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 87 divisions in 55 countries. As of December 31, 2018, the Company employed approximately 48,000 people.

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

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

THE ITW BUSINESS MODEL

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

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

•

Customer-back Innovation has fueled decades of profitable growth at ITW. The Company’s unique innovation approach is built on insight gathered from the 80/20 Front-to-Back process. Working from the customer back, ITW businesses position themselves as the go-to problem solver for their “80” customers. ITW’s innovation efforts are focused on understanding customer needs, particularly those in “80” markets with solid long-term growth fundamentals, and subsequently creating unique solutions to address those needs. These customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents;

•

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

ENTERPRISE STRATEGY

In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. Since then, ITW has made considerable progress in its path to full potential.

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.

•

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 87 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 2018 and is on track to do the same in 2019.

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

ITW has clearly demonstrated superior 80/20 management, resulting in meaningful incremental improvement in margins and returns as evidenced by the Company’s operating margin and after-tax return on invested capital. At the same time, these 80/20 initiatives can also result in restructuring initiatives that reduce costs and improve profitability and returns.

PATH TO FULL POTENTIAL - FINISHING THE JOB

Since the launch of the enterprise strategy, the Company has made considerable progress to position itself to reach full potential. The ITW Business Model and unique set of capabilities are a source of strong and enduring competitive advantage, but for the Company to truly reach its full potential over the next five years, every one of its divisions must also be operating at its full potential. To do so, the Company remains focused on three key areas to finish the job of positioning ITW to perform to its full potential:

•	Portfolio discipline

•	80/20 Front-to-Back practice excellence

•	Full-potential organic growth

Portfolio Discipline

The Company only operates in industries where it can generate significant, long-term competitive advantage from the ITW Business Model. ITW businesses have the right “raw material” in terms of market and business attributes that best fit the ITW Business Model and have significant potential to drive above-market organic growth over the long-term.

The Company focuses on high-quality businesses, ensuring it operates in markets with positive long-term macro fundamentals and with customers that have critical needs and value ITW's differentiated products, services and solutions. ITW’s portfolio operates in diverse end markets and geographies which makes the Company more resilient in the face of uncertain or volatile market environments.

80/20 Front-to-Back Practice Excellence

The 80/20 Front-to-Back process is a rigorous, iterative and highly data-driven approach to identify where the Company has true differentiation and the ability to drive sustainable, high-quality organic growth. The Company simplifies and eliminates complexity and redesigns every aspect of its business to ensure focused execution on key opportunities, markets, customers, and products. ITW will continue its efforts to drive 80/20 Front-to-Back practice excellence in every division in the Company, every day.

Full-potential Organic Growth

Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division. At the same time, the Company consistently reviews its portfolio, assesses businesses that are growth-challenged and evaluates if further portfolio refinements may be needed. The Company is currently exploring options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. If a decision is made to divest any of these businesses, the Company expects that earnings per share dilution would be offset by incremental share repurchases.

TERMS USED BY ITW

Management uses the following terms to describe the financial results of operations of the Company:

•	Organic business - acquired businesses that have been included in the Company's results of operations for more than 12 months on a constant currency basis.

•	Operating leverage - the estimated effect of the organic revenue volume changes on organic operating income, assuming variable margins remain the same as the prior period.

•	Price/cost - represents the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers.

•

Product line simplification (PLS) - focuses businesses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines; in the short-term, PLS may result in a decrease in revenue and overhead costs while improving operating margin. In the long-term, PLS is expected to result in growth in revenue, profitability, and returns.

Unless otherwise stated, the changes in financial results in the consolidated results of operations and the results of operations by segment represent the current year period versus the comparable period in the prior year.

CONSOLIDATED RESULTS OF OPERATIONS

The Company delivered solid financial results in 2018 despite some near-term market challenges in the second half of the year. While overall market conditions in North America were solid, auto production in Europe and China and demand levels in various international end markets served by the Specialty Products segment softened during the second half of the year. The primary driver of the Company's financial performance is the continued successful execution of enterprise initiatives and continued focus on the highly differentiated ITW Business Model. In 2018, five of seven segments achieved worldwide organic revenue growth while two segments were flat. All segments had operating margin above 21% for 2018.

The Company does not believe that recently imposed tariffs in 2018 have had a material impact on its operating results. However, the impact of tariffs and global trade policies could increase in the future. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of raw material cost increases resulting from these tariffs.

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 2018, 2017 and 2016 are summarized as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acq/Div		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	14,768			$	14,314			3.2	%		2.2	%	(0.1	)%	—	%	—	%	1.1	%	3.2	%
Operating income	3,584				3,485				2.8	%		1.2	%	—	%	0.5	%	—	%	1.1	%	2.8	%
Operating margin %	24.3		%		24.3		%		—			(20) bps		—		10 bps		—		10 bps		—

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

•	Organic revenue grew 2.2% primarily due to penetration gains, higher end market demand and product innovation. Product line simplification activities reduced organic revenue growth by 70 basis points.

◦	North American organic revenue increased 4.0% as all seven segments had revenue growth.

◦	Asia Pacific organic revenue grew 0.4% primarily driven by growth in the Welding, Test & Measurement and Electronics, Food Equipment and Polymers & Fluids segments, partially offset by a decline in the Specialty Products, Automotive OEM and Construction Products segments.

◦	Europe, Middle East and Africa organic revenue decreased 0.2% primarily driven by the Automotive OEM, Specialty Products and Polymers & Fluids segments.

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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.

•	Operating income of $3.6 billion increased 2.8%. Excluding the favorable impact of the 2017 confidential legal settlement, operating income would have increased 5.7%.

•

Operating margin of 24.3% was flat with the prior year. Excluding the 60 basis points of favorability from the 2017 confidential legal settlement, operating margin increased 60 basis points primarily due to the benefits of the Company's enterprise initiatives that contributed 110 basis points and positive operating leverage of 50 basis points, partially offset by unfavorable price/cost of 50 basis points and higher freight and employee-related expenses.

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The effective tax rate was 24.5% and 48.4% for 2018 and 2017, respectively. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the enactment of the "Tax Cuts and Jobs Act" in the United States. Excluding the tax charge of $658 million, the 2017 effective tax rate would have been 28.3%. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•	Diluted earnings per share (EPS) of $7.60 increased 56.4%. Excluding the 2017 unfavorable impact of $1.90 for the previously discussed one-time tax charge and the favorable impact of $0.17 for the confidential legal settlement, EPS increased 15.3%.

•	Free cash flow was $2.4 billion for 2018. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

•	The Company repurchased approximately 13.9 million shares of its common stock in 2018 for approximately $2.0 billion.

•	The Company increased the quarterly dividend by 28.2% in 2018. Total cash dividends of approximately $1.1 billion were paid in 2018.

•	Adjusted after-tax return on average invested capital was 28.2%, an increase of 390 basis points, primarily due to the new U.S. tax rules and regulations. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

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	$	3,485			$	3,056			14.1	%		12.6	%	0.7	%	0.1	%	0.1	%	0.6	%	14.1	%
Operating margin %	24.3		%		22.5		%		180 bps			200 bps		(30) bps		10 bps		—		—		180 bps

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

•

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.

•	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 4. 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 14.1%. Excluding the favorable impact of the confidential legal settlement, operating income would have increased 11.0%.

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Operating margin of 24.3% increased 180 basis points. Excluding the 60 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 revised the U.S. corporate income tax rules. As a result, the Company recorded a one-time income tax charge of $658 million during the fourth quarter of 2017. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•	Diluted earnings per share (EPS) of $4.86 included 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 included 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 24.3%, an increase of 220 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	2018				2017				2016
Automotive OEM	$	3,338			$	3,271			$	2,864
Food Equipment	2,214				2,123				2,110
Test & Measurement and Electronics	2,171				2,069				1,974
Welding	1,691				1,538				1,486
Polymers & Fluids	1,724				1,724				1,691
Construction Products	1,700				1,672				1,609
Specialty Products	1,951				1,938				1,885
Intersegment revenue	(21		)		(21		)		(20		)
Total	$	14,768			$	14,314			$	13,599

	Operating Income
In millions	2018				2017				2016
Automotive OEM	$	751			$	747			$	690
Food Equipment	572				556				537
Test & Measurement and Electronics	523				464				372
Welding	474				415				370
Polymers & Fluids	369				357				343
Construction Products	414				399				361
Specialty Products	522				527				482
Total Segments	3,625				3,465				3,155
Unallocated	(41		)		20				(99		)
Total	$	3,584			$	3,485			$	3,056

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 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,338			$	3,271			2.0	%		—	%	—	%	—	%	2.0	%	2.0	%
Operating income	$	751			$	747			0.5	%		(2.0	)%	—	%	0.6	%	1.9	%	0.5	%
Operating margin %	22.5		%		22.8		%		(30) bps			(40) bps		—		10 bps		—		(30) bps

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

•	Organic revenue was flat compared to worldwide auto builds which declined 1%. Product line simplification activities reduced organic revenue growth by 120 basis points.

◦	North American organic revenue increased 3.0% compared to North American auto builds which declined 1%. Auto builds for the Detroit 3, where the Company has higher content, were flat.

◦	European organic revenue declined 2.7% compared to European auto builds which declined 1% due to customer mix. Organic revenue was negatively impacted by the new emissions testing requirements in Europe which disrupted auto production in the second half of 2018.

◦	Asia Pacific organic revenue decreased 0.7%. China organic revenue grew 2.6% versus Chinese auto builds which declined 4%, as auto production in China softened during the second half of 2018.

•	Operating margin was 22.5% in 2018. The decrease of 30 basis points was primarily due to unfavorable price/cost of 130 basis points, partially offset by benefits from the Company's enterprise initiatives.

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, 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.

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 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,214			$	2,123			4.3	%		2.8	%	—	%	—	%	1.5	%	4.3	%
Operating income	$	572			$	556			2.9	%		1.0	%	—	%	0.3	%	1.6	%	2.9	%
Operating margin %	25.8		%		26.2		%		(40) bps			(50) bps		—		10 bps		—		(40) bps

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

•	Organic revenue increased 2.8% as equipment and service organic revenue increased 3.2% and 2.1%, respectively.

◦	North American organic revenue increased 3.5%. Equipment organic revenue grew 4.6% as higher end market demand in cooking, refrigeration and warewash was offset by lower end market demand in food retail. Service organic revenue grew 1.9%.

◦	International organic revenue increased 1.9%. Equipment organic revenue grew 1.8% primarily due to higher demand in the European warewash and cooking end markets, partially offset by lower end market demand in refrigeration. Service organic revenue increased 2.4%.

•	Operating margin of 25.8% in 2018 declined 40 basis points primarily due to the unfavorable impact of product mix and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and positive operating leverage of 60 basis points.

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.

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 electronics, medical, transportation and telecommunications applications.

The results of operations for the Test & Measurement and Electronics segment for 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,171			$	2,069			4.9	%		3.5	%	—	%	—	%	1.4	%	4.9	%
Operating income	$	523			$	464			12.7	%		11.3	%	—	%	—	%	1.4	%	12.7	%
Operating margin %	24.1		%		22.4		%		170 bps			170 bps		—		—		—		170 bps

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

•	Organic revenue increased 3.5% in 2018.

◦	Organic revenue for the test and measurement businesses increased 5.5% with growth in all major regions primarily due to higher semi-conductor end market demand. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 7.1%.

◦	Electronics organic revenue grew 1.2%. The electronics assembly businesses declined 4.3% due to lower demand across North America and Europe. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 5.0% primarily due to higher semi-conductor end market demand in North America.

•	Operating margin was 24.1% in 2018. The increase of 170 basis points was primarily driven by positive operating leverage of 90 basis points and benefits from the Company's enterprise initiatives.

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.

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 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Restructuring		Impairment		Foreign Currency		Total
Operating revenue	$	1,691			$	1,538			9.9	%		9.7	%	—	%	—	%	0.2	%	9.9	%
Operating income	$	474			$	415			14.3	%		13.1	%	1.0	%	—	%	0.2	%	14.3	%
Operating margin %	28.0		%		27.0		%		100 bps			80 bps		20 bps		—		—		100 bps

•	Operating revenue increased primarily due to higher organic revenue.

•	Organic revenue grew 9.7% driven by growth in equipment of 11.0% and consumables of 7.9%. Organic revenue grew primarily due to increased demand in the industrial end markets related to heavy equipment for agriculture, infrastructure and mining, in the commercial end markets related to construction, light fabrication and farm and ranch customers, and in the oil and gas end markets.

◦	North American organic revenue increased 10.6% primarily due to 14.7% and 5.8% growth in the industrial and commercial end markets, respectively.

◦	International organic revenue increased 5.7% primarily due to higher demand in the oil and gas end markets.

•	Operating margin was 28.0% in 2018. The increase of 100 basis points was primarily due to positive operating leverage of 150 basis points and benefits from the Company's enterprise initiatives, partially offset by higher freight and employee-related expenses.

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.

POLYMERS & FLUIDS

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

•	adhesives for industrial, construction and consumer purposes;

•	chemical fluids which clean or add lubrication to machines;

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

•	hand wipes and cleaners for industrial applications;

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

•	fillers and putties for auto body repair; and

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

The results of operations for the Polymers & Fluids segment for 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,724			$	1,724			-			1.0	%	(0.4	)%	—	%	(0.6	)%	-
Operating income	$	369			$	357			3.3	%		2.1	%	(0.2	)%	1.7	%	(0.3	)%	3.3	%
Operating margin %	21.4		%		20.7		%		70 bps			20 bps		—		40 bps		10 bps		70 bps

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

•	Organic revenue increased 1.0% as higher demand in North America was partially offset by lower demand in Europe.

◦	Organic revenue for the automotive aftermarket businesses grew 2.3% as stronger demand in the car care and tire repair businesses in North America was partially offset by a decline in the engine and body repair businesses.

◦	Organic revenue for the polymers businesses increased 0.9% primarily driven by an increase in North America and South America, partially offset by a decline in Europe.

◦	Organic revenue for the fluids businesses declined 1.1% primarily due to decreased demand in Europe and South America, partially offset by growth in the industrial maintenance, repair, and operations end markets in North America.

•	Operating margin of 21.4% increased 70 basis points primarily driven by benefits from the Company's enterprise initiatives, lower restructuring expenses and positive operating leverage of 30 basis points, partially offset by unfavorable price/cost of 100 basis points.

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	$	1,724			$	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.

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 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,700			$	1,672			1.6	%		1.2	%	—	%	—	%	0.4	%	1.6	%
Operating income	$	414			$	399			3.6	%		3.1	%	—	%	0.3	%	0.2	%	3.6	%
Operating margin %	24.3		%		23.9		%		40 bps			40 bps		—		10 bps		(10) bps		40 bps

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

•	Organic revenue increased 1.2% in 2018.

◦	North American organic revenue grew 1.6% as growth in the residential end markets of 3.2% was partially offset by a decline in the commercial end markets of 5.7%.

◦	International organic revenue increased 0.9%. European organic revenue increased 2.7% primarily due to growth in continental Europe and the Nordic countries. Asia Pacific organic revenue declined 0.8% primarily due to a decrease in the Australia and New Zealand retail end markets in the second half of the year.

•	Operating margin was 24.3% in 2018. The increase of 40 basis points was primarily driven by the net benefits of the Company's enterprise initiatives and cost management of 110 basis points and positive operating leverage of 20 basis points, partially offset by unfavorable price/cost of 90 basis points.

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.

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 closures and components for appliances;

•	airport ground support equipment; and

•	components for medical devices.

The results of operations for the Specialty Products segment for 2018, 2017 and 2016 were as follows:

2018 compared to 2017

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2018				2017				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,951			$	1,938			0.7	%		(0.4	)%	(0.1	)%	—	%	1.2	%	0.7	%
Operating income	$	522			$	527			(0.8	)%		(2.5	)%	(0.1	)%	0.6	%	1.2	%	(0.8	)%
Operating margin %	26.8		%		27.2		%		(40) bps			(60) bps		—		20 bps		—		(40) bps

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

•	Organic revenue decreased 0.4% as consumables declined 2.9%, partially offset by growth in equipment sales of 9.9%. Product line simplification activities reduced organic revenue growth by 130 basis points.

◦	North American organic revenue grew 1.8% primarily due to increased demand in the consumer packaging and ground support businesses, partially offset by a decline in the labels, appliance and plastic films businesses.

◦	International organic revenue decreased 3.8% primarily due to a decline in the graphics, appliance and plastic films businesses in Europe and Asia Pacific.

•	Operating margin of 26.8% in 2018 decreased 40 basis points primarily driven by the unfavorable impact of product mix, higher freight and employee-related expenses, and unfavorable price/cost of 20 basis points, partially offset by benefits from the Company's enterprise initiatives and lower restructuring expenses.

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.

OTHER FINANCIAL HIGHLIGHTS

•	Interest expense was $257 million in 2018, $260 million in 2017 and $237 million in 2016. Interest expense in 2018 was $3 million lower than the previous year primarily due to lower outstanding commercial paper in 2018. The increased expense in 2017 compared to 2016 was primarily due to the November 2016 debt issuance.

•	Other income (expense) was income of $67 million in 2018, $45 million in 2017 and $89 million in 2016. The income in 2018 increased $22 million compared to 2017 primarily due to other net periodic benefit income related

to defined benefit pension and other postretirement plans and lower foreign currency translation losses. The income in 2017 is lower than 2016 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 effective tax rate was 24.5% in 2018, 48.4% in 2017, and 30.0% in 2016. The effective tax rate for 2018 and 2017 included discrete tax benefits of $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation guidance effective January 1, 2017. Additionally, 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". Refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•

The impact of the Euro and other foreign currencies against the U.S. Dollar increased operating revenue and income before taxes by approximately $150 million and $37 million in 2018 versus 2017, respectively. 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.

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 was $29 million for the year ended December 31, 2016. The Company adopted the new guidance effective January 1, 2017 and applied the new guidance prospectively. Excess tax benefits of $10 million and $50 million were included in Income taxes in the statement of income for the years ended December 31, 2018 and December 31, 2017, respectively. The expected effect on income tax expense or net cash provided from operating activities related to future stock-based award settlements will vary each period and will depend on inputs such as the stock price at the time of settlement and the number of awards settled in the period presented.

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 control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, expanded revenue disclosures are required. The Company's sales arrangements with customers are predominantly short-term in nature and generally provide for transfer of control and risks and rewards of ownership at the time of product shipment or delivery of service. As such, the timing of revenue recognition under both the prior and new guidance is the same for the majority of the Company’s transactions. Effective January 1, 2018, the Company adopted the new revenue recognition guidance under the modified retrospective method and recorded a cumulative-effect adjustment reducing retained earnings by $9 million as of January 1, 2018. Under the modified retrospective method of adoption, prior periods are not restated and the new guidance is applied prospectively to revenue transactions completed on or after January 1, 2018. Given the nature of the Company’s revenue transactions, the new guidance had an immaterial impact on the Company's operating revenue, results of operations, and financial position for the year ended December 31, 2018. The Company updated its revenue recognition accounting policy to reflect the requirements of the new guidance and included additional disclosures regarding the Company's revenue transactions. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 3. Operating Revenue in Item 8. Financial Statements and Supplementary Data for further information.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the prior guidance. The provisions of the new guidance are being applied prospectively to intra-entity asset transfers on or after January 1, 2018 and may result in future tax rate volatility. Upon adoption of the new guidance on January 1, 2018, the Company recorded a cumulative-effect adjustment reducing deferred tax assets and retained earnings by

$406 million. For the year ended December 31, 2018, the impact of the new guidance on the Company's effective income tax rate was not material.

In March 2017, the FASB issued authoritative guidance which changes the income statement presentation 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 ("other 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 presentation of other net periodic benefit cost and restated the prior year statements of income and related disclosures for comparability, as required under the new guidance. For the years ended December 31, 2018, 2017 and 2016, other net periodic benefit cost included in Other income (expense) was income of $20 million, $9 million and $8 million, respectively. Refer to Note 10. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for further information.

In February 2018, the FASB issued authoritative guidance which allows for an optional one-time reclassification of the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance is effective January 1, 2019, with early adoption permitted. The Company elected to early adopt this guidance as of January 1, 2018 and to reclassify the stranded tax effects related to the Act, which resulted in an increase of $45 million to both retained earnings and accumulated other comprehensive loss. Refer to Note 12. Stockholders' Equity in Item 8. Financial Statements and Supplementary Data for further information.

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 a right-of-use asset for all leases with a lease term greater than twelve months, including operating leases, in the statement of financial position. This guidance was effective January 1, 2019 and the Company will apply the guidance prospectively to lease transactions as of and after the effective date. Although the Company is currently finalizing its review of operating leases as of the adoption date, the Company expects to record a right of use asset and lease liability for its operating leases of less than two percent of total assets. Additionally, the Company expects to provide additional disclosures in periods subsequent to adoption. The new guidance is not expected to have a material impact on the results of operations or cash flows of the Company.

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 $1.5 billion of cash and equivalents on hand at December 31, 2018 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, 2018, 2017 and 2016 was as follows:

In millions		2018				2017				2016
Net cash provided by operating activities		$	2,811			$	2,402			$	2,302
Additions to plant and equipment		(364		)		(297		)		(273		)
Free cash flow		$	2,447			$	2,105			$	2,029
Cash dividends paid		$	(1,124	)		$	(941	)		$	(821	)
Repurchases of common stock		(2,000		)		(1,000		)		(2,000		)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates		—				(3		)		(453		)
Dividend distribution from equity investment in Wilsonart		—				—				167
Net proceeds (repayments) of debt		(851		)		197				465
Other		50				119				128
Effect of exchange rate changes on cash and equivalents		(112		)		145				(133		)
Net increase (decrease) in cash and equivalents		$	(1,590	)		$	622			$	(618	)

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

Stock Repurchase Programs

On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provides for the repurchase of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2015 Program"). 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, 18.7 million shares of its common stock at an average price of $107.17 per share during 2016, approximately 7.1 million shares of its common stock at an average price of $140.56 per share during 2017 and approximately 13.9 million shares of its common stock at an average price of $143.66 per share during 2018. As of December 31, 2018, there were approximately $446 million of authorized repurchases remaining under the 2015 Program.

On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the buyback of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). As of December 31, 2018, there were $3.0 billion of authorized repurchases remaining under the 2018 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 third quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. The Company also excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. 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, 2018, 2017, and 2016 was as follows:

Dollars in millions		2018				2017				2016
Operating income		$	3,584			$	3,485			$	3,056
Less: Legal settlement income		—				(95		)		—
Adjusted operating income		3,584				3,390				3,056
Adjusted tax rate		24.9		%		28.3		%		30.0		%
Income taxes		(893		)		(958		)		(917		)
Operating income after taxes		$	2,691			$	2,432			$	2,139
Invested capital:
Trade receivables		$	2,622			$	2,628			$	2,357
Inventories		1,318				1,220				1,076
Net plant and equipment		1,791				1,778				1,652
Goodwill and intangible assets		5,717				6,024				6,021
Accounts payable and accrued expenses		(1,795		)		(1,848		)		(1,713		)
Other, net		(519		)		21				223
Total invested capital		$	9,134			$	9,823			$	9,616
Average invested capital		$	9,533			$	10,005			$	9,780
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)		—				—				(91		)
Adjusted average invested capital		$	9,533			$	10,005			$	9,689
Adjusted return on average invested capital		28.2		%		24.3		%		22.1		%

ROIC for the twelve months ended December 31, 2018 was 28.2%, an improvement of 390 basis points primarily related to the new U.S. tax rules and regulations. ROIC increased 220 basis points in 2017 versus 2016 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.

A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit is as follows:

	Twelve Months Ended
	December 31, 2018
	Income Taxes				Tax Rate
As reported	$	831			24.5	%
Net discrete tax benefit related to third quarter	15				0.4	%
As adjusted	$	846			24.9	%

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	%

Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the third quarter 2018 net discrete tax benefit and the 2017 discrete tax charge related to the 2017 U.S. tax legislation.

Working Capital

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital at December 31, 2018 and 2017 is summarized as follows:

Dollars in millions		2018				2017				Increase (Decrease)
Current Assets:
Cash and equivalents		$	1,504			$	3,094			$	(1,590	)
Trade receivables		2,622				2,628				(6		)
Inventories		1,318				1,220				98
Other		334				336				(2		)
		5,778				7,278				(1,500		)
Current Liabilities:
Short-term debt		1,351				850				501
Accounts payable and accrued expenses		1,795				1,848				(53		)
Other		396				355				41
		3,542				3,053				489
Net Working Capital		$	2,236			$	4,225			$	(1,989	)

The decrease in net working capital at December 31, 2018 was primarily driven by lower cash and equivalents and higher short-term debt due to current maturities of long-term debt.

As of December 31, 2018, a majority of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. 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, reinvesting to fund expansion of existing U.S. businesses 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 revised 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. As a result of the one-time repatriation provisions of the Act, the Company provided for substantially all U.S. taxes on the undistributed earnings of its foreign subsidiaries as of December 31, 2017. During 2018, the Company repatriated approximately $3.0 billion of cash and equivalents held by its international subsidiaries, a portion of which was used to repay outstanding commercial paper and to fund additional share repurchases. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

Debt

Total debt at December 31, 2018 and 2017 was as follows:

In millions		2018				2017				Increase (Decrease)
Short-term debt		$	1,351			$	850			$	501
Long-term debt		6,029				7,478				(1,449		)
Total debt		$	7,380			$	8,328			$	(948	)

As of December 31, 2018, Short-term debt included $650 million related to the 1.95% notes due March 1, 2019 and $700 million related to the 6.25% notes due April 1, 2019, which were reclassified from Long-term debt to Short-term debt in the first and second quarters of 2018, respectively. There was no commercial paper outstanding as of December 31, 2018. Short-term debt as of December 31, 2017 included commercial paper of $849 million.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the second quarter of 2016, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of May 9, 2021 to support the potential issuances of commercial paper. No amounts were outstanding under the line of credit agreement at December 31, 2018. The maximum outstanding commercial paper balance during 2018 was $1.2 billion, while the average daily balance was $210 million. As of December 31, 2018, the Company's foreign operations had authorized credit facilities with unused capacity of $227 million.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, 2018, 2017 and 2016 was as follows:

Dollars in millions	2018				2017				2016
Total debt	$	7,380			$	8,328			$	7,829
Net income	$	2,563			$	1,687			$	2,035
Add:
Interest expense	257				260				237
Other income	(67		)		(45		)		(89		)
Income taxes	831				1,583				873
Depreciation	272				256				246
Amortization and impairment of intangible assets	189				206				224
EBITDA	$	4,045			$	3,947			$	3,526
Total debt to EBITDA ratio	1.8				2.1				2.2

Stockholders’ Equity

The changes to stockholders’ equity during 2018 and 2017 were as follows:

In millions		2018				2017
Beginning balance		$	4,589			$	4,259
Net income		2,563				1,687
Adoption of new accounting guidance		(415		)		—
Cash dividends declared		(1,186		)		(982		)
Repurchases of common stock		(2,000		)		(1,000		)
Foreign currency translation adjustments		(328		)		406
Other		35				219
Ending balance		$	3,258			$	4,589

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company's significant contractual obligations as of December 31, 2018 were as follows:

In millions		2019				2020				2021				2022				2023				2024 and Future Years
Principal payments on long-term debt		$	1,350			$	4			$	350			$	573			$	573			$	4,597
Interest payments on debt		212				184				183				172				162				1,745
Noncurrent income taxes payable		—				33				49				49				91				273
Operating leases		67				48				32				24				18				34
		$	1,629			$	269			$	614			$	818			$	844			$	6,649

As of December 31, 2018, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $155 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, 2018.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The Company's critical accounting policies are as follows:

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

Goodwill and Intangible Assets— The Company’s business acquisitions typically result in recording goodwill and other intangible assets, which are a significant portion of the Company’s total assets and affect the amount of amortization expense and impairment charges that the Company could incur in future periods. The Company follows the guidance prescribed in the accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if

triggering events occur, the Company compares the estimated fair value of its reporting units to the carrying value of each reporting unit to determine if a potential goodwill impairment exists. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit’s goodwill. In calculating the fair value of the reporting units or specific intangible assets, management relies on a number of factors, including business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill and other intangible assets.

As of December 31, 2018, the Company had total goodwill and intangible assets of approximately $5.7 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 $43 million to $1.3 billion, with the average amount equal to $518 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 10. 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 $41 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 10. 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.