10-K 1 itw-20141231x10k.htm 10-K ITW-2014.12.31-10K


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, 2014
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.)
 
 
155 Harlem Avenue, Glenview, Illinois
 
60025
(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
1.75% Euro Notes due 2022
 
New York Stock Exchange
3.00% Euro Notes due 2034
 
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 30, 2014 was approximately $28.2 billion based on the New York Stock Exchange closing sales price as of June 30, 2014.
Shares of Common Stock outstanding at January 31, 2015: 379,447,026
Documents Incorporated by Reference
Portions of the 2015 Proxy Statement for Annual Meeting of Stockholders to be held on May 8, 2015.
 
Part III




 
Table of Contents
 
 
 
 
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
Signatures
Exhibit Index





PART I

ITEM 1. Business

General

Illinois Tool Works Inc. (the "Company" or "ITW") was founded in 1912 and incorporated in 1915. The Company's ticker symbol is ITW. The Company is a global manufacturer of a diversified range of industrial products and equipment with approximately 90 divisions in 57 countries. As of December 31, 2014, the Company employed approximately 49,000 persons.

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


3



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 segments of the Company unless otherwise noted.

Enterprise Strategy

In 2012, the Company embarked on an Enterprise Strategy with the objective of fully leveraging ITW’s core capabilities to deliver strong financial performance. ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.

The foundation of this strategy is a set of business practices referred to as the ITW Business Model consisting of three core elements:

80/20 Business Process - The concept of the 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 all 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 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.


4



Customer-Back Innovation - ITW’s customer-back approach to innovation builds on the Company’s 80/20 business process to help ITW businesses focus on the most profitable customers and invent solutions to solve their specific problems. ITW businesses are focused on building relationships with these major customers to develop deep knowledge and insight around their needs. These customer insights and learnings drive innovation at ITW. The Company actively protects its innovation through a patent portfolio of approximately 10,000 active patents.

Decentralized Entrepreneurial Culture - ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their customers. This leads to a focused and simple organizational structure that can deliver operational excellence adapted to their customers and end markets.

Key Initiatives

ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise 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 in 2012, 2013 and 2014. With the sale of the Company's former Industrial Packaging segment on May 1, 2014, the divestiture element of the Company's portfolio management initiative is essentially complete. The Company has historically acquired businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. Going forward, the Company will emphasize organic growth, while acquisitions will be targeted to bolt-on acquisitions that support and accelerate organic growth in existing segments, and new platforms that expand the Company’s long-term growth and earnings potential. Refer to the Discontinued Operations note in Item 8 - Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

Another key aspect of the portfolio management initiative is the focus on product line and customer base simplification. Product line and customer base simplification focuses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. Product line and customer base simplification is a core element of the Company's 80/20 business process. In the short-term, product line and customer base simplification may result in a decrease in revenue and overhead costs while improving operating margin. Over the long-term, product line and customer base simplification results in growth in revenue, profitability and returns, and is key to improving the Company's long-term operating and financial performance.

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.

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.

5




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.

Divestiture of 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 no longer presented 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 business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations.

See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

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.

The principal end markets served by the Company’s seven 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
Automotive OEM/Tiers
91
%
 
8
%
 
%
 
4
%
 
3
%
 
%
 
%
 
19
%
Automotive Aftermarket
2

 
1

 

 
42

 
2

 

 

 
6

General Industrial
1

 
18

 
1

 
14

 
35

 
1

 
13

 
12

Food Institutional/Restaurant

 

 
40

 

 

 

 

 
6

Food Service

 
3

 
33

 
1

 

 

 
1

 
6

Food & Beverage

 
1

 
2

 
2

 

 

 
25

 
4

Food Retail

 
1

 
14

 

 
4

 

 
4

 
3

Commercial Construction

 
1

 

 
7

 
8

 
27

 
2

 
6

Residential Construction

 

 

 
1

 
1

 
37

 
1

 
5

Renovation Construction

 

 

 
1

 
1

 
33

 

 
4

Consumer Durables
3

 
7

 
4

 
1

 
4

 

 
14

 
5

Electronics

 
23

 

 
2

 

 

 
2

 
4

Maintenance, Repair & Operations

 
1

 
1

 
12

 
10

 

 
1

 
4

Energy

 
5

 

 
3

 
14

 

 

 
3

Industrial Capital Goods
1

 
8

 

 

 
5

 

 
6

 
3

Other
2

 
23

 
5

 
10

 
13

 
2

 
31

 
10

 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%

Other includes several end markets, none of which are greater than 2% of the Company's consolidated revenues.

6




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 segment as of December 31, 2014 and 2013 was as follows:

In millions
2014
 
2013
Automotive OEM
$
414

 
$
386

Test & Measurement and Electronics
301

 
322

Food Equipment
237

 
218

Polymers & Fluids
60

 
66

Welding
84

 
92

Construction Products
28

 
31

Specialty Products
263

 
290

Total
$
1,387

 
$
1,405


Backlog orders scheduled for shipment beyond calendar year 2015 were not material as of December 31, 2014.

Competition

With operations in 57 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 business model and decentralized operating 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 $227 million in 2014, $240 million in 2013 and $240 million in 2012.


7



Intellectual Property

The Company owns approximately 3,400 unexpired U.S. patents and 6,600 foreign patents covering articles, methods and machines. In addition, the Company has approximately 1,600 applications for patents pending in the U.S. Patent Office and 4,100 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 49,000 persons as of December 31, 2014 and considers its employee relations to be excellent.

International

The Company's international operations include subsidiaries and joint ventures in 56 foreign countries on six continents. These operations serve such end markets as automotive OEM/tiers, automotive aftermarket, general industrial, commercial food equipment, construction, and others on a worldwide basis. The Company's revenues from sales to customers outside the U.S. were approximately 57% of revenues in 2014, 2013 and 2012.

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 potential 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 fluctuations in currency exchange rates. Additional risks of the Company's international operations are described under Item 1A. Risk Factors.


8



Executive Officers

Executive Officers of the Company as of February 13, 2015 were as follows:

Name
Office
Age
E. Scott Santi
President & Chief Executive Officer
53

Maria C. Green
Senior Vice President, General Counsel & Secretary
62

John R. Hartnett
Executive Vice President
54

Michael M. Larsen
Senior Vice President & Chief Financial Officer
46

Mary K. Lawler
Senior Vice President & Chief Human Resources Officer
49

Roland M. Martel
Executive Vice President
60

Steven L. Martindale
Executive Vice President
58

Sundaram Nagarajan
Executive Vice President
52

Christopher O’Herlihy
Executive Vice President
51

David C. Parry
Vice Chairman
61

Randall J. Scheuneman
Vice President & Chief Accounting Officer
47

Juan Valls
Executive Vice President
53

Michael R. Zimmerman
Executive Vice President
54


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.

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.

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 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. Larsen joined the Company and was elected Senior Vice President and Chief Financial Officer 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.

Ms. Lawler joined the Company and was elected Senior Vice President and Chief Human Resources Officer in October 2014. From June 2013 to October 2014, she served as Executive Vice President, Human Resources, at GATX Corporation, a rail car leasing company. Prior to that, she served as Senior Vice President, Human Resources, at GATX Corporation, from May 2008 to May 2013.
Mr. Martel has served in his present position since 2006.

Mr. Martindale has served in his present position since 2008.


9



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 Group President within the food equipment businesses.

Mr. Parry has served in his present position since 2010. Prior to that, he served as Executive Vice President from 2006 to 2010.

Mr. Scheuneman has served in his present position since 2009.

Mr. Valls has served in his present position since 2007.

Mr. Zimmerman was elected Executive Vice President in January 2015. He joined Permatex in 1999, which was acquired by ITW in 2005, and has held various management positions of increasing responsibility. Most recently, he served as Group President within the welding businesses.

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., 155 Harlem Avenue, Glenview, IL 60025, 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;
Conflict Minerals Policy 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. Downturns in the markets served by the Company could adversely affect its businesses, results of operations or financial condition.

The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial 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

10



collecting accounts receivable, increasing price competition, and increasing the risk that counterparties to the Company's contractual arrangements will become insolvent or otherwise unable to fulfill their obligations.

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 57 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.

The timing and amount of benefits from the Company’s 2013 - 2017 enterprise initiatives may not be as expected and the Company's financial results could be adversely impacted.

The Company’s 2013 - 2017 enterprise strategy and associated initiatives include portfolio management, business structure simplification and strategic sourcing. The portfolio management initiative, which included divesting businesses no longer aligned with the Company’s long-term objectives, is essentially complete; however, product line simplification and customer base simplification, which is a core element of the Company’s 80/20 business process, is being reapplied to the Company’s scaled up operating divisions and remains an active element of this initiative. Although these activities are expected to improve future operating margins and organic revenue growth, they may have a negative impact on the Company’s overall organic revenue growth in the short term. The Company has made significant progress on its business structure simplification and strategic sourcing initiatives, but scaling up of smaller businesses into larger businesses and leveraging purchasing power across businesses involves some execution risk. If the Company is unable to achieve the expected benefits from these initiatives or is unable to complete 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.

Share repurchases constitute a significant component of the Company’s capital allocation strategy. The Company funds its share repurchases with free operating cash flow and short-term borrowings. The amount and timing of share repurchases will be based on a variety of factors. Important factors that could cause the Company to limit, suspend or delay its share repurchases include unfavorable trading market conditions, the 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.

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, competition, export and import, environmental or other laws.

The Company has a decentralized operating structure under which its individual businesses are allowed significant decision-making autonomy within the Company’s strategic framework and internal financial and compliance controls. The Company cannot ensure that its internal controls will always protect against reckless or criminal acts committed by its employees, agents or business partners that might violate U.S. and/or non-U.S. laws, including anti-bribery, competition, export and import, and environmental laws. Any such improper actions could subject the Company to civil or criminal investigations,

11



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, and 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.

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 sometimes requires the investment of significant time and resources. Difficulties or delays in research, development, production or commercialization of new products and services may reduce future revenues and adversely affect the Company's competitive position. If the Company is unable to create sustainable product differentiation, its organic growth may be adversely affected.

Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns patents, trade secrets, copyrights, trademarks and/or other intellectual property rights related to many of its products, and also has exclusive and non-exclusive license rights under intellectual property owned by others. The Company's intellectual property rights 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.

Recent divestitures pose the risk of retained liabilities that could adversely affect the Company's financial results.

The Company's divestiture activity increased in 2012, 2013 and 2014 in accordance with its portfolio management initiative. Though the divestiture element of its portfolio management initiative is essentially complete, the Company has retained certain liabilities directly or through indemnifications made to the buyer against known and unknown contingent liabilities such as lawsuits, tax liabilities, product liability claims and environmental matters.

The Company has significant goodwill and other intangible assets, and future impairment of these assets could have a material adverse impact on our financial results.

In the past the Company has recorded significant goodwill and other identifiable intangible assets on its balance sheet as a result of acquisitions. A number of factors may result in impairments to goodwill and other intangible assets, including significant negative industry or economic trends, disruptions to our business, increased competition and significant changes in the use of the assets. Impairment charges could result that adversely affect the Company's financial condition or results of operations in the periods recognized.

Disruptions or volatility in global financial markets or changes in our credit ratings could increase our funding costs or reduce the availability of credit.

Global economic conditions may cause volatility and disruptions in the financial markets. The Company’s continued ability to meet its cash requirements requires substantial liquidity and access to the financial markets. In addition, the Company’s borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. If conditions in the financial markets decline or the Company’s credit ratings are negatively impacted, its funding costs could be increased or the availability of credit could be diminished.


12



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.

Unfavorable tax law changes and tax authority rulings may adversely affect results.

The Company is subject to income taxes in the U.S. 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 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 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 impact of failure of the Company's employees to comply with applicable laws and regulations, the impact of foreign currency fluctuations, 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.


13



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

Due to the Company’s decentralized operating structure, the Company operates out of a number of facilities worldwide, none of which are individually significant to the Company or its segments. 

As of December 31, 2014, the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:
 
 
Number Of Properties
 
Owned
 
Leased
 
Total
Automotive OEM
 
61

 
31

 
92

Test & Measurement and Electronics
 
27

 
71

 
98

Food Equipment
 
22

 
18

 
40

Polymers & Fluids
 
40

 
38

 
78

Welding
 
27

 
25

 
52

Construction Products
 
36

 
32

 
68

Specialty Products
 
52

 
41

 
93

Corporate
 
2

 
11

 
13

Total
 
267

 
267

 
534


The Company’s properties are highly suitable for the purposes for which they were designed 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.

The Company operated 328 plants and office facilities outside of the U.S. Principal countries include Australia, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Mexico, Spain, and the United Kingdom.

ITEM 3. Legal Proceedings

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.


14



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 Company's common stock is listed on the New York Stock Exchange. Quarterly market price and dividend data for 2014 and 2013 were as shown below:

 
Market Price Per Share
 
Dividends
Declared
Per Share
 
High
 
Low
 
2014:
 
 
 
 
 
Fourth quarter
$
97.79

 
$
79.06

 
$
0.485

Third quarter
89.58

 
81.72

 
0.485

Second quarter
89.50

 
80.80

 
0.42

First quarter
84.12

 
76.25

 
0.42

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


There were approximately 7,185 holders of record of common stock as of January 31, 2015. This number does not include beneficial owners of the Company's securities held in the name of nominees.


Repurchases of Common Stock—On August 2, 2013, the Company’s Board of Directors authorized a stock repurchase program which provides for the buyback of up to $6.0 billion of the Company’s common stock over an open-ended period of time (the "2013 Program"). As of December 31, 2014, approximately $1.4 billion of share repurchases remain outstanding under this program.


15



Share repurchase activity under the Company’s share repurchase program for the fourth quarter of 2014 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 Program
 
Maximum Value of Shares That May Yet Be Purchased Under Program
October 2014
3.5

 
$
86.29

 
3.5

 
$
1,953

November 2014
4.4

 
$
93.52

 
4.4

 
$
1,544

December 2014
1.0

 
$
94.80

 
1.0

 
$
1,448

Total
8.9

 
 
 
8.9

 
 

ITEM 6. Selected Financial Data

In millions except per share amounts
2014
 
2013
 
2012
 
2011
 
2010
Operating revenues
$
14,484

 
$
14,135

 
$
14,791

 
$
14,515

 
$
12,625

Income from continuing operations
1,890

 
1,630

 
2,233

 
1,775

 
1,258

Income per share from continuing operations:
 
 
 
 
Basic
4.70

 
3.65

 
4.75

 
3.61

 
2.51

Diluted
4.67

 
3.63

 
4.72

 
3.59

 
2.50

Total assets at year-end
17,678

 
19,966

 
19,309

 
17,984

 
16,412

Long-term debt at year-end
5,981

 
2,793

 
4,589

 
3,488

 
2,542

Cash dividends declared per common share
1.81

 
1.60

 
1.48

 
1.40

 
1.30


Certain reclassifications of prior year data have been made to conform to current year reporting, including discontinued operations as discussed below.

The Company periodically reviews its operations for businesses that may no longer be aligned with its enterprise initiatives and long-term objectives. As a result, 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 $1.1 billion, $49 million, $637 million, $296 million, and $245 million in the years 2014, 2013, 2012, 2011, and 2010, 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.


16



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 approximately 90 divisions in 57 countries. As of December 31, 2014, the Company employed approximately 49,000 persons.

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

Due to the large number of diverse businesses and the Company's decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company's corporate management collects data on several key measurements: operating 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 organic business (businesses that have been included in the Company's results of operations for more than 12 months), 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. The changes to operating income of organic businesses include the estimated effects of both operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the organic revenue volume changes on organic 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 revenues. Changes in variable margins and overhead costs represent the estimated effect of non-volume related changes in the operating income of organic businesses 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.

ENTERPRISE STRATEGY

In 2012, the Company embarked on an Enterprise Strategy with the objective of fully leveraging ITW’s core capabilities to deliver strong financial performance. ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.

The foundation of this strategy is a set of business practices referred to as the ITW Business Model consisting of three core elements:

80/20 Business Process - The concept of the 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 all 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 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.

17




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.

Customer-Back Innovation - ITW’s customer-back approach to innovation builds on the Company’s 80/20 business process to help ITW businesses focus on the most profitable customers and invent solutions to solve their specific problems. ITW businesses are focused on building relationships with these major customers to develop deep knowledge and insight around their needs. These customer insights and learnings drive innovation at ITW. The Company actively protects its innovation through a patent portfolio of approximately 10,000 active patents.

Decentralized Entrepreneurial Culture - ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their customers. This leads to a focused and simple organizational structure that can deliver operational excellence adapted to their customers and end markets.

KEY INITIATIVES

ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise 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 in 2012, 2013 and 2014. With the sale of the Company's former Industrial Packaging segment on May 1, 2014, the divestiture element of the Company's portfolio management initiative is essentially complete. The Company has historically acquired businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. Going forward, the Company will emphasize organic growth, while acquisitions will be targeted to bolt-on acquisitions that support and accelerate organic growth in existing segments, and new platforms that expand the Company’s long-term growth and earnings potential. Refer to the Discontinued Operations note in Item 8 - Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

Another key aspect of the portfolio management initiative is the focus on product line and customer base simplification. Product line and customer base simplification focuses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. Product line and customer base simplification is a core element of the Company's 80/20 business process. In the short-term, product line and customer base simplification may result in a decrease in revenue and overhead costs while improving operating margin. Over the long-term, product line and customer base simplification results in growth in revenue, profitability and returns, and is key to improving the Company's long-term operating and financial performance.

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.



18



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.

DISCONTINUED OPERATIONS

The Company periodically reviews its operations for businesses that may no longer be aligned with its enterprise initiatives and long-term objectives. As a result, 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 no longer presented 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 business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations.

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.

The operating results of the businesses discussed above, as well as certain previously divested businesses, are reported as discontinued operations in the statement of income for all periods presented. As of the second quarter of 2014, the Company has completed the divestiture of all of the businesses previously classified as discontinued operations. 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 2014, 2013 and 2012 are summarized as follows:

Dollars in millions
2014
 
2013
 
2012
Operating revenues
$
14,484

 
$
14,135

 
$
14,791

Operating income
2,888

 
2,514

 
2,475

Margin %
19.9
%
 
17.8
%
 
16.7
%


19



In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
2.6
 %
 
6.3
 %
 
0.6
 %
 
0.2
 %
 
0.6
 %
 
0.1
 %
Changes in variable margins and overhead costs

 
8.2

 
1.4

 

 
6.4

 
1.1

 
2.6

 
14.5

 
2.0

 
0.2

 
7.0

 
1.2

Acquisitions and divestitures
0.6

 
0.2

 
(0.1
)
 
(4.6
)
 
(4.7
)
 
0.1

Restructuring costs

 
0.9

 
0.2

 

 
(1.0
)
 
(0.2
)
Impairment of goodwill and intangibles

 

 

 

 

 

Translation
(0.7
)
 
(0.7
)
 

 

 
0.3

 

  Total
2.5
 %
 
14.9
 %
 
2.1
 %
 
(4.4
)%
 
1.6
 %
 
1.1
 %

Operating Revenues

Operating revenues increased 2.5% in 2014 versus 2013 due to an increase in organic and acquisition revenues, partially offset by the unfavorable effect of currency translation which primarily occurred in the fourth quarter. Total organic revenues increased 2.6% in 2014 versus 2013 primarily due to 8.9% growth in the Automotive OEM segment and 4.7% growth in the Food Equipment segment, partially offset by modest declines in the Polymers & Fluids and Specialty Products segments. Product line and customer base simplification activities associated with the portfolio management component of the Company's enterprise strategy reduced organic revenue growth by approximately one percentage point. International organic revenues increased 3.2% versus the prior year. European organic revenues increased 2.4% primarily driven by the Automotive OEM, Food Equipment and Test & Measurement and Electronics segments, partially offset by Welding, Polymers & Fluids and Construction Products. Asia Pacific organic revenues increased 4.9% primarily due to growth in Automotive OEM in China and Construction Products in Australia. North American organic revenues increased 2.3% primarily due to growth in the Automotive OEM, Welding and Food Equipment segments. Acquisitions primarily included the purchase of a European consumer packaging equipment business and a Chinese food equipment business in the third quarter of 2013.

Operating 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 organic revenues (see "Results of Operations by Segment" table below). 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. Worldwide organic 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 organic 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 organic 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 organic 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.


20



Operating Income

Operating income increased 14.9% in 2014 versus 2013 primarily due to changes in variable margins and overhead costs, an increase in organic revenues and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Operating margins were 19.9% for 2014, an increase of 210 basis points versus the prior year. Total organic business margins increased 200 basis points primarily due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased margins by 140 basis points over the prior year primarily due to the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, which contributed 120 basis points of margin improvement, favorable selling price versus material cost comparisons of 10 basis points, and lower operating expenses. Operating expenses in 2014 included the impact of lower employee benefit expenses, offset by costs related to continued investment in the business. The positive operating leverage effect of the increase in organic revenues contributed 60 basis points of improvement. Lower restructuring expenses increased total operating margins by 20 basis points.

Operating income increased 1.6% in 2013 versus 2012 primarily due to lower overhead expenses and an increase in organic revenues, partially offset by the divestiture of the former Decorative Surfaces segment and higher restructuring expenses. Total organic business margins increased 120 basis points in 2013 versus 2012 primarily due to lower overhead costs. The changes in variable margins and overhead costs increased organic business margins by 110 basis points, 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.

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
2014
 
2013
 
2012
Automotive OEM
$
2,590

 
$
2,396

 
$
2,171

Test & Measurement and Electronics
2,204

 
2,176

 
2,299

Food Equipment
2,177

 
2,047

 
1,939

Polymers & Fluids
1,927

 
1,993

 
2,063

Welding
1,850

 
1,837

 
1,847

Construction Products
1,707

 
1,717

 
1,724

Specialty Products
2,055

 
2,007

 
1,871

Intersegment revenues
(26
)
 
(38
)
 
(44
)
  Total Segments
14,484

 
14,135

 
13,870

Decorative Surfaces

 

 
921

  Total
$
14,484

 
$
14,135

 
$
14,791



21



 
Operating Income
In millions
2014
 
2013
 
2012
Automotive OEM
$
600

 
$
490

 
$
421

Test & Measurement and Electronics
340

 
321

 
342

Food Equipment
453

 
385

 
332

Polymers & Fluids
357

 
335

 
327

Welding
479

 
464

 
470

Construction Products
289

 
238

 
201

Specialty Products
440

 
408

 
365

  Total Segments
2,958

 
2,641

 
2,458

Decorative Surfaces

 

 
143

Unallocated
(70
)
 
(127
)
 
(126
)
  Total
$
2,888

 
$
2,514

 
$
2,475


Segments are allocated a fixed overhead charge based on the segment's revenues. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.

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 2014, this segment primarily served the automotive original equipment manufacturers and tiers (91%) market.

The results of operations for the Automotive OEM segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
2,590

 
$
2,396

 
$
2,171

Operating income
 
600

 
490

 
421

Margin %
 
23.2
%
 
20.5
%
 
19.4
%


22



In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
8.9
 %
 
16.2
 %
 
1.4
%
 
9.5
%
 
17.8
 %
 
1.5
 %
Changes in variable margins and overhead costs

 
4.0

 
0.8

 

 
0.2

 

 
8.9

 
20.2

 
2.2

 
9.5

 
18.0

 
1.5

Acquisitions and divestitures
(0.1
)
 

 

 

 

 

Restructuring costs

 
2.9

 
0.5

 

 
(3.2
)
 
(0.6
)
Impairment of goodwill and intangibles

 

 

 

 

 

Translation
(0.7
)
 
(0.6
)
 

 
0.9

 
1.7

 
0.2

  Total
8.1
 %
 
22.5
 %
 
2.7
%
 
10.4
%
 
16.5
 %
 
1.1
 %

Operating Revenues

Operating revenues increased 8.1% in 2014 versus 2013 primarily due to an increase in organic revenues, partially offset by the unfavorable effect of currency translation. As a result of product innovation and penetration gains, worldwide automotive organic revenues grew 8.9%, exceeding auto builds which grew 3%. European organic revenue growth of 10.8% exceeded auto build growth of 3%. North American automotive organic revenues grew 7.6% as North American auto builds increased 5% over the prior year. Organic revenues for Asia Pacific increased 12.1% over the prior year primarily due to revenue growth in China of 17.2%, which exceeded Chinese auto build growth of 8%.

Operating revenues increased 10.4% in 2013 versus 2012 due to the increase in organic revenues and the favorable effect of currency translation. Worldwide automotive organic revenue growth of 9.5% in 2013 versus 2012 exceeded auto builds of approximately 4% primarily due to worldwide product penetration gains. International automotive organic revenues increased 10.9% over the prior year. Organic 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 organic revenue growth was 6.8% while auto build growth was flat in 2013 versus 2012. North American automotive organic revenue growth of 8.0% exceeded auto build growth of 5% over the prior year.

Operating Income

Operating income increased 22.5% in 2014 versus 2013 due to higher organic revenues, changes in variable margins and overhead costs and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Total organic business margins increased 220 basis points primarily due to the positive operating leverage effect of the increase in organic revenues of 140 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 80 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by unfavorable selling price versus material cost comparisons of 30 basis points. Lower restructuring expenses increased total operating margins by 50 basis points.

Operating income increased 16.5% in 2013 versus 2012 primarily due to higher organic revenues and the favorable effect of currency translation, partially offset by higher restructuring expenses. Total organic business margins increased 150 basis points due to the positive operating leverage effect of the increase in organic revenues described above. The changes in variable margins and overhead costs had no significant effect on organic business 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.



23



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.

In 2014, this segment primarily served the electronics (23%), general industrial (18%), industrial capital goods (8%), automotive original equipment manufacturers and tiers (8%) and consumer durables (7%) markets.

The results of operations for the Test & Measurement and Electronics segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
2,204

 
$
2,176

 
$
2,299

Operating income
 
340

 
321

 
342

Margin %
 
15.4
%
 
14.8
%
 
14.9
%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
1.5
 %
 
4.5
 %
 
0.4
 %
 
(6.0
)%
 
(18.3
)%
 
(1.9
)%
Changes in variable margins and overhead costs
 

 
3.4

 
0.5

 

 
10.6

 
1.7

 
 
1.5

 
7.9

 
0.9

 
(6.0
)
 
(7.7
)
 
(0.2
)
Acquisitions and divestitures
 
(0.1
)
 
0.1

 

 
0.9

 
0.7

 

Restructuring costs
 

 
(2.4
)
 
(0.3
)
 

 
1.3

 
0.2

Impairment of goodwill and intangibles
 

 
0.2

 

 

 
(0.7
)
 
(0.1
)
Translation
 
(0.1
)
 

 

 
(0.2
)
 

 

  Total
 
1.3
 %
 
5.8
 %
 
0.6
 %
 
(5.3
)%
 
(6.4
)%
 
(0.1
)%

Operating Revenues

Operating revenues increased 1.3% in 2014 versus 2013 primarily due to an increase in organic revenues. Organic revenues for the worldwide test and measurement businesses increased 1.8% primarily due to strength in the Instron business. Worldwide electronics organic revenues increased 1.2% primarily due to a 2.0% increase in the other electronics businesses, which was driven by growth in the contamination control businesses, resulting primarily from increased demand across all major regions, the pressure sensitive adhesives businesses, primarily due to higher market demand in Europe, and the static control businesses, primarily due to increased sales to the industrial end market in Asia and North America. Organic revenues for the electronic assembly businesses declined 0.7% but showed improvement in the second half of the year.

Operating revenues decreased 5.3% in 2013 versus 2012 primarily due to a decline in organic revenues, partially offset by revenues from acquisitions. Worldwide electronics organic revenues decreased 14.0% in 2013 versus 2012 primarily due to a

24



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. Organic revenues for the other electronics businesses increased 3.1% in 2013 versus 2012 primarily due to increased demand from consumer electronics customers in China. Organic 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.

Operating Income

Operating income increased 5.8% in 2014 versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs, partially offset by higher restructuring expenses. Total organic business margins increased 90 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased organic business margins by 50 basis points primarily due to benefits resulting from the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by the impact of the discrete claim recovery in 2013 noted below. Higher restructuring expenses decreased total operating margins by 30 basis points.

Operating income decreased 6.4% in 2013 versus 2012 primarily due to the lower organic revenues noted above. Total organic business margins decreased 20 basis points primarily due to the negative operating leverage effect of the decrease in organic revenues of 190 basis points, partially offset by changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 170 basis points 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 discrete claim recovery of 30 basis points in 2013.

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 2014, this segment primarily served the food institutional/restaurant (40%), food service (33%) and food retail (14%) markets.

The results of operations for the Food Equipment segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
2,177

 
$
2,047

 
$
1,939

Operating income
 
453

 
385

 
332

Margin %
 
20.8
%
 
18.8
%
 
17.1
%


25



In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
4.7
%
 
11.2
%
 
1.2
 %
 
1.9
%
 
5.0
 %
 
0.5
 %
Changes in variable margins and  overhead costs
 

 
4.8

 
0.8

 

 
10.3

 
1.7

 
 
4.7

 
16.0

 
2.0

 
1.9

 
15.3

 
2.2

Acquisitions and divestitures
 
1.7

 
1.0

 
(0.2
)
 
3.2

 
0.3

 
(0.5
)
Restructuring costs
 

 
1.0

 
0.2

 

 
(0.5
)
 
(0.1
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 

 

 

 
0.4

 
0.6

 
0.1

  Total
 
6.4
%
 
18.0
%
 
2.0
 %
 
5.5
%
 
15.7
 %
 
1.7
 %

Operating Revenues

Operating revenues increased 6.4% in 2014 versus 2013 due to an increase in organic and acquisition revenues. North American organic revenues increased 5.1% as North American equipment revenues increased 5.3%, primarily due to product innovation and penetration gains in refrigeration and cooking. North American service revenues increased 4.0%. International organic revenues increased 4.6% as equipment revenues increased 6.4% primarily due to growth in warewash and refrigeration businesses and product innovation. International service revenue growth of 0.6% was impacted by slower demand in southern Europe. The increase in revenues from acquisitions was due to the purchase of a Chinese food equipment business in the third quarter of 2013.

Organic revenues increased 5.5% in 2013 versus 2012 primarily due to revenues from acquisitions and an increase in organic revenues. North American organic 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 organic 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.

Operating Income

Operating income increased 18.0% in 2014 versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs. Total organic business margins increased 200 basis points due to the positive operating leverage effect of the increase in organic revenues of 120 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 80 basis points primarily due to the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 20 basis points. Lower restructuring expenses increased total operating margins by 20 basis points.

Operating income increased 15.7% in 2013 versus 2012 primarily due to lower operating expenses and higher organic revenues. Total organic business margins increased 220 basis points due to the positive operating leverage effect of the increase in organic revenues of 50 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business 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.


26



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;
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 2014, this segment primarily served the automotive aftermarket (42%), general industrial (14%), maintenance, repair and operations, or "MRO" (12%) and construction (9%) markets.

The results of operations for the Polymers & Fluids segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
1,927

 
$
1,993

 
$
2,063

Operating income
 
357

 
335

 
327

Margin %
 
18.5
%
 
16.8
%
 
15.8
%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point
Increase
(Decrease)
 
% Increase (Decrease)
 
% Point
Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
(1.2
)%
 
(3.2
)%
 
(0.3
)%
 
(2.9
)%
 
(8.1
)%
 
(0.8
)%
Changes in variable margins and overhead costs
 

 
10.2

 
1.7

 

 
11.9

 
1.9

 
 
(1.2
)
 
7.0

 
1.4

 
(2.9
)
 
3.8

 
1.1

Acquisitions and divestitures
 

 

 

 
0.5

 

 

Restructuring costs
 

 
1.7

 
0.3

 

 
(0.5
)
 
(0.1
)
Impairment of goodwill and intangibles
 

 
(0.3
)
 

 

 

 

Translation
 
(2.1
)
 
(2.1
)
 

 
(1.0
)
 
(0.8
)
 

  Total
 
(3.3
)%
 
6.3
%
 
1.7
%
 
(3.4
)%
 
2.5
 %
 
1.0
 %

Operating Revenues

Operating revenues decreased 3.3% in 2014 versus 2013 primarily due to the unfavorable effect of currency translation and lower organic revenues. Ongoing product line and customer base simplification activities negatively impacted organic revenues by approximately two percentage points. Organic revenue decreases in North America and Europe were partially offset by growth in China and South America. Worldwide polymers organic revenues decreased 3.8% primarily due to revenue declines in North America and Europe, partially offset by growth in China and Brazil. Worldwide fluids and hygiene organic revenues decreased 0.4% primarily due to a decrease in revenues in Europe, partially offset by growth in Brazil. Automotive aftermarket organic revenues declined 0.2% driven by a decrease in revenues in North America, partially offset by growth in Asia Pacific and South America.


27



Operating revenues decreased 3.4% in 2013 versus 2012 primarily due to lower organic revenues and the unfavorable effect of currency translation. Organic 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 and customer base simplification 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.

Operating Income

Operating income increased 6.3% in 2014 versus 2013 primarily due to changes in variable margins and overhead costs and lower restructuring expenses, partially offset by lower organic revenues and the unfavorable effect of currency translation. Total organic business margins increased 140 basis points primarily due to changes in variable margins and overhead costs, partially offset by the negative operating leverage effect of the decrease in organic revenues of 30 basis points. The changes in variable margins and overhead costs increased organic business margins by 170 basis points due to lower operating expenses, primarily driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing. Lower restructuring expenses increased total operating margins by 30 basis points.

Operating income increased 2.5% in 2013 versus 2012 primarily due to lower operating expenses, partially offset by lower organic revenues, the unfavorable effect of currency translation and higher restructuring expenses. Total organic business 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 organic revenues. The changes in variable margins and overhead costs increased organic business 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.

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 2014, this segment primarily served the general industrial (35%) market, which included fabrication, shipbuilding and other general industrial markets, energy (14%), maintenance, repair and operations, or "MRO" (10%), construction (10%) and industrial capital goods (5%) markets.

The results of operations for the Welding segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
1,850

 
$
1,837

 
$
1,847

Operating income
 
479

 
464

 
470

Margin %
 
25.9
%
 
25.3
%
 
25.4
%


28



In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
1.2
 %
 
2.0
 %
 
0.2
 %
 
(2.3
)%
 
(3.7
)%
 
(0.4
)%
Changes in variable margins and overhead costs

 
2.3

 
0.6

 

 
3.2

 
0.9

 
1.2

 
4.3

 
0.8

 
(2.3
)
 
(0.5
)
 
0.5

Acquisitions and divestitures
0.3

 

 
(0.1
)
 
1.9

 
(0.4
)
 
(0.5
)
Restructuring costs

 
(0.5
)
 
(0.1
)
 

 
(0.3
)
 
(0.1
)
Impairment of goodwill and intangibles

 

 

 

 

 

Translation
(0.8
)
 
(0.6
)
 

 

 
(0.1
)
 

  Total
0.7
 %
 
3.2
 %
 
0.6
 %
 
(0.4
)%
 
(1.3
)%
 
(0.1
)%

Operating Revenues

Operating revenues increased 0.7% in 2014 versus 2013 primarily due to an increase in organic revenues, partially offset by the unfavorable effect of currency translation. Worldwide welding organic revenues increased 1.2%. North American welding organic revenues increased 6.0% primarily due to strength in equipment sales to general industrial and commercial customers. International organic revenues decreased 10.4% primarily due to a delay in China oil and gas pipeline projects and continued product line and customer base simplification activity in Europe. The increase from acquisition revenues was due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

Operating revenues decreased 0.4% in 2013 versus 2012 primarily due to a decline in organic revenues, partially offset by revenues from acquisitions. Worldwide welding organic revenues declined 2.3% in 2013 versus 2012. North American welding organic revenues were lower by 2.2% due to heavy equipment OEM and general industrial end market declines. International organic 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 due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

Operating Income

Operating income increased 3.2% in 2014 versus 2013 due to the changes in variable margins and overhead expenses and higher organic revenues, partially offset by the unfavorable effect of currency translation and higher restructuring expenses. Total organic business margins increased 80 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. Changes in variable margins and overhead costs increased organic business margins by 60 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 40 basis points, partially offset by higher overhead expenses driven by continued investment in product innovation.

Operating income decreased 1.3% in 2013 versus 2012 primarily due to lower organic revenues, lower income from acquisitions, and higher restructuring expenses, partially offset by lower operating expenses. Total organic business margins increased 50 basis points primarily due to lower operating expenses, partially offset by the negative operating leverage effect of organic revenue declines. Changes in variable margins and overhead costs increased organic business 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.



29



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 2014, this segment primarily served the residential construction (37%), renovation construction (33%) and commercial construction (27%) markets.

The results of operations for the Construction Products segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
1,707

 
$
1,717

 
$
1,724

Operating income
 
289

 
238

 
201

Margin %
 
17.0
%
 
13.9
%
 
11.6
%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
2.2
 %
 
6.8
 %
 
0.6
 %
 
0.5
 %
 
2.0
 %
 
0.2
 %
Changes in variable margins and overhead costs
 

 
15.7

 
2.2

 

 
22.5

 
2.6

 
 
2.2

 
22.5

 
2.8

 
0.5

 
24.5

 
2.8

Acquisitions and divestitures
 
(0.9
)
 
(0.7
)
 
0.1

 
0.1

 

 

Restructuring costs
 

 
2.4

 
0.3

 

 
(2.6
)
 
(0.3
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 
(1.9
)
 
(2.9
)
 
(0.1
)
 
(1.1
)
 
(2.5
)
 
(0.2
)
  Total
 
(0.6
)%
 
21.3
 %
 
3.1
 %
 
(0.5
)%
 
19.4
 %
 
2.3
 %

Operating Revenues

Operating revenues decreased 0.6% in 2014 versus 2013 primarily due to the negative impact of currency translation and divestitures, partially offset by an increase in organic revenues. Ongoing product line and customer base simplification activities negatively impacted organic revenues by approximately one percentage point. International organic revenues increased 2.2% as Asia Pacific increased 7.0% primarily due to strong end market growth in Australia and New Zealand. European organic revenues declined 2.1% primarily due to lower end market demand in the region and product line and customer base simplification activities. North American organic revenues increased 2.1% primarily due to U.S. renovation organic revenue growth of 4.6%, driven by increased sales to big box retailers, partially offset by a decrease in organic revenues in Canada, primarily due to lower demand in the residential market.

Operating revenues decreased 0.5% in 2013 versus 2012 primarily due to the unfavorable effect of currency translation, partially offset by an increase in organic revenues. North American organic revenues increased 4.6% in 2013 versus 2012 as U.S. residential organic revenue growth was 8.2% primarily due to increased consumable sales associated with year-over-year growth in housing starts. U.S. renovation organic revenue growth was 7.3% primarily due to strong tool sales and

30



increased sales to big box retailers. U.S. commercial organic revenues declined 1.4% primarily due to weak overall demand. International organic revenues declined 1.6% in 2013 versus 2012, as European organic revenues declined 5.3% due to lower sales of consumable products driven by a slowdown in construction activity in European end markets. Organic 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.

Operating Income

Operating income increased 21.3% in 2014 versus 2013 primarily due to lower operating expenses, higher organic revenues and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Total organic business margins increased 280 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues of 60 basis points. The changes in variable margins and overhead costs increased organic business margins by 220 basis points primarily driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 20 basis points. Lower restructuring expenses increased total operating margins by 30 basis points.

Operating income increased 19.4% in 2013 versus 2012 primarily due to lower operating expenses and higher organic revenues, partially offset by higher restructuring expenses and the unfavorable effect of currency translation. Total organic business margins increased 280 basis points primarily due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased organic business 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.

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 2014, this segment primarily served the food and beverage (25%), consumer durables (14%), general industrial (13%), printing and publishing (10%) and industrial capital goods (6%) markets.

The results of operations for the Specialty Products segment for 2014, 2013 and 2012 were as follows:

Dollars in millions
 
2014
 
2013
 
2012
Operating revenues
 
$
2,055

 
$
2,007

 
$
1,871

Operating income
 
440

 
408

 
365

Margin %
 
21.4
%
 
20.3
%
 
19.5
%


31



In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 
 
2014 Compared to 2013
 
2013 Compared to 2012
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
% Increase (Decrease)
 
% Point  Increase
(Decrease)
 
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
 
Operating
Revenues
 
Operating
Income
 
Operating
Margins
Organic business:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
 
(0.3
)%
 
(0.7
)%
 
(0.1
)%
 
1.3
%
 
2.9
 %
 
0.3
 %
Changes in variable margins and overhead costs
 

 
7.4

 
1.5

 

 
6.5

 
1.3

 
 
(0.3
)
 
6.7

 
1.4

 
1.3

 
9.4

 
1.6

Acquisitions and divestitures
 
2.7

 
0.7

 
(0.4
)
 
5.7

 
2.6

 
(0.6
)
Restructuring costs
 

 
0.5

 
0.1

 

 
(1.1
)
 
(0.2
)
Impairment of goodwill and intangibles
 

 

 

 

 

 

Translation
 

 
0.1

 

 
0.3

 
0.8

 

  Total
 
2.4
 %
 
8.0
 %
 
1.1
 %
 
7.3
%
 
11.7
 %
 
0.8
 %

Operating Revenues

Operating revenues increased 2.4% in 2014 versus 2013 due to an increase in acquisition revenues, partially offset by a decrease in organic revenues. Worldwide consumer packaging organic revenues decreased 1.0% driven by lower equipment revenues in North America. Worldwide ground support equipment organic revenues increased 5.3% primarily due to higher end market demand in North America. Worldwide appliance organic revenues increased 0.7% primarily due to penetration gains in the North American home appliance sector. Acquisition revenue was primarily due to the purchase of a European consumer packaging equipment business in the third quarter of 2013.

Operating revenues increased 7.3% in 2013 versus 2012 primarily due to an increase in acquisition and organic revenues, and the favorable effect of currency translation. Worldwide consumer packaging organic revenues increased 2.5% in 2013 versus 2012 primarily due to growth in multi-pack beverage systems. Worldwide appliance organic revenues declined 3.0% in 2013 versus 2012 primarily due to lower consumer demand in the European home appliance sector. Worldwide organic 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.

Operating Income

Operating income increased 8.0% in 2014 versus 2013 primarily due to the changes in variable margins and overhead costs, income from acquisitions and lower restructuring expenses, partially offset by lower organic revenues. Total organic business margins increased 140 basis points primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 150 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by unfavorable selling price versus material cost comparisons of 30 basis points. Acquisitions diluted total operating margins by 40 basis points primarily due to lower operating margins and the impact of intangible asset amortization expense.

Operating income increased 11.7% in 2013 versus 2012 primarily due to lower operating expenses, an increase in organic revenues, and income from acquisitions. Total organic business 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 organic revenues of 30 basis points. The changes in variable margins and overhead costs increased organic business 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.



32



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 were as follows:

Dollars in millions
For the Ten Months Ended October 31, 2012
Operating revenues
$
921

Operating income
143


AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets decreased to $242 million in 2014 from $250 million in 2013 and $252 million in 2012, due to various intangible assets being fully amortized in both 2014 and 2013.

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 2014, 2013 and 2012. In the third quarter of 2014, these assessments resulted in no goodwill impairment charges and total indefinite-lived intangible asset impairment charges of $3 million in the Polymers & Fluids and Test & Measurement and Electronics segments. In 2013, these assessments resulted in no goodwill impairment charges and an indefinite-lived intangible asset impairment charge of $2 million in the Test & Measurement and Electronics segment. In 2012, these assessments resulted in a goodwill impairment charge of $1 million in the Test & Measurement and Electronics segment and an indefinite-lived intangible asset impairment charge of $1 million in the Food Equipment segment. 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 $250 million in 2014, which includes interest expense on the notes issued in February 2014 and the Euro notes issued in May 2014, versus $239 million in 2013. Interest expense increased in 2013, which included the full year impact of interest expense on the 3.9% notes issued in late August 2012, versus $213 million in 2012. See the Debt note in Item 8. Financial Statements and Supplementary Data for further details regarding the Company's debt obligations.

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.



33



OTHER INCOME (EXPENSE)

Other income (expense) was income of $61 million in 2014 versus $72 million in 2013. This decrease was primarily due to a pre-tax gain of $30 million recorded in 2013 related to the acquisition of the controlling interest in an existing equity investment, partially offset by higher interest income ($65 million in 2014 versus $50 million in 2013).

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 in Item 8. Financial Statements and Supplementary Data for further details.

INCOME TAXES

The effective tax rate was 30.0% in 2014, 30.6% in 2013, and 30.3% in 2012. 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.

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 year ended 2014 versus 2013, the impact of foreign currencies against the U.S. Dollar decreased operating revenues by approximately $110 million in 2014 and decreased income from continuing operations by approximately $14 million. For the year ended 2013 versus 2012, the impact of foreign currency fluctuations against the U.S. Dollar did not have a significant impact on operating revenues or income from continuing operations.

INCOME FROM DISCONTINUED OPERATIONS

Income from discontinued operations was $1.1 billion in 2014, $49 million in 2013 and $637 million in 2012. Income from discontinued operations in 2014 included an after-tax gain of $1.1 billion on the disposal of the Industrial Packaging business in the second quarter of 2014. 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.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. The Company adopted this new guidance effective January 1, 2015. The new guidance applies prospectively to new disposals and new classifications of disposal groups held for sale after such date. As a result, this guidance did not have any impact on the Company's financial statements or related disclosures upon adoption.

In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning January 1, 2017. The Company is currently assessing the potential impact the guidance will have upon adoption.



34



LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are free operating cash flow and short-term credit facilities. In addition, the Company had $4.0 billion of cash on hand at December 31, 2014 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 business. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented 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 repurchase approximately 50 million shares through a program utilizing 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. The Company completed this program in the second quarter of 2014. Under this program, the Company repurchased approximately 14.0 million shares of its common stock in the fourth quarter of 2013 and approximately 35.7 million shares of its common stock in the first half of 2014.

On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations. A portion of the proceeds was used to fund share repurchases under the program noted above.

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.

Summarized cash flow information for the years ended December 31, 2014, 2013 and 2012 was as follows: 
In millions
 
2014
 
2013
 
2012
Net cash provided by operating activities
 
$
1,616

 
$
2,528

 
$
2,072

Additions to plant and equipment
 
(361
)
 
(368
)
 
(382
)
Free operating cash flow
 
$
1,255

 
$
2,160

 
$
1,690

 
 
 
 
 
 
 
Cash dividends paid
 
$
(711
)
 
$
(528
)
 
$
(865
)
Repurchases of common stock
 
(4,346
)
 
(2,106
)
 
(2,020
)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
 
(45
)
 
(369
)
 
(723
)
Net proceeds from sale of discontinued operations
 
3,191

 
206

 
815

Proceeds from sale of operations and affiliates
 
18

 
2

 
1,028

Net proceeds from debt
 
1,339

 
1,264

 
1,015

Other
 
206

 
303

 
608

Effect of exchange rate changes on cash and equivalents
 
(535
)
 
(93
)
 
53

Net increase in cash and equivalents
 
$
372

 
$
839

 
$
1,601


35




The 2014 net cash provided by operating activities included $724 million of tax payments related to the disposition of the Industrial Packaging segment. 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.

Stock Repurchase Programs

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 2013 and approximately 50.4 million shares of its common stock at an average price of $84.92 per share during 2014. As of December 31, 2014, there was approximately $1.4 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 performa