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

INTRODUCTION

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 85 divisions in 57 countries. As of December 31, 2016, the Company employed approximately 50,000 persons.

The Company's operations are organized and managed based on similar product offerings and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.

Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenue, operating income, operating margin, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.

THE ITW BUSINESS MODEL

The powerful and highly differentiated ITW Business Model is the Company’s core source of value creation. This business model is the Company’s competitive advantage and defines how ITW creates value for its shareholders and comprises three unique elements:

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ITW’s 80/20 management process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980’s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company 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;

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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 management process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are focused on understanding customer needs, particularly those in “80” markets with solid long-term growth fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of more than 17,000 granted and pending patents;

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ITW’s decentralized, entrepreneurial culture allows ITW businesses to be fast, focused, and responsive. ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their specific customers' needs. ITW colleagues recognize their unique responsibilities to execute the Company's strategy and values. As a result, the Company maintains a focused and simple organizational structure that, combined with outstanding execution, delivers best-in-class services adapted to each business' customers and end markets.

ENTERPRISE STRATEGY

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

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

Based on this rigorous evaluation, ITW determined that solid and consistent above-market organic growth must be the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders. To shift its primary growth engine to organic, the Company began executing a multi-step approach.

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The first step was to narrow the focus and improve the quality of ITW’s business portfolio. As part of the Portfolio Management initiative, ITW exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all ITW businesses. This process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated ITW divisions.

As a result of this work, ITW’s business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses’ largest / most profitable customers and product lines. With the initiative nearly complete and ITW businesses demonstrating notably improved financial performance, the Company believes that the significant product line simplification work is essentially finalized and will return to more normalized levels in 2017 and beyond.

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Step two, Business Structure Simplification, was implemented to simplify and scale-up ITW’s operating structure to support increased engineering, marketing, and sales resources, and, at the same time, improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 85 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

•	The Strategic Sourcing initiative was established as a core capability to better leverage ITW’s scale and improve global competitiveness. Sourcing is now a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through 2016 and is on track to do the same in 2017 and 2018.

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With the portfolio realignment and scale-up work largely complete, the Company was able to shift its focus to preparing for and accelerating, organic growth. As a preparatory step, ITW is in the process of reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.

Once the business has achieved operational excellence and identified the right growth opportunities, the final step is to accelerate organic growth. The process of preparing for accelerated organic growth generally takes 18 to 24 months.

Based on the financial performance of the divisions that are further along in this process, the Company believes that its organic growth framework is capable of delivering above-market organic growth across all segments. Divisions are at various phases in preparation for growth and many are either ready to grow or already growing above their respective markets. ITW management is fully aligned with this plan and very focused on executing it. With the close of 2016, approximately 85 percent of the divisions are ready to grow.

PATH TO FULL POTENTIAL

While the Company has made considerable progress and ITW’s performance is nearing best-in-class levels, the Company has significant opportunity for further improvement before it achieves full operating potential. In order to do so, ITW is focused on two key areas of opportunity, including: additional structural margin improvement and sustained above-market organic growth with strong incremental profitability.

Additional Structural Margin Improvement

To deliver on the additional structural margin improvement, the Company is implementing the following two levers: (1) further leveraging the 80/20 management process and (2) strategic sourcing.

•	The first lever, better leveraging the full power of the ITW Business Model, will be accomplished through a much more consistent and focused approach to 80/20 best practice implementation across the Company. The 80/20

management system has continuously been refined, improved and expanded into a unique holistic business management process of interconnected tools, which improves all aspects of the business and, when applied consistently and executed more effectively, will lead to additional margin improvement. 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. These 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.

•	The second lever, strategic sourcing, is a core element of ITW’s ongoing operational strategy and a sustainable enterprise-wide capability. Through the continued execution of this initiative, the Company expects to deliver additional margin improvement with the goal of a one percent reduction in spend in 2017 and 2018.

Sustained Above-Market Organic Growth with Strong Incremental Profitability

ITW has done extensive work on its portfolio and operating structure to position the Company to deliver sustainable above-market organic growth. The Company has narrowed the focus and significantly improved the growth potential of ITW’s business portfolio. With approximately 85% of its divisions ready to grow as of the end of 2016, ITW is well positioned for accelerated growth in 2017 and beyond. To deliver on this accelerated growth, the divisions have been implementing the organic growth framework, which includes continued investment in customer-back innovation and a strengthened focus on market penetration. ITW continues to focus on growing its share of "80" products with existing customers with whom the Company has a resonant value proposition as well as target potential new customers with similar pain points to existing customers. ITW has made strong progress on the Company’s pivot to organic growth and is well positioned to deliver on sustained above-market organic growth over the long-term.

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.

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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

Leveraging ITW's highly differentiated and proprietary business model, the Company delivered strong financial results in 2016 despite a challenging global macro environment and foreign currency translation headwinds. With the solid execution of the Company's Enterprise Strategy initiatives, six of seven segments achieved worldwide organic revenue growth and five of seven segments had operating margin expansion.

On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. EF&C had operating revenue of $245 million for the six months ended December 31, 2016. EF&C diluted the Company's operating margin in 2016 by 30 basis points due to lower operating margin and acquisition related expenses. The Company expects EF&C to be slightly accretive to earnings in the first twelve months, but expects improved earnings and operating margin performance in later years through the application of the Company's 80/20 business management process. The operating results of EF&C are reported within the Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented. Refer to Note 3. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information.

The Company’s consolidated results of operations for 2016, 2015 and 2014 are summarized as follows:

2016 compared to 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	13,405			$	14,484			(7.4	)%		(0.4	)%	(0.2	)%	—	%	(6.8	)%	(7.4	)%
Operating income	$	2,867			$	2,888			(0.7	)%		5.8	%	(0.3	)%	1.2	%	(7.4	)%	(0.7	)%
Operating margin %	21.4		%		19.9		%		150 bps			130 bps		—		20 bps		—		150 bps

•	Operating revenue decreased 7.4% primarily due to the unfavorable effect of foreign currency translation as the U.S. Dollar strengthened against most major currencies.

•	Organic revenue decreased 0.4% in 2015 as compared to the prior year.

◦	Automotive OEM, Food Equipment and Construction Products had solid organic revenue growth primarily due to penetration gains, higher market demand and product innovation. Organic revenue declined in the Welding and Test & Measurement and Electronics segments primarily due to lower demand in the oil and gas end markets and a challenging capital spending environment.

◦	PLS activities reduced organic revenue growth by approximately one percentage point.

◦	North American organic revenue decreased 0.5% as a decline in the Welding and Test & Measurement and Electronics segments was partially offset by growth in the Automotive OEM, Food Equipment and Construction Products segments.

◦	European organic revenue increased 1.2%. Double-digit growth in the Automotive OEM segment was partially offset by a decline in the Polymers & Fluids, Test & Measurement and Electronics and Welding segments.

◦	Asia Pacific organic revenue decreased 1.4% primarily due to a decline in the Welding and Test & Measurement and Electronics segments, partially offset by growth in the Construction Products segment.

•	Operating income of $2.9 billion decreased 0.7%. Excluding the negative impact from foreign currency translation of 7.4%, operating income would have increased 6.7%.

•	Operating margin of 21.4% increased 150 basis points primarily due to the benefit of the Company's enterprise initiatives related to business structure simplification and strategic sourcing that contributed 110 basis points. Lower restructuring expenses and favorable price/cost each contributed 20 basis points of operating margin expansion.

•	Diluted earnings per share (EPS) from continuing operations of $5.13 increased 9.9%. Excluding the negative impact from foreign currency of approximately $0.41 per diluted share, EPS would have increased 18.6%.

•	Free cash flow was $2.0 billion in 2015. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

•	The Company repurchased approximately 21.0 million shares of its common stock in 2015 for approximately $2.0 billion.

•	Total cash dividends of $742 million were paid in 2015.

•	Adjusted after-tax return on average invested capital was 20.4%, an increase of 140 basis points. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

RESULTS OF OPERATIONS BY SEGMENT

The reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as follows:

	Operating Revenue
In millions	2016				2015				2014
Automotive OEM	$	2,864			$	2,529			$	2,590
Food Equipment	2,110				2,096				2,177
Test & Measurement and Electronics	1,974				1,969				2,204
Welding	1,486				1,650				1,850
Polymers & Fluids	1,691				1,712				1,927
Construction Products	1,609				1,587				1,707
Specialty Products	1,885				1,885				2,055
Intersegment revenue	(20		)		(23		)		(26		)
Total	$	13,599			$	13,405			$	14,484

	Operating Income
In millions	2016				2015				2014
Automotive OEM	$	690			$	613			$	600
Food Equipment	537				498				453
Test & Measurement and Electronics	372				322				340
Welding	370				415				479
Polymers & Fluids	343				335				357
Construction Products	361				316				289
Specialty Products	482				439				440
Total Segments	3,155				2,938				2,958
Unallocated	(91		)		(71		)		(70		)
Total	$	3,064			$	2,867			$	2,888

Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.

AUTOMOTIVE OEM

This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications. This segment primarily serves the automotive original equipment manufacturers and tiers market. Products in this segment include:

•	plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses.

The results of operations for the Automotive OEM segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2016				2015				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,864			$	2,529			13.3	%		5.1	%	9.7	%	—	%	(1.5	)%	13.3	%
Operating income	$	690			$	613			12.6	%		10.7	%	2.6	%	0.7	%	(1.4	)%	12.6	%
Operating margin %	24.1		%		24.2		%		(10) bps			130 bps		(160) bps		20 bps		—		(10) bps

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

•	Organic revenue grew 5.1%.

◦	North American organic revenue grew 3.4% versus total North American auto build growth of 2%. Auto build growth for the Detroit 3, where the Company has higher content, declined 1%.

◦	European organic revenue growth of 6.0% exceeded European auto builds which grew 3%.

◦	Asia Pacific organic revenue increased 10.9% driven by product penetration gains in China due to new product launches in 2016. China organic revenue growth of 22.7% exceeded Chinese auto build growth of 14%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, grew 11%.

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

•	Operating margin of 24.1% decreased 10 basis points due to the dilutive impact of 160 basis points from the EF&C acquisition and unfavorable price/cost of 40 basis points, partially offset by positive operating leverage of 80 basis

points, the net benefits from the Company's enterprise initiatives and cost management of 90 basis points and lower restructuring expenses.

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,529			$	2,590			(2.4	)%		5.8	%	(0.2	)%	—	%	(8.0	)%	(2.4	)%
Operating income	$	613			$	600			2.1	%		10.4	%	(0.1	)%	(0.3	)%	(7.9	)%	2.1	%
Operating margin %	24.2		%		23.2		%		100 bps			100 bps		10 bps		(10) bps		—		100 bps

•	Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.

•	Organic revenue grew 5.8% as a result of product innovation and penetration gains, exceeding worldwide auto build growth of 1%.

◦	European organic revenue growth of 11.1% exceeded auto builds which grew 4%.

◦	North American organic revenue growth of 4.2% exceeded auto build growth of 3%.

◦	Asia Pacific organic revenue increased 0.5%. China organic revenue grew 7.9%, as Chinese auto builds increased 4%. Auto builds of foreign automotive manufacturers in China, where the Company has higher content, were flat for 2015.

•	Operating income of $613 million increased 2.1%. Excluding the negative impact of foreign currency translation of 7.9%, operating income would have increased 10.0%.

•	Operating margin was 24.2%. The increase of 100 basis points was primarily driven by 80 basis points of operating leverage, the net benefits from the Company's enterprise initiatives and favorable price/cost of 10 basis points.

FOOD EQUIPMENT

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

•	warewashing equipment;

•	cooking equipment, including ovens, ranges and broilers;

•	refrigeration equipment, including refrigerators, freezers and prep tables;

•	food processing equipment, including slicers, mixers and scales;

•	kitchen exhaust, ventilation and pollution control systems; and

•	food equipment service, maintenance and repair.

The results of operations for the Food Equipment segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2016				2015				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,110			$	2,096			0.7	%		2.8	%	—	%	—	%	(2.1	)%	0.7	%
Operating income	$	537			$	498			7.8	%		8.7	%	—	%	1.1	%	(2.0	)%	7.8	%
Operating margin %	25.4		%		23.7		%		170 bps			140 bps		—		30 bps		—		170 bps

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

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

◦	North American organic revenue increased 4.3%. North American equipment revenue increased 6.6% primarily due to strong end market demand in the retail, refrigeration, warewash and cooking businesses. Service revenue in North America increased 0.8%.

◦	International organic revenue grew 0.8%. International equipment organic revenue increased 0.8% primarily due to growth in Europe and Asia. International service organic revenue grew 0.9%.

•	Operating margin of 25.4% increased 170 basis points driven by positive operating leverage of 60 basis points, the net benefits of the Company's enterprise initiatives and cost management of 40 basis points, favorable price/cost of 40 basis points and lower restructuring expenses.

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,096			$	2,177			(3.7	)%		3.4	%	—	%	—	%	(7.1	)%	(3.7	)%
Operating income	$	498			$	453			9.8	%		17.7	%	—	%	(0.3	)%	(7.6	)%	9.8	%
Operating margin %	23.7		%		20.8		%		290 bps			290 bps		—		—		—		290 bps

•	Operating revenue decreased 3.7% due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.

•	Organic revenue increased 3.4% in 2015.

◦	North American organic revenue increased 5.6%. North American equipment revenue increased 6.6% primarily due to product innovation and improved market penetration in the warewash and refrigeration businesses. Service revenue in North America increased 4.1%.

◦	International organic revenue increased 1.0%. International equipment organic revenue increased 0.9% primarily due to growth in the refrigeration business, partially offset by difficult year-over-year comparisons in the cooking and retail businesses. International service organic revenue increased 1.3%.

•	Operating margin was 23.7%. The 290 basis point improvement was primarily driven by the benefits of the Company's enterprise initiatives, partially offset by additional investment in the business that contributed 160 basis points, positive operating leverage of 80 basis points and favorable price/cost of 30 basis points.

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 physical properties of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, and consumer durables markets. Products in this segment include:

•	equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;

•	electronic assembly equipment and related consumable solder materials;

•	electronic components and component packaging;

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

•	pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.

The results of operations for the Test & Measurement and Electronics segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

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

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

•	Organic revenue increased 1.8%.

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

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

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

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	1,969			$	2,204			(10.7	)%		(5.2	)%	—	%	—	%	—	%	(5.5	)%	(10.7	)%
Operating income	$	322			$	340			(5.1	)%		(2.5	)%	—	%	3.1	%	0.5	%	(6.2	)%	(5.1	)%
Operating margin %	16.3		%		15.4		%		90 bps			40 bps		—		40 bps		10 bps		—		90 bps

•	Operating revenue decreased 10.7% due to the unfavorable effect of foreign currency translation and the decrease in organic revenue.

•	Organic revenue decreased 5.2% in 2015.

◦	Organic revenue for the test and measurement businesses decreased 5.9% primarily due to the impact of a weak capital spending environment in North America and Europe.

◦	Electronics organic revenue declined 4.3% primarily due to the decrease in the electronics assembly businesses across all major regions. Organic revenue for the other electronics businesses increased 0.3% primarily driven by the contamination and static control businesses.

•	Operating income of $322 million decreased 5.1%. Excluding the negative impact of foreign currency translation of 6.2%, operating income would have increased 1.1%.

•	Operating margin was 16.3%. The increase of 90 basis points was primarily driven by the net benefits resulting from the Company's enterprise initiatives and cost management of 190 basis points, lower restructuring expenses, and favorable price/cost of 20 basis points, partially offset by negative operating leverage of 170 basis points.

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, and industrial capital goods markets. Products in this segment include:

•	arc welding equipment;

•	metal arc welding consumables and related accessories; and

•	metal jacketing and other insulation products.

The results of operations for the Welding segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

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

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

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

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

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

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

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,650			$	1,850			(10.8	)%		(7.6	)%	(0.1	)%	—	%	(3.1	)%	(10.8	)%
Operating income	$	415			$	479			(13.4	)%		(12.1	)%	—	%	0.3	%	(1.6	)%	(13.4	)%
Operating margin %	25.2		%		25.9		%		(70) bps			(130) bps		—		10 bps		50 bps		(70) bps

•	Operating revenue decreased primarily due to the decrease in organic revenue and the unfavorable effect of foreign currency translation.

•	Organic revenue decreased 7.6% due to lower demand in the oil and gas end markets, the impact of a soft capital spending environment and continued PLS activities.

◦	North American organic revenue declined 5.1% primarily due to decreases across the oil and gas and industrial end markets.

◦	International organic revenue decreased 14.5% primarily due to weak oil and gas end markets across all regions.

•	Operating margin was 25.2%. The decline of 70 basis points was primarily due to negative operating leverage of 130 basis points and lower variable margins due to product mix from lower sales of higher margin equipment, partially offset by favorable price/cost of 50 basis points and the net benefits of the Company's enterprise initiatives.

POLYMERS & FLUIDS

This segment is a highly branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. This segment primarily serves the automotive aftermarket, MRO, general industrial, 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 2016, 2015 and 2014 were as follows:

2016 compared to 2015

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

•	Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.

•	Organic revenue increased 1.3% primarily due to stronger demand in the automotive aftermarket and polymers businesses.

◦

Organic revenue for the automotive aftermarket businesses increased 2.1% primarily driven by an increase in car care and tire repair in North America. Organic revenue for the polymers businesses increased 1.4% primarily driven by an increase in South America and a modest increase in the European wind energy business, partially offset by a decline in North America. Organic revenue for the fluids businesses was flat as growth in South America was offset by a decline in the industrial maintenance, repair, and operations end markets in North America.

•	Operating margin of 20.3% increased 70 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 60 basis points and favorable operating leverage of 30 basis points, partially offset by unfavorable price/cost of 20 basis points.

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	1,712			$	1,927			(11.2	)%		(2.0	)%	(1.0	)%	—	%	—	%	(8.2	)%	(11.2	)%
Operating income	$	335			$	357			(6.3	)%		1.8	%	(2.3	)%	1.7	%	(0.4	)%	(7.1	)%	(6.3	)%
Operating margin %	19.6		%		18.5		%		110 bps			80 bps		(20) bps		30 bps		(10) bps		30 bps		110 bps

•	Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation and the decrease in organic revenue.

•	Organic revenue declined 2.0% primarily due to lower demand in Europe and North America.

◦

Organic revenue for the fluids businesses decreased 3.8% primarily driven by a decline in the industrial maintenance, repair and operations end markets in Europe and North America. Polymers businesses decreased 2.6% primarily due to the organic revenue decline in the European wind energy business, partially offset by growth in China and South America. Organic revenue for the automotive aftermarket businesses was essentially flat as a decline in North America was offset by growth in South America.

•	Operating income of $335 million decreased 6.3%. Excluding the negative impact of foreign currency translation of 7.1%, operating income would have increased 0.8%.

•	Operating margin was 19.6%. The 110 basis point improvement was primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 150 basis points and lower restructuring expenses, partially offset by lower variable margins due to product mix and negative operating leverage of 40 basis points.

CONSTRUCTION PRODUCTS

This segment is a branded supplier of innovative engineered fastening systems and solutions. This segment primarily serves the residential/remodel construction and commercial construction markets. Products in this segment include:

•	fasteners and related fastening tools for wood and metal applications;

•	anchors, fasteners and related tools for concrete applications;

•	metal plate truss components and related equipment and software; and

•	packaged hardware, fasteners, anchors and other products for retail.

The results of operations for the Construction Products segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

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

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

•	Organic revenue increased 3.0%.

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

◦	International organic revenue increased 2.8%. Asia Pacific organic revenue increased 2.9% primarily due to growth in Australia and New Zealand. European organic revenue increased 2.8% primarily due to growth in the United Kingdom.

•	Operating margin of 22.4% increased 250 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 130 basis points, positive operating leverage of 80 basis points and favorable price/cost of 50 basis points.

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,587			$	1,707			(7.0	)%		3.7	%	(0.5	)%	—	%	(10.2	)%	(7.0	)%
Operating income	$	316			$	289			8.8	%		17.0	%	(0.2	)%	3.8	%	(11.8	)%	8.8	%
Operating margin %	19.9		%		17.0		%		290 bps			220 bps		10 bps		60 bps		—		290 bps

•	Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation, partially offset by organic revenue growth.

•	Organic revenue increased 3.7%.

◦	North American organic revenue increased 7.1% primarily due to an increase in demand in the residential/remodel end markets.

◦	International organic revenue increased 1.8%. Asia Pacific organic revenue increased 4.0% primarily due to growth in Australia and New Zealand. European organic revenue decreased 0.3% primarily due to ongoing PLS activities.

•	Operating income of $316 million increased 8.8%. Excluding the negative impact of foreign currency translation of 11.8%, operating income would have increased 20.6%.

•	Operating margin improved 290 basis points to 19.9% primarily due to the net benefits of the Company's enterprise initiatives and cost management of 150 basis points, positive operating leverage of 100 basis points and lower restructuring expenses.

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

•	line integration, conveyor systems and line automation for the food and beverage industries;

•	plastic consumables that multi-pack cans and bottles and related equipment;

•	foil, film and related equipment used to decorate consumer products;

•	product coding and marking equipment and related consumables;

•	plastic and metal fasteners and components for appliances;

•	airport ground support equipment; and

•	components for medical devices.

The results of operations for the Specialty Products segment for 2016, 2015 and 2014 were as follows:

2016 compared to 2015

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

•	Operating revenue was flat as an increase in organic revenue was offset primarily by the unfavorable effect of foreign currency translation.

•	Organic revenue increased 1.2% primarily driven by growth in the consumer packaging, ground support equipment and sports branding businesses.

◦	International organic revenue increased 2.3% driven by growth in the appliance, foils, and gluing system businesses in Asia Pacific.

◦	North American organic revenue increased 0.6% driven by growth in the consumer packaging and medical businesses, partially offset by a decline in the brand identification businesses.

•	Operating margin of 25.6% increased 230 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 220 basis points and positive operating leverage of 30 basis points, partially offset by unfavorable price/cost of 20 basis points.

2015 compared to 2014

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2015				2014				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,885			$	2,055			(8.3	)%		(2.3	)%	—	%	—	%	(6.0	)%	(8.3	)%
Operating income	$	439			$	440			(0.4	)%		4.2	%	—	%	1.8	%	(6.4	)%	(0.4	)%
Operating margin %	23.3		%		21.4		%		190 bps			150 bps		—		40 bps		—		190 bps

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

•	Organic revenue declined 2.3%.

◦	Growth in the consumer packaging businesses, driven by strong food and beverage end market demand, and in the brand identification businesses, due to increased medical, credit card, and automotive end market demand, was more than offset by the impact of a challenging capital spending environment and ongoing PLS activities.

◦	North American organic revenue decreased 3.2% as growth in the consumer packaging and brand identification businesses was more than offset by a decline in the ground support equipment and the appliance businesses. International organic revenue decreased 0.9% primarily due to a decline in the ground support equipment businesses, partially offset by growth in the consumer packaging businesses.

•	Operating income of $439 million decreased 0.4%. Excluding the negative impact of foreign currency translation of 6.4%, operating income would have increased 6.0%.

•	Operating margin improved 190 basis points to 23.3% primarily due to the net benefits of the Company's enterprise initiatives and cost management of 150 basis points, favorable price/cost of 50 basis points and lower restructuring expenses, partially offset by negative operating leverage of 50 basis points.

OTHER FINANCIAL HIGHLIGHTS

•	Interest expense was $237 million in 2016, an increase from $226 million in 2015, primarily due to debt issuances in 2016. Interest expense was lower in 2015 compared to 2014 ($250 million in 2014) due to debt issuances in 2014 and 2015 at lower rates compared to prior debt obligations.

•

Other income (expense) was income of $81 million in 2016, $78 million in 2015 and $61 million in 2014. The income in 2016 included a $54 million pre-tax gain resulting from a $167 million dividend distribution from Wilsonart that exceeded the equity investment balance, partially offset by $30 million of pre-tax losses in 2016 related to the disposals of businesses and the disposal of a partnership investment. The increase in income in 2015 versus 2014 was primarily due to a $15 million gain on the sale of a business in the first quarter of 2015.

•	The effective tax rate was 30.0% in 2016, 30.1% in 2015, and 30.0% in 2014.

•	The impact of the Euro and other foreign currencies against the U.S. Dollar decreased operating revenue by approximately $210 million in 2016 versus 2015 and $995 million in 2015 versus 2014. Additionally, the impact of foreign currencies against the U.S. Dollar decreased income from continuing operations by approximately $41 million in 2016 versus 2015 and $153 million in 2015 versus 2014.

DISCONTINUED OPERATIONS

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

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

The operating results of the former Industrial Packaging segment as well as two Construction Products businesses are reported as discontinued operations in the statement of income for 2014. As of the second quarter of 2014, the Company had completed the divestiture of all of the businesses previously classified as discontinued operations. Refer to Note 2.

Discontinued Operations in Item 8. Financial Statements and Supplementary Data for discussion of the Company's discontinued operations.

NEW ACCOUNTING PRONOUNCEMENTS

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 standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning January 1, 2018, with early adoption permitted. The Company expects to adopt the new revenue accounting guidance effective January 1, 2018 and is in the process of completing its analysis of the impact this guidance will have on the consolidated financial statements and related disclosures.

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

In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits will be presented as an operating cash flow in the statement of cash flows rather than a financing activity for all current and prior periods presented. The Company adopted this guidance effective January 1, 2017. For the twelve months ended December 31, 2016 and 2015, the Company had classified $29 million and $20 million, respectively, of excess tax benefits as a financing activity in the statement of cash flows which will be presented as an operating cash flow under the new guidance. The expected effect on income tax expense or net cash provided from operating activities related to stock-based awards settled after adoption of the new guidance will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning January 1, 2018, with early adoption permitted. The Company is currently assessing the potential impact the guidance will have upon adoption.

In January 2017, the FASB issued authoritative guidance that simplifies the assessment of goodwill for impairment when the estimated fair value of a reporting unit is less than its carrying value by eliminating the requirement to determine the fair value of goodwill. Under the new guidance, the amount of goodwill impairment will be determined by the amount the carrying value of the reporting unit exceeds its fair value. The new guidance is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company performs its annual goodwill impairment assessment process in the third quarter, or more frequently if triggering events occur. Adoption of this new guidance is not expected to have a material impact on the Company's operating results, financial position or cash flows.

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 $2.5 billion of cash on hand at December 31, 2016 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.

In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging business. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented this segment as part of its continuing operations. As to the impact of this divestiture on the Company’s income per share from continuing operations and capital structure going forward, the Company also indicated that it intended to repurchase approximately 50 million shares through a program utilizing its existing share repurchase authorization to offset the full amount of divestiture-related dilution of income per share from continuing operations through a combination of sale proceeds, free cash flow and additional leverage. The Company completed this program in the second quarter of 2014. Under this program, the Company repurchased approximately 14.0 million shares of its common stock in the fourth quarter of 2013 and approximately 35.7 million shares of its common stock in the first half of 2014.

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

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

Cash Flow

The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the years ended December 31, 2016, 2015 and 2014 was as follows:

In millions		2016				2015				2014
Net cash provided by operating activities		$	2,302			$	2,299			$	1,616
Additions to plant and equipment		(273		)		(284		)		(361		)
Free cash flow		$	2,029			$	2,015			$	1,255
Cash dividends paid		$	(821	)		$	(742	)		$	(711	)
Repurchases of common stock		(2,000		)		(2,002		)		(4,346		)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates		(453		)		(6		)		(45		)
Dividend distribution from equity investment in Wilsonart		167				—				—
Net proceeds from sale of discontinued operations		—				—				3,191
Net proceeds from (repayment of) debt		465				151				1,339
Other		128				147				224
Effect of exchange rate changes on cash and equivalents		(133		)		(463		)		(535		)
Net increase (decrease) in cash and equivalents		$	(618	)		$	(900	)		$	372

The 2014 net cash provided by operating activities included $724 million of tax payments related to the disposition of the Industrial Packaging business.

Stock Repurchase Programs

On August 2, 2013, the Company’s Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2013 Program"). Under the 2013 Program, the Company repurchased approximately 3.3 million shares of its common stock at an average

price of $81.62 per share during 2013, approximately 50.4 million shares of its common stock at an average price of $84.92 per share during 2014, and approximately 14.9 million shares of its common stock at an average price of $96.84 during 2015. As of December 31, 2015, there were no authorized repurchases remaining under the 2013 Program.

On February 13, 2015, the Company's Board of Directors authorized a new stock repurchase program, which provided for the buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of $91.78 per share during 2015 and approximately 18.7 million shares of its common stock at an average price of $107.17 per share during 2016. As of December 31, 2016, there were approximately $3.4 billion of authorized repurchases remaining under the 2015 Program.

Adjusted After-Tax Return on Average Invested Capital

The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. Adjusted average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations, as well as the Company's net investment in the former Industrial Packaging segment and the equity investment in the Wilsonart business (formerly the Decorative Surfaces segment). Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC for the years ended December 31, 2016, 2015, and 2014 was as follows:

Dollars in millions		2016				2015				2014
Operating income		$	3,064			$	2,867			$	2,888
Tax rate		30.0		%		30.1		%		30.0		%
Income taxes		(919		)		(864		)		(866		)
Operating income after taxes		$	2,145			$	2,003			$	2,022
Invested capital:
Trade receivables		$	2,357			$	2,203			$	2,293
Inventories		1,076				1,086				1,180
Net plant and equipment		1,652				1,577				1,686
Goodwill and intangible assets		6,021				5,999				6,466
Accounts payable and accrued expenses		(1,713		)		(1,585		)		(1,799		)
Other, net		223				280				427
Total invested capital		$	9,616			$	9,560			$	10,253
Average invested capital		$	9,780			$	9,943			$	11,215
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)		(91		)		(123		)		(154		)
Adjustment for Industrial Packaging		—				—				(424		)
Adjusted average invested capital		$	9,689			$	9,820			$	10,637
Adjusted return on average invested capital		22.1		%		20.4		%		19.0		%

ROIC increased 170 basis points in 2016 versus 2015 as a result of a 7.1% improvement in after-tax operating income and a 1.3% decrease in adjusted average invested capital. ROIC increased 140 basis points in 2015 versus 2014 primarily as a result of a decrease in adjusted average invested capital of 7.7%.

Working Capital

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital at December 31, 2016 and 2015 is summarized as follows:

Dollars in millions		2016				2015				Increase (Decrease)
Current Assets:
Cash and equivalents		$	2,472			$	3,090			$	(618	)
Trade receivables		2,357				2,203				154
Inventories		1,076				1,086				(10		)
Other		218				341				(123		)
		6,123				6,720				(597		)
Current Liabilities:
Short-term debt		652				526				126
Accounts payable and accrued expenses		1,713				1,585				128
Other		395				257				138
		2,760				2,368				392
Net Working Capital		$	3,363			$	4,352			$	(989	)

The decrease in net working capital at December 31, 2016 was primarily driven by lower cash and equivalents.

Cash and equivalents totaled approximately $2.5 billion as of December 31, 2016 and $3.1 billion as of December 31, 2015, primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to U.S. income taxes and foreign withholding taxes if repatriated to the U.S. Cash and equivalents balances held internationally are typically used for international operating needs, reinvested to fund expansion of existing international businesses, used to fund new international acquisitions, or used to repay debt held internationally. In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs, which primarily consist of dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations and general corporate needs. The Company also uses its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated domestically and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

Debt

Total debt at December 31, 2016 and 2015 was as follows:

In millions		2016				2015				Increase (Decrease)
Short-term debt		$	652			$	526			$	126
Long-term debt		7,177				6,896				281
Total debt		$	7,829			$	7,422			$	407

In 2016, the Company reclassified $650 million related to the 0.90% notes due February 25, 2017 from Long-term debt to Short-term debt. There was no commercial paper outstanding as of December 31, 2016. As of December 31, 2015, Short-term debt included commercial paper of $498 million.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of May 9, 2021 to support the potential issuances of commercial paper. This agreement replaced the previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0 billion line of credit agreement with a termination date of August 15, 2018. No amounts were outstanding under the new line of credit agreement at December 31, 2016. The maximum outstanding commercial paper balance during 2016 was $1.3 billion, while

the average daily balance was $266 million. As of December 31, 2016, the Company's foreign operations had authorized credit facilities with unused capacity of $286 million.

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.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA to measure its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by income from continuing operations before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of goodwill and other intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, 2016, 2015 and 2014 was as follows:

Dollars in millions	2016				2015				2014
Total debt	$	7,829			$	7,422			$	7,419
Income from continuing operations	$	2,035			$	1,899			$	1,890
Add:
Interest expense	237				226				250
Other income	(81		)		(78		)		(61		)
Income taxes	873				820				809
Depreciation	246				244				262
Amortization and impairment of intangible assets	224				233				245
EBITDA	$	3,534			$	3,344			$	3,395
Total debt to EBITDA ratio	2.2				2.2				2.2

Stockholders’ Equity

The changes to stockholders’ equity during 2016 and 2015 were as follows:

In millions		2016				2015
Beginning balance		$	5,228			$	6,824
Net income		2,035				1,899
Cash dividends declared		(846		)		(756		)
Repurchases of common stock		(2,000		)		(2,002		)
Currency translation adjustments		(277		)		(860		)
Other		119				123
Ending balance		$	4,259			$	5,228

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company's significant contractual obligations as of December 31, 2016 were as follows:

In millions		2017				2018				2019				2020				2021				2022 and Future Years
Principal payments on notes		$	650			$	—			$	1,350			$	4			$	350			$	5,554
Interest payments on notes		240				237				209				180				180				2,053
Minimum lease payments		104				75				53				37				26				43
		$	994			$	312			$	1,612			$	221			$	556			$	7,650

As of December 31, 2016, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $97 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, 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The Company's critical accounting policies are as follows:

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

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

In addition, for approximately 22% of total inventories, the Company has elected to use the last-in, first-out ("LIFO") method of inventory costing. Generally, this method results in a lower inventory value than the first-in, first-out ("FIFO") method due to the effects of inflation.

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

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

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

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

Income Taxes— The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous

taxing jurisdictions. Income tax expense, assets and liabilities recognized by the Company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the Company’s various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.

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

As of December 31, 2016, the Company had total goodwill and intangible assets of approximately $6.0 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the Company’s 80/20 management process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately $208 million to $1.4 billion, with the average amount equal to $601 million. Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment charges related to one or more reporting units could occur in future periods.

Pension and Other Postretirement Benefits— The Company has various company-sponsored defined benefit retirement plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 9. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.

The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be 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 $39 million.

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

Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method will provide a more precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. The change is not expected to have a material impact on the 2017 net periodic pension and other postretirement benefit costs as the decrease in service and interest costs is largely offset by the impact of lower discount rates and expected returns on plan assets. Total estimated 2017 pension and other postretirement benefit costs are expected to be consistent with 2016. See Note 9. Pension and Other Postretirement Benefits in Item 8.

Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.