Item 8. Financial Statements and Supplementary Data

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Illinois Tool Works Inc. (the "Company" or "ITW") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we believe that, as of December 31, 2017, the Company’s internal control over financial reporting is effective based on those criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.

/s/ E. Scott Santi E. Scott Santi Chairman & Chief Executive Officer February 15, 2018		/s/ Michael M. Larsen Michael M. Larsen Senior Vice President & Chief Financial Officer February 15, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Illinois Tool Works Inc.

Glenview, Illinois

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Illinois Tool Works Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

February 15, 2018

We have served as the Company's auditor since 2002.

Statement of Income

Illinois Tool Works Inc. and Subsidiaries

	For the Years Ended December 31
In millions except per share amounts	2017				2016				2015
Operating Revenue	$	14,314			$	13,599			$	13,405
Cost of revenue	8,309				7,896				7,888
Selling, administrative, and research and development expenses	2,400				2,415				2,417
Legal settlement (income)	(95		)		—				—
Amortization and impairment of intangible assets	206				224				233
Operating Income	3,494				3,064				2,867
Interest expense	(260		)		(237		)		(226		)
Other income (expense)	36				81				78
Income Before Taxes	3,270				2,908				2,719
Income taxes	1,583				873				820
Net Income	$	1,687			$	2,035			$	1,899
Net Income Per Share:
Basic	$	4.90			$	5.73			$	5.16
Diluted	$	4.86			$	5.70			$	5.13

The Notes to Financial Statements are an integral part of this statement.

Statement of Comprehensive Income

Illinois Tool Works Inc. and Subsidiaries

	For the Years Ended December 31
In millions	2017				2016				2015
Net Income	$	1,687			$	2,035			$	1,899
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax	406				(277		)		(860		)
Pension and other postretirement benefit adjustments, net of tax	114				(26		)		14
Comprehensive Income	$	2,207			$	1,732			$	1,053

The Notes to Financial Statements are an integral part of this statement.

Statement of Financial Position

Illinois Tool Works Inc. and Subsidiaries

	December 31
In millions except per share amounts	2017				2016
Assets
Current Assets:
Cash and equivalents	$	3,094			$	2,472
Trade receivables	2,628				2,357
Inventories	1,220				1,076
Prepaid expenses and other current assets	336				218
Total current assets	7,278				6,123
Net plant and equipment	1,778				1,652
Goodwill	4,752				4,558
Intangible assets	1,272				1,463
Deferred income taxes	505				449
Other assets	1,195				956
	$	16,780			$	15,201
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt	$	850			$	652
Accounts payable	590				511
Accrued expenses	1,258				1,202
Cash dividends payable	266				226
Income taxes payable	89				169
Total current liabilities	3,053				2,760
Noncurrent Liabilities:
Long-term debt	7,478				7,177
Deferred income taxes	164				134
Noncurrent income taxes payable	614				—
Other liabilities	882				871
Total noncurrent liabilities	9,138				8,182
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2017 and 2016 Outstanding- 341.5 shares in 2017 and 346.9 shares in 2016	6				6
Additional paid-in-capital	1,218				1,188
Retained earnings	20,210				19,505
Common stock held in treasury	(15,562		)		(14,638		)
Accumulated other comprehensive income (loss)	(1,287		)		(1,807		)
Noncontrolling interest	4				5
Total stockholders’ equity	4,589				4,259
	$	16,780			$	15,201

The Notes to Financial Statements are an integral part of this statement.

Statement of Changes in Stockholders' Equity

Illinois Tool Works Inc. and Subsidiaries

In millions except per share amounts	Common Stock			Additional Paid-in Capital			Retained Earnings			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
Balance at December 31, 2014	$	6		$	1,096		$	17,173		$	(10,798	)	$	(658	)	$	5		$	6,824
Net income	—			—			1,899			—			—			—			1,899
Common stock issued for share-based compensation	—			(21		)	—			69			—			—			48
Stock-based compensation expense	—			39			—			2			—			—			41
Tax benefits related to stock options	—			20			—			—			—			—			20
Tax benefits related to defined contribution plans	—			3			—			—			—			—			3
Repurchases of common stock	—			—			—			(2,002		)	—			—			(2,002		)
Dividends declared ($2.07 per share)	—			—			(756		)	—			—			—			(756		)
Pension and other postretirement benefit adjustments	—			—			—			—			14			—			14
Currency translation adjustment	—			—			—			—			(860		)	—			(860		)
Noncontrolling interest	—			(2		)	—			—			—			(1		)	(3		)
Balance at December 31, 2015	6			1,135			18,316			(12,729		)	(1,504		)	4			5,228
Net income	—			—			2,035			—			—			—			2,035
Common stock issued for share-based compensation	—			(18		)	—			91			—			—			73
Stock-based compensation expense	—			39			—			—			—			—			39
Tax benefits related to stock options	—			29			—			—			—			—			29
Tax benefits related to defined contribution plans	—			3			—			—			—			—			3
Repurchases of common stock	—			—			—			(2,000		)	—			—			(2,000		)
Dividends declared ($2.40 per share)	—			—			(846		)	—			—			—			(846		)
Pension and other postretirement benefit adjustments	—			—			—			—			(26		)	—			(26		)
Currency translation adjustment	—			—			—			—			(277		)	—			(277		)
Noncontrolling interest	—			—			—			—			—			1			1
Balance at December 31, 2016	6			1,188			19,505			(14,638		)	(1,807		)	5			4,259
Net income	—			—			1,687			—			—			—			1,687
Common stock issued for share-based compensation	—			(4		)	—			76			—			—			72
Stock-based compensation expense	—			36			—			—			—			—			36
Repurchases of common stock	—			—			—			(1,000		)	—			—			(1,000		)
Dividends declared ($2.86 per share)	—			—			(982		)	—			—			—			(982		)
Pension and other postretirement benefit adjustments	—			—			—			—			114			—			114
Currency translation adjustment	—			—			—			—			406			—			406
Noncontrolling interest	—			(2		)	—			—			—			(1		)	(3		)
Balance at December 31, 2017	$	6		$	1,218		$	20,210		$	(15,562	)	$	(1,287	)	$	4		$	4,589

The Notes to Financial Statements are an integral part of this statement.

Statement of Cash Flows

Illinois Tool Works Inc. and Subsidiaries

	For the Years Ended December 31
In millions	2017				2016				2015
Cash Provided by (Used for) Operating Activities:
Net income	$	1,687			$	2,035			$	1,899
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	256				246				244
Amortization and impairment of intangible assets	206				224				233
Change in deferred income taxes	64				(263		)		(11		)
Provision for uncollectible accounts	3				7				7
(Income) loss from investments	(16		)		13				(4		)
(Gain) loss on sale of plant and equipment	(1		)		1				1
(Gain) loss on sale of operations and affiliates	(1		)		12				(16		)
Stock-based compensation expense	36				39				41
Gain on dividend distribution from equity investment in Wilsonart	—				(54		)		—
Other non-cash items, net	10				5				12
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in—
Trade receivables	(138		)		(132		)		(42		)
Inventories	(81		)		9				25
Prepaid expenses and other assets	(121		)		(63		)		24
Increase (decrease) in—
Accounts payable	39				(3		)		(30		)
Accrued expenses and other liabilities	(42		)		40				(56		)
Income taxes	501				187				(27		)
Other, net	—				(1		)		(1		)
Net cash provided by operating activities	2,402				2,302				2,299
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates	(3		)		(453		)		(6		)
Additions to plant and equipment	(297		)		(273		)		(284		)
Proceeds from investments	43				21				22
Dividend distribution from equity investment in Wilsonart	—				167				—
Proceeds from sale of plant and equipment	14				16				30
Proceeds from sale of operations and affiliates	2				3				29
Other, net	(10		)		(13		)		(1		)
Net cash provided by (used for) investing activities	(251		)		(532		)		(210		)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid	(941		)		(821		)		(742		)
Issuance of common stock	84				84				59
Repurchases of common stock	(1,000		)		(2,000		)		(2,002		)
Net proceeds from (repayments of) debt with original maturities of three months or less	849				(526		)		(946		)
Proceeds from debt with original maturities of more than three months	—				992				1,099
Repayments of debt with original maturities of more than three months	(652		)		(1		)		(2		)
Excess tax benefits from stock-based compensation	—				29				20
Other, net	(14		)		(12		)		(12		)
Net cash provided by (used for) financing activities	(1,674		)		(2,255		)		(2,526		)
Effect of Exchange Rate Changes on Cash and Equivalents	145				(133		)		(463		)
Cash and Equivalents:
Increase (decrease) during the year	622				(618		)		(900		)
Beginning of year	2,472				3,090				3,990
End of year	$	3,094			$	2,472			$	3,090
Supplementary Cash Flow Information:
Cash Paid During the Year for Interest	$	240			$	212			$	200
Cash Paid During the Year for Income Taxes, Net of Refunds	$	1,018			$	920			$	775
Liabilities Assumed from Acquisitions	$	5			$	150			$	1

The Notes to Financial Statements are an integral part of this statement.

Notes to Financial Statements

(1) Description of Business and Summary of Significant Accounting Policies

Description of business— Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with approximately 85 divisions in 56 countries. The Company primarily serves the automotive OEM/tiers, commercial food equipment, construction, general industrial, and automotive aftermarket end markets.

Consolidation and translation— The financial statements include the Company and its majority-owned subsidiaries. The Company follows the equity method of accounting for investments where the Company has a significant influence but not a controlling interest. Intercompany transactions are eliminated from the financial statements. Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates for the period. Translation adjustments are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Reclassifications— Certain reclassifications of prior year data have been made to conform to current year reporting.

Use of estimates— The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to financial statements. Actual results could differ from those estimates.

Acquisitions— The Company accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition.

Operating revenue— Operating revenue is recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed or determinable, and collectibility is reasonably assured, which is generally at the time of product shipment. Typical sales arrangements are for standard products and provide for transfer of ownership and risk of loss at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation and customer acceptance, revenue recognition is deferred until such obligations have been completed. Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are estimated at the time of sale based on historical experience and known trends and are recorded as a reduction in reported revenues.

Research and development expenses— Research and development expenses are recorded as expense in the year incurred. These costs were $225 million, $223 million and $218 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $53 million, $58 million and $58 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Income taxes— The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities given the provisions of the enacted tax laws. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

Cash and equivalents— Cash and equivalents include cash on hand and instruments having original maturities of three months or less. Cash and equivalents are stated at cost, which approximates fair value.

Trade receivables— Trade receivables are net of allowances for doubtful accounts which includes reserves for uncollectible accounts, customer credits and cash discounts. The Company estimates the allowance for uncollectible accounts based on the greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In addition, reserves for customer credits and cash discounts are estimated based on past experience. The changes in the allowance for doubtful accounts for the years ended 2017, 2016 and 2015 were as follows:

In millions		2017				2016				2015
Beginning balance		$	43			$	42			$	43
Provision charged to expense		3				7				7
Write-offs, net of recoveries		(6		)		(6		)		(5		)
Acquisitions and divestitures		—				1				—
Foreign currency translation		3				(1		)		(3		)
Ending balance		$	43			$	43			$	42

Inventories— Inventories are stated at the lower of cost or net realizable value and include material, labor and factory overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at LIFO were approximately 21% and 22% of total inventories as of December 31, 2017 and 2016, respectively. If the FIFO method was used for all inventories, total inventories would have been approximately $89 million and $86 million higher than reported at December 31, 2017 and 2016, respectively. The major classes of inventory at December 31, 2017 and 2016 were as follows:

In millions		2017				2016
Raw material		$	465			$	407
Work-in-process		141				126
Finished goods		703				629
LIFO reserve		(89		)		(86		)
Total inventories		$	1,220			$	1,076

Net plant and equipment— Net plant and equipment are stated at cost, less accumulated depreciation. Renewals and improvements that increase the useful life of plant and equipment are capitalized. Maintenance and repairs are charged to expense as incurred. Net plant and equipment consisted of the following at December 31, 2017 and 2016:

In millions		2017				2016
Land		$	203			$	186
Buildings and improvements		1,370				1,297
Machinery and equipment		3,301				3,036
Equipment leased to others		164				160
Construction in progress		123				104
Gross plant and equipment		5,161				4,783
Accumulated depreciation		(3,383		)		(3,131		)
Net plant and equipment		$	1,778			$	1,652

The Company’s U.S. businesses primarily compute depreciation on an accelerated basis. The majority of the Company's international businesses compute depreciation on a straight-line basis. The ranges of useful lives used to depreciate plant and equipment are as follows:

Buildings and improvements	5—50 years
Machinery and equipment	3—12 years
Equipment leased to others	Term of lease

Depreciation was $256 million, $246 million and $244 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Goodwill and intangible assets— Goodwill represents the excess cost over fair value of the net assets of acquired businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.

The Company performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units, including discounting estimated future cash flows based on a detailed cash flow forecast prepared by the relevant reporting unit and market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit's goodwill.

The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these intangible assets are determined based on a Level 3 valuation method using a relief-from-royalty income approach derived from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible asset.

Accrued warranties— The Company accrues for product warranties based on historical experience. The changes in accrued warranties for the years ended December 31, 2017, 2016 and 2015 were as follows:

In millions		2017				2016				2015
Beginning balance		$	45			$	46			$	49
Charges		(45		)		(41		)		(37		)
Provision charged to expense		43				42				36
Acquisitions and divestitures		—				1				—
Foreign currency translation		2				(3		)		(2		)
Ending balance		$	45			$	45			$	46

New Accounting Pronouncements

Effective January 1, 2017

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

Effective January 1, 2018

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

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

In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, including interest cost, expected return on assets, settlements, curtailments, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. Effective January 1, 2018, the Company adopted the new guidance and will apply the new presentation of net periodic benefit cost in future periods and expects to restate prior periods for comparability. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows. For the years ended December 31, 2017, 2016 and 2015, the other components of net periodic benefit cost were income of $9 million, income of $8 million, and expense of $1 million, respectively. Refer to Note 9. Pension and Other Postretirement Benefits for further information regarding the Company’s net periodic benefit cost.

Effective January 1, 2019

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

(2) Acquisitions

Net cash paid for acquisitions during 2017, 2016 and 2015 was $3 million, $453 million and $6 million, respectively. Acquisitions, individually and in the aggregate, did not materially affect the Company's results of operations or financial position for any period presented.

The net cash paid for acquisitions in 2016 primarily related to the acquisition of the Engineered Fasteners and Components ("EF&C") business from ZF TRW on July 1, 2016 for a purchase price of approximately $450 million. EF&C had operating revenue of $517 million for the year ended December 31, 2017 and $245 million for the six months ended December 31,

2016, which was reported within the Company’s Automotive OEM segment. As a result of the EF&C transaction, the Company recorded $187 million of goodwill and $134 million of amortizable intangible assets primarily related to customer relationships and technology. Approximately $104 million of the acquired goodwill balance is tax deductible. The fair values of the intangible assets were estimated based on discounted cash flow and market-based valuation models using Level 2 and Level 3 inputs and assumptions. The intangible assets are expected to be amortized on a straight-line basis over their estimated useful lives ranging from 4 to 17 years, with a weighted average amortization period of 16 years.

(3) Legal Settlement

In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.

(4) Other Income (Expense)

Other income (expense) consisted of the following:

In millions		2017				2016				2015
Interest income		$	45			$	38			$	52
Income (loss) from investments		16				(13		)		4
Gain (loss) on disposal of operations and affiliates		1				(12		)		16
Equity income (loss) in Wilsonart		—				61				(4		)
Gain (loss) on foreign currency transactions, net		(25		)		9				5
Other, net		(1		)		(2		)		5
Total other income (expense)		$	36			$	81			$	78

In the fourth quarter of 2012, the Company divested a 51% majority interest in its former Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). As a result of the transaction, the Company owns common units (the "Common Units") of Wilsonart International Holdings LLC ("Wilsonart") initially representing approximately 49% (on an as-converted basis) of the total outstanding equity. CD&R owns cumulative convertible participating preferred units (the "Preferred Units") of Wilsonart representing approximately 51% (on an as-converted basis) of the total outstanding equity. The Preferred Units rank senior to the Common Units as to dividends and liquidation preference, and accrue dividends at a rate of 10% per annum. The ownership interest in Wilsonart is reported using the equity method of accounting. The Company's proportionate share in income (loss) of Wilsonart is reported in Other income (expense) in the consolidated statement of income. As the Company's investment in Wilsonart is structured as a partnership for U.S. tax purposes, U.S. taxes are recorded separately from the equity investment. Equity income (loss) in Wilsonart for the year ended December 31, 2016 included a $54 million pre-tax gain resulting from a $167 million cash dividend distribution from Wilsonart which exceeded the Company's equity investment balance. As a result of the dividend distribution, the equity investment balance in Wilsonart was reduced to zero and any subsequent equity investment income will not be recognized until the gain is recaptured.

(5) Income Taxes

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revise the U.S. corporate income tax rules. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of the amounts recorded at December 31, 2017.

In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as follows:

•

A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can be paid in installments over eight years and, as such, $614 million was recorded as noncurrent income taxes payable in the statement of financial position. Additionally, as a result of the one-time repatriation provisions of the Act, the Company expects to repatriate approximately $2 billion of foreign held cash and equivalents and recorded additional foreign withholding taxes of $53 million in the fourth quarter of 2017.

•

A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018. Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. The Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.

•	Deductibility of certain executive compensation. The Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.

•	Taxation of certain global intangible low-taxed income entities ("GILTI") beginning in 2018. This provision does not impact the Company in 2017, but will impact the Company in subsequent years and is expected to partially offset the benefit of the lower U.S. corporate tax rate discussed above.

The provisional amounts recorded for the year ended December 31, 2017 reflect the Company’s best estimate based on information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement of estimated amounts.

Provision for income taxes— The components of the provision for income taxes were as follows:

In millions		2017				2016				2015
U.S. federal income taxes:
Current		$	1,117			$	756			$	503
Deferred		(10		)		(224		)		8
Total U.S. federal income taxes		1,107				532				511
Foreign income taxes:
Current		296				290				310
Deferred		102				(5		)		(11		)
Benefit of net operating loss carryforwards		—				—				(48		)
Total foreign income taxes		398				285				251
State income taxes:
Current		106				90				66
Deferred		(28		)		(34		)		(8		)
Total state income taxes		78				56				58
Total provision for income taxes		$	1,583			$	873			$	820

Income before taxes for domestic and foreign operations was as follows:

In millions		2017				2016				2015
Domestic		$	1,806			$	1,653			$	1,660
Foreign		1,464				1,255				1,059
Total income before taxes		$	3,270			$	2,908			$	2,719

The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:

		2017			2016			2015
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
Tax effect of U.S. federal tax law change		20.1			—			—
State income taxes, net of U.S. federal tax benefit		1.2			1.3			1.4
Differences between U.S. federal statutory and foreign tax rates		(3.5	)		(3.6	)		(3.1	)
Nontaxable foreign interest income		(1.7	)		(2.1	)		(3.3	)
Tax effect of foreign dividends		0.9			1.5			2.8
Tax relief for U.S. manufacturers		(1.4	)		(1.4	)		(1.6	)
Excess tax benefits from stock-based compensation		(1.5	)		—			—
Other, net		(0.7	)		(0.7	)		(1.1	)
Effective tax rate		48.4	%		30.0	%		30.1	%

Prior to the Act, deferred U.S. federal and state income taxes and foreign withholding taxes had not been provided on substantially all undistributed earnings of international subsidiaries as these earnings were considered permanently invested. As part of the one-time deemed repatriation provisions of the Act, the Company provided for U.S. tax on substantially all undistributed earnings of its foreign subsidiaries as of December 31, 2017. Upon repatriation of these earnings to the U.S., the Company may be subject to foreign withholding taxes. As of December 31, 2017, the Company had provided for $75 million of foreign withholding taxes related to the expected repatriation of approximately $2 billion of foreign held cash and equivalents, which includes the $53 million recorded in the fourth quarter of 2017, as discussed above.

Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities at December 31, 2017 and 2016 were as follows:

		2017								2016
In millions		Asset				Liability				Asset				Liability
Goodwill and intangible assets		$	195			$	(506	)		$	240			$	(716	)
Inventory reserves, capitalized tax cost and LIFO inventory		31				(3		)		40				(5		)
Investments		15				(180		)		23				(206		)
Plant and equipment		18				(64		)		23				(79		)
Accrued expenses and reserves		45				—				76				—
Employee benefit accruals		177				—				306				—
Foreign tax credit carryforwards		13				—				6				—
Net operating loss carryforwards		507				—				610				—
Capital loss carryforwards		98				—				42				—
Allowances for uncollectible accounts		9				—				13				—
Pension liabilities		—				(25		)		25				—
Deferred intercompany deductions		405				—				430				—
Unrealized loss (gain) on foreign debt instruments		—				(19		)		—				(140		)
Other		99				(15		)		97				(16		)
Gross deferred income tax assets (liabilities)		1,612				(812		)		1,931				(1,162		)
Valuation allowances		(459		)		—				(454		)		—
Total deferred income tax assets (liabilities)		$	1,153			$	(812	)		$	1,477			$	(1,162	)

The valuation allowances recorded at December 31, 2017 and 2016 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2017, the Company has utilized all realizable foreign tax credit carryforwards.

At December 31, 2017, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:

	Gross Carryforwards Related
In millions	to Net Operating Losses
2018	$	15
2019	17
2020	86
2021	79
2022	24
2023	19
2024	17
2025-2037	17
Do not expire	1,685
Total gross carryforwards related to net operating losses	$	1,959

Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the years ended 2017, 2016 and 2015 were as follows:

In millions		2017				2016				2015
Beginning balance		$	210			$	259			$	218
Additions based on tax positions related to the current year		42				19				39
Additions for tax positions of prior years		100				126				54
Reductions for tax positions of prior years		(24		)		(97		)		(41		)
Settlements		(53		)		(96		)		(6		)
Foreign currency translation		10				(1		)		(5		)
Ending balance		$	285			$	210			$	259

Included in the balance at December 31, 2017 were approximately $254 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate.

Settlements during 2017 primarily related to the Company effectively settling with the German Fiscal Authority on issues identified during its 2009-2011 audit, which primarily related to intercompany transactions. During the fourth quarter of 2016, the Company effectively settled with the Internal Revenue Service on issues identified during its 2012-2013 audit, which primarily related to deferred gain recognition and foreign tax credits. Based on this agreement, the Company decreased its unrecognized tax benefits by approximately $96 million.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $31 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. The following table summarizes the open tax years for the Company’s major jurisdictions:

Jurisdiction		Open Tax Years
United States – Federal		2014-2017
United Kingdom		2016-2017
Germany		2012-2017
France		2014-2017
Australia		2013-2017

The Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest and penalties as of December 31, 2017 and 2016 was $25 million and $28 million, respectively.

On February 18, 2014, the Company received a Notice of Deficiency ("NOD") from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case proceeded to court with the trial taking place in the third quarter of 2016. Final decision by the tax court is expected in 2018. Although the court's final decision cannot be predicted with certainty, the Company believes its position continues to be supportable. Accordingly, no reserve has been recorded related to this matter.

(6) Net Income Per Share

Net income per basic share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Net income per diluted share is computed by dividing net income by the weighted-average number of shares assuming dilution for stock options and restricted stock units. Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised and the unvested restricted stock units vested during the period. The computation of net income per share was as follows:

In millions except per share amounts		2017				2016				2015
Net Income		$	1,687			$	2,035			$	1,899
Net income per share—Basic:
Weighted-average common shares		344.1				355.0				367.9
Net income per share—Basic		$	4.90			$	5.73			$	5.16
Net income per share—Diluted:
Weighted-average common shares		344.1				355.0				367.9
Effect of dilutive stock options and restricted stock units		2.7				2.1				2.2
Weighted-average common shares assuming dilution		346.8				357.1				370.1
Net income per share—Diluted		$	4.86			$	5.70			$	5.13

Options that were considered antidilutive were not included in the computation of diluted net income per share. There were no antidilutive options outstanding as of December 31, 2017 and 2016. There were 0.6 million antidilutive options outstanding as of December 31, 2015.

(7) Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:

In millions	Automotive OEM				Test & Measurement and Electronics				Food Equipment				Polymers & Fluids				Welding				Construction Products				Specialty Products				Total
Balance, December 31, 2015	$	277			$	1,355			$	259			$	894			$	261			$	516			$	877			$	4,439
2016 activity:
Acquisitions & divestitures	187				1				—				(2		)		—				(1		)		1				186
Foreign currency translation	(8		)		(20		)		(10		)		(3		)		(1		)		(7		)		(18		)		(67		)
Balance, December 31, 2016	456				1,336				249				889				260				508				860				4,558
2017 activity:
Acquisitions & divestitures	—				—				—				—				—				—				1				1
Foreign currency translation	32				36				20				30				12				22				41				193
Balance, December 31, 2017	$	488			$	1,372			$	269			$	919			$	272			$	530			$	902			$	4,752
Cumulative goodwill impairment charges, December 31, 2017	$	24			$	83			$	60			$	15			$	5			$	7			$	46			$	240

Intangible assets as of December 31, 2017 and 2016 were as follows:

		2017												2016
In millions		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Amortizable intangible assets:
Customer lists and relationships		$	1,753			$	(1,182	)		$	571			$	1,744			$	(1,060	)		$	684
Trademarks and brands		761				(391		)		370				733				(344		)		389
Patents and proprietary technology		623				(473		)		150				620				(432		)		188
Other		474				(453		)		21				461				(444		)		17
Total amortizable intangible assets		3,611				(2,499		)		1,112				3,558				(2,280		)		1,278
Indefinite-lived intangible assets:
Trademarks and brands		160				—				160				185				—				185
Total intangible assets		$	3,771			$	(2,499	)		$	1,272			$	3,743			$	(2,280	)		$	1,463

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2017, 2016 and 2015. The 2017 and 2016 assessments resulted in no impairment charges. In 2015, the Company recorded a $2 million indefinite-lived intangible asset impairment charge related to a brand in the Polymers & Fluids segment which had a fair value of $24 million and a carrying value of $26 million. The 2015 impairment was included in Amortization and impairment of intangible assets in the statement of income.

For the years ended December 31, 2017, 2016 and 2015, amortization expense and impairment of intangible assets was $206 million, $224 million and $233 million, respectively.

The estimated amortization expense of intangible assets for the future years ending December 31 is as follows:

In millions
2018	$	185
2019	163
2020	143
2021	124
2022	112

(8) Debt

Short-term debt— Short-term debt represents obligations with a maturity date of one year or less and is stated at cost which approximates fair value. Short-term debt also includes current maturities of long-term debt. Short-term debt as of December 31, 2017 and 2016 consisted of the following:

In millions		2017				2016
Commercial paper		$	849			$	—
Current maturities of long-term debt		1				650
Other borrowings		—				2
Total short-term debt		$	850			$	652

As of December 31, 2017, Short-term debt included commercial paper of $849 million. As of December 31, 2016, Short-term debt included $650 million related to the 0.90% notes due February 25, 2017, which were repaid on the due date.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of May 9, 2021 to support the potential issuances of commercial paper. This agreement replaced the previously existing $1.5 billion line of credit agreement with a termination date of June 8, 2017 and the $1.0 billion line of credit agreement with a termination date of August 15, 2018. No amounts were outstanding under the new line of credit agreement at December 31, 2017. As of December 31, 2017, the Company was in compliance with the financial covenants of the line of credit agreement, which includes a minimum interest coverage ratio. The weighted-average interest rate on commercial paper was 1.0% and 0.4% at December 31, 2017 and 2016, respectively.

As of December 31, 2017, the Company had unused capacity of approximately $206 million under international debt facilities.

Long-term debt— Long-term debt represents obligations with a maturity date greater than one year, and excludes current maturities that have been reclassified to short-term debt. Long-term debt at carrying value and fair value as of December 31, 2017 and 2016 consisted of the following:

				2017								2016
In millions		Effective Interest Rate		Carrying Value				Fair Value				Carrying Value				Fair Value
0.90% notes due February 25, 2017		0.95%		$	—			$	—			$	650			$	650
1.95% notes due March 1, 2019		1.98%		649				649				648				656
6.25% notes due April 1, 2019		6.25%		699				736				698				768
4.88% notes due thru December 31, 2020		4.96%		4				4				4				4
3.375% notes due September 15, 2021		3.43%		348				361				348				365
1.75% Euro notes due May 20, 2022		1.86%		595				638				520				565
1.25% Euro notes due May 22, 2023		1.35%		595				624				520				549
3.50% notes due March 1, 2024		3.54%		696				734				695				728
2.65% notes due November 15, 2026		2.69%		992				980				991				959
2.125% Euro notes due May 22, 2030		2.18%		594				646				519				565
3.0% Euro notes due May 19, 2034		3.13%		586				702				512				618
4.875% notes due September 15, 2041		4.97%		636				791				636				734
3.9% notes due September 1, 2042		3.96%		1,081				1,183				1,080				1,114
Other borrowings				4				4				6				6
Total				$	7,479			$	8,052			$	7,827			$	8,281
Less: Current maturities of long-term debt				(1		)						(650		)
Total long-term debt				$	7,478							$	7,177

The approximate fair values of the Company’s long-term debt, including current maturities, were based on a valuation model, using Level 2 observable inputs which included market rates for comparable instruments for the respective periods.

In 2005, the Company issued $54 million of 4.88% notes due through December 31, 2020 at 100% of face value.

In 2009, the Company issued $700 million of 6.25% redeemable notes due April 1, 2019 at 99.98% of face value.

In 2011, the Company issued $350 million of 3.375% notes due September 15, 2021 at 99.552% of face value and $650 million of 4.875% notes due September 15, 2041 at 98.539% of face value.

In 2012, the Company issued $1.1 billion of 3.9% notes due September 1, 2042 at 99.038% of face value.

In February 2014, the Company issued $650 million of 0.9% notes due February 25, 2017 at 99.861% of face value, $650 million of 1.95% notes due March 1, 2019 at 99.871% of face value, and $700 million of 3.5% notes due March 1, 2024 at 99.648% of face value. The $650 million of 0.9% notes due February 25, 2017 were repaid on the due date.

In May 2014, the Company issued €500 million of 1.75% Euro notes due May 20, 2022 at 99.16% of face value and €500 million of 3.0% Euro notes due May 19, 2034 at 98.089% of face value.

In May 2015, the Company issued €500 million of 1.25% Euro notes due May 22, 2023 at 99.239% of face value and €500 million of 2.125% Euro notes due May 22, 2030 at 99.303% of face value. Net proceeds from the May 2015 debt issuances were used to repay commercial paper and for general corporate purposes.

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

The Company designated the €1.0 billion of Euro notes issued in May 2014 and the €1.0 billion of Euro notes issued in May 2015 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Refer to Note 11. Stockholders' Equity for additional information regarding the net investment hedge.

All of the Company's notes listed above represent senior unsecured obligations ranking equal in right of payment. Scheduled maturities of long-term debt, including current maturities of long-term debt, for the future years ending December 31 are as follows:

In millions
2018	$	1
2019	1,348
2020	4
2021	348
2022	595
2023 and future years	5,183
Total	$	7,479

(9) Pension and Other Postretirement Benefits

The Company has both funded and unfunded defined benefit pension and other postretirement benefit plans, predominately in the U.S. The U.S. primary pension plan provides benefits based on years of service and final average salary. The U.S. primary postretirement health care plan is contributory with the participants’ contributions adjusted annually. The U.S. primary postretirement life insurance plan is noncontributory. Beginning January 1, 2007, the U.S. primary pension and other postretirement benefit plans were closed to new participants. Newly hired employees and employees from acquired businesses that are not participating in these plans are eligible for additional Company contributions under the existing U.S. primary defined contribution retirement plans. The Company’s expense related to defined contribution plans was $79 million in 2017, $77 million in 2016, and $77 million in 2015. In addition to the U.S. plans, the Company also has defined benefit pension plans in certain other countries, mainly the United Kingdom, Canada, Germany and Switzerland.

Summarized information regarding net periodic benefit cost included in the statement of income related to the Company's significant defined benefit pension and other postretirement benefit plans is as follows:

		Pension												Other Postretirement Benefits
In millions		2017				2016				2015				2017				2016				2015
Components of net periodic benefit cost:
Service cost		$	63			$	62			$	70			$	9			$	9			$	11
Interest cost		72				92				92				19				24				24
Expected return on plan assets		(133		)		(144		)		(151		)		(23		)		(23		)		(25		)
Amortization of actuarial (gain) loss		57				44				60				(1		)		—				(1		)
Amortization of prior service cost		—				—				1				—				(1		)		1
Total net periodic benefit cost		$	59			$	54			$	72			$	4			$	9			$	10

The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2016 and MP-2017, to measure its U.S. pension and other postretirement obligations as of December 31, 2016 and 2017, respectively, which did not have a significant impact in either period.

The following tables provide a rollforward of the plan benefit obligations, plan assets and a reconciliation of funded status for the years ended December 31, 2017 and 2016:

		Pension								Other Postretirement Benefits
In millions		2017				2016				2017				2016
Change in benefit obligation:
Benefit obligation at January 1		$	2,562			$	2,462			$	551			$	552
Service cost		63				62				9				9
Interest cost		72				92				19				24
Plan participants’ contributions		2				2				12				12
Actuarial (gain) loss		26				216				(5		)		(5		)
Acquisitions and divestitures		—				7				—				—
Benefits paid		(152		)		(150		)		(41		)		(43		)
Medicare subsidy received		—				—				1				2
Foreign currency translation		88				(129		)		—				—
Benefit obligation at December 31		$	2,661			$	2,562			$	546			$	551

		Pension								Other Postretirement Benefits
In millions		2017				2016				2017				2016
Change in plan assets:
Fair value of plan assets at January 1		$	2,487			$	2,441			$	351			$	342
Actual return on plan assets		227				274				45				36
Company contributions		178				70				6				4
Plan participants’ contributions		2				2				12				12
Benefits paid		(152		)		(150		)		(41		)		(43		)
Foreign currency translation		90				(150		)		—				—
Fair value of plan assets at December 31		$	2,832			$	2,487			$	373			$	351
Funded status		$	171			$	(75	)		$	(173	)		$	(200	)
Other immaterial plans		(65		)		(58		)		(5		)		(5		)
Net asset (liability) at December 31		$	106			$	(133	)		$	(178	)		$	(205	)
The amounts recognized in the statement of financial position as of December 31 consist of:
Other assets		$	337			$	131			$	—			$	—
Accrued expenses		(12		)		(12		)		(4		)		(4		)
Other noncurrent liabilities		(219		)		(252		)		(174		)		(201		)
Net asset (liability) at end of year		$	106			$	(133	)		$	(178	)		$	(205	)
The pre-tax amounts recognized in accumulated other comprehensive income consist of:
Net actuarial (gain) loss		$	548			$	673			$	(64	)		$	(38	)
Prior service cost		—				—				—				—
		$	548			$	673			$	(64	)		$	(38	)
Accumulated benefit obligation		$	2,499			$	2,207
Plans with accumulated benefit obligation in excess of plan assets as of December 31:
Projected benefit obligation		$	184			$	183
Accumulated benefit obligation		$	175			$	167
Fair value of plan assets		$	27			$	25

Company contributions in 2017 included an additional $115 million discretionary pension contribution related to the U.S. primary pension plan.

Assumptions— The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:

	Pension									Other Postretirement Benefits
	2017			2016			2015			2017			2016			2015
Assumptions used to determine benefit obligations at December 31:
Discount rate	3.12	%		3.41	%		3.95	%		3.72	%		4.30	%		4.55	%
Rate of compensation increases	3.54	%		3.77	%		3.72	%
Assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate	3.41	%		3.95	%		3.70	%		4.30	%		4.55	%		4.15	%
Expected return on plan assets	5.53	%		6.22	%		6.54	%		6.80	%		7.00	%		7.00	%
Rate of compensation increases	3.77	%		3.72	%		3.72	%

The expected long-term rates of return for pension and other postretirement benefit plans were developed using historical asset class returns while factoring in current market conditions such as inflation, interest rates and asset class performance.

The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method provides a more precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate.

Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care benefit plans. The assumed health care cost trend rates used to determine the postretirement benefit obligation at December 31 were as follows:

	2017			2016			2015
Health care cost trend rate assumed for the next year	6.25	%		6.00	%		6.00	%
Ultimate trend rate	4.50	%		4.50	%		4.50	%
Year the rate reaches the ultimate trend rate	2025			2023			2021

A one percentage-point change in assumed health care cost trend rates would have the following impact:

In millions		1 Percentage-Point Increase				1 Percentage-Point Decrease
Change in service cost and interest cost for 2017		$	—			$	(1	)
Change in postretirement benefit obligation at December 31, 2017		$	6			$	(11	)

Plan assets— The Company’s overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of growing plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessary risk, the pension funds are diversified across several asset classes, securities and investment managers. The target allocations for plan assets are 15% to 25% equity securities, 75% to 85% fixed income securities and 0% to 10% in other types of investments. The Company does not use derivatives for the purpose of speculation, leverage, circumventing investment guidelines or taking risks that are inconsistent with specified guidelines.

The assets in the Company’s postretirement health care plan are primarily invested in life insurance policies. The Company’s overall investment strategy for the assets in the postretirement health care fund is to invest in assets that provide a reasonable tax exempt rate of return while preserving capital.

The following tables present the fair value of the Company’s pension and other postretirement benefit plan assets at December 31, 2017 and 2016, by asset category and valuation methodology. Level 1 assets are valued using unadjusted quoted prices for identical assets in active markets. Level 2 assets are valued using quoted prices or other observable inputs for similar assets. Level 3 assets are valued using unobservable inputs, but reflect the assumptions market participants would be expected to use in pricing the assets. Each financial instrument’s categorization is based on the lowest level of input that is significant to the fair value measurement.

		2017
In millions		Total				Level 1				Level 2				Level 3
Pension Plan Assets:
Cash and equivalents		$	43			$	34			$	9			$	—
Equity securities:
Domestic		—				—				—				—
Fixed income securities:
Government securities		371				—				371				—
Corporate debt securities		943				—				943				—
Mortgage-backed securities		—				—				—				—
Investment contracts with insurance companies		1				—				—				1
Commingled funds:
Collective trust funds		1,424
Partnerships/private equity interests		41
Other		9				—				9				—
Total fair value of pension plan assets		$	2,832			$	34			$	1,332			$	1
Other Postretirement Benefit Plan Assets:
Cash and equivalents		$	2			$	2			$	—			$	—
Life insurance policies		371
Total fair value of other postretirement benefit plan assets		$	373			$	2			$	—			$	—

		2016
In millions		Total				Level 1				Level 2				Level 3
Pension Plan Assets:
Cash and equivalents		$	82			$	55			$	27			$	—
Equity securities:
Domestic		1				1				—				—
Fixed income securities:
Government securities		307				—				307				—
Corporate debt securities		541				—				541				—
Mortgage-backed securities		19				—				19				—
Investment contracts with insurance companies		1				—				—				1
Commingled funds:
Collective trust funds		1,478
Partnerships/private equity interests		54
Other		4
Total fair value of pension plan assets		$	2,487			$	56			$	894			$	1
Other Postretirement Benefit Plan Assets:
Cash and equivalents		$	1			$	1			$	—			$	—
Life insurance policies		350
Total fair value of other postretirement benefit plan assets		$	351			$	1			$	—			$	—

Cash and equivalents include cash on hand and instruments with original maturities of three months or less and are valued at cost, which approximates fair value. Equity securities primarily include common and preferred equity securities covering a wide range of industries and geographies that are traded in active markets and are valued based on quoted prices. Fixed

income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities, asset-backed securities and investment contracts. The majority of the assets in this category are valued by evaluating bid prices provided by independent financial data services. For securities where market data is not readily available, unobservable market data is used to value the security. The underlying investments include small-cap equity, international equity and long- and short-term fixed income instruments. Other primarily includes derivative instruments such as interest rate swaps used by fixed income investment managers to offset interest rate sensitivity.

Pension assets measured at net asset value include collective trust funds, partnerships/private equity interests and life insurance policies. Collective trust funds are private funds that are valued based on the value of the underlying investments which can be redeemed on a daily basis. The underlying investments include both passively and actively managed U.S. and foreign large- and mid-cap equity funds and short-term investment funds. Partnerships/private equity interests are investments in partnerships where the benefit plan is a limited partner. The investments are valued by the investment managers on a periodic basis using pricing models that use market, income and cost valuation methods. Distributions are received from these funds on a periodic basis through the liquidation of the underlying assets of the fund. Life insurance policies are used to fund other postretirement benefits in order to obtain favorable tax treatment and are valued based on the cash surrender value of the underlying policies. The Company has selected the funds in which these assets are invested and may elect to withdraw funds with proper notice to the insurance company or maintain the policies and receive death benefits as determined by the contracts.

Cash flows— The Company generally funds its pension and other postretirement benefit plans as required by law or to the extent such contributions are tax deductible. The Company expects to contribute approximately $26 million to its pension plans and $5 million to its other postretirement benefit plans in 2018. The Company’s portion of the benefit payments that are expected to be paid during the years ending December 31 is as follows:

In millions		Pension				Other Postretirement Benefits
2018		$	159			$	35
2019		161				36
2020		164				37
2021		167				37
2022		174				37
Years 2023-2027		886				183

(10) Commitments and Contingencies

Litigation— The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, product liability (including toxic tort) and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters and its experience in contesting, litigating and settling other similar matters. The Company believes resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, liquidity or future operations.

Lease Commitments— Rental expense was $120 million, $121 million and $117 million for the years ended December 31 2017, 2016 and 2015. Future minimum lease payments under non-cancelable leases for the years ending December 31 are as follows:

In millions
2018	$	88
2019	63
2020	45
2021	31
2022	25
2023 and future years	61
Total future minimum lease payments	$	313

(11) Stockholders' Equity

Preferred Stock— Preferred Stock, without par value, of which 0.3 million shares are authorized and unissued, is issuable in series. The Board of Directors is authorized to fix by resolution the designation and characteristics of each series of preferred stock. The Company has no present commitment to issue its preferred stock.

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

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

Cash Dividends— Cash dividends declared were $2.86 per share in 2017, $2.40 per share in 2016 and $2.07 per share in 2015. Cash dividends paid were $2.73 per share in 2017, $2.30 per share in 2016 and $2.005 per share in 2015.

Accumulated Other Comprehensive Income (Loss)— The changes in accumulated other comprehensive income (loss) during 2017, 2016 and 2015 were as follows:

In millions		2017				2016				2015
Beginning balance		$	(1,807	)		$	(1,504	)		$	(658	)
Foreign currency translation adjustments during the period		294				(251		)		(800		)
Foreign currency translation adjustments reclassified to income		2				(1		)		—
Income taxes		110				(25		)		(60		)
Total foreign currency translation adjustments, net of tax		406				(277		)		(860		)
Pension and other postretirement benefit adjustments during the period		96				(67		)		(41		)
Pension and other postretirement benefit adjustments reclassified to income		56				43				61
Income taxes		(38		)		(2		)		(6		)
Total pension and other postretirement benefit adjustments, net of tax		114				(26		)		14
Ending balance		$	(1,287	)		$	(1,807	)		$	(1,504	)

Foreign currency translation adjustments reclassified to income primarily relate to the disposal of operations and were included in the related gain or loss upon disposal. Pension and other postretirement benefit adjustments reclassified to income represent the amortization of actuarial gains and losses and prior service cost. Refer to Note 9. Pension and Other Postretirement Benefits for the amounts included in net periodic benefit cost.

The Company designated €1.0 billion of Euro notes issued in May 2014 and €1.0 billion of Euro notes issued in May 2015 as hedges of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income (loss). The cumulative unrealized pre-tax gain recorded in Accumulated other comprehensive income (loss) related to the net investment hedge was $81 million and $375 million as of December 31, 2017 and December 31, 2016, respectively.

As of December 31, 2017 and 2016, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.0 billion and $1.4 billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs of $291 million and $405 million, respectively. The estimated pre-tax unrecognized net

benefit cost that will be amortized from Accumulated other comprehensive income (loss) into income in 2018 is $41 million for pension and other postretirement benefits.

(12) Stock-Based Compensation

On May 8, 2015 (the "Effective Date"), the 2015 Long-Term Incentive Plan (the "2015 Plan") was approved by shareholders. As of the Effective Date, no additional awards will be granted to employees under the 2011 Long-Term Incentive Plan (the "2011 Plan"). The significant terms of stock options and restricted stock units ("RSUs") were not changed under the 2015 Plan. Stock options and RSUs have been issued to officers and other management employees under these plans. Stock options generally vest over a four-year period and have an expiration of ten years from the issuance date. RSUs generally "cliff" vest after a three-year period and include units with and without performance criteria. RSUs with performance criteria provide for full "cliff" vesting after three years if the Compensation Committee certifies that the performance goals have been met. Upon vesting, the holder will receive one share of common stock of the Company for each vested RSU.

Commencing in February 2013, the Company began issuing shares from treasury stock to cover the exercised options and vested RSUs. Prior to February 2013, the Company generally issued new shares from its authorized but unissued share pool. As of December 31, 2017, approximately 13 million shares of ITW common stock were reserved for issuance under these plans.

The Company records compensation expense for the grant date fair value of stock awards over the remaining service periods of those awards. The following table summarizes the Company’s stock-based compensation expense:

In millions		2017				2016				2015
Pre-tax compensation expense		$	36			$	39			$	35
Tax benefit		(9		)		(13		)		(12		)
Total stock-based compensation expense, net of tax		$	27			$	26			$	23

The following table summarizes activity related to non-vested RSUs during 2017:

Shares in millions		Number of Shares			Weighted-Average Grant-Date Fair Value
Unvested, January 1, 2017		0.7			$83.39
Granted		0.2			127.81
Vested		(0.3	)		74.29
Canceled		—			103.95
Unvested, December 31, 2017		0.6			99.87

The following table summarizes stock option activity for the year ended December 31, 2017:

In millions except exercise price and contractual terms		Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Under option, January 1, 2017		5.3			$68.05
Granted		0.7			127.95
Exercised		(1.4	)		56.03
Canceled or expired		(0.1	)		117.67
Under option, December 31, 2017		4.5			80.88		6.0		$387
Exercisable, December 31, 2017		2.9			66.80		4.9		$291

Effective with the 2017 grant, issued RSUs provide for dividend equivalents payable in additional RSUs for dividends that would have been paid during the vesting period. Accordingly, the fair value of RSUs issued in 2017 is equal to the common stock fair market value on the date of the grant. For grants prior to 2017, the fair value of RSUs was determined by reducing the closing market price on the date of the grant by the present value of projected dividends over the vesting period. Stock option exercise prices are equal to the common stock fair market value on the date of grant. The Company uses a binomial

option pricing model to estimate the fair value of the stock options granted. The following summarizes the assumptions used in the models:

		2017		2016		2015
Risk-free interest rate		0.91-2.61%		0.56-1.86%		0.23-2.25%
Weighted-average volatility		22.0%		24.0%		23.0%
Dividend yield		2.22%		2.12%		2.11%
Expected years until exercise		7.2-7.9		6.9-7.7		6.9-8.0

Lattice-based option valuation models, such as the binomial option pricing model, incorporate ranges of assumptions for inputs. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise timing and employee termination rates within the valuation model. The weighted-average dividend yield is based on historical information. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The ranges presented result from separate groups of employees assumed to exhibit different exercise behavior.

The weighted-average grant-date fair value of stock options granted during 2017, 2016 and 2015 was $26.83, $20.02 and $20.58 per share, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $132 million, $89 million and $55 million, respectively. As of December 31, 2017, there was $9 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.2 years. Exercise of stock options during the years ended December 31, 2017, 2016 and 2015 resulted in cash receipts of $84 million, $84 million and $59 million, respectively. The total fair value of vested stock option awards during the years ended December 31, 2017, 2016 and 2015 was $13 million, $12 million and $13 million, respectively.

As of December 31, 2017, there was $24 million of total unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average remaining contractual life of 1.9 years. The total fair value of vested RSU awards during the years ended December 31, 2017, 2016 and 2015 was $19 million, $21 million and $20 million, respectively.

(13) Other Balance Sheet Information

Other balance sheet information at December 31, 2017 and 2016 was as follows:

In millions		2017				2016
Prepaid expenses and other current assets:
Income tax refunds receivable		$	121			$	21
Value-added-tax receivables		70				55
Vendor advances		26				20
Other		119				122
Total prepaid expenses and other current assets		$	336			$	218
Other assets:
Cash surrender value of life insurance policies		$	442			$	442
Prepaid pension assets		337				131
Customer tooling		184				146
Investments		53				73
Other		179				164
Total other assets		$	1,195			$	956
Accrued expenses:
Compensation and employee benefits		$	411			$	379
Deferred revenue and customer deposits		205				180
Rebates		147				144
Warranties		45				45
Current portion of pension and other postretirement benefit obligations		16				16
Other		434				438
Total accrued expenses		$	1,258			$	1,202
Other liabilities:
Pension benefit obligation		$	219			$	252
Postretirement benefit obligation		174				201
Other		489				418
Total other liabilities		$	882			$	871

(14) Segment Information

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

Automotive OEM— This segment is a global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems. Businesses in this segment produce components and fasteners for automotive-related applications.

Food Equipment— This segment is a highly focused and branded industry-leader in commercial food equipment differentiated by innovation and integrated service offerings.

Test & Measurement and Electronics— This segment is a branded and innovative producer of test and measurement and electronic manufacturing and MRO solutions that improve efficiency and quality for customers in diverse end markets. Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics.

Welding— This segment is a branded value-added equipment and specialty consumable manufacturer with innovative and leading technology. Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications.

Polymers & Fluids— This segment is a highly branded supplier to niche markets that require value-added, differentiated products. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance.

Construction Products— This segment is a branded supplier of innovative engineered fastening systems and solutions.

Specialty Products— This segment is focused on diversified niche market opportunities with substantial patent protection producing beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.

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

Segment information for 2017, 2016 and 2015 was as follows:

In millions		2017				2016				2015
Operating revenue:
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:
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
Depreciation and amortization and impairment of intangible assets:
Automotive OEM		$	111			$	90			$	76
Food Equipment		45				45				48
Test & Measurement and Electronics		92				104				110
Welding		28				36				37
Polymers & Fluids		89				92				95
Construction Products		33				34				36
Specialty Products		64				69				75
Total		$	462			$	470			$	477
Plant and equipment additions:
Automotive OEM		$	147			$	116			$	106
Food Equipment		27				31				37
Test & Measurement and Electronics		23				25				32
Welding		17				16				23
Polymers & Fluids		16				18				20
Construction Products		22				20				26
Specialty Products		45				47				40
Total		$	297			$	273			$	284
Identifiable assets:
Automotive OEM		$	2,402			$	2,051			$	1,419
Food Equipment		1,054				1,013				1,054
Test & Measurement and Electronics		2,449				2,362				2,448
Welding		756				701				747
Polymers & Fluids		2,067				2,019				2,034
Construction Products		1,196				1,099				1,129
Specialty Products		1,721				1,599				1,659
Total Segments		11,645				10,844				10,490
Corporate		5,135				4,357				5,239
Total		$	16,780			$	15,201			$	15,729

Identifiable assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash and equivalents, investments and other general corporate assets.

Enterprise-wide information for 2017, 2016 and 2015 was as follows:

In millions		2017				2016				2015
Operating Revenue by Geographic Region:
United States		$	6,243			$	6,176			$	6,167
Canada/Mexico		996				923				928
Total North America		7,239				7,099				7,095
Europe, Middle East and Africa		4,102				3,787				3,725
Asia Pacific		2,577				2,361				2,197
South America		396				352				388
Total Operating Revenue		$	14,314			$	13,599			$	13,405

Operating revenue by geographic region is based on the customers' locations. At December 31, 2017, the Company had approximately 10% of its total long-lived assets in Germany. There was no single country outside the U.S. with long-lived assets exceeding 10% of the Company's total long-lived assets in 2016 or 2015. No single customer accounted for more than 5% of consolidated revenues in 2017, 2016 or 2015. Additionally, the Company has thousands of product lines within its businesses; therefore, providing operating revenue by product line is not practicable.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The unaudited quarterly financial data included as supplementary data reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.

		Three Months Ended
		March 31								June 30								September 30								December 31
In millions except per share amounts		2017				2016				2017				2016				2017				2016				2017				2016
Operating revenue		$	3,471			$	3,274			$	3,599			$	3,431			$	3,615			$	3,495			$	3,629			$	3,399
Cost of revenue		2,004				1,896				2,087				1,967				2,094				2,027				2,124				2,006
Operating income		809				722				874				792				961				808				850				742
Net income		536				468				587				525				640				535				(76		)		507
Net income (loss) per share:
Basic		1.55				1.29				1.70				1.47				1.86				1.51				(0.22		)		1.46
Diluted		1.54				1.29				1.69				1.46				1.85				1.50				(0.22		)		1.45

In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million, or $1.92 per diluted share, related to the enactment of the United States "Tax Cuts and Jobs Act." Refer to Note 5. Income Taxes for further information.

In the second quarter of 2017, the Company entered into a $95 million confidential settlement agreement to resolve a litigation matter. Based on the terms of the agreement, the Company received the settlement within 120 days of the execution of the agreement. The receipt of the settlement resulted in a favorable pre-tax impact of $15 million in the second quarter of 2017 and $80 million in the third quarter of 2017, which was included in operating income.