilsonart") initially representing
approximately 49% (on an as-converted basis) of the total outstanding equity. CD&R owns cumulative convertible
participating preferred units (the "Preferred Units") of Wilsonart representing approximately 51% (on an as-converted basis)
of the total outstanding equity. The Preferred Units rank senior to the Common Units as to dividends and liquidation
preference, and accrue dividends at a rate of 10% per annum. The ownership interest in Wilsonart is reported using the equity
method of accounting. The Company's proportionate share in income (loss) of Wilsonart is reported in Other income (expense)
in the consolidated statement 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. Equity income (loss) in Wilsonart for the year ended
December 31, 2016 included a $54 million pre-tax gain resulting from a $167 million cash dividend distribution from
Wilsonart which exceeded the Company's equity investment balance. As a result of the dividend distribution, the equity
investment balance in Wilsonart was reduced to zero and any subsequent equity investment income will not be recognized
until the gain is recaptured.
(5)
Income Taxes
On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act
significantly revise the U.S. corporate income tax rules. At December 31, 2017, the Company has not completed the
accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on
the existing deferred tax balances and one-time transition tax. The Company is still analyzing certain aspects of the Act and
refining its calculations, which could potentially affect the measurement of the amounts recorded at December 31, 2017.
53
In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the
enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as
follows:
•
•
•
•
A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign
subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income
tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can
be paid in installments over eight years and, as such, $614 million was recorded as noncurrent income taxes payable
in the statement of financial position. Additionally, as a result of the one-time repatriation provisions of the Act, the
Company expects to repatriate approximately $2 billion of foreign held cash and equivalents and recorded additional
foreign withholding taxes of $53 million in the fourth quarter of 2017.
A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in
2018. Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should be measured using
the enacted tax rate expected to apply in the years in which they are expected to be settled. The Company recorded a
one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets
and liabilities to reflect the impact of lower future U.S. corporate tax rates.
Deductibility of certain executive compensation. The Company recorded a one-time write-off of deferred tax
assets of $11 million related to the non-deductibility of certain performance-based compensation.
Taxation of certain global intangible low-taxed income entities ("GILTI") beginning in 2018. This provision
does not impact the Company in 2017, but will impact the Company in subsequent years and is expected to partially
offset the benefit of the lower U.S. corporate tax rate discussed above.
The provisional amounts recorded for the year ended December 31, 2017 reflect the Company’s best estimate based on
information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement
of estimated amounts.
Provision for income taxes— The components of the provision for income taxes were as follows:
In millions
U.S. federal income taxes:
2017
2016
2015
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,117
(10)
1,107
$
756
(224)
532
Foreign income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit of net operating loss carryforwards . . . . . . . . . . . . . . . .
Total foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
296
102
—
398
106
(28)
78
290
(5)
—
285
90
(34)
56
$
1,583
$
873
$
503
8
511
310
(11)
(48)
251
66
(8)
58
820
Income before taxes for domestic and foreign operations was as follows:
In millions
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
1,806
1,464
3,270
$
$
1,653
1,255
2,908
$
$
1,660
1,059
2,719
54
The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:
U.S. federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of U.S. federal tax law change . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
35.0%
20.1
1.2
(3.5)
(1.7)
0.9
(1.4)
(1.5)
(0.7)
48.4%
35.0%
—
1.3
(3.6)
(2.1)
1.5
(1.4)
—
(0.7)
30.0%
35.0%
—
1.4
(3.1)
(3.3)
2.8
(1.6)
—
(1.1)
30.1%
Prior to the Act, deferred U.S. federal and state income taxes and foreign withholding taxes had not been provided on
substantially all undistributed earnings of international subsidiaries as these earnings were considered permanently invested.
As part of the one-time deemed repatriation provisions of the Act, the Company provided for U.S. tax on substantially all
undistributed earnings of its foreign subsidiaries as of December 31, 2017. Upon repatriation of these earnings to the U.S.,
the Company may be subject to foreign withholding taxes. As of December 31, 2017, the Company had provided for $75
million of foreign withholding taxes related to the expected repatriation of approximately $2 billion of foreign held cash and
equivalents, which includes the $53 million recorded in the fourth quarter of 2017, as discussed above.
Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities at December 31, 2017 and
2016 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) . . . . . . . . . . . .
$
$
2017
2016
Asset
Liability
Asset
Liability
195
31
15
18
45
177
13
507
98
9
—
405
—
99
1,612
(459)
1,153
$
$
(506) $
(3)
(180)
(64)
—
—
—
—
—
—
(25)
—
(19)
(15)
(812)
—
(812) $
240
40
23
23
76
306
6
610
42
13
25
430
—
97
1,931
(454)
1,477
$
$
(716)
(5)
(206)
(79)
—
—
—
—
—
—
—
—
(140)
(16)
(1,162)
—
(1,162)
The valuation allowances recorded at December 31, 2017 and 2016 related primarily to certain net operating loss
carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2017, the Company has
utilized all realizable foreign tax credit carryforwards.
55
At December 31, 2017, 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
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025-2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Do not expire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross carryforwards related to net operating losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Carryforwards Related
to Net Operating Losses
15
17
86
79
24
19
17
17
1,685
1,959
Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the years ended 2017, 2016 and
2015 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
210
42
100
(24)
(53)
10
285
$
$
259
19
126
(97)
(96)
(1)
210
$
$
218
39
54
(41)
(6)
(5)
259
Included in the balance at December 31, 2017 were approximately $254 million of unrecognized tax benefits that, if
recognized, would impact the Company’s effective tax rate.
Settlements during 2017 primarily related to the Company effectively settling with the German Fiscal Authority on issues
identified during its 2009-2011 audit, which primarily related to intercompany transactions. During the fourth quarter of
2016, the Company effectively settled with the Internal Revenue Service on issues identified during its 2012-2013 audit,
which primarily related to deferred gain recognition and foreign tax credits. Based on this agreement, the Company decreased
its unrecognized tax benefits by approximately $96 million.
56
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 $31 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
2014-2017
2016-2017
2012-2017
2014-2017
2013-2017
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, 2017 and 2016 was $25 million and $28 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 proceeded to court with the trial taking
place in the third quarter of 2016. Final decision by the tax court is expected in 2018. Although the court's final decision
cannot be predicted with certainty, the Company believes its position continues to be supportable. Accordingly, no reserve
has been recorded related to this matter.
(6)
Net Income Per Share
Net income per basic share is computed by dividing net income by the weighted-average number of shares outstanding for
the period. Net income per diluted share is computed by dividing net income 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 net income per share was as follows:
In millions except per share amounts
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share—Basic:
Weighted-average common shares. . . . . . . . . . . . . . . . . . . .
Net income per share—Basic. . . . . . . . . . . . . . . . . . . . . . . .
Net income per share—Diluted:
Weighted-average common shares. . . . . . . . . . . . . . . . . . . .
Effect of dilutive stock options and restricted stock units . .
Weighted-average common shares assuming dilution . . . . .
Net income per share—Diluted . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2017
2016
2015
1,687
$
2,035
$
344.1
4.90
344.1
2.7
346.8
4.86
$
$
355.0
5.73
355.0
2.1
357.1
5.70
$
$
1,899
367.9
5.16
367.9
2.2
370.1
5.13
Options that were considered antidilutive were not included in the computation of diluted net income per share. There were
no antidilutive options outstanding as of December 31, 2017 and 2016. There were 0.6 million antidilutive options
outstanding as of December 31, 2015.
57
(7)
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:
In millions
Balance, December 31, 2015 . $
2016 activity:
Acquisitions & divestitures. . .
Foreign currency translation . .
Balance, December 31, 2016 .
2017 activity:
Acquisitions & divestitures. . .
Foreign currency translation . .
Balance, December 31, 2017 . $
Cumulative goodwill
impairment charges,
December 31, 2017 . . . . . . . $
Automotive
OEM
Test &
Measurement
and Electronics
Food
Equipment
Polymers &
Fluids
Welding
Construction
Products
Specialty
Products
Total
277
$
1,355
$
259
$
894
$
261
$
516
$
877
$
4,439
187
(8)
456
—
32
1
(20)
1,336
—
36
—
(10)
249
—
20
(2)
(3)
889
—
30
—
(1)
260
—
12
(1)
(7)
508
—
22
1
(18)
860
1
41
186
(67)
4,558
1
193
488
$
1,372
$
269
$
919
$
272
$
530
$
902
$
4,752
24
$
83
$
60
$
15
$
5
$
7
$
46
$
240
Intangible assets as of December 31, 2017 and 2016 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:
2017
Accumulated
Amortization
Cost
Net
Cost
2016
Accumulated
Amortization
$
1,753
761
623
474
3,611
(1,182) $
(391)
(473)
(453)
(2,499)
$
571
370
150
21
1,112
$
1,744
733
620
461
3,558
(1,060) $
(344)
(432)
(444)
(2,280)
Net
684
389
188
17
1,278
Trademarks and brands . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . .
$
160
3,771
$
—
(2,499) $
160
1,272
$
185
3,743
$
—
(2,280) $
185
1,463
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third
quarter of 2017, 2016 and 2015. The 2017 and 2016 assessments resulted in no impairment charges. In 2015, the Company
recorded a $2 million indefinite-lived intangible asset impairment charge related to a brand in the Polymers & Fluids segment
which had a fair value of $24 million and a carrying value of $26 million. The 2015 impairment was included in
Amortization and impairment of intangible assets in the statement of income.
For the years ended December 31, 2017, 2016 and 2015, amortization expense and impairment of intangible assets was $206
million, $224 million and $233 million, respectively.
The estimated amortization expense of intangible assets for the future years ending December 31 is as follows:
In millions
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185
163
143
124
112
58
(8)
Debt
Short-term 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, 2017 and 2016 consisted of the following:
In millions
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
849
1
—
850
$
$
—
650
2
652
As of December 31, 2017, Short-term debt included commercial paper of $849 million. As of December 31, 2016, Short-
term debt included $650 million related to the 0.90% notes due February 25, 2017, which were repaid on the due date.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-
sized acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit
agreement with a termination date of May 9, 2021 to support the potential issuances of commercial paper. This agreement
replaced the previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0
billion line of credit agreement with a termination date of August 15, 2018. No amounts were outstanding under the new
line of credit agreement at December 31, 2017. As of December 31, 2017, the Company was in compliance with the
financial covenants of the line of credit agreement, which includes a minimum interest coverage ratio. The weighted-
average interest rate on commercial paper was 1.0% and 0.4% at December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Company had unused capacity of approximately $206 million under international debt
facilities.
Long-term debt— 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. Long-term debt at carrying value and fair value as of
December 31, 2017 and 2016 consisted of the following:
2017
2016
Effective
Interest Rate
0.95%
1.98%
6.25%
4.96%
3.43%
1.86%
1.35%
3.54%
2.69%
2.18%
3.13%
4.97%
3.96%
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 . . . . . . . . . .
2.65% notes due November 15, 2026 . . . . . .
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. . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current maturities of long-term debt . .
Total long-term debt . . . . . . . . . . . . . . . . . . .
$
$
Carrying Value
$
— $
649
699
4
348
595
595
696
992
594
586
636
1,081
4
7,479
(1)
7,478
$
Fair Value
— $
649
736
4
361
638
624
734
980
646
702
791
1,183
4
8,052
$
Carrying Value
650
648
698
4
348
520
520
695
991
519
512
636
1,080
6
7,827
(650)
7,177
$
Fair Value
650
656
768
4
365
565
549
728
959
565
618
734
1,114
6
8,281
$
$
The approximate fair values of the Company’s long-term debt, including current maturities, were based on a valuation
model, using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.
59
In 2005, the Company issued $54 million of 4.88% notes due through December 31, 2020 at 100% of face value.
In 2009, the Company issued $700 million of 6.25% redeemable notes due April 1, 2019 at 99.98% of face value.
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. The $650 million of 0.9% notes due February 25, 2017 were repaid on the due date.
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.
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.
In November 2016, the Company issued $1.0 billion of 2.65% notes due November 15, 2026 at 99.685% of face value. Net
proceeds from the November 2016 debt issuance were used to repay commercial paper and for general corporate purposes.
The Company designated the €1.0 billion of Euro notes issued in May 2014 and the €1.0 billion of Euro notes issued in
May 2015 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 Note 11. Stockholders' Equity for additional information
regarding the net investment hedge.
All of the Company's notes listed above represent senior unsecured obligations ranking equal in right of payment.
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
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1
1,348
4
348
595
5,183
7,479
(9)
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. 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 $79 million in 2017,
$77 million in 2016, and $77 million in 2015. In addition to the U.S. plans, the Company also has defined benefit pension
plans in certain other countries, mainly the United Kingdom, Canada, Germany and Switzerland.
60
Summarized information regarding net periodic benefit cost included in the statement of income related to the Company's
significant defined benefit pension and other postretirement benefit plans is as follows:
In millions
Components of net periodic benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . .
Amortization of actuarial (gain) loss. . . . . .
Amortization of prior service cost. . . . . . . .
Total net periodic benefit cost. . . . . . . . . . . . . . .
2017
Pension
2016
2015
Other Postretirement Benefits
2015
2016
2017
$
63
$
62
$
70
$
9
$
9
$
72
(133)
57
92
(144)
44
—
59
$
—
54
$
$
92
(151)
60
1
72
19
(23)
(1)
—
$
4
$
24
(23)
—
(1)
9
$
11
24
(25)
(1)
1
10
The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2016 and MP-2017, to
measure its U.S. pension and other postretirement obligations as of December 31, 2016 and 2017, respectively, which did not
have a significant impact in either period.
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, 2017 and 2016:
In millions
Change in benefit obligation:
Benefit obligation at January 1 . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . .
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and divestitures . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare subsidy received. . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Benefit obligation at December 31 . . . . . . . . . . . . . . .
$
$
Pension
Other Postretirement Benefits
2017
2016
2017
2016
2,562
63
72
2
26
—
(152)
—
88
2,661
$
$
2,462
62
92
2
216
7
(150)
—
(129)
2,562
$
$
551
9
19
12
(5)
—
(41)
1
—
546
$
$
552
9
24
12
(5)
—
(43)
2
—
551
61
In millions
Change in plan assets:
Fair value of plan assets at January 1. . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Fair value of plan assets at December 31 . . . . . . . . . .
Funded status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other immaterial plans . . . . . . . . . . . . . . . . . . . . . . . .
Net asset (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 asset (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
2017
2016
2017
2016
$
351
45
6
12
(41)
—
$
373
(173) $
(5)
(178) $
— $
(4)
(174)
(178) $
(64) $
—
(64) $
342
36
4
12
(43)
—
351
(200)
(5)
(205)
—
(4)
(201)
(205)
(38)
—
(38)
2,487
227
178
2
(152)
90
2,832
171
(65)
106
337
(12)
(219)
106
548
—
548
2,499
184
175
27
$
$
$
$
$
$
$
$
$
$
$
$
$
2,441
274
70
2
(150)
(150)
2,487
$
(75) $
(58)
(133) $
$
131
(12)
(252)
(133) $
$
$
673
—
673
2,207
183
167
25
Company contributions in 2017 included an additional $115 million discretionary pension contribution related to the U.S.
primary pension plan.
Assumptions— The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as
follows:
2017
Pension
2016
2015
Other Postretirement Benefits
2015
2016
2017
Assumptions used to determine benefit
obligations at December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
3.12%
3.54%
3.41%
3.77%
3.95%
3.72%
3.72%
4.30%
4.55%
Assumptions used to determine net periodic
benefit cost for years ended December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
3.41%
5.53%
3.77%
3.95%
6.22%
3.72%
3.70%
6.54%
3.72%
4.30%
6.80%
4.55%
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.
62
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. Beginning in 2017, the Company changed the method used to estimate the service and
interest cost components of net periodic pension and other postretirement benefit costs. The new method provides a more
precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along
the yield curve to the projected cash flows rather than a single weighted-average rate.
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. . . . . . . . . . . . . . . . . . . . . .
6.25%
4.50%
2025
6.00%
4.50%
2023
6.00%
4.50%
2021
2017
2016
2015
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 2017. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in postretirement benefit obligation at December 31, 2017 . . . . . . . . . . .
$
$
1 Percentage-
Point Increase
1 Percentage-
Point Decrease
— $
$
6
(1)
(11)
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 15% to 25% equity securities, 75% to 85% 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, 2017 and 2016, 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.
63
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Equity securities:
$
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
Government securities. . . . . . . . . . . . . . . . .
Corporate debt securities. . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Investment contracts with insurance
companies . . . . . . . . . . . . . . . . . . . . . . . .
Commingled funds:
Collective trust funds . . . . . . . . . . . . . . . . .
Partnerships/private equity interests . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of pension plan assets. . . . . . . . . . . .
Other Postretirement Benefit Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Life insurance policies . . . . . . . . . . . . . . . . . . . .
Total fair value of other postretirement benefit plan
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Equity securities:
$
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
Government securities. . . . . . . . . . . . . . . . .
Corporate debt securities. . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Investment contracts with insurance
companies . . . . . . . . . . . . . . . . . . . . . . . .
Commingled funds:
Collective trust funds . . . . . . . . . . . . . . . . .
Partnerships/private equity interests . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of pension plan assets. . . . . . . . . . . .
Other Postretirement Benefit Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Life insurance policies . . . . . . . . . . . . . . . . . . . .
Total fair value of other postretirement benefit plan
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Total
Level 1
Level 2
Level 3
2017
43
$
34
$
9
$
—
371
943
—
1
1,424
41
9
2,832
2
371
$
$
—
—
—
—
—
—
371
943
—
—
—
34
$
9
1,332
$
2
$
— $
373
$
2
$
— $
Total
Level 1
Level 2
Level 3
2016
82
$
55
$
27
$
1
307
541
19
1
1,478
54
4
2,487
1
350
$
$
1
—
—
—
—
—
307
541
19
—
56
$
894
$
1
$
— $
351
$
1
$
— $
—
—
—
—
—
1
—
1
—
—
—
—
—
—
—
1
1
—
—
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
64
income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities, asset-
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. 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.
Pension assets measured at net asset value include collective trust funds, partnerships/private equity interests and life
insurance policies. Collective trust funds are private funds that are valued 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 in which these assets are invested 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 $26 million to its pension
plans and $5 million to its other postretirement benefit plans in 2018. 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
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2023-2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Pension
Other Postretirement
Benefits
$
159
161
164
167
174
886
35
36
37
37
37
183
(10)
Commitments and Contingencies
Litigation— 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.
Lease Commitments— Rental expense was $120 million, $121 million and $117 million for the years ended December 31
2017, 2016 and 2015. Future minimum lease payments under non-cancelable leases for the years ending December 31 are as
follows:
In millions
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
88
63
45
31
25
61
313
65
(11)
Stockholders' Equity
Preferred Stock— 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.
Share Repurchases— On August 2, 2013, the Company’s Board of Directors authorized a stock repurchase program, which
provided for the repurchase of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the
"2013 Program"). Under the 2013 Program, the Company repurchased approximately 14.9 million shares of its common stock
at an average price of $96.84 during 2015. As of December 31, 2015, there were no authorized repurchases remaining under
the 2013 Program.
On February 13, 2015, the Company's Board of Directors authorized a new stock repurchase program, which provided for the
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, approximately 18.7 million shares of its common stock at an average price of
$107.17 per share during 2016, and approximately 7.1 million shares of its common stock at an average price of $140.56 per
share during 2017. As of December 31, 2017, there were approximately $2.4 billion of authorized repurchases remaining
under the 2015 Program.
Cash Dividends— Cash dividends declared were $2.86 per share in 2017, $2.40 per share in 2016 and $2.07 per share in
2015. Cash dividends paid were $2.73 per share in 2017, $2.30 per share in 2016 and $2.005 per share in 2015.
Accumulated Other Comprehensive Income (Loss)— The changes in accumulated other comprehensive income (loss)
during 2017, 2016 and 2015 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
$
(1,807) $
(1,504) $
(658)
Foreign currency translation adjustments during the period . . . . . . . . . . . . . . . .
Foreign currency translation adjustments reclassified to income . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign currency translation adjustments, net of tax . . . . . . . . . . . . . . . .
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, net of tax . . . . . .
294
2
110
406
96
56
(38)
114
(251)
(1)
(25)
(277)
(67)
43
(2)
(26)
(800)
—
(60)
(860)
(41)
61
(6)
14
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,287) $
(1,807) $
(1,504)
Foreign currency translation adjustments reclassified to income primarily relate to the disposal of operations and were
included in the related gain or loss upon disposal. Pension and other postretirement benefit adjustments reclassified to income
represent the amortization of actuarial gains and losses and prior service cost. Refer to Note 9. Pension and Other
Postretirement Benefits for the amounts included in net periodic benefit cost.
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 pre-tax gain recorded in Accumulated other comprehensive income (loss) related to
the net investment hedge was $81 million and $375 million as of December 31, 2017 and December 31, 2016, respectively.
As of December 31, 2017 and 2016, the ending balance of Accumulated other comprehensive income (loss) consisted of after-
tax cumulative translation adjustment losses of $1.0 billion and $1.4 billion, respectively, and after-tax unrecognized pension
and other postretirement benefits costs of $291 million and $405 million, respectively. The estimated pre-tax unrecognized net
66
benefit cost that will be amortized from Accumulated other comprehensive income (loss) into income in 2018 is $41 million
for pension and other postretirement benefits.
(12)
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 an expiration 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.
Commencing in February 2013, the Company began issuing shares from treasury stock to cover the exercised options and
vested RSUs. Prior to February 2013, the Company generally issued new shares from its authorized but unissued share pool.
As of December 31, 2017, approximately 13 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 . . . . . . . . . . .
$
$
2017
2016
2015
36
(9)
27
$
$
39
(13)
26
$
$
35
(12)
23
The following table summarizes activity related to non-vested RSUs during 2017:
Shares in millions
Unvested, January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
0.7
0.2
(0.3)
—
0.6
Weighted-Average
Grant-
Date Fair Value
$83.39
127.81
74.29
103.95
99.87
The following table summarizes stock option activity for the year ended December 31, 2017:
In millions except exercise price and contractual terms
Under option, January 1, 2017 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired. . . . . . . . . . . . . . . . . . . . . .
Under option, December 31, 2017 . . . . . . . . . .
Exercisable, December 31, 2017 . . . . . . . . . . . .
Number of
Shares
5.3
0.7
(1.4)
(0.1)
4.5
2.9
Weighted-Average
Exercise Price
$68.05
127.95
56.03
117.67
80.88
66.80
Weighted-Average
Remaining
Contractual Term
Aggregate Intrinsic
Value
6.0
4.9
$387
$291
Effective with the 2017 grant, issued RSUs provide for dividend equivalents payable in additional RSUs for dividends that
would have been paid during the vesting period. Accordingly, the fair value of RSUs issued in 2017 is equal to the common
stock fair market value on the date of the grant. For grants prior to 2017, the fair value of RSUs was 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
67
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
0.91-2.61%
22.0%
2.22%
7.2-7.9
2016
0.56-1.86%
24.0%
2.12%
6.9-7.7
2015
0.23-2.25%
23.0%
2.11%
6.9-8.0
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 exercise behavior.
The weighted-average grant-date fair value of stock options granted during 2017, 2016 and 2015 was $26.83, $20.02 and
$20.58 per share, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31,
2017, 2016 and 2015 was $132 million, $89 million and $55 million, respectively. As of December 31, 2017, there was $9
million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over
a weighted-average period of 2.2 years. Exercise of stock options during the years ended December 31, 2017, 2016 and 2015
resulted in cash receipts of $84 million, $84 million and $59 million, respectively. The total fair value of vested stock option
awards during the years ended December 31, 2017, 2016 and 2015 was $13 million, $12 million and $13 million, respectively.
As of December 31, 2017, there was $24 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 1.9 years. The total fair value of vested
RSU awards during the years ended December 31, 2017, 2016 and 2015 was $19 million, $21 million and $20 million,
respectively.
68
(13)
Other Balance Sheet Information
Other balance sheet information at December 31, 2017 and 2016 was as follows:
In millions
Prepaid expenses and other current assets:
Income tax refunds receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value-added-tax receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vendor advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets:
Cash surrender value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses:
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rebates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of pension and other postretirement benefit obligations . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities:
Pension benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
2017
2016
121
70
26
119
336
442
337
184
53
179
1,195
411
205
147
45
16
434
1,258
219
174
489
882
$
$
$
$
$
$
$
$
21
55
20
122
218
442
131
146
73
164
956
379
180
144
45
16
438
1,202
252
201
418
871
69
(14)
Segment Information
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to
senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and
Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The following is a description of the
Company's seven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain
points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for
automotive-related applications.
Food Equipment— This segment is a highly focused and branded industry-leader in commercial food equipment
differentiated by innovation and integrated service offerings.
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.
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.
Polymers & Fluids— This segment is a highly branded supplier to niche markets that require value-added, differentiated
products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and
polymers for auto aftermarket maintenance and appearance.
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 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. Unallocated in 2017 includes the favorable impact from the previously discussed confidential
legal settlement.
70
Segment information for 2017, 2016 and 2015 was as follows:
In millions
Operating revenue:
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income:
$
$
$
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization and impairment of intangible assets:
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant and equipment additions:
$
$
$
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets:
Automotive OEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2017
2016
2015
3,271
2,123
2,069
1,538
1,724
1,672
1,938
(21)
14,314
747
556
464
415
357
399
527
3,465
29
3,494
111
45
92
28
89
33
64
462
147
27
23
17
16
22
45
297
2,402
1,054
2,449
756
2,067
1,196
1,721
11,645
5,135
16,780
$
$
$
$
$
$
$
$
$
$
2,864
2,110
1,974
1,486
1,691
1,609
1,885
(20)
13,599
690
537
372
370
343
361
482
3,155
(91)
3,064
90
45
104
36
92
34
69
470
116
31
25
16
18
20
47
273
2,051
1,013
2,362
701
2,019
1,099
1,599
10,844
4,357
15,201
$
$
$
$
$
$
$
$
$
$
2,529
2,096
1,969
1,650
1,712
1,587
1,885
(23)
13,405
613
498
322
415
335
316
439
2,938
(71)
2,867
76
48
110
37
95
36
75
477
106
37
32
23
20
26
40
284
1,419
1,054
2,448
747
2,034
1,129
1,659
10,490
5,239
15,729
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.
71
Enterprise-wide information for 2017, 2016 and 2015 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2017
2016
2015
6,243
996
7,239
4,102
2,577
396
14,314
$
$
6,176
923
7,099
3,787
2,361
352
13,599
$
$
6,167
928
7,095
3,725
2,197
388
13,405
Operating revenue by geographic region is based on the customers' locations. At December 31, 2017, the Company had
approximately 10% of its total long-lived assets in Germany. There was no single country outside the U.S. with long-lived
assets exceeding 10% of the Company's total long-lived assets in 2016 or 2015. No single customer accounted for more than
5% of consolidated revenues in 2017, 2016 or 2015. Additionally, the Company has thousands of product lines within its
businesses; therefore, providing operating revenue by product line is not practicable.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share:
Three Months Ended
March 31
June 30
September 30
December 31
2017
$ 3,471
2,004
809
536
2016
$ 3,274
1,896
722
468
2017
$ 3,599
2,087
874
587
2016
$ 3,431
1,967
792
525
2017
$ 3,615
2,094
961
640
2016
$ 3,495
2,027
808
535
2017
$ 3,629
2,124
850
(76)
2016
$ 3,399
2,006
742
507
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
1.55
1.54
1.29
1.29
1.70
1.69
1.47
1.46
1.86
1.85
1.51
1.50
(0.22)
(0.22)
1.46
1.45
In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.92 per
diluted share, related to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note 5. Income Taxes for
further information.
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a
litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution
of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of
2017 and $80 million in the third quarter of 2017, which was included in operating income.
72
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
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, 2017. 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, 2017,
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, 2017 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
None.
73
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
"Proposal 1 - Election of Directors" in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
Information regarding the Audit Committee and its Financial Experts is incorporated by reference from the information under
the captions "Proposal 1 - Election of Directors - Board of Directors and Its Committees" and "Audit Committee Report" in
the Company’s Proxy Statement for the 2018 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 "Proposal 1 - Election of Directors - Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company’s Proxy Statement for the 2018 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 "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" in
the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
ITEM 11. Executive Compensation
This information is incorporated by reference from the information under the captions "NEO Compensation," "Proposal 1 -
Election of Directors - Director Compensation," and "Compensation Discussion and Analysis" in the Company’s Proxy
Statement for the 2018 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 "Proposal 1 - Election of Directors -
Ownership of ITW Stock" and "NEO Compensation - Equity Compensation Plan Information" in the Company’s Proxy
Statement for the 2018 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 "Proposal 1 - Election of Directors - Ownership of ITW Stock," "Certain Relationships and Related Party
Transactions" and "Proposal 1 - Election of Directors - Corporate Governance Policies and Practices" in the Company’s
Proxy Statement for the 2018 Annual Meeting of Stockholders.
Information regarding director independence is incorporated by reference from the information under the captions "Proposal
1 - Election of Directors - Corporate Governance Policies and Practices" and "Appendix A - Categorical Standards for
Director Independence" in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
ITEM 14. Principal Accounting Fees and Services
This information is incorporated by reference from the information under the caption "Proposal 2 - Ratification of the
Appointment of Independent Registered Public Accounting Firm" in the Company’s Proxy Statement for the 2018 Annual
Meeting of Stockholders.
74
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 Financial Position
Statement of Changes in Stockholders' Equity
Statement of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
Exhibit
Number
2.1(a)
2.1(b)
3(a)(i)
3(a)(ii)
3(b)
4(a)
4(b)
4(c)
4(d)
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.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Illinois Tool Works Inc.,
filed as Exhibit 3(a)(ii) to the Company’s Form 8-K filed on May 12, 2016 (Commission File No. 1-4797) and
incorporated herein by reference.
By-laws of Illinois Tool Works Inc., as amended and restated as of May 6, 2016, filed as Exhibit 3(b)(i) to the
Company’s Form 8-K filed on May 12, 2016 (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.
75
Exhibit
Number
4(e)
4(f)
4(g)
4(h)
4(i)
10(a)*
10(b)*
10(c)*
10(d)*
10(e)*
10(f)*
10(g)*
10(h)*
10(i)*
10(j)*
10(k)*
10(l)*
10(m)*
10(n)*
10(o)*
Description
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.
Officer’s Certificate dated November 7, 2016, establishing the terms, and setting forth the forms, of the 2.65%
Notes due 2026, filed as Exhibit 4.1 to the Company’s Form 8-K filed on November 10, 2016 (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.
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 June 30, 2015 (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 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.
Form of stock option terms filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on
February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.
Form of restricted stock unit terms filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed on
February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.
76
Exhibit
Number
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
10(w)*
10(x)*
10(y)
21
23
24
31
32
99(a)
Description
Form of performance share unit terms filed as Exhibit 99.3 to the Company's Current Report on Form 8-K filed
on February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.
Form of Performance Cash Grant filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on
February 9, 2017 (Commission File No. 1-4797) and incorporated herein by reference.
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.
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.
First Amendment to the ITW Executive 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.
Five Year Credit Agreement dated as of May 9, 2016 among Illinois Tool Works Inc., the Lenders, JPMorgan
Chase Bank, National Association, as Administrative Agent, and Citibank, N.A., as Syndication Agent filed as
Exhibit 10(a) to the Company’s Form 8-K filed on May 12, 2016 (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.
A description of the capital stock of Illinois Tool Works Inc. is included under Item 8.01 Other Events in the
Company's Report on Form 8-K filed on February 9, 2017 (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, 2017, 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
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, 2017, with the exception of the Officers' Certificates related to 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 2.65% Notes due 2026, 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(c)
through (i) 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.
ITEM 16. Form 10-K Summary
None.
78
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 15th day of February 2018.
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 15th day of February 2018.
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
JAY L. HENDERSON
RICHARD H. LENNY
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).
79
2017 ADJUSTED INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED (UNAUDITED)
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP TO NON-GAAP RECONCILIATIONS (UNAUDITED)
As reported
Discrete tax charge related to 2017 U.S. tax legislation
Confidential legal settlement
As adjusted for the tax charge and legal settlement
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
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
ANNUAL REPORT APPENDIX
Twelve Months Ended
December 31, 2017
4.86
$
(1.90)
0.17
6.59
$
Twelve Months Ended
December 31, 2012
4.72
$
1.34
(0.04)
0.21
3.21
$
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
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 charge is as follows:
Twelve Months Ended
December 31, 2012
Dollars in millions
As reported
Discrete tax charge
As adjusted
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
PROXY PEER GROUP
$
Income Taxes
$
973
(36)
937
Tax Rate
30.3%
(1.1)
29.2%
The 2017 peer group consists of the following 17 public companies, consistent with the peer group included in the Company's Proxy statement:
3M Company
Caterpillar Inc.
Cummins Inc.
Deere & Company
Dover Corporation
Eaton Corporation plc
Emerson Electric Co.
Fortive Corporation
General Dynamics Corporation
Honeywell International Inc.
Ingersoll-Rand plc
Johnson Controls, Inc.
Parker-Hannifin Corporation
PPG Industries, Inc.
Raytheon Company
Rockwell Automation, Inc.
Stanley Black & Decker, Inc.
The total shareholder return peer group average is calculated using a simple average.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
SEGMENT PEER GROUP
Automotive OEM: Actuant Corporation, Allison Transmission Inc, Anixter International Inc., Delphi Technologies PLC and BorgWarner Inc.
Test & Measurement and Electronics: Fortive Corporation, Keysight Technologies, Inc., Mettler-Toledo International Inc., Renishaw plc, Spectris plc and
Thermo Fisher Scientific Inc.
Food Equipment: Welbilt, Inc. and Middleby Corporation
Polymers and Fluids: 3M Company, DowDuPont and Huntsman Corporation
Welding: Kennametal Inc., Lincoln Electric Holdings, Inc. and Colfax Corporation
Construction Products: Carlisle, Crane Co., Ingersoll-Rand plc, Masco Corporation and Stanley Black & Decker, Inc.
Specialty Products: Ball Corporation, Berry Plastics, and Bemis Company, Inc.
Contents
Letter to Shareholders
2017 Financial Highlights and Shareholder Returns Since 2012
Our Differentiated Business Model = Our Competitive Advantage
ITW’s Capital Allocation Framework
Overview of ITW’s Operating Segments
Corporate Executives and Board of Directors
Shareholder Information
1
5
6
7
8
12
INSIDE
BACK
COVER
105 YEARS
OF ENDURING
PERFORMANCE
About ITW
Founded in 1912, ITW (NYSE: ITW) is a global industrial
company centered on a diff erentiated 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 approximately 50,000 dedicated colleagues
around the world thrive in our decentralized, entrepreneurial
culture. In 2017, the company achieved revenues of $14.3 billion,
with roughly half coming from outside North America. To learn
more, please visit www.itw.com.
SHAREHOLDER INFORMATION
ANNUAL MEETING
Friday, May 4, 2018, 10:00 a.m.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
TRANSFER AGENT AND REGISTRAR
Questions regarding stock ownership, dividend payments or change
of address should be directed to the company’s transfer agent:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
http://shareholder.broadridge.com/ITW
Phone Toll Free: 888.829.7424
International: +1.720.399.2177
COMMON STOCK
New York Stock Exchange
Symbol: ITW
TRADEMARKS
Certain trademarks in this publication are owned or licensed
by Illinois Tool Works Inc. or its wholly owned subsidiaries.
CONTACT INVESTOR RELATIONS
For additional assistance: 224.661.7433 or investorrelations@itw.com
VISIT US ON THE WEB
www.itw.com
COMMITTED TO SOCIAL RESPONSIBILITY
Learn about our CSR activities and goals in our
2017 report: http://www.itw-csr.com
STOCK AND DIVIDEND ACTION
Eff ective with the October 10, 2017 payment, the quarterly cash dividend on
ITW common stock was increased to 78 cents per share. ITW’s annual dividend
payment has increased for more than 54 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, Broadridge Corporate Issuer Solutions, Inc.
Located in the company’s corporate headquarters,
the Patent Wall proudly displays a subset of the more
than 17,000 granted and pending ITW patents.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
www.itw.com
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Illinois Tool Works Inc.
2017 Annual Report