Illinois Tool Works Inc.
2019
Annual Report
About ITW Founded in 1912, ITW (NYSE: ITW) is a global
industrial company built around a differentiated and proprietary
business model. The company’s seven industry-leading segments
leverage the ITW Business Model to generate solid growth
with best-in-class margins and returns in markets where
highly innovative, customer-focused solutions are required.
ITW’s approximately 45,000 dedicated colleagues
around the world thrive in the company’s decentralized,
entrepreneurial culture. In 2019, the company achieved
revenues of $14.1 billion, with roughly half coming from
outside North America. To learn more, please visit
www.itw.com.
Contents
1
4
5
6
8
INSIDE BACK COVER
Letter to
The ITW Business Model
ITW Performance
Overview of ITW’s
Corporate Executives
Shareholder
Shareholders
Is a Powerful Source of
Progress Since 2012
Operating Segments
and Board of Directors
Information
Competitive Advantage
To Our Fellow Shareholders
ITW delivered another year of strong financial performance
unique ITW skill to come together as a company and focus
and continued progress in the execution of our enterprise
on what is most important will see us through this global
strategy in 2019. Against a backdrop of an industrial
pandemic crisis and allow us to emerge well-positioned to
demand environment that went from decelerating in the first
resume our journey to ITW’s full-potential performance.
half of 2019 to contracting in the second half, we continued
to execute well on the things within our control. Despite
revenues that were down five percent year on year, we
delivered record GAAP EPS of $7.74, best-in-class operating
To that end, we have determined that for the duration of the
global pandemic crisis, we will focus as a company and in
every one of our divisions on the following two priorities:
margins of 24.1 percent, after-tax ROIC of 28.7 percent1,
1. The health, well-being, and support
and growth in free cash flow of nine percent1. In addition,
of our ITW colleagues, and
we raised our dividend by seven percent and returned
$2.8 billion to shareholders in the form of dividends and
2. Continuing to serve our customers
to the best of our ability.
share repurchases.
Equally important, we continued to make solid progress on
our path to ITW’s full-potential performance through the
execution of our enterprise strategy.
Leveraging the Strength and Resilience of
the ITW Business Model to Navigate the
Unprecedented Challenges of the Present...
These will be our “80” priorities until this crisis is over.
In executing on these priorities over the course of the
coming weeks and months, more than anything we will rely
on ITW’s core values, our decentralized entrepreneurial
culture, and our “flexibility within the framework” operating
model to guide each of our divisions and their leadership
teams in determining how best to implement them in their
specific situations.
As we write this letter, the world is in the throes of a global
There is no question that the issues and uncertainties
pandemic crisis, and measures being implemented by
associated with the coronavirus pandemic will present
governments around the globe to bring it under control are
some challenges for ITW and will have an impact on our
increasing in their scope and intensity almost daily. We are
near-term performance, as will be the case for just about
in a time of unprecedented disruption and uncertainty, both
every company. However, we believe strongly that all the
from a human health and an economic perspective.
work we have done over the last seven years to improve
At ITW, 80/20 thinking and the laser-like focus that it drives
on what is most important at any point in time have served
the company extremely well in times of both opportunity
and challenge for over 30 years. In this time of exceptional
challenge, we have no doubt that our ability to utilize this
our company’s profitability, capital efficiency, and balance
sheet put ITW in a stronger position than many to withstand
the effects of the pandemic, however they unfold, and to
come out the other side well-positioned to continue
on our path to ITW’s full-potential performance.
1 After-tax return on average invested capital (ROIC) and Free Cash Flow are non-GAAP measures. Refer to Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the 2019 Form 10-K for information regarding these non-GAAP measures, including reconciliations to
the most comparable GAAP measures.
I L L I N O I S T O O L W O R K S I N C . 1
...While Remaining Committed to Executing
Our Strategy to Deliver Differentiated
Performance Over the Long Term
The latter half of this premise will certainly be tested over
the coming months. We are confident that together our
company and our people are more than up to the task.
The ITW Business Model is our company’s defining
competitive advantage. It is a powerful and proprietary set
of strategic, operational, and cultural practices that have
been in a state of continual development and evolution inside
the company for over 30 years. For the past seven years,
we have been executing a strategy centered squarely on our
commitment to leveraging the differentiated performance
capability of the ITW Business Model to full potential across
the company. As a result, today, the ITW Business Model is
Management and Governance Developments
A deep and experienced management team and a highly
accomplished Board of Directors are critical components of
ITW’s long-term performance and success. We value and
appreciate them always, and especially during challenging
times such as these. We thank them all for their leadership,
guidance, and dedication to the company.
more powerful and our people are more skilled in applying it
We recognize Juan Valls, who retired as executive vice
than ever before in our history – by a significant margin.
president in 2019 after 30 years of service. We thank Juan
When we launched our enterprise strategy in 2012, our
stated goals were to deliver solid growth with best-in-class
margins and returns. Over the course of the past seven
years, we have made significant progress toward achieving
these goals. In 2019, ITW’s operating margins were the
highest in our proxy peer group, we ranked number two in
our peer group in return on capital performance, and in a
for his many contributions and strong leadership over the
course of his distinguished career and wish him the very
best in his retirement. We also recognize James A. Skinner,
who will retire after serving as a member of our Board of
Directors for 15 years, including three years as our lead
director. We thank Jim for all his guidance, insight, and
many contributions to ITW as a member of our board.
challenging macro environment, we outgrew our markets by
In 2019, we made several executive appointments
one percent1.
Through the execution of our enterprise strategy, our aim
is to position the company to deliver top-tier industrial
sector performance over any five-year period regardless of
the environment. In order to do so, we need to be able to
generate high-quality growth when market conditions are
favorable and be resilient enough to continue to perform
and execute on our long-term strategy when they are not.
including Axel Beck as executive vice president of the
Food Equipment segment, Kenneth Escoe as executive
vice president of the Specialty Products segment, and
Sharon Szafranski as executive vice president of the
Construction Products segment. In addition, Lei Schlitz
transferred from the Food Equipment segment to become
executive vice president of the Automotive OEM segment.
They are all strong and seasoned ITW leaders and we are
excited by what we know they will bring to their new roles.
ITW’s 2023 Annual Performance Targets
~28%
Operating
Margin
~40%
After-Tax
ROIC
3-5%
Organic
Growth
~35%
Incremental
Margin
7-10%
EPS
Growth
100+%
Free Cash Flow
as % of
Net Income
~50%
Dividend
Payout Ratio
1 Based on ITW Management market growth estimates.
2 2 0 1 9 A N N U A L R E P O R T
E. Scott Santi
Christopher A. O’Herlihy
Looking Ahead
In closing, we offer our deepest thanks and admiration
• That we will do everything we can to ensure that we
to our ITW colleagues around the world for the hard
come out the other side ready to resume aggressively
work, dedication, and ingenuity they bring to serving our
executing our long-term strategy and continue on our quest
customers and executing our strategy with excellence each
to firmly establish ITW as one of the world’s best-performing,
and every day. We thank you, our fellow shareholders, for
highest-quality, and most-respected industrial companies.
your continued support and we wish good health to you
and yours.
Sincerely,
This is a time of extraordinary and unprecedented disruption
and, at this moment, it is impossible to determine how it will
all play out. However, in this time of significant uncertainty,
we can promise you three things:
• That the combined strengths of the ITW Business Model,
our dynamic decentralized entrepreneurial culture, and our
people put ITW in a better position than most to deal with
whatever lies ahead.
• That we, along with the other members of our executive
leadership team, will utilize the full extent of our company’s
E. Scott Santi
Chairman & Chief Executive Officer
Christopher A. O’Herlihy
Vice Chairman
considerable capabilities and resources to support our
colleagues and our customers to the best of our ability
March 27, 2020
through this challenge.
I L L I N O I S T O O L W O R K S I N C . 3
The ITW Business Model Is a Powerful
Source of Competitive Advantage
The ITW Business Model is comprised of three elements:
80/20 Front-to-Back defines how we operate. It is a unique
set of proprietary tools and methodologies that our divisions
use to structure and operate their businesses to maximize
the performance, execution, and value-add they provide to
their largest and most profitable customers, and minimize
the costs, complexity, and distractions associated with
serving small customers. Through the application of
ITW’s 80/20 Front-to-Back process, our divisions deliver
best-in-class customer-facing execution, high-quality
organic growth, and superior profitability and return on
capital performance.
Our Decentralized, Entrepreneurial Culture is the key
Customer-Back Innovation drives how we innovate.
to how we execute. Our people are clear about what is
At ITW, we innovate from the customer back, not from the
expected of them with regard to our business model, our
research and development center out. Our divisions partner
strategy, and our values. Within this framework, we empower
with their key customers to create unique solutions that
our business teams to make decisions and customize their
solve difficult technical challenges and improve business
approach in order to maximize the relevance and impact of
performance. The deep capabilities and creativity of our
the ITW Business Model for their specific customers and
people in this regard are evidenced by our portfolio of
end-markets. Our people thrive in ITW’s “flexibility within the
approximately 18,000 granted and pending patents, including
framework” culture; they think and act like entrepreneurs,
more than 1,900 new patent applications filed in 2019.
they are accountable, and they deliver.
2019 Operating Margin by
Segment vs. Peer Average1
ITW
Peers
At ITW, we believe operating margin is the best indicator
of relative competitive advantage, as it incorporates both
the level of value-add in the solutions a business provides
to its customers and the efficiency of its processes to
produce and distribute them.
22%
14%
28%
26%
26%
28%
26%
24%
18%
16%
15%
14%
11%
10%
Automotive OEM
Test &
Measurement
and Electronics2
1 See appendix for segment peer group definition.
Food Equipment
Polymers & Fluids2
Welding
Construction
Products
Specialty Products
2 Test & Measurement and Electronics and Polymers & Fluids exclude 200 bps and 360 bps, respectively, of unfavorable operating margin impact of amortization expense related to intangible assets.
4 2 0 1 9 A N N U A L R E P O R T
ITW Performance Progress Since 2012
Earnings Per Share
Operating Margin
After-Tax ROIC2
13%
CAGR
+820
bps
+1420
bps
$7.74
24.1%
28.7%
$3.21
15.9%
14.5%
20122
2019
20121
2019
2012
2019
Annual Dividend
Total Shareholder Returns
2.8x
$4.28
$1.52
2012
2019
246%
162% 166%
S&P 500
Proxy
Peer Group3
ITW
1 As reported in the 2012 Form 10-K.
2 After-tax return on average invested capital (ROIC) and 2012 Adjusted EPS are non-GAAP measures. Refer to Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2019 Form 10-K and the
appendix included in this Annual Report for information regarding these non-GAAP measures, including reconciliations to
the most comparable GAAP measures.
3 See appendix for proxy peer group definition.
I L L I N O I S T O O L W O R K S I N C . 5
ITW’s
Diversified High-Quality Business Portfolio
ITW’s business portfolio criteria:
3 End-markets with strong
3 Positive long-term
3 Strong and durable
and sustainable
differentiated attributes
macro fundamentals
competitive advantages
with relevance to key
end-market trends
ITW’s
Seven
Operating
Segments
6 2 0 1 9 A N N U A L R E P O R T
Automotive
OEM
Highly focused, global,
niche supplier of solutions
to top-tier OEMs and
their suppliers
Food
Equipment
Test & Measurement
and Electronics
Industry-leading global positions through
Leading global supplier of production
differentiated innovation in commercial
and laboratory testing and assembly
dishwashing, cooking, refrigeration,
equipment, accessories, consumables,
retail, and integrated service offerings
and aftermarket parts and service
2019 revenues
2019 revenues
2019 revenues
$3.1 billion
2019 operating margin
$2.2 billion
2019 operating margin
21.5%
26.4%
$2.1 billion
2019 operating margin
1
27.6%
ITW’s
Diversified High-Quality Business Portfolio
3 Significant potential for
3 Ability to leverage the ITW
ITW to drive above-market
organic growth over the
long term
Business Model to generate
consistent, best-in-class
margins and returns
Polymers
& Fluids
Welding
Construction
Products
Specialty
Products
Specialized adhesives,
Highly focused supplier of value-added
Global provider of innovative fastening
Innovative, value-added
lubricants, and additives
welding equipment and specialty
solutions that improve contractor
solutions for consumer
for industrial- and consumer-
consumables for a variety of commercial,
productivity and building quality in
packaging, product branding,
related end-markets
industrial, and infrastructure applications
residential and commercial construction
and other niche applications
2019 revenues
$1.7 billion
2019 operating margin
2019 revenues
$1.6 billion
2019 operating margin
1
26.4%
27.7%
2019 revenues
$1.6 billion
2019 operating margin
23.6%
2019 revenues
$1.8 billion
2019 operating margin
25.9%
1 Test & Measurement and Electronics and Polymers & Fluids exclude 200 bps and 360 bps, respectively,
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 . 7
Corporate Executives
PICTURED
Michael R. Zimmerman, Sharon A. Szafranski, Axel R. J. Beck, Steven L. Martindale, Mary K. Lawler, Michael M. Larsen, Christopher A. O’Herlihy, E. Scott Santi,
LEFT TO RIGHT
Norman D. Finch Jr., Lei Zhang Schlitz, T. Kenneth Escoe, John R. Hartnett
E. Scott Santi
Chairman & Chief Executive Officer
Christopher A. O’Herlihy
Vice Chairman
Norman D. Finch Jr.
Senior Vice President,
General Counsel & Secretary
Michael M. Larsen
Senior Vice President &
Chief Financial Officer
Mary K. Lawler
Senior Vice President &
Chief Human Resources Officer
Axel R. J. Beck
Executive Vice President,
Food Equipment
T. Kenneth Escoe
Executive Vice President,
Specialty Products
John R. Hartnett
Executive Vice President,
Welding
Steven L. Martindale
Executive Vice President,
Test & Measurement and Electronics
Lei Zhang Schlitz
Executive Vice President,
Automotive OEM
Sharon A. Szafranski
Executive Vice President,
Construction Products
Michael R. Zimmerman
Executive Vice President,
Polymers & Fluids
2019 Board of Directors
Daniel J. Brutto
Retired President,
UPS International
Retired Senior Vice President,
United Parcel Service, Inc.
Susan Crown
Chairman & Chief Executive Officer,
Owl Creek Partners, LLC
James W. Griffith
Retired President &
Chief Executive Officer,
The Timken Company
Jay L. Henderson
Retired Vice Chairman, Client Service,
PricewaterhouseCoopers LLP
Richard H. Lenny
Non-Executive Chairman,
Conagra Brands, Inc.
E. Scott Santi
Chairman & Chief Executive Officer,
Illinois Tool Works Inc.
James A. Skinner
Independent Lead Director,
Illinois Tool Works Inc.
Retired Vice Chairman &
Chief Executive Officer,
McDonald’s Corporation
David B. Smith, Jr.
Executive Vice President for Policy &
Legal Affairs and General Counsel,
Mutual Fund Directors Forum
Pamela B. Strobel
Retired Executive Vice President and
Chief Administrative Officer,
Exelon Corporation
Retired President,
Exelon Business Services Company
Kevin M. Warren
Chief Marketing Officer,
UPS International
Anré D. Williams
Group President,
Global Merchant & Network Services,
American Express Company
8 2 0 1 9 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
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4797
ILLINOIS TOOL WORKS INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
155 Harlem Avenue Glenview Illinois
(Address of Principal Executive Offices)
36-1258310
(I.R.S. Employer
Identification No.)
60025
(Zip Code)
Title of Each Class
Common Stock
1.75% Euro Notes due 2022
1.25% Euro Notes due 2023
0.250% Euro Notes due 2024
0.625% Euro Notes due 2027
2.125% Euro Notes due 2030
1.00% Euro Notes due 2031
3.00% Euro Notes due 2034
Registrant’s telephone number, including area code: (847) 724-7500
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
ITW
Name of Each Exchange on Which Registered
New York Stock Exchange
ITW22
ITW23
ITW24A
ITW27
ITW30
ITW31
ITW34
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2019 was approximately $45.6 billion based on the New York Stock
Exchange closing sales price as of June 30, 2019.
Shares of Common Stock outstanding at January 31, 2020: 318,864,237.
Documents Incorporated by Reference
Portions of the 2020 Proxy Statement for Annual Meeting of Stockholders to be held on May 8, 2020.
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
9
14
14
14
14
15
16
17
38
39
76
76
76
77
77
77
77
77
78
81
82
ITEM 1. Business
General
PART I
Illinois Tool Works Inc. (the "Company" or "ITW") was founded in 1912 and incorporated in 1915. The Company's ticker
symbol is ITW. The Company is a global manufacturer of a diversified range of industrial products and equipment with 84
divisions in 53 countries. As of December 31, 2019, the Company employed approximately 45,000 people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to
senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and
Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. The following is a description of the
Company's seven segments:
Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain
points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for
automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers
market. Products in this segment include:
•
plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.
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, automotive original
equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment
include:
•
•
•
•
•
equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
electronic assembly equipment;
electronic components and component packaging;
static control equipment and consumables used for contamination control in clean room environments; and
pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications
applications.
Welding— This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and
leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array
of industrial and commercial applications. This segment primarily serves the general industrial market, which includes
fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment
manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
arc welding equipment; and
•
• metal arc welding consumables and related accessories.
3
Polymers & Fluids— This segment is a branded supplier to niche markets that require value-added, differentiated products.
Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for
auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial,
MRO and construction markets. Products in this segment include:
•
•
•
•
•
•
•
adhesives for industrial, construction and consumer purposes;
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, general industrial, consumer
durables, industrial capital goods and printing and publishing 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 closures 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. The ITW
Business Model is the Company’s competitive advantage and defines how ITW creates value for its shareholders. It is
comprised of three unique elements:
•
•
ITW’s 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially
introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded
80/20 into a proprietary, holistic business management process that generates significant value for the Company and
its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest
and best opportunities (the “80”) and eliminates cost, complexity and distractions associated with the less profitable
opportunities (the “20”). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in
product availability, quality, and innovation, while generating superior financial performance;
Customer-back Innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation
approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW
businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are
focused on understanding customer needs, particularly those in “80” markets with solid long-term growth
fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive
innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents;
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 and solutions adapted to each
business' customers and end markets.
Enterprise Strategy
In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling
performance potential of the ITW Business Model. 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, and developing a strategy
to replicate that performance across its operations.
ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class
financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the
Company began executing a multi-step approach.
•
•
•
The first step was to narrow the focus and improve the quality of ITW's 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.
Step two, Business Structure Simplification, was implemented to simplify and scale up ITW’s operating structure to
support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of
which were critical to driving accelerated organic growth. ITW now has 84 scaled-up divisions with significantly
enhanced focus on growth investments, core customers and products, and customer-back innovation.
The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering
an average of one percent reduction in spend each year from 2013 through 2019 and continues to be a key contributor
to the Company's ongoing enterprise strategy.
• With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing
for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up
divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best
opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and
returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the same time, these
80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
Path to Full Potential - Finishing the Job
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full
potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage,
but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its
full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
•
•
•
Portfolio discipline
80/20 Front-to-Back practice excellence
Full-potential organic growth
5
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW
Business Model. ITW businesses have the right “raw material” in terms of market and business attributes that best fit the ITW
Business Model and have significant potential to drive above-market organic growth over the long-term.
The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals
and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW’s portfolio
operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or
volatile market environments.
As part of its agenda to finish the job, the Company routinely evaluates its portfolio to ensure it delivers sustainable
differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and
assessing selective high-quality acquisitions to supplement ITW’s long-term growth potential.
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses
with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three
businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share
dilution from divestitures would be offset by incremental share repurchases. Refer to Note 2. Divestitures in Item 8. Financial
Statements and Supplementary Data for more information regarding divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has
true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates
complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers,
and products.
ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the
Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company,
division by division, will produce further customer-facing performance improvement in a number of the Company's divisions
and additional structural margin expansion at the enterprise level.
Full-Potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has
clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential
organic growth in every division, with specific focus on:
•
•
•
"80” focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's
largest and most differentiated product offerings and customer relationships
Customer-Back Innovation - strengthening the Company's commitment to serial innovation and delivering a
continuous flow of differentiated new products to its key customers
Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or
further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Distribution Methods
The Company’s businesses primarily distribute their products directly to industrial manufacturers and through independent
distributors.
6
Backlog
Backlog generally is not considered a significant factor in the Company’s businesses as relatively short delivery periods and
rapid inventory turnover are characteristic of most of their products. Total backlog was $1.5 billion and $1.6 billion as of
December 31, 2019 and 2018, respectively. Due to the predominately short-term nature of the Company's arrangements with
its customers, backlog orders scheduled for shipment beyond calendar year 2020 were not material as of December 31, 2019.
Competition
With operations in 53 countries, the Company offers a wide range of products in a myriad of markets, many of which are
fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area.
The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or
divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller
ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding
segment competes globally with Lincoln Electric and ESAB.
In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product
quality, brand preference and service delivery. Technical capability is also a competitive factor in most segments. The
Company believes that each segment's primary competitive advantages derive from the Company's business model and
decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its
businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational
excellence utilizing the Company's 80/20 Front-to-Back 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.
Intellectual Property
The Company owns approximately 3,600 unexpired U.S. patents and 8,700 foreign patents covering articles, methods and
machines. In addition, the Company has approximately 1,500 applications for patents pending in the U.S. Patent Office and
4,300 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The
Company maintains a patent group for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important; however, the expiration of any one of the
Company's patents would not have a material effect on the Company's results of operations or financial position. The
Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and
efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks,
which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW,
which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the
Automotive OEM segment; Hobart in the Food Equipment segment; Instron in the Test & Measurement and Electronics
segment; Miller in the Welding segment; Rain-X and Permatex in the Polymers & Fluids segment; Paslode in the Construction
Products segment; and Hi-Cone in the Specialty Products segment.
Environmental
The Company believes that its manufacturing plants and equipment are in substantial compliance with all applicable
environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s
capital expenditures, competitive position, financial position or results of operations.
Various legislative and administrative regulations concerning environmental issues have become effective or are under
consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date,
such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows.
7
Employees
The Company employed approximately 45,000 people as of December 31, 2019 and considers its employee relations to be
excellent.
Information About Our Executive Officers
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.
Executive Officers of the Company as of February 14, 2020 were as follows:
Name
Age
Present Position
E. Scott Santi . . . . . . . . 58 Chairman & Chief Executive Officer .
Year
Elected to
Present
Position
2015
Axel Beck . . . . . . . . . . . 54 Executive Vice President . . . . . . . . . . .
2020
Kenneth Escoe . . . . . . . 44 Executive Vice President . . . . . . . . . . .
2020
Norman D. Finch Jr. . . . 55 Senior Vice President, General
Counsel & Secretary . . . . . . . . . . . . . .
John R. Hartnett . . . . . . 59 Executive Vice President . . . . . . . . . . .
Michael M. Larsen . . . . 51 Senior Vice President & Chief
Financial Officer . . . . . . . . . . . . . . . . .
Mary K. Lawler . . . . . . 54 Senior Vice President & Chief Human
Resources Officer. . . . . . . . . . . . . . . . .
Steven L. Martindale . . 63 Executive Vice President . . . . . . . . . . .
Christopher O’Herlihy . 56 Vice Chairman . . . . . . . . . . . . . . . . . . .
Randall J. Scheuneman. 52 Vice President & Chief Accounting
Officer . . . . . . . . . . . . . . . . . . . . . . . . .
Lei Schlitz. . . . . . . . . . . 53 Executive Vice President . . . . . . . . . . .
2017
2012
2013
2014
2008
2015
2009
2015
Sharon Szafranski . . . . . 53 Executive Vice President . . . . . . . . . . .
2020
Michael R. Zimmerman 59 Executive Vice President . . . . . . . . . . .
2015
Other Positions Held During 2015-2019
President and Chief Executive Officer,
2012-2015
Vice President/General Manager, food
equipment businesses, 2011-2016, Group
President, food equipment businesses,
2016-2020
Vice President/General Manager, welding
businesses, 2014-2016, Vice President/
General Manager, specialty products
businesses, 2016-2019, Group President,
specialty products businesses, 2019-2020
Vice President, General Counsel and
Secretary, Sealed Air Corporation, a
global manufacturer of products related to
food safety and security, facility hygiene
and product protection, 2013-2017
Executive Vice President, 2010-2015
Group President, food equipment
businesses, 2011-2015
Vice President/General Manager, food
equipment businesses, 2010-2016, Vice
President/General Manager, test &
measurement and electronics businesses,
2016-2019, Group President, test &
measurement and electronics businesses,
2019-2020
Group President, welding businesses,
2010-2015
8
Available Information
The Company electronically files reports with the Securities and Exchange Commission ("SEC"). 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 Social Responsibility Reports;
Anti-Human Trafficking Disclosure;
Conflict Minerals Policy Statement;
Supplier Code of Conduct;
Government Affairs Information;
Environmental & Sustainability Policy;
Human Rights Policy;
Safety Policy; and
United Kingdom Tax Policy Document.
ITEM 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but
not limited to, those set forth below, which could cause actual results to vary materially from recent results or from
anticipated future results. These risk factors should be considered together with information included elsewhere in this
Annual Report on Form 10-K.
The Company's results are impacted by global economic conditions. Downturns in the markets served by the
Company could adversely affect its businesses, results of operations or financial condition.
The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial
market instability, natural disasters, public health crises, high unemployment, government deficit reduction, sequestration and
other austerity measures impacting the markets the Company serves can adversely affect the Company’s businesses by
reducing demand for the Company's products and services, limiting financing available to the Company's customers, causing
production delays, increasing order cancellations and the difficulty in collecting accounts receivable, increasing price
competition, or increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or
otherwise unable to fulfill their obligations.
The global nature of the Company's operations subjects it to political and economic risks that could adversely affect
its business, results of operations or financial condition.
Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently
operates in 53 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;
9
•
•
•
•
•
•
•
•
•
•
the impact of widespread public health crises;
government embargoes or foreign trade restrictions;
the imposition of duties and tariffs and other trade barriers and retaliatory countermeasures;
government actions impacting international trade agreements;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for expropriation or nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on its ability to enforce legal rights and remedies; and
potentially adverse tax consequences.
The current global geopolitical and trade environment has resulted in raw material inflation and potential for increased
escalation of domestic and international tariffs and retaliatory trade policies. Further changes in U.S. trade policy (including
new or additional increases in duties or tariffs) and additional retaliatory actions by U.S. trade partners could result in a
worsening of economic conditions. Additionally, in early 2020, an outbreak of the coronavirus occurred in China and other
jurisdictions. The extent of the outbreak and its impact on the markets served by the Company and on its operations is
uncertain. A prolonged outbreak could interrupt the operations of the Company and its customers and suppliers. If the
Company is unable to successfully manage these and other risks associated with managing and expanding its international
businesses, the risks could have a material adverse effect on the Company's business, results of operations or financial
condition.
The benefits from the Company’s Enterprise Strategy may not be as expected and the Company's financial results
could be adversely impacted, or the Company may not meet its long-term financial performance targets.
As the Company continues to execute on its Enterprise Strategy initiatives, it remains focused on the core principles of
portfolio discipline, 80/20 Front-to-Back practice excellence, and organic growth. 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 by
the Company’s operating divisions and are active elements of the Enterprise Strategy. Although these activities are expected
to improve future operating margins and organic revenue growth, they are also expected to have a negative impact on the
Company’s overall organic revenue growth in the short term. Additionally, other core activities of the Enterprise Strategy
related to portfolio discipline and organic growth, including customer-back innovation and strategic sales excellence, may not
have the desired impact on future operating results. If the Company is unable to realize the expected benefits from its
Enterprise Strategy initiatives, the Company's financial results could be adversely impacted, or the Company may not meet
its long-term financial performance targets.
The timing and amount of the Company’s share repurchases are subject to a number of uncertainties.
Share repurchases constitute a significant component of the Company’s capital allocation strategy. The Company funds its
share repurchases with free cash flow and short-term borrowings. The amount and timing of share repurchases will be based
on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases
include unfavorable trading market conditions, the price of the Company's common stock, the nature of other investment
opportunities presented to the Company from time to time, the ability to obtain financing at attractive rates and the
availability of U.S. cash.
The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees,
agents or business partners violate anti-bribery, competition, export and import, environmental or other laws.
The Company has a decentralized operating structure under which its individual businesses are allowed significant decision-
making autonomy within the Company’s strategic framework and internal financial and compliance controls. The Company
cannot ensure that its internal controls will always protect against reckless or criminal acts committed by its employees,
agents or business partners that might violate U.S. and/or non-U.S. laws, including anti-bribery, competition, export and
import, and environmental laws. Any such improper actions could subject the Company to civil or criminal investigations,
could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or
could damage its reputation.
10
A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's
operating income.
Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are
realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability
is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and
incurs expenses. Significant long-term fluctuations in relative currency values, and in particular, an increase in the value of
the U.S. Dollar against foreign currencies, has had and could have an adverse effect on profitability and financial condition.
If the Company is unable to successfully introduce new products, its future growth may be adversely affected.
The Company's ability to develop new products based on innovation can affect its competitive position and sometimes
requires the investment of significant time and resources. Difficulties or delays in research, development, production or
commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive
position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.
If the Company is unable to adequately protect its intellectual property, its competitive position and results of
operations may be adversely impacted.
Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets,
copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and
non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights may be
challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or
protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of
intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights or inability to
preserve existing intellectual property rights could adversely impact the Company's competitive position and results of
operations.
The Company's acquisition of businesses could negatively impact its profitability and returns.
The Company has engaged in various acquisitions in the past, and could choose to acquire additional businesses in the future.
Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the
following, any of which could adversely affect the Company's profitability and returns:
•
•
•
•
•
•
The acquired business could under-perform relative to the Company’s expectations and the price paid for it, or not
perform in accordance with the Company’s anticipated timetable.
The acquired business could cause the Company's financial results to differ from expectations in any given fiscal
period, or over the long term.
Acquisition-related earnings charges could adversely impact operating results.
The acquired business could place unanticipated demands on the Company's management, operational resources and
financial and internal control systems.
The Company may assume unknown liabilities, known contingent liabilities that become realized or known
liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions
resulting from the activities of the acquired business. The realization of any of these liabilities or deficiencies may
increase the Company's expenses, adversely affect its financial position or cause noncompliance with its financial
reporting obligations.
As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable
intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize
charges relating to the impairment of these assets.
Divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.
The Company had significant divestiture activity in 2012, 2013 and 2014 in accordance with its portfolio management
initiative, and it divested additional businesses in 2019 as it continues portfolio refinements to maintain portfolio discipline.
The Company has retained certain liabilities directly or through indemnifications made to the buyers against known and
unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental matters, which
could adversely affect the Company's financial results.
11
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 adversely affect the Company's financial condition or results of operations in the
periods recognized.
Disruptions or volatility in global financial markets or changes in the Company's credit ratings could increase the
Company's funding costs or reduce the availability of credit.
Global economic conditions may cause volatility and disruptions in the financial markets. The Company’s continued ability
to meet its cash requirements requires substantial liquidity and access to the financial markets. In addition, the Company’s
borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. If conditions in the
financial markets decline or the Company’s credit ratings are negatively impacted, its funding costs could be increased or the
availability of credit could be diminished.
Raw material price increases and supply shortages could adversely affect results.
The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of
reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in
the past and significant increases could adversely affect the Company's results of operations and profit margins. In particular,
changes in trade policies, the imposition of duties and tariffs, potential retaliatory countermeasures and severe weather events
could adversely impact the price or availability of raw materials. Due to pricing pressure or other factors, the Company may
not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or
its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
Unfavorable tax law changes and tax authority rulings may adversely affect results.
The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax
liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be
adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the
valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes is subject to ongoing audits by
U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from
amounts recorded, future financial results may include unfavorable tax adjustments.
In December 2017, the U.S. government enacted comprehensive tax legislation that included significant changes to the
taxation of business entities. The Company’s accounting for the tax effects of the Act may be subject to change due to
subsequent clarification of the tax law which could adversely affect the Company's operating results or financial condition.
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its
results of operations and cash flows.
The performance of financial markets and interest rates impact the Company's funding obligations under its defined benefit
pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on
plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
Potential adverse outcomes in legal proceedings may adversely affect results.
The Company's businesses expose it to potential toxic tort and other types of product liability claims that are inherent in the
design, manufacture and sale of its products and the products of third-party vendors. The Company currently maintains
insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established
limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance
programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or
more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it
maintains adequate insurance programs, claims could have a material adverse effect on the Company's financial condition,
liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.
12
Uncertainty related to environmental regulation and industry standards, as well as physical risks of climate change,
could impact the Company's results of operations and financial position.
Increased public awareness and concern regarding environmental risks, including global climate change, may result in more
international, regional and/or federal requirements or industry standards to reduce or mitigate global warming and other
environmental risks. These regulations or standards could mandate even more restrictive requirements, such as stricter limits
on greenhouse gas emissions and production of single use plastics, than the voluntary commitments that the Company has
made or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate
legislation, which creates economic and regulatory uncertainty. In addition, the physical risks of climate change may impact
the availability and cost of materials and natural resources, sources and supply of energy, product demand and manufacturing.
If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational
restrictions and compliance requirements upon the Company or its products, or the Company's operations are disrupted due to
physical impacts of climate change, the Company’s business, capital expenditures, results of operations, financial condition
and competitive position could be negatively impacted.
If the Company is unable to protect its information technology infrastructure against service interruptions, data
corruption, cyber-based attacks or network security breaches, or if there is a violation of data privacy laws, there
could be a negative impact on operating results or the Company may suffer financial or reputational damage.
The Company relies on information technology networks and systems, including the Internet, to process, transmit and store
electronic information, and to manage or support a variety of business processes and activities, including procurement,
manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage,
disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components;
power outages; hardware failures; attacks by computer hackers; computer viruses; employee error or malfeasance. In
addition, security breaches could result in unauthorized disclosure of confidential information or personal data belonging to
our employees, partners, customers or suppliers. We are also subject to data privacy laws, including the EU General Data
Protection Regulation, in the various countries in which we operate. If our information technology systems suffer severe
damage, disruption, or shutdown, and business continuity plans do not effectively resolve the issues in a timely manner, or if
we violate data privacy laws, there could be a negative impact on operating results or the Company may suffer financial or
reputational damage.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "believe,"
"expect," "plans," "intends," "may," "strategy," "prospects," "estimate," "project," "target," "anticipate," "guidance,"
"forecast," and other similar words, including, without limitation, statements regarding the expected performance of acquired
businesses and impact of divested businesses, the impact of tariffs and raw material cost inflation, economic and regulatory
conditions in various geographic regions, the timing and amount of share repurchases, the timing and amount of benefits
from the Company's enterprise initiatives, the adequacy of internally generated funds and credit facilities to service debt and
finance the Company's capital allocation priorities, the sufficiency of U.S. generated cash to fund cash requirements in the
U.S., the impact of the recently enacted U.S. tax legislation, the cost and availability of additional financing, the Company's
portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy,
the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of
future goodwill or intangible asset impairment charges, the impact of failure of the Company's employees to comply with
applicable laws and regulations, the impact of foreign currency fluctuations, the outcome of outstanding legal proceedings,
the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax
matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to
differ materially from those anticipated. Important risks that may influence future results include those risks described above.
These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue
reliance on forward-looking statements as a prediction of actual results.
Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation
to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new
information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates
with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-
13
public information or other confidential commercial information. Investors should not assume that ITW agrees with any
statement or report issued by any analyst irrespective of the content of the statement or report.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Due to the Company’s decentralized operating structure and global operations, the Company operates out of a number of
facilities worldwide, none of which are individually significant to the Company or its segments. As of December 31, 2019,
the Company operated approximately 440 plants and office facilities, excluding regional sales offices and warehouse
facilities. Approximately 280 of the facilities were located outside of the United States. Principal foreign countries include
China, Germany, the United Kingdom and France.
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.
ITEM 3. Legal Proceedings
None.
ITEM 4. Mine Safety Disclosures
None.
14
PART II
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Common Stock Data— The Company's common stock is listed on the New York Stock Exchange. There were
approximately 5,513 holders of record of common stock as of January 31, 2020. This number does not include beneficial
owners of the Company's securities held in the name of nominees.
*Assumes $100 invested on 12/31/14 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.
Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.
The 2019 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. 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 spin-off from Danaher Corporation in 2016.
15
Repurchases of Common Stock— On February 13, 2015, 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 "2015 Program"). The 2015 Program was completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the
repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018
Program"). As of December 31, 2019, there were approximately $1.9 billion of authorized repurchases remaining under the
2018 program.
Share repurchase activity under the Company's share repurchase program for the fourth quarter of 2019 was as follows:
In millions except per share amounts
Period
October 2019 . . . . . . . .
November 2019 . . . . . .
December 2019 . . . . . .
Total . . . . . . . . . . . . . . .
Total Number of
Shares Purchased
0.1
0.3
1.8
2.2
Average Price
Paid Per Share
167.78
$
173.98
$
175.67
$
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 Programs
$
$
$
0.1
0.3
1.8
2.2
2,301
2,256
1,946
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. . . .
2019
2018
2017
2016
2015
$
14,109
2,521
$
14,768
2,563
$
14,314
1,687
$
13,599
2,035
7.78
7.74
15,068
7,754
4.14
7.65
7.60
14,870
6,029
3.56
4.90
4.86
16,780
7,478
2.86
5.73
5.70
15,201
7,177
2.40
13,405
1,899
5.16
5.13
15,729
6,896
2.07
In 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.90 per diluted share, related
to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note 6. Income Taxes in Item 8. Financial Statements
and Supplementary Data for further information.
Certain reclassifications of prior year data have been made to conform to current year reporting, including the adoption of
new accounting guidance as discussed below.
In March 2016, the FASB issued authoritative guidance that included several changes to simplify the accounting for stock-
based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and
classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires
that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized
through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits
should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax
benefits recognized in equity under the prior guidance were $29 million 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 $28 million, $10 million and $50 million were included in Income taxes in the
statement of income for the years ended December 31, 2019, 2018 and 2017, respectively. The expected effect on income tax
expense or net cash provided from operating activities related to future stock-based award settlements will vary each period
and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period
presented.
Additional information on the comparability of results is included in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and
equipment with 84 divisions in 53 countries. As of December 31, 2019, the Company employed approximately 45,000
people.
The Company's operations are organized and managed based on similar product offerings and end markets, and are reported
to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and
Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
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. The ITW
Business Model is the Company’s competitive advantage and defines how ITW creates value for its shareholders. It is
comprised of three unique elements:
•
•
•
ITW’s 80/20 Front-to-Back process is the operating system that is applied in every ITW business. Initially
introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded
80/20 into a proprietary, holistic business management process that generates significant value for the Company and
its customers. Through the application of data driven insights generated by 80/20 practice, ITW focuses on its largest
and best opportunities (the “80”) and eliminates cost, complexity and distractions associated with the less profitable
opportunities (the “20”). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in
product availability, quality, and innovation, while generating superior financial performance;
Customer-back Innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation
approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW
businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are
focused on understanding customer needs, particularly those in “80” markets with solid long-term growth
fundamentals, and creating unique solutions to address those needs. These customer insights and learnings drive
innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents;
ITW’s Decentralized, Entrepreneurial Culture enables ITW businesses to be fast, focused, and responsive. ITW
businesses have significant flexibility within the framework of the ITW Business Model to customize their approach
in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to
execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational
structure that, combined with outstanding execution, delivers best-in-class services and solutions adapted to each
business' customers and end markets.
ENTERPRISE STRATEGY
In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling
performance potential of the ITW Business Model. 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, and developing a strategy
to replicate that performance across its operations.
17
ITW determined that solid and consistent above-market organic growth is the core growth engine to deliver world-class
financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the
Company began executing a multi-step approach.
•
•
•
The first step was to narrow the focus and improve the quality of ITW's 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.
Step two, Business Structure Simplification, was implemented to simplify and scale up ITW’s operating structure to
support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of
which were critical to driving accelerated organic growth. ITW now has 84 scaled-up divisions with significantly
enhanced focus on growth investments, core customers and products, and customer-back innovation.
The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering
an average of one percent reduction in spend each year from 2013 through 2019 and continues to be a key contributor
to the Company's ongoing enterprise strategy.
• With the initial portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing
for and accelerating organic growth, reapplying the 80/20 Front-to-Back process to optimize its newly scaled-up
divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best
opportunities to drive organic growth.
ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and
returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the same time, these
80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.
PATH TO FULL POTENTIAL - FINISHING THE JOB
Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full
potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage,
but for the Company to truly finish the job and reach its full potential, every one of its divisions must also be operating at its
full potential. To do so, the Company remains focused on its core principles to position ITW to perform to its full potential:
•
•
•
Portfolio discipline
80/20 Front-to-Back practice excellence
Full-potential organic growth
Portfolio Discipline
The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW
Business Model. ITW businesses have the right “raw material” in terms of market and business attributes that best fit the ITW
Business Model and have significant potential to drive above-market organic growth over the long-term.
The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals
and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW’s portfolio
operates in highly diverse end markets and geographies which makes the Company more resilient in the face of uncertain or
volatile market environments.
As part of its agenda to finish the job, the Company routinely evaluates its portfolio to ensure it delivers sustainable
differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and
assessing selective high-quality acquisitions to supplement ITW’s long-term growth potential.
18
The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses
with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three
businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share
dilution from divestitures would be offset by incremental share repurchases. Refer to Note 2. Divestitures in Item 8. Financial
Statements and Supplementary Data for more information regarding divestitures.
80/20 Front-to-Back Practice Excellence
The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has
true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates
complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers,
and products.
ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the
Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company,
division by division, will produce further customer-facing performance improvement in a number of the Company's divisions
and additional structural margin expansion at the enterprise level.
Full-potential Organic Growth
Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has
clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential
organic growth in every division, with specific focus on:
•
•
•
"80” focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's
largest and most differentiated product offerings and customer relationships
Customer-Back Innovation - strengthening the Company's commitment to serial innovation and delivering a
continuous flow of differentiated new products to its key customers
Strategic Sales Excellence - deploying a high-performance sales function in every division
As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or
further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions.
TERMS USED BY ITW
Management uses the following terms to describe the financial results of operations of the Company:
• Organic business - acquired businesses that have been included in the Company's results of operations for more than
12 months on a constant currency basis.
• Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income,
•
•
assuming variable margins remain the same as the prior period.
Price/cost - represents the estimated net impact of increases or decreases in the cost of materials used in the
Company's products versus changes in the selling price to the Company's customers.
Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated
with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers
and product lines; in the short-term, PLS may result in a decrease in revenue and overhead costs while improving
operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.
Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by
segment represent the current year period versus the comparable period in the prior year.
CONSOLIDATED RESULTS OF OPERATIONS
The Company delivered solid financial results in 2019 despite a contracting industrial demand environment. With the
Company's diversified high-quality business portfolio, highly differentiated ITW Business Model and continued strong
execution on enterprise initiatives throughout the year, the Company grew diluted earnings per share and returned
approximately $2.8 billion to shareholders in the form of dividends and share repurchases in 2019. Additionally, all segments
had operating margin at or above 21.5% for 2019.
19
The Company does not believe that tariffs imposed in the past year have had a material impact on its operating results. The
Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to
mitigate the impact of any raw material cost increases resulting from these tariffs.
In early 2020, an outbreak of the coronavirus occurred in China and other jurisdictions. The extent of the outbreak and its
impact on the markets served by the Company and on its operations is uncertain. A prolonged outbreak could interrupt the
operations of the Company and its customers and suppliers.
The Company presents certain financial measures in fiscal year 2017 excluding the $658 million tax charge related to the "Tax
Cuts and Jobs Act" and the benefit of a favorable $95 million legal settlement. These non-GAAP measures are consistent with
the way management analyzes and assesses the Company's operating performance. The Company believes these non-GAAP
measures enhance investors' understanding of the Company's underlying financial performance, as well as their ability to
compare the Company's financial results and overall performance to that of its peers.
The Company’s consolidated results of operations for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
2019
$ 14,109
$ 3,402
Operating margin %
24.1%
2018
$ 14,768
$ 3,584
(4.5)%
(5.1)%
24.3% (20) bps
Inc (Dec)
Organic
(1.9)%
(1.3)%
10 bps
(0.3)%
(0.1)%
—
— %
(1.4)%
(30) bps
(2.3)%
(2.3)%
—
Total
(4.5)%
(5.1)%
(20) bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
•
•
•
•
•
•
•
Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and
divestitures.
Organic revenue decreased 1.9% primarily driven by a decline in the Automotive OEM, Specialty Products, Welding
and Construction Products segments. Product line simplification activities reduced organic revenue by 60 basis points.
◦
◦
◦
North American organic revenue decreased 1.8% as a decline in the Automotive OEM, Specialty Products,
Welding and Polymers & Fluids segments was partially offset by growth in the Food Equipment, Test &
Measurement and Electronics and Construction Products segments.
Europe, Middle East and Africa organic revenue decreased 2.2% as five segments declined, partially offset by
growth in the Food Equipment and Construction Products segments.
Asia Pacific organic revenue declined 1.6% as a decrease in the Construction Products, Automotive OEM,
Food Equipment and Test & Measurement and Electronics segments was partially offset by an increase in the
Welding, Polymers & Fluids and Specialty Products segments.
Operating income of $3.4 billion decreased 5.1% primarily due to unfavorable foreign currency translation, higher
restructuring expenses and lower organic revenue.
Operating margin of 24.1% decreased 20 basis points. Excluding the unfavorable impact of higher restructuring
expenses of 30 basis points, operating margin increased 10 basis points primarily due to benefits from the Company's
enterprise initiatives that contributed 120 basis points and favorable price/cost of 10 basis points, partially offset by
negative operating leverage of 50 basis points, product mix and higher employee-related expenses.
The effective tax rate for 2019 was 23.3% compared to 24.5% in 2018. The 2019 and 2018 effective tax rates
benefited from the lower U.S. corporate federal tax rate and discrete items. The 2019 effective tax rate benefited from
a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting
primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from
a discrete tax benefit of $37 million in the third quarter related to the release of a valuation allowance against the
deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22 million in the
third quarter related to foreign tax credits. Additionally, the effective tax rate for 2019 and 2018 included $28 million
and $10 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income
Taxes in Item 8. Financial Statements and Supplementary Data for further information.
Diluted earnings per share (EPS) of $7.74, an increase of 1.8%, included a $0.09 gain in 2019 from the disposal of
businesses.
Free cash flow was $2.7 billion for 2019. Refer to the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
20
•
•
•
The Company repurchased approximately 9.8 million shares of its common stock in 2019 for approximately $1.5
billion.
The Company increased the quarterly dividend by 7.0% in 2019. Total cash dividends of approximately $1.3 billion
were paid in 2019.
Adjusted after-tax return on average invested capital was 28.7% for 2019. Refer to the Adjusted After-Tax Return on
Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
2018
$ 14,768
$ 3,584
2017
$ 14,314
$ 3,485
Operating margin %
24.3%
24.3%
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
Total
3.2%
2.8%
—
2.2%
1.2%
(20) bps
(0.1)%
— %
—
—%
0.5%
10 bps
1.1%
1.1%
10 bps
3.2%
2.8%
—
•
•
•
•
•
•
•
•
•
•
•
Operating revenue increased due to an increase in organic revenue and the favorable effect of foreign currency
translation.
Organic revenue grew 2.2% primarily due to penetration gains, higher end market demand and product innovation.
Product line simplification activities reduced organic revenue growth by 70 basis points.
◦
◦
◦
North American organic revenue increased 4.0% as all seven segments had revenue growth.
Asia Pacific organic revenue grew 0.4% primarily driven by growth in the Welding, Test & Measurement and
Electronics, Food Equipment and Polymers & Fluids segments, partially offset by a decline in the Specialty
Products, Automotive OEM and Construction Products segments.
Europe, Middle East and Africa organic revenue decreased 0.2% primarily driven by the Automotive OEM,
Specialty Products and Polymers & Fluids segments.
In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a
litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the
execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the
second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.
Operating income of $3.6 billion increased 2.8%. Excluding the favorable impact of the 2017 confidential legal
settlement, operating income would have increased 5.7%.
Operating margin of 24.3% was flat with the prior year. Excluding the 60 basis points of favorability from the 2017
confidential legal settlement, operating margin increased 60 basis points primarily due to the benefits of the
Company's enterprise initiatives that contributed 110 basis points and positive operating leverage of 50 basis points,
partially offset by unfavorable price/cost of 50 basis points and higher freight and employee-related expenses.
The effective tax rate was 24.5% and 48.4% for 2018 and 2017, respectively. Included in the effective tax rate for
2017 was a one-time additional income tax expense of $658 million related to the enactment of the "Tax Cuts and Jobs
Act" in the United States. Excluding the tax charge of $658 million, the 2017 effective tax rate would have been
28.3%. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further
information.
Diluted earnings per share (EPS) of $7.60 increased 56.4%. Excluding the 2017 unfavorable impact of $1.90 for the
previously discussed one-time tax charge and the favorable impact of $0.17 for the confidential legal settlement, EPS
increased 15.3%.
Free cash flow was $2.4 billion for 2018. Refer to the Cash Flow section of Liquidity and Capital Resources for a
reconciliation of this non-GAAP measure.
The Company repurchased approximately 13.9 million shares of its common stock in 2018 for approximately $2.0
billion.
The Company increased the quarterly dividend by 28.2% in 2018. Total cash dividends of approximately $1.1 billion
were paid in 2018.
Adjusted after-tax return on average invested capital was 28.2%, an increase of 390 basis points, primarily due to the
new U.S. tax rules and regulations. Refer to the Adjusted After-Tax Return on Average Invested Capital section of
Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.
21
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as
follows:
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . $
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
2019
2018
2017
$
$
$
$
$
$
3,063
2,188
2,121
1,638
1,669
1,625
1,825
(20)
14,109
659
578
542
453
381
383
472
2019
3,338
2,214
2,171
1,691
1,724
1,700
1,951
(21)
14,768
Operating Income
2018
751
572
523
474
369
414
522
3,468
(66)
3,402
$
3,625
(41)
3,584
$
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
20
3,485
2017
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.
22
The results of operations for the Automotive OEM segment for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2019
3,063
659
21.5%
$
$
2018
3,338
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
Total
(8.2)%
751
(12.2)%
22.5% (100) bps
(5.4)%
(7.0)%
(40) bps
—%
—%
—
— %
(2.6)%
(60) bps
(2.8)%
(2.6)%
—
(8.2)%
(12.2)%
(100) bps
•
•
•
Operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.
Organic revenue declined 5.4% versus worldwide auto builds which decreased 6%. Auto builds for North America,
Europe and China, where the Company has a higher concentration of revenue as compared to other geographic regions,
declined 6%. Product line simplification activities reduced organic revenue by 120 basis points. Additionally, organic
revenue was negatively impacted by approximately 100 basis points due to unexpected customer shutdowns in North
America in the second half of 2019.
◦
◦
◦
North American organic revenue decreased 7.8% compared to North American auto builds which were down
4% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 8%.
Additionally, 2019 was negatively impacted by unexpected customer shutdowns.
European organic revenue declined 4.5% compared to European auto builds which declined 4% in 2019 due to
customer mix.
Asia Pacific organic revenue declined 2.2% in 2019. China organic revenue declined 1.0% versus Chinese
auto builds which declined 8% in 2019.
Operating margin was 21.5% in 2019. The decrease of 100 basis points was primarily due to negative operating
leverage of 90 basis points, unfavorable price/cost of 60 basis points, higher restructuring expenses and product mix,
partially offset by benefits from the Company's enterprise initiatives.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2018
3,338
751
22.5%
$
$
2017
3,271
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
2.0%
747
0.5%
22.8% (30) bps
— %
(2.0)%
(40) bps
—%
—%
—
—%
0.6%
10 bps
2.0%
1.9%
—
Total
2.0%
0.5%
(30) bps
•
•
•
Operating revenue increased due to the favorable effect of foreign currency translation.
Organic revenue was flat compared to worldwide auto builds which declined 1%. Product line simplification activities
reduced organic revenue growth by 120 basis points.
◦
◦
◦
North American organic revenue increased 3.0% compared to North American auto builds which declined 1%.
Auto builds for the Detroit 3, where the Company has higher content, were flat.
European organic revenue declined 2.7% compared to European auto builds which declined 1% due to
customer mix. Organic revenue was negatively impacted by the new emissions testing requirements in Europe
which disrupted auto production in the second half of 2018.
Asia Pacific organic revenue decreased 0.7%. China organic revenue grew 2.6% versus Chinese auto builds
which declined 4%, as auto production in China softened during the second half of 2018.
Operating margin was 22.5% in 2018. The decrease of 30 basis points was primarily due to unfavorable price/cost of
130 basis points, partially offset by benefits from the Company's enterprise initiatives.
23
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 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2019
2,188
578
26.4%
$
$
2018
2,214
572
25.8%
Inc (Dec)
Organic
(1.2)%
1.1 %
60 bps
1.1%
4.5%
90 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
— %
(1.2)%
(30) bps
(2.3)%
(2.2)%
—
Total
(1.2)%
1.1 %
60 bps
•
•
•
Operating revenue declined due to the unfavorable effect of foreign currency translation, partially offset by higher organic
revenue.
Organic revenue increased 1.1% as equipment organic revenue decreased 0.2% and service organic revenue increased
3.5%.
◦
North American organic revenue grew 1.1%. Equipment organic revenue declined 0.4% primarily driven by
lower demand in the restaurant and institutional end markets, partially offset by higher demand in food retail.
Service organic revenue increased 3.6%.
International organic revenue grew 1.1% as equipment organic revenue increased 0.2% primarily due to higher
demand in the European warewash, cooking and retail end markets, partially offset by lower demand in Asia.
Service organic revenue increased 3.5%.
◦
Operating margin of 26.4% in 2019 increased 60 basis points primarily driven by benefits from the Company's enterprise
initiatives, favorable price/cost of 40 basis points and positive operating leverage of 30 basis points, partially offset by
product mix, higher employee-related expenses and higher restructuring expenses.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2018
2,214
572
25.8%
$
$
2017
2,123
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
4.3%
556
2.9%
26.2% (40) bps
2.8%
1.0%
(50) bps
—%
—%
—
—%
0.3%
10 bps
1.5%
1.6%
—
Total
4.3%
2.9%
(40) bps
•
•
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
Organic revenue increased 2.8% as equipment and service organic revenue increased 3.2% and 2.1%, respectively.
◦
North American organic revenue increased 3.5%. Equipment organic revenue grew 4.6% as higher end market
demand in cooking, refrigeration and warewash was offset by lower end market demand in food retail. Service
organic revenue grew 1.9%.
24
◦
International organic revenue increased 1.9%. Equipment organic revenue grew 1.8% primarily due to higher
demand in the European warewash and cooking end markets, partially offset by lower end market demand in
refrigeration. Service organic revenue increased 2.4%.
•
Operating margin of 25.8% in 2018 declined 40 basis points primarily due to the unfavorable impact of product mix and
higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and positive
operating leverage of 60 basis points.
TEST & MEASUREMENT AND ELECTRONICS
This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair,
and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this
segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as
equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily
serves the electronics, general industrial, automotive original equipment manufacturers and tiers, industrial capital goods, energy
and consumer durables markets. Products in this segment include:
• equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
• electronic assembly equipment;
• electronic components and component packaging;
• static control equipment and consumables used for contamination control in clean room environments; and
• pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications applications.
The results of operations for the Test & Measurement and Electronics segment for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2019
2,121
542
25.6%
$
$
2018
2,171
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(2.3)%
3.7 %
523
24.1% 150 bps
(0.3)%
5.7 %
140 bps
(0.2)%
— %
10 bps
— %
(0.2)%
—
(1.8)%
(1.8)%
—
Total
(2.3)%
3.7 %
150 bps
•
•
•
•
Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and a
divestiture.
Operating revenue for 2019 included $58 million related to the business divested in 2019.
Organic revenue decreased 0.3% in 2019.
◦
◦
Organic revenue for the test and measurement businesses decreased 0.8% primarily driven by lower semi-
conductor end market demand in North America. Excluding semi-conductor, the test and measurement
businesses increased 3.5%. Instron, where demand is more closely tied to the capital spending environment, had
organic revenue growth of 6.4%.
Electronics organic revenue grew 0.4%. The other electronics businesses, which include the contamination
control, static control and pressure sensitive adhesives businesses, grew 1.5% primarily due to growth in North
America and Asia, partially offset by a decline in Europe. The electronics assembly businesses decreased 1.4%
primarily due to lower demand in Asia.
Operating margin of 25.6% in 2019 increased 150 basis points primarily driven by benefits from the Company's enterprise
initiatives, lower intangible asset amortization expense and favorable price/cost of 50 basis points.
25
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2018
2,171
523
24.1%
$
$
2017
2,069
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
4.9%
464
12.7%
22.4% 170 bps
3.5%
11.3%
170 bps
—%
—%
—
—%
—%
—
1.4%
1.4%
—
Total
4.9%
12.7%
170 bps
•
•
•
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
Organic revenue increased 3.5% in 2018.
◦
◦
Organic revenue for the test and measurement businesses increased 5.5% with growth in all major regions
primarily due to higher semi-conductor end market demand. Instron, where demand is more closely tied to the
capital spending environment, had organic revenue growth of 7.1%.
Electronics organic revenue grew 1.2%. The electronics assembly businesses declined 4.3% due to lower
demand across North America and Europe. The other electronics businesses, which include the contamination
control, static control and pressure sensitive adhesives businesses, grew 5.0% primarily due to higher semi-
conductor end market demand in North America.
Operating margin was 24.1% in 2018. The increase of 170 basis points was primarily driven by positive operating
leverage of 90 basis points and benefits from the Company's enterprise initiatives.
WELDING
This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology.
Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and
commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and
other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and
industrial capital goods markets. Products in this segment include:
• arc welding equipment; and
• metal arc welding consumables and related accessories.
The results of operations for the Welding segment for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2019
1,638
453
27.7%
$
$
2018
1,691
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(3.1)%
474
(4.4)%
28.0% (30) bps
(1.2)%
(2.1)%
(20) bps
(1.1)%
(0.4)%
20 bps
— %
(1.7)%
(50) bps
(0.8)%
(0.2)%
20 bps
Total
(3.1)%
(4.4)%
(30) bps
•
•
•
Operating revenue decreased due to lower organic revenue, the impact of divestiture activity and the unfavorable effect of
foreign currency translation.
Operating revenue for 2019 included $62 million related to the business divested in 2019.
Organic revenue decreased 1.2% as equipment declined 2.6%, partially offset by growth in consumables of 0.8%.
◦
◦
North American organic revenue declined 1.1% as a decrease in the industrial end markets was partially offset by
growth in the commercial and oil and gas end markets.
International organic revenue decreased 1.6% primarily due to a decline in Europe, partially offset by higher
demand in Asia in the oil and gas end markets.
26
•
Operating margin of 27.7% decreased 30 basis points compared to the prior year primarily driven by higher restructuring
expenses of 50 basis points, product mix, negative operating leverage of 20 basis points and higher employee-related
expenses, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 70 basis points.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2018
1,691
474
28.0%
$
$
2017
1,538
9.9%
415
14.3%
27.0% 100 bps
9.7%
13.1%
80 bps
—%
—%
—
—%
1.0%
20 bps
0.2%
0.2%
—
Total
9.9%
14.3%
100 bps
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
•
•
•
Operating revenue increased primarily due to higher organic revenue.
Organic revenue grew 9.7% driven by growth in equipment of 11.0% and consumables of 7.9%. Organic revenue grew
primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture, infrastructure
and mining, in the commercial end markets related to construction, light fabrication and farm and ranch customers, and in
the oil and gas end markets.
◦
◦
North American organic revenue increased 10.6% primarily due to 14.7% and 5.8% growth in the industrial and
commercial end markets, respectively.
International organic revenue increased 5.7% primarily due to higher demand in the oil and gas end markets.
Operating margin was 28.0% in 2018. The increase of 100 basis points was primarily due to positive operating leverage of
150 basis points and benefits from the Company's enterprise initiatives, partially offset by higher freight and employee-
related expenses.
POLYMERS & FLUIDS
This segment is a branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment
produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance
and appearance. This segment primarily serves the automotive aftermarket, general industrial, MRO and construction markets.
Products in this segment include:
•
•
•
•
•
•
•
adhesives for industrial, construction and consumer purposes;
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 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
Operating margin %
$
$
2019
1,669
381
22.8%
$
$
2018
1,724
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(3.2)%
3.1 %
369
21.4% 140 bps
—%
7.9%
170 bps
(0.4)%
(0.1)%
—
— %
(1.5)%
(30) bps
(2.8)%
(3.2)%
—
Total
(3.2)%
3.1 %
140 bps
•
Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation.
27
•
•
Organic revenue was flat as growth in the polymers businesses was offset by declines in the automotive aftermarket and
fluids businesses.
◦
◦
◦
Organic revenue for the automotive aftermarket businesses declined 0.7% primarily due to lower demand in the
tire repair businesses in North America and the additives businesses in Europe, partially offset by stronger
demand in the car care businesses in North America.
Organic revenue for the polymers businesses increased 2.4% primarily driven by growth in Asia and North
America, primarily in the heavy industrial end markets.
Organic revenue for the fluids businesses decreased 2.0% primarily due to a decline in the industrial
maintenance, repair, and operations end markets in North America.
Operating margin of 22.8% increased 140 basis points primarily due to the net benefits from the Company's enterprise
initiatives and cost management, partially offset by higher restructuring expenses.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2018
1,724
369
21.4%
$
$
2017
1,724
357
20.7%
Inc (Dec)
Organic
—%
3.3%
70 bps
1.0%
2.1%
20 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(0.4)%
(0.2)%
—
—%
1.7%
40 bps
(0.6)%
(0.3)%
10 bps
Total
—%
3.3%
70 bps
•
•
•
Operating revenue was flat as an increase in organic revenue was offset by the unfavorable effect of foreign currency
translation and a divestiture.
Organic revenue increased 1.0% as higher demand in North America was partially offset by lower demand in Europe.
◦
◦
◦
Organic revenue for the automotive aftermarket businesses grew 2.3% as stronger demand in the car care and tire
repair businesses in North America was partially offset by a decline in the engine and body repair businesses.
Organic revenue for the polymers businesses increased 0.9% primarily driven by an increase in North America
and South America, partially offset by a decline in Europe.
Organic revenue for the fluids businesses declined 1.1% primarily due to decreased demand in Europe and South
America, partially offset by growth in the industrial maintenance, repair, and operations end markets in North
America.
Operating margin of 21.4% increased 70 basis points primarily driven by benefits from the Company's enterprise
initiatives, lower restructuring expenses and positive operating leverage of 30 basis points, partially offset by unfavorable
price/cost of 100 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.
28
The results of operations for the Construction Products segment for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2019
1,625
383
23.6%
$
$
2018
1,700
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(4.4)%
414
(7.4)%
24.3% (70) bps
(1.0)%
(3.1)%
(50) bps
—%
—%
—
— %
(1.2)%
(30) bps
(3.4)%
(3.1)%
10 bps
Total
(4.4)%
(7.4)%
(70) bps
•
•
•
Operating revenue decreased in 2019 due to the unfavorable effect of foreign currency translation and lower organic
revenue.
Organic revenue declined 1.0% in 2019.
◦
◦
North American organic revenue was flat as an increase of 1.9% in the United States residential end markets was
offset by a decline of 3.2% in the commercial end markets and a decline in Canada.
International organic revenue declined 1.8%. Asia Pacific organic revenue decreased 5.1% primarily due to a
decline in Australia and New Zealand across all end markets. European organic revenue increased 1.3% driven
by growth in continental Europe.
Operating margin of 23.6% decreased 70 basis points primarily driven by unfavorable price/cost of 40 basis points, higher
restructuring expenses, product mix and negative operating leverage of 10 basis points, partially offset by benefits from
the Company's enterprise initiatives.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Operating revenue
Operating income
$
$
Operating margin %
2018
1,700
414
24.3%
$
$
2017
1,672
399
23.9%
Inc (Dec)
Organic
1.6%
3.6%
40 bps
1.2%
3.1%
40 bps
Components of Increase (Decrease)
Acquisition/
Divestiture
Restructuring
Foreign
Currency
—%
—%
—
—%
0.3%
10 bps
0.4%
0.2%
(10) bps
Total
1.6%
3.6%
40 bps
•
•
•
Operating revenue increased due to higher organic revenue and the favorable effect of foreign currency translation.
Organic revenue increased 1.2% in 2018.
◦
◦
North American organic revenue grew 1.6% as growth in the residential end markets of 3.2% was partially offset
by a decline in the commercial end markets of 5.7%.
International organic revenue increased 0.9%. European organic revenue increased 2.7% primarily due to growth
in continental Europe and the Nordic countries. Asia Pacific organic revenue declined 0.8% primarily due to a
decrease in the Australia and New Zealand retail end markets in the second half of the year.
Operating margin was 24.3% in 2018. The increase of 40 basis points was primarily driven by the net benefits of the
Company's enterprise initiatives and cost management of 110 basis points and positive operating leverage of 20 basis
points, partially offset by unfavorable price/cost of 90 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, general industrial, consumer durables, industrial capital goods and printing
and publishing 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;
29
• product coding and marking equipment and related consumables;
• plastic and metal closures and components for appliances;
• airport ground support equipment; and
• components for medical devices.
The results of operations for the Specialty Products segment for 2019, 2018 and 2017 were as follows:
2019 compared to 2018
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2019
1,825
472
25.9%
$
$
2018
1,951
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
(6.5)%
(9.7)%
522
26.8% (90) bps
(4.1)%
(7.6)%
(100) bps
(0.6)%
— %
20 bps
— %
(0.5)%
(10) bps
(1.8)%
(1.6)%
—
Total
(6.5)%
(9.7)%
(90) bps
•
•
•
•
Operating revenue decreased in 2019 due to lower organic revenue, the unfavorable effect of foreign currency translation
and the impact of divestiture activity.
Operating revenue for 2019 included $14 million related to the businesses divested in 2019.
Organic revenue decreased 4.1% in 2019. Consumables declined 5.8% primarily due to lower demand in North America
and Europe. Equipment sales increased 2.2% primarily due to higher demand in North America, partially offset by a
decline in Asia. Product line simplification activities reduced organic revenue by 100 basis points.
◦
◦
North American organic revenue decreased 3.1% primarily due to a decrease in the specialty films, labels and
appliance businesses, partially offset by growth in the ground support equipment business and consumer
packaging businesses.
International organic revenue decreased 5.6% primarily due to a decline in the specialty films, graphics,
appliance and foils businesses in Europe.
Operating margin of 25.9% decreased 90 basis points primarily due to negative operating leverage of 90 basis points,
product mix and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives.
2018 compared to 2017
Dollars in millions
For the Years Ended
December 31,
Components of Increase (Decrease)
Operating revenue
Operating income
$
$
Operating margin %
2018
1,951
522
26.8%
$
$
2017
1,938
Inc (Dec)
Organic
Acquisition/
Divestiture
Restructuring
Foreign
Currency
0.7 %
527
(0.8)%
27.2% (40) bps
(0.4)%
(2.5)%
(60) bps
(0.1)%
(0.1)%
—
—%
0.6%
20 bps
1.2%
1.2%
—
Total
0.7 %
(0.8)%
(40) bps
•
•
•
Operating revenue increased due to the favorable effect of foreign currency translation.
Organic revenue decreased 0.4% as consumables declined 2.9%, partially offset by growth in equipment sales of 9.9%.
Product line simplification activities reduced organic revenue growth by 130 basis points.
◦
◦
North American organic revenue grew 1.8% primarily due to increased demand in the consumer packaging and
ground support businesses, partially offset by a decline in the labels, appliance and plastic films businesses.
International organic revenue decreased 3.8% primarily due to a decline in the graphics, appliance and plastic
films businesses in Europe and Asia Pacific.
Operating margin of 26.8% in 2018 decreased 40 basis points primarily driven by the unfavorable impact of product mix,
higher freight and employee-related expenses, and unfavorable price/cost of 20 basis points, partially offset by benefits
from the Company's enterprise initiatives and lower restructuring expenses.
30
OTHER FINANCIAL HIGHLIGHTS
•
•
•
•
Interest expense was $221 million in 2019, $257 million in 2018 and $260 million in 2017. Interest expense in 2019
was $36 million lower than the previous year primarily due to the repayment of the $700 million notes due April 1,
2019 and the $650 million notes due March 1, 2019. Interest expense in 2018 was $3 million lower than 2017
primarily due to lower outstanding commercial paper in 2018.
Other income (expense) was income of $107 million in 2019, $67 million in 2018 and $45 million in 2017. The
income in 2019 increased $40 million compared to the previous year primarily due to a net pre-tax gain on the
disposal of operations and affiliates of $44 million in 2019. The income in 2018 increased $22 million compared to
2017 primarily due to other net periodic benefit income related to defined benefit pension and other postretirement
plans and lower foreign currency translation losses.
The effective tax rate was 23.3% in 2019, 24.5% in 2018, and 48.4% in 2017. The 2019 effective tax rate benefited
from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment
resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate
benefited from a discrete tax benefit of $37 million in the third quarter related to the release of a valuation allowance
against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22
million in the third quarter related to foreign tax credits. 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". Additionally,
the effective tax rate for 2019, 2018 and 2017 included discrete tax benefits of $28 million, $10 million and $50
million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes
in Item 8. Financial Statements and Supplementary Data for further information.
The impact of the Euro and other foreign currencies against the U.S. Dollar decreased operating revenue and income
before taxes by approximately $339 million and $84 million in 2019 versus 2018, respectively. The impact of the
Euro and other foreign currencies against the U.S. Dollar increased operating revenue and income before taxes by
approximately $150 million and $37 million in 2018 versus 2017, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1. Description of Business and Summary of
Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data.
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
$2.0 billion of cash and equivalents on hand as of December 31, 2019 and also maintains strong access to public debt
markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital
allocation priorities, which include:
•
•
•
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.
31
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, 2019, 2018 and 2017 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). . . .
Proceeds from sale of operations and affiliates . . . . . . . . . . . . . .
Net proceeds (repayments) of debt . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and equivalents . . . . . .
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . .
$
$
$
$
2019
2018
2017
2,995
(326)
2,669
$
$
(1,321) $
(1,500)
(4)
120
422
100
(9)
477
$
2,811
(364)
2,447
$
$
(1,124) $
(2,000)
—
1
(851)
49
(112)
(1,590) $
2,402
(297)
2,105
(941)
(1,000)
(3)
2
197
117
145
622
Free cash flow for the year ended December 31, 2017 included the impact of an additional $115 million discretionary pension
contribution related to the U.S. primary pension plan.
Stock Repurchase Programs
On February 13, 2015, 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 "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, approximately 7.1 million shares of its common stock at an average price of $140.56 per share during
2017, approximately 13.9 million shares of its common stock at an average price of $143.66 per share during 2018 and
approximately 3.1 million shares of its common stock at an average price of $143.23 per share during 2019. The 2015
Program was completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the
repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018
Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an
average price of $158.11 per share during 2019. As of December 31, 2019, there were approximately $1.9 billion of
authorized repurchases remaining under the 2018 program.
32
Adjusted After-Tax Return on Average Invested Capital
The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its
operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a
meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used
by other companies to calculate ROIC. For comparability, the Company excluded the third quarter discrete tax benefit of $21
million from the effective tax rate for the year ended December 31, 2019. Additionally, the Company excluded the third
quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. The
Company also excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal
settlement from the calculation of ROIC for the year ended December 31, 2017. 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. 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, 2019, 2018, and 2017 was as follows:
Dollars in millions
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Legal settlement income . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income after taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Invested capital:
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total invested capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average invested capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted after-tax return on average invested capital. . . . . . .
$
$
$
$
$
2019
2018
2017
3,402
$
3,584
$
—
3,402
24.0%
(815)
2,587
2,461
1,164
280
1,729
5,343
(1,689)
(481)
8,807
9,028
28.7%
$
$
$
$
—
3,584
24.9%
(893)
2,691
2,622
1,318
—
1,791
5,717
(1,795)
(519)
9,134
9,533
28.2%
$
$
$
$
3,485
(95)
3,390
28.3%
(958)
2,432
2,628
1,220
—
1,778
6,024
(1,848)
21
9,823
10,005
24.3%
ROIC increased 50 basis points for the twelve month period ended December 31, 2019 compared to the prior year period as a
result of a 5.3% decrease in average invested capital versus a 3.9% decrease in after-tax operating income. ROIC increased
390 basis points in 2018 versus 2017 primarily related to the new U.S. tax rules and regulations.
A reconciliation of the 2019 effective tax rate excluding the third quarter discrete tax benefit of $21 million is as follows:
Dollars in millions
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discrete tax benefit related to third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Twelve Months Ended
December 31, 2019
Income Taxes
Tax Rate
767
21
788
23.3%
0.7%
24.0%
33
A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million is as follows:
Dollars in millions
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net discrete tax benefit related to third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Twelve Months Ended
December 31, 2018
Income Taxes
Tax Rate
831
15
846
24.5%
0.4%
24.9%
A reconciliation of the 2017 effective tax rate excluding the discrete tax charge of $658 million related to the 2017 U.S. tax
legislation is as follows:
Dollars in millions
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discrete tax charge related to 2017 U.S. tax legislation. . . . . . . . . . . . . . . . . . . . . . .
As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Twelve Months Ended
December 31, 2017
Income Taxes
Tax Rate
1,583
(658)
925
48.4 %
(20.1)%
28.3 %
Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the
discrete tax items noted above.
Working Capital
Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of
December 31, 2019 and 2018 is summarized as follows:
Dollars in millions
Current Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Current Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . .
Liabilities held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2019
2018
Increase
(Decrease)
1,981
2,461
1,164
296
351
6,253
4
1,689
71
390
2,154
4,099
$
$
1,504
2,622
1,318
334
—
5,778
1,351
1,795
—
396
3,542
2,236
$
$
477
(161)
(154)
(38)
351
475
(1,347)
(106)
71
(6)
(1,388)
1,863
The increase in net working capital as of December 31, 2019 was primarily driven by lower short-term debt. See Note 10.
Debt in Item 8. Financial Statements and Supplementary Data for further information.
As of December 31, 2019, approximately half of the Company's cash and equivalents was held by international subsidiaries.
Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. Cash and
equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of
existing international businesses. International funds may also be used to fund international acquisitions or, if not considered
34
permanently invested, may be repatriated to the U.S. The Company has accrued for foreign withholding taxes related to
foreign held cash and equivalents that are not permanently invested.
In the U.S., the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital
allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases,
acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general
corporate needs. The Company may also use its commercial paper program, which is backed by long-term credit facilities,
for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's
commercial paper program will continue to be sufficient to fund cash requirements in the U.S.
Debt
Total debt as of December 31, 2019 and 2018 was as follows:
In millions
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
4
7,754
7,758
$
$
Increase
(Decrease)
1,351
6,029
7,380
$
$
(1,347)
1,725
378
As of December 31, 2019, short-term debt included $4 million related to the 4.88% notes due December 31, 2020. As of
December 31, 2018, short-term debt included $650 million related to the 1.95% notes due March 1, 2019 and $700
million related to the 6.25% notes due April 1, 2019, both of which were repaid on the due date. There was no commercial
paper outstanding as of December 31, 2019 and December 31, 2018.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized
acquisitions. During the third quarter of 2019, the Company entered into a $2.5 billion, five-year line of credit agreement
with a termination date of September 27, 2024 to support the potential issuances of commercial paper. This agreement
replaced the existing $2.5 billion line of credit agreement with a termination date of May 9, 2021. No amounts were
outstanding under the line of credit agreement at December 31, 2019. The maximum outstanding commercial paper balance
during 2019 was $1.5 billion, while the average daily balance was $306 million.
As of December 31, 2019, the Company's foreign operations had authorized credit facilities with unused capacity of $206
million.
In June 2019, the Company issued €600 million of 0.25% Euro notes due December 5, 2024 at 99.662% of face value, €500
million of 0.625% Euro notes due December 5, 2027 at 99.343% of face value and €500 million of 1.00% Euro notes due
June 5, 2031 at 98.982% of face value. Net proceeds from the issuances were used to repay commercial paper and for general
corporate purposes.
35
Total Debt to EBITDA
The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The
Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term
financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA.
EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA
represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and
amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended
December 31, 2019, 2018 and 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ Equity
The changes to stockholders’ equity during 2019 and 2018 were as follows:
2019
2018
2017
7,758
2,521
$
$
7,380
2,563
$
$
221
(107)
767
267
159
257
(67)
831
272
189
3,828
$
4,045
$
2.0
1.8
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of new accounting guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
3,258
2,521
—
(1,335)
(1,500)
(2)
88
3,030
$
$
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company's significant contractual obligations as of December 31, 2019 were as follows:
8,328
1,687
260
(45)
1,583
256
206
3,947
2.1
4,589
2,563
(415)
(1,186)
(2,000)
(328)
35
3,258
In millions
Principal payments on long-term debt . .
Interest payments on debt . . . . . . . . . . . .
Noncurrent income taxes payable . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . .
2020
2021
2022
2023
2024
2025 and
Future
Years
$
$
4
197
33
55
289
$
$
350
197
49
42
638
$
$
561
185
49
32
827
$
$
561
175
91
23
850
$
$
1,373
155
122
18
1,668
$
$
4,992
1,653
151
21
6,817
36
As of December 31, 2019, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $168 million.
The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits.
The Company did not have any significant off-balance sheet commitments at December 31, 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has three accounting policies that it believes are most important to the Company’s financial condition and
results of operations, and which require the Company to make estimates about matters that are inherently uncertain.
Management bases its estimates on historical experience, and in some cases on observable market information. Various
assumptions are also used that are believed to be reasonable under the circumstances and form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
The Company's critical accounting policies are as follows:
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, 2019, the Company had total goodwill and intangible assets of approximately $5.3 billion allocated to its
reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to
its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is
lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and
other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long
period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the
Company’s 80/20 Front-to-Back process. The amount of goodwill and other intangible assets allocated to individual reporting
units ranges from approximately $167 million to $1.2 billion, with the average amount equal to $533 million. Fair value
determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent
uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment
charges related to one or more reporting units could occur in future periods.
Pension and Other Postretirement Benefits— The Company has various company-sponsored defined benefit retirement
plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit
expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each
participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in
determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan
assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the
amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 11. Pension and Other
Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial
assumptions used in determining pension and postretirement health care liabilities and expenses.
37
The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S.
primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be
effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed
income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would
increase the present value of the U.S. primary pension plan obligation by approximately $41 million. The Company estimates
the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to
the projected cash flows rather than a single weighted-average rate. See Note 11. Pension and Other Postretirement Benefits
in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement
benefit plans and related assumptions.
The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment
allocations among asset classes. For the U.S. primary pension plan, a 25 basis point decrease in the expected return on plan
assets would increase the annual pension expense by approximately $4 million.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
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 10. Debt in Item 8. Financial Statements and Supplemental Data for details related to the fair value of
the Company's debt instruments.
Foreign Currency Risk
The Company operates in the U.S. and 52 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 or economic union. Therefore, the Company's manufacturing operations generally do not
have significant assets or liabilities denominated in currencies other than their functional currencies.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May
2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated
foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of
this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency
translation adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain
recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $239 million and $187
million as of December 31, 2019 and 2018, respectively.
38
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, 2019.
In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we believe that, as of
December 31, 2019, the Company’s internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.
/s/ E. Scott Santi
E. Scott Santi
Chairman & Chief Executive Officer
February 14, 2020
/s/ Michael M. Larsen
Michael M. Larsen
Senior Vice President & Chief Financial Officer
February 14, 2020
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Illinois Tool Works Inc.
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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes
in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control Over 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.
40
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Income Taxes-Refer to Note 6 to the financial statements
Critical Audit Matter Description
The Company’s income tax expense is recognized and measured based on management’s interpretation of the tax regulations and
rulings in numerous taxing jurisdictions, which requires significant judgment. When calculating income tax expense management
makes estimates and assumptions, including determination of the completeness of book income in each jurisdiction, calculation of
taxable income through identification and classification of book to tax differences (either temporary or permanent items),
consideration of applicable tax deductions or credits, and the identification of uncertain tax positions.
The evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the
identified position. Management evaluates uncertain tax positions identified and a liability is established for unrecognized tax
benefits when there is a more than 50% likelihood that its tax position will not be sustained upon examination by taxing
authorities. There is additional judgment to determine the amount of the liability for the underlying tax position. The Company’s
income tax expense for 2019 was $767 million and the liability recorded for unrecognized tax benefits as of December 31, 2019,
was $296 million.
Given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings,
certain audit matters required a high degree of auditor judgment and increased extent of effort, including the need to involve our
income tax specialists. These matters included the auditing of income tax expense, identification of uncertain tax positions,
measurement of unrecognized tax benefits, and certain planning transactions with income tax expense implications.
How the Critical Audit Matter Was Addressed in the Audit
With the assistance of our income tax specialists, our principal audit procedures related to income tax expense included the
following, among others:
• We tested the effectiveness of management’s controls over income taxes, including those over income tax expense,
unrecognized tax benefits, and certain planning transactions with income tax expense implications.
• We evaluated management’s significant estimates and judgments incorporated into the calculation of income tax expense by:
• Selecting a sample of book to tax differences (temporary and permanent) and testing the accuracy, completeness, and
classification of the selections, including evaluating that all impacts of significant transactions with income tax expense
implications are considered.
• Developing an expectation over the foreign income tax expense by jurisdiction and comparing it to the recorded balance.
• Testing the accuracy of the income tax expense calculation.
• We evaluated management’s significant judgments regarding the identification of uncertain tax positions by:
• Evaluating the reasonableness of a selection of certain planning transactions with income tax expense implications,
including the completeness and accuracy of the underlying data supporting the transactions.
• Assessing management’s methods and assumptions used in identifying uncertain tax positions.
• Comparing results of prior tax audits to ongoing and anticipated tax audits by tax authorities.
• Evaluating external information, including applicable tax law, new interpretations, and related changes to assess the
completeness and reasonableness of management’s considerations.
• Determining if there was additional information not considered in management’s assessment.
• We evaluated a sample of the liabilities recorded for unrecognized tax benefits to assess the establishment and amount of the
liability for the specific underlying tax position.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 14, 2020
We have served as the Company's auditor since 2002.
41
14,314
8,306
2,412
(95)
206
3,485
(260)
45
3,270
1,583
1,687
4.90
4.86
Statement of Income
Illinois Tool Works Inc. and Subsidiaries
For the Years Ended December 31
2018
2017
2019
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,109
$
14,768
$
8,187
2,361
—
159
3,402
(221)
107
3,288
767
8,604
2,391
—
189
3,584
(257)
67
3,394
831
2,521
$
2,563
$
Net Income Per Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7.78
7.74
$
$
7.65
7.60
$
$
The Notes to Financial Statements are an integral part of this statement.
42
Statement of Comprehensive Income
Illinois Tool Works Inc. and Subsidiaries
In millions
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax . . . . . . . . . . . . .
Pension and other postretirement benefit adjustments, net of tax . . .
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31
2019
2018
2017
2,521
$
2,563
$
1,687
(2)
(26)
2,493
$
(328)
(17)
2,218
$
406
114
2,207
The Notes to Financial Statements are an integral part of this statement.
43
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 2019 and 2018
Outstanding- 319.8 shares in 2019 and 328.1 shares in 2018 . . . . . . . . . . . .
Additional paid-in-capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
1,304
22,403
(18,982)
(1,705)
4
3,030
15,068
$
$
The Notes to Financial Statements are an integral part of this statement.
44
December 31
2019
2018
$
$
$
1,981
2,461
1,164
296
351
6,253
1,729
4,492
851
516
1,227
15,068
4
472
1,217
342
48
71
2,154
7,754
668
462
1,000
9,884
1,504
2,622
1,318
334
—
5,778
1,791
4,633
1,084
554
1,030
14,870
1,351
524
1,271
328
68
—
3,542
6,029
707
495
839
8,070
6
1,253
21,217
(17,545)
(1,677)
4
3,258
14,870
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 $
1,188 $
19,505 $
(14,638) $
(1,807) $
5 $
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
(4)
36
—
—
—
—
(2)
1,218
—
—
(5)
40
—
—
—
—
1,253
—
11
41
—
—
—
—
(1)
1,687
—
—
—
(982)
—
—
—
20,210
2,563
(370)
—
—
—
(1,186)
—
—
21,217
2,521
—
—
—
(1,335)
—
—
—
—
76
—
(1,000)
—
—
—
—
(15,562)
—
—
17
—
(2,000)
—
—
—
(17,545)
—
63
—
(1,500)
—
—
—
—
—
—
—
—
—
114
406
—
(1,287)
—
(45)
—
—
—
—
(17)
(328)
(1,677)
—
—
—
—
—
(26)
(2)
—
—
—
—
—
—
—
—
(1)
4
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
4,259
1,687
72
36
(1,000)
(982)
114
406
(3)
4,589
2,563
(415)
12
40
(2,000)
(1,186)
(17)
(328)
3,258
2,521
74
41
(1,500)
(1,335)
(26)
(2)
(1)
In millions except per share amounts
Balance at December 31, 2016 . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for stock-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Repurchases of common stock . . . . . . .
Dividends declared ($2.86 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustments . . . . .
Noncontrolling interest . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Adoption of new accounting guidance .
Common stock issued for stock-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Repurchases of common stock . . . . . . .
Dividends declared ($3.56 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustments . . . . .
Balance at December 31, 2018 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for stock-based
compensation . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . .
Repurchases of common stock . . . . . . .
Dividends declared ($4.14 per share) . .
Pension and other postretirement
benefit adjustments. . . . . . . . . . . . . .
Currency translation adjustments . . . . .
Noncontrolling interest . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . $
6 $
1,304 $
22,403 $
(18,982) $
(1,705) $
4 $
3,030
The Notes to Financial Statements are an integral part of this statement.
45
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
2017
2018
2019
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided by operating activities:
2,521
$
2,563
$
1,687
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . . .
Additions to plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . .
Effect of Exchange Rate Changes on Cash and Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Equivalents:
267
159
32
6
(15)
(9)
(44)
41
9
40
98
11
(16)
(95)
(7)
(3)
2,995
(4)
(326)
20
25
120
(18)
(183)
(1,321)
85
(1,500)
(1)
1,774
(1,351)
(12)
(2,326)
(9)
Increase (decrease) during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
477
1,504
1,981
Supplementary Cash Flow Information:
Cash Paid During the Year for Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Paid During the Year for Income Taxes, Net of Refunds . . . . . . . . . . . . . . . . . . . . . $
223
742
$
$
$
The Notes to Financial Statements are an integral part of this statement.
272
189
34
5
(9)
(7)
2
40
10
(60)
(108)
3
(46)
(36)
(41)
—
2,811
—
(364)
16
26
1
(4)
(325)
(1,124)
22
(2,000)
(850)
—
(1)
(11)
(3,964)
(112)
(1,590)
3,094
1,504
247
838
$
$
$
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
46
(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 84 divisions in 53 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— Prior to 2018, the Company recognized revenue when persuasive evidence of an arrangement existed,
product had shipped and the risks and rewards of ownership had transferred or services had been rendered, the price to the
customer was fixed or determinable, and collectability was reasonably assured, which generally occurred at the time of
product shipment. Effective January 1, 2018, the Company adopted new revenue recognition guidance. Under this new
guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains
control of that good or receives the service performed. The Company's sales arrangements with customers are predominantly
short-term in nature involving a single performance obligation related to the delivery of products and generally provide for
transfer of control at the time of shipment. 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. In these circumstances, operating revenue may be recognized over time
as the service is provided to the customer or deferred until all significant obligations have been completed. The amount of
operating revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods or
services and may include adjustments for customer allowances and rebates. Customer allowances and rebates consist
primarily of volume discounts and other short-term incentive programs, which are estimated at the time of sale based on
historical experience and anticipated trends. Shipping and handling charges billed to customers are included in revenue and
are recognized along with the related product revenue as they are considered a fulfillment cost. Sales commissions are
expensed when incurred, which is generally at the time of revenue recognition. Contract liabilities associated with sales
arrangements primarily relate to deferred revenue on equipment sales and prepaid service contracts. Total deferred revenue
and customer deposits were $188 million and $215 million as of December 31, 2019 and 2018, respectively, and are short-
term in nature. For additional information regarding the Company's operating revenue, see New Accounting Pronouncements
below and Note 3. Operating Revenue.
Research and development expenses— Research and development expenses are recorded as expense in the year incurred.
These costs were $221 million, $233 million and $225 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $48 million,
$50 million and $53 million for the years ended December 31, 2019, 2018 and 2017, 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
47
liabilities given the provisions of the enacted tax laws. Valuation allowances are established when it is estimated that it is
more likely than not that the tax benefit of the deferred tax asset will not be realized.
Cash and equivalents— Cash and equivalents include cash on hand and instruments having original maturities of three
months or less. Cash and equivalents are stated at cost, which approximates fair value.
Trade receivables— Trade receivables are net of allowances for doubtful accounts. Prior to 2018, the allowance for doubtful
accounts included reserves for uncollectible accounts and customer credits. Under the new revenue guidance adopted on
January 1, 2018, the reserve for customer credits is reported as a liability and included in Accrued expenses in the Statement
of Financial Position. Accordingly, after January 1, 2018, the allowance for doubtful accounts was comprised of reserves for
uncollectible accounts. The changes in the allowance for doubtful accounts for the years ended December 31, 2019, 2018 and
2017 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of new revenue recognition guidance. . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to assets held for sale . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
21
—
6
(4)
(2)
(1)
20
$
$
43
(23)
5
(3)
—
(1)
21
$
$
43
—
3
(6)
—
3
43
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 23% of total inventories as of December 31, 2019 and 2018. If the FIFO method was used for all
inventories, total inventories would have been approximately $89 million and $97 million higher than reported at
December 31, 2019 and 2018, respectively. The major classes of inventory at December 31, 2019 and 2018 were as follows:
In millions
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
452
131
670
(89)
1,164
$
$
523
161
731
(97)
1,318
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, 2019 and 2018:
In millions
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
186
1,357
3,551
133
5,227
(3,498)
1,729
$
$
194
1,368
3,517
154
5,233
(3,442)
1,791
48
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5—50 years
3—12 years
Depreciation was $267 million, $272 million and $256 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
Goodwill and intangible assets— Goodwill represents the excess cost over fair value of the net assets of acquired
businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. Amortizable intangible
assets are being amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.
The Company performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more
frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants.
When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting
units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The
Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units, including
discounting estimated future cash flows based on a detailed cash flow forecast prepared by the relevant reporting unit and
market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an
impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting
unit's goodwill.
The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these
intangible assets are determined based on a Level 3 valuation method using a relief-from-royalty income approach derived
from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying
value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible
asset.
Accrued warranties— The Company accrues for product warranties based on historical experience. The changes in accrued
warranties for the years ended December 31, 2019, 2018 and 2017 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
45
(44)
44
—
45
$
$
45
(49)
50
(1)
45
$
$
45
(45)
43
2
45
New Accounting Pronouncements
Effective January 1, 2018
In May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to change the criteria for
revenue recognition. The core principle of the new guidance is that revenue should be recognized to depict the transfer of
control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In addition, expanded revenue disclosures are required. The Company's
sales arrangements with customers are predominantly short-term in nature and generally provide for transfer of control and
risks and rewards of ownership at the time of product shipment or delivery of service. As such, the timing of revenue
recognition under both the prior and new guidance is the same for the majority of the Company’s transactions. Effective
January 1, 2018, the Company adopted the new revenue recognition guidance under the modified retrospective method and
recorded a cumulative-effect adjustment reducing retained earnings by $9 million as of January 1, 2018. Under the modified
49
retrospective method of adoption, prior periods are not restated and the new guidance is applied prospectively to revenue
transactions completed on or after January 1, 2018. Given the nature of the Company’s revenue transactions, the new
guidance had an immaterial impact on the Company's operating revenue, results of operations, and financial position for the
year ended December 31, 2018. The Company updated its revenue recognition accounting policy to reflect the requirements
of the new guidance and included additional disclosures regarding the Company's revenue transactions. Refer to the
Company’s operating revenue accounting policy above and Note 3. Operating Revenue for additional information.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an
intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as
required under the prior guidance. The provisions of the new guidance are being applied prospectively to intra-entity asset
transfers on or after January 1, 2018 and may result in future tax rate volatility. Upon adoption of the new guidance on
January 1, 2018, the Company recorded a cumulative-effect adjustment reducing deferred tax assets and retained earnings by
$406 million. For the years ended December 31, 2019 and 2018, the impact of the new guidance on the Company's effective
income tax rate was not material.
In February 2018, the FASB issued authoritative guidance which allows for an optional one-time reclassification of the
stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs
Act" (the "Act") from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance was effective
January 1, 2019, with early adoption permitted. The Company elected to early adopt this guidance as of January 1, 2018 and
to reclassify the stranded tax effects related to the Act, which resulted in an increase of $45 million to both retained earnings
and accumulated other comprehensive loss. Refer to Note 13. Stockholders' Equity for additional information.
Effective January 1, 2019
In February 2016, the FASB issued authoritative guidance to change the criteria for recognizing leasing transactions. The
primary change under the new guidance is that a lessee is required to recognize a lease liability and corresponding right-of-
use asset for its operating leases. The new guidance also requires additional disclosures. Effective January 1, 2019, the
Company adopted the new guidance prospectively for all operating lease transactions as of and after the effective date with a
noncancellable lease term greater than one year. Upon adoption, the Company recorded a lease liability of $205 million and a
corresponding right-of-use asset. The new guidance did not have a material impact on the results of operations or cash flows
for the year ended December 31, 2019. Refer to Note 9. Leases for additional information regarding the Company’s lease
transactions.
In August 2017, the FASB issued authoritative guidance which included targeted improvements to simplify the application of
hedge accounting and improve financial reporting of hedging activities. Effective January 1, 2019, the Company adopted the
new guidance which did not have a material impact on the Company's results of operations, financial position or cash flows
for the year ended December 31, 2019.
Effective January 1, 2020
In June 2016, the FASB issued authoritative guidance which changes the methodology used to measure credit losses for
certain financial instruments. Under current guidance, credit loss reserves are estimated based on historical information. The
new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the
financial asset. This new guidance is effective for the Company prospectively beginning January 1, 2020 and is not expected
to have a material impact on the Company's results of operations or financial position.
In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for impairment. Under
current guidance, when the estimated fair value of a reporting unit is less than its carrying value, the fair value of the
goodwill must be determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the
requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the
amount that the carrying value of the reporting unit exceeds its fair value. This new guidance is effective for the Company
prospectively beginning January 1, 2020 and will be applied by the Company during its annual assessment of goodwill in the
third quarter, or earlier if a triggering event occurs. The adoption of this new accounting guidance is not expected to have a
material impact on the Company's results of operations or financial position.
50
(2)
Divestitures
The Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further
portfolio refinements may be needed. The Company previously communicated its intent to explore options, including
potential divestitures, for certain businesses with annual revenues totaling up to $1 billion. As such, the Company may
commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the
business.
In the second quarter of 2019, the Company approved plans to divest six businesses, including two businesses in the Test &
Measurement and Electronics segment, one business in the Automotive OEM segment, one business in the Welding segment,
and two businesses in the Specialty Products segment. These six businesses were classified as held for sale beginning in the
second quarter of 2019. In the fourth quarter of 2019, the Company divested three of the held for sale businesses which
included one business in the Test & Measurement and Electronics segment, one business in the Welding segment, and one
business in the Specialty Products segment.
For the twelve months ended December 31, 2019, the Company recorded net pre-tax gains on disposal of businesses of $44
million ($30 million after-tax, or $0.09 per diluted share) which was primarily due to the three divestitures of held for sale
businesses discussed above. The net pre-tax gain was included in Other income (expense) in the Statement of Income.
Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the
twelve months ended December 31, 2019, 2018 and 2017, was as follows:
In millions
Operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
2018
2017
134
$
194
$
202
The operating revenue for the twelve months ended December 31, 2019 of $134 million related to the businesses divested in
2019 included $62 million in the Welding segment, $58 million in the Test & Measurement and Electronics segment, and $14
million in the Specialty Products segment.
As of December 31, 2019, three of the businesses discussed above continued to be held for sale, including one business in the
Test & Measurement and Electronics segment, one business in the Automotive OEM segment, and one business in the
Specialty Products segment. All of these businesses are expected to be sold within one year. The assets and liabilities related
to the held for sale businesses were included in assets and liabilities held for sale in the Statement of Financial Position as of
December 31, 2019, as follows:
In millions
Trade receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
81
28
48
166
28
351
21
17
33
71
Operating revenue related to the three businesses held for sale as of December 31, 2019 that was included in the Company's
results of operations for the twelve months ended December 31, 2019, 2018 and 2017, was as follows:
In millions
Operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
2018
2017
373
$
393
$
397
51
(3)
Operating Revenue
The Company's 84 diversified operating divisions are organized and managed based on similar product categories and end
markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test
& Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating
revenue by product category, which is consistent with the Company's segment presentation, for the twelve months ended
December 31, 2019, 2018 and 2017 was as follows:
In millions
Automotive OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Food Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Test & Measurement and Electronics . . . . . . . . . . . .
Welding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Polymers & Fluids. . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction Products . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenue. . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
2018
2017
3,063
2,188
2,121
1,638
1,669
1,625
1,825
(20)
14,109
$
$
3,338
2,214
2,171
1,691
1,724
1,700
1,951
(21)
14,768
$
$
3,271
2,123
2,069
1,538
1,724
1,672
1,938
(21)
14,314
Prior to 2018, the Company recognized revenue when persuasive evidence of an arrangement existed, product had shipped
and the risks and rewards of ownership had transferred or services had been rendered, the price to the customer was fixed or
determinable, and collectability was reasonably assured, which generally occurred at the time of product shipment. Effective
January 1, 2018, the Company adopted new revenue recognition guidance. Under this new guidance, operating revenue is
recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives
the service performed. Given the nature of the Company’s revenue transactions, the new guidance had an immaterial impact
on the Company's operating revenue, results of operations, and financial position for the twelve months ended December 31,
2019 and 2018. See Note 1. Description of Business and Summary of Significant Accounting Policies for additional
information. The following is a description of the product offerings, end markets and typical revenue transactions for each of
the Company's 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.
Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply
agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue
for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the
customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the
Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations
under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset
rather than operating revenue as tooling is not considered a product offering central to the Company's operations.
Food Equipment— This segment is a highly focused and branded industry leader in commercial food equipment
differentiated by innovation and integrated service offerings. This segment primarily serves the food service, food
institutional/restaurant and food retail markets. Products in this segment include:
•
•
•
•
•
•
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.
52
Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances
involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of
installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the
related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand
service repairs and parts is recorded upon completion and customer acceptance of the work performed.
Test & Measurement and Electronics— This segment is a branded and innovative producer of test and measurement and
electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality
for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for
testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic
subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, automotive original
equipment manufacturers and tiers, industrial capital goods, energy and consumer durables markets. Products in this segment
include:
•
•
•
•
•
equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
electronic assembly equipment;
electronic components and component packaging;
static control equipment and consumables used for contamination control in clean room environments; and
pressure sensitive adhesives and components for electronics, medical, transportation and telecommunications
applications.
Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where
significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment
and customer acceptance, revenue recognition is deferred until such obligations have been completed.
Welding— This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and
leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array
of industrial and commercial applications. This segment primarily serves the general industrial market, which includes
fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment
manufacturers and tiers, and industrial capital goods markets. Products in this segment include:
arc welding equipment; and
•
• metal arc welding consumables and related accessories.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically
recognizes revenue for these products at the time of product shipment.
Polymers & Fluids— This segment is a branded supplier to niche markets that require value-added, differentiated products.
Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for
auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, general industrial,
MRO and construction markets. Products in this segment include:
•
•
•
•
•
•
•
adhesives for industrial, construction and consumer purposes;
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.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically
recognizes revenue for these products at the time of product shipment.
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;
53
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.
•
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically
recognizes revenue for these products at the time of product shipment.
Specialty Products— This segment is focused on diversified niche market opportunities with substantial patent protection
producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and
appliance components and fasteners. This segment primarily serves the food and beverage, general industrial, consumer
durables, industrial capital goods and printing and publishing markets. Products in this segment include:
•
•
•
•
•
•
•
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 closures and components for appliances;
airport ground support equipment; and
components for medical devices.
Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically
recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations
to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer
acceptance, revenue is recognized when such obligations have been completed.
(4)
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 were included in operating income.
(5)
Other Income (Expense)
Other income (expense) for the twelve months ended December 31, 2019, 2018 and 2017 consisted of the following:
In millions
Gain (loss) on disposal of operations and affiliates . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net periodic benefit income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity income in Wilsonart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on foreign currency transactions, net . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
44
29
24
15
—
(10)
5
107
$
$
(2) $
35
20
9
—
(1)
6
67
$
1
45
9
16
—
(25)
(1)
45
Refer to Note 2. Divestitures for further information regarding the Gain (loss) on disposal of operations and affiliates of $44
million for the twelve months ended December 31, 2019.
In the fourth quarter of 2012, the Company divested a 51% majority interest in its former Decorative Surfaces segment to
certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). As a result of the transaction, the Company owns
common units (the "Common Units") of Wilsonart International Holdings LLC ("Wilsonart") initially representing
approximately 49% (on an as-converted basis) of the total outstanding equity. CD&R owns cumulative convertible
participating preferred units (the "Preferred Units") of Wilsonart representing approximately 51% (on an as-converted basis)
of the total outstanding equity. The Preferred Units rank senior to the Common Units as to dividends and liquidation
preference, and accrue dividends at a rate of 10% per annum. The ownership interest in Wilsonart is reported using the equity
54
method of accounting. The Company's proportionate share in income (loss) of Wilsonart is reported in Other income (expense)
in the 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. In 2016, the Company received a $167 million dividend
distribution from Wilsonart which exceeded the Company's equity investment balance and resulted in a $54 million pre-tax
gain in 2016. As a result of the dividend distribution, the equity investment balance in Wilsonart was reduced to zero and any
subsequent equity investment income will not be recognized until the gain is recaptured.
(6)
Income Taxes
On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act
significantly revised the U.S. corporate income tax rules. 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. The noncurrent income taxes payable related to the one-time repatriation tax
was $462 million and $495 million as of December 31, 2019 and 2018, respectively. Additionally, as a result of the
one-time repatriation provisions of the Act, the Company recorded additional foreign withholding taxes of $53
million in the fourth quarter of 2017 related to the expected repatriation of foreign held cash and equivalents.
A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in
2018. Although the lower tax rate took effect in 2018, deferred tax assets and liabilities should be measured using
the enacted tax rate expected to apply in the years in which they are expected to be settled. In the fourth quarter of
2017, the Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the
Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.
Deductibility of certain executive compensation. In the fourth quarter of 2017, the Company recorded a one-time
write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based
compensation.
At December 31, 2017, the Company had not completed the accounting for the tax effects of enactment of the Act; however,
the Company made a reasonable estimate which was recorded in the fourth quarter of 2017. During 2018, the Company
revised its initial estimates which did not result in material changes to the provisional amounts recorded at December 31,
2017, or the effective tax rate for 2018. As of December 31, 2018, the Company had completed its accounting related to the
tax effects of enactment of the Act. The Company’s ongoing accounting for the tax effects of the Act are based on the
Company's current understanding of the changes in the tax law under the Act, but may be impacted due to issuance of final
regulations or further clarification of the tax law.
55
Provision for income taxes— The components of the provision for income taxes for the twelve months ended December 31,
2019, 2018 and 2017 were as follows:
In millions
U.S. federal income taxes:
2019
2018
2017
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
356
(26)
330
$
373
(15)
358
Foreign income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302
53
355
77
5
82
358
49
407
66
—
66
$
767
$
831
$
1,583
1,117
(10)
1,107
296
102
398
106
(28)
78
Income before taxes for domestic and foreign operations for the twelve months ended December 31, 2019, 2018 and 2017
was as follows:
In millions
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
1,774
1,514
3,288
$
$
1,774
1,620
3,394
$
$
1,806
1,464
3,270
The reconciliation between the U.S. federal statutory tax rate and the effective tax rate for the twelve months ended
December 31, 2019, 2018 and 2017 was as follows:
U.S. federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax effect of foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
2017
21.0%
1.1
—
1.7
2.0
(1.4)
0.2
—
(0.9)
(0.4)
23.3%
21.0%
1.5
(0.1)
1.6
2.1
(1.7)
1.0
—
(0.3)
(0.6)
24.5%
35.0%
0.5
20.1
1.2
(3.5)
(1.7)
0.4
(1.4)
(1.5)
(0.7)
48.4%
The Company's effective tax rate for the twelve months ended December 31, 2019, 2018 and 2017 was 23.3%,
24.5% and 48.4%, respectively. The 2019 and 2018 effective tax rates benefited from the lower U.S. corporate federal tax
rate and discrete items. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for
the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the Act. The 2018
effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter related to the release of a valuation
allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge of $22
million in the third quarter related to foreign tax credits. Included in the effective tax rate for 2017 was a one-time additional
income tax expense of $658 million related to the enactment of the Act. Additionally, the effective tax rates for 2019, 2018
56
and 2017 included $28 million, $10 million and $50 million, respectively, related to excess tax benefits from stock-based
compensation.
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 earnings to the U.S., the
Company may be subject to foreign withholding taxes. The accrual for foreign withholding taxes related to the expected
repatriation of foreign held cash and equivalents as of December 31, 2019 and 2018 was $62 million and $71 million,
respectively.
Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of
December 31, 2019, undistributed earnings of certain international subsidiaries that are considered permanently invested
were approximately $5.7 billion. Determination of the related deferred tax liability is not practicable because of the
complexities associated with the hypothetical calculation.
Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities as of December 31, 2019
and 2018 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss (gain) on foreign debt instruments . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred income tax assets (liabilities) . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets (liabilities) . . . . . . . . . . . .
$
$
2019
2018
Asset
Liability
Asset
Liability
202
29
16
17
42
176
7
419
80
9
—
—
45
32
1,074
(408)
666
$
$
(453) $
(3)
(158)
(74)
—
—
—
—
—
—
(15)
(57)
(45)
(13)
(818)
—
(818) $
194
30
19
17
36
186
8
451
89
10
—
—
—
32
1,072
(418)
654
$
$
(484)
(3)
(171)
(72)
—
—
—
—
—
—
(19)
(45)
—
(13)
(807)
—
(807)
The valuation allowances recorded as of December 31, 2019 and 2018 related primarily to certain net operating loss
carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2019, the Company had
utilized all realizable foreign tax credit carryforwards.
57
As of December 31, 2019, 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:
86
80
25
7
49
117
1,378
1,742
210
42
100
(24)
(53)
10
285
Gross Carryforwards Related
to Net Operating Losses
In millions
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025-2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Do not expire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross carryforwards related to net operating losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the twelve months ended
December 31, 2019, 2018 and 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
297
6
13
(14)
(5)
(1)
296
$
$
285
3
49
(31)
(5)
(4)
297
$
$
Included in the balance as of December 31, 2019 were approximately $267 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.
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 $56 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
2016-2019
2017-2019
2012-2019
2016-2019
2013-2019
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, 2019 and 2018 was $19 million and $25 million, respectively.
58
(7)
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 for the twelve months ended December 31, 2019, 2018 and 2017 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 . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2019
2018
2017
2,521
$
2,563
$
323.9
7.78
323.9
1.7
325.6
7.74
$
$
335.0
7.65
335.0
2.1
337.1
7.60
$
$
1,687
344.1
4.90
344.1
2.7
346.8
4.86
Options that were considered antidilutive were not included in the computation of diluted net income per share. There were
0.9 million and 0.5 million antidilutive options outstanding as of December 31, 2019 and 2018, respectively. There were no
antidilutive options outstanding as of December 31, 2017.
(8)
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the twelve months ended December 31, 2019 and 2018 were as follows:
In millions
Balance, December 31, 2017 . $
2018 activity:
Foreign currency translation . .
Balance, December 31, 2018 .
2019 activity:
Acquisitions / (divestitures) . .
Transfer to assets held for sale
Foreign currency translation . .
Balance, December 31, 2019 . $
Cumulative goodwill
impairment charges,
December 31, 2019 . . . . . . . $
Automotive
OEM
Test &
Measurement
and Electronics
Food
Equipment
Polymers &
Fluids
Welding
Construction
Products
Specialty
Products
Total
488
$
1,372
$
269
$
919
$
272
$
530
$
902
$
4,752
(12)
476
—
(5)
(5)
(20)
1,352
2
(109)
—
(10)
259
—
—
(3)
(30)
889
—
—
(2)
(9)
263
—
(4)
(1)
(17)
513
—
—
(1)
(21)
881
(119)
4,633
(1)
(8)
(4)
1
(126)
(16)
466
$
1,245
$
256
$
887
$
258
$
512
$
868
$
4,492
24
$
83
$
60
$
15
$
5
$
7
$
46
$
240
59
Intangible assets as of December 31, 2019 and 2018 were as follows:
2019
Accumulated
Amortization
Cost
Net
Cost
2018
Accumulated
Amortization
Net
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:
$
1,530
694
581
449
3,254
(1,195) $
(434)
(501)
(433)
(2,563)
Trademarks and brands . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . .
$
160
3,414
$
—
(2,563) $
335
260
80
16
691
160
851
$
$
$
1,747
759
621
478
3,605
(1,282) $
(435)
(506)
(458)
(2,681)
465
324
115
20
924
160
3,765
$
—
(2,681) $
160
1,084
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third
quarter of 2019, 2018 and 2017. There were no impairment charges as a result of these assessments.
For the twelve months ended December 31, 2019, 2018 and 2017, amortization expense of intangible assets was $159
million, $189 million and $206 million, respectively.
As of December 31, 2019, the estimated future amortization expense of intangible assets for the twelve months ending
December 31 was as follows:
In millions
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
117
104
85
68
(9)
Leases
Effective January 1, 2019, the Company adopted new lease accounting guidance which requires the recognition of a lease
liability and corresponding right-of-use asset for all operating leases with a noncancellable lease term of greater than one
year. The new guidance did not change the recognition of rental expense for operating leases which is recognized on a
straight-line basis over the noncancellable lease term based on the minimum lease payments at lease inception. Changes in
rent subsequent to commencement that were not included in minimum lease payments at inception are recognized as variable
rent in the period incurred.
The Company’s lease transactions are primarily for the use of facilities, vehicles and equipment under operating lease
arrangements. Total rental expense for operating leases for the twelve months ended December 31, 2019, 2018 and 2017 was
$113 million, $124 million and $120 million, respectively. Total rental expense for 2019 included $69 million related to
capitalized operating leases and $44 million related to short-term operating leases and variable lease payments. Short-term
operating leases have original terms of one year or less, or can be terminated at the Company's option with a short notice
period and without significant penalty, and are not capitalized. The right-of-use asset related to operating leases was $206
million as of December 31, 2019 and was included in Other assets. As of December 31, 2019, the current portion of the lease
liability for operating leases was $51 million and was included in Accrued expenses, and the long-term portion was $128
million and was included in Other liabilities.
60
As of December 31, 2019, future maturities of operating lease liabilities for the twelve months ending December 31 were as
follows:
In millions
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion of operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term portion of operating lease liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
55
42
32
23
18
21
191
(12)
179
51
128
As of December 31, 2019, operating leases included in the lease liability had a weighted average remaining lease term of 4.6
years and a weighted average discount rate of 2.59% based on the incremental borrowing rate of the Company and its
subsidiaries. During the twelve months ended December 31, 2019, cash paid related to maturities of operating lease liabilities
was $70 million and operating lease right-of-use assets obtained in exchange for operating lease liabilities was $50 million.
As of December 31, 2018, future minimum lease payments under operating leases with noncancellable terms in excess of one
year for the twelve months ending December 31 were as follows:
In millions
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
67
48
32
24
18
34
223
(10)
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, 2019 and 2018 consisted of the following:
In millions
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
4
—
4
$
$
1,350
1
1,351
As of December 31, 2019, short-term debt included $4 million related to the 4.88% notes due through December 31, 2020.
As of December 31, 2018, short-term debt included $650 million related to the 1.95% notes due March 1, 2019 and $700
million related to the 6.25% notes due April 1, 2019, both of which were repaid on the due date. There was no commercial
paper outstanding as of December 31, 2019 and 2018.
The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-
sized acquisitions. During the third quarter of 2019, the Company entered into a $2.5 billion, five-year line of credit
61
agreement with a termination date of September 27, 2024 to support the potential issuances of commercial paper. This
agreement replaced the existing $2.5 billion line of credit agreement with a termination date of May 9, 2021. No amounts
were outstanding under the line of credit agreement as of December 31, 2019. The Company was also in compliance with
the financial covenants of the line of credit agreement as of December 31, 2019, which included a minimum interest
coverage ratio. The weighted-average interest rate on commercial paper was 2.5% and 1.7% for the twelve months ended
December 31, 2019 and 2018, respectively.
As of December 31, 2019, 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, 2019 and 2018 consisted of the following:
2019
2018
Effective
Interest Rate
1.98%
6.25%
4.96%
3.43%
1.86%
1.35%
3.54%
0.31%
2.69%
0.71%
2.18%
1.09%
3.13%
4.97%
3.96%
In millions
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 . . . . . . . . . .
0.25% Euro notes due December 5, 2024 . . .
2.65% notes due November 15, 2026 . . . . . .
0.625% Euro notes due December 5, 2027 . .
2.125% Euro notes due May 22, 2030 . . . . .
1.00% Euro notes due June 5, 2031 . . . . . . .
3.00% Euro notes due May 19, 2034 . . . . . .
4.875% notes due September 15, 2041 . . . . .
3.90% notes due September 1, 2042 . . . . . . .
Other borrowings. . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current maturities of long-term debt . .
Total long-term debt . . . . . . . . . . . . . . . . . . .
$
$
Carrying Value
$
— $
—
4
349
558
558
697
668
993
554
555
552
548
637
1,082
3
7,758
(4)
7,754
$
Fair Value
— $
—
4
358
584
584
742
677
1,032
570
644
580
724
829
1,283
3
8,614
$
Carrying Value
650
700
4
349
570
569
696
—
993
—
567
—
560
636
1,081
4
7,379
(1,350)
6,029
$
Fair Value
649
706
4
354
603
596
712
—
933
—
620
—
678
719
1,087
4
7,665
$
$
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.
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, which
were repaid on the due date.
In 2011, the Company issued $350 million of 3.375% notes due September 15, 2021 at 99.552% of face value and $650
million of 4.875% notes due September 15, 2041 at 98.539% of face value.
In 2012, the Company issued $1.1 billion of 3.9% notes due September 1, 2042 at 99.038% of face value.
In February 2014, the Company issued $650 million of 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 1.95% notes due March 1, 2019
were repaid on the due date.
62
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.
In June 2019, the Company issued €600 million of 0.25% Euro notes due December 5, 2024 at 99.662% of face value,
€500 million of 0.625% Euro notes due December 5, 2027 at 99.343% of face value and €500 million of 1.00% Euro notes
due June 5, 2031 at 98.982% of face value. Net proceeds from the issuances were used to repay commercial paper and for
general corporate purposes.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May
2015 and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-
denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Refer to
Note 13. 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. As of
December 31, 2019, scheduled future maturities of long-term debt, including current maturities of long-term debt, for the
twelve months ending December 31 were as follows:
In millions
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and future years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4
349
558
558
1,365
4,924
7,758
(11)
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 $86 million in 2019,
$82 million in 2018, and $79 million in 2017. 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.
63
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 for the twelve months ended December 31, 2019,
2018 and 2017 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. . . . . . . . . . . . . . .
2019
Pension
2018
2017
Other Postretirement Benefits
2017
2018
2019
$
52
$
60
$
63
$
7
$
78
(121)
21
72
(126)
43
1
31
$
—
49
$
$
72
(133)
57
—
59
20
(22)
(1)
—
$
4
$
8
$
18
(25)
(2)
—
(1) $
9
19
(23)
(1)
—
4
The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and
research and development expenses in the Statement of Income while the other components of net periodic benefit cost are
presented within Other income (expense).
The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2019 and MP-2018, to
measure its U.S. pension and other postretirement obligations as of December 31, 2019 and 2018, 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 twelve months ended December 31, 2019 and 2018:
In millions
Change in benefit obligation:
Benefit obligation at January 1 . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . .
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . .
Transfer to liabilities held for sale . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare subsidy received. . . . . . . . . . . . . . . . . .
Liabilities from other immaterial plans . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . .
Benefit obligation at December 31 . . . . . . . . . . . . . . .
$
$
Pension
Other Postretirement Benefits
2019
2018
2019
2018
2,429
52
78
2
—
295
(2)
(156)
—
—
33
2,731
$
$
2,661
60
72
2
9
(162)
—
(165)
—
5
(53)
2,429
$
$
511
7
20
12
—
61
—
(42)
1
—
—
570
$
$
546
8
18
12
—
(35)
—
(40)
2
—
—
511
64
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
2019
2018
2019
2018
$
333
66
5
12
(42)
—
$
374
(196) $
(5)
(201) $
— $
(3)
(198)
(201) $
(35) $
—
(35) $
373
(19)
7
12
(40)
—
333
(178)
(5)
(183)
—
(4)
(179)
(183)
(53)
—
(53)
2,550
379
27
2
(156)
42
2,844
113
(42)
71
297
(11)
(215)
71
568
7
575
2,589
194
188
29
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,832
(82)
23
2
(165)
(60)
2,550
121
(46)
75
290
(12)
(203)
75
552
8
560
2,299
176
170
28
Assumptions— The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as
follows:
2019
Pension
2018
2017
Other Postretirement Benefits
2017
2018
2019
Assumptions used to determine benefit
obligations as of December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
2.61%
3.44%
3.66%
3.52%
3.12%
3.54%
3.29%
4.40%
3.72%
Assumptions used to determine net periodic
benefit cost for the twelve months ended
December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . .
3.66%
4.71%
3.52%
3.12%
4.77%
3.54%
3.41%
5.53%
3.77%
4.40%
6.70%
3.72%
6.80%
4.30%
6.80%
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.
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
65
duration to the liabilities in the plan. The Company estimates the service and interest cost components of net periodic benefit
cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average
rate.
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 as of 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. . . . . . . . . . . . . . . . . . . . . .
6.70%
4.50%
2026
7.00%
4.50%
2026
6.25%
4.50%
2025
2019
2018
2017
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 2019. . . . . . . . . . . . . . . . . . . . . . . . . .
Change in postretirement benefit obligation at December 31, 2019 . . . . . . . . . . .
$
$
1 Percentage-
Point Increase
1 Percentage-
Point Decrease
— $
$
2
(1)
(3)
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 investments, 75% to 85% fixed income investments 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.
66
The following tables present the fair value of the Company’s pension and other postretirement benefit plan assets as of
December 31, 2019 and 2018, 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.
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
$
Government securities. . . . . . . . . . . . . . . . .
Corporate debt 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:
Life insurance policies . . . . . . . . . . . . . . . . . . . .
Total fair value of other postretirement benefit plan
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
In millions
Pension Plan Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Fixed income securities:
$
Government securities. . . . . . . . . . . . . . . . .
Corporate debt 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:
Life insurance policies . . . . . . . . . . . . . . . . . . . .
Total fair value of other postretirement benefit plan
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
Level 1
Level 2
Level 3
2019
28
$
27
$
1
$
—
—
—
355
969
—
—
27
$
4
1,329
$
355
969
1
1,460
27
4
2,844
$
374
—
—
—
1
—
1
374
$
— $
— $
—
Total
Level 1
Level 2
Level 3
2018
28
$
27
$
1
$
—
—
—
371
853
—
—
27
$
4
1,229
$
371
853
1
1,257
36
4
2,550
$
333
—
—
—
1
—
1
333
$
— $
— $
—
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. Fixed income securities primarily consist of U.S. and foreign government bills, notes and
bonds, corporate debt 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,
67
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.
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 $29 million to its pension
plans and $5 million to its other postretirement benefit plans in 2020. As of December 31, 2019, the Company’s portion of the
future benefit payments that are expected to be paid during the twelve months ending December 31 is as follows:
In millions
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2025-2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Pension
Other Postretirement
Benefits
$
152
157
164
171
175
862
35
35
35
35
36
176
(12)
Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those
involving environmental, product liability (including toxic tort) and general liability claims. The Company accrues for such
liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are
based on developments to date, the Company’s estimates of the outcomes of these matters and its experience in contesting,
litigating and settling other similar matters. The Company believes resolution of these matters, individually and in the
aggregate, will not have a material adverse effect on the Company’s financial position, liquidity or future operations.
(13)
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 February 13, 2015, 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 "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, approximately 7.1 million shares of its common stock at an average price of
$140.56 per share during 2017, approximately 13.9 million shares of its common stock at an average price of $143.66 per
share during 2018 and approximately 3.1 million shares of its common stock at an average price of $143.23 per share during
2019. The 2015 Program was completed in the second quarter of 2019.
On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the
repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018
Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an
68
average price of $158.11 per share during 2019. As of December 31, 2019, there were approximately $1.9 billion of authorized
repurchases remaining under the 2018 program.
Cash Dividends— Cash dividends declared were $4.14 per share in 2019, $3.56 per share in 2018 and $2.86 per share in
2017. Cash dividends paid were $4.07 per share in 2019, $3.34 per share in 2018 and $2.73 per share in 2017.
Accumulated Other Comprehensive Income (Loss)— The changes in accumulated other comprehensive income (loss)
during 2019, 2018 and 2017 were as follows:
In millions
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
2017
$
(1,677) $
(1,287) $
(1,807)
Adoption of new accounting guidance related to reclassification of certain tax
effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . .
—
7
—
(9)
(2)
(54)
21
7
(26)
(45)
(308)
5
(25)
(328)
(64)
41
6
(17)
—
294
2
110
406
96
56
(38)
114
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,705) $
(1,677) $
(1,287)
Effective January 1, 2018, the Company elected to early adopt new accounting guidance related to the stranded tax effects
resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") and
reclassified $45 million of stranded income tax effects from Accumulated other comprehensive income (loss) to Retained
earnings. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for additional
information.
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 11. Pension and Other
Postretirement Benefits for the amounts included in net periodic benefit cost.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015
and the €1.6 billion of Euro notes issued in June 2019 as hedges of a portion of its net investment in Euro-denominated foreign
operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt
resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation
adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain recorded in
Accumulated other comprehensive income (loss) related to the net investment hedge was $239 million and $187 million as of
December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, the ending balance of Accumulated other comprehensive income (loss) consisted of after-
tax cumulative translation adjustment losses of $1.3 billion and $1.3 billion, respectively, and after-tax unrecognized pension
and other postretirement benefits costs of $390 million and $364 million, respectively. The estimated pre-tax unrecognized net
benefit cost that will be amortized from Accumulated other comprehensive income (loss) into income in 2020 is $48 million
for pension and other postretirement benefits.
69
(14)
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 are issued to officers and/or 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, 2019, approximately 11 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 for the twelve months
ended December 31, 2019, 2018 and 2017:
In millions
Pre-tax stock-based compensation expense . . . . . . . . . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense, net of tax . . . . . . . . . . .
$
$
2019
2018
2017
41
(5)
36
$
$
40
(5)
35
$
$
36
(9)
27
The following table summarizes activity related to non-vested RSUs for the twelve months ended December 31, 2019:
Shares in millions
Unvested, January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested, December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
0.5
0.2
(0.2)
0.5
Weighted-Average
Grant-
Date Fair Value
$121.24
144.43
87.28
144.92
The following table summarizes stock option activity for the twelve months ended December 31, 2019:
In millions except exercise price and contractual terms
Under option, January 1, 2019 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired. . . . . . . . . . . . . . . . . . . . . .
Under option, December 31, 2019 . . . . . . . . . .
Exercisable, December 31, 2019 . . . . . . . . . . . .
Number of
Shares
4.6
0.5
(1.3)
(0.1)
3.7
2.4
Weighted-Average
Exercise Price
$90.56
144.21
64.51
144.55
106.57
89.55
Weighted-Average
Remaining
Contractual Term
Aggregate Intrinsic
Value
5.9
4.8
$271
$220
70
The fair value of RSUs is equal to the common stock fair market value on the date of the grant. RSUs provide for dividend
equivalents payable in additional RSUs for dividends that would have been paid during the vesting period. Stock option
exercise prices are equal to the common stock fair market value on the date of grant. The Company estimates forfeitures based
on historical rates for awards with similar characteristics. The Company uses a binomial option pricing model to estimate the
fair value of the stock options granted. The following summarizes the assumptions used in the option valuations for the twelve
months ended December 31, 2019, 2018 and 2017:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected years until exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2.50-2.68%
22.0%
2.20%
8.7-9.0
2018
2.07-3.06%
22.0%
2.10%
7.5-8.4
2017
0.91-2.61%
22.0%
2.22%
7.2-7.9
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 for the twelve months ended December 31, 2019, 2018
and 2017 was $34.36, $38.34 and $26.83 per share, respectively. The aggregate intrinsic value of stock options exercised
during the twelve months ended December 31, 2019, 2018 and 2017 was $127 million, $33 million and $132 million,
respectively. As of December 31, 2019, there was $10 million of total unrecognized compensation cost related to unvested
stock options. That cost is expected to be recognized over a weighted-average period of 2.0 years. Exercise of stock options
during the twelve months ended December 31, 2019, 2018 and 2017 resulted in cash receipts of $85 million, $22 million and
$84 million, respectively. The total fair value of vested stock option awards during the twelve months ended December 31,
2019, 2018 and 2017 was $17 million, $15 million and $13 million, respectively.
As of December 31, 2019, there was $29 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 1.8 years. The total fair value of vested
RSU awards during the twelve months ended December 31, 2019, 2018 and 2017 was $20 million, $19 million and $19
million, respectively.
71
(15)
Other Balance Sheet Information
Other balance sheet information as of December 31, 2019 and 2018 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses:
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rebates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of pension and other postretirement benefit obligations . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities:
Pension benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term portion of operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
2019
2018
77
73
25
121
296
441
297
206
141
51
91
1,227
335
188
159
51
45
14
425
1,217
215
198
128
459
1,000
$
$
$
$
$
$
$
$
98
79
30
127
334
429
290
—
171
51
89
1,030
391
215
172
—
45
16
432
1,271
203
179
—
457
839
72
(16)
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 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.
73
Segment information for 2019, 2018 and 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2019
2018
2017
3,063
2,188
2,121
1,638
1,669
1,625
1,825
(20)
14,109
659
578
542
453
381
383
472
3,468
(66)
3,402
125
41
69
26
77
29
59
426
134
35
26
28
18
29
56
326
2,417
1,042
2,374
734
1,862
1,176
1,656
11,261
3,807
15,068
$
$
$
$
$
$
$
$
$
$
3,338
2,214
2,171
1,691
1,724
1,700
1,951
(21)
14,768
751
572
523
474
369
414
522
3,625
(41)
3,584
123
44
88
27
83
32
64
461
184
28
31
23
15
25
58
364
2,388
1,019
2,343
789
1,942
1,167
1,687
11,335
3,535
14,870
$
$
$
$
$
$
$
$
$
$
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
20
3,485
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
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.
74
Enterprise-wide information for the twelve months ended December 31, 2019, 2018 and 2017 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2019
2018
2017
6,507
972
7,479
3,920
2,400
310
14,109
$
$
6,562
1,050
7,612
4,241
2,573
342
14,768
$
$
6,243
996
7,239
4,102
2,577
396
14,314
Operating revenue by geographic region is based on the customers' locations. As of December 31, 2019, the Company had
approximately 11% of its total long-lived assets in China. There was no single country outside the U.S with long-lived assets
exceeding 10% of the Company's total long-lived assets in 2018. No single customer accounted for more than 5% of
consolidated revenues for the twelve months ended December 31, 2019, 2018 or 2017.
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 per share:
Three Months Ended
March 31
June 30
September 30
December 31
2019
$ 3,552
2,059
839
597
2018
$ 3,744
2,181
903
652
2019
$ 3,609
2,099
871
623
2018
$ 3,831
2,231
932
666
2019
$ 3,479
2,007
868
660
2018
$ 3,613
2,096
889
638
2019
$ 3,469
2,022
824
641
2018
$ 3,580
2,096
860
607
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
$
1.82
1.81
$
1.92
1.90
$
1.92
1.91
$
1.98
1.97
$
2.05
2.04
$
1.91
1.90
$
2.00
1.99
$
1.84
1.83
75
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, 2019. 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, 2019,
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, 2019 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.
76
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 2020 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 2020 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 "Information About Our 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 Reports" in the Company’s Proxy
Statement for the 2020 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 2020 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 2020 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 2020 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 2020 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 2020 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 2020 Annual
Meeting of Stockholders.
77
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 Current Report on 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 Current Report on 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 August 31, 2011, establishing the terms, and setting forth the forms, of the
3.375% Notes due 2021 and the 4.875% Notes due 2041, filed as Exhibit 4.3 to the Company’s Current
Report on Form 8-K filed on September 1, 2011 (Commission File No. 001-04797) and incorporated
herein by reference.
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.
78
Exhibit
Number
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
10(a)*
10(b)*
10(c)*
10(d)*
10(e)*
10(f)*
10(g)*
10(h)*
10(i)*
10(j)*
10(k)*
10(l)*
Description
Officers’ Certificate dated February 25, 2014, establishing the terms, and setting forth the forms, of the
0.9% Notes due 2017, the 1.95% Notes due 2019, and the 3.5% Notes due 2024, filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on February 26, 2014 (Commission File No. 001-04797)
and incorporated herein by reference.
Officers’ Certificate dated May 20, 2014, establishing the terms, and setting forth the forms, of the 1.75%
Euro Notes due 2022 and the 3.0% Euro Notes due 2034, filed as Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed on May 22, 2014 (Commission File No. 001-04797) and incorporated herein by
reference.
Officers’ Certificate dated May 19, 2015, establishing the terms, and setting forth the forms, of the 1.25%
Euro Notes due 2023 and the 2.125% Euro Notes due 2030, filed as Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed on May 22, 2015 (Commission File No. 001-04797) and incorporated herein by
reference.
Officer’s Certificate dated November 7, 2016, establishing the terms, and setting forth the forms, of the
2.65% Notes due 2026, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on
November 10, 2016 (Commission File No. 001-04797) and incorporated herein by reference.
Officers’ Certificate dated June 5, 2019, establishing the terms, and setting forth the forms, of the 0.250%
Notes due 2024, the 0.625% Notes due 2027 and the 1.000% Notes due 2031, filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on June 5, 2019 (Commission File No. 001-04797) and
incorporated herein by reference.
Description of the Company’s common stock.
Description of the 1.75% Euro Notes due 2022 and 3.00% Euro Notes due 2034.
Description of the 1.25% Euro Notes due 2023 and 2.125% Euro Notes due 2030.
Description of the 0.250% Euro Notes due 2024, 0.625% Euro Notes due 2027 and 1.00% Euro Notes due
2031.
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 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 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.
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.
Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on
February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference
Form of performance share unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference
79
Exhibit
Number
10(m)*
10(n)*
10(o)*
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
Description
Form of performance cash terms filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed
on February 14, 2019 (Commission File No. 1-4797) and incorporated herein by reference
Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on
February 5, 2020 (Commission File No. 1-4797) and incorporated herein by reference.
Form of performance share unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on February 5, 2020 (Commission File No. 1-4797) and incorporated herein by reference.
Form of performance cash terms filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed
on February 5, 2020 (Commission File No. 1-4797) and incorporated herein by reference.
Form of restricted stock unit terms filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K
filed on February 5, 2020 (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 Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2013 (Commission File No. 1-4797) and incorporated herein by reference.
Five Year Credit Agreement dated as of September 27, 2019 among Illinois Tool Works Inc., JPMorgan
Chase Bank, N.A., as Agent, Citibank, N.A., as Syndication Agent, and a syndicate of lenders, filed as
Exhibit 10(a) to the Company’s Current Report on Form 8-K filed on October 3, 2019 (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.
101.INS
iXBRL Instance Document**
101.SCH iXBRL Taxonomy Extension Schema**
101.CAL iXBRL Taxonomy Extension Calculation Linkbase**
101.DEF
iXBRL Taxonomy Extension Definition Linkbase**
101.LAB iXBRL Taxonomy Extension Label Linkbase**
101.PRE iXBRL Taxonomy Extension Presentation Linkbase**
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
80
*
**
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, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Statement of
Income, (ii) Statement of Comprehensive Income, (iii) Statement of Changes in Stockholders' Equity (iv) Statement
of Financial Position, (v) Statement of Cash Flows and (vi) related Notes to Financial Statements.
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, 2019, with the exception of the Officers' Certificates related to 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, 0.25%
Euro Notes due 2024, the 2.65% Notes due 2026, 0.625% Euro Notes due 2027, the 2.125% Euro Notes due 2030, 1.00%
Euro Notes due 2031, 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.
81
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 14th day of February 2020.
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 14th day of February 2020.
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).
82
2012 ADJUSTED INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED (UNAUDITED)
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
GAAP TO NON-GAAP RECONCILIATIONS (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
Adjusted 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)
Adjustment for Industrial Packaging
Adjusted average invested capital
Adjusted after-tax return on average invested capital
A reconciliation of the 2012 effective tax rate excluding the discrete tax charge is as follows:
Dollars in millions
As reported
Discrete tax charge
As adjusted
ANNUAL REPORT APPENDIX
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
14.5%
30.3%
(1.1)
29.2%
Twelve Months Ended
December 31, 2012
Income Taxes
Tax Rate
$
$
973
(36)
937
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
PROXY PEER GROUP
The 2019 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: Enerpac Tool Group, Allison Transmission Holdings Inc., Anixter International Inc., Delphi Technologies PLC and BorgWarner Inc.
Test & Measurement and Electronics: Ametek Inc, Fortive Corp, Keysight Technologies, Inc., Mettler-Toledo International Inc., Renishaw PLC, Spectris PLC and Thermo Fisher Scientific Inc.
Food Equipment: Welbilt, Inc. and Middleby Corporation
Polymers & 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 Amcor
Shareholder Information
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, including media inquiries: 224.661.7431 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 annual CSR report: www.itw-csr.com
Stock and Dividend Action
Effective with the October 9, 2019 payment, the quarterly cash dividend on ITW common stock was increased to
$1.07 per share. ITW’s annual dividend payment has increased for more than 56 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.
Illinois Tool Works Inc.
155 Harlem Avenue
Glenview, Illinois 60025
www.itw.com