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

INTRODUCTION

Illinois Tool Works Inc. (the "Company" or "ITW") is a global manufacturer of a diversified range of industrial products and equipment with 84 divisions in 53 countries. As of December 31, 2019, the Company employed approximately 45,000 people.

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

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

THE ITW BUSINESS MODEL

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

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

•

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

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

ENTERPRISE STRATEGY

In late 2012, ITW began its strategic framework transitioning the Company on its current path to fully leverage the compelling performance potential of the ITW Business Model. The Company undertook a complete review of its performance, focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns, and developing a strategy to replicate that performance across its operations.

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

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

As a result of this work, ITW's business portfolio now has significantly higher organic growth potential. ITW segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases. The Company achieved this through product line simplification, or eliminating the complexity and overhead costs associated with smaller product lines and customers, while supporting and growing the businesses' largest / most profitable customers and product lines.

•

Step two, Business Structure Simplification, was implemented to simplify and scale up ITW’s operating structure to support increased engineering, marketing, and sales resources, and improve global reach and competitiveness, all of which were critical to driving accelerated organic growth. ITW now has 84 scaled-up divisions with significantly enhanced focus on growth investments, core customers and products, and customer-back innovation.

•	The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 through 2019 and continues to be a key contributor to the Company's ongoing enterprise strategy.

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

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

PATH TO FULL POTENTIAL - FINISHING THE JOB

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

•	Portfolio discipline

•	80/20 Front-to-Back practice excellence

•	Full-potential organic growth

Portfolio Discipline

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

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

As part of its agenda to finish the job, the Company routinely evaluates its portfolio to ensure it delivers sustainable differentiation and drives consistent long-term performance. This includes both implementing portfolio refinements and assessing selective high-quality acquisitions to supplement ITW’s long-term growth potential.

The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with revenues totaling up to $1 billion. In the fourth quarter of 2019, the Company completed the divestitures of three businesses and continues to evaluate options for certain other businesses. The Company expects any earnings per share dilution from divestitures would be offset by incremental share repurchases. Refer to Note 2. Divestitures in Item 8. Financial Statements and Supplementary Data for more information regarding divestitures.

80/20 Front-to-Back Practice Excellence

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

ITW will continue its efforts to finish the job and drive 80/20 Front-to-Back practice excellence in every division in the Company, every day. Driving strong operational excellence in the quality of 80/20 Front-to-Back practice across the Company, division by division, will produce further customer-facing performance improvement in a number of the Company's divisions and additional structural margin expansion at the enterprise level.

Full-potential Organic Growth

Reaching full potential means that every division is positioned for sustainable, high-quality organic growth. The Company has clearly defined action plans aimed at leveraging the performance power of the ITW Business Model to achieve full-potential organic growth in every division, with specific focus on:

•	"80” focused Market Penetration - fully leveraging the considerable growth potential that resides in the Company's largest and most differentiated product offerings and customer relationships

•	Customer-Back Innovation - strengthening the Company's commitment to serial innovation and delivering a continuous flow of differentiated new products to its key customers

•	Strategic Sales Excellence - deploying a high-performance sales function in every division

As the Company continues to make progress toward its full potential, the Company will explore opportunities to reinforce or further expand the long-term organic growth potential of ITW through the addition of selective high-quality acquisitions.

TERMS USED BY ITW

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

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

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

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

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

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

CONSOLIDATED RESULTS OF OPERATIONS

The Company delivered solid financial results in 2019 despite a contracting industrial demand environment. With the Company's diversified high-quality business portfolio, highly differentiated ITW Business Model and continued strong execution on enterprise initiatives throughout the year, the Company grew diluted earnings per share and returned approximately $2.8 billion to shareholders in the form of dividends and share repurchases in 2019. Additionally, all segments had operating margin at or above 21.5% for 2019.

The Company does not believe that tariffs imposed in the past year have had a material impact on its operating results. The Company will continue to evaluate the impact of enacted and proposed tariffs on its businesses, as well as pricing actions to mitigate the impact of any raw material cost increases resulting from these tariffs.

In early 2020, an outbreak of the coronavirus occurred in China and other jurisdictions. The extent of the outbreak and its impact on the markets served by the Company and on its operations is uncertain. A prolonged outbreak could interrupt the operations of the Company and its customers and suppliers.

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

The Company’s consolidated results of operations for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	14,109			$	14,768			(4.5	)%		(1.9	)%	(0.3	)%	—	%	(2.3	)%	(4.5	)%
Operating income	$	3,402			$	3,584			(5.1	)%		(1.3	)%	(0.1	)%	(1.4	)%	(2.3	)%	(5.1	)%
Operating margin %	24.1		%		24.3		%		(20) bps			10 bps		—		(30) bps		—		(20) bps

•	Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and divestitures.

•	Organic revenue decreased 1.9% primarily driven by a decline in the Automotive OEM, Specialty Products, Welding and Construction Products segments. Product line simplification activities reduced organic revenue by 60 basis points.

◦	North American organic revenue decreased 1.8% as a decline in the Automotive OEM, Specialty Products, Welding and Polymers & Fluids segments was partially offset by growth in the Food Equipment, Test & Measurement and Electronics and Construction Products segments.

◦	Europe, Middle East and Africa organic revenue decreased 2.2% as five segments declined, partially offset by growth in the Food Equipment and Construction Products segments.

◦	Asia Pacific organic revenue declined 1.6% as a decrease in the Construction Products, Automotive OEM, Food Equipment and Test & Measurement and Electronics segments was partially offset by an increase in the Welding, Polymers & Fluids and Specialty Products segments.

•	Operating income of $3.4 billion decreased 5.1% primarily due to unfavorable foreign currency translation, higher restructuring expenses and lower organic revenue.

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Operating margin of 24.1% decreased 20 basis points. Excluding the unfavorable impact of higher restructuring expenses of 30 basis points, operating margin increased 10 basis points primarily due to benefits from the Company's enterprise initiatives that contributed 120 basis points and favorable price/cost of 10 basis points, partially offset by negative operating leverage of 50 basis points, product mix and higher employee-related expenses.

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The effective tax rate for 2019 was 23.3% compared to 24.5% in 2018. The 2019 and 2018 effective tax rates benefited from the lower U.S. corporate federal tax rate and discrete items. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter 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 of $22 million in the third quarter related to foreign tax credits. Additionally, the effective tax rate for 2019 and 2018 included $28 million and $10 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•	Diluted earnings per share (EPS) of $7.74, an increase of 1.8%, included a $0.09 gain in 2019 from the disposal of businesses.

•	Free cash flow was $2.7 billion for 2019. Refer to the Cash Flow section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

•	The Company repurchased approximately 9.8 million shares of its common stock in 2019 for approximately $1.5 billion.

•	The Company increased the quarterly dividend by 7.0% in 2019. Total cash dividends of approximately $1.3 billion were paid in 2019.

•	Adjusted after-tax return on average invested capital was 28.7% for 2019. Refer to the Adjusted After-Tax Return on Average Invested Capital section of Liquidity and Capital Resources for a reconciliation of this non-GAAP measure.

2018 compared to 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS BY SEGMENT

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

	Operating Revenue
In millions	2019				2018				2017
Automotive OEM	$	3,063			$	3,338			$	3,271
Food Equipment	2,188				2,214				2,123
Test & Measurement and Electronics	2,121				2,171				2,069
Welding	1,638				1,691				1,538
Polymers & Fluids	1,669				1,724				1,724
Construction Products	1,625				1,700				1,672
Specialty Products	1,825				1,951				1,938
Intersegment revenue	(20		)		(21		)		(21		)
Total	$	14,109			$	14,768			$	14,314

	Operating Income
In millions	2019				2018				2017
Automotive OEM	$	659			$	751			$	747
Food Equipment	578				572				556
Test & Measurement and Electronics	542				523				464
Welding	453				474				415
Polymers & Fluids	381				369				357
Construction Products	383				414				399
Specialty Products	472				522				527
Total Segments	3,468				3,625				3,465
Unallocated	(66		)		(41		)		20
Total	$	3,402			$	3,584			$	3,485

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

AUTOMOTIVE OEM

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

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

The results of operations for the Automotive OEM segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	3,063			$	3,338			(8.2	)%		(5.4	)%	—	%	—	%	(2.8	)%	(8.2	)%
Operating income	$	659			$	751			(12.2	)%		(7.0	)%	—	%	(2.6	)%	(2.6	)%	(12.2	)%
Operating margin %	21.5		%		22.5		%		(100) bps			(40) bps		—		(60) bps		—		(100) bps

•	Operating revenue declined due to lower organic revenue and the unfavorable effect of foreign currency translation.

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Organic revenue declined 5.4% versus worldwide auto builds which decreased 6%. Auto builds for North America, Europe and China, where the Company has a higher concentration of revenue as compared to other geographic regions, declined 6%. Product line simplification activities reduced organic revenue by 120 basis points. Additionally, organic revenue was negatively impacted by approximately 100 basis points due to unexpected customer shutdowns in North America in the second half of 2019.

◦	North American organic revenue decreased 7.8% compared to North American auto builds which were down 4% due to customer mix. Auto builds for the Detroit 3, where the Company has higher content, decreased 8%. Additionally, 2019 was negatively impacted by unexpected customer shutdowns.

◦	European organic revenue declined 4.5% compared to European auto builds which declined 4% in 2019 due to customer mix.

◦	Asia Pacific organic revenue declined 2.2% in 2019. China organic revenue declined 1.0% versus Chinese auto builds which declined 8% in 2019.

•	Operating margin was 21.5% in 2019. The decrease of 100 basis points was primarily due to negative operating leverage of 90 basis points, unfavorable price/cost of 60 basis points, higher restructuring expenses and product mix, partially offset by benefits from the Company's enterprise initiatives.

2018 compared to 2017

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

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

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

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

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

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

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

FOOD EQUIPMENT

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

•	warewashing equipment;

•	cooking equipment, including ovens, ranges and broilers;

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

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

•	kitchen exhaust, ventilation and pollution control systems; and

•	food equipment service, maintenance and repair.

The results of operations for the Food Equipment segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,188			$	2,214			(1.2	)%		1.1	%	—	%	—	%	(2.3	)%	(1.2	)%
Operating income	$	578			$	572			1.1	%		4.5	%	—	%	(1.2	)%	(2.2	)%	1.1	%
Operating margin %	26.4		%		25.8		%		60 bps			90 bps		—		(30) bps		—		60 bps

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

•	Organic revenue increased 1.1% as equipment organic revenue decreased 0.2% and service organic revenue increased 3.5%.

◦	North American organic revenue grew 1.1%. Equipment organic revenue declined 0.4% primarily driven by lower demand in the restaurant and institutional end markets, partially offset by higher demand in food retail. Service organic revenue increased 3.6%.

◦	International organic revenue grew 1.1% as equipment organic revenue increased 0.2% primarily due to higher demand in the European warewash, cooking and retail end markets, partially offset by lower demand in Asia. Service organic revenue increased 3.5%.

•	Operating margin of 26.4% in 2019 increased 60 basis points primarily driven by benefits from the Company's enterprise initiatives, favorable price/cost of 40 basis points and positive operating leverage of 30 basis points, partially offset by product mix, higher employee-related expenses and higher restructuring expenses.

2018 compared to 2017

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

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

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

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

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

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

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, automotive original equipment manufacturers and tiers, industrial capital goods, energy 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;

•	electronic components and component packaging;

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

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

The results of operations for the Test & Measurement and Electronics segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	2,121			$	2,171			(2.3	)%		(0.3	)%	(0.2	)%	—	%	(1.8	)%	(2.3	)%
Operating income	$	542			$	523			3.7	%		5.7	%	—	%	(0.2	)%	(1.8	)%	3.7	%
Operating margin %	25.6		%		24.1		%		150 bps			140 bps		10 bps		—		—		150 bps

•	Operating revenue declined due to the unfavorable effect of foreign currency translation, lower organic revenue and a divestiture.

•	Operating revenue for 2019 included $58 million related to the business divested in 2019.

•	Organic revenue decreased 0.3% in 2019.

◦	Organic revenue for the test and measurement businesses decreased 0.8% primarily driven by lower semi-conductor end market demand in North America. Excluding semi-conductor, the test and measurement businesses increased 3.5%. Instron, where demand is more closely tied to the capital spending environment, had organic revenue growth of 6.4%.

◦	Electronics organic revenue grew 0.4%. The other electronics businesses, which include the contamination control, static control and pressure sensitive adhesives businesses, grew 1.5% primarily due to growth in North America and Asia, partially offset by a decline in Europe. The electronics assembly businesses decreased 1.4% primarily due to lower demand in Asia.

•	Operating margin of 25.6% in 2019 increased 150 basis points primarily driven by benefits from the Company's enterprise initiatives, lower intangible asset amortization expense and favorable price/cost of 50 basis points.

2018 compared to 2017

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

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

•	Organic revenue increased 3.5% in 2018.

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

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

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

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; and

•	metal arc welding consumables and related accessories.

The results of operations for the Welding segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/ Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,638			$	1,691			(3.1	)%		(1.2	)%	(1.1	)%	—	%	(0.8	)%	(3.1	)%
Operating income	$	453			$	474			(4.4	)%		(2.1	)%	(0.4	)%	(1.7	)%	(0.2	)%	(4.4	)%
Operating margin %	27.7		%		28.0		%		(30) bps			(20) bps		20 bps		(50) bps		20 bps		(30) bps

•	Operating revenue decreased due to lower organic revenue, the impact of divestiture activity and the unfavorable effect of foreign currency translation.

•	Operating revenue for 2019 included $62 million related to the business divested in 2019.

•	Organic revenue decreased 1.2% as equipment declined 2.6%, partially offset by growth in consumables of 0.8%.

◦	North American organic revenue declined 1.1% as a decrease in the industrial end markets was partially offset by growth in the commercial and oil and gas end markets.

◦	International organic revenue decreased 1.6% primarily due to a decline in Europe, partially offset by higher demand in Asia in the oil and gas end markets.

•	Operating margin of 27.7% decreased 30 basis points compared to the prior year primarily driven by higher restructuring expenses of 50 basis points, product mix, negative operating leverage of 20 basis points and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives and favorable price/cost of 70 basis points.

2018 compared to 2017

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

•	Operating revenue increased primarily due to higher organic revenue.

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

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

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

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

POLYMERS & FLUIDS

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

•	adhesives for industrial, construction and consumer purposes;

•	chemical fluids which clean or add lubrication to machines;

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

•	hand wipes and cleaners for industrial applications;

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

•	fillers and putties for auto body repair; and

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

The results of operations for the Polymers & Fluids segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,669			$	1,724			(3.2	)%		—	%	(0.4	)%	—	%	(2.8	)%	(3.2	)%
Operating income	$	381			$	369			3.1	%		7.9	%	(0.1	)%	(1.5	)%	(3.2	)%	3.1	%
Operating margin %	22.8		%		21.4		%		140 bps			170 bps		—		(30) bps		—		140 bps

•	Operating revenue decreased primarily due to the unfavorable effect of foreign currency translation.

•	Organic revenue was flat as growth in the polymers businesses was offset by declines in the automotive aftermarket and fluids businesses.

◦	Organic revenue for the automotive aftermarket businesses declined 0.7% primarily due to lower demand in the tire repair businesses in North America and the additives businesses in Europe, partially offset by stronger demand in the car care businesses in North America.

◦	Organic revenue for the polymers businesses increased 2.4% primarily driven by growth in Asia and North America, primarily in the heavy industrial end markets.

◦	Organic revenue for the fluids businesses decreased 2.0% primarily due to a decline in the industrial maintenance, repair, and operations end markets in North America.

•	Operating margin of 22.8% increased 140 basis points primarily due to the net benefits from the Company's enterprise initiatives and cost management, partially offset by higher restructuring expenses.

2018 compared to 2017

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

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

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

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

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

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

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

CONSTRUCTION PRODUCTS

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

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

•	anchors, fasteners and related tools for concrete applications;

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

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

The results of operations for the Construction Products segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,625			$	1,700			(4.4	)%		(1.0	)%	—	%	—	%	(3.4	)%	(4.4	)%
Operating income	$	383			$	414			(7.4	)%		(3.1	)%	—	%	(1.2	)%	(3.1	)%	(7.4	)%
Operating margin %	23.6		%		24.3		%		(70) bps			(50) bps		—		(30) bps		10 bps		(70) bps

•	Operating revenue decreased in 2019 due to the unfavorable effect of foreign currency translation and lower organic revenue.

•	Organic revenue declined 1.0% in 2019.

◦	North American organic revenue was flat as an increase of 1.9% in the United States residential end markets was offset by a decline of 3.2% in the commercial end markets and a decline in Canada.

◦	International organic revenue declined 1.8%. Asia Pacific organic revenue decreased 5.1% primarily due to a decline in Australia and New Zealand across all end markets. European organic revenue increased 1.3% driven by growth in continental Europe.

•	Operating margin of 23.6% decreased 70 basis points primarily driven by unfavorable price/cost of 40 basis points, higher restructuring expenses, product mix and negative operating leverage of 10 basis points, partially offset by benefits from the Company's enterprise initiatives.

2018 compared to 2017

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

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

•	Organic revenue increased 1.2% in 2018.

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

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

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

SPECIALTY PRODUCTS

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

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

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

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

•	product coding and marking equipment and related consumables;

•	plastic and metal closures and components for appliances;

•	airport ground support equipment; and

•	components for medical devices.

The results of operations for the Specialty Products segment for 2019, 2018 and 2017 were as follows:

2019 compared to 2018

	For the Years Ended
Dollars in millions	December 31,											Components of Increase (Decrease)
	2019				2018				Inc (Dec)			Organic		Acquisition/Divestiture		Restructuring		Foreign Currency		Total
Operating revenue	$	1,825			$	1,951			(6.5	)%		(4.1	)%	(0.6	)%	—	%	(1.8	)%	(6.5	)%
Operating income	$	472			$	522			(9.7	)%		(7.6	)%	—	%	(0.5	)%	(1.6	)%	(9.7	)%
Operating margin %	25.9		%		26.8		%		(90) bps			(100) bps		20 bps		(10) bps		—		(90) bps

•	Operating revenue decreased in 2019 due to lower organic revenue, the unfavorable effect of foreign currency translation and the impact of divestiture activity.

•	Operating revenue for 2019 included $14 million related to the businesses divested in 2019.

•	Organic revenue decreased 4.1% in 2019. Consumables declined 5.8% primarily due to lower demand in North America and Europe. Equipment sales increased 2.2% primarily due to higher demand in North America, partially offset by a decline in Asia. Product line simplification activities reduced organic revenue by 100 basis points.

◦	North American organic revenue decreased 3.1% primarily due to a decrease in the specialty films, labels and appliance businesses, partially offset by growth in the ground support equipment business and consumer packaging businesses.

◦	International organic revenue decreased 5.6% primarily due to a decline in the specialty films, graphics, appliance and foils businesses in Europe.

•	Operating margin of 25.9% decreased 90 basis points primarily due to negative operating leverage of 90 basis points, product mix and higher employee-related expenses, partially offset by benefits from the Company's enterprise initiatives.

2018 compared to 2017

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

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

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

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

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

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

OTHER FINANCIAL HIGHLIGHTS

•	Interest expense was $221 million in 2019, $257 million in 2018 and $260 million in 2017. Interest expense in 2019 was $36 million lower than the previous year primarily due to the repayment of the $700 million notes due April 1, 2019 and the $650 million notes due March 1, 2019. Interest expense in 2018 was $3 million lower than 2017 primarily due to lower outstanding commercial paper in 2018.

•

Other income (expense) was income of $107 million in 2019, $67 million in 2018 and $45 million in 2017. The income in 2019 increased $40 million compared to the previous year primarily due to a net pre-tax gain on the disposal of operations and affiliates of $44 million in 2019. The income in 2018 increased $22 million compared to 2017 primarily due to other net periodic benefit income related to defined benefit pension and other postretirement plans and lower foreign currency translation losses.

•

The effective tax rate was 23.3% in 2019, 24.5% in 2018, and 48.4% in 2017. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the "Tax Cuts and Jobs Act." The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter 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 of $22 million in the third quarter 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 United States "Tax Cuts and Jobs Act". Additionally, the effective tax rate for 2019, 2018 and 2017 included discrete tax benefits of $28 million, $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation. Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information.

•

The impact of the Euro and other foreign currencies against the U.S. Dollar decreased operating revenue and income before taxes by approximately $339 million and $84 million in 2019 versus 2018, respectively. The impact of the Euro and other foreign currencies against the U.S. Dollar increased operating revenue and income before taxes by approximately $150 million and $37 million in 2018 versus 2017, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 1. Description of Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are free cash flow and short-term credit facilities. In addition, the Company had $2.0 billion of cash and equivalents on hand as of December 31, 2019 and also maintains strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:

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

•	payment of an attractive dividend to shareholders; and

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

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

Cash Flow

The Company uses free cash flow to measure cash flow generated by operations that is available for dividends, share repurchases, acquisitions and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company’s financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free cash flow represents net cash provided by operating activities less additions to plant and equipment. Free cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies. Summarized cash flow information for the years ended December 31, 2019, 2018 and 2017 was as follows:

In millions		2019				2018				2017
Net cash provided by operating activities		$	2,995			$	2,811			$	2,402
Additions to plant and equipment		(326		)		(364		)		(297		)
Free cash flow		$	2,669			$	2,447			$	2,105
Cash dividends paid		$	(1,321	)		$	(1,124	)		$	(941	)
Repurchases of common stock		(1,500		)		(2,000		)		(1,000		)
Acquisition of businesses (excluding cash and equivalents)		(4		)		—				(3		)
Proceeds from sale of operations and affiliates		120				1				2
Net proceeds (repayments) of debt		422				(851		)		197
Other		100				49				117
Effect of exchange rate changes on cash and equivalents		(9		)		(112		)		145
Net increase (decrease) in cash and equivalents		$	477			$	(1,590	)		$	622

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

Stock Repurchase Programs

On February 13, 2015, the Company's Board of Directors authorized a stock repurchase program which provided 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, approximately 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, approximately 13.9 million shares of its common stock at an average price of $143.66 per share during 2018 and approximately 3.1 million shares of its common stock at an average price of $143.23 per share during 2019. The 2015 Program was completed in the second quarter of 2019.

On August 3, 2018, the Company's Board of Directors authorized a new stock repurchase program which provides for the repurchase of up to an additional $3.0 billion of the Company's common stock over an open-ended period of time (the "2018 Program"). Under the 2018 Program, the Company repurchased approximately 6.7 million shares of its common stock at an average price of $158.11 per share during 2019. As of December 31, 2019, there were approximately $1.9 billion of authorized repurchases remaining under the 2018 program.

Adjusted After-Tax Return on Average Invested Capital

The Company uses adjusted after-tax return on average invested capital ("ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. For comparability, the Company excluded the third quarter discrete tax benefit of $21 million from the effective tax rate for the year ended December 31, 2019. Additionally, the Company excluded the third quarter net discrete tax benefit of $15 million from the effective tax rate for the year ended December 31, 2018. The Company also excluded the $658 million income tax charge from the effective tax rate and the $95 million confidential legal settlement from the calculation of ROIC for the year ended December 31, 2017. Average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations. Average invested capital is calculated using balances at the start of the period and at the end of each quarter. ROIC for the years ended December 31, 2019, 2018, and 2017 was as follows:

Dollars in millions		2019				2018				2017
Operating income		$	3,402			$	3,584			$	3,485
Less: Legal settlement income		—				—				(95		)
Adjusted operating income		3,402				3,584				3,390
Adjusted tax rate		24.0		%		24.9		%		28.3		%
Income taxes		(815		)		(893		)		(958		)
Operating income after taxes		$	2,587			$	2,691			$	2,432
Invested capital:
Trade receivables		$	2,461			$	2,622			$	2,628
Inventories		1,164				1,318				1,220
Net assets held for sale		280				—				—
Net plant and equipment		1,729				1,791				1,778
Goodwill and intangible assets		5,343				5,717				6,024
Accounts payable and accrued expenses		(1,689		)		(1,795		)		(1,848		)
Other, net		(481		)		(519		)		21
Total invested capital		$	8,807			$	9,134			$	9,823
Average invested capital		$	9,028			$	9,533			$	10,005
Adjusted after-tax return on average invested capital		28.7		%		28.2		%		24.3		%

ROIC increased 50 basis points for the twelve month period ended December 31, 2019 compared to the prior year period as a result of a 5.3% decrease in average invested capital versus a 3.9% decrease in after-tax operating income. ROIC increased 390 basis points in 2018 versus 2017 primarily related to the new U.S. tax rules and regulations.

A reconciliation of the 2019 effective tax rate excluding the third quarter discrete tax benefit of $21 million is as follows:

	Twelve Months Ended
	December 31, 2019
Dollars in millions	Income Taxes				Tax Rate
As reported	$	767			23.3	%
Discrete tax benefit related to third quarter	21				0.7	%
As adjusted	$	788			24.0	%

A reconciliation of the 2018 effective tax rate excluding the third quarter net discrete tax benefit of $15 million is as follows:

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

A reconciliation of the 2017 effective tax rate excluding the discrete tax charge of $658 million related to the 2017 U.S. tax legislation is as follows:

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

Refer to Note 6. Income Taxes in Item 8. Financial Statements and Supplementary Data for further information regarding the discrete tax items noted above.

Working Capital

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital as of December 31, 2019 and 2018 is summarized as follows:

Dollars in millions		2019				2018				Increase (Decrease)
Current Assets:
Cash and equivalents		$	1,981			$	1,504			$	477
Trade receivables		2,461				2,622				(161		)
Inventories		1,164				1,318				(154		)
Prepaid expenses and other current assets		296				334				(38		)
Assets held for sale		351				—				351
		6,253				5,778				475
Current Liabilities:
Short-term debt		4				1,351				(1,347		)
Accounts payable and accrued expenses		1,689				1,795				(106		)
Liabilities held for sale		71				—				71
Other		390				396				(6		)
		2,154				3,542				(1,388		)
Net Working Capital		$	4,099			$	2,236			$	1,863

The increase in net working capital as of December 31, 2019 was primarily driven by lower short-term debt. See Note 10. Debt in Item 8. Financial Statements and Supplementary Data for further information.

As of December 31, 2019, approximately half of the Company's cash and equivalents was held by international subsidiaries. Cash and equivalents held internationally may be subject to foreign withholding taxes if repatriated to the U.S. Cash and equivalents held internationally are typically used for international operating needs or reinvested to fund expansion of existing international businesses. International funds may also be used to fund international acquisitions or, if not considered

permanently invested, may be repatriated to the U.S. The Company has accrued for foreign withholding taxes related to foreign held cash and equivalents that are not permanently invested.

In the U.S., the Company utilizes cash flows from operations to fund domestic cash needs and the Company's capital allocation priorities. This includes operating needs of the U.S. businesses, dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations, reinvesting to fund expansion of existing U.S. businesses and general corporate needs. The Company may also use its commercial paper program, which is backed by long-term credit facilities, for short-term liquidity needs. The Company believes cash generated by operations and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

Debt

Total debt as of December 31, 2019 and 2018 was as follows:

In millions		2019				2018				Increase (Decrease)
Short-term debt		$	4			$	1,351			$	(1,347	)
Long-term debt		7,754				6,029				1,725
Total debt		$	7,758			$	7,380			$	378

As of December 31, 2019, short-term debt included $4 million related to the 4.88% notes due December 31, 2020. 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, both of which were repaid on the due date. There was no commercial paper outstanding as of December 31, 2019 and December 31, 2018.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. During the third quarter of 2019, the Company entered into a $2.5 billion, five-year line of credit agreement with a termination date of September 27, 2024 to support the potential issuances of commercial paper. This agreement replaced the existing $2.5 billion line of credit agreement with a termination date of May 9, 2021. No amounts were outstanding under the line of credit agreement at December 31, 2019. The maximum outstanding commercial paper balance during 2019 was $1.5 billion, while the average daily balance was $306 million.

As of December 31, 2019, the Company's foreign operations had authorized credit facilities with unused capacity of $206 million.

In June 2019, the Company issued €600 million of 0.25% Euro notes due December 5, 2024 at 99.662% of face value, €500 million of 0.625% Euro notes due December 5, 2027 at 99.343% of face value and €500 million of 1.00% Euro notes due June 5, 2031 at 98.982% of face value. Net proceeds from the issuances were used to repay commercial paper and for general corporate purposes.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA as a measure of its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by net income before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of intangible assets on a trailing twelve month basis. Total debt to EBITDA for the years ended December 31, 2019, 2018 and 2017 was as follows:

Dollars in millions	2019				2018				2017
Total debt	$	7,758			$	7,380			$	8,328
Net income	$	2,521			$	2,563			$	1,687
Add:
Interest expense	221				257				260
Other income	(107		)		(67		)		(45		)
Income taxes	767				831				1,583
Depreciation	267				272				256
Amortization and impairment of intangible assets	159				189				206
EBITDA	$	3,828			$	4,045			$	3,947
Total debt to EBITDA ratio	2.0				1.8				2.1

Stockholders’ Equity

The changes to stockholders’ equity during 2019 and 2018 were as follows:

In millions		2019				2018
Beginning balance		$	3,258			$	4,589
Net income		2,521				2,563
Adoption of new accounting guidance		—				(415		)
Cash dividends declared		(1,335		)		(1,186		)
Repurchases of common stock		(1,500		)		(2,000		)
Foreign currency translation adjustments		(2		)		(328		)
Other		88				35
Ending balance		$	3,030			$	3,258

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company's significant contractual obligations as of December 31, 2019 were as follows:

In millions		2020				2021				2022				2023				2024				2025 and Future Years
Principal payments on long-term debt		$	4			$	350			$	561			$	561			$	1,373			$	4,992
Interest payments on debt		197				197				185				175				155				1,653
Noncurrent income taxes payable		33				49				49				91				122				151
Operating leases		55				42				32				23				18				21
		$	289			$	638			$	827			$	850			$	1,668			$	6,817

As of December 31, 2019, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $168 million. The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits. The Company did not have any significant off-balance sheet commitments at December 31, 2019.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The Company's critical accounting policies are as follows:

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

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

As of December 31, 2019, the Company had total goodwill and intangible assets of approximately $5.3 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the Company’s 80/20 Front-to-Back process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately $167 million to $1.2 billion, with the average amount equal to $533 million. Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment charges related to one or more reporting units could occur in future periods.

Pension and Other Postretirement Benefits*—* The Company has various company-sponsored defined benefit retirement plans covering a number of U.S. employees and many employees outside the U.S. Pension and other postretirement benefit expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. See Note 11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.

The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately $41 million. The Company estimates the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate. See Note 11. Pension and Other Postretirement Benefits in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.

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