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 84 divisions in 53 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 $188 million and $215 million as of December 31, 2019 and 2018, 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 $221 million, $233 million and $225 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Advertising expenses— Advertising expenses are recorded as expense in the year incurred. These costs were $48 million, $50 million and $53 million for the years ended December 31, 2019, 2018 and 2017, 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 Accrued expenses in the Statement of Financial Position. Accordingly, after January 1, 2018, the allowance for doubtful accounts was comprised of reserves for uncollectible accounts. The changes in the allowance for doubtful accounts for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
21
|
|
|
$
|
43
|
|
|
$
|
43
|
|
Adoption of new revenue recognition guidance
|
|
—
|
|
|
(23
|
)
|
|
—
|
|
Provision charged to expense
|
|
6
|
|
|
5
|
|
|
3
|
|
Write-offs, net of recoveries
|
|
(4
|
)
|
|
(3
|
)
|
|
(6
|
)
|
Transfer to assets held for sale
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
|
(1
|
)
|
|
(1
|
)
|
|
3
|
|
Ending balance
|
|
$
|
20
|
|
|
$
|
21
|
|
|
$
|
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% of total inventories as of December 31, 2019 and 2018. If the FIFO method was used for all inventories, total inventories would have been approximately $89 million and $97 million higher than reported at December 31, 2019 and 2018, respectively. The major classes of inventory at December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
Raw material
|
|
$
|
452
|
|
|
$
|
523
|
|
Work-in-process
|
|
131
|
|
|
161
|
|
Finished goods
|
|
670
|
|
|
731
|
|
LIFO reserve
|
|
(89
|
)
|
|
(97
|
)
|
Total inventories
|
|
$
|
1,164
|
|
|
$
|
1,318
|
|
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
Land
|
|
$
|
186
|
|
|
$
|
194
|
|
Buildings and improvements
|
|
1,357
|
|
|
1,368
|
|
Machinery and equipment
|
|
3,551
|
|
|
3,517
|
|
Construction in progress
|
|
133
|
|
|
154
|
|
Gross plant and equipment
|
|
5,227
|
|
|
5,233
|
|
Accumulated depreciation
|
|
(3,498
|
)
|
|
(3,442
|
)
|
Net plant and equipment
|
|
$
|
1,729
|
|
|
$
|
1,791
|
|
The Company’s U.S. businesses primarily compute depreciation on an accelerated basis. The majority of the Company's international businesses compute depreciation on a straight-line basis. The ranges of useful lives used to depreciate plant and equipment are as follows:
|
|
|
Buildings and improvements
|
5—50 years
|
Machinery and equipment
|
3—12 years
|
Depreciation was $267 million, $272 million and $256 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
45
|
|
|
$
|
45
|
|
|
$
|
45
|
|
Charges
|
|
(44
|
)
|
|
(49
|
)
|
|
(45
|
)
|
Provision charged to expense
|
|
44
|
|
|
50
|
|
|
43
|
|
Foreign currency translation
|
|
—
|
|
|
(1
|
)
|
|
2
|
|
Ending balance
|
|
$
|
45
|
|
|
$
|
45
|
|
|
$
|
45
|
|
New Accounting Pronouncements
Effective January 1, 2018
In May 2014, the Financial Accounting Standards Board (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 years ended December 31, 2019 and 2018, the impact of the new guidance on the Company's effective income tax rate was not material.
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 was 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 13. 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. The primary change under the new guidance is that a lessee is required to recognize a lease liability and corresponding right-of-use asset for its operating leases. The new guidance also requires additional disclosures. Effective January 1, 2019, the Company adopted the new guidance prospectively for all operating lease transactions as of and after the effective date with a noncancellable lease term greater than one year. Upon adoption, the Company recorded a lease liability of $205 million and a corresponding right-of-use asset. The new guidance did not have a material impact on the results of operations or cash flows for the year ended December 31, 2019. Refer to Note 9. Leases for additional information regarding the Company’s lease transactions.
In August 2017, the FASB issued authoritative guidance which included targeted improvements to simplify the application of hedge accounting and improve financial reporting of hedging activities. Effective January 1, 2019, the Company adopted the new guidance which did not have a material impact on the Company's results of operations, financial position or cash flows for the year ended December 31, 2019.
Effective January 1, 2020
In June 2016, the FASB issued authoritative guidance which changes the methodology used to measure credit losses for certain financial instruments. Under current guidance, credit loss reserves are estimated based on historical information. The new guidance requires credit loss reserves to reflect the estimated credit losses expected to be incurred over the life of the financial asset. This new guidance is effective for the Company prospectively beginning January 1, 2020 and is not expected to have a material impact on the Company's results of operations or financial position.
In January 2017, the FASB issued authoritative guidance which simplifies the assessment of goodwill for impairment. Under current guidance, when the estimated fair value of a reporting unit is less than its carrying value, the fair value of the goodwill must be determined by valuing the other assets and liabilities of the reporting unit. Under the new guidance, the requirement to determine the fair value of goodwill has been eliminated, and an impairment charge is recognized for the amount that the carrying value of the reporting unit exceeds its fair value. This new guidance is effective for the Company prospectively beginning January 1, 2020 and will be applied by the Company during its annual assessment of goodwill in the third quarter, or earlier if a triggering event occurs. The adoption of this new accounting guidance is not expected to have a material impact on the Company's results of operations or financial position.
(2) Divestitures
The Company routinely reviews its portfolio of businesses relative to its business portfolio criteria and evaluates if further portfolio refinements may be needed. The Company previously communicated its intent to explore options, including potential divestitures, for certain businesses with annual revenues totaling up to $1 billion. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as held for sale in periods prior to the sale of the business.
In the second quarter of 2019, the Company approved plans to divest six businesses, including two businesses in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, one business in the Welding segment, and two businesses in the Specialty Products segment. These six businesses were classified as held for sale beginning in the second quarter of 2019. In the fourth quarter of 2019, the Company divested three of the held for sale businesses which included one business in the Test & Measurement and Electronics segment, one business in the Welding segment, and one business in the Specialty Products segment.
For the twelve months ended December 31, 2019, the Company recorded net pre-tax gains on disposal of businesses of $44 million ($30 million after-tax, or $0.09 per diluted share) which was primarily due to the three divestitures of held for sale businesses discussed above. The net pre-tax gain was included in Other income (expense) in the Statement of Income. Operating revenue related to businesses divested in 2019 that was included in the Company's results of operations for the twelve months ended December 31, 2019, 2018 and 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Operating revenue
|
$
|
134
|
|
|
$
|
194
|
|
|
$
|
202
|
|
The operating revenue for the twelve months ended December 31, 2019 of $134 million related to the businesses divested in 2019 included $62 million in the Welding segment, $58 million in the Test & Measurement and Electronics segment, and $14 million in the Specialty Products segment.
As of December 31, 2019, three of the businesses discussed above continued to be held for sale, including one business in the Test & Measurement and Electronics segment, one business in the Automotive OEM segment, and one business in the Specialty Products segment. All of these businesses are expected to be sold within one year. The assets and liabilities related to the held for sale businesses were included in assets and liabilities held for sale in the Statement of Financial Position as of December 31, 2019, as follows:
|
|
|
|
|
In millions
|
|
Trade receivables
|
$
|
81
|
|
Inventories
|
28
|
|
Net plant and equipment
|
48
|
|
Goodwill and intangible assets
|
166
|
|
Other
|
28
|
|
Total assets held for sale
|
$
|
351
|
|
|
|
Accounts payable
|
$
|
21
|
|
Accrued expenses
|
17
|
|
Other
|
33
|
|
Total liabilities held for sale
|
$
|
71
|
|
Operating revenue related to the three businesses held for sale as of December 31, 2019 that was included in the Company's results of operations for the twelve months ended December 31, 2019, 2018 and 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Operating revenue
|
$
|
373
|
|
|
$
|
393
|
|
|
$
|
397
|
|
(3) Operating Revenue
The Company's 84 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, 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, 2019 and 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:
|
|
•
|
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, 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.
|
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; and
|
|
|
•
|
metal arc welding consumables and related accessories.
|
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, 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.
|
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) for the twelve months ended December 31, 2019, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Gain (loss) on disposal of operations and affiliates
|
|
$
|
44
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Interest income
|
|
29
|
|
|
35
|
|
|
45
|
|
Other net periodic benefit income
|
|
24
|
|
|
20
|
|
|
9
|
|
Income (loss) from investments
|
|
15
|
|
|
9
|
|
|
16
|
|
Equity income in Wilsonart
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain (loss) on foreign currency transactions, net
|
|
(10
|
)
|
|
(1
|
)
|
|
(25
|
)
|
Other, net
|
|
5
|
|
|
6
|
|
|
(1
|
)
|
Total other income (expense)
|
|
$
|
107
|
|
|
$
|
67
|
|
|
$
|
45
|
|
Refer to Note 2. Divestitures for further information regarding the Gain (loss) on disposal of operations and affiliates of $44 million for the twelve months ended December 31, 2019.
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 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. In 2016, the Company received a $167 million dividend distribution from Wilsonart which exceeded the Company's equity investment balance and resulted in a $54 million pre-tax gain in 2016. 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 $462 million and $495 million as of December 31, 2019 and 2018, 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 had completed its accounting related to the tax effects of enactment of the Act. The Company’s ongoing accounting for the tax effects of the Act are based on the Company's current understanding of the changes in the tax law under the Act, but may be impacted due to issuance of final regulations or further clarification of the tax law.
Provision for income taxes— The components of the provision for income taxes for the twelve months ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal income taxes:
|
|
|
|
|
|
|
Current
|
|
$
|
356
|
|
|
$
|
373
|
|
|
$
|
1,117
|
|
Deferred
|
|
(26
|
)
|
|
(15
|
)
|
|
(10
|
)
|
Total U.S. federal income taxes
|
|
330
|
|
|
358
|
|
|
1,107
|
|
Foreign income taxes:
|
|
|
|
|
|
|
Current
|
|
302
|
|
|
358
|
|
|
296
|
|
Deferred
|
|
53
|
|
|
49
|
|
|
102
|
|
Total foreign income taxes
|
|
355
|
|
|
407
|
|
|
398
|
|
State income taxes:
|
|
|
|
|
|
|
Current
|
|
77
|
|
|
66
|
|
|
106
|
|
Deferred
|
|
5
|
|
|
—
|
|
|
(28
|
)
|
Total state income taxes
|
|
82
|
|
|
66
|
|
|
78
|
|
Total provision for income taxes
|
|
$
|
767
|
|
|
$
|
831
|
|
|
$
|
1,583
|
|
Income before taxes for domestic and foreign operations for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
|
$
|
1,774
|
|
|
$
|
1,774
|
|
|
$
|
1,806
|
|
Foreign
|
|
1,514
|
|
|
1,620
|
|
|
1,464
|
|
Total income before taxes
|
|
$
|
3,288
|
|
|
$
|
3,394
|
|
|
$
|
3,270
|
|
The reconciliation between the U.S. federal statutory tax rate and the effective tax rate for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal statutory tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
U.S. tax effect of foreign earnings
|
|
1.1
|
|
|
1.5
|
|
|
0.5
|
|
Tax effect of U.S. federal tax law change
|
|
—
|
|
|
(0.1
|
)
|
|
20.1
|
|
State income taxes, net of U.S. federal tax benefit
|
|
1.7
|
|
|
1.6
|
|
|
1.2
|
|
Differences between U.S. federal statutory and foreign tax rates
|
|
2.0
|
|
|
2.1
|
|
|
(3.5
|
)
|
Nontaxable foreign interest income
|
|
(1.4
|
)
|
|
(1.7
|
)
|
|
(1.7
|
)
|
Tax effect of foreign dividends
|
|
0.2
|
|
|
1.0
|
|
|
0.4
|
|
Tax relief for U.S. manufacturers
|
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
Excess tax benefits from stock-based compensation
|
|
(0.9
|
)
|
|
(0.3
|
)
|
|
(1.5
|
)
|
Other, net
|
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.7
|
)
|
Effective tax rate
|
|
23.3
|
%
|
|
24.5
|
%
|
|
48.4
|
%
|
The Company's effective tax rate for the twelve months ended December 31, 2019, 2018 and 2017 was 23.3%, 24.5% and 48.4%, respectively. 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 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 enactment of the Act. Additionally, the effective tax rates for 2019, 2018
and 2017 included $28 million, $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation.
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 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, 2019 and 2018 was $62 million and $71 million, respectively.
Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2019, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $5.7 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 as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
In millions
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Goodwill and intangible assets
|
|
$
|
202
|
|
|
$
|
(453
|
)
|
|
$
|
194
|
|
|
$
|
(484
|
)
|
Inventory reserves, capitalized tax cost and LIFO inventory
|
|
29
|
|
|
(3
|
)
|
|
30
|
|
|
(3
|
)
|
Investments
|
|
16
|
|
|
(158
|
)
|
|
19
|
|
|
(171
|
)
|
Plant and equipment
|
|
17
|
|
|
(74
|
)
|
|
17
|
|
|
(72
|
)
|
Accrued expenses and reserves
|
|
42
|
|
|
—
|
|
|
36
|
|
|
—
|
|
Employee benefit accruals
|
|
176
|
|
|
—
|
|
|
186
|
|
|
—
|
|
Foreign tax credit carryforwards
|
|
7
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Net operating loss carryforwards
|
|
419
|
|
|
—
|
|
|
451
|
|
|
—
|
|
Capital loss carryforwards
|
|
80
|
|
|
—
|
|
|
89
|
|
|
—
|
|
Allowances for uncollectible accounts
|
|
9
|
|
|
—
|
|
|
10
|
|
|
—
|
|
Pension liabilities
|
|
—
|
|
|
(15
|
)
|
|
—
|
|
|
(19
|
)
|
Unrealized loss (gain) on foreign debt instruments
|
|
—
|
|
|
(57
|
)
|
|
—
|
|
|
(45
|
)
|
Operating leases
|
|
45
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
32
|
|
|
(13
|
)
|
|
32
|
|
|
(13
|
)
|
Gross deferred income tax assets (liabilities)
|
|
1,074
|
|
|
(818
|
)
|
|
1,072
|
|
|
(807
|
)
|
Valuation allowances
|
|
(408
|
)
|
|
—
|
|
|
(418
|
)
|
|
—
|
|
Total deferred income tax assets (liabilities)
|
|
$
|
666
|
|
|
$
|
(818
|
)
|
|
$
|
654
|
|
|
$
|
(807
|
)
|
The valuation allowances recorded as of December 31, 2019 and 2018 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2019, the Company had utilized all realizable foreign tax credit carryforwards.
As of December 31, 2019, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:
|
|
|
|
|
|
Gross Carryforwards Related
|
In millions
|
to Net Operating Losses
|
2020
|
$
|
86
|
|
2021
|
80
|
|
2022
|
25
|
|
2023
|
7
|
|
2024
|
49
|
|
2025-2045
|
117
|
|
Do not expire
|
1,378
|
|
Total gross carryforwards related to net operating losses
|
$
|
1,742
|
|
Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the twelve months ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
297
|
|
|
$
|
285
|
|
|
$
|
210
|
|
Additions based on tax positions related to the current year
|
|
6
|
|
|
3
|
|
|
42
|
|
Additions for tax positions of prior years
|
|
13
|
|
|
49
|
|
|
100
|
|
Reductions for tax positions of prior years
|
|
(14
|
)
|
|
(31
|
)
|
|
(24
|
)
|
Settlements
|
|
(5
|
)
|
|
(5
|
)
|
|
(53
|
)
|
Foreign currency translation
|
|
(1
|
)
|
|
(4
|
)
|
|
10
|
|
Ending balance
|
|
$
|
296
|
|
|
$
|
297
|
|
|
$
|
285
|
|
Included in the balance as of December 31, 2019 were approximately $267 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.
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 $56 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. The following table summarizes the open tax years for the Company’s major jurisdictions:
|
|
|
|
Jurisdiction
|
|
Open Tax Years
|
United States – Federal
|
|
2016-2019
|
United Kingdom
|
|
2017-2019
|
Germany
|
|
2012-2019
|
France
|
|
2016-2019
|
Australia
|
|
2013-2019
|
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, 2019 and 2018 was $19 million and $25 million, respectively.
(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 for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions except per share amounts
|
|
2019
|
|
2018
|
|
2017
|
Net Income
|
|
$
|
2,521
|
|
|
$
|
2,563
|
|
|
$
|
1,687
|
|
Net income per share—Basic:
|
|
|
|
|
|
|
Weighted-average common shares
|
|
323.9
|
|
|
335.0
|
|
|
344.1
|
|
Net income per share—Basic
|
|
$
|
7.78
|
|
|
$
|
7.65
|
|
|
$
|
4.90
|
|
Net income per share—Diluted:
|
|
|
|
|
|
|
Weighted-average common shares
|
|
323.9
|
|
|
335.0
|
|
|
344.1
|
|
Effect of dilutive stock options and restricted stock units
|
|
1.7
|
|
|
2.1
|
|
|
2.7
|
|
Weighted-average common shares assuming dilution
|
|
325.6
|
|
|
337.1
|
|
|
346.8
|
|
Net income per share—Diluted
|
|
$
|
7.74
|
|
|
$
|
7.60
|
|
|
$
|
4.86
|
|
Options that were considered antidilutive were not included in the computation of diluted net income per share. There were 0.9 million and 0.5 million antidilutive options outstanding as of December 31, 2019 and 2018, respectively. There were no antidilutive options outstanding as of December 31, 2017.
(8) Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the twelve months ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Automotive OEM
|
|
Test & Measurement and Electronics
|
|
Food Equipment
|
|
Polymers & Fluids
|
|
Welding
|
|
Construction Products
|
|
Specialty Products
|
|
Total
|
Balance, December 31, 2017
|
$
|
488
|
|
|
$
|
1,372
|
|
|
$
|
269
|
|
|
$
|
919
|
|
|
$
|
272
|
|
|
$
|
530
|
|
|
$
|
902
|
|
|
$
|
4,752
|
|
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
|
|
2019 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions / (divestitures)
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
Transfer to assets held for sale
|
(5
|
)
|
|
(109
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(8
|
)
|
|
(126
|
)
|
Foreign currency translation
|
(5
|
)
|
|
—
|
|
|
(3
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(4
|
)
|
|
(16
|
)
|
Balance, December 31, 2019
|
$
|
466
|
|
|
$
|
1,245
|
|
|
$
|
256
|
|
|
$
|
887
|
|
|
$
|
258
|
|
|
$
|
512
|
|
|
$
|
868
|
|
|
$
|
4,492
|
|
Cumulative goodwill impairment charges, December 31, 2019
|
$
|
24
|
|
|
$
|
83
|
|
|
$
|
60
|
|
|
$
|
15
|
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
46
|
|
|
$
|
240
|
|
Intangible assets as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
In millions
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships
|
|
$
|
1,530
|
|
|
$
|
(1,195
|
)
|
|
$
|
335
|
|
|
$
|
1,747
|
|
|
$
|
(1,282
|
)
|
|
$
|
465
|
|
Trademarks and brands
|
|
694
|
|
|
(434
|
)
|
|
260
|
|
|
759
|
|
|
(435
|
)
|
|
324
|
|
Patents and proprietary technology
|
|
581
|
|
|
(501
|
)
|
|
80
|
|
|
621
|
|
|
(506
|
)
|
|
115
|
|
Other
|
|
449
|
|
|
(433
|
)
|
|
16
|
|
|
478
|
|
|
(458
|
)
|
|
20
|
|
Total amortizable intangible assets
|
|
3,254
|
|
|
(2,563
|
)
|
|
691
|
|
|
3,605
|
|
|
(2,681
|
)
|
|
924
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brands
|
|
160
|
|
|
—
|
|
|
160
|
|
|
160
|
|
|
—
|
|
|
160
|
|
Total intangible assets
|
|
$
|
3,414
|
|
|
$
|
(2,563
|
)
|
|
$
|
851
|
|
|
$
|
3,765
|
|
|
$
|
(2,681
|
)
|
|
$
|
1,084
|
|
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2019, 2018 and 2017. There were no impairment charges as a result of these assessments.
For the twelve months ended December 31, 2019, 2018 and 2017, amortization expense of intangible assets was $159 million, $189 million and $206 million, respectively.
As of December 31, 2019, the estimated future amortization expense of intangible assets for the twelve months ending December 31 was as follows:
|
|
|
|
|
In millions
|
|
2020
|
$
|
135
|
|
2021
|
117
|
|
2022
|
104
|
|
2023
|
85
|
|
2024
|
68
|
|
(9) Leases
Effective January 1, 2019, the Company adopted new lease accounting guidance which requires the recognition of a lease liability and corresponding right-of-use asset for all operating leases with a noncancellable lease term of greater than one year. The new guidance did not change the recognition of rental expense for operating leases which is recognized on a straight-line basis over the noncancellable lease term based on the minimum lease payments at lease inception. Changes in rent subsequent to commencement that were not included in minimum lease payments at inception are recognized as variable rent in the period incurred.
The Company’s lease transactions are primarily for the use of facilities, vehicles and equipment under operating lease arrangements. Total rental expense for operating leases for the twelve months ended December 31, 2019, 2018 and 2017 was $113 million, $124 million and $120 million, respectively. Total rental expense for 2019 included $69 million related to capitalized operating leases and $44 million related to short-term operating leases and variable lease payments. Short-term operating leases have original terms of one year or less, or can be terminated at the Company's option with a short notice period and without significant penalty, and are not capitalized. The right-of-use asset related to operating leases was $206 million as of December 31, 2019 and was included in Other assets. As of December 31, 2019, the current portion of the lease liability for operating leases was $51 million and was included in Accrued expenses, and the long-term portion was $128 million and was included in Other liabilities.
As of December 31, 2019, future maturities of operating lease liabilities for the twelve months ending December 31 were as follows:
|
|
|
|
|
In millions
|
|
2020
|
$
|
55
|
|
2021
|
42
|
|
2022
|
32
|
|
2023
|
23
|
|
2024
|
18
|
|
2025 and future years
|
21
|
|
Total future minimum lease payments
|
191
|
|
Less: Imputed interest
|
(12
|
)
|
Operating lease liability
|
179
|
|
Less: Current portion of operating lease liability
|
51
|
|
Long-term portion of operating lease liability
|
$
|
128
|
|
As of December 31, 2019, operating leases included in the lease liability had a weighted average remaining lease term of 4.6 years and a weighted average discount rate of 2.59% based on the incremental borrowing rate of the Company and its subsidiaries. During the twelve months ended December 31, 2019, cash paid related to maturities of operating lease liabilities was $70 million and operating lease right-of-use assets obtained in exchange for operating lease liabilities was $50 million.
As of December 31, 2018, future minimum lease payments under operating leases with noncancellable terms in excess of one year for the twelve months ending December 31 were as follows:
|
|
|
|
|
In millions
|
|
2019
|
$
|
67
|
|
2020
|
48
|
|
2021
|
32
|
|
2022
|
24
|
|
2023
|
18
|
|
2024 and future years
|
34
|
|
Total future minimum lease payments
|
$
|
223
|
|
(10) 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, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
Current maturities of long-term debt
|
|
$
|
4
|
|
|
$
|
1,350
|
|
Bank overdrafts
|
|
—
|
|
|
1
|
|
Total short-term debt
|
|
$
|
4
|
|
|
$
|
1,351
|
|
As of December 31, 2019, short-term debt included $4 million related to the 4.88% notes due through 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 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 as of December 31, 2019. The Company was also in compliance with the financial covenants of the line of credit agreement as of December 31, 2019, which included a minimum interest coverage ratio. The weighted-average interest rate on commercial paper was 2.5% and 1.7% for the twelve months ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company had unused capacity of approximately $206 million under international debt facilities.
Long-term debt— Long-term debt represents obligations with a maturity date greater than one year, and excludes current maturities that have been reclassified to short-term debt. Long-term debt at carrying value and fair value as of December 31, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
In millions
|
|
Effective Interest Rate
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
1.95% notes due March 1, 2019
|
|
1.98%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
649
|
|
6.25% notes due April 1, 2019
|
|
6.25%
|
|
—
|
|
|
—
|
|
|
700
|
|
|
706
|
|
4.88% notes due thru December 31, 2020
|
|
4.96%
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
3.375% notes due September 15, 2021
|
|
3.43%
|
|
349
|
|
|
358
|
|
|
349
|
|
|
354
|
|
1.75% Euro notes due May 20, 2022
|
|
1.86%
|
|
558
|
|
|
584
|
|
|
570
|
|
|
603
|
|
1.25% Euro notes due May 22, 2023
|
|
1.35%
|
|
558
|
|
|
584
|
|
|
569
|
|
|
596
|
|
3.50% notes due March 1, 2024
|
|
3.54%
|
|
697
|
|
|
742
|
|
|
696
|
|
|
712
|
|
0.25% Euro notes due December 5, 2024
|
|
0.31%
|
|
668
|
|
|
677
|
|
|
—
|
|
|
—
|
|
2.65% notes due November 15, 2026
|
|
2.69%
|
|
993
|
|
|
1,032
|
|
|
993
|
|
|
933
|
|
0.625% Euro notes due December 5, 2027
|
|
0.71%
|
|
554
|
|
|
570
|
|
|
—
|
|
|
—
|
|
2.125% Euro notes due May 22, 2030
|
|
2.18%
|
|
555
|
|
|
644
|
|
|
567
|
|
|
620
|
|
1.00% Euro notes due June 5, 2031
|
|
1.09%
|
|
552
|
|
|
580
|
|
|
—
|
|
|
—
|
|
3.00% Euro notes due May 19, 2034
|
|
3.13%
|
|
548
|
|
|
724
|
|
|
560
|
|
|
678
|
|
4.875% notes due September 15, 2041
|
|
4.97%
|
|
637
|
|
|
829
|
|
|
636
|
|
|
719
|
|
3.90% notes due September 1, 2042
|
|
3.96%
|
|
1,082
|
|
|
1,283
|
|
|
1,081
|
|
|
1,087
|
|
Other borrowings
|
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
4
|
|
Total
|
|
|
|
$
|
7,758
|
|
|
$
|
8,614
|
|
|
$
|
7,379
|
|
|
$
|
7,665
|
|
Less: Current maturities of long-term debt
|
|
|
|
(4
|
)
|
|
|
|
(1,350
|
)
|
|
|
|
Total long-term debt
|
|
|
|
$
|
7,754
|
|
|
|
|
$
|
6,029
|
|
|
|
|
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, which were repaid on the due date.
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 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 1.95% notes due March 1, 2019 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.
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.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 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 13. 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. As of December 31, 2019, scheduled future maturities of long-term debt, including current maturities of long-term debt, for the twelve months ending December 31 were as follows:
|
|
|
|
|
In millions
|
|
2020
|
$
|
4
|
|
2021
|
349
|
|
2022
|
558
|
|
2023
|
558
|
|
2024
|
1,365
|
|
2025 and future years
|
4,924
|
|
Total
|
$
|
7,758
|
|
(11) 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 $86 million in 2019, $82 million in 2018, and $79 million in 2017. 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 for the twelve months ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement Benefits
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
52
|
|
|
$
|
60
|
|
|
$
|
63
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
9
|
|
Interest cost
|
|
78
|
|
|
72
|
|
|
72
|
|
|
20
|
|
|
18
|
|
|
19
|
|
Expected return on plan assets
|
|
(121
|
)
|
|
(126
|
)
|
|
(133
|
)
|
|
(22
|
)
|
|
(25
|
)
|
|
(23
|
)
|
Amortization of actuarial (gain) loss
|
|
21
|
|
|
43
|
|
|
57
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Amortization of prior service cost
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
|
$
|
31
|
|
|
$
|
49
|
|
|
$
|
59
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
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-2019 and MP-2018, to measure its U.S. pension and other postretirement obligations as of December 31, 2019 and 2018, 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 twelve months ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement Benefits
|
In millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
2,429
|
|
|
$
|
2,661
|
|
|
$
|
511
|
|
|
$
|
546
|
|
Service cost
|
|
52
|
|
|
60
|
|
|
7
|
|
|
8
|
|
Interest cost
|
|
78
|
|
|
72
|
|
|
20
|
|
|
18
|
|
Plan participants’ contributions
|
|
2
|
|
|
2
|
|
|
12
|
|
|
12
|
|
Amendments
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
|
295
|
|
|
(162
|
)
|
|
61
|
|
|
(35
|
)
|
Transfer to liabilities held for sale
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(156
|
)
|
|
(165
|
)
|
|
(42
|
)
|
|
(40
|
)
|
Medicare subsidy received
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
Liabilities from other immaterial plans
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
|
33
|
|
|
(53
|
)
|
|
—
|
|
|
—
|
|
Benefit obligation at December 31
|
|
$
|
2,731
|
|
|
$
|
2,429
|
|
|
$
|
570
|
|
|
$
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement Benefits
|
In millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
2,550
|
|
|
$
|
2,832
|
|
|
$
|
333
|
|
|
$
|
373
|
|
Actual return on plan assets
|
|
379
|
|
|
(82
|
)
|
|
66
|
|
|
(19
|
)
|
Company contributions
|
|
27
|
|
|
23
|
|
|
5
|
|
|
7
|
|
Plan participants’ contributions
|
|
2
|
|
|
2
|
|
|
12
|
|
|
12
|
|
Benefits paid
|
|
(156
|
)
|
|
(165
|
)
|
|
(42
|
)
|
|
(40
|
)
|
Foreign currency translation
|
|
42
|
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at December 31
|
|
$
|
2,844
|
|
|
$
|
2,550
|
|
|
$
|
374
|
|
|
$
|
333
|
|
Funded status
|
|
$
|
113
|
|
|
$
|
121
|
|
|
$
|
(196
|
)
|
|
$
|
(178
|
)
|
Other immaterial plans
|
|
(42
|
)
|
|
(46
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Net asset (liability) at December 31
|
|
$
|
71
|
|
|
$
|
75
|
|
|
$
|
(201
|
)
|
|
$
|
(183
|
)
|
The amounts recognized in the Statement of Financial Position as of December 31 consist of:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
297
|
|
|
$
|
290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued expenses
|
|
(11
|
)
|
|
(12
|
)
|
|
(3
|
)
|
|
(4
|
)
|
Other noncurrent liabilities
|
|
(215
|
)
|
|
(203
|
)
|
|
(198
|
)
|
|
(179
|
)
|
Net asset (liability) at end of year
|
|
$
|
71
|
|
|
$
|
75
|
|
|
$
|
(201
|
)
|
|
$
|
(183
|
)
|
The pre-tax amounts recognized in accumulated other comprehensive income consist of:
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
$
|
568
|
|
|
$
|
552
|
|
|
$
|
(35
|
)
|
|
$
|
(53
|
)
|
Prior service cost
|
|
7
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
|
$
|
575
|
|
|
$
|
560
|
|
|
$
|
(35
|
)
|
|
$
|
(53
|
)
|
Accumulated benefit obligation
|
|
$
|
2,589
|
|
|
$
|
2,299
|
|
|
|
|
|
Plans with accumulated benefit obligation in excess of plan assets as of December 31:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
194
|
|
|
$
|
176
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
188
|
|
|
$
|
170
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
29
|
|
|
$
|
28
|
|
|
|
|
|
Assumptions— The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Postretirement Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Assumptions used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
2.61
|
%
|
|
3.66
|
%
|
|
3.12
|
%
|
|
3.29
|
%
|
|
4.40
|
%
|
|
3.72
|
%
|
Rate of compensation increases
|
3.44
|
%
|
|
3.52
|
%
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic benefit cost for the twelve months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.66
|
%
|
|
3.12
|
%
|
|
3.41
|
%
|
|
4.40
|
%
|
|
3.72
|
%
|
|
4.30
|
%
|
Expected return on plan assets
|
4.71
|
%
|
|
4.77
|
%
|
|
5.53
|
%
|
|
6.70
|
%
|
|
6.80
|
%
|
|
6.80
|
%
|
Rate of compensation increases
|
3.52
|
%
|
|
3.54
|
%
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
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. 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.
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 as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Health care cost trend rate assumed for the next year
|
6.70
|
%
|
|
7.00
|
%
|
|
6.25
|
%
|
Ultimate trend rate
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Year the rate reaches the ultimate trend rate
|
2026
|
|
|
2026
|
|
|
2025
|
|
A one percentage-point change in assumed health care cost trend rates would have the following impact:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
1 Percentage-Point Increase
|
|
1 Percentage-Point Decrease
|
Change in service cost and interest cost for 2019
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Change in postretirement benefit obligation at December 31, 2019
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
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 as of December 31, 2019 and 2018, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
In millions
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Pension Plan Assets:
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
28
|
|
|
$
|
27
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Government securities
|
|
355
|
|
|
—
|
|
|
355
|
|
|
—
|
|
Corporate debt securities
|
|
969
|
|
|
—
|
|
|
969
|
|
|
—
|
|
Investment contracts with insurance companies
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Commingled funds:
|
|
|
|
|
|
|
|
|
Collective trust funds
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
Partnerships/private equity interests
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Total fair value of pension plan assets
|
|
$
|
2,844
|
|
|
$
|
27
|
|
|
$
|
1,329
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plan Assets:
|
|
|
|
|
|
|
|
|
Life insurance policies
|
|
$
|
374
|
|
|
|
|
|
|
|
|
|
|
Total fair value of other postretirement benefit plan assets
|
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
In millions
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Pension Plan Assets:
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
28
|
|
|
$
|
27
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Government securities
|
|
371
|
|
|
—
|
|
|
371
|
|
|
—
|
|
Corporate debt securities
|
|
853
|
|
|
—
|
|
|
853
|
|
|
—
|
|
Investment contracts with insurance companies
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Commingled funds:
|
|
|
|
|
|
|
|
|
Collective trust funds
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
Partnerships/private equity interests
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
4
|
|
|
—
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 $29 million to its pension plans and $5 million to its other postretirement benefit plans in 2020. As of December 31, 2019, the Company’s portion of the future benefit payments that are expected to be paid during the twelve months ending December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Pension
|
|
Other Postretirement Benefits
|
2020
|
|
$
|
152
|
|
|
$
|
35
|
|
2021
|
|
157
|
|
|
35
|
|
2022
|
|
164
|
|
|
35
|
|
2023
|
|
171
|
|
|
35
|
|
2024
|
|
175
|
|
|
36
|
|
Years 2025-2029
|
|
862
|
|
|
176
|
|
(12) Commitments and Contingencies
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.
(13) 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 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.
Cash Dividends— Cash dividends declared were $4.14 per share in 2019, $3.56 per share in 2018 and $2.86 per share in 2017. Cash dividends paid were $4.07 per share in 2019, $3.34 per share in 2018 and $2.73 per share in 2017.
Accumulated Other Comprehensive Income (Loss)— The changes in accumulated other comprehensive income (loss) during 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
(1,677
|
)
|
|
$
|
(1,287
|
)
|
|
$
|
(1,807
|
)
|
|
|
|
|
|
|
|
Adoption of new accounting guidance related to reclassification of certain tax effects
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments during the period
|
|
7
|
|
|
(308
|
)
|
|
294
|
|
Foreign currency translation adjustments reclassified to income
|
|
—
|
|
|
5
|
|
|
2
|
|
Income taxes
|
|
(9
|
)
|
|
(25
|
)
|
|
110
|
|
Total foreign currency translation adjustments, net of tax
|
|
(2
|
)
|
|
(328
|
)
|
|
406
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit adjustments during the period
|
|
(54
|
)
|
|
(64
|
)
|
|
96
|
|
Pension and other postretirement benefit adjustments reclassified to income
|
|
21
|
|
|
41
|
|
|
56
|
|
Income taxes
|
|
7
|
|
|
6
|
|
|
(38
|
)
|
Total pension and other postretirement benefit adjustments, net of tax
|
|
(26
|
)
|
|
(17
|
)
|
|
114
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(1,705
|
)
|
|
$
|
(1,677
|
)
|
|
$
|
(1,287
|
)
|
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 11. Pension and Other Postretirement Benefits for the amounts included in net periodic benefit cost.
The Company designated the €1.0 billion of Euro notes issued in May 2014, the €1.0 billion of Euro notes issued in May 2015 and the €1.6 billion of Euro notes issued in June 2019 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 $239 million and $187 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, the ending balance of Accumulated other comprehensive income (loss) consisted of after-tax cumulative translation adjustment losses of $1.3 billion and $1.3 billion, respectively, and after-tax unrecognized pension and other postretirement benefits costs of $390 million and $364 million, respectively. The estimated pre-tax unrecognized net benefit cost that will be amortized from Accumulated other comprehensive income (loss) into income in 2020 is $48 million for pension and other postretirement benefits.
(14) 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, 2019, approximately 11 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 for the twelve months ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Pre-tax stock-based compensation expense
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
36
|
|
Tax benefit
|
|
(5
|
)
|
|
(5
|
)
|
|
(9
|
)
|
Total stock-based compensation expense, net of tax
|
|
$
|
36
|
|
|
$
|
35
|
|
|
$
|
27
|
|
The following table summarizes activity related to non-vested RSUs for the twelve months ended December 31, 2019:
|
|
|
|
|
|
|
Shares in millions
|
|
Number of
Shares
|
|
Weighted-Average
Grant-Date Fair Value
|
Unvested, January 1, 2019
|
|
0.5
|
|
|
$121.24
|
Granted
|
|
0.2
|
|
|
144.43
|
Vested
|
|
(0.2
|
)
|
|
87.28
|
Unvested, December 31, 2019
|
|
0.5
|
|
|
144.92
|
The following table summarizes stock option activity for the twelve months ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
In millions except exercise price and contractual terms
|
|
Number of Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate Intrinsic
Value
|
Under option, January 1, 2019
|
|
4.6
|
|
|
$90.56
|
|
|
|
|
Granted
|
|
0.5
|
|
|
144.21
|
|
|
|
|
Exercised
|
|
(1.3
|
)
|
|
64.51
|
|
|
|
|
Canceled or expired
|
|
(0.1
|
)
|
|
144.55
|
|
|
|
|
Under option, December 31, 2019
|
|
3.7
|
|
|
106.57
|
|
5.9
|
|
$271
|
Exercisable, December 31, 2019
|
|
2.4
|
|
|
89.55
|
|
4.8
|
|
$220
|
The fair value of RSUs is equal to the common stock fair market value on the date of the grant. RSUs provide for dividend equivalents payable in additional RSUs for dividends that would have been paid during the vesting period. Stock option exercise prices are equal to the common stock fair market value on the date of grant. The Company estimates forfeitures based on historical rates for awards with similar characteristics. 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 option valuations for the twelve months ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
|
2.50-2.68%
|
|
2.07-3.06%
|
|
0.91-2.61%
|
Weighted-average volatility
|
|
22.0%
|
|
22.0%
|
|
22.0%
|
Dividend yield
|
|
2.20%
|
|
2.10%
|
|
2.22%
|
Expected years until exercise
|
|
8.7-9.0
|
|
7.5-8.4
|
|
7.2-7.9
|
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 for the twelve months ended December 31, 2019, 2018 and 2017 was $34.36, $38.34 and $26.83 per share, respectively. The aggregate intrinsic value of stock options exercised during the twelve months ended December 31, 2019, 2018 and 2017 was $127 million, $33 million and $132 million, respectively. As of December 31, 2019, 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 2.0 years. Exercise of stock options during the twelve months ended December 31, 2019, 2018 and 2017 resulted in cash receipts of $85 million, $22 million and $84 million, respectively. The total fair value of vested stock option awards during the twelve months ended December 31, 2019, 2018 and 2017 was $17 million, $15 million and $13 million, respectively.
As of December 31, 2019, there was $29 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 twelve months ended December 31, 2019, 2018 and 2017 was $20 million, $19 million and $19 million, respectively.
(15) Other Balance Sheet Information
Other balance sheet information as of December 31, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
Prepaid expenses and other current assets:
|
|
|
|
|
Income tax refunds receivable
|
|
$
|
77
|
|
|
$
|
98
|
|
Value-added-tax receivables
|
|
73
|
|
|
79
|
|
Vendor advances
|
|
25
|
|
|
30
|
|
Other
|
|
121
|
|
|
127
|
|
Total prepaid expenses and other current assets
|
|
$
|
296
|
|
|
$
|
334
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
$
|
441
|
|
|
$
|
429
|
|
Prepaid pension assets
|
|
297
|
|
|
290
|
|
Operating lease right-of-use asset
|
|
206
|
|
|
—
|
|
Customer tooling
|
|
141
|
|
|
171
|
|
Investments
|
|
51
|
|
|
51
|
|
Other
|
|
91
|
|
|
89
|
|
Total other assets
|
|
$
|
1,227
|
|
|
$
|
1,030
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
335
|
|
|
$
|
391
|
|
Deferred revenue and customer deposits
|
|
188
|
|
|
215
|
|
Rebates
|
|
159
|
|
|
172
|
|
Current portion of operating lease liability
|
|
51
|
|
|
—
|
|
Warranties
|
|
45
|
|
|
45
|
|
Current portion of pension and other postretirement benefit obligations
|
|
14
|
|
|
16
|
|
Other
|
|
425
|
|
|
432
|
|
Total accrued expenses
|
|
$
|
1,217
|
|
|
$
|
1,271
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
Pension benefit obligation
|
|
$
|
215
|
|
|
$
|
203
|
|
Postretirement benefit obligation
|
|
198
|
|
|
179
|
|
Long-term portion of operating lease liability
|
|
128
|
|
|
—
|
|
Other
|
|
459
|
|
|
457
|
|
Total other liabilities
|
|
$
|
1,000
|
|
|
$
|
839
|
|
(16) 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 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Operating revenue:
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
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
|
|
Depreciation and amortization and impairment of intangible assets:
|
Automotive OEM
|
|
$
|
125
|
|
|
$
|
123
|
|
|
$
|
111
|
|
Food Equipment
|
|
41
|
|
|
44
|
|
|
45
|
|
Test & Measurement and Electronics
|
|
69
|
|
|
88
|
|
|
92
|
|
Welding
|
|
26
|
|
|
27
|
|
|
28
|
|
Polymers & Fluids
|
|
77
|
|
|
83
|
|
|
89
|
|
Construction Products
|
|
29
|
|
|
32
|
|
|
33
|
|
Specialty Products
|
|
59
|
|
|
64
|
|
|
64
|
|
Total
|
|
$
|
426
|
|
|
$
|
461
|
|
|
$
|
462
|
|
Plant and equipment additions:
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
134
|
|
|
$
|
184
|
|
|
$
|
147
|
|
Food Equipment
|
|
35
|
|
|
28
|
|
|
27
|
|
Test & Measurement and Electronics
|
|
26
|
|
|
31
|
|
|
23
|
|
Welding
|
|
28
|
|
|
23
|
|
|
17
|
|
Polymers & Fluids
|
|
18
|
|
|
15
|
|
|
16
|
|
Construction Products
|
|
29
|
|
|
25
|
|
|
22
|
|
Specialty Products
|
|
56
|
|
|
58
|
|
|
45
|
|
Total
|
|
$
|
326
|
|
|
$
|
364
|
|
|
$
|
297
|
|
Identifiable assets:
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
2,417
|
|
|
$
|
2,388
|
|
|
$
|
2,402
|
|
Food Equipment
|
|
1,042
|
|
|
1,019
|
|
|
1,054
|
|
Test & Measurement and Electronics
|
|
2,374
|
|
|
2,343
|
|
|
2,449
|
|
Welding
|
|
734
|
|
|
789
|
|
|
756
|
|
Polymers & Fluids
|
|
1,862
|
|
|
1,942
|
|
|
2,067
|
|
Construction Products
|
|
1,176
|
|
|
1,167
|
|
|
1,196
|
|
Specialty Products
|
|
1,656
|
|
|
1,687
|
|
|
1,721
|
|
Total Segments
|
|
11,261
|
|
|
11,335
|
|
|
11,645
|
|
Corporate
|
|
3,807
|
|
|
3,535
|
|
|
5,135
|
|
Total
|
|
$
|
15,068
|
|
|
$
|
14,870
|
|
|
$
|
16,780
|
|
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 the twelve months ended December 31, 2019, 2018 and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
2019
|
|
2018
|
|
2017
|
Operating Revenue by Geographic Region:
|
|
|
|
|
|
|
United States
|
|
$
|
6,507
|
|
|
$
|
6,562
|
|
|
$
|
6,243
|
|
Canada/Mexico
|
|
972
|
|
|
1,050
|
|
|
996
|
|
Total North America
|
|
7,479
|
|
|
7,612
|
|
|
7,239
|
|
Europe, Middle East and Africa
|
|
3,920
|
|
|
4,241
|
|
|
4,102
|
|
Asia Pacific
|
|
2,400
|
|
|
2,573
|
|
|
2,577
|
|
South America
|
|
310
|
|
|
342
|
|
|
396
|
|
Total Operating Revenue
|
|
$
|
14,109
|
|
|
$
|
14,768
|
|
|
$
|
14,314
|
|
Operating revenue by geographic region is based on the customers' locations. As of December 31, 2019, the Company had approximately 11% of its total long-lived assets in China. 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. No single customer accounted for more than 5% of consolidated revenues for the twelve months ended December 31, 2019, 2018 or 2017.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited quarterly financial data included as supplementary data reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
In millions except per share amounts
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating revenue
|
|
$
|
3,552
|
|
|
$
|
3,744
|
|
|
$
|
3,609
|
|
|
$
|
3,831
|
|
|
$
|
3,479
|
|
|
$
|
3,613
|
|
|
$
|
3,469
|
|
|
$
|
3,580
|
|
Cost of revenue
|
|
2,059
|
|
|
2,181
|
|
|
2,099
|
|
|
2,231
|
|
|
2,007
|
|
|
2,096
|
|
|
2,022
|
|
|
2,096
|
|
Operating income
|
|
839
|
|
|
903
|
|
|
871
|
|
|
932
|
|
|
868
|
|
|
889
|
|
|
824
|
|
|
860
|
|
Net income
|
|
597
|
|
|
652
|
|
|
623
|
|
|
666
|
|
|
660
|
|
|
638
|
|
|
641
|
|
|
607
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.82
|
|
|
$
|
1.92
|
|
|
$
|
1.92
|
|
|
$
|
1.98
|
|
|
$
|
2.05
|
|
|
$
|
1.91
|
|
|
$
|
2.00
|
|
|
$
|
1.84
|
|
Diluted
|
|
1.81
|
|
|
1.90
|
|
|
1.91
|
|
|
1.97
|
|
|
2.04
|
|
|
1.90
|
|
|
1.99
|
|
|
1.83
|
|