10-K 1 itw-20131231x10k.htm FORM 10-K ITW-2013.12.31-10K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number 1-4797 
ILLINOIS TOOL WORKS INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
36-1258310
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3600 W. Lake Avenue, Glenview, Illinois
 
60026-1215
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (847) 724-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2013 was approximately $25,600,000,000 based on the New York Stock Exchange closing sales price as of June 28, 2013.
Shares of Common Stock outstanding at January 31, 2014: 424,867,793
Documents Incorporated by Reference
Portions of the 2014 Proxy Statement for Annual Meeting of Stockholders to be held on May 2, 2014.
 
Part III




PART I
ITEM 1. Business
General
Illinois Tool Works Inc. (the “Company” or “ITW”) was founded in 1912 and incorporated in 1915. The Company is a global manufacturer of a diversified range of industrial products and equipment with operations in 56 countries.
The Company periodically makes changes to its management reporting structure to better align its businesses with Company objectives and operating strategies. Effective January 1, 2013, the Company made certain changes in how its operations are reported to senior management in order to better align its portfolio of businesses with its enterprise-wide portfolio management initiative. As a result of this reorganization, the Company's continuing operations are internally reported as 28 operating segments to senior management as of December 31, 2013, which have been aggregated into the following seven external reportable segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
The significant changes that resulted from this reorganization included the following:
Certain businesses within the former Transportation segment, primarily related to the automotive aftermarket business, are reported in the Polymers & Fluids segment and the Transportation segment has been renamed Automotive OEM.
The Welding business, which was formerly reported in the Power Systems & Electronics segment, is reported separately as the Welding segment.
The Electronics business, which was formerly reported in the Power Systems & Electronics segment, has been combined with the Test & Measurement business, which was formerly reported in the All Other segment, to form a new Test & Measurement and Electronics segment.
The All Other segment has been renamed Specialty Products.
The following is a description of the Company's seven reportable segments:
Automotive OEM: Businesses in this segment produce components and fasteners for automotive-related applications.
In the Automotive OEM segment, products and services include:
plastic and metal components, fasteners and assemblies for automobiles, light trucks, and other industrial uses.
Test & Measurement and Electronics: 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.
In the Test & Measurement and Electronics segment, products include:
equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
electronic assembly equipment and related consumable solder materials;
electronic components and component packaging;
static control equipment and consumables used for contamination control in clean room environments; and
pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.
Food Equipment: Businesses in this segment produce commercial food equipment and provide related service.
In the Food Equipment segment, products and services include:
warewashing equipment;
cooking equipment, including ovens, ranges and broilers;
refrigeration equipment, including refrigerators, freezers and prep tables;
food processing equipment, including slicers, mixers and scales;
kitchen exhaust, ventilation and pollution control systems; and
food equipment service, maintenance and repair.
Polymers & Fluids: Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, janitorial and hygiene products, and fluids and polymers for auto aftermarket maintenance and appearance.
In the Polymers & Fluids segment, products 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;

2



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.
Welding: Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications.
In the Welding segment, products include:
arc welding equipment;
metal arc welding consumables and related accessories; and
metal jacketing and other insulation products.
Construction Products: Businesses in this segment produce construction fastening systems and truss products.
In the Construction Products segment, products 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.
Specialty Products: Diversified businesses in this segment produce beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.
In the Specialty Products segment, products 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 fasteners and components for appliances;
airport ground support equipment; and
components for medical devices.
The information set forth below is applicable to all reportable segments of the Company unless otherwise noted.
80/20 Business Process
A key element of the Company’s business strategy is its continuous 80/20 business process. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company uses this 80/20 business process to simplify and focus on the key drivers of business profitability, and as a result, reduces complexity that often creates unnecessary expense and disguises what is truly important. The Company utilizes the 80/20 process in various aspects of its business. Common applications of the 80/20 business process include:
Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products.
Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers.
Simplifying the supplier base by partnering with 80/20 suppliers and reducing the number of 20/80 suppliers.
Designing business processes, systems and measurements around the 80/20 activities.
The result of the application of this 80/20 business process is that the Company has over time improved its long-term operating and financial performance. These 80/20 efforts can result in restructuring projects that reduce costs, and improve profitability and returns. Corporate management works closely with those businesses that have operating results below expectations to apply this 80/20 business process and improve results.
Enterprise Strategy
During 2012, the Company embarked on an Enterprise Strategy that includes three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.
Portfolio Management - The Company's portfolio management initiative aims to construct a business portfolio that leverages the Company's differentiated business model and growth potential. As part of this initiative, the Company reviews its operations for businesses that may no longer be aligned with its long-term objectives. As a result, the

3



Company's divestiture activity increased over historical periods in 2012 and 2013 and is expected to increase further in 2014 with the planned divestiture of the Industrial Packaging segment. The Company has historically acquired businesses with complementary products and services, as well as larger acquisitions that represent potential new platforms. Going forward, the focus will be on businesses with sustainable differentiation and growth potential. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.
Business Structure Simplification - The business structure simplification initiative simplifies the Company's organizational model and adds scale to the Company's operating divisions in order to increase organic revenue growth, enhance global competitiveness and drive operational efficiencies. This initiative focuses on reducing the number of the Company's operating divisions and increasing the average revenue size of each division, while retaining the positive attributes of a decentralized operating model. The Company expects to enhance its profitability and returns through a combination of applying its 80/20 business process to the new divisions, more focused growth investments and reduced infrastructure.
Strategic Sourcing - The Company's strategic sourcing initiative focuses on building sourcing capability in order to leverage purchasing scale to enhance profitability and global competitiveness. It incorporates both enterprise-level and segment-level purchasing that cross the Company's many businesses. This initiative is expected to transform sourcing into a core strategic function in the Company.
Divestiture of Majority Interest in Former Decorative Surfaces Segment
On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective November 1, 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.
The Decorative Surfaces business produces decorative high-pressure laminate surfacing materials for furniture, office and retail space, countertops, worktops and other applications. Principal end markets served include commercial, renovation and residential construction.
Plan to Sell the Industrial Packaging Segment
In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and is no longer presenting this segment as part of its continuing operations.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging segment to The Carlyle Group for $3.2 billion. The transaction is subject to regulatory approval and customary closing conditions, and is expected to close by mid-2014.
See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.
The Industrial Packaging business produces steel and plastic strapping and related tools and equipment; plastic stretch film and related equipment; and paper and plastic products that protect goods in transit. Principal end markets served include general industrial, primary metals, food and beverage, and construction.
Current Year Developments
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financial Information about Segments and Markets
Segment and operating results are included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Segment Information note in Item 8. Financial Statements and Supplementary Data.

4



The principal end markets served by the Company’s seven reportable segments by percentage of revenue are as follows:
End Markets Served
Automotive OEM
 
Test & Measurement and Electronics
 
Food Equipment
 
Polymers & Fluids
 
Welding
 
Construction Products
 
Specialty Products
 
Total
General Industrial
4
%
 
34
%
 
1
%
 
18
%
 
55
%
 
1
%
 
20
%
 
18
%
Automotive OEM/Tiers
84

 
7

 

 
3

 
3

 
1

 
1

 
16

Automotive Aftermarket
8

 

 

 
41

 
1

 

 

 
7

Commercial Construction

 
1

 

 
8

 
9

 
30

 
2

 
6

Residential Construction

 

 

 
1

 
1

 
46

 

 
6

Renovation Construction

 

 

 
1

 
1

 
22

 

 
3

Food & Beverage

 
2

 
2

 
1

 

 

 
26

 
4

Food Institutional/Restaurant

 

 
31

 

 

 

 

 
5

Food Service

 
2

 
34

 
1

 

 

 
1

 
6

Food Retail

 

 
22

 

 

 

 
5

 
4

Consumer Durables
2

 
6

 
4

 

 

 

 
14

 
4

Electronics

 
20

 

 
2

 

 

 
2

 
4

Maintenance, Repair & Operations

 
2

 
1

 
12

 
12

 

 
1

 
4

Other
2

 
26

 
5

 
12

 
18

 

 
28

 
13

 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Other includes several end markets, some of which are paper products, primary metals, and printing and publishing.
The Company’s businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.
Backlog
Backlog generally is not considered a significant factor in the Company’s businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of their products. Backlog by reportable segment as of December 31, 2013 and 2012 was as follows:
In millions
2013
 
2012
Automotive OEM
$
386

 
$
287

Test & Measurement and Electronics
322

 
348

Food Equipment
218

 
192

Polymers & Fluids
66

 
74

Welding
92

 
106

Construction Products
31

 
20

Specialty Products
290

 
244

Total
$
1,405

 
$
1,271

Backlog orders scheduled for shipment beyond calendar year 2014 were not material as of December 31, 2013.
Competition
With operations in 56 countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the Welding segment competes globally with Lincoln Electric and ESAB.
In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product quality, brand preference, service delivery and price. Technical capability is also a competitive factor in most segments. The Company believes that each segment's primary competitive advantages derive from the Company's decentralized operating

5



structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational excellence utilizing the Company's 80/20 business process and leveraging its product innovation capabilities. The Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Automotive OEM segment.
Raw Materials
The Company uses raw materials of various types, primarily steel, resins, chemicals and paper, that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, and no such problems are currently anticipated.
Research and Development
Developing new and improved products, broadening the application of established products, and continuing efforts to improve and develop new methods, processes and equipment all contribute to the Company's organic growth. Many new products are designed to reduce customers' costs by eliminating steps in their manufacturing processes, reducing the number of parts in an assembly or improving the quality of customers' assembled products. Typically, the development of such products is accomplished by working closely with customers on specific applications. Research and development expenses were $240 million in 2013, $240 million in 2012 and $221 million in 2011.
Intellectual Property
The Company owns approximately 3,400 unexpired U.S. patents and 6,500 foreign patents covering articles, methods and machines. In addition, the Company has approximately 1,700 applications for patents pending in the U.S. Patent Office and 4,000 applications pending in foreign patent offices. There is no assurance that any of these patents will be issued. The Company maintains a patent department for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important; however, the expiration of any one of the Company's patents would not have a material effect on the Company's results of operations or financial position. The Company also credits its success in the markets it serves to engineering capability; manufacturing techniques; skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
In addition to patents, many of the Company's products and services are sold under various owned or licensed trademarks, which are important to the Company in the aggregate. Some of the Company's more significant trademarks include ITW, which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the Automotive OEM segment; Instron in the Test & Measurement and Electronics segment; Hobart in the Food Equipment segment; Permatex and Wynn's in the Polymers & Fluids segment; Miller in the Welding segment; Paslode in the Construction Products segment; and Hi-Cone in the Specialty Products segment.
Environmental
The Company believes that its manufacturing plants and equipment are in substantial compliance with all applicable environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s capital expenditures, competitive position, financial position or results of operations.
Various legislative and administrative regulations concerning environmental issues have become effective or are under consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date, such developments have not had a substantial adverse impact on the Company's revenues, earnings or cash flows.
Employees
The Company employed approximately 51,000 persons in its continuing operations as of December 31, 2013 and considers its employee relations to be excellent.
International
The Company's international operations include subsidiaries and joint ventures in 55 foreign countries on six continents. These operations serve such end markets as general industrial, automotive, construction, food institutional/restaurant and service, food and beverage, consumer durables, electronics, maintenance, repair and operations, and others on a worldwide basis. The Company's revenues from sales to customers outside the U.S. were approximately 57% of revenues in 2013, 57% of revenues in 2012 and 59% of revenues in 2011.

6



Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Segment Information note in Item 8. Financial Statements and Supplementary Data for additional information on international activities. International operations are subject to certain risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates. Additional risks of the Company's international operations are described under Item 1A. Risk Factors.
Executive Officers
Executive Officers of the Company as of February 14, 2014 were as follows:
Name
 
Office
Age
Sharon M. Brady
 
Senior Vice President, Human Resources
63

Timothy J. Gardner
 
Executive Vice President
58

Maria C. Green
 
Senior Vice President, General Counsel & Secretary
61

John R. Hartnett
 
Executive Vice President
53

Craig A. Hindman
 
Executive Vice President
59

Michael M. Larsen
 
Senior Vice President & Chief Financial Officer
45

Roland M. Martel
 
Executive Vice President
59

Steven L. Martindale
 
Executive Vice President
57

Sundaram Nagarajan
 
Executive Vice President
51

Christopher O’Herlihy
 
Executive Vice President
50

David C. Parry
 
Vice Chairman
60

E. Scott Santi
 
President & Chief Executive Officer
52

Randall J. Scheuneman
 
Vice President & Chief Accounting Officer
46

Juan Valls
 
Executive Vice President
52

The executive officers of the Company serve at the discretion of the Board of Directors. Set forth below is information regarding the principal occupations and employment and business experience over the past five years for each executive officer. Unless otherwise stated, employment is by the Company.
Ms. Brady has served in her present position since 2006.
Mr. Gardner has served in his present position since 2009. He joined the Company in 1997 and has held various sales and management positions in the consumer packaging businesses. Most recently, he served as Group President of the consumer packaging businesses.
Ms. Green was elected Senior Vice President, General Counsel & Secretary of the Company in February 2012. She joined the Company in 1997 as an Associate General Counsel and Assistant Secretary, became Deputy General Counsel and Assistant Secretary in 2008, and was elected Vice President, General Counsel & Secretary in August 2011.
Mr. Hartnett was elected Executive Vice President of Construction Products in 2012. He joined Signode in 1980, which was acquired by ITW in 1986, and has held various management positions of increasing responsibility. Most recently, he served as Group President of the Automotive Aftermarket businesses.
Mr. Hindman has served in his present position since 2004.
Mr. Larsen joined the Company and was elected to his present position in September 2013. From October 2010 to August 2013, he served as Vice President and Chief Financial Officer of Gardner Denver, Inc., a global manufacturer of highly engineered compressors, blowers, pumps and other fluid transfer equipment. In addition, he served as interim CEO of Gardner Denver from July 2012 to November 2012, and as President, Chief Executive Officer and a director of that company from November 2012 to July 2013. Prior to joining Gardner Denver, he was Chief Financial Officer at General Electric Water & Process Technologies, a global provider of water treatment and process solutions. His previous experience includes more than 15 years with General Electric, where he held a number of global finance leadership roles with increasing responsibility.
Mr. Martel has served in his present position since 2006.
Mr. Martindale has served in his present position since 2008.

7



Mr. Nagarajan was elected Executive Vice President in 2010. He joined the Company in 1991 and has held various engineering and management positions in the welding businesses. Most recently, he served as Group President within the welding businesses.
Mr. O’Herlihy was elected Executive Vice President in 2010. He joined the Company in 1989 and has held various operational, management and leadership positions of increasing responsibility. Most recently he served as President, international food equipment businesses.
Mr. Parry has served in his present position since 2010. He served as Executive Vice President from 2006 to 2010. Prior thereto, he served as President of the Performance Polymers Group.
Mr. Santi was elected President and Chief Executive Officer, as well as a director, in November 2012, after having been elected President and Chief Operating Officer in October 2012. Mr. Santi served as Vice Chairman from 2008 to October 2012 and as Executive Vice President from 2004 to 2008.
Mr. Scheuneman was appointed Vice President and Chief Accounting Officer in 2009. Prior to joining the Company in 2009, he held several financial leadership positions at W.W. Grainger, Inc., including Vice President, Finance, for the Lab Safety Supply business from 2006 to 2009, and Vice President, Internal Audit, from 2002 to 2006. He was appointed Principal Accounting Officer in 2009.
Mr. Valls has served in his present position since 2007.
Available Information
The Company electronically files reports with the Securities and Exchange Commission ("SEC"). The public may read and copy any materials the Company has filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company's website (www.itw.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any shareholder who requests them. The Company will furnish any exhibit not contained herein upon the payment of a fee representing the reasonable cost to the Company of furnishing the exhibit. Requests for exhibits may be sent to Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, IL 60026, Attention: Secretary. Also posted on the Company’s website are the following:
Statement of Principles of Conduct;
Code of Ethics for CEO and key financial and accounting personnel;
Charters of the Audit, Corporate Governance and Nominating, and Compensation Committees of the Board of Directors;
Corporate Governance Guidelines;
Global Anti-Corruption Policy;
Corporate Citizenship Statement; and
Government Affairs Information.

ITEM 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.
The Company's results are impacted by global economic conditions. Weakness or downturns in the markets served by the Company could adversely affect its business, results of operations or financial condition.
The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, credit market instability, high unemployment, government deficit reduction, sequestration and other austerity measures impacting the markets we serve can adversely affect the Company’s businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers, increasing order cancellations and the difficulty in collecting accounts receivable, increasing price competition, increasing the risk of impairment of goodwill and other long-lived assets, and increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.

8



The global nature of the Company's operations subjects it to political and economic risks that could adversely affect its business, results of operations or financial condition.
The Company currently operates in 56 countries. The risks inherent in the Company's global operations include:
fluctuation in currency exchange rates;
limitations on ownership or participation in local enterprises;
price controls, exchange controls and limitations on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
acts of terrorism;
government embargoes or foreign trade restrictions;
the imposition of duties and tariffs and other trade barriers;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for expropriation or nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on its ability to enforce legal rights and remedies; and
potentially adverse tax consequences.
If the Company is unable to successfully manage these and other risks associated with managing and expanding its international businesses, the risks could have a material adverse effect on the Company's business, results of operations or financial condition.
If the Company is unable to successfully manage its enterprise initiatives, the timing and amount of benefits from these initiatives may not be as expected and the Company's financial results could be adversely impacted.
The Company has completed the first year of its five year enterprise strategy and associated initiatives: portfolio management, business structure simplification and strategic sourcing. These initiatives include divesting assets that may no longer be aligned with its enterprise initiatives and long-term objectives, the scaling up of smaller businesses into larger businesses and better leveraging of purchasing power. If the Company is unable to retain its key employees, maintain productivity or otherwise implement these initiatives without material disruption to its businesses, the timing and amount of benefits from these initiatives may not be as expected and the Company's financial results could be adversely impacted.
The timing and amount of the Company’s share repurchases are subject to a number of uncertainties.
The Company previously announced its intention to fully offset the divestiture-related EPS dilution from the proposed sale of the Industrial Packaging segment through share repurchases. The Company currently plans to fund the repurchases through a combination of sale proceeds, free operating cash flow and additional borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause us to limit, suspend or delay the Company's stock repurchases include unfavorable market conditions, the trading price of the Company's common stock, the nature of other investment opportunities presented to us from time to time, the ability to obtain financing at attractive rates and the availability of U.S. cash. If we delay, limit or suspend the Company's stock repurchase program, the Company's stock price may be negatively affected.
Divestitures could negatively impact the Company's business, and retained liabilities from businesses that the Company sells could adversely affect the Company's financial results.
As part of its portfolio management initiative, the Company reviews its operations for businesses that may no longer be aligned with its enterprise initiatives and long-term objectives. As a result, the Company's divestiture activity increased over historical periods in 2012 and 2013 and is expected to increase further in 2014 with the planned divestiture of the Industrial Packaging segment. Divestitures pose risks and challenges that could negatively impact the Company's business, including the potentially dilutive effect on earnings per share, distraction of management's attention from core businesses, potential disputes with buyers and potential impairment charges. In addition, the Company may be required to retain responsibility for, or agree to indemnify buyers against known and unknown contingent liabilities related to the businesses sold, such as lawsuits, tax liabilities, product liability claims and environmental matters.

9



The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery or other laws.
The Company cannot provide assurance that its internal controls will always protect it from reckless or criminal acts committed by its employees, agents or business partners that would violate U.S. and/or non-U.S. laws, including anti-bribery laws, competition, and export and import compliance. Any such improper actions could subject the Company to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, or could damage its reputation.
A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's operating income.
Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. Dollar against foreign currencies, could have an adverse effect on profitability and financial condition.
The Company's acquisition of businesses could negatively impact its growth, profitability and returns.
Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect the Company's growth, profitability and returns:
Any acquired business, technology, service or product could under-perform relative to the Company's expectations and the price paid for it, or not perform in accordance with the Company's anticipated timetable.
Acquisitions could cause the Company's financial results to differ from expectations in any given fiscal period, or over the long term.
Acquisition-related earnings charges could adversely impact operating results.
Acquisitions could place unanticipated demands on the Company's management, operational resources and financial and internal control systems.
The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated. The realization of any of these liabilities may increase the Company's expenses or adversely affect its financial position.
As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may recognize charges relating to the impairment of these assets.
Diminished credit availability could adversely impact the Company's ability to readily obtain financing or to obtain cost-effective financing.
The Company may utilize the commercial paper markets for a portion of its short-term liquidity needs. If conditions in the financial markets decline, there is no assurance that the commercial paper markets will remain available to the Company or that the lenders participating in the Company's long-term credit facilities will be able to provide financing in accordance with the terms of its credit agreements. A failure of one or more of the syndicate members in the Company's credit facilities could reduce the availability of credit and adversely affect the Company's liquidity. If the Company determines that it is appropriate or necessary to raise capital in the future, funds may not be available on cost-effective terms.
Raw material price increases and supply shortages could adversely affect results.
The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company's results of operations and profit margins. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
If the Company is unable to successfully introduce new products or adequately protect its intellectual property, its future growth may be adversely affected.
The Company's ability to develop new products based on innovation can affect its competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products and

10



services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect the Company's competitive position.
Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-exclusive rights under patents owned by others. The Company's intellectual property may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights or inability to preserve existing intellectual property rights could adversely impact the Company's competitive position and results of operations.
Unfavorable tax law changes and tax authority rulings may adversely affect results.
The Company is subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or tax laws. The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.
The performance of the financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
Potential adverse outcomes in legal proceedings may adversely affect results.
The Company's businesses expose it to potential toxic tort and other types of product liability claims that are inherent in the design, manufacture and sale of its products and the products of third-party vendors. The Company currently maintains insurance programs consisting of self insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it maintains adequate insurance programs, claims could have a material adverse effect on the Company's financial condition, liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “believe,” “expect,” “plans,” “intends,” “may,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “guidance,” “forecast,” and other similar words, including, without limitation, statements regarding the expected acquisition or disposition of businesses, economic conditions in various geographic regions, the timing and amount of share repurchases, the Company's Enterprise Strategy and its ability to manage its strategic business initiatives and the timing and amount of benefits therefrom, the adequacy of internally generated funds and credit facilities, the ability to fund debt service obligations, the cost and availability of additional financing, the intention to refinance debt obligations, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include those risks described above. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

11



Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

ITEM 1B. Unresolved Staff Comments
Not applicable.

ITEM 2. Properties
As of December 31, 2013, the Company's continuing operations operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:
 
Number
Of
Properties
 
Floor Space
 
Owned
 
Leased
 
Total
 
 
 
(In millions of square feet)
Automotive OEM
92

 
4.4

 
2.4

 
6.8

Test & Measurement and Electronics
111

 
3.1

 
2.6

 
5.7

Food Equipment
45

 
3.2

 
0.9

 
4.1

Polymers & Fluids
80

 
3.6

 
1.6

 
5.2

Welding
49

 
3.5

 
0.8

 
4.3

Construction Products
68

 
2.8

 
0.9

 
3.7

Specialty Products
111

 
3.3

 
3.1

 
6.4

Corporate
34

 
2.8

 
0.2

 
3.0

Total
590

 
26.7

 
12.5

 
39.2

The principal plants and office facilities outside of the U.S. are in Australia, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Italy, Netherlands, Spain, and the United Kingdom.
The Company’s properties are primarily of steel, brick or concrete construction and are maintained in good operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the Company's businesses.

ITEM 3. Legal Proceedings
Not applicable.

ITEM 4. Mine Safety Disclosures
Not applicable.

12



PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Price and Dividend Data—The common stock of Illinois Tool Works Inc. was listed on the New York Stock Exchange for 2013 and 2012. Quarterly market price and dividend data for 2013 and 2012 were as shown below:
 
Market Price Per Share
 
Dividends
Declared
Per Share
 
High
 
Low
 
2013:
 
 
 
 
 
Fourth quarter
$
84.32

 
$
73.60

 
$
0.42

Third quarter
78.56

 
68.16

 
0.42

Second quarter
71.74

 
60.02

 
0.38

First quarter
65.60

 
59.71

 
0.38

2012:
 
 
 
 
 
Fourth quarter
$
63.33

 
$
58.20

 
$
0.38

Third quarter
62.09

 
49.07

 
0.38

Second quarter
58.27

 
50.35

 
0.36

First quarter
58.24

 
47.42

 
0.36

The approximate number of holders of record of common stock as of January 31, 2014 was 7,544. This number does not include beneficial owners of the Company's securities held in the name of nominees.
Repurchases of Common Stock—On May 6, 2011, the Company's Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $4.0 billion of the Company’s common stock over an open-ended period of time (the “2011 Program”). Under the 2011 Program, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $43.20 per share during 2011, approximately 35.5 million shares of its common stock at an average price of $56.93 per share during 2012 and approximately 26.4 million shares of its common stock at an average price of $71.89 per share during 2013. As of December 31, 2013, there were no authorized repurchases remaining under the 2011 Program.

13



On August 2, 2013, the Company's Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the “2013 Program”). Under the 2013 Program, the Company repurchased approximately 3.3 million shares of its common stock at an average price of $81.62 per share during December 2013. As of December 31, 2013, there was approximately $5.7 billion of authorized repurchases remaining under the 2013 Program.
Share repurchase activity under the Company's share repurchase programs for the fourth quarter of 2013 was as follows:
In millions except per share amounts
 
 
 
 
 
 
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Programs
 
Maximum Value of Shares That May Yet Be Purchased Under Program
October 2013
3.3

 
$
77.30

 
3.3

 
$
6,592

November 2013
5.1

 
$
79.23

 
5.1

 
$
6,185

December 2013
5.6

 
$
80.60

 
5.6

 
$
5,731

Total
14.0

 
 
 
14.0

 
 

ITEM 6. Selected Financial Data
In millions except per share amounts
2013
 
2012
 
2011
 
2010
 
2009
Operating revenues
$
14,135

 
$
14,791

 
$
14,515

 
$
12,625

 
$
11,216

Income from continuing operations
1,630

 
2,233

 
1,775

 
1,258

 
889

Income per share from continuing operations:
 
 
 
 
Basic
3.65

 
4.75

 
3.61

 
2.51

 
1.78

Diluted
3.63

 
4.72

 
3.59

 
2.50

 
1.77

Total assets at year-end
19,966

 
19,309

 
17,984

 
16,412

 
15,811

Long-term debt at year-end
2,793

 
4,589

 
3,488

 
2,542

 
2,861

Cash dividends declared per common share
1.60

 
1.48

 
1.40

 
1.30

 
1.24

Certain reclassifications of prior years' data have been made to conform to current year reporting, including discontinued operations as discussed below.
The Company periodically reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as discontinued operations. For businesses reported as discontinued operations in the statement of income, all related prior period income statement information has been restated to conform to the current year reporting of these businesses. Income from discontinued operations was $49 million, $637 million, $296 million, $245 million, and $84 million in the years 2013, 2012, 2011, 2010, and 2009, respectively. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's discontinued operations.
On October 31, 2012, the Company divested a 51% majority interest in its Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective November 1, 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.
Information on the comparability of results is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

14



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

INTRODUCTION
Illinois Tool Works Inc. (the “Company” or “ITW”) is a global manufacturer of a diversified range of industrial products and equipment with operations in 56 countries.
The Company periodically makes changes to its management reporting structure to better align its businesses with Company objectives and operating strategies. Effective January 1, 2013, the Company made certain changes in how its operations are reported to senior management in order to better align its portfolio of businesses with its enterprise-wide portfolio management initiative. As a result of this reorganization, the Company's continuing operations are internally reported as 28 operating segments to senior management as of December 31, 2013, which have been aggregated into the following seven external reportable segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
The significant changes that resulted from this reorganization included the following:
Certain businesses within the former Transportation segment, primarily related to the automotive aftermarket business, are reported in the Polymers & Fluids segment and the Transportation segment has been renamed Automotive OEM.
The Welding business, which was formerly reported in the Power Systems & Electronics segment, is reported separately as the Welding segment.
The Electronics business, which was formerly reported in the Power Systems & Electronics segment, has been combined with the Test & Measurement business, which was formerly reported in the All Other segment, to form a new Test & Measurement and Electronics segment.
The All Other segment has been renamed Specialty Products.
The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2013.
Commensurate with the change in reportable segments described above, the segment operating income was also revised for a change in how the operating expenses maintained at the corporate level are allocated to the Company's segments. Prior to January 1, 2013, the Company allocated all operating expenses maintained at the corporate level to its segments. Beginning January 1, 2013, segments are allocated a fixed overhead charge based on the segment's revenues. Expenses not charged to the segments are now reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuation on a quarterly and annual basis.
The prior year segment results and related disclosures have been restated to conform to the current year presentation under the new segment structure and expense allocation methodology.
Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating revenues, operating income, operating margins, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.
Management analyzes the Company's consolidated results of operations and the results of each segment by identifying the effects of changes in the results of the base businesses, newly acquired and recently divested companies, restructuring costs, goodwill and intangible asset impairment charges, and currency translation on the operating revenues and operating income of each segment. Base businesses are those businesses that have been included in the Company's results of operations for more than 12 months. The changes to base business operating income include the estimated effects of both operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the base business revenue volume changes on operating income, assuming variable margins remain the same as the prior period. As manufacturing and administrative overhead costs usually do not significantly change as a result of revenues increasing or decreasing, the percentage change in operating income due to operating leverage is usually more than the percentage change in the base business revenues. Changes in variable margins and overhead costs represent the estimated effect of non-volume related changes in base business operating income and may be driven by a number of factors, including changes in product mix, the cost of raw materials, labor and overhead, and pricing to customers. Selling price versus material cost comparisons represent the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers. Management reviews these price versus cost comparisons by analyzing the net impact of changes to each segment's operating margin.


15



80/20 BUSINESS PROCESS
A key element of the Company’s business strategy is its continuous 80/20 business process. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company uses this 80/20 business process to simplify and focus on the key drivers of business profitability, and as a result, reduces complexity that often creates unnecessary expense and disguises what is truly important. The Company utilizes the 80/20 process in various aspects of its business. Common applications of the 80/20 business process include:
Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products.
Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers.
Simplifying the supplier base by partnering with 80/20 suppliers and reducing the number of 20/80 suppliers.
Designing business processes, systems and measurements around the 80/20 activities.
The result of the application of this 80/20 business process is that the Company has over time improved its long-term operating and financial performance. These 80/20 efforts can result in restructuring projects that reduce costs, and improve profitability and returns. Corporate management works closely with those businesses that have operating results below expectations to apply this 80/20 business process and improve results.

ENTERPRISE STRATEGY
During 2012, the Company embarked on an Enterprise Strategy that includes three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.
Portfolio Management - The Company's portfolio management initiative aims to construct a business portfolio that leverages the Company's differentiated business model and growth potential. As part of this initiative, the Company reviews its operations for businesses that may no longer be aligned with its long-term objectives. As a result, the Company's divestiture activity increased over historical periods in 2012 and 2013 and is expected to increase further in 2014 with the planned divestiture of the Industrial Packaging segment. The Company has historically acquired businesses with complementary products and services, as well as larger acquisitions that represent potential new platforms. Going forward, the focus will be on businesses with sustainable differentiation and growth potential. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's discontinued operations.
Business Structure Simplification - The business structure simplification initiative simplifies the Company's organizational model and adds scale to the Company's operating divisions in order to increase organic revenue growth, enhance global competitiveness and drive operational efficiencies. This initiative focuses on reducing the number of the Company's operating divisions and increasing the average revenue size of each division, while retaining the positive attributes of a decentralized operating model. The Company expects to enhance its profitability and returns through a combination of applying its 80/20 business process to the new divisions, more focused growth investments and reduced infrastructure.
Strategic Sourcing - The Company's strategic sourcing initiative focuses on building sourcing capability in order to leverage purchasing scale to enhance profitability and global competitiveness. It incorporates both enterprise-level and segment-level purchasing that cross the Company's many businesses. This initiative is expected to transform sourcing into a core strategic function in the Company.

DIVESTITURE OF MAJORITY INTEREST IN FORMER DECORATIVE SURFACES SEGMENT
On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective November 1, 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.


16



DISCONTINUED OPERATIONS
The Company periodically reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as discontinued operations.
In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company's Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and is no longer presenting this segment as part of its continuing operations.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging segment to The Carlyle Group for $3.2 billion. The transaction is subject to regulatory approval and customary closing conditions, and is expected to close by mid-2014.
In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business previously included in the Construction Products segment and a specialty coatings business previously included in the Polymers & Fluids segment. The construction distribution and specialty coatings businesses were classified as held for sale beginning in the third quarter of 2013.
In the first quarter of 2013, the Company committed to plans for the divestiture of two transportation related businesses and a machine components business previously included in the Specialty Products segment, two construction distribution businesses previously included in the Construction Products segment, and a chemical manufacturing business previously included in the Polymers & Fluids segment. These businesses were classified as held for sale beginning in the first quarter of 2013.
These held for sale businesses discussed above, as well as certain previously divested businesses, are reported as discontinued operations in the statement of income. All related prior period income statement information has been restated to conform to the current year reporting of these businesses. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's discontinued operations.

CONSOLIDATED RESULTS OF OPERATIONS
The Company’s consolidated results of operations for 2013, 2012 and 2011 are summarized as follows:
Dollars in millions
2013
 
2012
 
2011
Operating revenues
$
14,135

 
$
14,791

 
$
14,515

Operating income
2,514

 
2,475

 
2,361

Margin %
17.8
%
 
16.7
%
 
16.3
%

In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
0.2
 %
 
0.6
 %
 
0.1
 %
 
2.2
 %
 
2.7
 %
 
0.1
 %
Changes in variable margins and overhead costs

 
6.4

 
1.1

 

 
6.5

 
1.1

 
0.2

 
7.0

 
1.2

 
2.2

 
9.2

 
1.2

Acquisitions
1.7

 
0.4

 
(0.2
)
 
3.5

 
0.8

 
(0.6
)
Divestitures
(6.3
)
 
(5.1
)
 
0.3

 
(1.3
)
 
(0.7
)
 
0.1

Restructuring costs

 
(1.0
)
 
(0.2
)
 

 
(2.0
)
 
(0.3
)
Impairment of goodwill and intangibles

 

 

 

 
(0.1
)
 

Translation

 
0.3

 

 
(2.5
)
 
(2.4
)
 

  Total
(4.4
)%
 
1.6
 %
 
1.1
 %
 
1.9
 %
 
4.8
 %
 
0.4
 %

17



Operating Revenues
Revenues decreased 4.4% in 2013 versus 2012 primarily due to divestitures which reduced revenues by 6.3% over the prior year. On October 31, 2012, the Company divested a 51% majority interest in the former Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% ownership interest in Wilsonart, the historical operating results of Decorative Surfaces are presented in continuing operations. Excluding the 2012 revenues of the former Decorative Surfaces segment of $921 million, 2013 revenues increased by $265 million, or 1.9%, over the prior year, primarily driven by higher revenues from acquisitions and higher base revenues (see "Results of Operations by Segment" table below). Worldwide base revenues increased 0.2% in 2013 versus 2012 primarily due to growth in the Automotive OEM segment, partially offset by lower revenues in the electronic assembly equipment businesses within the Test & Measurement and Electronics segment. International base revenues increased 1.2% due to growth in Asia Pacific of 3.6%, primarily due to the result of strong growth in China in 2013 versus 2012. European base revenues declined 0.8% due to weakness in the European economic environment in the first half of 2013 which moderately improved in the second half of the year. North American base revenues were lower by 0.5% primarily due to the electronic assembly business within the Test & Measurement and Electronics segment. This was partially offset by growth in the North American Automotive OEM, Food Equipment, and Construction Products businesses. Acquisitions contributed 1.7% to revenues in 2013 versus 2012 primarily due to the purchase of a European consumer packaging equipment business and a Chinese food equipment business.
Revenues increased 1.9% in 2012 versus 2011 primarily due to higher base revenues and revenues from acquisitions, partially offset by the unfavorable effect of currency translation and the reduction of revenues due to divestitures. Divestitures reduced revenues by 1.3% primarily due to only ten months of operating results for the Decorative Surfaces segment in 2012 versus twelve months of operating results in 2011 as the Company divested a 51% interest in the Decorative Surfaces segment on October 31, 2012, at which time the segment was deconsolidated. Base revenues increased 2.2% in 2012 versus 2011 as North American economic conditions were stronger than the European and Asia Pacific economic environments. North American base revenues increased 4.3% in 2012 versus 2011. International base revenues decreased 0.2% as Europe declined 0.9% in 2012 versus 2011 primarily driven by weakness in Southern Europe. Asia Pacific base revenues increased 0.7% in 2012 versus 2011 primarily due to growth in the Automotive OEM segment across the region. Acquisitions contributed 3.5% to revenues primarily due to the purchase of a manufacturer of specialty devices used to measure the flow of gases and fluids in the first quarter of 2012 and a thermal processing and environmental equipment manufacturer in the third quarter of 2011. Currency translation resulted in a 2.5% decline in revenues primarily due to a weaker Euro versus the year ago period.
Operating Income
Operating income increased 1.6% in 2013 versus 2012 primarily due to lower overhead expenses and an increase in base revenues, partially offset by the divestiture of the former Decorative Surfaces segment and higher restructuring expenses. Total base operating margins increased 120 basis points in 2013 versus 2012 primarily due to lower overhead costs. The changes in variable margins and overhead costs increased base margins by 110 basis points in 2013 versus 2012, driven by reductions in overhead expenses from the Company's enterprise initiatives of 80 basis points, resulting primarily from the benefits of business structure simplification activities, and the favorable effect of selling price versus material cost comparisons of 40 basis points.
Operating income increased 4.8% in 2012 versus 2011 primarily due to improved variable margins and the positive operating leverage effect of the increase in base revenues. Currency translation resulted in a 2.4% decline in operating income primarily due to a weaker Euro versus the year ago period. Higher restructuring expenses due to increased cost reduction activities also negatively impacted operating income by 2.0%. Base margins increased 120 basis points primarily due to improved variable margins. Changes in variable margins and overhead costs improved base margins 110 basis points primarily due to the favorable effect of selling price versus material cost comparisons of 60 basis points and benefits of restructuring projects. The increase in base margins was partially offset by a 60 basis point decline related to acquisitions, primarily due to amortization expense related to intangible assets. Restructuring expenses diluted total operating margins by 30 basis points primarily due to restructuring activities related to continued improvements in operating structure and efficiencies.


18



RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenues and operating income to total operating revenues and operating income is as follows:
 
Operating Revenues
In millions
2013
 
2012
 
2011
Automotive OEM
$
2,396

 
$
2,171

 
$
2,092

Test & Measurement and Electronics
2,176

 
2,299

 
2,011

Food Equipment
2,047

 
1,939

 
1,985

Polymers & Fluids
1,993

 
2,063

 
2,059

Welding
1,837

 
1,847

 
1,724

Construction Products
1,717

 
1,724

 
1,752

Specialty Products
2,007

 
1,871

 
1,856

Intersegment revenues
(38
)
 
(44
)
 
(48
)
  Total Segments
14,135

 
13,870

 
13,431

Decorative Surfaces

 
921

 
1,084

  Total
$
14,135

 
$
14,791

 
$
14,515

 
Operating Income
In millions
2013
 
2012
 
2011
Automotive OEM
$
490

 
$
421

 
$
386

Test & Measurement and Electronics
321

 
342

 
300

Food Equipment
385

 
332

 
311

Polymers & Fluids
335

 
327

 
328

Welding
464

 
470

 
440

Construction Products
238

 
201

 
218

Specialty Products
408

 
365

 
383

  Total Segments
2,641

 
2,458

 
2,366

Decorative Surfaces


143


154

Unallocated
(127
)
 
(126
)
 
(159
)
  Total
$
2,514

 
$
2,475

 
$
2,361


AUTOMOTIVE OEM
Businesses in this segment produce components and fasteners for automotive-related applications.
In the Automotive OEM segment, products and services include:
plastic and metal components, fasteners and assemblies for automobiles, light trucks, and other industrial uses.
In 2013, this segment primarily served the automotive original equipment manufacturers and tiers (84%) and automotive aftermarket (8%) markets.
The results of operations for the Automotive OEM segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
2,396

 
$
2,171

 
$
2,092

Operating income
 
490

 
421

 
386

Margin %
 
20.5
%
 
19.4
%
 
18.4
%

19



In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
9.5
%
 
17.8
 %
 
1.5
 %
 
7.5
 %
 
14.5
 %
 
1.2
 %
Changes in variable margins and overhead costs

 
0.2

 

 

 
(0.2
)
 

 
9.5

 
18.0

 
1.5

 
7.5

 
14.3

 
1.2

Acquisitions

 

 

 

 

 

Divestitures

 

 

 

 

 

Restructuring costs

 
(3.2
)
 
(0.6
)
 

 
(1.6
)
 
(0.2
)
Impairment of goodwill and intangibles

 

 

 

 

 

Translation
0.9

 
1.7

 
0.2

 
(3.8
)
 
(3.9
)
 

  Total
10.4
%
 
16.5
 %
 
1.1
 %
 
3.7
 %
 
8.8
 %
 
1.0
 %
Operating Revenues
Revenues increased 10.4% in 2013 versus 2012 primarily due to an increase in base business and the favorable effect of currency translation. Worldwide automotive base revenue growth of 9.5% in 2013 versus 2012 exceeded auto builds of approximately 4% primarily due to worldwide product penetration gains. International automotive base revenues increased 10.9% over the prior year. Base revenues for Asia Pacific increased 20.8% over the prior year primarily due to revenue growth in China of 37.7%, which exceeded Chinese auto build growth of 14%. European base revenue growth was 6.8% while auto build growth was flat in 2013 versus 2012. North American automotive base revenue growth of 8.0% exceeded auto build growth of 5% over the prior year.
Revenues increased 3.7% in 2012 versus 2011 due to the increase in base business, partially offset by the unfavorable effect of currency translation. Worldwide automotive base revenue growth of 7.5% in 2012 versus 2011 was primarily due to an increase in worldwide auto builds of 6%, favorable customer mix and product penetration gains in Europe, and growing product penetration with automotive original equipment manufacturers in China. International automotive base revenues increased 7.2% in 2012 versus 2011. European base revenue growth of 3.0% exceeded auto build declines of 5% in 2012 versus 2011. Base revenues for Asia Pacific increased 22.1% in 2012 versus 2011 while base revenue growth in China of 31.3% exceeded Chinese auto build growth of 6% in 2012 versus 2011. North American automotive base revenues grew 8.1% as North American auto builds increased 17% in 2012 versus 2011.
Operating Income
Operating income increased 16.5% in 2013 versus 2012 primarily due to higher base revenues and the favorable effect of currency translation, partially offset by higher restructuring expenses. Total base operating margins increased 150 basis points due to the positive operating leverage effect of the increase in base revenues described above. The changes in variable margins and overhead costs had no significant effect on base margins as the benefits of business structure simplification activities were offset by higher overhead costs primarily related to business expansion in China. Higher restructuring expenses diluted total operating margins by 60 basis points in 2013 versus 2012.
Operating income increased 8.8% in 2012 versus 2011 primarily due to the positive operating leverage effect of the base revenue increase, partially offset by the unfavorable effect of currency translation and higher restructuring expenses. Base margins increased 120 basis points due to the positive operating leverage effect of the increase in base revenues described above. Higher restructuring expenses diluted total operating margins by 20 basis points.

TEST & MEASUREMENT AND ELECTRONICS
Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, and equipment and consumables used in the production of electronic subassemblies and microelectronics.
In the Test & Measurement and Electronics segment, products include:
equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;

20



electronic assembly equipment and related consumable solder materials;
electronic components and component packaging;
static control equipment and consumables used for contamination control in clean room environments; and
pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.
In 2013, this segment primarily served the general industrial (34%) market, which included industrial capital goods, energy, and other general industrial markets, electronics (20%), automotive original equipment manufacturers and tiers (7%), and consumer durables (6%) markets.
The results of operations for the Test & Measurement and Electronics segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
2,176

 
$
2,299

 
$
2,011

Operating income
 
321

 
342

 
300

Margin %
 
14.8
%
 
14.9
%
 
14.9
%
In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
(6.0
)%
 
(18.3
)%
 
(1.9
)%
 
3.3
 %
 
9.5
 %
 
0.9
 %
Changes in variable margins and overhead costs
 

 
10.6

 
1.7

 

 
5.5

 
0.8

 
 
(6.0
)
 
(7.7
)
 
(0.2
)
 
3.3

 
15.0

 
1.7

Acquisitions
 
0.9

 
0.6

 

 
13.0

 
2.9

 
(1.4
)
Divestitures
 

 
0.1

 

 

 

 

Restructuring costs
 

 
1.3

 
0.2

 

 
(2.0
)
 
(0.3
)
Impairment of goodwill and intangibles
 

 
(0.7
)
 
(0.1
)
 

 

 

Translation
 
(0.2
)
 

 

 
(1.9
)
 
(2.1
)
 

  Total
 
(5.3
)%
 
(6.4
)%
 
(0.1
)%
 
14.4
 %
 
13.8
 %
 
 %
Operating Revenues
Revenues decreased 5.3% in 2013 versus 2012 primarily due to a decline in base business, partially offset by revenues from acquisitions. Worldwide electronics base business revenues decreased 14.0% in 2013 versus 2012, primarily due to a 36.1% decrease in revenues in the electronic assembly businesses resulting primarily from strong order rates from a key customer in 2012 that did not recur in 2013. Base revenues for the other electronics businesses increased 3.1% in 2013 versus 2012 primarily due to increased demand from consumer electronics customers in China. Base revenues for the worldwide test and measurement businesses increased 2.0% in 2013 versus 2012 primarily due to increased order rates during the fourth quarter of 2013. The acquisition revenue was primarily due to the purchase of a European food and pharmaceutical inspection business in the fourth quarter of 2012.
Revenues increased 14.4% in 2012 versus 2011 due to the increase in revenues from acquisitions and base revenues, partially offset by the unfavorable effect of currency translation. Base revenues for the worldwide test and measurement businesses increased 7.1% in 2012 versus 2011 primarily due to increased equipment orders both internationally and in North America. Worldwide electronics base business revenues increased 0.5% in 2012 versus 2011 primarily due to base revenue growth of 7.9% in the electronic assembly businesses driven by strong order rates from a key electronics customer, partially offset by a 4.0% decline in the other electronics businesses as consumer demand for basic cell phones and computers was weaker. The acquisition revenue was primarily due to the purchase of a thermal processing and environmental equipment manufacturer in the third quarter of 2011.

21



Operating Income
Operating income decreased 6.4% in 2013 versus 2012 primarily due to the lower base revenues noted above. Total base operating margins decreased 20 basis points in 2013 versus 2012 primarily due to the negative operating leverage effect of the decrease in base revenues of 190 basis points, partially offset by changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 170 basis points in 2013 versus 2012 primarily due to benefits from business structure simplification activities and overhead cost management of 60 basis points, lower intangible asset amortization expense of 40 basis points, favorable selling price versus material cost comparisons of 30 basis points, and a one-time claim recovery of 30 basis points in 2013.
Operating income increased 13.8% in 2012 versus 2011 primarily due to the growth in base revenues, changes in variable margins and overhead costs, and revenues from acquisitions, partially offset by higher restructuring expenses and the unfavorable effect of currency translation. Base operating margins increased 170 basis points due to the positive operating leverage effect of the increase in base revenues of 90 basis points and the changes in variable margins and overhead costs of 80 basis points, primarily due to favorable selling price versus material cost comparisons of 50 basis points. Acquisitions diluted total operating margins by 140 basis points versus the prior year. Higher restructuring expenses decreased total operating margins by 30 basis points due to increased cost reduction activities in 2012.

FOOD EQUIPMENT
Businesses in this segment produce commercial food equipment and provide related service.
In the Food Equipment segment, products and services include:
warewashing equipment;
cooking equipment, including ovens, ranges and broilers;
refrigeration equipment, including refrigerators, freezers and prep tables;
food processing equipment, including slicers, mixers and scales;
kitchen exhaust, ventilation and pollution control systems; and
food equipment service, maintenance and repair.
In 2013, this segment primarily served the service (34%), food institutional/restaurant (31%), and food retail (22%) markets.
The results of operations for the Food Equipment segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
2,047

 
$
1,939

 
$
1,985

Operating income
 
385

 
332

 
311

Margin %
 
18.8
%
 
17.1
%
 
15.7
%
In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
1.9
%
 
5.0
 %
 
0.5
 %
 
0.5
 %
 
1.4
 %
 
0.1
%
Changes in variable margins and overhead costs
 

 
10.3

 
1.7

 

 
7.1

 
1.1

 
 
1.9

 
15.3

 
2.2

 
0.5

 
8.5

 
1.2

Acquisitions
 
3.2

 
0.3

 
(0.5
)
 

 

 

Divestitures
 

 

 

 

 

 

Restructuring costs
 

 
(0.5
)
 
(0.1
)
 

 
1.2

 
0.2

Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 
0.4

 
0.6

 
0.1

 
(2.9
)
 
(3.4
)
 

  Total
 
5.5
%
 
15.7
 %
 
1.7
 %
 
(2.4
)%
 
6.3
 %
 
1.4
%

22



Operating Revenues
Revenues increased 5.5% in 2013 versus 2012 primarily due to revenues from acquisitions and an increase in base revenues. North American base revenues increased 3.8% in 2013 versus 2012 as North American service revenues increased 5.5% due to expanded service capabilities and improved market penetration, and equipment revenues increased 2.6% due to stronger growth in the second half of 2013. International base revenues declined 0.2% in 2013 versus 2012. International service revenues increased 3.9% primarily due to expanded service capabilities in Europe. International equipment revenues declined 2.0% over the prior year primarily due to lower European sales in the cooking businesses in France and Italy. Improved European equipment sales in the second half of 2013 partially offset the revenue decline in the first half of 2013. The increase in revenues from acquisitions was due to the purchase of a Brazilian manufacturer of cooking equipment in the fourth quarter of 2012 and a Chinese food equipment business in the third quarter of 2013.
Revenues decreased 2.4% in 2012 versus 2011 due to the unfavorable effect of currency translation, which was partially offset by the growth in base business. North American base revenues increased 3.0% in 2012 versus 2011 as equipment revenues increased 2.7% and service revenues grew 3.6%. The increase in equipment revenues was driven by growth in certain institutional, restaurant, and retail markets but declined in the fourth quarter of 2012, largely due to slower demand from institutional customers in budget constrained sectors. The increase in service revenues was partly due to expanded service capabilities and improved market penetration. International base revenues decreased 2.0% in 2012 versus 2011 as equipment revenues decreased 4.2%, primarily due to lower European sales in the cooking businesses, partially offset by product penetration gains in China and Brazil. International service revenues increased 3.4% driven by expanded service capabilities in Europe.
Operating Income
Operating income increased 15.7% in 2013 versus 2012 primarily due to lower operating expenses and higher base revenues. Total base operating margins increased 220 basis points in 2013 versus 2012 due to the positive operating leverage effect of the increase in base revenues and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 170 basis points primarily due to higher variable margins of 120 basis points, driven by favorable selling price versus material cost comparisons of 60 basis points and operating efficiencies primarily in the North American service business, and lower overhead expenses of 50 basis points resulting primarily from the benefits of business structure simplification activities.
Operating income increased 6.3% in 2012 versus 2011 primarily due to improved variable margins and productivity improvements, higher base revenues, and a decrease in restructuring expenses, partially offset by the unfavorable effect of currency translation. Base operating margins increased 120 basis points primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 110 basis points in 2012 versus 2011 primarily due to the positive impact of selling price versus material cost comparisons of 60 basis points and a 50 basis point improvement from lower operating expenses due to productivity improvements in North America and Europe.
POLYMERS & FLUIDS
Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, janitorial and hygiene products, and fluids and polymers for auto aftermarket maintenance and appearance.
In the Polymers & Fluids segment, products 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; and
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.
In 2013, this segment primarily served the automotive aftermarket (41%), general industrial (18%), maintenance, repair and operations, or "MRO" (12%), and construction (10%) markets.
The results of operations for the Polymers & Fluids segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
1,993

 
$
2,063

 
$
2,059

Operating income
 
335

 
327

 
328

Margin %
 
16.8
%
 
15.8
%
 
16.0
%

23



In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point
Increase
(Decrease)
 
% Increase (Decrease)
 
% Point
Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
(2.9
)%
 
(8.1
)%
 
(0.8
)%
 
(3.6
)%
 
(9.9
)%
 
(1.0
)%
Changes in variable margins and overhead costs
 

 
11.9

 
1.9

 

 
11.0

 
1.8

 
 
(2.9
)
 
3.8

 
1.1

 
(3.6
)
 
1.1

 
0.8

Acquisitions
 
0.5

 

 

 
7.0

 
3.3

 
(0.6
)
Divestitures
 

 

 

 

 

 

Restructuring costs
 

 
(0.5
)
 
(0.1
)
 

 
(2.2
)
 
(0.4
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 
(1.0
)
 
(0.8
)
 

 
(3.2
)
 
(3.2
)
 

  Total
 
(3.4
)%
 
2.5
%
 
1.0
%
 
0.2
 %
 
(1.0
)%
 
(0.2
)%
Operating Revenues
Revenues decreased 3.4% in 2013 versus 2012 primarily due to lower base revenues and the unfavorable effect of currency translation. Base revenues for the polymers and hygiene businesses decreased 5.3%, worldwide fluids decreased 2.3% and the automotive aftermarket businesses declined 1.6% in 2013 versus 2012. Revenue declines were primarily due to product line simplification (PLS) activities, exiting low margin business and the loss of certain product sales. Acquisition revenue was primarily due to the purchase of a manufacturer of advanced technology silicone materials in the second quarter of 2012.
Revenues increased 0.2% in 2012 versus 2011 primarily due to revenues from acquisitions, partially offset by a decrease in base revenues and the unfavorable effect of currency translation. Worldwide base revenues for the polymers and hygiene businesses decreased 4.0% in 2012 versus 2011 primarily driven by a decrease in European sales, especially in Spain, and from exiting low margin business. Worldwide base revenues for the fluids business decreased 1.2% in 2012 versus 2011 primarily due to decreased sales in Europe, partially offset by modest growth in North America and Brazil. Worldwide base revenues for the automotive aftermarket businesses declined 4.0% in 2012 versus 2011 primarily due to the loss of a major product line with a key customer and decreased demand for car care products in Europe, partially offset by higher demand in the U.S. The increase in acquisition revenue was primarily due to the purchase of a North American automotive aftermarket business in the first quarter of 2011, a manufacturer of advanced technology silicone materials in the second quarter of 2012, a European specialty chemical business in the first quarter of 2012, and a European automotive aftermarket business in the third quarter of 2011.
Operating Income
Operating income increased 2.5% in 2013 versus 2012 primarily due to lower operating expenses, partially offset by lower base revenues, the unfavorable effect of currency translation and higher restructuring expenses. Total base operating margins increased 110 basis points in 2013 versus 2012 primarily due to changes in variable margins and overhead costs, partially offset by the negative operating leverage effect of the decrease in base revenues. The changes in variable margins and overhead costs increased base operating margins by 190 basis points primarily due to lower overhead expenses of 130 basis points, primarily driven by the benefits of business structure simplification activities and overhead cost management, and favorable selling price versus material cost comparisons of 50 basis points.
Operating income decreased 1.0% in 2012 versus 2011 primarily due to the decrease in base revenues, the unfavorable effect of currency translation, and higher restructuring expenses, partially offset by changes in variable margins and overhead costs and income from acquisitions. Total base operating margins increased 80 basis points versus the prior year primarily due to changes in variable margins and overhead costs of 180 basis points, partially offset by the impact of the decrease in base revenues noted above. The positive impact from changes in variable margins and overhead costs was primarily due to the favorable impact of selling price versus material cost comparisons of 80 basis points and lower overhead costs of 90 basis points, primarily due to the benefits of restructuring projects. Acquisitions diluted total operating margins by 60 basis points primarily due to the impact of intangible asset amortization expense.

24




WELDING
Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications.
In the Welding segment, products include:
arc welding equipment;
metal arc welding consumables and related accessories; and
metal jacketing and other insulation products.
In 2013, this segment primarily served the general industrial (55%) market, which included energy, fabrication, industrial capital goods and other general industrial markets, maintenance, repair and operations, or "MRO" (12%), and construction (11%) markets.
The results of operations for the Welding segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
1,837

 
$
1,847

 
$
1,724

Operating income
 
464

 
470

 
440

Margin %
 
25.3
%
 
25.4
%
 
25.5
%
In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
(2.3
)%
 
(3.7
)%
 
(0.4
)%
 
6.8
 %
 
10.6
 %
 
0.9
 %
Changes in variable margins and overhead costs

 
3.2

 
0.9

 

 
(1.9
)
 
(0.4
)
 
(2.3
)
 
(0.5
)
 
0.5

 
6.8

 
8.7

 
0.5

Acquisitions
1.9

 
(0.4
)
 
(0.5
)
 
1.2

 
(0.6
)
 
(0.4
)
Divestitures

 

 

 

 

 

Restructuring costs

 
(0.3
)
 
(0.1
)
 

 
(1.1
)
 
(0.2
)
Impairment of goodwill and intangibles

 

 

 

 

 

Translation

 
(0.1
)
 

 
(0.9
)
 
(0.5
)
 

  Total
(0.4
)%
 
(1.3
)%
 
(0.1
)%
 
7.1
 %
 
6.5
 %
 
(0.1
)%
Operating Revenues
Revenues decreased 0.4% in 2013 versus 2012 primarily due to a decline in base business, partially offset by revenues from acquisitions. Worldwide welding base revenues declined 2.3% in 2013 versus 2012. North American welding base business revenues were lower by 2.2% due to heavy equipment OEM and general industrial end market declines. International base business revenues decreased 2.6% in 2013 versus 2012 primarily due to the ongoing strategic exit from the Chinese ship building end market. The increase from acquisition revenues was primarily due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

25



Revenues increased 7.1% in 2012 versus 2011 due to growth in base business and revenues from acquisitions, partially offset by the unfavorable effect of currency translation. Worldwide welding base revenues increased 6.8% in 2012 versus 2011, but softened in the fourth quarter, as worldwide revenues declined 1.3% in the fourth quarter largely due to a 5.4% decline in the international welding base business. North American welding base revenues increased 7.6% in 2012 versus 2011 due to growth in oil and gas end markets for the full year and increased sales to heavy equipment OEM's in the first half of 2012, with slowed growth in heavy equipment OEM demand in the second half of the year. Base revenues for the international welding businesses increased 4.7% in 2012 versus 2011 primarily due to growth in international oil and gas markets, partially offset by a weak Chinese ship building end market. Acquisition revenue was primarily due to the purchase of a thermal insulation manufacturer and service provider in the third quarter of 2011.
Operating Income
Operating income decreased 1.3% in 2013 versus 2012 primarily due to lower base revenues, lower income from acquisitions, and higher restructuring expenses, partially offset by lower operating expenses. Total base operating margins increased 50 basis points primarily due to lower operating expenses, partially offset by the negative operating leverage effect of base revenue declines. Changes in variable margins and overhead costs increased base margins by 90 basis points driven by favorable selling price versus material cost comparisons of 70 basis points and lower overhead costs including the benefits of business structure simplification activities. Acquisitions diluted total operating margins by 50 basis points in 2013 versus 2012 primarily due to lower operating margins and the impact of intangible asset amortization expense.
Operating income increased 6.5% in 2012 versus 2011 primarily due to the favorable operating leverage effect of the growth in base revenues, partially offset by changes in variable margins and overhead costs and higher restructuring expenses due to increased cost reduction activities. Base margins increased 50 basis points in 2012 versus 2011 primarily due to the favorable operating leverage effect of the growth in base business of 90 basis points, partially offset by changes in variable margins and overhead costs. The changes in variable margins and overhead costs decreased base margins by 40 basis points primarily due to higher overhead expenses of 130 basis points, including investments in emerging markets related to the oil and gas businesses, partially offset by the favorable impact of selling price versus material cost comparisons of 90 basis points. Acquisitions diluted total operating margins by 40 basis points in 2012 versus 2011 primarily due to lower operating margins and the impact of intangible asset amortization expense.

CONSTRUCTION PRODUCTS
Businesses in this segment produce construction fastening systems and truss products.
In the Construction Products segment, products 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.
In 2013, this segment primarily served the residential construction (46%), commercial construction (30%), and renovation construction (22%) markets.
The results of operations for the Construction Products segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
1,717

 
$
1,724

 
$
1,752

Operating income
 
238

 
201

 
218

Margin %
 
13.9
%
 
11.6
%
 
12.5
%


26



In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
0.5
 %
 
2.0
 %
 
0.2
 %
 
0.5
 %
 
1.7
 %
 
0.2
 %
Changes in variable margins and overhead costs
 

 
22.5

 
2.6

 

 
(1.7
)
 
(0.2
)
 
 
0.5

 
24.5

 
2.8

 
0.5

 

 

Acquisitions
 
0.4

 
0.1

 

 
2.0

 
1.7

 

Divestitures
 
(0.3
)
 
(0.1
)
 

 
(1.8
)
 
0.5

 
0.3

Restructuring costs
 

 
(2.6
)
 
(0.3
)
 

 
(9.4
)
 
(1.2
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 
(1.1
)
 
(2.5
)
 
(0.2
)
 
(2.2
)
 
(1.6
)
 

  Total
 
(0.5
)%
 
19.4
 %
 
2.3
 %
 
(1.5
)%
 
(8.8
)%
 
(0.9
)%
Operating Revenues
Revenues decreased 0.5% in 2013 versus 2012 primarily due to the negative impact of currency translation, partially offset by an increase in base revenues. North American base revenues increased 4.6% in 2013 versus 2012 as U.S. residential base revenue growth was 8.2% primarily due to increased consumable sales associated with year-over-year growth in housing starts. U.S. renovation base revenue growth was 7.3% primarily due to strong tool sales and increased sales to big box retailers. U.S. commercial base revenues declined 1.4% primarily due to weak overall demand. International base revenues declined 1.6% in 2013 versus 2012, as European base revenues declined 5.3% due to lower sales of consumable products driven by a slowdown in construction activity in European end markets. Base revenues in Asia Pacific increased 2.4% in 2013 versus 2012 primarily due to growth in commercial and residential construction activity in Australia and New Zealand.
Revenues decreased 1.5% in 2012 versus 2011 primarily due to the unfavorable effect of currency translation, partially offset by an increase in base revenues. In North America, base revenue growth for residential, renovation and commercial construction was 8.3%, 7.1% and 5.4%, respectively. The North American base revenue increase was driven by improved U.S. housing starts as well as a modest increase in commercial construction square footage activity. International base revenues declined 2.3% as European base revenues declined 4.0% due to lower sales of consumable products driven by a slowdown in construction activity in all European end markets. Base revenues in Asia Pacific declined 0.2% in 2012 versus 2011 primarily due to lower renovation and commercial construction activity in Australia and New Zealand.
Operating Income
Operating income increased 19.4% in 2013 versus 2012 primarily due to lower operating expenses and higher base revenues, partially offset by higher restructuring expenses and the unfavorable effect of currency translation. Total base margins increased 280 basis points in 2013 versus 2012 due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in base revenues. The changes in variable margins and overhead costs increased total base margins by 260 basis points in 2013 versus 2012 due to lower overhead costs of 210 basis points, primarily driven by the benefits of business structure simplification activities and overhead cost management, and higher variable margins of 50 basis points. Restructuring expenses reduced total operating margins by 30 basis points due to increased cost reduction activities in Europe.
Operating income decreased 8.8% in 2012 versus 2011 primarily due to higher restructuring expenses, higher operating expenses, and the unfavorable effect of currency translation, partially offset by income from acquisitions and higher base revenues. Base margins were flat versus the prior year, as the favorable operating leverage effect of the increase in base revenues was offset by higher operating expenses in Europe. Restructuring expenses reduced total operating margins by 120 basis points due to increased cost reduction activities worldwide.


27



SPECIALTY PRODUCTS
Diversified businesses in this segment produce beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.
In the Specialty Products segment, products 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 fasteners and components for appliances;
airport ground support equipment; and
components for medical devices.
In 2013, this segment primarily served the food and beverage (26%), general industrial (20%) market, which included industrial capital goods and other general industrial markets, consumer durables (14%), and printing and publishing (10%) markets.
The results of operations for the Specialty Products segment for 2013, 2012 and 2011 were as follows:
Dollars in millions
 
2013
 
2012
 
2011
Operating revenues
 
$
2,007

 
$
1,871

 
$
1,856

Operating income
 
408

 
365

 
383

Margin %
 
20.3
%
 
19.5
%
 
20.6
%

In 2013 and 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2013 Compared to 2012
 
2012 Compared to 2011
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Base business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
1.3
%
 
2.9
 %
 
0.3
 %
 
0.3
 %
 
0.6
 %
 
0.1
 %
Changes in variable margins and overhead costs
 

 
6.5

 
1.3

 

 
0.1

 

 
 
1.3

 
9.4

 
1.6

 
0.3

 
0.7

 
0.1

Acquisitions
 
5.7

 
2.6

 
(0.6
)
 
2.7

 
(0.7
)
 
(0.7
)
Divestitures
 

 

 

 

 

 

Restructuring costs
 

 
(1.1
)
 
(0.2
)
 

 
(2.5
)
 
(0.5
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 
0.3

 
0.8

 

 
(2.1
)
 
(2.2
)
 

  Total
 
7.3
%
 
11.7
 %
 
0.8
 %
 
0.9
 %
 
(4.7
)%
 
(1.1
)%
Operating Revenues
Revenues increased 7.3% in 2013 versus 2012 primarily due to an increase in acquisition and base business revenues, and the favorable effect of currency translation. Worldwide consumer packaging base revenues increased 2.5% in 2013 versus 2012 primarily due to growth in multi-pack beverage systems. Worldwide appliance base business revenues declined 3.0% in 2013 versus 2012 primarily due to lower consumer demand in the European home appliance sector. Worldwide base revenues of the ground support equipment business increased 1.1% in 2013 versus 2012. Acquisition revenue was primarily due to the third quarter 2013 purchase of a European consumer packaging equipment business and the fourth quarter 2012 purchase of a North American medical products manufacturer.
Revenues increased 0.9% in 2012 versus 2011 primarily due to revenues from acquisitions and an increase in base business, partially offset by the unfavorable effect of currency translation. Worldwide consumer packaging base revenues increased 0.4% as higher sales in both the global packaging solutions business and the plastics and security business were partially offset by lower sales related to the reclosable packaging business and the worldwide foils and transfer ribbon business. Worldwide appliance base revenue growth was 5.8% primarily due to market penetration and improved customer demand in

28



North America in 2012 versus 2011. Worldwide base revenues of the ground support equipment business decreased 5.2% in 2012 versus 2011. Acquisition revenue was primarily due to the first quarter 2012 purchase of a manufacturer of thermal transfer ribbons for bar coding and labeling applications.
Operating Income
Operating income increased 11.7% in 2013 versus 2012 primarily due to lower operating expenses, an increase in base revenues, and income from acquisitions. Total base operating margins increased 160 basis points in 2013 versus 2012 primarily due to the changes in variable margins and overhead costs and the positive operating leverage effect of the increase in base revenues of 30 basis points. The changes in variable margins and overhead costs increased base margins by 130 basis points in 2013 versus 2012 driven by lower overhead expenses of 120 basis points, primarily resulting from the benefits of business structure simplification activities, and improvements in variable margins of 10 basis points. Acquisitions diluted total operating margins by 60 basis points in 2013 versus 2012 primarily due to amortization expense related to intangible assets.
Operating income decreased 4.7% in 2012 versus 2011 primarily due to higher restructuring expenses, the unfavorable effect of currency translation, and lower income from acquisitions, partially offset by the growth in base revenues. Total base margins increased 10 basis points due to the favorable operating leverage effect of the increase in base revenues. Acquisitions diluted total operating margins by 70 basis points primarily due to amortization expense related to intangible assets. Higher restructuring expenses decreased total operating margins by 50 basis points due to increased cost reduction activities in 2012.

DECORATIVE SURFACES
The Decorative Surfaces business produces decorative high-pressure laminate surfacing materials for furniture, office and retail space, countertops, worktops and other applications. Principal end markets served include commercial, renovation and residential construction.
On August 15, 2012, the Company entered into a definitive agreement (the "Investment Agreement") to divest a 51% majority interest in its Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). Under the terms of the Investment Agreement, the Company contributed the assets and stock of the Decorative Surfaces segment to a newly formed entity, Wilsonart International Holdings LLC ("Wilsonart"). The transaction closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49% immediately following the close of the transaction. The Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest in Wilsonart using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest in Wilsonart, the historical operating results of Decorative Surfaces are presented in continuing operations. Additionally, effective November 1, 2012, the operating results of Decorative Surfaces were no longer reviewed by senior management of the Company and therefore, effective the fourth quarter of 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.
Historical operating results of Decorative Surfaces for 2012 and 2011 were as follows:
Dollars in millions
 
For the Ten Months Ended October 31, 2012
 
For the Twelve Months Ended December 31, 2011
Operating revenues
 
$
921

 
$
1,084

Operating income
 
143

 
154


Revenues declined 15.0% and operating income decreased 7.1% in 2012 versus 2011 due to there being only ten months of operating results in 2012 versus twelve months of operating results in 2011 as the Company divested a 51% interest in the Decorative Surfaces segment on October 31, 2012.

AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased to $250 million in 2013 from $252 million in 2012, due to various intangible assets being fully amortized. Amortization of intangible assets increased to $252 million in 2012 versus $219 million in 2011, due to intangible asset amortization for acquired businesses, most notably a manufacturer of specialty devices used to measure the flow of gases and fluids in the Test & Measurement and Electronics segment acquired in the beginning of 2012.


29



IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2013, 2012 and 2011. In 2013, these assessments resulted in no goodwill impairment charges and an intangible asset impairment charge of $2 million related to a manufacturer of specialty devices used to measure the flow of gases and fluids in the Test & Measurement and Electronics segment. In 2012, these assessments resulted in a goodwill impairment charge of $1 million related to the pressure sensitive adhesives reporting unit in the Test & Measurement and Electronics segment and an intangible asset impairment charge of $1 million related to a retail food weighing business in the Food Equipment segment. There were no impairment charges in 2011. See the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for further details of the impairment charges.

INTEREST EXPENSE
Interest expense increased to $239 million in 2013, which includes the full year impact of interest expense on the 3.9% notes issued in late August 2012, versus $213 million in 2012. Interest expense increased in 2012, which includes the full year impact of interest expense on the 3.375% notes and 4.875% notes issued in late August 2011 and the interest expense related to the 3.9% notes issued in late August 2012, versus $191 million in 2011. The increase was partially offset by lower interest expense on the 6.55% preferred debt securities, which were fully paid on the first business day in 2012. The weighted-average interest rate on the Company's commercial paper was 0.2% in 2013, 0.2% in 2012 and 0.1% in 2011.

GAIN ON SALE OF INTEREST IN DECORATIVE SURFACES
In the fourth quarter of 2012, the Company recorded a pre-tax gain of $933 million ($632 million after-tax) related to the sale of a 51% majority interest in the former Decorative Surfaces segment. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

OTHER INCOME (EXPENSE)
Other income (expense) was income of $72 million in 2013 versus $11 million in 2012. This increase was primarily due to a pre-tax gain of $30 million recorded in the first quarter of 2013 related to the acquisition of the controlling interest in an existing equity investment, higher interest income ($50 million in 2013 versus $38 million in 2012) and lower equity investment losses related to Wilsonart ($14 million in 2013 versus $30 million in 2012). See the Other Income (Expense) note and the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion.
Other income (expense) was income of $11 million in 2012 versus $53 million in 2011 primarily due to an equity investment loss related to Wilsonart of $30 million in 2012, lower income from investments ($11 million in 2012 versus $17 million in 2011) and losses on foreign currency transactions ($10 million in 2012 versus $3 million in 2011).

INCOME TAXES
The effective tax rate was 30.6% in 2013, 30.3% in 2012, and 20.2% in 2011. The effective tax rate for 2013 was unfavorably impacted by a $40 million discrete tax charge in the third quarter of 2013 related to the tax treatment of intercompany financing transactions that impact the taxability of foreign earnings. The effective tax rate for 2012 was unfavorably impacted by discrete tax charges totaling $36 million in the fourth quarter of 2012, which included $35 million for the settlement of an IRS tax audit for the years 2008-2009. The effective tax rate for 2011 was favorably impacted by the discrete non-cash tax benefit of $166 million in the first quarter of 2011 related to the decision in the Company’s favor by the Federal Court of Australia, Victoria with respect to a significant portion of the income tax deductions that had been challenged by the Australian Tax Office.
See the Income Taxes note in Item 8. Financial Statements and Supplementary Data for further details on these discrete tax adjustments and a reconciliation of the U.S. federal statutory rate to the effective tax rate.

FOREIGN CURRENCY
For the twelve months of 2013 versus 2012, the impact of foreign currencies against the U.S. Dollar decreased operating revenues by approximately $9 million in 2013 and did not have a significant impact on income from continuing operations. The strengthening of the U.S. Dollar against foreign currencies in 2012 versus 2011 decreased operating revenues by approximately $357 million in 2012 and decreased income from continuing operations by approximately $36 million ($0.08 per diluted share).

30




INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations was $49 million in 2013, $637 million in 2012 and $296 million in 2011. Income from discontinued operations in 2013 included after-tax losses on disposals of $72 million and goodwill impairment of $42 million related to various divested businesses. Income from discontinued operations in 2012 included an after-tax gain of $372 million related to the sale of the finishing group of businesses. See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are free operating cash flows and short-term credit facilities. In addition, the Company had $3.6 billion of cash on hand at December 31, 2013 and also maintains strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:
investment in existing businesses to fund internal growth;
payment of an attractive dividend to shareholders;
share repurchases; and
acquisitions.
In September 2013, the Company's Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale in the third quarter of 2013 and is no longer presenting this segment as part of its continuing operations. As to the impact of this divestiture on the Company’s income per share from continuing operations and capital structure going forward, the Company also indicated that it intended to utilize its existing share repurchase authorization to offset the full amount of divestiture-related dilution of income per share from continuing operations through a combination of sale proceeds, free operating cash flow and additional leverage. As a result, the Company repurchased approximately 14 million shares of its common stock in the fourth quarter of 2013 and expects to repurchase approximately 35 million additional shares through a program that is expected to conclude no later than the end of 2014.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging segment to The Carlyle Group for $3.2 billion. The transaction is subject to regulatory approval and customary closing conditions, and is expected to close by mid-2014.
The Company believes that, based on its revenues, operating margins, current free operating cash flow, and credit ratings, it could readily obtain additional financing if necessary.

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

31



Summarized cash flow information for the years ended December 31, 2013, 2012 and 2011 was as follows: 
In millions
 
2013
 
2012
 
2011
Net cash provided by operating activities
 
$
2,528

 
$
2,072

 
$
1,956

Additions to plant and equipment
 
(368
)
 
(382
)
 
(353
)
Free operating cash flow
 
$
2,160

 
$
1,690

 
$
1,603

 
 
 
 
 
 
 
Cash dividends paid
 
$
(528
)
 
$
(865
)
 
$
(680
)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
 
(369
)
 
(723
)
 
(1,308
)
Repurchases of common stock
 
(2,106
)
 
(2,020
)
 
(950
)
Proceeds from investments
 
40

 
281

 
37

Net proceeds from sale of discontinued operations
 
206

 
815

 

Proceeds from sale of operations and affiliates
 
2

 
1,028

 
22

Net proceeds (repayments) of debt
 
1,264

 
1,015

 
1,148

Other
 
263

 
327

 
184

Effect of exchange rate changes on cash and equivalents
 
(93
)
 
53

 
(64
)
Net increase (decrease) in cash and equivalents
 
$
839

 
$
1,601

 
$
(8
)
Cash dividends paid during 2013 do not include the dividend payment of $174 million originally scheduled to be paid in January 2013, which was accelerated and paid in December 2012.
On August 20, 2007, the Company's Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $3.0 billion of the Company's common stock over an open-ended period of time (the “2007 Program”). Under the 2007 Program, the Company repurchased approximately 16.3 million shares of its common stock at an average price of $53.51 per share during 2011. As of December 31, 2011, there were no authorized repurchases remaining under the 2007 Program.
On May 6, 2011, the Company's Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $4.0 billion of the Company’s common stock over an open-ended period of time (the “2011 Program”). Under the 2011 Program, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $43.20 per share during 2011, approximately 35.5 million shares of its common stock at an average price of $56.93 per share during 2012 and approximately 26.4 million shares of its common stock at an average price of $71.89 per share during 2013. As of December 31, 2013, there were no authorized repurchases remaining under the 2011 Program.
On August 2, 2013, the Company's Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the “2013 Program”). Under the 2013 Program, the Company repurchased approximately 3.3 million shares of its common stock at an average price of $81.62 per share during December 2013. As of December 31, 2013, there was approximately $5.7 billion of authorized repurchases remaining under the 2013 Program.

Adjusted Return on Average Invested Capital
The Company uses adjusted return on average invested capital (“adjusted ROIC”) to measure the effectiveness of its operations’ use of invested capital to generate profits. Adjusted ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. To improve comparability of adjusted ROIC in the periods presented, after-tax operating income excludes the operating income of the former Decorative Surfaces segment. Adjusted average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations, as well as the Company's net investment in the former Decorative Surfaces and Industrial Packaging segments, and the equity investment in the Wilsonart business. Average invested capital is calculated using balances at the start of the period and at the end of each quarter.

32



Adjusted ROIC for the years ended December 31, 2013, 2012, and 2011 was as follows: 
Dollars in millions
 
2013
 
2012
 
2011
Operating income
 
$
2,514

 
$
2,475

 
$
2,361

Adjustment for Decorative Surfaces
 

 
(143
)
 
(154
)
Adjusted operating income
 
2,514

 
2,332

 
2,207

Adjusted tax rate (28.8% for 2013, 29.2% for 2012, and 27.6% for 2011)
 
(724
)