Item 8. Financial Statements and Supplementary Data

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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, 2018. 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, 2018, 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, 2018 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, 2019/s/ Michael M. Larsen Michael M. Larsen Senior Vice President & Chief Financial Officer February 15, 2019

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, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019

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 amounts201820172016
Operating Revenue$14,768$14,314$13,599
Cost of revenue8,6048,3067,908
Selling, administrative, and research and development expenses2,3912,4122,411
Legal settlement (income)—(95)—
Amortization and impairment of intangible assets189206224
Operating Income3,5843,4853,056
Interest expense(257)(260)(237)
Other income (expense)674589
Income Before Taxes3,3943,2702,908
Income taxes8311,583873
Net Income$2,563$1,687$2,035
Net Income Per Share:
Basic$7.65$4.90$5.73
Diluted$7.60$4.86$5.70

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 millions201820172016
Net Income$2,563$1,687$2,035
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax(328)406(277)
Pension and other postretirement benefit adjustments, net of tax(17)114(26)
Comprehensive Income$2,218$2,207$1,732

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 amounts20182017
Assets
Current Assets:
Cash and equivalents$1,504$3,094
Trade receivables2,6222,628
Inventories1,3181,220
Prepaid expenses and other current assets334336
Total current assets5,7787,278
Net plant and equipment1,7911,778
Goodwill4,6334,752
Intangible assets1,0841,272
Deferred income taxes554505
Other assets1,0301,195
$14,870$16,780
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt$1,351$850
Accounts payable524590
Accrued expenses1,2711,258
Cash dividends payable328266
Income taxes payable6889
Total current liabilities3,5423,053
Noncurrent Liabilities:
Long-term debt6,0297,478
Deferred income taxes707164
Noncurrent income taxes payable495614
Other liabilities839882
Total noncurrent liabilities8,0709,138
Stockholders’ Equity:
Common stock (par value of $0.01 per share):
Issued- 550.0 shares in 2018 and 2017 Outstanding- 328.1 shares in 2018 and 341.5 shares in 201766
Additional paid-in-capital1,2531,218
Retained earnings21,21720,210
Common stock held in treasury(17,545)(15,562)
Accumulated other comprehensive income (loss)(1,677)(1,287)
Noncontrolling interest44
Total stockholders’ equity3,2584,589
$14,870$16,780

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 amountsCommon StockAdditional Paid-in CapitalRetained EarningsCommon Stock Held in TreasuryAccumulated Other Comprehensive Income (Loss)Noncontrolling InterestTotal
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 adjustments————(277)—(277)
Noncontrolling interest—————11
Balance at December 31, 201661,18819,505(14,638)(1,807)54,259
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 adjustments————406—406
Noncontrolling interest—(2)———(1)(3)
Balance at December 31, 201761,21820,210(15,562)(1,287)44,589
Net income——2,563———2,563
Adoption of new accounting guidance——(370)—(45)—(415)
Common stock issued for share-based compensation—(5)—17——12
Stock-based compensation expense—40————40
Repurchases of common stock———(2,000)——(2,000)
Dividends declared ($3.56 per share)——(1,186)———(1,186)
Pension and other postretirement benefit adjustments————(17)—(17)
Currency translation adjustments————(328)—(328)
Balance at December 31, 2018$6$1,253$21,217$(17,545)$(1,677)$4$3,258

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 millions201820172016
Cash Provided by (Used for) Operating Activities:
Net income$2,563$1,687$2,035
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation272256246
Amortization and impairment of intangible assets189206224
Change in deferred income taxes3464(263)
Provision for uncollectible accounts537
(Income) loss from investments(9)(16)13
(Gain) loss on sale of plant and equipment(7)(1)1
(Gain) loss on sale of operations and affiliates2(1)12
Stock-based compensation expense403639
Gain on dividend distribution from equity investment in Wilsonart——(54)
Other non-cash items, net10105
Change in assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in—
Trade receivables(60)(138)(132)
Inventories(108)(81)9
Prepaid expenses and other assets3(121)(63)
Increase (decrease) in—
Accounts payable(46)39(3)
Accrued expenses and other liabilities(36)(42)40
Income taxes(41)501187
Other, net——(1)
Net cash provided by operating activities2,8112,4022,302
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates—(3)(453)
Additions to plant and equipment(364)(297)(273)
Proceeds from investments164321
Dividend distribution from equity investment in Wilsonart——167
Proceeds from sale of plant and equipment261416
Proceeds from sale of operations and affiliates123
Other, net(4)(10)(13)
Net cash provided by (used for) investing activities(325)(251)(532)
Cash Provided by (Used for) Financing Activities:
Cash dividends paid(1,124)(941)(821)
Issuance of common stock228484
Repurchases of common stock(2,000)(1,000)(2,000)
Net proceeds from (repayments of) debt with original maturities of three months or less(850)849(526)
Proceeds from debt with original maturities of more than three months——992
Repayments of debt with original maturities of more than three months(1)(652)(1)
Excess tax benefits from stock-based compensation——29
Other, net(11)(14)(12)
Net cash provided by (used for) financing activities(3,964)(1,674)(2,255)
Effect of Exchange Rate Changes on Cash and Equivalents(112)145(133)
Cash and Equivalents:
Increase (decrease) during the year(1,590)622(618)
Beginning of year3,0942,4723,090
End of year$1,504$3,094$2,472
Supplementary Cash Flow Information:
Cash Paid During the Year for Interest$247$240$212
Cash Paid During the Year for Income Taxes, Net of Refunds$838$1,018$920
Liabilities Assumed from Acquisitions$—$5$150

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 87 divisions in 55 countries. The Company primarily serves the automotive OEM/tiers, commercial food equipment, construction, general industrial, and automotive aftermarket end markets.

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

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

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

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

Operating revenue— Prior to 2018, the Company recognized revenue when persuasive evidence of an arrangement existed, product had shipped and the risks and rewards of ownership had transferred or services had been rendered, the price to the customer was fixed or determinable, and collectability was reasonably assured, which generally occurred at the time of product shipment. Effective January 1, 2018, the Company adopted new revenue recognition guidance. Under this new guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. The Company's sales arrangements with customers are predominantly short-term in nature involving a single performance obligation related to the delivery of products and generally provide for transfer of control at the time of shipment. In limited circumstances, arrangements may include service performed over time, or there may be significant obligations to the customer that are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance. In these circumstances, operating revenue may be recognized over time as the service is provided to the customer or deferred until all significant obligations have been completed. The amount of operating revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods or services and may include adjustments for customer allowances and rebates. Customer allowances and rebates consist primarily of volume discounts and other short-term incentive programs, which are estimated at the time of sale based on historical experience and anticipated trends. Shipping and handling charges billed to customers are included in revenue and are recognized along with the related product revenue as they are considered a fulfillment cost. Sales commissions are expensed when incurred, which is generally at the time of revenue recognition. Contract liabilities associated with sales arrangements primarily relate to deferred revenue on equipment sales and prepaid service contracts. Total deferred revenue and customer deposits were $215 million and $205 million for the years ended December 31, 2018 and 2017, respectively, and are short-term in nature. For additional information regarding the Company's operating revenue, see New Accounting Pronouncements below and Note 3. Operating Revenue.

Research and development expenses— Research and development expenses are recorded as expense in the year incurred. These costs were $233 million, $225 million and $223 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $50 million, $53 million and $58 million for the years ended December 31, 2018, 2017 and 2016, 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. Prior to 2018, the allowance for doubtful accounts included reserves for uncollectible accounts and customer credits. Under the new revenue guidance adopted on January 1, 2018, the reserve for customer credits is reported as a liability and included in "Other accrued expenses" in Note 14. Other Balance Sheet Information. Accordingly, after January 1, 2018, the allowance for doubtful accounts comprises of reserves for uncollectible accounts. The changes in the allowance for doubtful accounts for the years ended December 31, 2018, 2017 and 2016 were as follows:

In millions201820172016
Beginning balance$43$43$42
Adoption of new revenue recognition guidance(23)——
Provision charged to expense537
Write-offs, net of recoveries(3)(6)(6)
Acquisitions and divestitures——1
Foreign currency translation(1)3(1)
Ending balance$21$43$43

Inventories— Inventories are stated at the lower of cost or net realizable value and include material, labor and factory overhead. The last-in, first-out ("LIFO") method is used to determine the cost of inventories at certain U.S. businesses. The first-in, first-out ("FIFO") method, which approximates current cost, is used for all other inventories. Inventories priced at LIFO were approximately 23% and 21% of total inventories as of December 31, 2018 and 2017, respectively. If the FIFO method was used for all inventories, total inventories would have been approximately $97 million and $89 million higher than reported at December 31, 2018 and 2017, respectively. The major classes of inventory at December 31, 2018 and 2017 were as follows:

In millions20182017
Raw material$523$465
Work-in-process161141
Finished goods731703
LIFO reserve(97)(89)
Total inventories$1,318$1,220

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, 2018 and 2017:

In millions20182017
Land$194$203
Buildings and improvements1,3681,370
Machinery and equipment3,3523,301
Equipment leased to others165164
Construction in progress154123
Gross plant and equipment5,2335,161
Accumulated depreciation(3,442)(3,383)
Net plant and equipment$1,791$1,778

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 improvements5—50 years
Machinery and equipment3—12 years
Equipment leased to othersTerm of lease

Depreciation was $272 million, $256 million and $246 million for the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016 were as follows:

In millions201820172016
Beginning balance$45$45$46
Charges(49)(45)(41)
Provision charged to expense504342
Acquisitions and divestitures——1
Foreign currency translation(1)2(3)
Ending balance$45$45$45

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 the Company’s operating revenue accounting policy above and Note 3. Operating Revenue for additional information.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the prior guidance. The provisions of the new guidance are being applied prospectively to intra-entity asset transfers on or after January 1, 2018 and may result in future tax rate volatility. Upon adoption of the new guidance on January 1, 2018, the Company recorded a cumulative-effect adjustment reducing deferred tax assets and retained earnings by $406 million. For the 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 for additional 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 for additional 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.

(2) Acquisitions

There were no acquisitions during 2018. Net cash paid for acquisitions during 2017 and 2016 was $3 million and $453 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. As a result of the EF&C transaction, which was reported in the Company's Automotive OEM segment, 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 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) Operating Revenue

The Company's 87 diversified operating divisions are organized and managed based on similar product categories and end markets, and are reported to senior management as the following seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Operating revenue by product category, which is consistent with the Company's segment presentation, for the twelve months ended December 31, 2018, 2017 and 2016 was as follows:

In millions201820172016
Automotive OEM$3,338$3,271$2,864
Food Equipment2,2142,1232,110
Test & Measurement and Electronics2,1712,0691,974
Welding1,6911,5381,486
Polymers & Fluids1,7241,7241,691
Construction Products1,7001,6721,609
Specialty Products1,9511,9381,885
Intersegment revenue(21)(21)(20)
Total$14,768$14,314$13,599

Prior to 2018, the Company recognized revenue when persuasive evidence of an arrangement existed, product had shipped and the risks and rewards of ownership had transferred or services had been rendered, the price to the customer was fixed or determinable, and collectability was reasonably assured, which generally occurred at the time of product shipment. Effective January 1, 2018, the Company adopted new revenue recognition guidance. Under this new guidance, operating revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. Given the nature of the Company’s revenue transactions, the new guidance had an immaterial impact on the Company's operating revenue, results of operations, and financial position for the twelve months ended December 31, 2018. See Note 1. Description of Business and Summary of Significant Accounting Policies for additional information. The following is a description of the product offerings, end markets and typical revenue transactions for each of the Company's seven segments:

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

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

Products sold in this segment are primarily manufactured to the customer's specifications and are sold under long-term supply agreements with OEM auto manufacturers and other top tier auto parts suppliers. The Company typically recognizes revenue for products in this segment at the time of shipment. Certain products may be produced utilizing tooling that is owned by the customer that the Company developed and is reimbursed by the customer for the associated cost. In these arrangements, the Company typically retains a contractual right to use the customer-owned tooling for the purpose of fulfilling its obligations under the supply agreement. The Company records reimbursements for the cost of customer-owned tooling as a cost offset rather than operating revenue as tooling is not considered a product offering central to the Company's operations.

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

•warewashing equipment;
•cooking equipment, including ovens, ranges and broilers;
•refrigeration equipment, including refrigerators, freezers and prep tables;
•food processing equipment, including slicers, mixers and scales;
•kitchen exhaust, ventilation and pollution control systems; and
•food equipment service, maintenance and repair.

Revenue for equipment sold in this segment is typically recognized at the time of product shipment. In limited circumstances involving installation of equipment and customer acceptance, the Company may recognize revenue upon completion of installation and acceptance by the customer. Annual service contracts are typically sold separate from equipment and the related revenue is recognized on a straight-line basis over the annual service period. Operating revenue for on-demand service repairs and parts is recorded upon completion and customer acceptance of the work performed.

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

Revenue for products sold in this segment is typically recognized at the time of shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue recognition is deferred until such obligations have been completed.

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

•arc welding equipment;
•metal arc welding consumables and related accessories; and
•metal jacketing and other insulation products.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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

•adhesives for industrial, construction and consumer purposes;
•chemical fluids which clean or add lubrication to machines;
•epoxy and resin-based coating products for industrial applications;
•hand wipes and cleaners for industrial applications;
•fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•fillers and putties for auto body repair; and
•polyester coatings and patch and repair products for the marine industry.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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

•fasteners and related fastening tools for wood and metal applications;
•anchors, fasteners and related tools for concrete applications;
•metal plate truss components and related equipment and software; and
•packaged hardware, fasteners, anchors and other products for retail.

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment.

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

Products in this segment are primarily manufactured to meet anticipated customer demand. The Company typically recognizes revenue for these products at the time of product shipment. In limited circumstances where significant obligations to the customer are unfulfilled at the time of shipment, typically involving installation of equipment and customer acceptance, revenue is recognized when such obligations have been completed.

(4) Legal Settlement

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

(5) Other Income (Expense)

Other income (expense) consisted of the following:

In millions201820172016
Interest income$35$45$38
Other net periodic benefit income2098
Income (loss) from investments916(13)
Equity income in Wilsonart——61
Gain (loss) on disposal of operations and affiliates(2)1(12)
Gain (loss) on foreign currency transactions, net(1)(25)9
Other, net6(1)(2)
Total other income (expense)$67$45$89

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.

(6) Income Taxes

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revised the U.S. corporate income tax rules. In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as follows:

•A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can be paid in installments over eight years. The noncurrent income taxes payable related to the one-time repatriation tax was $495 million and $614 million at December 31, 2018 and 2017, respectively. Additionally, as a result of the one-time repatriation provisions of the Act, the Company recorded additional foreign withholding taxes of $53 million in the fourth quarter of 2017 related to the expected repatriation of foreign held cash and equivalents.
•A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018. Although the lower tax rate took effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. In the fourth quarter of 2017, the Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.
•Deductibility of certain executive compensation. In the fourth quarter of 2017, the Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.

At December 31, 2017, the Company had not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate which was recorded in the fourth quarter of 2017. During 2018, the Company revised its initial estimates which did not result in material changes to the provisional amounts recorded at December 31, 2017, or the effective tax rate for 2018. As of December 31, 2018, the Company has completed its accounting related to the tax effects of enactment of the Act. The Company’s accounting for the tax effects of the Act are subject to future changes due to subsequent clarification of the tax law. On January 15, 2019, the U.S. Department of Treasury released final regulations related to the one-time transition tax. Although the Company's assessment of these final rules is not complete, they are not expected to materially impact the Company’s financial statements.

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

In millions201820172016
U.S. federal income taxes:
Current$373$1,117$756
Deferred(15)(10)(224)
Total U.S. federal income taxes3581,107532
Foreign income taxes:
Current358296290
Deferred49102(5)
Total foreign income taxes407398285
State income taxes:
Current6610690
Deferred—(28)(34)
Total state income taxes667856
Total provision for income taxes$831$1,583$873

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

In millions201820172016
Domestic$1,774$1,806$1,653
Foreign1,6201,4641,255
Total income before taxes$3,394$3,270$2,908

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

201820172016
U.S. federal statutory tax rate21.0%35.0%35.0%
U.S. tax effect of foreign earnings1.50.50.7
Tax effect of U.S. federal tax law change(0.1)20.1—
State income taxes, net of U.S. federal tax benefit1.61.21.3
Differences between U.S. federal statutory and foreign tax rates2.1(3.5)(3.6)
Nontaxable foreign interest income(1.7)(1.7)(2.1)
Tax effect of foreign dividends1.00.40.8
Tax relief for U.S. manufacturers—(1.4)(1.4)
Excess tax benefits from stock-based compensation(0.3)(1.5)—
Other, net(0.6)(0.7)(0.7)
Effective tax rate24.5%48.4%30.0%

The Company's effective tax rate for the twelve months ended December 31, 2018, 2017 and 2016 was 24.5%, 48.4% and 30.0%, respectively. The 2018 effective tax rate benefited from the lower U.S. corporate federal tax rate and discrete items, primarily related to a discrete tax benefit of $37 million in the third quarter of 2018 related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge in the third quarter of 2018 of $22 million related to foreign tax credits. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the enactment of the Act.

Additionally, the effective tax rate for 2018 and 2017 included $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation guidance effective January 1, 2017. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for additional information.

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. The accrual for foreign withholding taxes related to the expected repatriation of foreign held cash and equivalents as of December 31, 2018 and December 31, 2017 was $71 million and $75 million, respectively.

Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2018, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $6 billion. Determination of the related deferred tax liability is not practicable because of the complexities associated with the hypothetical calculation.

Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities at December 31, 2018 and 2017 were as follows:

20182017
In millionsAssetLiabilityAssetLiability
Goodwill and intangible assets$194$(484)$195$(506)
Inventory reserves, capitalized tax cost and LIFO inventory30(3)31(3)
Investments19(171)15(180)
Plant and equipment17(72)18(64)
Accrued expenses and reserves36—45—
Employee benefit accruals186—177—
Foreign tax credit carryforwards8—13—
Net operating loss carryforwards451—507—
Capital loss carryforwards89—98—
Allowances for uncollectible accounts10—9—
Pension liabilities—(19)—(25)
Deferred intercompany deductions——405—
Unrealized loss (gain) on foreign debt instruments—(45)—(19)
Other32(13)99(15)
Gross deferred income tax assets (liabilities)1,072(807)1,612(812)
Valuation allowances(418)—(459)—
Total deferred income tax assets (liabilities)$654$(807)$1,153$(812)

The valuation allowances recorded at December 31, 2018 and 2017 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2018, the Company has utilized all realizable foreign tax credit carryforwards.

At December 31, 2018, 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 millionsto Net Operating Losses
2019$25
202087
202181
202234
20237
20247
2025-204555
Do not expire1,532
Total gross carryforwards related to net operating losses$1,828

Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the years ended 2018, 2017 and 2016 were as follows:

In millions201820172016
Beginning balance$285$210$259
Additions based on tax positions related to the current year34219
Additions for tax positions of prior years49100126
Reductions for tax positions of prior years(31)(24)(97)
Settlements(5)(53)(96)
Foreign currency translation(4)10(1)
Ending balance$297$285$210

Included in the balance at December 31, 2018 were approximately $268 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 $42 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:

JurisdictionOpen Tax Years
United States – Federal2016-2018
United Kingdom2017-2018
Germany2012-2018
France2014-2018
Australia2013-2018

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, 2018 and 2017 was $25 million for both periods.

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 assessed 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. In August 2018, the court decided in favor of the Company. The Company did not have a reserve for this matter, which was fully resolved in 2018.

(7) Net Income Per Share

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

In millions except per share amounts201820172016
Net Income$2,563$1,687$2,035
Net income per share—Basic:
Weighted-average common shares335.0344.1355.0
Net income per share—Basic$7.65$4.90$5.73
Net income per share—Diluted:
Weighted-average common shares335.0344.1355.0
Effect of dilutive stock options and restricted stock units2.12.72.1
Weighted-average common shares assuming dilution337.1346.8357.1
Net income per share—Diluted$7.60$4.86$5.70

Options that were considered antidilutive were not included in the computation of diluted net income per share. There were 0.5 million antidilutive options outstanding as of December 31, 2018. There were no antidilutive options outstanding as of December 31, 2017 and 2016.

(8) Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:

In millionsAutomotive OEMTest & Measurement and ElectronicsFood EquipmentPolymers & FluidsWeldingConstruction ProductsSpecialty ProductsTotal
Balance, December 31, 2016$456$1,336$249$889$260$508$860$4,558
2017 activity:
Acquisitions & divestitures——————11
Foreign currency translation32362030122241193
Balance, December 31, 20174881,3722699192725309024,752
2018 activity:
Foreign currency translation(12)(20)(10)(30)(9)(17)(21)(119)
Balance, December 31, 2018$476$1,352$259$889$263$513$881$4,633
Cumulative goodwill impairment charges, December 31, 2018$24$83$60$15$5$7$46$240

Intangible assets as of December 31, 2018 and 2017 were as follows:

20182017
In millionsCostAccumulated AmortizationNetCostAccumulated AmortizationNet
Amortizable intangible assets:
Customer lists and relationships$1,747$(1,282)$465$1,753$(1,182)$571
Trademarks and brands759(435)324761(391)370
Patents and proprietary technology621(506)115623(473)150
Other478(458)20474(453)21
Total amortizable intangible assets3,605(2,681)9243,611(2,499)1,112
Indefinite-lived intangible assets:
Trademarks and brands160—160160—160
Total intangible assets$3,765$(2,681)$1,084$3,771$(2,499)$1,272

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2018, 2017 and 2016. There were no impairment charges as a result of these assessments.

For the years ended December 31, 2018, 2017 and 2016, amortization expense of intangible assets was $189 million, $206 million and $224 million, respectively.

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

In millions
2019$163
2020142
2021124
2022111
202392

(9) 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, 2018 and 2017 consisted of the following:

In millions20182017
Commercial paper$—$849
Current maturities of long-term debt1,3501
Bank overdrafts1—
Total short-term debt$1,351$850

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. 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. As of December 31, 2018, 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 1.7% and 1.0% for the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, the Company had unused capacity of approximately $227 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, 2018 and 2017 consisted of the following:

20182017
In millionsEffective Interest RateCarrying ValueFair ValueCarrying ValueFair Value
1.95% notes due March 1, 20191.98%650649649649
6.25% notes due April 1, 20196.25%700706699736
4.88% notes due thru December 31, 20204.96%4444
3.375% notes due September 15, 20213.43%349354348361
1.75% Euro notes due May 20, 20221.86%570603595638
1.25% Euro notes due May 22, 20231.35%569596595624
3.50% notes due March 1, 20243.54%696712696734
2.65% notes due November 15, 20262.69%993933992980
2.125% Euro notes due May 22, 20302.18%567620594646
3.0% Euro notes due May 19, 20343.13%560678586702
4.875% notes due September 15, 20414.97%636719636791
3.9% notes due September 1, 20423.96%1,0811,0871,0811,183
Other borrowings4444
Total$7,379$7,665$7,479$8,052
Less: Current maturities of long-term debt(1,350)(1)
Total long-term debt$6,029$7,478

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 12. 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
2019$1,350
20204
2021349
2022570
2023569
2024 and future years4,537
Total$7,379

(10) 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 $82 million in 2018, $79 million in 2017, and $77 million in 2016. 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:

PensionOther Postretirement Benefits
In millions201820172016201820172016
Components of net periodic benefit cost:
Service cost$60$63$62$8$9$9
Interest cost727292181924
Expected return on plan assets(126)(133)(144)(25)(23)(23)
Amortization of actuarial (gain) loss435744(2)(1)—
Amortization of prior service cost—————(1)
Total net periodic benefit cost$49$59$54$(1)$4$9

The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the statement of income while the other components of net periodic benefit cost are presented within Other income (expense).

The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2018 and MP-2017, to measure its U.S. pension and other postretirement obligations as of December 31, 2018 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, 2018 and 2017:

PensionOther Postretirement Benefits
In millions2018201720182017
Change in benefit obligation:
Benefit obligation at January 1$2,661$2,562$546$551
Service cost606389
Interest cost72721819
Plan participants’ contributions221212
Amendments9———
Actuarial (gain) loss(162)26(35)(5)
Benefits paid(165)(152)(40)(41)
Medicare subsidy received——21
Liabilities from other immaterial plans5———
Foreign currency translation(53)88——
Benefit obligation at December 31$2,429$2,661$511$546
PensionOther Postretirement Benefits
In millions2018201720182017
Change in plan assets:
Fair value of plan assets at January 1$2,832$2,487$373$351
Actual return on plan assets(82)227(19)45
Company contributions2317876
Plan participants’ contributions221212
Benefits paid(165)(152)(40)(41)
Foreign currency translation(60)90——
Fair value of plan assets at December 31$2,550$2,832$333$373
Funded status$121$171$(178)$(173)
Other immaterial plans(46)(65)(5)(5)
Net asset (liability) at December 31$75$106$(183)$(178)
The amounts recognized in the statement of financial position as of December 31 consist of:
Other assets$290$337$—$—
Accrued expenses(12)(12)(4)(4)
Other noncurrent liabilities(203)(219)(179)(174)
Net asset (liability) at end of year$75$106$(183)$(178)
The pre-tax amounts recognized in accumulated other comprehensive income consist of:
Net actuarial (gain) loss$552$548$(53)$(64)
Prior service cost8———
$560$548$(53)$(64)
Accumulated benefit obligation$2,299$2,499
Plans with accumulated benefit obligation in excess of plan assets as of December 31:
Projected benefit obligation$176$184
Accumulated benefit obligation$170$175
Fair value of plan assets$28$27

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:

PensionOther Postretirement Benefits
201820172016201820172016
Assumptions used to determine benefit obligations at December 31:
Discount rate3.66%3.12%3.41%4.40%3.72%4.30%
Rate of compensation increases3.52%3.54%3.77%
Assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate3.12%3.41%3.95%3.72%4.30%4.55%
Expected return on plan assets4.77%5.53%6.22%6.80%6.80%7.00%
Rate of compensation increases3.54%3.77%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:

201820172016
Health care cost trend rate assumed for the next year7.00%6.25%6.00%
Ultimate trend rate4.50%4.50%4.50%
Year the rate reaches the ultimate trend rate202620252023

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

In millions1 Percentage-Point Increase1 Percentage-Point Decrease
Change in service cost and interest cost for 2018$—$(1)
Change in postretirement benefit obligation at December 31, 2018$5$(8)

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

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

The following tables present the fair value of the Company’s pension and other postretirement benefit plan assets at December 31, 2018 and 2017, 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.

2018
In millionsTotalLevel 1Level 2Level 3
Pension Plan Assets:
Cash and equivalents$28$27$1$—
Fixed income securities:
Government securities371—371—
Corporate debt securities853—853—
Investment contracts with insurance companies1——1
Commingled funds:
Collective trust funds1,257
Partnerships/private equity interests36
Other4—4—
Total fair value of pension plan assets$2,550$27$1,229$1
Other Postretirement Benefit Plan Assets:
Life insurance policies$333
Total fair value of other postretirement benefit plan assets$333$—$—$—
2017
In millionsTotalLevel 1Level 2Level 3
Pension Plan Assets:
Cash and equivalents$43$34$9$—
Fixed income securities:
Government securities371—371—
Corporate debt securities943—943—
Investment contracts with insurance companies1——1
Commingled funds:
Collective trust funds1,424
Partnerships/private equity interests41
Other9—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 policies371
Total fair value of other postretirement benefit plan assets$373$2$—$—

Cash and equivalents include cash on hand and instruments with original maturities of three months or less and are valued at cost, which approximates fair value. Fixed income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities and investment contracts. The majority of the assets in this category are valued by evaluating bid prices provided by independent financial data services. For securities where market data is not readily available, unobservable market data is used to value the security. The underlying investments include small-cap equity, international equity and long- and short-term fixed income instruments.

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

Cash flows— The Company generally funds its pension and other postretirement benefit plans as required by law or to the extent such contributions are tax deductible. The Company expects to contribute approximately $28 million to its pension plans and $5 million to its other postretirement benefit plans in 2019. The Company’s portion of the benefit payments that are expected to be paid during the years ending December 31 is as follows:

In millionsPensionOther Postretirement Benefits
2019$162$35
202016536
202116936
202217237
202318037
Years 2024-2028895182

(11) 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 $124 million, $120 million and $121 million for the years ended December 31 2018, 2017 and 2016, respectively. Minimum lease payments under operating leases with non-cancelable terms in excess of one year for the years ending December 31 are as follows:

In millions
2019$67
202048
202132
202224
202318
2024 and future years34
Total future minimum lease payments$223

(12) Stockholders' Equity

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

Share Repurchases— On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which 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.

Cash Dividends— Cash dividends declared were $3.56 per share in 2018, $2.86 per share in 2017 and $2.40 per share in 2016. Cash dividends paid were $3.34 per share in 2018, $2.73 per share in 2017 and $2.30 per share in 2016.

Accumulated Other Comprehensive Income (Loss)— The changes in accumulated other comprehensive income (loss) during 2018, 2017 and 2016 were as follows:

In millions201820172016
Beginning balance$(1,287)$(1,807)$(1,504)
Adoption of new accounting guidance related to reclassification of certain tax effects(45)——
Foreign currency translation adjustments during the period(308)294(251)
Foreign currency translation adjustments reclassified to income52(1)
Income taxes(25)110(25)
Total foreign currency translation adjustments, net of tax(328)406(277)
Pension and other postretirement benefit adjustments during the period(64)96(67)
Pension and other postretirement benefit adjustments reclassified to income415643
Income taxes6(38)(2)
Total pension and other postretirement benefit adjustments, net of tax(17)114(26)
Ending balance$(1,677)$(1,287)$(1,807)

Effective January 1, 2018, the Company elected to early adopt new accounting guidance related to the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the "Tax Cuts and Jobs Act" (the "Act") and reclassified $45 million of stranded income tax effects from Accumulated other comprehensive income (loss) to Retained earnings. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for additional information.

Foreign currency translation adjustments reclassified to income primarily relate to the disposal of operations and were included in the related gain or loss upon disposal. Pension and other postretirement benefit adjustments reclassified to income represent the amortization of actuarial gains and losses and prior service cost. Refer to Note 10. 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 $187 million and $81 million as of December 31, 2018 and 2017, respectively.

As of December 31, 2018 and 2017, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.3 billion and $1.0 billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs of $364 million and $291 million, respectively. The estimated pre-tax unrecognized net benefit cost that will be amortized from Accumulated other comprehensive income (loss) into income in 2019 is $21 million for pension and other postretirement benefits.

(13) Stock-Based Compensation

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

Commencing in February 2013, the Company began issuing shares from treasury stock to cover the exercised options and vested RSUs. Prior to February 2013, the Company generally issued new shares from its authorized but unissued share pool. As of December 31, 2018, 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 millions201820172016
Pre-tax compensation expense$40$36$39
Tax benefit(5)(9)(13)
Total stock-based compensation expense, net of tax$35$27$26

The following table summarizes activity related to non-vested RSUs during 2018:

Shares in millionsNumber of SharesWeighted-Average Grant-Date Fair Value
Unvested, January 1, 20180.6$99.87
Granted0.2162.49
Vested(0.3)92.71
Unvested, December 31, 20180.5121.24

The following table summarizes stock option activity for the year ended December 31, 2018:

In millions except exercise price and contractual termsNumber of SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual TermAggregate Intrinsic Value
Under option, January 1, 20184.5$80.88
Granted0.5163.36
Exercised(0.4)61.22
Under option, December 31, 20184.690.565.6$165
Exercisable, December 31, 20183.274.084.6$168

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 2018 and 2017 was 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:

201820172016
Risk-free interest rate2.07-3.06%0.91-2.61%0.56-1.86%
Weighted-average volatility22.0%22.0%24.0%
Dividend yield2.10%2.22%2.12%
Expected years until exercise7.5-8.47.2-7.96.9-7.7

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 2018, 2017 and 2016 was $38.34, $26.83 and $20.02 per share, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $33 million, $132 million and $89 million, respectively. As of December 31, 2018, there was $10 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.1 years. Exercise of stock options during the years ended December 31, 2018, 2017 and 2016 resulted in cash receipts of $22 million, $84 million and $84 million, respectively. The total fair value of vested stock option awards during the years ended December 31, 2018, 2017 and 2016 was $15 million, $13 million and $12 million, respectively.

As of December 31, 2018, there was $30 million of total unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average remaining contractual life of 1.8 years. The total fair value of vested RSU awards during the years ended December 31, 2018, 2017 and 2016 was $19 million, $19 million and $21 million, respectively.

(14) Other Balance Sheet Information

Other balance sheet information at December 31, 2018 and 2017 was as follows:

In millions20182017
Prepaid expenses and other current assets:
Income tax refunds receivable$98$121
Value-added-tax receivables7970
Vendor advances3026
Other127119
Total prepaid expenses and other current assets$334$336
Other assets:
Cash surrender value of life insurance policies$429$442
Prepaid pension assets290337
Customer tooling171184
Investments5153
Other89179
Total other assets$1,030$1,195
Accrued expenses:
Compensation and employee benefits$391$411
Deferred revenue and customer deposits215205
Rebates172147
Warranties4545
Current portion of pension and other postretirement benefit obligations1616
Other432434
Total accrued expenses$1,271$1,258
Other liabilities:
Pension benefit obligation$203$219
Postretirement benefit obligation179174
Other457489
Total other liabilities$839$882

(15) Segment Information

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

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

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

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

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

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

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

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

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

Segment information for 2018, 2017 and 2016 was as follows:

In millions201820172016
Operating revenue:
Automotive OEM$3,338$3,271$2,864
Food Equipment2,2142,1232,110
Test & Measurement and Electronics2,1712,0691,974
Welding1,6911,5381,486
Polymers & Fluids1,7241,7241,691
Construction Products1,7001,6721,609
Specialty Products1,9511,9381,885
Intersegment revenue(21)(21)(20)
Total$14,768$14,314$13,599
Operating income:
Automotive OEM$751$747$690
Food Equipment572556537
Test & Measurement and Electronics523464372
Welding474415370
Polymers & Fluids369357343
Construction Products414399361
Specialty Products522527482
Total Segments3,6253,4653,155
Unallocated(41)20(99)
Total$3,584$3,485$3,056
Depreciation and amortization and impairment of intangible assets:
Automotive OEM$123$111$90
Food Equipment444545
Test & Measurement and Electronics8892104
Welding272836
Polymers & Fluids838992
Construction Products323334
Specialty Products646469
Total$461$462$470
Plant and equipment additions:
Automotive OEM$184$147$116
Food Equipment282731
Test & Measurement and Electronics312325
Welding231716
Polymers & Fluids151618
Construction Products252220
Specialty Products584547
Total$364$297$273
Identifiable assets:
Automotive OEM$2,388$2,402$2,051
Food Equipment1,0191,0541,013
Test & Measurement and Electronics2,3432,4492,362
Welding789756701
Polymers & Fluids1,9422,0672,019
Construction Products1,1671,1961,099
Specialty Products1,6871,7211,599
Total Segments11,33511,64510,844
Corporate3,5355,1354,357
Total$14,870$16,780$15,201

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 2018, 2017 and 2016 was as follows:

In millions201820172016
Operating Revenue by Geographic Region:
United States$6,562$6,243$6,176
Canada/Mexico1,050996923
Total North America7,6127,2397,099
Europe, Middle East and Africa4,2414,1023,787
Asia Pacific2,5732,5772,361
South America342396352
Total Operating Revenue$14,768$14,314$13,599

Operating revenue by geographic region is based on the customers' locations. There was no single country outside the U.S. with long-lived assets exceeding 10% of the Company's total long-lived assets in 2018 and 2016. At December 31, 2017, the Company had approximately 10% of its total long-lived assets in Germany. No single customer accounted for more than 5% of consolidated revenues in 2018, 2017 or 2016. 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 31June 30September 30December 31
In millions except per share amounts20182017201820172018201720182017
Operating revenue$3,744$3,471$3,831$3,599$3,613$3,615$3,580$3,629
Cost of revenue2,1812,0032,2312,0872,0962,0922,0962,124
Operating income903807932872889960860846
Net income (loss)652536666587638640607(76)
Net income (loss) per share:
Basic1.921.551.981.701.911.861.84(0.22)
Diluted1.901.541.971.691.901.851.83(0.22)

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 6. 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.

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