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

INTRODUCTION

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 85 divisions in 56 countries. As of December 31, 2017, the Company employed approximately 50,000 people.

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

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

THE ITW BUSINESS MODEL

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

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ITW’s 80/20 front to back process is the operating system that is applied in every ITW business. Initially introduced as a manufacturing efficiency tool in the 1980s, ITW has continually refined, improved and expanded 80/20 into a proprietary, holistic business management process that generates significant value for the Company and its customers. Through the application of data-driven insights generated by 80/20 practice, ITW focuses on its largest and best opportunities (the “80”) and eliminates cost, complexity and distractions associated with the less profitable opportunities (the “20”). 80/20 enables ITW businesses to consistently achieve world-class operational excellence in product availability, quality, and innovation, while generating superior financial performance;

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

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

ENTERPRISE STRATEGY

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

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

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

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

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

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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 established sourcing as a core strategic and operational capability at ITW. The Company’s 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through 2017 and is on track to do the same in 2018.

•	With the portfolio realignment and scale-up work largely complete, the Company shifted its focus to preparing for and accelerating, organic growth, reapplying 80/20 to optimize its newly scaled-up divisions for growth, first, to build a foundation of operational excellence, and second, to identify the best opportunities to drive organic growth.

ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns. With this first phase of the strategy nearing completion, the Company will look ahead to the next five years and delivering differentiated performance on a sustained basis.

SUSTAINED DIFFERENTIATED PERFORMANCE

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

•	The ITW Business Model is the Company's competitive advantage

•	Focus on quality growth

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

•	Invest only where ITW has a competitive advantage

The ITW Business Model is the Company's Competitive Advantage

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

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

• Customer-Back Innovation Approach = How the Company Innovates

• Decentralized Entrepreneurial Culture = How the Company Executes

Focus on Quality Growth

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

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

The Company only invests and operates in industries and businesses that have the right “raw material” to generate high quality organic growth through the application of the ITW Business Model. ITW’s current portfolio of seven segments offers solid growth potential and a high degree of diversification in terms of geographic and end market exposures, enabling the Company to deliver consistent high-quality growth in an increasingly volatile and competitive global market environment.

"Do What We Say" Execution is a Critical Differentiator

ITW’s commitment to execution is a key differentiator for ITW. Living up to the Company’s commitments - “do what we say” execution - is a deeply embedded core element of the culture. The culture is the engine that translates ITW's strategy into action, and action into results.

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

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

Invest Only Where ITW Has a Competitive Advantage

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

Investments to support organic growth and sustain its highly differentiated core businesses, such as new product innovation, marketing programs, simplification projects, and capital investments, are ITW’s number one investment priority.

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

The Company's strong financial results in 2017 demonstrate the combination of ITW's high-quality business portfolio with continued focus on leveraging the powerful and highly differentiated ITW Business Model. Meaningful progress on accelerating organic revenue growth and strong execution on enterprise initiatives resulted in all seven segments achieving worldwide organic revenue growth and having operating margin above 20% for 2017.

On July 1, 2016, the Company completed the acquisition of the Engineered Fasteners and Components business ("EF&C") from ZF TRW for a purchase price of approximately $450 million. EF&C had operating revenue of $517 million in 2017 and $245 million for the last six months of 2016. EF&C diluted the Company's operating margin in 2017 and 2016 due to lower operating margin and acquisition related expenses. The Company expects EF&C's operating margin to improve in later years through the application of the Company's 80/20 front to back process. The operating results of EF&C are reported within the Company's Automotive OEM segment. The acquisition of EF&C did not materially affect the Company's results of operations or financial position for any period presented. Refer to Note 2. Acquisitions in Item 8. Financial Statements and Supplementary Data for further information.

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

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

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	14,314			$	13,599			5.3	%		2.9	%	1.8	%	—	%	—	%	0.6	%	5.3	%
Operating income	3,494				3,064				14.0	%		12.5	%	0.7	%	0.1	%	0.1	%	0.6	%	14.0	%
Operating margin %	24.4		%		22.5		%		190 bps			210 bps		(30) bps		10 bps		—		—		190 bps

•	Operating revenue increased due to growth in organic and acquisition revenues and the favorable effect of foreign currency translation.

•	Organic revenue grew 2.9% as all seven segments achieved growth.

◦	North American organic revenue grew 1.6%. Growth in five segments was partially offset by a decline in the Automotive OEM and Food Equipment segments.

◦	Europe, Middle East and Africa organic revenue increased 3.5% as growth in five segments was partially offset by a decline in the Welding and Polymers & Fluids segments.

◦	Asia Pacific organic revenue increased 6.8% as growth in five segments was partially offset by a decline in the Welding and Food Equipment segments.

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

•	Operating income of $3.5 billion increased 14.0%. Excluding the favorable impact of the confidential legal settlement, operating income would have increased 10.9%.

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Operating margin of 24.4% increased 190 basis points. Excluding the 70 basis points of favorability from the confidential legal settlement, operating margin of 23.7% increased 120 basis points primarily driven by the benefits of the Company's enterprise initiatives of 120 basis points. In addition, positive operating leverage of 70 basis points was offset by unfavorable price/cost of 40 basis points and the dilutive impact of 30 basis points from the EF&C acquisition.

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On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revise the U.S. corporate income tax rules. As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. As a result, the Company recorded a one-time income tax charge of $658 million during the fourth quarter of 2017. The provisional amounts recorded reflect the Company's best estimate based on information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement of estimated amounts. Refer to Note 5. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

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

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

•	The Company repurchased approximately 7.1 million shares of its common stock in 2017 for approximately $1.0 billion.

•	The Company increased the quarterly dividend by 20.0% in 2017. Total cash dividends of $941 million were paid in 2017.

•	Adjusted after-tax return on average invested capital was 24.4%, an increase of 230 basis points. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

2016 compared to 2015

	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.

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	2017				2016				2015
Automotive OEM	$	3,271			$	2,864			$	2,529
Food Equipment	2,123				2,110				2,096
Test & Measurement and Electronics	2,069				1,974				1,969
Welding	1,538				1,486				1,650
Polymers & Fluids	1,724				1,691				1,712
Construction Products	1,672				1,609				1,587
Specialty Products	1,938				1,885				1,885
Intersegment revenue	(21		)		(20		)		(23		)
Total	$	14,314			$	13,599			$	13,405

	Operating Income
In millions	2017				2016				2015
Automotive OEM	$	747			$	690			$	613
Food Equipment	556				537				498
Test & Measurement and Electronics	464				372				322
Welding	415				370				415
Polymers & Fluids	357				343				335
Construction Products	399				361				316
Specialty Products	527				482				439
Total Segments	3,465				3,155				2,938
Unallocated	29				(91		)		(71		)
Total	$	3,494			$	3,064			$	2,867

Segments are allocated a fixed overhead charge based on the segment's revenue. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis. Unallocated in 2017 includes the favorable impact from the previously discussed confidential legal settlement.

AUTOMOTIVE OEM

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

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

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

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,271			$	2,864			14.2	%		4.1	%	8.9	%	—	%	1.2	%	14.2	%
Operating income	$	747			$	690			8.2	%		5.7	%	3.2	%	(1.6	)%	0.9	%	8.2	%
Operating margin %	22.8		%		24.1		%		(130) bps			30 bps		(120) bps		(40) bps		—		(130) bps

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

•	Organic revenue grew 4.1% as a result of penetration gains, exceeding auto build growth of 2%.

◦	European organic revenue growth of 8.3% exceeded European auto builds which grew 3%.

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

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

•	Operating margin of 22.8% decreased 130 basis points primarily driven by the dilutive impact of 120 basis points from the EF&C acquisition, unfavorable price/cost of 120 basis points and higher restructuring expenses, partially offset by positive operating leverage of 60 basis points and the net benefits from the Company's enterprise initiatives and cost management of 90 basis points.

2016 compared to 2015

	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.

FOOD EQUIPMENT

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

•	warewashing equipment;

•	cooking equipment, including ovens, ranges and broilers;

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

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

•	kitchen exhaust, ventilation and pollution control systems; and

•	food equipment service, maintenance and repair.

The results of operations for the Food Equipment segment for 2017, 2016 and 2015 were as follows:

2017 compared to 2016

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

•	Operating revenue increased primarily due to organic revenue growth.

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

◦	International organic revenue grew 2.3%. International equipment organic revenue increased 2.6% primarily due to higher demand in the European refrigeration and warewash end markets. International service organic revenue grew 1.7%.

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

•	Operating margin of 26.2% increased 80 basis points primarily driven by lower restructuring expenses, positive operating leverage and favorable price/cost of 20 basis points each, and the net benefits of the Company's enterprise initiatives and cost management.

2016 compared to 2015

	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.

TEST & MEASUREMENT AND ELECTRONICS

This segment is a branded and innovative producer of test and measurement and electronic manufacturing and maintenance, repair, and operations, or "MRO" solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics. This segment primarily serves the electronics, general industrial, industrial capital goods, automotive original equipment manufacturers and tiers, and consumer durables markets. Products in this segment include:

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

•	electronic assembly equipment and related consumable solder materials;

•	electronic components and component packaging;

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

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

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

2017 compared to 2016

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

•	Operating revenue increased due to organic revenue growth.

•	Organic revenue increased 4.8%.

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

◦

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

•	Operating margin of 22.4% increased 350 basis points primarily driven by the net benefits resulting from the Company's enterprise initiatives and cost management of 130 basis points, positive operating leverage of 130 basis points and favorable price/cost of 30 basis points.

2016 compared to 2015

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

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

•	Organic revenue increased 1.8%.

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

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

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

WELDING

This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications. This segment primarily serves the general industrial market, which includes fabrication, shipbuilding and other general industrial markets, and energy, construction, MRO, automotive original equipment manufacturers and tiers, and industrial capital goods markets. Products in this segment include:

•	arc welding equipment;

•	metal arc welding consumables and related accessories; and

•	metal jacketing and other insulation products.

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

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	1,538			$	1,486			3.5	%		3.2	%	—	%	—	%	0.3	%	3.5	%
Operating income	$	415			$	370			12.1	%		9.6	%	1.5	%	0.8	%	0.2	%	12.1	%
Operating margin %	27.0		%		24.9		%		210 bps			160 bps		30 bps		20 bps		—		210 bps

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

•	Organic revenue grew 3.2% as equipment grew 6.5%, partially offset by a decrease of 1.0% in consumables. Organic revenue grew primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining and in the commercial end markets related to construction, light fabrication and farm and ranch customers.

◦	North American organic revenue grew 6.2% primarily driven by 7.2% growth in the industrial end markets and 4.8% growth in the commercial end markets.

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

•

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

2016 compared to 2015

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

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

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

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

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

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

POLYMERS & FLUIDS

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

•	adhesives for industrial, construction and consumer purposes;

•	chemical fluids which clean or add lubrication to machines;

•	epoxy and resin-based coating products for industrial applications;

•	hand wipes and cleaners for industrial applications;

•	fluids, polymers and other supplies for auto aftermarket maintenance and appearance;

•	fillers and putties for auto body repair; and

•	polyester coatings and patch and repair products for the marine industry.

The results of operations for the Polymers & Fluids segment for 2017, 2016 and 2015 were as follows:

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	1,724			$	1,691			2.0	%		1.0	%	—	%	—	%	—	%	1.0	%	2.0	%
Operating income	$	357			$	343			4.1	%		4.7	%	—	%	(1.1	)%	—	%	0.5	%	4.1	%
Operating margin %	20.7		%		20.3		%		40 bps			80 bps		—		(30) bps		—		(10) bps		40 bps

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

•	Organic revenue grew 1.0% primarily due to higher demand in North American end markets.

◦	Organic revenue for the automotive aftermarket businesses increased 0.6% primarily driven by stronger demand in the car care and tire repair businesses in North America.

◦	Organic revenue for the fluids businesses grew 2.9% primarily due to an increase in the industrial maintenance, repair, and operations end markets in North America and Europe.

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

•	Operating margin of 20.7% increased 40 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 80 basis points and favorable operating leverage of 30 basis points, partially offset by unfavorable price/cost of 30 basis points and higher restructuring expenses.

2016 compared to 2015

	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.

CONSTRUCTION PRODUCTS

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

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

•	anchors, fasteners and related tools for concrete applications;

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

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

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

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,672			$	1,609			3.9	%		2.9	%	—	%	—	%	1.0	%	3.9	%
Operating income	$	399			$	361			10.7	%		7.5	%	—	%	2.0	%	1.2	%	10.7	%
Operating margin %	23.9		%		22.4		%		150 bps			100 bps		—		50 bps		—		150 bps

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

•	Organic revenue increased 2.9%.

◦	International organic revenue increased 3.6%. European organic revenue grew 4.0% primarily due to growth in the United Kingdom and the Nordic countries. Asia Pacific organic revenue increased 3.1% primarily due to growth in the Australia and New Zealand retail end markets.

◦	North American organic revenue increased 1.9% primarily due to 2.1% growth in the residential end markets, partially offset by a decline of 0.5% in the commercial end markets.

•	Operating margin of 23.9% increased 150 basis points driven by the net benefits of the Company's enterprise initiatives and cost management of 110 basis points, positive operating leverage of 70 basis points and lower restructuring expenses of 50 basis points, partially offset by unfavorable price/cost of 80 basis points.

2016 compared to 2015

	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 and commercial end markets.

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

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

SPECIALTY PRODUCTS

This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, consumer durables, general industrial, printing and publishing and industrial capital goods markets. Products in this segment include:

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

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

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

•	product coding and marking equipment and related consumables;

•	plastic and metal fasteners and components for appliances;

•	airport ground support equipment; and

•	components for medical devices.

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

2017 compared to 2016

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2017				2016				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,938			$	1,885			2.8	%		3.5	%	(1.1	)%	—	%	0.4	%	2.8	%
Operating income	$	527			$	482			9.4	%		10.0	%	(0.1	)%	(1.0	)%	0.5	%	9.4	%
Operating margin %	27.2		%		25.6		%		160 bps			160 bps		30 bps		(30) bps		—		160 bps

•	Operating revenue increased due to organic revenue growth and the favorable effect of foreign currency translation, partially offset by a divestiture.

•	Organic revenue increased 3.5% primarily driven by growth of 4.2% in the consumer packaging businesses.

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

◦	North American organic revenue increased 1.3% driven by growth in the consumer packaging, medical and appliance businesses, partially offset by a decline in the ground support equipment and gluing system businesses.

•	Operating margin of 27.2% increased 160 basis points primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 110 basis points and positive operating leverage of 70 basis points, partially offset by unfavorable price/cost of 30 basis points and higher restructuring expenses.

2016 compared to 2015

	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.

OTHER FINANCIAL HIGHLIGHTS

•	Interest expense was $260 million in 2017, $237 million in 2016 and $226 million in 2015. The increased expense in each respective period was primarily due to the November 2016 debt issuance.

•

Other income (expense) was income of $36 million in 2017, $81 million in 2016 and $78 million in 2015. The income in 2017 is lower than the previous year primarily due to foreign currency translation losses and a $54 million pre-tax gain recorded in 2016 resulting from a $167 million dividend distribution from Wilsonart that exceeded the equity investment balance, partially offset by $30 million of pre-tax losses in 2016 related to the disposals of businesses and the disposal of a partnership investment. The income in 2015 included a $15 million gain on the sale of a business.

•

The effective tax rate was 48.4% in 2017, 30.0% in 2016, and 30.1% in 2015. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the United States "Tax Cuts and Jobs Act" and discrete income tax benefits of $50 million related to the new stock-based compensation guidance effective January 1, 2017. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 5. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•

The impact of the Euro and other foreign currencies against the U.S. Dollar increased operating revenue and income before taxes by approximately $77 million and $13 million in 2017 versus 2016, respectively. The impact of the Euro and other foreign currencies against the U.S. Dollar decreased operating revenue by approximately $210 million and income before taxes by approximately $41 million in 2016 versus 2015, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2017

In March 2016, the FASB issued authoritative guidance that includes several changes to simplify the accounting for stock-based compensation, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification of tax benefits in the statement of cash flows. Among the more significant changes, the new guidance requires that the income tax effects associated with the settlement of stock-based awards after adoption of the guidance be recognized through income tax expense rather than directly in equity. Additionally, the income tax effects related to excess tax benefits should be presented within operating cash flows in the statement of cash flows rather than as a financing activity. Excess tax benefits recognized in equity under the prior guidance were $29 million and $20 million for the years ended December 31, 2016 and 2015, respectively. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $50 million were included in Income taxes in the statement of income for the year ended December 31, 2017. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each period and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.

Effective January 1, 2018

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

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. Effective January 1, 2018, the Company adopted the new guidance and will apply the newly adopted guidance to intra-entity asset transfers on or after the date of adoption. As a result of adopting the new guidance, the Company expects to record a cumulative-effect adjustment reducing deferred tax assets and retained earnings by approximately $400 million. Additionally, intra-entity asset transfers may result in future tax rate volatility under the new guidance.

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

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

Effective January 1, 2019

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

LIQUIDITY AND CAPITAL RESOURCES

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

•	internal investments to support organic growth and sustain core businesses;

•	payment of an attractive dividend to shareholders; and

•	external investments in selective strategic acquisitions that support the Company's organic growth focus and an active share repurchase program.

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

Cash Flow

The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the years ended December 31, 2017, 2016 and 2015 was as follows:

In millions		2017				2016				2015
Net cash provided by operating activities		$	2,402			$	2,302			$	2,299
Additions to plant and equipment		(297		)		(273		)		(284		)
Free cash flow		$	2,105			$	2,029			$	2,015
Cash dividends paid		$	(941	)		$	(821	)		$	(742	)
Repurchases of common stock		(1,000		)		(2,000		)		(2,002		)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates		(3		)		(453		)		(6		)
Dividend distribution from equity investment in Wilsonart		—				167				—
Net proceeds from debt		197				465				151
Other		119				128				147
Effect of exchange rate changes on cash and equivalents		145				(133		)		(463		)
Net increase (decrease) in cash and equivalents		$	622			$	(618	)		$	(900	)

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

Stock Repurchase Programs

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

On February 13, 2015, the Company's Board of Directors authorized a new stock repurchase program, which provided for the buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program"). Under the 2015 Program, the Company repurchased approximately 6.1 million shares of its common stock at an average price of $91.78 per share during 2015, approximately 18.7 million shares of its common stock at an average price of $107.17 per share during 2016, and approximately 7.1 million shares of its common stock at an average price of $140.56 per share during 2017. As of December 31, 2017, there were approximately $2.4 billion of authorized repurchases remaining under the 2015 Program.

Adjusted After-Tax Return on Average Invested Capital

The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. For comparability, the Company excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. Adjusted average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations, as well as the Company's equity investment in the Wilsonart business (formerly the Decorative Surfaces segment). Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC for the years ended December 31, 2017, 2016, and 2015 was as follows:

Dollars in millions		2017				2016				2015
Operating income		$	3,494			$	3,064			$	2,867
Less: Legal settlement income		(95		)		—				—
Adjusted operating income		3,399				3,064				2,867
Tax rate		28.3		%		30.0		%		30.1		%
Income taxes		(961		)		(919		)		(864		)
Operating income after taxes		$	2,438			$	2,145			$	2,003
Invested capital:
Trade receivables		$	2,628			$	2,357			$	2,203
Inventories		1,220				1,076				1,086
Net plant and equipment		1,778				1,652				1,577
Goodwill and intangible assets		6,024				6,021				5,999
Accounts payable and accrued expenses		(1,848		)		(1,713		)		(1,585		)
Other, net		21				223				280
Total invested capital		$	9,823			$	9,616			$	9,560
Average invested capital		$	10,005			$	9,780			$	9,943
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)		—				(91		)		(123		)
Adjusted average invested capital		$	10,005			$	9,689			$	9,820
Adjusted return on average invested capital		24.4		%		22.1		%		20.4		%

ROIC increased 230 basis points for the year ended December 31, 2017 compared to the prior year period as a result of a 13.7% improvement in after-tax operating income versus a 3.3% increase in adjusted average invested capital. The discrete tax benefits related to share-based compensation improved after-tax ROIC by 50 basis points in 2017. ROIC increased 170 basis points in 2016 versus 2015 as a result of a 7.1% improvement in after-tax operating income and a 1.3% decrease in adjusted average invested capital.

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

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

Working Capital

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

Dollars in millions		2017				2016				Increase (Decrease)
Current Assets:
Cash and equivalents		$	3,094			$	2,472			$	622
Trade receivables		2,628				2,357				271
Inventories		1,220				1,076				144
Other		336				218				118
		7,278				6,123				1,155
Current Liabilities:
Short-term debt		850				652				198
Accounts payable and accrued expenses		1,848				1,713				135
Other		355				395				(40		)
		3,053				2,760				293
Net Working Capital		$	4,225			$	3,363			$	862

The increase in net working capital at December 31, 2017 was primarily driven by higher cash and equivalents.

Cash and equivalents totaled approximately $3.1 billion as of December 31, 2017 and $2.5 billion as of December 31, 2016, primarily all of which was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. A portion of the cash and equivalents balances held internationally is typically used for international operating needs, reinvested to fund expansion of existing international businesses, used to fund new international acquisitions, or used to repay debt held internationally. In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs, which primarily consist of dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations and general corporate needs. The Company also uses its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated domestically and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

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

Debt

Total debt at December 31, 2017 and 2016 was as follows:

In millions		2017				2016				Increase (Decrease)
Short-term debt		$	850			$	652			$	198
Long-term debt		7,478				7,177				301
Total debt		$	8,328			$	7,829			$	499

As of December 31, 2017, Short-term debt included commercial paper of $849 million. As of December 31, 2016, Short-term debt included $650 million related to the 0.90% notes due February 25, 2017, which were repaid on the due date. There was no commercial paper outstanding as of December 31, 2016.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of May 9, 2021 to support the potential issuances of commercial paper. This agreement replaced the previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0 billion line of credit agreement with a termination date of August 15, 2018. No amounts were outstanding under the new line of credit agreement at December 31, 2017. The maximum outstanding commercial paper balance during 2017 was $1.1 billion, while the average daily balance was $691 million. As of December 31, 2017, the Company's foreign operations had authorized credit facilities with unused capacity of $206 million.

In November 2016, the Company issued $1.0 billion of 2.65% notes due November 15, 2026 at 99.685% of face value. Net proceeds from the November 2016 debt issuance were used to repay commercial paper and for general corporate purposes.

Total Debt to EBITDA

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

Dollars in millions	2017				2016				2015
Total debt	$	8,328			$	7,829			$	7,422
Net income	$	1,687			$	2,035			$	1,899
Add:
Interest expense	260				237				226
Other income	(36		)		(81		)		(78		)
Income taxes	1,583				873				820
Depreciation	256				246				244
Amortization and impairment of intangible assets	206				224				233
EBITDA	$	3,956			$	3,534			$	3,344
Total debt to EBITDA ratio	2.1				2.2				2.2

Stockholders’ Equity

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

In millions		2017				2016
Beginning balance		$	4,259			$	5,228
Net income		1,687				2,035
Cash dividends declared		(982		)		(846		)
Repurchases of common stock		(1,000		)		(2,000		)
Currency translation adjustments		406				(277		)
Other		219				119
Ending balance		$	4,589			$	4,259

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

In millions		2018				2019				2020				2021				2022				2023 and Future Years
Principal payments on debt		$	1			$	1,350			$	4			$	350			$	600			$	5,254
Interest payments on debt		243				215				186				186				174				1,925
Noncurrent income taxes payable		53				53				53				53				53				403
Minimum lease payments		88				63				45				31				25				61
		$	385			$	1,681			$	288			$	620			$	852			$	7,643

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The Company's critical accounting policies are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately $40 million. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method provides a more precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 9. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.

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