ILLINOIS TOOL WORKS INC
10-Qs and 10-Ks
PROXIES
Table of Contents
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, 2010 | ||||
| or | ||||
| [ ] | 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
(State or Other Jurisdiction of Incorporation or Organization) |
36-1258310
(I.R.S. Employer Identification No.) |
|
|
3600 W. Lake Avenue, Glenview, Illinois
(Address of Principal Executive Offices) |
60026-1215
(Zip Code) |
Registrant’s telephone number, including area code:
(847) 724-7500
Securities registered pursuant to Section 12(b) of the
Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
|
Common Stock
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
X
No
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
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
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
(234.405 of this chapter) during the preceding 12 months
(or such shorter period that the registrant was required to
submit and post such files).
Yes
X
No
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
| Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
No
X
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 2010 was
approximately $17,100,000,000 based on the New York Stock
Exchange closing sales price as of June 30, 2010.
Shares of Common Stock outstanding at January 31, 2011:
498,419,391.
Documents
Incorporated by Reference
|
2011 Proxy Statement for Annual Meeting of Stockholders to be
held on May 6, 2011
|
Part III |
TABLE OF CONTENTS
Table of Contents
PART I
| ITEM 1. | Business |
General
Illinois Tool Works Inc. (the “Company” or
“ITW”) was founded in 1912 and incorporated in 1915.
The Company is a multinational manufacturer of a diversified
range of industrial products and equipment with operations in 57
countries. These businesses are internally reported as 60
operating segments to senior management. The Company’s 60
operating segments have been aggregated into the following eight
external reportable segments:
Transportation:
Businesses in this
segment produce components, fasteners, fluids and polymers, as
well as truck remanufacturing and related parts and service.
In the Transportation segment, products and services include:
| • | metal and plastic components, fasteners and assemblies for automobiles and light trucks; | |
| • | fluids and polymers for auto aftermarket maintenance and appearance; | |
| • | fillers and putties for auto body repair; | |
| • | polyester coatings and patch and repair products for the marine industry; and | |
| • | truck remanufacturing and related parts and service. |
Industrial Packaging:
Businesses in
this segment produce steel, plastic and paper products and
equipment used for bundling, shipping and protecting goods in
transit.
In the Industrial Packaging segment, products include:
| • | steel and plastic strapping and related tools and equipment; | |
| • | plastic stretch film and related equipment; | |
| • | paper and plastic products that protect goods in transit; and | |
| • | metal jacketing and other insulation products. |
Power Systems &
Electronics:
Businesses in this segment
produce equipment and consumables associated with specialty
power conversion, metallurgy and electronics.
In the Power Systems & Electronics segment, products
include:
| • | arc welding equipment; | |
| • | metal arc welding consumables and related accessories; | |
| • | metal solder materials for PC board fabrication; | |
| • | equipment and services for microelectronics assembly; | |
| • | electronic components and component packaging; and | |
| • | airport ground support equipment. |
Food Equipment:
Businesses in this
segment produce commercial food equipment and 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. |
Construction Products:
Businesses in
this segment produce tools, fasteners and other products for
construction applications.
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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. |
Polymers & Fluids:
Businesses
in this segment produce adhesives, sealants, lubrication and
cutting fluids and hygiene products.
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; and | |
| • | pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications. |
Decorative Surfaces:
Businesses in this
segment produce decorative surfacing materials for furniture,
office and retail space, countertops and other applications.
In the Decorative Surfaces segment, products include:
| • | decorative high-pressure laminate for furniture, office and retail space, and countertops; and | |
| • | high-pressure laminate worktops. |
All Other:
This segment includes all
other operating segments.
In the All Other segment, products include:
| • | equipment and related software for testing and measuring of materials and structures; | |
| • | plastic reclosable packaging for consumer food storage; | |
| • | plastic reclosable bags for storage of clothes and home goods; | |
| • | plastic consumables that multi-pack cans and bottles and related equipment; | |
| • | plastic fasteners and components for appliances, furniture and industrial uses; | |
| • | metal fasteners and components for appliances and industrial applications; | |
| • | swabs, wipes and mats for clean room usage; | |
| • | foil, film and related equipment used to decorate consumer products; | |
| • | product coding and marking equipment and related consumables; | |
| • | paint spray and adhesive dispensing equipment; | |
| • | static and contamination control equipment; and | |
| • | line integration, conveyor systems and line automation for the food and beverage industries. |
80/20
Business Process
A key element of the Company’s business strategy is its
continuous 80/20 business process for both existing businesses
and new acquisitions. The basic concept of this 80/20 business
process is to focus on what is most important (the 20% of the
items which account for 80% of the value) and to spend less time
and resources on the less important (the 80% of the items which
account for 20% of the value). The Company’s operations use
this 80/20 business process to simplify and focus on the key
parts of their business, and as a result, reduce complexity that
often disguises what is truly important. The Company’s
operations utilize the 80/20 process in various aspects of their
business. Common applications of the 80/20 business process
include:
| • | Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products. | |
| • | Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers. |
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| • | 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 margins.
Corporate management works closely with those businesses that
have operating results below expectations to help those
businesses better apply this 80/20 business process and improve
their results.
Discontinued
Operations
In August 2008, the Company’s Board of Directors authorized
the divestiture of the Click Commerce industrial software
business, which was previously reported in the All Other
segment. In the second quarter of 2009, the Company completed
the sale of the Click Commerce business. Additionally, the
Company completed the divestiture of an automotive components
business in 2009, a consumer packaging business in 2008, an
automotive machinery business and a consumer packaging business
in 2007, and a construction business in 2006.
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 of the segments 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 eight
segments by percentage of revenue are as follows:
|
Power
|
||||||||||||||||||||||||||||||||||||
|
Transpor-
|
Industrial
|
Systems &
|
Food
|
Construction
|
Polymers
|
Decorative
|
All
|
Total
|
||||||||||||||||||||||||||||
| End Markets Served | tation | Packaging | Electronics | Equipment | Products | & Fluids | Surfaces | Other | Company | |||||||||||||||||||||||||||
|
Commercial Construction
|
1 | % | 7 | % | 5 | % | — | % | 23 | % | 10 | % | 58 | % | 1 | % | 9 | % | ||||||||||||||||||
|
Residential Construction
|
— | 2 | 1 | — | 45 | 2 | 11 | 1 | 6 | |||||||||||||||||||||||||||
|
Renovation Construction
|
— | — | — | — | 28 | 1 | 30 | — | 5 | |||||||||||||||||||||||||||
|
General Industrial
|
3 | 24 | 46 | — | 3 | 27 | 1 | 26 | 17 | |||||||||||||||||||||||||||
|
Automotive OEM/Tiers
|
61 | 1 | 3 | — | — | 5 | — | 4 | 11 | |||||||||||||||||||||||||||
|
Automotive Aftermarket
|
25 | 1 | 1 | — | — | 10 | — | 1 | 5 | |||||||||||||||||||||||||||
|
Food Institutional/Restaurant
|
— | — | — | 45 | — | 1 | — | — | 5 | |||||||||||||||||||||||||||
|
Food Service
|
— | 1 | — | 34 | — | 2 | — | 2 | 5 | |||||||||||||||||||||||||||
|
Food Retail
|
— | — | — | 16 | — | — | — | 3 | 3 | |||||||||||||||||||||||||||
|
Consumer Durables
|
1 | 2 | 2 | — | — | 5 | — | 14 | 4 | |||||||||||||||||||||||||||
|
Food & Beverage
|
— | 13 | 1 | 1 | — | 2 | — | 17 | 6 | |||||||||||||||||||||||||||
|
Electronics
|
— | 1 | 17 | — | — | 5 | — | 6 | 4 | |||||||||||||||||||||||||||
|
Primary Metals
|
— | 22 | 2 | — | — | 2 | — | 1 | 4 | |||||||||||||||||||||||||||
|
Other
|
9 | 26 | 22 | 4 | 1 | 28 | — | 24 | 16 | |||||||||||||||||||||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||
“Other” includes several end markets, some of which
are maintenance repair and operations, or “MRO”,
printing and publishing, and paper products.
The Company’s businesses primarily distribute their
products directly to industrial manufacturers and through
independent distributors.
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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 its
products. Backlog by segment as of December 31, 2010 and
2009 is summarized as follows:
| In Thousands | 2010 | 2009 | ||||||
|
Transportation
|
$ | 276,000 | $ | 225,000 | ||||
|
Industrial Packaging
|
121,000 | 113,000 | ||||||
|
Power Systems & Electronics
|
138,000 | 125,000 | ||||||
|
Food Equipment
|
204,000 | 179,000 | ||||||
|
Construction Products
|
33,000 | 24,000 | ||||||
|
Polymers & Fluids
|
83,000 | 73,000 | ||||||
|
Decorative Surfaces
|
29,000 | 19,000 | ||||||
|
All Other
|
462,000 | 340,000 | ||||||
|
Total
|
$ | 1,346,000 | $ | 1,098,000 | ||||
Backlog orders scheduled for shipment beyond calendar year 2011
were not material as of December 31, 2010.
The information set forth below is applicable to all industry
segments of the Company unless otherwise noted:
Competition
With operations in 57 countries, the Company has a wide
diversity of products in a myriad of markets, many of which are
fragmented, and we encounter a wide variety of competitors that
vary by product line, end market and geographic area. Our
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 our segments generally
has several main competitors and numerous smaller ones in most
of their end markets and geographic areas. In addition, our
Decorative Surfaces and Power Systems & Electronics
segments each has one global competitor and numerous smaller
regional competitors.
In virtually all segments, we compete on the basis of product
innovation, product quality, brand preference, service delivery
and price. Technical capability is also a competitive factor in
most of our segments. We believe that for each of our segments,
our primary competitive advantages derive from our decentralized
operating structure, which creates a strong focus on end markets
and customers at the local level, enabling our businesses to
respond rapidly to market dynamics. This structure enables our
business units to drive operational excellence utilizing our
80/20 business process and leverages our product innovation
capabilities. We also believe that our global footprint is a
competitive advantage in many of our markets, especially in our
Transportation and Decorative Surfaces segments.
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
The Company’s growth has resulted from developing new and
improved products, broadening the application of established
products, continuing efforts to improve and develop new methods,
processes and equipment, and from acquisitions. 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 by
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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 $220,462,000 in 2010,
$198,536,000 in 2009 and $212,658,000 in 2008.
Intellectual
Property
The Company owns approximately 3,800 unexpired United States
patents and 8,800 foreign patents covering articles, methods and
machines. In addition, the Company has approximately 1,800
applications for patents pending in the United States Patent
Office and 5,100 pending foreign patent offices, but there is no
assurance that any of these patents will be issued. The Company
maintains an active 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 leadership 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 many of its businesses; Deltar and
Shakeproof in the Transportation segment; Signode in the
Industrial Packaging segment; Miller in the Power
Systems & Electronics segment; Hobart in the Food
Equipment segment; Paslode in the Construction Products segment;
and Wilsonart in the Decorative Surfaces 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 or earnings. The Company
has made considerable efforts to develop and sell
environmentally compatible products.
Employees
The Company employed approximately 61,000 persons as of
December 31, 2010 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 construction, general
industrial, automotive, food institutional/restaurant and
service, food and beverage, electronics, consumer durables,
primary metals, and others on a worldwide basis. The
Company’s revenues from sales to customers outside the
United States were approximately 58% of revenues in 2010, 57% of
revenues in 2009 and 58% of revenues in 2008.
Refer to Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations and the Segment
Information note in Item 8. Financial Statements and
Supplementary Data for additional information on international
activities. International operations are subject to certain
risks inherent in conducting business in foreign countries,
including price controls, exchange controls, limitations on
participation in local enterprises, nationalization,
expropriation and other governmental action, and changes in
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currency exchange rates. Additional risks of our international
operations are described under “Item 1A. Risk
Factors.”
Executive
Officers
Executive Officers of the Company as of February 25, 2011
were as follows:
| Name | Office | Age | ||||
|
Sharon M. Brady
|
Senior Vice President, Human Resources | 60 | ||||
|
Robert E. Brunner
|
Executive Vice President | 53 | ||||
|
Timothy J. Gardner
|
Executive Vice President | 55 | ||||
|
Philip M. Gresh, Jr.
|
Executive Vice President | 62 | ||||
|
Thomas J. Hansen
|
Vice Chairman | 62 | ||||
|
Craig A. Hindman
|
Executive Vice President | 56 | ||||
|
Ronald D. Kropp
|
Senior Vice President & Chief Financial Officer | 45 | ||||
|
Roland M. Martel
|
Executive Vice President | 56 | ||||
|
Steven L. Martindale
|
Executive Vice President | 54 | ||||
|
Sundaram Nagarajan
|
Executive Vice President | 48 | ||||
|
Christopher O’Herlihy
|
Executive Vice President | 47 | ||||
|
David C. Parry
|
Vice Chairman | 57 | ||||
|
E. Scott Santi
|
Vice Chairman | 49 | ||||
|
Randall J. Scheuneman
|
Vice President & Chief Accounting Officer | 43 | ||||
|
David B. Speer
|
Chairman & Chief Executive Officer | 59 | ||||
|
Allan C. Sutherland
|
Senior Vice President, Taxes & Investments | 47 | ||||
|
Juan Valls
|
Executive Vice President | 49 | ||||
|
Jane L. Warner
|
Executive Vice President | 64 | ||||
|
James H. Wooten, Jr.
|
Senior Vice President, General Counsel & Corporate Secretary | 62 | ||||
The executive officers of the Company serve at the pleasure of
the Board of Directors. Except for Mses. Brady and Warner and
Messrs. Brunner, Gardner, Martel, Martindale, Nagarajan,
O’Herlihy, Parry, Scheuneman and Valls, each of the
foregoing officers has been employed by the Company in various
elected executive capacities for more than five years.
Ms. Brady was elected Senior Vice President of Human
Resources in 2006. From 1998 to 2006, she was Vice President and
Chief Human Resource Officer of Snap-On Inc. Ms. Warner was
elected Executive Vice President in 2007. Prior to joining the
Company in 2005 as President of the worldwide finishing
businesses, she was President of Plexus Systems and a Vice
President of EDS. Mr. Brunner was elected Executive Vice
President in 2006. He joined the Company in 1980 and has held
various management positions with the automotive fasteners
businesses. Mr. Gardner was elected Executive Vice
President in 2009. He joined the Company in 1997 and has held
various sales and management positions in the consumer packaging
businesses. Most recently, he served as Group President of the
consumer packaging businesses. Mr. Martel was elected
Executive Vice President in 2006. He joined the Company in 1994
and has held various management positions in the automotive and
metal components businesses. Mr. Martindale was elected
Executive Vice President in 2008. Prior to joining the Company
in 2005 as President of the test and measurement businesses, he
was Chief Financial Officer and Chief Operating Officer of
Instron. Mr. Nagarajan was elected Executive Vice President
in 2010. He joined the Company in 1991 and has held various
engineering and management positions in the welding businesses.
Most recently, he served as Group President, within the welding
businesses. Mr. O’Herlihy was elected Executive Vice
President in 2010. He joined the Company in 1989 and has held
various operational, management and leadership positions of
increasing responsibility. Most recently he served as President,
international food equipment businesses. Mr. Parry was
elected Vice Chairman in 2010. Previously he was elected
Executive Vice President in 2006. He joined the Company in 1994
and has held various management positions in the performance
polymers businesses. Mr. Scheuneman was appointed Vice
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President and Chief Accounting Officer in 2009. Prior to joining
the Company in 2009, he held several financial leadership
positions at W.W. Grainger, Inc., including Vice President,
Finance, for the Lab Safety Supply business from 2006 to 2009,
and Vice President, Internal Audit, from 2002 to 2006. He was
appointed Principal Accounting Officer in 2009. Mr. Valls
was elected Executive Vice President in 2007. Prior to this, he
was Vice President and General Manager of ITW Delfast
International. He joined the Company in 1989 and has held
various management positions in the European automotive
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 an Internet site
(
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 it. 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; and | |
| • | Corporate Governance Guidelines. |
| 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.
An
interruption or slowdown of economic recovery in the markets
served by the Company could adversely affect our business
operating results or financial condition.
Although recently most of our end markets have shown significant
recovery from the global recession, we cannot be certain that
the recovery will continue globally as anticipated. An
interruption or slowdown of the economic recovery in one or more
of our significant markets could have an adverse effect on the
Company’s business, results of operations or financial
condition.
The
global nature of our operations subjects the Company to
political and economic risks that could adversely affect our
business, results of operations or financial
condition.
The Company currently operates in 57 countries. In 2010,
approximately 58% of the Company’s revenues were generated
from sales to customers outside of the United States. As the
Company continues to expand its global footprint, these sales
may represent an increasing portion of the Company’s
revenues. The risks inherent in our global operations include:
| • | fluctuation in currency exchange rates; | |
| • | limitations on ownership and on repatriation of earnings; | |
| • | transportation delays and interruptions; | |
| • | political, social and economic instability and disruptions; | |
| • | government embargoes or foreign trade restrictions; | |
| • | the imposition of duties and tariffs and other trade barriers; |
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| • | import and export controls; | |
| • | labor unrest and current and changing regulatory environments; | |
| • | the potential for 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.
Our
acquisition of businesses could negatively impact our
profitability and return on invested capital.
As part of our business strategy, we acquire businesses in the
ordinary course. Our acquisitions involve a number of risks and
financial, accounting, managerial and operational challenges,
including the following, any of which could adversely affect our
growth and profitability:
| • | Any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable. | |
| • | Acquisitions could cause our financial results to differ from our expectations in any given fiscal period, or over the long term. | |
| • | Acquisition-related earnings charges could adversely impact operating results. | |
| • | Acquisitions could place unanticipated demands on our management, operational resources and financial and internal control systems. | |
| • | We may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated. The realization of any of these liabilities may increase our expenses or adversely affect our financial position. | |
| • | As a result of our acquisitions, we have recorded significant goodwill and other identifiable intangible assets on our balance sheet. If we are not able to realize the value of these assets, we may incur charges relating to the impairment of these assets. |
We may
incur fines or penalties, damage to our reputation or other
adverse consequences if our employees, agents or business
partners violate anti-bribery or other laws.
We cannot provide assurance that our internal controls will
always protect us from reckless or criminal acts committed by
our employees, agents or business partners that would violate
U.S. and/or
non-U.S. laws,
including anti-bribery laws, competition, and export and import
compliance. Any such improper actions could subject us to civil
or criminal investigations in the U.S. and in other
jurisdictions, could lead to substantial civil or criminal
monetary and non-monetary penalties against us or our
subsidiaries, and could damage our reputation.
A
significant fluctuation between the U.S. dollar and other
currencies could adversely impact our operating
income.
Although the Company’s financial results are reported in
U.S. dollars, a significant portion of our 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 we generate revenues and incur expenses. Significant
long-term fluctuations in relative currency values, in
particular an increase in the value of the U.S. dollar
against foreign currencies, could have an adverse effect on our
profitability and financial condition.
Diminished
credit availability could adversely impact our ability to
readily obtain financing or to obtain cost-effective
financing.
A deterioration in world financial markets and decreases in
credit availability could make it more difficult for us to
obtain financing when desired or cause the cost of financing to
increase.
9
Table of Contents
Raw
material price increases and supply shortages could adversely
affect results.
The supply of raw materials to the Company and to its component
parts suppliers could be interrupted for a variety of reasons,
including availability and pricing. Prices for raw materials
necessary for production have fluctuated significantly in the
past and significant increases could adversely affect the
Company’s results of operations and profit margins. Due to
pricing pressure or other factors, the Company may not be able
to pass along increased raw material and components parts prices
to its customers in the form of price increases or its ability
to do so could be delayed. Consequently, its results of
operations and financial condition may be adversely affected.
If the
Company is unable to successfully introduce new products or
adequately protect its intellectual property, its future growth
may be adversely affected.
The Company’s ability to develop new products based on
innovation can affect its competitive position and often
requires the investment of significant resources. Difficulties
or delays in research, development or production of new products
and services or failure to gain market acceptance of new
products and technologies may reduce future revenues and
adversely affect the Company’s competitive position.
Protecting the Company’s intellectual property is critical
to its innovation efforts. The Company owns a number of patents,
trademarks and licenses related to its products and has
exclusive and non-exclusive rights under patents owned by
others. The Company’s intellectual property may be
challenged or infringed upon by third parties, particularly in
countries where property rights are not highly developed or
protected, or the Company may be unable to maintain, renew or
enter into new license agreements with third-party owners of
intellectual property on reasonable terms. Unauthorized use of
the Company’s intellectual property rights or inability to
preserve existing intellectual property rights could adversely
impact the Company’s competitive position and results of
operations.
An
unfavorable environment for making acquisitions may adversely
affect the Company’s growth rate.
The Company has historically followed a strategy of identifying
and acquiring businesses with complementary products and
services as well as larger acquisitions that represent potential
new platforms. There can be no assurance that the Company will
be able to continue to find suitable businesses to purchase or
that it will be able to acquire such businesses on acceptable
terms. If the Company is unsuccessful in its efforts, its growth
rate could be adversely affected.
Unfavorable
tax law changes and tax authority rulings may adversely affect
results.
The Company is subject to income taxes in the United States and
in various foreign jurisdictions. Domestic and international tax
liabilities are based on the income and expenses in various tax
jurisdictions. The Company’s effective tax rate could be
adversely affected by changes in the mix of earnings among
countries with differing statutory tax rates, changes in the
valuation allowance of deferred tax assets or tax laws. The
amount of income taxes and other taxes are subject to ongoing
audits by U.S. federal, state and local tax authorities and
by
non-U.S. authorities.
If these audits result in assessments different from amounts
recorded, future financial results may include unfavorable tax
adjustments.
Our
defined benefit pension plans are subject to financial market
risks that could adversely affect our results of operations and
cash flows.
The performance of the financial markets and interest rates
impact our funding obligations under our 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 our funding obligations and adversely impact
our results of operations and cash flows.
10
Table of Contents
Potential
adverse outcome 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, successful 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,” “strategy,” “prospects,”
“estimate,” “project,” “target,”
“anticipate,” “guidance,”
“forecast,” and other similar words, including,
without limitation, statements regarding 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 anticipated improvement of
worldwide end markets in 2011, the adequacy of internally
generated funds and credit facilities, the meeting of dividend
payout objectives, the ability to fund debt service obligations,
the Company’s portion of future benefit payments related to
pension and postretirement benefits, expected contributions to
defined benefit plans, the availability of additional financing,
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.
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.
11
Table of Contents
| ITEM 2. | Properties |
As of December 31, 2010, the Company operated the following
plants and office facilities, excluding regional sales offices
and warehouse facilities:
|
Number
|
||||||||||||||||
|
of
|
Floor Space | |||||||||||||||
| Properties | Owned | Leased | Total | |||||||||||||
| (In millions of square feet) | ||||||||||||||||
|
Transportation
|
105 | 4.6 | 2.5 | 7.1 | ||||||||||||
|
Industrial Packaging
|
114 | 7.5 | 3.2 | 10.7 | ||||||||||||
|
Power Systems & Electronics
|
77 | 5.1 | 1.2 | 6.3 | ||||||||||||
|
Food Equipment
|
45 | 3.6 | 0.7 | 4.3 | ||||||||||||
|
Construction Products
|
89 | 2.9 | 1.5 | 4.4 | ||||||||||||
|
Polymers & Fluids
|
87 | 1.6 | 1.5 | 3.1 | ||||||||||||
|
Decorative Surfaces
|
12 | 4.1 | — | 4.1 | ||||||||||||
|
All Other
|
183 | 6.7 | 3.3 | 10.0 | ||||||||||||
|
Corporate
|
38 | 4.3 | 0.2 | 4.5 | ||||||||||||
|
Total
|
750 | 40.4 | 14.1 | 54.5 | ||||||||||||
The principal plants outside of the U.S. are in Australia,
Belgium, Brazil, Canada, China, Czech Republic, Denmark, France,
Germany, Ireland, Italy, Netherlands, Spain, Switzerland and the
United Kingdom.
The Company’s properties are primarily of steel, brick or
concrete construction and are maintained in good operating
condition. Productive 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 productive 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 businesses.
| ITEM 3. | Legal Proceedings |
Not applicable.
12
Table of Contents
PART II
| ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock Price and Dividend Data
— The
common stock of Illinois Tool Works Inc. was listed on the New
York Stock Exchange for 2010 and 2009. Quarterly market price
and dividend data for 2010 and 2009 were as shown below:
|
Market Price
|
Dividends
|
|||||||||||
| Per Share | Declared | |||||||||||
| High | Low | Per Share | ||||||||||
|
2010:
|
||||||||||||
|
Fourth quarter
|
$ | 53.89 | $ | 45.57 | $ | .34 | ||||||
|
Third quarter
|
47.67 | 40.33 | .34 | |||||||||
|
Second quarter
|
52.72 | 41.05 | .31 | |||||||||
|
First quarter
|
50.15 | 41.94 | .31 | |||||||||
|
2009:
|
||||||||||||
|
Fourth quarter
|
$ | 51.16 | $ | 40.77 | $ | .31 | ||||||
|
Third quarter
|
44.91 | 34.47 | .31 | |||||||||
|
Second quarter
|
38.97 | 29.69 | .31 | |||||||||
|
First quarter
|
37.47 | 25.60 | .31 | |||||||||
The approximate number of holders of record of common stock as
of January 31, 2011 was 9,879. This number does not include
beneficial owners of the Company’s securities held in the
name of nominees.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
*
$100 invested on 12/31/05
in stock or index funds, including reinvestment of dividends.
Fiscal year ending December 31.
13
Table of Contents
| ITEM 6. | Selected Financial Data |
| In Thousands (except per share amounts) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Operating revenues
|
$ | 15,870,376 | $ | 13,877,068 | $ | 17,100,341 | $ | 16,110,267 | $ | 13,788,346 | ||||||||||
|
Income from continuing operations
|
1,527,193 | 969,490 | 1,691,093 | 1,827,691 | 1,680,551 | |||||||||||||||
|
Income from continuing operations per common share:
|
||||||||||||||||||||
|
Basic
|
3.05 | 1.94 | 3.26 | 3.31 | 2.97 | |||||||||||||||
|
Diluted
|
3.03 | 1.93 | 3.24 | 3.29 | 2.95 | |||||||||||||||
|
Total assets at year-end
|
16,250,273 | 16,081,984 | 15,203,551 | 15,525,862 | 13,880,439 | |||||||||||||||
|
Long-term debt at year-end
|
2,511,959 | 2,914,874 | 1,247,883 | 1,888,839 | 955,610 | |||||||||||||||
|
Cash dividends declared per common share
|
1.30 | 1.24 | 1.18 | .98 | .75 | |||||||||||||||
Certain reclassifications of prior years’ data have been
made to conform to current year reporting.
On January 1, 2009, the Company adopted new accounting
guidance related to business combinations. The new accounting
guidance requires an entity to recognize assets acquired,
liabilities assumed, contractual contingencies and contingent
consideration at their fair value on the acquisition date. This
new guidance also requires prospectively that
(1) acquisition-related costs be expensed as incurred;
(2) restructuring costs generally be recognized as
post-acquisition expenses; and (3) changes in deferred tax
asset valuation allowances and income tax uncertainties after
the measurement period impact income tax expense. Refer to the
Acquisitions note in Item 8. Financial Statements and
Supplementary Data for discussion of the change in accounting
principle.
On January 1, 2009, the Company adopted new accounting
guidance on fair value measurements for all nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at
fair value on a nonrecurring basis. The new accounting guidance
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants and provides guidance
for measuring fair values and the necessary disclosures. Refer
to the Goodwill and Intangible Assets note in Item 8.
Financial Statements and Supplementary Data for discussion of
the change in accounting principle.
On January 1, 2008, the Company adopted new accounting
guidance related to defined benefit plans which required the
Company to change its measurement date to correspond with the
Company’s fiscal year-end. The Company previously used a
September 30 measurement date. Refer to the Pension and Other
Postretirement Benefits note in Item 8. Financial
Statements and Supplementary Data for discussion of the effect
of the change in accounting principle.
On January 1, 2007, the Company adopted new accounting
guidance that addresses how a change or projected change in the
timing of cash flows relating to income taxes generated by a
leveraged lease transaction affects the accounting by a lessor
for that lease.
Information on the comparability of results is included in
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
| 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 multinational manufacturer of a
diversified range of industrial products and equipment with
operations in 57 countries. These businesses are internally
reported as 60 operating segments to senior management. The
Company’s 60 operating segments have been aggregated into
the following eight external reportable segments:
Transportation; Industrial Packaging; Power Systems &
Electronics; Food Equipment; Construction Products;
Polymers & Fluids; Decorative Surfaces; and All Other.
14
Table of Contents
Due to the large number of diverse businesses and the
Company’s highly decentralized operating style, 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.
The results of each segment are analyzed by identifying the
effects of changes in the results of the base businesses, newly
acquired companies, restructuring costs, goodwill and intangible
asset impairment charges, and currency translation on the
operating revenues and operating income of each segment. Base
businesses are those businesses that have been included in the
Company’s results of operations for more than
12 months. The changes to base business operating income
include the estimated effects of both operating leverage and
changes in variable margins and overhead costs. Operating
leverage is the estimated effect of the base business revenue
changes on operating income, assuming variable margins remain
the same as the prior period. As manufacturing and
administrative overhead costs usually do not significantly
change as a result of revenues increasing or decreasing, the
percentage change in operating income due to operating leverage
is usually more than the percentage change in the base business
revenues.
A key element of the Company’s business strategy is its
continuous 80/20 business process for both existing businesses
and new acquisitions. The basic concept of this 80/20 business
process is to focus on what is most important (the 20% of the
items which account for 80% of the value) and to spend less time
and resources on the less important (the 80% of the items which
account for 20% of the value). The Company’s operations use
this 80/20 business process to simplify and focus on the key
parts of their business, and as a result, reduce complexity that
often disguises what is truly important. The Company’s
operations utilize the 80/20 process in various aspects of their
businesses. Common applications of the 80/20 business process
include:
| • | Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products. | |
| • | Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers. | |
| • | Simplifying the supplier base by partnering with 80/20 suppliers and reducing the number of 20/80 suppliers. | |
| • | Designing business processes, systems and measurements around the 80/20 activities. |
The result of the application of this 80/20 business process is
that the Company has over time improved its long-term operating
and financial performance. These 80/20 efforts can result in
restructuring projects that reduce costs and improve margins.
Corporate management works closely with those businesses that
have operating results below expectations to help those
businesses better apply this 80/20 business process and improve
their results.
CONSOLIDATED
RESULTS OF OPERATIONS
The Company’s consolidated results of operations for 2010,
2009 and 2008 are summarized as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 15,870,376 | $ | 13,877,068 | $ | 17,100,341 | ||||||
|
Operating income
|
2,356,678 | 1,385,979 | 2,501,286 | |||||||||
|
Margin %
|
14.8 | % | 10.0 | % | 14.6 | % | ||||||
15
Table of Contents
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
10.8 | % | 44.2 | % | 3.0 | % | (18.4 | )% | (51.8 | )% | (6.0 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 6.0 | 0.6 | — | 21.2 | 3.8 | ||||||||||||||||||
| 10.8 | 50.2 | 3.6 | (18.4 | ) | (30.6 | ) | (2.2 | ) | ||||||||||||||||
|
Acquisitions and divestitures
|
3.0 | 1.9 | (0.2 | ) | 4.2 | — | (0.6 | ) | ||||||||||||||||
|
Restructuring costs
|
— | 8.9 | 0.8 | — | (4.1 | ) | (0.7 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 7.5 | 0.7 | — | (4.1 | ) | (0.7 | ) | ||||||||||||||||
|
Translation
|
0.8 | 1.5 | — | (4.8 | ) | (5.8 | ) | (0.4 | ) | |||||||||||||||
|
Other
|
(0.2 | ) | — | (0.1 | ) | 0.2 | — | — | ||||||||||||||||
| 14.4 | % | 70.0 | % | 4.8 | % | (18.8 | )% | (44.6 | )% | (4.6 | )% | |||||||||||||
Operating Revenues
Revenues increased 14.4% in 2010 versus 2009 primarily due to
higher base revenues and revenues from acquisitions. Base
revenues increased 10.8% in 2010 versus 2009 as the Company saw
improvement in macroeconomic indices across many geographies as
worldwide end markets began to recover from the global
recession. North American and international base revenues
increased 10.9% and 10.4%, respectively, in 2010 versus 2009.
End markets associated with transportation, welding, industrial
packaging and PC board/electronics showed improvement in 2010.
The company anticipates continued macroeconomic improvement in
2011.
Revenues decreased 18.8% in 2009 versus 2008 primarily due to
lower base revenues and the unfavorable effect of currency
translation, mainly due to the strengthening of the dollar,
partially offset by revenues from acquisitions. Total base
revenues declined 18.4% in 2009 versus 2008. Base revenues
declined 21.6% and 14.9% for North American and international
businesses, respectively, as both were adversely affected by the
global recession and weak industrial production in related end
markets throughout 2009.
Operating Income
Operating income increased 70.0% in 2010 versus 2009 primarily
due to the increase in base revenues, lower restructuring
expenses, and 2009 goodwill and intangible asset impairment
charges. Base margins increased 360 basis points primarily
due to positive leverage from the increase in base revenues.
Additionally, benefits from restructuring projects were
partially offset by unfavorable selling price versus material
cost comparisons. Lower restructuring expenses in 2010 versus
2009 reflect the Company’s 2009 efforts to reduce costs in
response to weak economic conditions. In 2009, the Company
recorded impairment charges of $90.0 million and
$15.6 million against goodwill and intangibles,
respectively, compared to $1.0 million in intangible asset
impairment charges in 2010.
Operating income declined 44.6% in 2009 versus 2008 due to the
decline in base revenues, the negative effect of currency
translation, increased restructuring expenses and increased
goodwill and intangible asset impairment charges. In 2009, the
Company recorded impairment charges of $90.0 million and
$15.6 million against goodwill and intangibles,
respectively. The goodwill and intangible asset impairments were
primarily related to new reporting units which were acquired
over the last few years before the recent economic downturn.
These charges were driven primarily by lower current forecasts
compared to the expected
16
Table of Contents
forecasts at the time the reporting units were acquired. The
higher restructuring expenses reflected the Company’s
efforts to reduce costs in response to weak economic conditions.
Improvements in base variable margins and lower overhead costs
increased base margins 380 basis points in 2009, as the
cumulative benefits of restructuring projects began to be
realized and selling price versus material cost comparisons were
favorable. Total margins declined by 460 basis points in
2009 primarily due to the declines in base revenues,
restructuring expenses and the goodwill and intangible asset
impairment charges.
TRANSPORTATION
Businesses in this segment produce components, fasteners, fluids
and polymers, as well as truck remanufacturing and related parts
and service.
In the Transportation segment, products and services include:
| • | metal and plastic components, fasteners and assemblies for automobiles and light trucks; | |
| • | fluids and polymers for auto aftermarket maintenance and appearance; | |
| • | fillers and putties for auto body repair; | |
| • | polyester coatings and patch and repair products for the marine industry; and | |
| • | truck remanufacturing and related parts and service. |
In 2010, this segment primarily served the automotive original
equipment manufacturers and tiers (61%) and automotive
aftermarket (25%) markets.
The results of operations for the Transportation segment for
2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 2,531,304 | $ | 2,066,446 | $ | 2,352,273 | ||||||
|
Operating income
|
373,864 | 143,571 | 273,088 | |||||||||
|
Margin %
|
14.8 | % | 6.9 | % | 11.6 | % | ||||||
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
20.0 | % | 101.4 | % | 4.7 | % | (16.2 | )% | (52.2 | )% | (5.0 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 25.5 | 1.5 | — | 23.5 | 3.3 | ||||||||||||||||||
| 20.0 | 126.9 | 6.2 | (16.2 | ) | (28.7 | ) | (1.7 | ) | ||||||||||||||||
|
Acquisitions and divestitures
|
2.4 | 8.1 | 0.2 | 9.1 | (0.6 | ) | (0.9 | ) | ||||||||||||||||
|
Restructuring costs
|
— | 17.7 | 1.0 | — | (4.1 | ) | (0.6 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 10.0 | 0.6 | — | (5.3 | ) | (0.7 | ) | ||||||||||||||||
|
Translation
|
0.1 | (2.4 | ) | (0.2 | ) | (5.1 | ) | (8.7 | ) | (0.8 | ) | |||||||||||||
|
Other
|
— | 0.1 | 0.1 | — | — | — | ||||||||||||||||||
| 22.5 | % | 160.4 | % | 7.9 | % | (12.2 | )% | (47.4 | )% | (4.7 | )% | |||||||||||||
Operating
Revenues
Revenues increased 22.5% in 2010 versus 2009 primarily due to
the increase in base and acquisition revenues. The increase in
acquisition revenue was primarily due to the purchase of a North
American
17
Table of Contents
automotive aftermarket business in the second quarter of 2010.
Worldwide automotive base revenues increased 30.6%. North
American automotive base revenues increased 37.8% in 2010 versus
2009 primarily due to an increase in auto builds of
approximately 39%. International automotive base revenues
increased 25.1% primarily due to an increase in European auto
builds of approximately 16% and increased product penetration.
The automotive aftermarket businesses, which were less impacted
in 2009 by the economic downturn, were virtually flat over the
prior year. Base revenues for the truck remanufacturing and
related parts and service business declined 5.4% over the prior
year.
Revenues declined 12.2% in 2009 versus 2008 due to declines in
base revenues and the unfavorable effect of currency
translation. Acquisition revenues partially mitigated the base
revenue decrease and were primarily related to the purchase of a
North American truck remanufacturing and related parts and
service business in the third quarter of 2008. Worldwide
automotive base revenues declined 19.0% for the full year.
North American automotive base revenues declined 23.3% in
2009 due to a decline in auto builds of 32%. International
automotive base revenues declined 15.4% in 2009 due to a 24%
decline in European auto builds. The automotive aftermarket
businesses, which were less impacted by the economic downturn,
declined 9.5%.
Operating
Income
Operating income increased 160.4% in 2010 versus 2009 primarily
due to the increase in base revenues, lower restructuring
expenses, 2009 goodwill and intangible asset impairment charges,
and income from acquisitions. Base margins increased
620 basis points primarily due to the positive leverage
effect of the increase in base revenues described above,
benefits from restructuring projects and favorable inventory
obsolescence expense comparisons. During the third quarter of
2009, a $12.0 million goodwill impairment charge was
recorded in the truck remanufacturing and related parts and
service business.
Operating income decreased 47.4% in 2009 versus 2008 primarily
due to the decline in base revenues described above, the
unfavorable effect of currency translation and higher
restructuring expenses. In addition, a $12.0 million
goodwill impairment charge was recorded in the third quarter of
2009 related to the North American truck remanufacturing and
related parts and service business. The increase in
restructuring expenses was primarily due to efforts to reduce
costs in response to the decline in worldwide automotive
production. Total operating margins declined by 470 basis
points primarily due to the decline in base revenues described
above, partially offset by reductions in overhead expenses,
favorable selling price versus material cost comparisons and
benefits of restructuring projects.
INDUSTRIAL
PACKAGING
Businesses in this segment produce steel, plastic and paper
products and equipment used for bundling, shipping and
protecting goods in transit.
In the Industrial Packaging segment, products include:
| • | steel and plastic strapping and related tools and equipment; | |
| • | plastic stretch film and related equipment; | |
| • | paper and plastic products that protect goods in transit; and | |
| • | metal jacketing and other insulation products. |
In 2010, this segment primarily served the general industrial
(24%), primary metals (22%), food and beverage (13%) and
construction (9%) markets.
The results of operations for the Industrial Packaging segment
for 2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 2,276,774 | $ | 1,927,442 | $ | 2,618,922 | ||||||
|
Operating income
|
235,643 | 88,754 | 281,134 | |||||||||
|
Margin %
|
10.3 | % | 4.6 | % | 10.7 | % | ||||||
18
Table of Contents
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
14.5 | % | 122.1 | % | 4.3 | % | (21.6 | )% | (86.4 | )% | (8.8 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 3.6 | 0.2 | — | 30.7 | 4.2 | ||||||||||||||||||
| 14.5 | 125.7 | 4.5 | (21.6 | ) | (55.7 | ) | (4.6 | ) | ||||||||||||||||
|
Acquisitions
|
2.3 | 3.6 | (0.1 | ) | 1.2 | (0.2 | ) | (0.2 | ) | |||||||||||||||
|
Restructuring costs
|
— | 33.3 | 1.3 | — | (4.4 | ) | (0.6 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 0.4 | — | — | — | — | ||||||||||||||||||
|
Translation
|
1.3 | 2.4 | — | (6.0 | ) | (8.1 | ) | (0.7 | ) | |||||||||||||||
|
Other
|
— | 0.1 | — | — | — | — | ||||||||||||||||||
| 18.1 | % | 165.5 | % | 5.7 | % | (26.4 | )% | (68.4 | )% | (6.1 | )% | |||||||||||||
Operating
Revenues
Revenues increased 18.1% in 2010 versus 2009 due to the increase
in base revenues, revenues from acquisitions and the favorable
effect of currency translation. Base revenues increased 23.2%
for the North American strapping businesses in 2010 largely
due to an increase in steel and plastic strap volume driven by
improved industrial production demand in key industries
including primary metals and general industrial. The
international strapping businesses increased 10.5% while
worldwide protective packaging increased 16.4% over the prior
period. Acquisition revenue increased primarily due to the
purchase of a North American protective packaging business in
the fourth quarter of 2009.
Revenues decreased 26.4% in 2009 versus 2008 primarily due to
lower base revenues and the unfavorable impact of currency
translation. Base revenues declined 35.3% for the North American
strapping businesses largely due to declines in consumable and
equipment volume in key end markets such as primary metals,
construction and general industrial. The international strapping
businesses declined 25.6% due to the global decrease in
industrial production activity. Worldwide stretch and protective
packaging declined 13.8% and 1.3%, respectively.
Operating
Income
Operating income increased 165.5% in 2010 versus 2009 primarily
due to the increase in base revenues and lower restructuring
expenses. Base operating margins increased 450 basis points
primarily driven by leverage from the increase in base revenues
and restructuring benefits, partially offset by unfavorable
selling price versus material cost comparisons. Lower
restructuring expenses compared to 2009 increased total
operating margins by 130 basis points.
Operating income decreased 68.4% in 2009 versus 2008 primarily
due to the negative leverage effect of the decline in base
revenues described above, the negative effect of currency
translation and higher restructuring expenses. Base margins
declined 460 basis points primarily due to the decline in
base revenues discussed above, partially offset by favorable
selling price versus material cost comparisons and reduced
overhead costs as the benefits of restructuring projects began
to be realized.
19
Table of Contents
POWER
SYSTEMS & ELECTRONICS
Businesses in this segment produce equipment and consumables
associated with specialty power conversion, metallurgy and
electronics.
In the Power Systems & Electronics segment, products
include:
| • | arc welding equipment; | |
| • | metal arc welding consumables and related accessories; | |
| • | metal solder materials for PC board fabrication; | |
| • | equipment and services for microelectronics assembly; | |
| • | electronic components and component packaging; and | |
| • | airport ground support equipment. |
In 2010, this segment primarily served the general industrial
(46%), electronics (17%) and construction (6%) markets.
The results of operations for the Power Systems &
Electronics segment for 2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 1,942,054 | $ | 1,601,587 | $ | 2,334,121 | ||||||
|
Operating income
|
410,352 | 216,863 | 461,300 | |||||||||
|
Margin %
|
21.1 | % | 13.5 | % | 19.8 | % | ||||||
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
19.7 | % | 57.6 | % | 4.3 | % | (31.4 | )% | (60.5 | )% | (8.4 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 8.8 | 1.0 | — | 20.1 | 5.8 | ||||||||||||||||||
| 19.7 | 66.4 | 5.3 | (31.4 | ) | (40.4 | ) | (2.6 | ) | ||||||||||||||||
|
Acquisitions
|
0.3 | (0.4 | ) | (0.1 | ) | 2.5 | (0.9 | ) | (0.8 | ) | ||||||||||||||
|
Restructuring costs
|
— | 8.3 | 0.9 | — | (3.5 | ) | (1.0 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 13.1 | 1.5 | — | (6.0 | ) | (1.7 | ) | ||||||||||||||||
|
Translation
|
1.2 | 1.8 | — | (2.4 | ) | (2.3 | ) | (0.2 | ) | |||||||||||||||
|
Other
|
0.1 | — | — | (0.1 | ) | 0.1 | — | |||||||||||||||||
| 21.3 | % | 89.2 | % | 7.6 | % | (31.4 | )% | (53.0 | )% | (6.3 | )% | |||||||||||||
Operating
Revenues
Revenues increased 21.3% in 2010 versus 2009 primarily due to
growth in base business. Worldwide welding base revenues
increased 11.0%. North American welding base business revenues
increased 15.9% as end markets began to experience recovery,
particularly for heavy equipment OEM’s and general
manufacturers. Base business revenues for the international
welding businesses increased 1.0% in 2010 versus 2009 primarily
due to increased oil and gas end market activity, partially
offset by declines in Asian shipyard activity. Base
20
Table of Contents
revenues for the PC board fabrication businesses increased 71.6%
as demand for consumer electronics and capital equipment
increased significantly.
Revenues declined 31.4% in 2009 versus 2008 mainly due to
declines in base revenues and the negative effect of currency
translation. Revenues fell as end market demand declined across
the broad spectrum of industries that this segment serves,
including key end markets such as commercial construction and
general industrial. The revenue decrease was partially offset by
2008 acquisitions, including a welding equipment business and a
PC board fabrication business. Worldwide base welding revenues
declined 32.6% in 2009. North American welding base businesses
declined 36.3% while international welding base businesses
declined 23.5%. Base revenues for the electronics businesses
fell 29.4% while base revenues in the PC board fabrication
businesses fell 44.9%, both largely due to the decline in
consumer demand for electronics during 2009.
Operating
Income
Operating income increased 89.2% in 2010 versus 2009 mainly due
to the favorable leverage effect of the growth in base revenues,
2009 impairment charges and lower restructuring expenses. Base
margins increased 530 basis points primarily due to the
favorable leverage effect of the growth in base revenues, the
cumulative benefits of restructuring projects and favorable
product mix, partially offset by unfavorable selling price
versus material cost comparisons. During the first quarter of
2009, $24.7 million of goodwill and intangible asset
impairment charges were recorded in the PC Board fabrication and
welding accessories businesses.
Operating income decreased 53.0% in 2009 versus 2008 primarily
due to the declines in base revenues described above, 2009
impairment charges, higher restructuring expenses and the
negative effect of currency translation. Goodwill and intangible
asset impairment charges of $18.0 million and
$6.7 million, respectively, were incurred in the PC board
fabrication and welding accessories businesses in the first
quarter of 2009. Base margins decreased 260 basis points
primarily due to the decline in base revenues, partially offset
by favorable selling price versus material cost comparisons,
benefits of restructuring projects and lower overhead costs.
FOOD
EQUIPMENT
Businesses in this segment produce commercial food equipment and
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 2010, this segment primarily served the food
institutional/restaurant (45%), service (34%) and food retail
(16%) markets.
The results of operations for the Food Equipment segment for
2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 1,871,511 | $ | 1,859,277 | $ | 2,133,186 | ||||||
|
Operating income
|
259,707 | 255,093 | 320,867 | |||||||||
|
Margin %
|
13.9 | % | 13.7 | % | 15.0 | % | ||||||
21
Table of Contents
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
0.6 | % | 1.7 | % | 0.2 | % | (9.1 | )% | (25.4 | )% | (2.7 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | (4.6 | ) | (0.6 | ) | — | 13.8 | 2.3 | ||||||||||||||||
| 0.6 | (2.9 | ) | (0.4 | ) | (9.1 | ) | (11.6 | ) | (0.4 | ) | ||||||||||||||
|
Acquisitions
|
0.5 | (0.2 | ) | (0.1 | ) | 1.3 | — | (0.2 | ) | |||||||||||||||
|
Restructuring costs
|
— | 4.5 | 0.6 | — | (3.5 | ) | (0.6 | ) | ||||||||||||||||
|
Translation
|
(0.4 | ) | 0.4 | 0.1 | (5.0 | ) | (5.4 | ) | (0.1 | ) | ||||||||||||||
|
Other
|
— | — | — | — | — | — | ||||||||||||||||||
| 0.7 | % | 1.8 | % | 0.2 | % | (12.8 | )% | (20.5 | )% | (1.3 | )% | |||||||||||||
Operating
Revenues
Revenues increased 0.7% in 2010 versus 2009 as modest base
business and acquisition revenue increases were partially offset
by the unfavorable effect of currency translation. North
American base revenues declined 1.4% in 2010 versus 2009
primarily due to declines in equipment sales for end markets
including the lodging and casino markets. Base revenues in the
service portion of the business increased 1.5% as customers
continued to maintain existing equipment. International base
revenues increased 2.4% for the period largely due to increased
Asian and Latin American revenue offset by lower European
equipment sales in 2010 versus 2009. The acquired revenues were
attributable to the acquisition of a European food equipment
business in the third quarter of 2010.
Revenues decreased 12.8% in 2009 versus 2008 due to the decline
in base business and the unfavorable effect of currency
translation, partially offset by revenues from acquisitions. The
acquired revenues were attributable to the acquisition of a
European food equipment business. North American food equipment
base revenues declined 11.2% while international food equipment
base revenues declined 7.9% in 2009 as a result of weak demand
across all worldwide markets. Base revenues for the North
American institutional/restaurant businesses declined 14.7% as
customers delayed equipment purchases. Base service revenues
declined a moderate 1.2% as customers continued to maintain
existing equipment.
Operating
Income
Operating income increased 1.8% in 2010 versus 2009. Base
business margins decreased 40 basis points primarily due to
higher overhead expenses and adjustments related to a European
business, partially offset by favorable selling price versus
material cost comparisons and benefits from restructuring. Lower
restructuring expenses in 2010 versus 2009 increased total
operating margins by 60 basis points.
Operating income declined 20.5% in 2009 versus 2008 due to the
decrease in base revenues described above and the unfavorable
effect of currency translation and restructuring expenses. Base
margins decreased 40 basis points primarily due to the
decline in base revenues, partially offset by margin gains from
favorable selling price versus material cost comparisons,
benefits from restructuring projects and favorable product mix.
22
Table of Contents
CONSTRUCTION
PRODUCTS
Businesses in this segment produce tools, fasteners and other
products for construction applications.
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 2010, this segment primarily served the residential
construction (45%), renovation construction (28%), and
commercial construction (23%) markets.
The results of operations for the Construction Products segment
for 2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 1,755,028 | $ | 1,529,509 | $ | 1,990,683 | ||||||
|
Operating income
|
200,927 | 97,871 | 244,822 | |||||||||
|
Margin %
|
11.4 | % | 6.4 | % | 12.3 | % | ||||||
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
5.0 | % | 31.5 | % | 1.6 | % | (16.9 | )% | (59.2 | )% | (6.3 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 63.0 | 3.8 | — | 13.3 | 2.0 | ||||||||||||||||||
| 5.0 | 94.5 | 5.4 | (16.9 | ) | (45.9 | ) | (4.3 | ) | ||||||||||||||||
|
Acquisitions
|
5.3 | 0.2 | (0.5 | ) | 0.7 | (1.0 | ) | (0.2 | ) | |||||||||||||||
|
Restructuring costs
|
— | (4.8 | ) | (0.3 | ) | — | (1.9 | ) | (0.3 | ) | ||||||||||||||
|
Translation
|
4.4 | 15.4 | 0.4 | (7.0 | ) | (11.2 | ) | (1.1 | ) | |||||||||||||||
| 14.7 | % | 105.3 | % | 5.0 | % | (23.2 | )% | (60.0 | )% | (5.9 | )% | |||||||||||||
Operating
Revenues
Revenues increased 14.7% in 2010 versus 2009 primarily due to an
increase in base revenues, revenues from acquisitions and the
favorable effect of currency translation. European base revenues
increased 8.4% in 2010 primarily due to improved market
conditions. Base revenues for the Asia-Pacific region increased
3.7% as market conditions in the Australian residential
construction market improved. North American base revenues
increased 1.8% primarily due to modest inventory restocking and
a one-time licensing agreement settlement in the second quarter
of 2010 in the commercial construction business. The North
American base business was negatively impacted by an 8% decline
in U.S. housing starts on an annualized basis and an 18%
decline in commercial construction square footage activity.
Acquisition revenue was primarily the result of the purchase of
a European business in the second quarter of 2010.
Revenues declined 23.2% in 2009 versus 2008 primarily as a
result of the decline in base revenues and the unfavorable
effect of currency translation. Base revenues for the North
American, European and Asia-Pacific regions decreased 26.7%,
22.9% and 1.1%, respectively, primarily due to weakness in the
residential and commercial construction markets in North America
and Europe. U.S. housing starts declined 14% on
23
Table of Contents
an annualized basis in 2009 versus 2008. In addition,
U.S. commercial construction square footage activity fell
46% for the year versus 2008. The Asia-Pacific region
outperformed other regions largely due to better customer
activity in Australia and New Zealand.
Operating Income
Operating income increased 105.3% in 2010 versus 2009 primarily
due to positive leverage from the increase in base revenues
described above, lower operating expenses and the favorable
effect of currency translation, partially offset by higher
restructuring expenses. Base margins increased 540 basis
points versus the prior year primarily due to the favorable
leverage effect of the increase in base revenues, favorable
selling price versus material cost comparisons, favorable
inventory obsolescence expense comparisons, benefits from
restructuring projects and a favorable one-time licensing
agreement settlement in the second quarter of 2010 in the
commercial construction business.
Operating income decreased 60.0% in 2009 versus 2008 primarily
due to the base revenue decline described above. In addition,
the unfavorable effect of currency translation and higher
restructuring expenses contributed to the lower income and
margins. Base margins declined 430 basis points as reduced
operating expenses, including favorable selling price versus
material cost comparisons and benefits from restructuring
projects, were more than offset by the effect of lower base
revenues.
POLYMERS &
FLUIDS
Businesses in this segment produce adhesives, sealants,
lubrication and cutting fluids and hygiene products.
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; and | |
| • | pressure-sensitive adhesives and components for telecommunications, electronics, medical and transportation applications. |
In 2010, this segment primarily served the general industrial
(27%), construction (13%), MRO (12%) and automotive aftermarket
(10%) markets.
The results of operations for the Polymers & Fluids
segment for 2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 1,359,542 | $ | 1,195,750 | $ | 1,295,972 | ||||||
|
Operating income
|
200,295 | 80,231 | 190,805 | |||||||||
|
Margin %
|
14.7 | % | 6.7 | % | 14.7 | % | ||||||
24
Table of Contents
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
8.0 | % | 49.9 | % | 2.6 | % | (12.5 | )% | (34.7 | )% | (3.7 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 4.9 | 0.3 | — | 21.1 | 3.5 | ||||||||||||||||||
| 8.0 | 54.8 | 2.9 | (12.5 | ) | (13.6 | ) | (0.2 | ) | ||||||||||||||||
|
Acquisitions
|
4.8 | 5.7 | (0.3 | ) | 10.6 | (1.8 | ) | (1.2 | ) | |||||||||||||||
|
Restructuring costs
|
— | 11.7 | 0.7 | — | (4.1 | ) | (0.7 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 75.3 | 4.7 | — | (31.6 | ) | (5.3 | ) | ||||||||||||||||
|
Translation
|
0.9 | 2.1 | — | (5.9 | ) | (6.9 | ) | (0.6 | ) | |||||||||||||||
|
Other
|
— | — | — | 0.1 | — | — | ||||||||||||||||||
| 13.7 | % | 149.6 | % | 8.0 | % | (7.7 | )% | (58.0 | )% | (8.0 | )% | |||||||||||||
Operating
Revenues
Revenues increased 13.7% in 2010 versus 2009 primarily due to an
increase in base revenues and revenues from acquisitions.
Acquisition revenue was primarily the result of the purchase of
four Latin American adhesive businesses in 2009 and a Latin
American polymers business in the third quarter of 2010. Total
base revenues for both the polymers and fluids businesses
increased 8.0% due to recovery in most of the industrial based
end markets served by the worldwide polymers and fluids
businesses. Growth in the emerging markets of Brazil and China
was particularly strong during the year.
Revenues decreased 7.7% in 2009 versus 2008 primarily due to
lower base revenues and the unfavorable effect of currency
translation, partially offset by revenues from acquisitions.
Acquisition revenue was primarily the result of the purchase of
a pressure sensitive adhesives business and two construction
adhesives businesses in 2008. Total base revenues declined 12.5%
primarily due to weakness in worldwide industrial production and
construction end markets. Worldwide base revenues for the fluids
businesses declined 10.5% while base revenues for the polymers
businesses declined 13.8% in 2009.
Operating
Income
Operating income increased 149.6% in 2010 versus 2009 primarily
due to the increase in base revenues described above, lower
restructuring expenses and a 2009 goodwill impairment charge.
During the first quarter of 2009, a $60.0 million goodwill
impairment charge was recorded against the pressure sensitive
adhesives business. Base margins increased 290 basis points
versus last year primarily due to the positive leverage effect
of the increase in base revenues and benefits of restructuring
projects.
Operating income decreased 58.0% in 2009 versus 2008 primarily
due to the decline in base revenues and the $60.0 million
goodwill impairment charge against the pressure sensitive
adhesives business in the first quarter of 2009. Base margins
decreased 20 basis points as favorable selling price versus
material cost comparisons and the benefits of restructuring
projects were more than offset by the effect of lower base
revenues. The first quarter 2009 goodwill impairment charge
reduced total operating margins by 530 basis points.
Additionally, acquisitions diluted margins 120 basis points
for the year.
25
Table of Contents
DECORATIVE
SURFACES
Businesses in this segment produce decorative surfacing
materials for furniture, office and retail space, countertops
and other applications.
In the Decorative Surfaces segment, products include:
| • | decorative high-pressure laminate for furniture, office and retail space, and countertops; and | |
| • | high-pressure laminate worktops. |
In 2010, this segment primarily served the commercial
construction (58%), renovation construction (30%) and
residential construction (11%) markets.
The results of operations for the Decorative Surfaces segment
for 2010, 2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 1,007,848 | $ | 998,191 | $ | 1,230,995 | ||||||
|
Operating income
|
104,675 | 113,725 | 142,582 | |||||||||
|
Margin %
|
10.4 | % | 11.4 | % | 11.6 | % | ||||||
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
1.1 | % | 4.2 | % | 0.3 | % | (14.9 | )% | (51.4 | )% | (5.0 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | (12.7 | ) | (1.4 | ) | — | 39.3 | 5.4 | ||||||||||||||||
| 1.1 | (8.5 | ) | (1.1 | ) | (14.9 | ) | (12.1 | ) | 0.4 | |||||||||||||||
|
Restructuring costs
|
— | (0.4 | ) | (0.1 | ) | — | (5.3 | ) | (0.7 | ) | ||||||||||||||
|
Translation
|
(0.2 | ) | 0.9 | 0.1 | (4.0 | ) | (2.9 | ) | 0.2 | |||||||||||||||
|
Other
|
0.1 | — | 0.1 | — | 0.1 | (0.1 | ) | |||||||||||||||||
| 1.0 | % | (8.0 | )% | (1.0 | )% | (18.9 | )% | (20.2 | )% | (0.2 | )% | |||||||||||||
Operating
Revenues
Revenues increased 1.0% in 2010 versus 2009 primarily due to the
increase in base revenues. Base revenues increased 3.2% for the
North American laminate business primarily due to improvement in
the commercial construction sector including office equipment.
International base revenues increased 1.2% primarily due to
improvements in Asian end markets, partially offset by modest
declines in European end markets. Base revenues for the flooring
business declined 37.1% as the Company is in the process of
closing its flooring business.
Revenues decreased 18.9% in 2009 versus 2008 due to lower base
revenues and the unfavorable effect of currency translation.
North American laminate base revenues declined 18.9% as a result
of the downturn in North American commercial and residential
construction. These declines were partially offset by product
penetration in the premium high-definition laminate product
market. International base revenues declined 9.7% due to
European volume declines.
26
Table of Contents
Operating
Income
Operating income decreased 8.0% in 2010 versus 2009 primarily
due to higher operating costs. Base margins decreased
110 basis points versus the prior year primarily due to
costs related to the closing of the flooring business and
unfavorable selling price versus material cost comparisons,
partially offset by the benefits of restructuring projects and
the positive leverage of the increase in base revenues.
Operating income decreased 20.2% in 2009 versus 2008 primarily
due to the decline in base revenues, increased restructuring
expenses and the unfavorable effect of currency translation.
Base margins increased 40 basis points primarily due to
favorable selling price versus material cost comparisons,
benefits from restructuring projects and higher margins on the
high-definition laminate product, partially offset by the effect
of lower base revenues.
ALL
OTHER
This segment includes all other operating segments.
In the All Other segment, products include:
| • | equipment and related software for testing and measuring of materials and structures; | |
| • | plastic reclosable packaging for consumer food storage; | |
| • | plastic reclosable bags for storage of clothes and home goods; | |
| • | plastic consumables that multi-pack cans and bottles and related equipment; | |
| • | plastic fasteners and components for appliances, furniture and industrial uses; | |
| • | metal fasteners and components for appliances and industrial applications; | |
| • | swabs, wipes and mats for clean room usage; | |
| • | foil, film and related equipment used to decorate consumer products; | |
| • | product coding and marking equipment and related consumables; | |
| • | paint spray and adhesive dispensing equipment; | |
| • | static and contamination control equipment; and | |
| • | line integration, conveyor systems and line automation for the food and beverage industries. |
In 2010, this segment primarily served the general industrial
(26%), food and beverage (17%), consumer durables (14%),
electronics (6%) and food retail/service (5%) markets.
The results of operations for the All Other segment for 2010,
2009 and 2008 were as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 3,219,272 | $ | 2,764,141 | $ | 3,198,433 | ||||||
|
Operating income
|
571,215 | 389,871 | 586,688 | |||||||||
|
Margin %
|
17.7 | % | 14.1 | % | 18.3 | % | ||||||
27
Table of Contents
In 2010 and 2009, the changes in revenues, operating income and
operating margins over the prior year were primarily due to the
following factors:
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
|
% Point Increase
|
% Point Increase
|
|||||||||||||||||||||||
| % Increase (Decrease) | (Decrease) | % Increase (Decrease) | (Decrease) | |||||||||||||||||||||
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
Operating
|
|||||||||||||||||||
| Revenues | Income | Margins | Revenues | Income | Margins | |||||||||||||||||||
|
Base business:
|
||||||||||||||||||||||||
|
Revenue change/Operating leverage
|
10.5 | % | 34.9 | % | 3.1 | % | (17.5 | )% | (43.4 | )% | (5.7 | )% | ||||||||||||
|
Changes in variable margins and overhead costs
|
— | 0.5 | 0.1 | — | 17.7 | 3.9 | ||||||||||||||||||
| 10.5 | 35.4 | 3.2 | (17.5 | ) | (25.7 | )% | (1.8 | ) | ||||||||||||||||
|
Acquisitions and divestitures
|
6.1 | 2.4 | (0.7 | ) | 7.5 | 2.0 | (0.9 | ) | ||||||||||||||||
|
Restructuring costs
|
— | 8.8 | 1.1 | — | (5.3 | ) | (1.2 | ) | ||||||||||||||||
|
Impairment of goodwill and intangibles
|
— | 0.2 | — | — | (0.3 | ) | — | |||||||||||||||||
|
Translation
|
(0.2 | ) | (0.3 | ) | — | (3.6 | ) | (4.3 | ) | (0.3 | ) | |||||||||||||
|
Other
|
0.1 | — | — | — | 0.1 | — | ||||||||||||||||||
| 16.5 | % | 46.5 | % | 3.6 | % | (13.6 | )% | (33.5 | )% | (4.2 | )% | |||||||||||||
Operating
Revenues
Revenues increased 16.5% in 2010 versus 2009 primarily due an
increase in base business revenues and revenues from
acquisitions. The acquisition revenue was primarily due to the
purchase of a consumer packaging business in the fourth quarter
of 2009. Base business revenues increased 7.8% for the test and
measurement businesses due to increased demand for capital
equipment, particularly in the Asia-Pacific region. Base
revenues increased 6.7% in 2010 versus 2009 for the consumer
packaging business due to improvement in decorating end markets.
Base revenues for the industrial plastics and metals businesses
improved 15.1% due to increased demand for domestic appliances.
Base revenues increased 16.3% for the finishing businesses due
to improved North American and international industrial end
market demand.
Revenues decreased 13.6% in 2009 versus 2008 primarily due to
the decline in base business revenues and the unfavorable effect
of currency translation, partially offset by an increase in
revenues from acquired companies. The acquisition revenue was
primarily related to the purchase of two test and measurement
businesses in 2008. Base revenues declined 15.6%, 12.2%, 21.5%
and 32.5%, for the test and measurement, consumer packaging,
industrial plastics and metals and finishing businesses,
respectively, due to negative industrial production trends and
the related impact of weak end market and capital equipment
demand across the broad spectrum of industries this segment
serves.
Operating
Income
Operating income increased 46.5% in 2010 versus 2009 primarily
due to the growth in base revenues and lower restructuring
expenses. Base margins increased 320 basis points primarily
due to the positive leverage effect from the increase in base
revenues and benefits from past restructuring projects,
partially offset by unfavorable selling price versus material
cost comparisons. In addition, lower restructuring costs
increased total operating margins by 110 basis points.
Acquisitions and divestitures diluted total operating margins by
70 basis points in 2010.
Operating income declined 33.5% in 2009 versus 2008 primarily
due to the decline in base revenues described above, higher
restructuring expenses and the unfavorable effect of currency
translation, partially offset by increased income from
acquisitions. Base margins decreased 180 basis points as
favorable selling
28
Table of Contents
price versus material cost comparisons and benefits from
restructuring projects were more than offset by the effect of
lower base revenues. Additionally, acquisitions diluted total
margins by 90 basis points.
AMORTIZATION
OF INTANGIBLE ASSETS
Amortization expense increased to $212.9 million in 2010
and $203.2 million in 2009, versus $184.4 million in
2008, due to intangible asset amortization related to newly
acquired businesses.
IMPAIRMENT
OF GOODWILL AND OTHER INTANGIBLE ASSETS
Total goodwill and other intangible asset impairment charges by
segment for the years ended December 31, 2010, 2009 and
2008 were as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Transportation
|
$ | — | $ | 14,414 | $ | 13 | ||||||
|
Industrial Packaging
|
— | 386 | — | |||||||||
|
Power Systems & Electronics
|
— | 28,337 | 824 | |||||||||
|
Food Equipment
|
— | 46 | — | |||||||||
|
Polymers & Fluids
|
— | 60,416 | 251 | |||||||||
|
All Other
|
1,006 | 1,969 | 487 | |||||||||
| $ | 1,006 | $ | 105,568 | $ | 1,575 | |||||||
The Company recorded $1.0 million of intangible asset
impairment charges in 2010 versus $105.6 million of
goodwill and other intangible asset impairment charges in 2009.
The 2009 charges were primarily due to goodwill impairment
charges related to the pressure sensitive adhesives reporting
unit of $60.0 million, the PC board fabrication reporting
unit of $18.0 million and the truck remanufacturing and
related parts and service reporting unit of $12.0 million.
Impairment of goodwill and other intangible assets was
$105.6 million in 2009 versus $1.6 million in 2008.
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 $175.5 million in 2010 versus
$164.8 million in 2009 primarily due to interest on the
6.25% and 5.15% notes which were issued in March 2009,
partially offset by lower interest related to the
5.75% notes repaid at maturity in March 2009, and lower
commercial paper borrowings. Interest expense increased to
$164.8 million in 2009 versus $154.5 million in 2008
primarily due to interest on the 6.25% and 5.15% notes,
partially offset by lower interest related to the
5.75% notes, lower interest related to the
6.875% notes repaid at maturity in November 2008, and lower
commercial paper rates and borrowings. The weighted-average
interest rate on commercial paper was 0.2% in 2010, 0.3% in 2009
and 2.4% in 2008.
OTHER
INCOME (EXPENSE)
Other income (expense) was income of $30.8 million in 2010
versus expense of $7.4 million in 2009. The increase was
primarily due to gains on disposal of operating affiliates of
$12.8 million (versus a loss of $6.7 million in 2009),
and higher income from investments of $20.8 million (versus
$4.9 million in 2009).
Other income (expense) was expense of $7.4 million in 2009
versus income of $4.7 million in 2008. The decrease was
primarily due to 2009 losses on foreign currency transactions of
$24.9 million, lower income from investments of
$4.9 million (versus $17.0 million in 2008) and
lower interest income of $17.6 million (versus
$29.4 million in 2008), partially offset by the impact of
the German transfer tax charge of $44.0 million in 2008.
29
Table of Contents
INCOME
TAXES
The effective tax rate was 31.0% in 2010, 20.1% in 2009 and
28.1% in 2008. The effective tax rate for 2010 was unfavorably
impacted by the discrete tax charge of $21.9 million in the
first quarter of 2010 related to the Patient Protection and
Affordable Care Act and the Health Care and Education
Reconciliation Act, signed into law in March 2010. The effective
tax rate for 2009 was favorably impacted by discrete tax
adjustments in the fourth quarter of $85.5 million related
to a global legal structure reorganization and
$77.5 million related to a favorable settlement reached
with the German tax authorities. In the above mentioned
reorganization, the Company reorganized its ownership structure
in certain U.S. and foreign subsidiaries in the fourth
quarter of 2009 and made an election regarding the U.S. tax
treatment of a foreign subsidiary. The Company recorded a
reduction in tax expense primarily for the effect of the
resulting foreign tax credits. Also during the fourth quarter of
2009, the Company finalized a settlement with the German tax
authorities primarily regarding the treatment of an intercompany
financing transaction which resulted in the reversal of
previously established tax reserves as a reduction of tax
expense.
The Company has been litigating its dispute with the Australian
Tax Office over the tax treatment of an intercompany financing
transaction between the U.S. and Australia. The case was
heard before the Federal Court of Australia, Victoria, in
September 2010. The proceedings result from the Company’s
appeal of a decision by the Australian Tax Commissioner to
disallow income tax deductions for income tax years 2002 through
2005 and the assessment of withholding taxes for income tax year
2003. The Company also contested the Commissioner’s similar
determination for income tax years 2006 and 2007; however, the
parties agreed to defer the appeal of that determination until a
decision was made on the earlier years. On February 4,
2011, the Federal Court of Australia decided in the
Company’s favor with respect to a significant portion of
the income tax deductions. The Court issued the final orders on
February 18, 2011. Based on this decision, the Company
expects in 2011 to decrease its unrecognized tax benefits
related to this matter by approximately $186 million and
decrease tax expense by approximately $166 million. The
Australian Tax Office has 21 days from the date the Court
issued its final orders to appeal the decision.
See the Income Taxes note in Item 8. Financial Statements
and Supplementary Data for a reconciliation of the
U.S. Federal statutory rate to the effective tax rate.
INCOME
FROM CONTINUING OPERATIONS
Income from continuing operations in 2010 of $1.5 billion
($3.03 per diluted share) was 57.5% higher than 2009 income of
$969.5 million ($1.93 per diluted share). Income from
continuing operations in 2009 was 42.7% lower than 2008 income
of $1.7 billion ($3.24 per diluted share).
FOREIGN
CURRENCY
The weakening of the U.S. dollar against foreign currencies
increased operating revenues by approximately $153 million
in 2010 and increased income from continuing operations by
approximately 6 cents per diluted share. The strengthening of
the U.S. dollar against foreign currencies decreased
operating revenues by approximately $653 million in 2009
and decreased income from continuing operations by approximately
10 cents per diluted share.
DISCONTINUED
OPERATIONS
Loss from discontinued operations was $22.5 million in 2009
versus $172.1 million in 2008, primarily due to 2008
impairment on goodwill of $132.6 million, and a loss
reserve on assets held for sale of $64.0 million partially
offset by gains on sales of discontinued operations in 2008
versus losses in 2009. See the Discontinued Operations note in
Item 8. Financial Statements and Supplementary Data for
further information.
30
Table of Contents
NEW
ACCOUNTING PRONOUNCEMENTS
In October 2009, new accounting guidance was issued on
multiple-deliverable revenue arrangements. The new accounting
guidance amends the accounting for multiple-deliverable
arrangements to enable the vendor to account for products or
services separately rather than as a combined unit. The guidance
establishes a hierarchy for determining the selling price of a
deliverable, which is based on: (1) vendor-specific
objective evidence, (2) third-party evidence or
(3) estimates. The Company will adopt the new accounting
guidance on January 1, 2011 and does not expect the new
guidance to materially affect the Company’s financial
position or results of operations.
2011
INTERNATIONAL REPORTING CHANGE
Effective January 1, 2011, the Company will be eliminating
the one month lag for the reporting of its international
operations outside of North America. As a result, the Company
will report both North American and international results on a
calendar year basis. Prior to this, the international fiscal
reporting period began in December and ended in November.
LIQUIDITY
AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are free
operating cash flows and short-term credit facilities.
Management continues to believe that internally generated cash
flows will be adequate to service debt, continue to pay
dividends, to finance internal growth and to fund small to
medium-sized acquisitions.
The primary uses of liquidity are:
| • | dividend payments — the Company’s dividend payout guidelines are 30% to 45% of the last two years’ average free operating cash flow; | |
| • | acquisitions; and | |
| • | any excess liquidity may be used for share repurchases. |
Cash
Flow
The Company uses free operating cash flow to measure cash flow
generated by operations that is available for dividends,
acquisitions, share repurchases and debt repayment. The Company
believes this measure is useful to investors in evaluating our
financial performance and measures our ability to generate cash
internally to fund Company initiatives. 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 three years ended
December 31, 2010, 2009 and 2008 was as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Net cash provided by operating activities
|
$ | 1,560,790 | $ | 2,146,589 | $ | 2,222,224 | ||||||
|
Additions to plant and equipment
|
(286,172 | ) | (247,102 | ) | (362,312 | ) | ||||||
|
Free operating cash flow
|
$ | 1,274,618 | $ | 1,899,487 | $ | 1,859,912 | ||||||
|
Cash dividends paid
|
$ | (636,200 | ) | $ | (619,681 | ) | $ | (598,690 | ) | |||
|
Acquisitions
|
(433,403 | ) | (281,674 | ) | (1,546,982 | ) | ||||||
|
Repurchases of common stock
|
(350,000 | ) | — | (1,390,594 | ) | |||||||
|
Net proceeds (repayments) of debt
|
(185,364 | ) | (736,470 | ) | 1,467,613 | |||||||
|
Effect of exchange rate changes on cash and equivalents
|
(34,747 | ) | 183,722 | (82,002 | ) | |||||||
|
Other
|
236,362 | 130,438 | 206,169 | |||||||||
|
Net increase (decrease) in cash and equivalents
|
$ | (128,734 | ) | $ | 575,822 | $ | (84,574 | ) | ||||
31
Table of Contents
On August 20, 2007, the Company’s Board of Directors
authorized a stock repurchase program, which provides for the
buyback of up to $3.0 billion of the Company’s common
stock over an open-ended period of time. Through
December 31, 2010, the Company repurchased
47.9 million shares of its common stock under this program
at an average price of $44.48 per share. There are approximately
$871 million of authorized repurchases remaining under this
program.
Return
on Average Invested Capital
The Company uses return on average invested capital
(“ROIC”) to measure the effectiveness of its
operations’ use of invested capital to generate profits.
The Company believes that ROIC is a meaningful metric to
investors in evaluating the Company’s financial performance
and may be different than the method used by other companies to
calculate ROIC. Invested capital represents the net assets of
the Company, excluding cash and cash equivalents and outstanding
debt, which are excluded as they do not represent capital
investment in the Company’s operations. Average invested
capital is calculated using balances at the start of the year
and at the end of each quarter. ROIC for the three years ended
December 31, 2010, 2009, and 2008 was as follows:
| Dollars in Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating income
|
$ | 2,356,678 | $ | 1,385,979 | $ | 2,501,286 | ||||||
|
Taxes (31.0%, 20.1% and 28.1%, respectively)
|
(729,628 | ) | (278,998 | ) | (702,611 | ) | ||||||
|
Operating income after taxes
|
$ | 1,627,050 | $ | 1,106,981 | $ | 1,798,675 | ||||||
|
Invested Capital:
|
||||||||||||
|
Trade receivables
|
$ | 2,678,084 | $ | 2,491,492 | $ | 2,571,987 | ||||||
|
Inventories
|
1,547,447 | 1,356,233 | 1,774,697 | |||||||||
|
Net plant and equipment
|
2,023,045 | 2,136,527 | 2,109,432 | |||||||||
|
Investments
|
441,606 | 451,293 | 465,894 | |||||||||
|
Goodwill and intangible assets
|
6,573,943 | 6,584,149 | 6,297,219 | |||||||||
|
Accounts payable and accrued expenses
|
(2,147,516 | ) | (2,048,966 | ) | (1,999,097 | ) | ||||||
|
Net assets held for sale
|
— | — | 61,525 | |||||||||
|
Other, net
|
(95,655 | ) | (343,069 | ) | (667,660 | ) | ||||||
|
Total invested capital
|
$ | 11,020,954 | $ | 10,627,659 | $ | 10,613,997 | ||||||
|
Average invested capital
|
$ | 10,645,278 | $ | 10,390,424 | $ | 11,235,625 | ||||||
|
Return on average invested capital
|
15.3 | % | 10.7 | % | 16.0 | % | ||||||
The 460 basis point increase in ROIC in 2010 versus 2009
was the result of after-tax operating income increasing 47.0%,
primarily due to an increase in base business, while average
invested capital increased slightly.
The 530 basis point decrease in ROIC in 2009 versus 2008
was the result of after-tax operating income decreasing 38.5%,
resulting from the economic downturn, while average invested
capital decreased 7.5%.
32
Table of Contents
Working
Capital
Net working capital at December 31, 2010 and 2009 is
summarized as follows:
|
Increase
|
||||||||||||
| Dollars in Thousands | 2010 | 2009 | (Decrease) | |||||||||
|
Current Assets:
|
||||||||||||
|
Cash and equivalents
|
$ | 1,190,038 | $ | 1,318,772 | $ | (128,734 | ) | |||||
|
Trade receivables
|
2,678,084 | 2,491,492 | 186,592 | |||||||||
|
Inventories
|
1,547,447 | 1,356,233 | 191,214 | |||||||||
|
Other
|
552,832 | 508,098 | 44,734 | |||||||||
| 5,968,401 | 5,674,595 | 293,806 | ||||||||||
|
Current Liabilities:
|
||||||||||||
|
Short-term debt
|
317,787 | 213,681 | 104,106 | |||||||||
|
Accounts payable and accrued expenses
|
2,147,516 | 2,048,966 | 98,550 | |||||||||
|
Other
|
628,289 | 572,991 | 55,298 | |||||||||
| 3,093,592 | 2,835,638 | 257,954 | ||||||||||
|
Net Working Capital
|
$ | 2,874,809 | $ | 2,838,957 | $ | 35,852 | ||||||
|
Current Ratio
|
1.93 | 2.00 | ||||||||||
Debt
Total debt at December 31, 2010 and 2009 was as follows:
|
Increase
|
||||||||||||
| Dollars in Thousands | 2010 | 2009 | (Decrease) | |||||||||
|
Short-term debt
|
$ | 317,787 | $ | 213,681 | $ | 104,106 | ||||||
|
Long-term debt
|
2,511,959 | 2,914,874 | (402,915 | ) | ||||||||
|
Total debt
|
$ | 2,829,746 | $ | 3,128,555 | $ | (298,809 | ) | |||||
|
Total debt to total capitalization
|
23.2 | % | 26.2 | % | ||||||||
The Company issues commercial paper to fund general corporate
needs and to fund small and medium-sized acquisitions. As of
December 31, 2010, the Company had no amounts outstanding
under its commercial paper program. The Company has committed
lines of credit of $2.5 billion in the U.S. to support
the potential issuances of commercial paper. Of this amount,
$1.0 billion is provided under a line of credit agreement
with a termination date of June 10, 2011 and
$1.0 billion is provided under a line of credit agreement
with a termination date of June 11, 2013. The remaining
$500 million is provided under a revolving credit facility
that terminates on June 15, 2012. No amounts are
outstanding under these three facilities. The Company’s
foreign operations also have unused capacity on uncommitted
facilities of approximately $318 million.
The Company believes that based on its current free operating
cash flow,
debt-to-capitalization
ratios and credit ratings, it could readily obtain additional
financing if necessary. The Company’s targeted
debt-to-capital
ratio is 20% to 30%, excluding the impact of any larger
acquisitions.
33
Table of Contents
Stockholders’
Equity
The changes to stockholders’ equity during 2010 and 2009
were as follows:
| In Thousands | 2010 | 2009 | ||||||
|
Beginning balance
|
$ | 8,817,876 | $ | 7,675,091 | ||||
|
Net income
|
1,527,193 | 947,009 | ||||||
|
Cash dividends declared
|
(649,709 | ) | (620,679 | ) | ||||
|
Repurchases of common stock
|
(350,000 | ) | — | |||||
|
Stock option and restricted stock activity
|
186,818 | 165,007 | ||||||
|
Currency translation adjustments
|
(180,149 | ) | 716,208 | |||||
|
Other
|
29,217 | (64,760 | ) | |||||
|
Ending balance
|
$ | 9,381,246 | $ | 8,817,876 | ||||
CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company’s significant contractual obligations as of
December 31, 2010 were as follows:
|
2016 and
|
||||||||||||||||||||||||
| In Thousands | 2011 | 2012 | 2013 | 2014 | 2015 | Future Years | ||||||||||||||||||
|
Total long-term debt
|
$ | 252,236 | $ | 16,572 | $ | 6,132 | $ | 1,776,592 | $ | 2,688 | $ | 709,975 | ||||||||||||
|
Interest payments on notes and preferred debt securities
|
153,509 | 136,873 | 136,635 | 107,305 | 43,982 | 154,006 | ||||||||||||||||||
|
Minimum lease payments
|
150,509 | 109,472 | 83,673 | 58,649 | 43,952 | 73,956 | ||||||||||||||||||
| $ | 556,254 | $ | 262,917 | $ | 226,440 | $ | 1,942,546 | $ | 90,622 | $ | 937,937 | |||||||||||||
As of December 31, 2010, the Company has recorded income
taxes payable, including liabilities for unrecognized tax
benefits, of $459.1 million. The Company is not able to
reasonably estimate the timing of payments related to the
liabilities for unrecognized tax benefits.
At December 31, 2010, the Company had open stand-by letters
of credit of approximately $181 million, substantially all
of which expire in 2011. The Company had no other significant
off-balance sheet commitments at December 31, 2010.
CRITICAL
ACCOUNTING POLICIES
The Company has six accounting policies which it believes are
most important to the Company’s financial condition and
results of operations, and which require the Company to make
estimates about matters that are inherently uncertain.
Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates.
These critical accounting policies are as follows:
Realizability of Inventories
—
Inventories are stated at the lower of cost or market.
Generally, the Company’s businesses perform an analysis of
the historical sales usage of the individual inventory items on
hand and a reserve is recorded to adjust inventory cost to
market value based on the following usage criteria:
| Usage Classification | Criteria | Reserve % | ||||
|
Active
|
Quantity on hand is less than prior 6 months’ usage | 0 | % | |||
|
Slow-moving
|
Some usage in last 12 months, but quantity on hand exceeds prior 6 months’ usage | 50 | % | |||
|
Obsolete
|
No usage in the last 12 months | 90 | % | |||
34
Table of Contents
In addition, for approximately half of the
U.S. inventories, the Company has elected to use the
last-in,
first-out (“LIFO”) method of inventory costing.
Generally, this method results in a lower inventory value than
the
first-in,
first-out (“FIFO”) method due to the effects of
inflation.
Collectibility of Accounts Receivable
—
The Company estimates the allowance
for uncollectible accounts based on the greater of a specific
reserve or a reserve calculated based on the historical
write-off percentage over the last two years. In addition, the
allowance for uncollectible accounts includes reserves for
customer credits and cash discounts, which are also estimated
based on past experience.
Depreciation of Plant and Equipment
—
The Company’s
U.S. businesses compute depreciation on an accelerated
basis, as follows:
|
Buildings and improvements
|
150% declining balance | |
|
Machinery and equipment
|
200% declining balance |
The majority of the international businesses compute
depreciation on a straight-line basis to conform to their local
statutory accounting and tax regulations.
Income Taxes
—
The Company
provides deferred income tax assets and liabilities based on the
estimated future tax effects of differences between the
financial and tax bases of assets and liabilities based on
currently enacted tax laws. The Company’s deferred and
other tax balances are based on management’s interpretation
of the tax regulations and rulings in numerous taxing
jurisdictions. Income tax expense and liabilities recognized by
the Company also reflect its best estimates and assumptions
regarding, among other things, the level of future taxable
income and effect of the Company’s various tax planning
strategies. Future tax authority rulings and changes in tax
laws, changes in projected levels of taxable income and future
tax planning strategies could affect the actual effective tax
rate and tax balances recorded by the Company.
Goodwill and Intangible Assets
— The
Company’s business acquisitions typically result in
recording goodwill and intangible assets, which are a
significant portion of the Company’s total assets and
affect the amount of amortization expense and impairment charges
that the Company could incur in future periods. The Company
follows the guidance prescribed in the accounting standards to
test goodwill and intangible assets for impairment. On an annual
basis, or more frequently if triggering events occur, the
Company compares the estimated fair value of its 60 reporting
units to the carrying value of each reporting unit to determine
if a goodwill impairment exists. If the fair value of a
reporting unit is less than its carrying value, an impairment
loss, if any, is recorded for the difference between the implied
fair value and the carrying value of the reporting unit’s
goodwill. In calculating the fair value of the reporting units,
management relies on a number of factors, including operating
results, business plans, economic projections, anticipated
future cash flows, comparable transactions and other market
data. There are inherent uncertainties related to these factors
and management’s judgment in applying them in the
impairment tests of goodwill and intangible assets.
In the third quarter of 2009, the Company changed the date of
its annual goodwill impairment assessment from the first quarter
to the third quarter. This constituted a change in method of
applying an accounting principle that the Company believes is
preferable. The change was made to better align the timing of
the Company’s goodwill impairment assessment with the
Company’s annual business planning and forecasting process.
Goodwill and other intangible asset impairment charges related
to continuing operations were $1.0 million in 2010,
$105.6 million in 2009 and $1.6 million in 2008. The
impairments during 2009 were primarily related to new reporting
units which were acquired over the last few years before the
recent economic downturn. These charges were driven primarily by
lower current forecasts compared to the expected forecasts at
the time the reporting units were acquired. See the Goodwill and
Intangible Assets note in Item 8. Financial Statements and
Supplementary Data for further discussion of the relative
carrying values and fair values of the reporting units related
to these impairment charges.
35
Table of Contents
As of December 31, 2010, the Company had goodwill and
intangible assets of $6.6 billion allocated to its 60
reporting units. Although there can be no assurance that the
Company will not incur additional impairment charges related to
its goodwill and intangible assets, the Company generally
believes the risk of significant impairment charges is lessened
by the number of diversified businesses and end markets
represented by its 60 reporting units that have goodwill and
intangible assets. In addition, the individual businesses in
many of the reporting units have been acquired over a long
period of time, and therefore have been able to improve their
performance, primarily as a result of the application of the
Company’s 80/20 business simplification process. The amount
of goodwill and intangible assets allocated to individual
reporting units range from approximately $3 million to
$740 million, with the average amount equal to
$110 million.
Fair value determinations require considerable judgment and are
sensitive to changes in the factors described above. Due to the
inherent uncertainties associated with these factors and
economic conditions in the Company’s global end markets,
impairment charges related to one or more reporting units could
occur in future periods.
Pension and Other Postretirement Benefits
— The Company has various company-sponsored
defined benefit retirement plans covering a substantial portion
of U.S. employees and many employees outside the United
States. Pension and other postretirement expense and obligations
are determined based on actuarial valuations. Pension benefit
obligations are generally based on each participant’s years
of service, future compensation, and age at retirement or
termination. Important assumptions in determining pension and
postretirement expense and obligations are the discount rate,
the expected long-term return on plan assets and healthcare cost
trend rates. See the Pension and Other Postretirement Benefits
note in Item 8. Financial Statements and Supplementary Data
for additional discussion of actuarial assumptions used in
determining pension and postretirement health care liabilities
and expenses.
The Company determines the discount rate used to measure plan
liabilities as of the December 31 measurement date for the
U.S. pension and postretirement benefit plans. The discount
rate reflects the current rate at which the associated
liabilities could theoretically be effectively settled at the
end of the year. In estimating this rate, the Company looks at
rates of return on high-quality fixed income investments, with
similar duration to the liabilities in the plan. A 25 basis
point decrease in the discount rate would increase the present
value of the U.S. primary pension plan obligation by
approximately $32 million.
The expected long-term return on plan assets is based on
historical and expected long-term returns for similar investment
allocations among asset classes. For the U.S. primary
pension plan, the Company’s assumption for the expected
return on plan assets was 8.0% for 2010 and will be 8.0% for
2011. A 25 basis point decrease in the expected return on
plan assets would increase the annual pension expense by
approximately $3 million. See the Pension and Other
Postretirement Benefits note in Item 8. Financial
Statements and Supplementary Data for information on how this
rate is determined.
36
Table of Contents
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
MARKET
RISK
Interest
Rate Risk
The Company’s exposure to market risk for changes in
interest rates relates primarily to the Company’s debt.
The following table presents the Company’s debt for which
fair value is subject to changing market interest rates:
|
6.55%
|
||||||||||||||||||||
|
5.25%
|
5.15%
|
6.25%
|
Preferred Debt
|
4.88%
|
||||||||||||||||
|
Euro Notes Due
|
Notes Due
|
Notes Due
|
Securities Due
|
Notes Due thru
|
||||||||||||||||
| In Thousands | Oct 1, 2014 | April 1, 2014 | April 1, 2019 | Dec 31, 2011 | Dec 31, 2020 | |||||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||||||
|
Estimated cash outflow by year
of principal maturity |
||||||||||||||||||||
|
2011
|
$ | — | $ | — | $ | — | $ | 250,000 | $ | — | ||||||||||
|
2012
|
— | — | — | — | 10,233 | |||||||||||||||
|
2013
|
— | — | — | — | 4,312 | |||||||||||||||
|
2014
|
973,575 | 800,000 | — | — | 2,664 | |||||||||||||||
|
2015
|
— | — | — | — | 1,018 | |||||||||||||||
|
2016 and thereafter
|
— | — | 700,000 | — | 3,727 | |||||||||||||||
|
Estimated fair value
|
1,066,454 | 882,480 | 816,200 | 263,750 | 23,471 | |||||||||||||||
|
Carrying value
|
972,848 | 799,567 | 699,903 | 249,949 | 21,954 | |||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||
|
Total estimated cash outflow
|
$ | 1,126,275 | $ | 800,000 | $ | 700,000 | $ | 250,000 | $ | 27,667 | ||||||||||
|
Estimated fair value
|
1,192,860 | 870,176 | 781,158 | 267,500 | 28,815 | |||||||||||||||
|
Carrying value
|
1,125,241 | 799,447 | 699,894 | 249,902 | 27,667 | |||||||||||||||
Foreign
Currency Risk
The Company operates in the United States and 56 other
countries. In general, the Company’s products are primarily
manufactured and sold within the same country. The initial
funding for the foreign manufacturing operations was provided
primarily through the permanent investment of equity capital
from the U.S. parent company. Therefore, the Company and
its subsidiaries do not have significant assets or liabilities
denominated in currencies other than their functional
currencies. As such, the Company does not have any significant
derivatives or other financial instruments that are subject to
foreign currency risk at December 31, 2010 or 2009.
In October 2007, the Company issued €750.0 million of
5.25% Euro notes due October 1, 2014. The Company has
significant operations with the Euro as their functional
currency. The Company believes that the Euro cash flows from
these businesses will be adequate to fund the debt obligations
under these notes.
37
Table of Contents
| ITEM 8. | Financial Statements and Supplementary Data |
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Illinois Tool Works Inc. (the
“Company” or “ITW”) is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
ITW’s internal control system was designed to provide
reasonable assurance to the Company’s management and Board
of Directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
ITW management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2010. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in
Internal
Control — Integrated Framework.
Based on our
assessment we believe that, as of December 31, 2010, the
Company’s internal control over financial reporting is
effective based on those criteria.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010 has been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
herein.
|
/s/ David
B. Speer
|
/s/ Ronald
D. Kropp
|
|
|
David B. Speer
|
Ronald D. Kropp | |
|
Chairman & Chief Executive Officer
February 25, 2011 |
Senior Vice President & Chief Financial Officer
February 25, 2011 |
38
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Illinois Tool
Works Inc.:
We have audited the accompanying statement of financial position
of Illinois Tool Works Inc. and Subsidiaries (the
“Company”) as of December 31, 2010 and 2009, and
the related statements of income, income reinvested in the
business, comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2010. We also
have audited the Company’s internal control over financial
reporting as of December 31, 2010, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for these financial statements, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
management report on internal control over financial reporting.
Our responsibility is to express an opinion on these financial
statements and an opinion on the Company’s internal control
over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Illinois Tool Works Inc. and Subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on the criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
February 25, 2011
39
Table of Contents
Statement
of Income
Illinois Tool Works Inc. and Subsidiaries
Illinois Tool Works Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| In Thousands except for per share amounts | ||||||||||||
|
Operating Revenues
|
$ | 15,870,376 | $ | 13,877,068 | $ | 17,100,341 | ||||||
|
Cost of revenues
|
10,240,448 | 9,144,852 | 11,186,871 | |||||||||
|
Selling, administrative, and research and development expenses
|
3,059,360 | 3,037,439 | 3,226,199 | |||||||||
|
Amortization of intangible assets
|
212,884 | 203,230 | 184,410 | |||||||||
|
Impairment of goodwill and other intangible assets
|
1,006 | 105,568 | 1,575 | |||||||||
|
Operating Income
|
2,356,678 | 1,385,979 | 2,501,286 | |||||||||
|
Interest expense
|
(175,456 | ) | (164,839 | ) | (154,458 | ) | ||||||
|
Other income (expense)
|
30,771 | (7,350 | ) | 4,710 | ||||||||
|
Income from Continuing Operations Before Income Taxes
|
2,211,993 | 1,213,790 | 2,351,538 | |||||||||
|
Income taxes
|
684,800 | 244,300 | 660,445 | |||||||||
|
Income from Continuing Operations
|
1,527,193 | 969,490 | 1,691,093 | |||||||||
|
Loss from Discontinued Operations
|
— | (22,481 | ) | (172,090 | ) | |||||||
|
Net Income
|
$ | 1,527,193 | $ | 947,009 | $ | 1,519,003 | ||||||
|
Income Per Share from Continuing Operations:
|
||||||||||||
|
Basic
|
$ | 3.05 | $ | 1.94 | $ | 3.26 | ||||||
|
Diluted
|
$ | 3.03 | $ | 1.93 | $ | 3.24 | ||||||
|
Loss Per Share from Discontinued Operations:
|
||||||||||||
|
Basic
|
$ | — | $ | (0.04 | ) | $ | (0.33 | ) | ||||
|
Diluted
|
$ | — | $ | (0.04 | ) | $ | (0.33 | ) | ||||
|
Net Income Per Share:
|
||||||||||||
|
Basic
|
$ | 3.05 | $ | 1.89 | $ | 2.93 | ||||||
|
Diluted
|
$ | 3.03 | $ | 1.89 | $ | 2.91 | ||||||
The Notes to Financial Statements are an integral part of
this statement.
40
Table of Contents
Statement
of Income Reinvested in the Business
Illinois Tool Works Inc. and Subsidiaries
Illinois Tool Works Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Beginning Balance
|
$ | 9,521,740 | $ | 9,196,465 | $ | 9,879,065 | ||||||
|
Net income
|
1,527,193 | 947,009 | 1,519,003 | |||||||||
|
Cash dividends declared
|
(649,709 | ) | (620,679 | ) | (604,988 | ) | ||||||
|
Retirement of treasury shares
|
— | — | (1,583,827 | ) | ||||||||
|
Cumulative effect of adopting new accounting guidance, net of tax
|
— | (1,055 | ) | (12,788 | ) | |||||||
|
Ending Balance
|
$ | 10,399,224 | $ | 9,521,740 | $ | 9,196,465 | ||||||
Statement
of Comprehensive Income
Illinois Tool Works Inc. and Subsidiaries
Illinois Tool Works Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Net Income
|
$ | 1,527,193 | $ | 947,009 | $ | 1,519,003 | ||||||
|
Other Comprehensive Income:
|
||||||||||||
|
Foreign currency translation adjustments
|
(180,149 | ) | 716,208 | (874,952 | ) | |||||||
|
Pension and other postretirement benefit adjustments, net
of tax
|
24,966 | (62,271 | ) | (432,618 | ) | |||||||
|
Comprehensive Income
|
$ | 1,372,010 | $ | 1,600,946 | $ | 211,433 | ||||||
The Notes to Financial Statements are an integral part of
these statements.
41
Table of Contents
Statement
of Financial Position
Illinois Tool Works Inc. and Subsidiaries
Illinois Tool Works Inc. and Subsidiaries
| December 31 | ||||||||
| In Thousands except shares | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and equivalents
|
$ | 1,190,038 | $ | 1,318,772 | ||||
|
Trade receivables
|
2,678,084 | 2,491,492 | ||||||
|
Inventories
|
1,547,447 | 1,356,233 | ||||||
|
Deferred income taxes
|
301,591 | 231,858 | ||||||
|
Prepaid expenses and other current assets
|
251,241 | 276,240 | ||||||
|
Total current assets
|
5,968,401 | 5,674,595 | ||||||
|
Plant and Equipment:
|
||||||||
|
Land
|
259,109 | 247,911 | ||||||
|
Buildings and improvements
|
1,547,895 | 1,589,534 | ||||||
|
Machinery and equipment
|
3,870,773 | 3,945,692 | ||||||
|
Equipment leased to others
|
184,944 | 182,485 | ||||||
|
Construction in progress
|
97,879 | 90,908 | ||||||
|
Gross plant and equipment
|
5,960,600 | 6,056,530 | ||||||
|
Accumulated depreciation
|
(3,937,555 | ) | (3,920,003 | ) | ||||
|
Net plant and equipment
|
2,023,045 | 2,136,527 | ||||||
|
Investments
|
441,606 | 451,293 | ||||||
|
Goodwill
|
4,879,312 | 4,860,732 | ||||||
|
Intangible assets
|
1,694,631 | 1,723,417 | ||||||
|
Deferred income taxes
|
623,344 | 673,044 | ||||||
|
Other assets
|
619,934 | 562,376 | ||||||
| $ | 16,250,273 | $ | 16,081,984 | |||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current Liabilities:
|
||||||||
|
Short-term debt
|
$ | 317,787 | $ | 213,681 | ||||
|
Accounts payable
|
754,117 | 689,572 | ||||||
|
Accrued expenses
|
1,393,399 | 1,359,394 | ||||||
|
Cash dividends payable
|
169,233 | 155,724 | ||||||
|
Income taxes payable
|
459,056 | 417,267 | ||||||
|
Total current liabilities
|
3,093,592 | 2,835,638 | ||||||
|
Noncurrent Liabilities:
|
||||||||
|
Long-term debt
|
2,511,959 | 2,914,874 | ||||||
|
Deferred income taxes
|
186,935 | 207,677 | ||||||
|
Other liabilities
|
1,076,541 | 1,305,919 | ||||||
|
Total noncurrent liabilities
|
3,775,435 | 4,428,470 | ||||||
|
Stockholders’ Equity:
|
||||||||
|
Common stock:
|
||||||||
|
Issued — 538,505,782 shares in 2010 and
535,010,960 shares in 2009
|
5,385 | 5,350 | ||||||
|
Additional
paid-in-capital
|
460,806 | 270,985 | ||||||
|
Income reinvested in the business
|
10,399,224 | 9,521,740 | ||||||
|
Common stock held in treasury
|
(1,740,682 | ) | (1,390,594 | ) | ||||
|
Accumulated other comprehensive income
|
245,543 | 400,726 | ||||||
|
Noncontrolling interest
|
10,970 | 9,669 | ||||||
|
Total stockholders’ equity
|
9,381,246 | 8,817,876 | ||||||
| $ | 16,250,273 | $ | 16,081,984 | |||||
The Notes to Financial Statements are an integral part of
this statement.
42
Table of Contents
Statement
of Cash Flows
Illinois Tool Works Inc. and Subsidiaries
Illinois Tool Works Inc. and Subsidiaries
| For the Years Ended December 31 | ||||||||||||
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Cash Provided by (Used for) Operating Activities:
|
||||||||||||
|
Net income
|
$ | 1,527,193 | $ | 947,009 | $ | 1,519,003 | ||||||
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
||||||||||||
|
Depreciation
|
334,388 | 366,127 | 367,615 | |||||||||
|
Amortization and impairment of goodwill and other intangible
assets
|
213,890 | 308,798 | 324,292 | |||||||||
|
Change in deferred income taxes
|
(150,369 | ) | (477,582 | ) | (97,807 | ) | ||||||
|
Provision for uncollectible accounts
|
5,021 | 16,191 | 15,405 | |||||||||
|
(Gain) loss on sale of plant and equipment
|
(924 | ) | 1,856 | 4,245 | ||||||||
|
Income from investments
|
(20,808 | ) | (4,944 | ) | (17,017 | ) | ||||||
|
(Gain) loss on disposal of operations and affiliates
|
(12,783 | ) | 34,315 | 43,522 | ||||||||
|
Stock compensation expense
|
56,443 | 51,858 | 41,686 | |||||||||
|
Other non-cash items, net
|
(1,503 | ) | (1,548 | ) | 2,731 | |||||||
|
Change in assets and liabilities:
|
||||||||||||
|
(Increase) decrease in —
|
||||||||||||
|
Trade receivables
|
(238,213 | ) | 336,873 | 263,478 | ||||||||
|
Inventories
|
(177,761 | ) | 572,679 | (97,319 | ) | |||||||
|
Prepaid expenses and other assets
|
(51,203 | ) | 8,939 | (76,146 | ) | |||||||
|
Increase (decrease) in —
|
||||||||||||
|
Accounts payable
|
69,450 | (84,526 | ) | (191,856 | ) | |||||||
|
Accrued expenses and other liabilities
|
81,926 | (256,171 | ) | (21,141 | ) | |||||||
|
Income taxes receivable and payable
|
(73,992 | ) | 324,231 | 147,660 | ||||||||
|
Other, net
|
35 | 2,484 | (6,127 | ) | ||||||||
|
Net cash provided by operating activities
|
1,560,790 | 2,146,589 | 2,222,224 | |||||||||
|
Cash Provided by (Used for) Investing Activities:
|
||||||||||||
|
Acquisition of businesses (excluding cash and equivalents) and
additional interest in affiliates
|
(433,403 | ) | (281,674 | ) | (1,546,982 | ) | ||||||
|
Additions to plant and equipment
|
(286,172 | ) | (247,102 | ) | (362,312 | ) | ||||||
|
Purchases of investments
|
(16,047 | ) | (17,586 | ) | (19,583 | ) | ||||||
|
Proceeds from investments
|
25,322 | 20,215 | 26,932 | |||||||||
|
Proceeds from sale of plant and equipment
|
18,102 | 28,590 | 23,393 | |||||||||
|
Proceeds from sale of operations and affiliates
|
62,958 | 17,259 | 106,053 | |||||||||
|
Other, net
|
22,396 | (23,824 | ) | 9,182 | ||||||||
|
Net cash used for investing activities
|
(606,844 | ) | (504,122 | ) | (1,763,317 | ) | ||||||
|
Cash Provided by (Used for) Financing Activities:
|
||||||||||||
|
Cash dividends paid
|
(636,200 | ) | (619,681 | ) | (598,690 | ) | ||||||
|
Issuance of common stock
|
114,844 | 101,733 | 56,189 | |||||||||
|
Repurchases of common stock
|
(350,000 | ) | — | (1,390,594 | ) | |||||||
|
Net proceeds (repayments) of debt with original maturities of
three months or less
|
(152,037 | ) | (1,610,262 | ) | 1,510,374 | |||||||
|
Proceeds from debt with original maturities of more than three
months
|
759 | 2,159,140 | 118,662 | |||||||||
|
Repayments of debt with original maturities of more than three
months
|
(34,086 | ) | (1,285,348 | ) | (161,423 | ) | ||||||
|
Excess tax benefits from share-based compensation
|
8,787 | 4,051 | 4,003 | |||||||||
|
Net cash used for financing activities
|
(1,047,933 | ) | (1,250,367 | ) | (461,479 | ) | ||||||
|
Effect of Exchange Rate Changes on Cash and Equivalents
|
(34,747 | ) | 183,722 | (82,002 | ) | |||||||
|
Cash and Equivalents:
|
||||||||||||
|
Increase (decrease) during the year
|
(128,734 | ) | 575,822 | (84,574 | ) | |||||||
|
Beginning of year
|
1,318,772 | 742,950 | 827,524 | |||||||||
|
End of year
|
$ | 1,190,038 | $ | 1,318,772 | $ | 742,950 | ||||||
|
Cash Paid During the Year for Interest
|
$ | 175,682 | $ | 153,971 | $ | 157,175 | ||||||
|
Cash Paid During the Year for Income Taxes, Net of Refunds
|
$ | 903,045 | $ | 364,383 | $ | 619,885 | ||||||
|
Liabilities Assumed from Acquisitions
|
$ | 180,803 | $ | 57,863 | $ | 577,035 | ||||||
The Notes to Financial Statements are an integral part of
this statement.
43
Table of Contents
Notes to
Financial Statements
The Notes to Financial Statements
furnish additional
information on items in the financial statements. The notes have
been arranged in the same order as the related items appear in
the statements.
Illinois Tool Works Inc. (the “Company” or
“ITW”) is a multinational manufacturer of a
diversified range of industrial products and equipment with
operations in 57 countries. The Company primarily serves the
construction, general industrial, automotive and food
institutional/restaurant markets.
Significant accounting principles and policies of the Company
are in italics. Certain reclassifications of prior years’
data have been made to conform to current year reporting.
The preparation of the Company’s financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the
notes to financial statements. Actual results could differ from
those estimates. The significant estimates included in the
preparation of the financial statements are related to
inventories, trade receivables, plant and equipment, income
taxes, goodwill and intangible assets, product liability
matters, litigation, product warranties, pensions, other
postretirement benefits, environmental matters and stock options.
Consolidation and Translation
—
The
financial statements include the Company and substantially all
of its majority-owned subsidiaries. All significant intercompany
transactions are eliminated from the financial statements.
Substantially all of the Company’s foreign subsidiaries
outside North America have November 30 fiscal year-ends to
facilitate inclusion of their financial statements in the
December 31 consolidated financial statements.
Foreign subsidiaries’ assets and liabilities are
translated to U.S. dollars at
end-of-period
exchange rates. Revenues and expenses are translated at average
rates for the period. Translation adjustments are reported as a
component of accumulated other comprehensive income in
stockholders’ equity.
Discontinued Operations
— The Company
periodically reviews its operations for businesses which may no
longer be aligned with its long-term objectives. In August 2008,
the Company’s Board of Directors authorized the divestiture
of the Click Commerce industrial software business which was
previously reported in the All Other segment. In the second
quarter of 2009, the Company completed the sale of the Click
Commerce business.
In 2009, the Company sold an automotive components business. In
2008, the Company sold a consumer packaging business.
Results of the discontinued operations for the years ended
December 31, 2009 and 2008 were as follows:
| In Thousands | 2009 | 2008 | ||||||
|
Operating revenues
|
$ | 26,498 | $ | 117,553 | ||||
|
Loss before taxes
|
$ | (33,678 | ) | $ | (171,629 | ) | ||
|
Income tax (expense) benefit
|
11,197 | (461 | ) | |||||
|
Loss from discontinued operations
|
$ | (22,481 | ) | $ | (172,090 | ) | ||
In 2009, loss before taxes includes losses on disposals of
$27,665,000 on the Click Commerce and automotive components
businesses.
In 2008, loss before taxes includes goodwill impairment charges
of $132,563,000 related to the Click Commerce business and
losses on anticipated sale of $64,000,000 related to the Click
Commerce and the automotive components businesses. Also included
are gains on disposals of $19,942,000, primarily related to the
completed divestiture of a consumer packaging business.
44
Table of Contents
Notes to
Financial Statements — (Continued)
Acquisitions
—
The Company accounts for
acquisitions under the acquisition method, in which assets
acquired and liabilities assumed are recorded at fair value as
of the date of acquisition. The operating results of the
acquired companies are included in the Company’s
consolidated financial statements from the date of
acquisition.
Acquisitions,
individually and in the aggregate, did not materially affect the
Company’s results of operations or financial position for
all periods presented. Summarized information related to
acquisitions is as follows:
| In Thousands except number of acquisitions | 2010 | 2009 | 2008 | |||||||||
|
Number of acquisitions
|
24 | 20 | 50 | |||||||||
|
Net cash paid during the year
|
$ | 433,403 | $ | 281,674 | $ | 1,546,982 | ||||||
The premium over tangible net assets recorded for acquisitions
based on purchase price allocations during 2010, 2009 and 2008
were as follows:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
Premium
|
Average
|
Premium
|
Average
|
Premium
|
|||||||||||||||||||
| In Thousands except for weighted- average lives (years) | Life | Recorded | Life | Recorded | Life | Recorded | ||||||||||||||||||
|
Goodwill
|
$ | 184,209 | $ | 95,887 | $ | 676,235 | ||||||||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||||||||||
|
Customer lists and relationships
|
11.8 | 82,293 | 10.7 | 48,152 | 12.6 | 416,904 | ||||||||||||||||||
|
Patents and proprietary technology
|
11.2 | 34,365 | 12.3 | 30,421 | 12.7 | 111,593 | ||||||||||||||||||
|
Trademarks and brands
|
15.7 | 47,407 | 14.0 | 19,732 | 16.0 | 140,158 | ||||||||||||||||||
|
Noncompete agreements
|
3.0 | 2,169 | 6.2 | 8,859 | 3.2 | 25,637 | ||||||||||||||||||
|
Other
|
5.1 | 12,190 | 4.4 | 6,846 | 2.3 | 15,326 | ||||||||||||||||||
|
Total amortizable intangible assets
|
12.1 | 178,424 | 10.3 | 114,010 | 12.7 | 709,618 | ||||||||||||||||||
|
Indefinite-lived intangible assets:
|
||||||||||||||||||||||||
|
Trademarks and brands
|
13,008 | 12,254 | 39,488 | |||||||||||||||||||||
|
Total premium recorded
|
$ | 375,641 | $ | 222,151 | $ | 1,425,341 | ||||||||||||||||||
Of the total goodwill recorded for acquisitions, the Company
expects goodwill of $48,835,000 in 2010, $72,167,000 in 2009,
and $83,694,000 in 2008 will be tax deductible.
On January 1, 2009, the Company adopted new accounting
guidance related to business combinations. The new accounting
guidance requires an entity to recognize assets acquired,
liabilities assumed, contractual contingencies and contingent
consideration at their fair value on the acquisition date. The
new guidance also requires prospectively that
(1) acquisition-related costs be expensed as incurred;
(2) restructuring costs generally be recognized as a
post-acquisition expense; and (3) changes in deferred tax
asset valuation allowances and income tax uncertainties after
the measurement period impact income tax expense. Upon adoption
of the new guidance, the Company recorded an after-tax charge to
equity of $1,055,000 in 2009.
Operating Revenues
are recognized when persuasive
evidence of an arrangement exists, product has shipped and the
risks and rewards of ownership have transferred or services have
been rendered, the price to the customer is fixed or
determinable, and collectibility is reasonably assured,
which is generally at the time of product
shipment.
Typical sales arrangements are for
standard products and provide for transfer of ownership and risk
of loss at the time of shipment.
In limited
circumstances where significant obligations to the customer are
unfulfilled at the time of shipment, typically involving
installation and customer acceptance, revenue recognition is
deferred until such obligations have been completed. Customer
allowances and rebates, consisting primarily of volume discounts
and other short-term incentive programs, are estimated at the
time of sale based on historical experience and known trends and
are recorded as a reduction in reported
revenues.
No single customer accounted
for more than 5% of consolidated revenues in 2010, 2009 or 2008.
In October 2009, new accounting guidance was issued on
multiple-deliverable revenue arrangements. The new accounting
guidance amends the accounting for multiple-deliverable
arrangements to enable the vendor
45
Table of Contents
Notes to
Financial Statements — (Continued)
to account for product or services separately rather than as a
combined unit. The guidance establishes a hierarchy for
determining the selling price of a deliverable, which is based
on: (1) vendor-specific objective evidence,
(2) third-party evidence or (3) estimates. The Company
will adopt the new accounting guidance on January 1, 2011
and does not expect the new guidance to materially affect the
Company’s financial position or results of operations.
Research and Development Expenses
are recorded as
expense in the year incurred.
These costs
were $220,462,000 in 2010, $198,536,000 in 2009 and $212,658,000
in 2008.
Rental Expense
was $170,339,000 in 2010, $175,092,000 in
2009 and $161,810,000 in 2008. Future minimum lease payments for
the years ending December 31 are as follows:
| In Thousands | ||||
|
2011
|
$ | 150,509 | ||
|
2012
|
109,472 | |||
|
2013
|
83,673 | |||
|
2014
|
58,649 | |||
|
2015
|
43,952 | |||
|
2016 and future years
|
73,956 | |||
| $ | 520,211 | |||
Advertising Expenses
are recorded as expense in the
year incurred.
These costs were
$87,121,451 in 2010, $79,259,000 in 2009 and $107,395,000 in
2008.
Other Income (Expense)
consisted of the following:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Interest income
|
$ | 22,420 | $ | 17,551 | $ | 29,392 | ||||||
|
Investment income
|
20,808 | 4,944 | 17,017 | |||||||||
|
Losses on foreign currency transactions
|
(16,015 | ) | (24,948 | ) | (1,407 | ) | ||||||
|
German transfer tax settlement
|
(3,563 | ) | — | (44,002 | ) | |||||||
|
Other, net
|
7,121 | (4,897 | ) | 3,710 | ||||||||
| $ | 30,771 | $ | (7,350 | ) | $ | 4,710 | ||||||
46
Table of Contents
Notes to
Financial Statements — (Continued)
Income Taxes
—
The Company utilizes the
asset and liability method of accounting for income taxes.
Deferred income taxes are determined based on the estimated
future tax effects of differences between the financial and tax
bases of assets and liabilities given the provisions of the
enacted tax laws.
The
components of the provision for income taxes were as shown below:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
U.S. Federal income taxes:
|
||||||||||||
|
Current
|
$ | 428,848 | $ | 229,929 | $ | 329,200 | ||||||
|
Deferred
|
(64,369 | ) | (13,861 | ) | (8,866 | ) | ||||||
|
Benefit of net operating loss and foreign tax credits
carryforwards
|
— | (86,022 | ) | — | ||||||||
| $ | 364,479 | $ | 130,046 | $ | 320,334 | |||||||
|
Foreign income taxes:
|
||||||||||||
|
Current
|
$ | 269,904 | $ | 369,766 | $ | 285,476 | ||||||
|
Deferred
|
19,452 | (235,341 | ) | 6,189 | ||||||||
|
Benefit of net operating loss carryforwards
|
(11,741 | ) | (32,910 | ) | (1,532 | ) | ||||||
| $ | 277,615 | $ | 101,515 | $ | 290,133 | |||||||
|
State income taxes:
|
||||||||||||
|
Current
|
$ | 53,011 | $ | 42,182 | $ | 78,285 | ||||||
|
Deferred
|
(3,127 | ) | (25,500 | ) | (28,307 | ) | ||||||
|
Benefit of net operating loss carryforwards
|
(7,178 | ) | (3,943 | ) | — | |||||||
| $ | 42,706 | $ | 12,739 | $ | 49,978 | |||||||
| $ | 684,800 | $ | 244,300 | $ | 660,445 | |||||||
Income from continuing operations before income taxes for
domestic and foreign operations was as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Domestic
|
$ | 1,242,276 | $ | 499,654 | $ | 1,198,006 | ||||||
|
Foreign
|
969,717 | 714,136 | 1,153,532 | |||||||||
| $ | 2,211,993 | $ | 1,213,790 | $ | 2,351,538 | |||||||
The reconciliation between the U.S. Federal statutory tax
rate and the effective tax rate was as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
U.S. Federal statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes, net of U.S. Federal tax benefit
|
1.1 | 0.8 | 1.6 | |||||||||
|
Nondeductible goodwill impairment
|
— | 2.5 | — | |||||||||
|
Differences between U.S. Federal statutory and foreign tax rates
|
(2.4 | ) | (3.3 | ) | (3.2 | ) | ||||||
|
Nontaxable foreign interest income
|
(2.9 | ) | (4.6 | ) | (3.1 | ) | ||||||
|
Foreign tax credit related to a global legal structure
reorganization
|
— | (7.0 | ) | — | ||||||||
|
German tax audit settlement
|
— | (4.7 | ) | — | ||||||||
|
Tax effect of foreign dividends
|
0.4 | 1.3 | 0.2 | |||||||||
|
Tax relief for U.S. manufacturers
|
(1.2 | ) | (0.8 | ) | (1.0 | ) | ||||||
|
Other, net
|
1.0 | 0.9 | (1.4 | ) | ||||||||
|
Effective tax rate
|
31.0 | % | 20.1 | % | 28.1 | % | ||||||
47
Table of Contents
Notes to
Financial Statements — (Continued)
Deferred U.S. Federal income taxes and foreign
withholding taxes have not been provided on the remaining
undistributed earnings of certain international subsidiaries of
approximately $5,700,000,000 as of December 31, 2010 and
2009, as these earnings are considered permanently invested.
Upon repatriation of these earnings to
the U.S. in the form of dividends or otherwise, the Company
may be subject to U.S. income taxes and foreign withholding
taxes. The actual U.S. tax cost would depend on income tax
laws and circumstances at the time of distribution.
Determination of the related tax liability is not practicable
because of the complexities associated with the hypothetical
calculation.
The components of deferred income tax assets and liabilities at
December 31, 2010 and 2009 were as follows:
| 2010 | 2009 | |||||||||||||||
| In Thousands | Asset | Liability | Asset | Liability | ||||||||||||
|
Goodwill and intangible assets
|
$ | 487,911 | $ | (849,456 | ) | $ | 524,899 | $ | (792,361 | ) | ||||||
|
Inventory reserves, capitalized tax cost and LIFO inventory
|
65,913 | (11,961 | ) | 65,598 | (15,745 | ) | ||||||||||
|
Investments
|
33,849 | (57,196 | ) | 33,133 | (59,324 | ) | ||||||||||
|
Plant and equipment
|
35,087 | (90,346 | ) | 36,879 | (91,672 | ) | ||||||||||
|
Accrued expenses and reserves
|
329,552 | — | 114,242 | — | ||||||||||||
|
Employee benefit accruals
|
334,372 | — | 327,991 | — | ||||||||||||
|
Foreign tax credit carryforwards
|
96,232 | — | 211,301 | — | ||||||||||||
|
Net operating loss carryforwards
|
516,766 | — | 511,576 | — | ||||||||||||
|
Capital loss carryforwards
|
32,451 | — | 31,055 | — | ||||||||||||
|
Allowances for uncollectible accounts
|
19,857 | — | 17,992 | — | ||||||||||||
|
Pension liabilities
|
116,164 | — | 131,647 | — | ||||||||||||
|
Other
|
113,561 | (33,550 | ) | 119,128 | (34,388 | ) | ||||||||||
|
Gross deferred income tax assets (liabilities)
|
2,181,715 | (1,042,509 | ) | 2,125,441 | (993,490 | ) | ||||||||||
|
Valuation allowances
|
(401,206 | ) | — | (434,726 | ) | — | ||||||||||
|
Total deferred income tax assets (liabilities)
|
$ | 1,780,509 | $ | (1,042,509 | ) | $ | 1,690,715 | $ | (993,490 | ) | ||||||
Valuation allowances are established when it is estimated
that it is more likely than not that the tax benefit of the
deferred tax asset will not be
realized.
The valuation
allowances recorded at December 31, 2010 and 2009 relate
primarily to certain net operating loss carryforwards and
capital loss carryforwards.
48
Table of Contents
Notes to
Financial Statements — (Continued)
At December 31, 2010, the Company had net operating loss
carryforwards available to offset future taxable income in the
U.S. and certain foreign jurisdictions, which expire as
follows:
|
Gross Net
|
||||
|
Operating Loss
|
||||
| In Thousands | Carryforwards | |||
|
2011
|
$ | 6,960 | ||
|
2012
|
6,855 | |||
|
2013
|
10,466 | |||
|
2014
|
7,490 | |||
|
2015
|
4,569 | |||
|
2016
|
4,498 | |||
|
2017
|
7,373 | |||
|
2018
|
22,356 | |||
|
2019
|
59,253 | |||
|
2020
|
113,166 | |||
|
2021
|
72,611 | |||
|
2022
|
19,218 | |||
|
2023
|
19,230 | |||
|
2024
|
16,099 | |||
|
2025
|
18,392 | |||
|
2026
|
39 | |||
|
2027
|
1,686 | |||
|
2028
|
3,205 | |||
|
2029
|
3,381 | |||
|
2030
|
2,916 | |||
|
Do not expire
|
1,204,875 | |||
| $ | 1,604,638 | |||
The Company has foreign tax credit carryovers of $96,232,000 as
of December 31, 2010 and $211,301,000 as of
December 31, 2009 that are available for use by the Company
between 2011 and 2020.
The changes in the amount of unrecognized tax benefits during
2010, 2009 and 2008 were as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance
|
$ | 725,000 | $ | 800,000 | $ | 773,000 | ||||||
|
Additions based on tax positions related to the current year
|
57,000 | 123,000 | 67,000 | |||||||||
|
Additions for tax positions of prior years
|
55,000 | 122,000 | 107,000 | |||||||||
|
Reductions for tax positions of prior years
|
(92,000 | ) | (18,000 | ) | (66,000 | ) | ||||||
|
Settlements
|
— | (383,000 | ) | — | ||||||||
|
Foreign currency translation
|
(41,000 | ) | 81,000 | (81,000 | ) | |||||||
|
Ending balance
|
$ | 704,000 | $ | 725,000 | $ | 800,000 | ||||||
Included in the balance at December 31, 2010, are
approximately $525,000,000 of tax positions that, if recognized,
would impact the Company’s effective tax rate.
The Company settled several items during 2009 related to its
German and U.S. tax audits. The most significant issues
related to a financing transaction, leveraged leases and
mortgage-backed securities.
In the U.S., the Internal Revenue Service has completed its
audit for the years
2006-2007
and has proposed several adjustments which the Company is
protesting. The Company has recorded its best estimate of its
exposure for this audit; however, it is reasonably possible that
the Company will resolve an issue related to a
49
Table of Contents
Notes to
Financial Statements — (Continued)
deduction for foreign exchange losses on an intercompany loan
within the next 12 months and that the amount of the
Company’s unrecognized tax benefits may decrease by
approximately $179,000,000.
The Company has been litigating its dispute with the Australian
Tax Office over the tax treatment of an intercompany financing
transaction between the U.S. and Australia. The case was
heard before the Federal Court of Australia, Victoria, in
September 2010. The proceedings result from the Company’s
appeal of a decision by the Australian Tax Commissioner to
disallow income tax deductions for income tax years 2002 through
2005 and the assessment of withholding taxes for income tax year
2003. The Company also contested the Commissioner’s similar
determination for income tax years 2006 and 2007; however, the
parties agreed to defer the appeal of that determination until a
decision was made on the earlier years. The Company has recorded
its best estimate of the exposure for this audit.
On February 4, 2011, the Federal Court of Australia decided
in the Company’s favor with respect to a significant
portion of the income tax deductions. The Court issued the final
orders on February 18, 2011. Based on this decision, the
Company expects in 2011 to decrease its unrecognized tax
benefits related to this matter by approximately $186,000,000
and decrease tax expense by approximately $166,000,000. The
Australian Tax Office has 21 days from the date the Court
issues its final orders to appeal the decision.
The Company files numerous consolidated and separate tax returns
in the U.S. Federal jurisdiction and in many state and
foreign jurisdictions.
The
following table summarizes the open tax years for the
Company’s major jurisdictions:
|
Open
|
||||
| Jurisdiction | Tax Years | |||
|
United States — Federal
|
2001-2010 | |||
|
United Kingdom
|
2000-2010 | |||
|
Germany
|
2006-2010 | |||
|
France
|
2002-2010 | |||
|
Australia
|
2002-2010 | |||
The Company recognizes interest and penalties related to
income tax matters in income tax
expense.
The accrual for
interest and penalties, as of December 31, 2010 and 2009
was $39,000,000 and $45,000,000, respectively.
Income from Continuing Operations Per Share
is
computed by dividing income from continuing operations by the
weighted-average number of shares outstanding for the period.
Income from continuing operations per diluted share is computed
by dividing income from continuing operations by the
weighted-average number of shares assuming dilution for stock
options and restricted stock.
Dilutive
shares reflect the potential additional shares that would be
outstanding if the dilutive stock options outstanding were
exercise
50
Table of Contents
Notes to
Financial Statements — (Continued)
and the unvested restricted stock vested during the period. The
computation of income from continuing operations per share was
as follows:
| In Thousands except per share amounts | 2010 | 2009 | 2008 | |||||||||
|
Income from continuing operations
|
$ | 1,527,193 | $ | 969,490 | $ | 1,691,093 | ||||||
|
Income from continuing operations per share — Basic:
|
||||||||||||
|
Weighted-average common shares
|
500,772 | 500,177 | 518,609 | |||||||||
|
Income from continuing operations per share — Basic
|
$ | 3.05 | $ | 1.94 | $ | 3.26 | ||||||
|
Income from continuing operations per share — Diluted:
|
||||||||||||
|
Weighted-average common shares
|
500,772 | 500,177 | 518,609 | |||||||||
|
Effect of dilutive stock options and restricted stock
|
2,578 | 1,744 | 2,604 | |||||||||
|
Weighted-average common shares assuming dilution
|
503,350 | 501,921 | 521,213 | |||||||||
|
Income from continuing operations per share — Diluted
|
$ | 3.03 | $ | 1.93 | $ | 3.24 | ||||||
Options that were considered antidilutive were not included
in the computation of diluted income from continuing operations
per share.
The antidilutive
options outstanding as of December 31, 2010, 2009 and 2008
were 10,434,146, 14,581,559 and 11,729,898, respectively.
Cash and Equivalents
included
interest-bearing instruments of $716,139,000 at
December 31, 2010 and $791,010,000 at December 31,
2009.
Interest-bearing
instruments have maturities of 90 days or less and are
stated at cost, which approximates market.
Trade Receivables
were net of allowances for
uncollectible accounts. The changes in the allowances for
uncollectible accounts during 2010, 2009 and 2008 were as
follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance
|
$ | (77,866 | ) | $ | (75,965 | ) | $ | (74,816 | ) | |||
|
Provision charged to expense
|
(5,021 | ) | (16,191 | ) | (15,405 | ) | ||||||
|
Write-offs, net of recoveries
|
11,262 | 25,250 | 11,526 | |||||||||
|
Acquisitions and divestitures
|
(2,875 | ) | (2,327 | ) | (9,898 | ) | ||||||
|
Foreign currency translation
|
4,139 | (8,602 | ) | 9,599 | ||||||||
|
Transfer to assets held for sale
|
— | — | 699 | |||||||||
|
Other
|
21 | (31 | ) | 2,330 | ||||||||
|
Ending balance
|
$ | (70,340 | ) | $ | (77,866 | ) | $ | (75,965 | ) | |||
Inventories
at December 31, 2010
and 2009 were as follows:
| In Thousands | 2010 | 2009 | ||||||
|
Raw material
|
$ | 530,963 | $ | 417,314 | ||||
|
Work-in-process
|
157,223 | 137,463 | ||||||
|
Finished goods
|
859,261 | 801,456 | ||||||
| $ | 1,547,447 | $ | 1,356,233 | |||||
Inventories are stated at the lower of cost or market and
include material, labor and factory overhead. The
last-in,
first-out (“LIFO”) method is used to determine the
cost of the inventories of approximately half of the
U.S. inventories.
Inventories priced
at LIFO were approximately 22% of total inventories as of
December 31, 2010 and 2009.
The
first-in,
first-out (“FIFO”) method, which approximates current
cost, is used for all other inventories.
If the FIFO method was used for all
inventories, total inventories would have been approximately
$122,888,000 and $115,090,000 higher than reported at
December 31, 2010 and 2009, respectively.
51
Table of Contents
Notes to
Financial Statements — (Continued)
Prepaid Expenses and Other Current Assets
as of
December 31, 2010 and 2009 were as follows:
| In Thousands | 2010 | 2009 | ||||||
|
Value-added-tax receivables
|
$ | 54,649 | $ | 47,568 | ||||
|
Vendor advances
|
32,886 | 30,712 | ||||||
|
Insurance
|
27,166 | 31,052 | ||||||
|
Other
|
136,540 | 166,908 | ||||||
| $ | 251,241 | $ | 276,240 | |||||
Plant and Equipment
are stated at cost less
accumulated depreciation. Renewals and improvements that
increase the useful life of plant and equipment are capitalized.
Maintenance and repairs are charged to expense as incurred.
Depreciation was $334,388,000 in 2010, $365,372,000 in 2009 and
$366,711,000 in 2008, and was reflected primarily in cost of
revenues. Discontinued operations depreciation was $755,000 in
2009 and $904,000 in 2008 and was reflected in loss from
discontinued operations.
Depreciation
of plant and equipment for financial reporting purposes is
computed on an accelerated basis for U.S. businesses and on
a straight-line basis for a majority of the international
businesses.
The range of useful lives used to depreciate plant and equipment
is as follows:
|
Buildings and improvements
|
10 — 50 years | |
|
Machinery and equipment
|
3 — 20 years | |
|
Equipment leased to others
|
Term of lease |
Investments
as of December 31, 2010 and 2009
consisted of the following:
| In Thousands | 2010 | 2009 | ||||||
|
Leases of equipment
|
$ | 281,067 | $ | 271,725 | ||||
|
Venture capital limited partnership
|
50,112 | 59,046 | ||||||
|
Properties held for sale
|
45,971 | 35,908 | ||||||
|
Affordable housing limited partnerships
|
39,002 | 59,986 | ||||||
|
Property developments
|
25,454 | 24,628 | ||||||
| $ | 441,606 | $ | 451,293 | |||||
Leases
of Equipment
The components of the investment in leases of equipment at
December 31, 2010 and 2009 were as shown below:
| In Thousands | 2010 | 2009 | ||||||
|
Leveraged and direct financing leases:
|
||||||||
|
Gross lease contracts receivable, net of nonrecourse debt service
|
$ | 145,687 | $ | 145,738 | ||||
|
Estimated residual value of leased assets
|
247,512 | 247,512 | ||||||
|
Unearned income
|
(120,863 | ) | (131,385 | ) | ||||
| 272,336 | 261,865 | |||||||
|
Equipment under operating leases
|
8,731 | 9,860 | ||||||
| $ | 281,067 | $ | 271,725 | |||||
Deferred tax liabilities related to leases of equipment were
$56,170,000 and $54,707,000 at December 31, 2010 and 2009,
respectively.
52
Table of Contents
Notes to
Financial Statements — (Continued)
The investment in leases of equipment at December 31, 2010
and 2009 relates to the following types of equipment:
| In Thousands | 2010 | 2009 | ||||||
|
Telecommunications
|
$ | 178,946 | $ | 172,011 | ||||
|
Air traffic control
|
66,433 | 62,856 | ||||||
|
Aircraft
|
35,391 | 36,520 | ||||||
|
Manufacturing
|
297 | 338 | ||||||
| $ | 281,067 | $ | 271,725 | |||||
In 2003, the Company entered into a leveraged lease transaction
related to air traffic control equipment in Australia with a
cash investment of $48,763,000. In 2002, the Company entered
into leveraged leasing transactions related to mobile
telecommunications equipment with two major European
telecommunications companies with a cash investment of
$144,676,000. Under the terms of the telecommunications and air
traffic control lease transactions, the lessees have made
upfront payments to third-party financial institutions that are
acting as payment undertakers. These payment undertakers are
obligated to make the required scheduled payments directly to
the nonrecourse debt holders and to the lessors, including the
Company. In the event of default by the lessees, the Company has
the right to recover its net investment from the payment
undertakers. In addition, the lessees are required to purchase
residual value insurance from a creditworthy third party at a
date near the end of the lease term.
Income from leveraged leases was $10,513,000 and $7,618,000 for
the years ended December 31, 2010 and 2009, respectively.
Expense from leveraged leases was $10,191,000 for the year ended
December 31, 2008.
Unearned income related
to leveraged leases is recognized as lease income over the life
of the lease based on the effective yield of the lease. The
Company adjusts recognition of lease income on its leveraged
leases when there is a change in the assumptions affecting total
income or the timing of cash flows associated with the lease.
The residual values of leased assets are estimated at the
inception of the lease based on market appraisals and reviewed
for impairment at least annually.
Other
Investments
The Company entered into a venture capital limited partnership
in 2001 that invests primarily in late-stage venture capital
opportunities.
The
Company has a 25% limited partnership interest and
accounts
for this investment using the equity method, whereby the Company
recognizes its proportionate share of the partnership’s
income or loss. The partnership’s financial statements are
prepared on a
mark-to-market
basis.
The Company has entered into several affordable housing limited
partnerships primarily to receive tax benefits in the form of
tax credits and tax deductions from operating losses.
These affordable
housing investments are accounted for using the effective yield
method, in which the investment is amortized to income tax
expense as the tax benefits are received. The tax credits are
credited to income tax expense as they are allocated to the
Company.
The Company has invested in property developments with a
residential construction developer through partnerships in which
the Company has a 50% interest.
These partnership
investments are accounted for using the equity method, whereby
the Company recognizes its proportionate share of the
partnerships’ income or loss.
Goodwill and Intangible
Assets
— Goodwill represents
the excess cost over fair value of the net assets of purchased
businesses.
The
Company does not amortize goodwill and intangible assets that
have indefinite lives. The Company performs an annual impairment
assessment of goodwill and intangible assets with indefinite
lives based on the estimated fair value of the related reporting
unit or intangible asset.
53
Table of Contents
Notes to
Financial Statements — (Continued)
On January 1, 2009, the Company adopted new accounting
guidance on fair value measurements for all nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at
fair value on a nonrecurring basis. The new accounting guidance
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants and provides guidance
for measuring fair value and the necessary disclosures.
When performing its annual goodwill impairment assessment, the
Company compares the estimated fair value of each of its 60
reporting units to its carrying value. Fair values are
determined primarily by discounting estimated future cash flows
based either on current operating cash flows or on a detailed
cash flow forecast prepared by the relevant reporting unit. The
Company also considers additional valuation techniques, such as
market multiples from similar transactions and quoted market
prices of relevant public companies. If the fair value of a
reporting unit is less than its carrying value, an impairment
loss, if any, is recorded for the difference between the implied
fair value and the carrying value of the reporting unit’s
goodwill.
The Company’s indefinite-lived intangibles consist of
trademarks and brands. The estimated fair values of these
intangibles are determined based on a
relief-of-royalty
income approach derived from internally forecasted revenues of
the related products. If the fair value of the trademark or
brand is less than its carrying value, an impairment loss is
recorded for the difference between the estimated fair value and
carrying value of the intangible asset.
Amortization and impairment of goodwill and other intangible
assets for the years ended December 31, 2010, 2009 and 2008
were as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Goodwill:
|
||||||||||||
|
Impairment
|
$ | — | $ | 90,000 | $ | 137 | ||||||
|
Intangible Assets:
|
||||||||||||
|
Amortization
|
212,884 | 203,230 | 184,410 | |||||||||
|
Impairment
|
1,006 | 15,568 | 1,438 | |||||||||
| $ | 213,890 | $ | 308,798 | $ | 185,985 | |||||||
Loss from discontinued operations included goodwill impairment
charges of $132,563,000 and amortization of $5,744,000 in 2008.
In 2010, the Company performed its annual goodwill and
indefinite-lived intangible asset impairment assessment which
resulted in immaterial intangible asset impairment charges.
In the third quarter of 2009, the Company changed the date of
its annual goodwill impairment assessment from the first quarter
to the third quarter. This constituted a change in the method of
applying an accounting principle that the Company believes is
preferable, as it better aligns the timing of the Company’s
goodwill impairment assessment with the Company’s annual
business planning and forecasting process. In the third quarter
of 2009, the Company performed its goodwill impairment
assessment which resulted in a charge of $12,000,000 related to
the truck remanufacturing and related parts and service
reporting unit in the Transportation segment.
In the first quarter of 2009, the Company performed its annual
goodwill impairment assessment which resulted in impairment
charges of $60,000,000 related to the pressure sensitive
adhesives reporting unit in the Polymers & Fluids
segment and $18,000,000 related to the PC board fabrication
reporting unit in the Power Systems & Electronics
segment.
Also in 2009, intangible asset impairments of $15,568,000 were
recorded to reduce to the estimated fair value the carrying
value of certain trademarks, brands and patents. Approximately
$5,800,000 of this total charge related to the PC board
fabrication reporting unit and the remainder to various
trademarks, brands
54
Table of Contents
Notes to
Financial Statements — (Continued)
and patents of other reporting units. The annual impairment
testing of goodwill and indefinite-lived intangible assets
during 2008 resulted in immaterial impairment charges for
continuing operations.
The impairments during 2009 were primarily related to new
reporting units which were acquired over the last few years
before the recent economic downturn. These charges were driven
primarily by lower current forecasts compared to the expected
forecasts at the time the reporting units were acquired.
A summary of goodwill and intangible assets that were adjusted
to fair value and the related impairment charges included in
earnings for 2009 is as follows:
|
Total
|
||||||||||||
|
Impairment
|
||||||||||||
| In Thousands | Book Value | Fair Value | Charges | |||||||||
|
Goodwill
|
$ | 449,000 | $ | 359,000 | $ | 90,000 | ||||||
|
Intangible assets
|
98,544 | 82,976 | 15,568 | |||||||||
The changes in the carrying amount of goodwill by segment for
the years ended December 31, 2010 and 2009 were as follows:
|
Power
|
||||||||||||||||||||||||||||||||||||
|
Transpor-
|
Industrial
|
Systems &
|
Food
|
Construction
|
Polymers
|
Decorative
|
All
|
|||||||||||||||||||||||||||||
| In Thousands | tation | Packaging | Electronics | Equipment | Products | & Fluids | Surfaces | Other | Total | |||||||||||||||||||||||||||
|
Balance, Dec 31, 2008
|
$ | 551,029 | $ | 671,445 | $ | 426,188 | $ | 193,055 | $ | 504,470 | $ | 751,113 | $ | 13,265 | $ | 1,406,985 | $ | 4,517,550 | ||||||||||||||||||
|
2009 activity:
|
||||||||||||||||||||||||||||||||||||
|
Acquisitions & divestitures
|
(9,354 | ) | 16,200 | (815 | ) | 6,052 | 3,495 | (3,845 | ) | — | 69,785 | 81,518 | ||||||||||||||||||||||||
|
Impairment charges
|
(12,000 | ) | — | (18,000 | ) | — | — | (60,000 | ) | — | — | (90,000 | ) | |||||||||||||||||||||||
|
Foreign currency translation
|
36,067 | 76,518 | 17,775 | 18,794 | 65,941 | 59,426 | 199 | 76,944 | 351,664 | |||||||||||||||||||||||||||
|
Intersegment goodwill transfers
|
(17,089 | ) | 18,468 | — | (3,005 | ) | — | 3,646 | — | (2,020 | ) | — | ||||||||||||||||||||||||
|
Balance, Dec 31, 2009
|
548,653 | 782,631 | 425,148 | 214,896 | 573,906 | 750,340 | 13,464 | 1,551,694 | 4,860,732 | |||||||||||||||||||||||||||
|
2010 activity:
|
||||||||||||||||||||||||||||||||||||
|
Acquisitions & divestitures
|
48,180 | 1,242 | 4,554 | 1,642 | 10,817 | 48,743 | — | 41,270 | 156,448 | |||||||||||||||||||||||||||
|
Impairment charges
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Foreign currency translation
|
(21,732 | ) | (30,175 | ) | (3,519 | ) | (17,458 | ) | (4,506 | ) | (22,360 | ) | (308 | ) | (37,810 | ) | (137,868 | ) | ||||||||||||||||||
|
Intersegment goodwill transfers
|
(17,905 | ) | 933 | (267 | ) | — | (962 | ) | 22,187 | — | (3,986 | ) | — | |||||||||||||||||||||||
|
Balance, Dec 31, 2010
|
$ | 557,196 | $ | 754,631 | $ | 425,916 | $ | 199,080 | $ | 579,255 | $ | 798,910 | $ | 13,156 | $ | 1,551,168 | $ | 4,879,312 | ||||||||||||||||||
As of December 31, 2010 and 2009, accumulated goodwill
impairment charges from continuing operations were $127,975,000.
Intangible assets as of December 31, 2010 and 2009 were as
follows:
| 2010 | 2009 | |||||||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||||||
| In Thousands | Cost | Amortization | Net | Cost | Amortization | Net | ||||||||||||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||||||||||||||
|
Customer lists and relationships
|
$ | 1,224,425 | $ | (407,811 | ) | $ | 816,614 | $ | 1,135,601 | $ | (302,629 | ) | $ | 832,972 | ||||||||||||||
|
Patents and proprietary technology
|
466,614 | (208,820 | ) | 257,794 | 447,210 | (171,439 | ) | 275,771 | ||||||||||||||||||||
|
Trademarks and brands
|
438,399 | (116,926 | ) | 321,473 | 403,364 | (89,251 | ) | 314,113 | ||||||||||||||||||||
|
Software
|
198,645 | (153,259 | ) | 45,386 | 186,955 | (134,816 | ) | 52,139 | ||||||||||||||||||||
|
Noncompete agreements
|
158,034 | (134,827 | ) | 23,207 | 155,822 | (120,011 | ) | 35,811 | ||||||||||||||||||||
|
Other
|
110,058 | (92,864 | ) | 17,194 | 95,490 | (85,027 | ) | 10,463 | ||||||||||||||||||||
|
Total amortizable intangible assets
|
2,596,175 | (1,114,507 | ) | 1,481,668 | 2,424,442 | (903,173 | ) | 1,521,269 | ||||||||||||||||||||
|
Indefinite-lived intangible assets:
|
||||||||||||||||||||||||||||
|
Trademarks and brands
|
212,963 | — | 212,963 | 202,148 | — | 202,148 | ||||||||||||||||||||||
|
Total intangible assets
|
$ | 2,809,138 | $ | (1,114,507 | ) | $ | 1,694,631 | $ | 2,626,590 | $ | (903,173 | ) | $ | 1,723,417 | ||||||||||||||
55
Table of Contents
Notes to
Financial Statements — (Continued)
Amortizable intangible assets are being amortized primarily
on a straight-line basis over their estimated useful lives of 3
to 20 years.
The estimated amortization expense of intangible assets for the
future years ending December 31 is as follows:
| In Thousands | ||||
|
2011
|
$ | 207,000 | ||
|
2012
|
195,000 | |||
|
2013
|
176,000 | |||
|
2014
|
163,000 | |||
|
2015
|
152,000 | |||
Other Assets
as of December 31, 2010 and 2009
consisted of the following:
| In Thousands | 2010 | 2009 | ||||||
|
Cash surrender value of life insurance policies
|
$ | 362,344 | $ | 340,294 | ||||
|
Customer tooling
|
73,267 | 69,964 | ||||||
|
Noncurrent receivables
|
37,894 | 40,679 | ||||||
|
Prepaid pension assets
|
16,677 | 15,907 | ||||||
|
Other
|
129,752 | 95,532 | ||||||
| $ | 619,934 | $ | 562,376 | |||||
Pension and Other Postretirement Benefits
— The
Company has both funded and unfunded defined benefit pension and
other post retirement benefit plans, predominately in the
U.S. covering a majority of U.S. employees.
The U.S. primary pension plan provides benefits based on
years of service and final average salary. The U.S. primary
postretirement healthcare plan is contributory with the
participants’ contributions adjusted annually. The
U.S. primary postretirement life insurance plan is
noncontributory.
Beginning January 1, 2007, the U.S. primary pension
and other postretirement benefit plans were closed to new
participants. Newly hired employees and employees from acquired
businesses that are not participating in these plans are
eligible for additional Company contributions under the existing
U.S. primary defined contribution retirement plans. The
Company’s expense related to defined contribution plans was
$69,300,000 in 2010, $66,000,000 in 2009 and $66,700,000 in 2008.
In addition to the U.S. plans, the Company also has defined
benefit pension plans in certain other countries, mainly the
United Kingdom, Switzerland, Germany and Canada.
On January 1, 2008, the Company adopted new accounting
guidance which required the Company to change the measurement
date of its defined benefit plans to correspond with the
Company’s fiscal year end. The Company previously used a
September 30 measurement date. As allowed under the provisions
of this new guidance, the Company elected to remeasure its plan
assets and benefit obligation as of the beginning of the fiscal
year. Upon adoption, the Company recorded an after-tax charge of
$12,788,000 to beginning retained earnings and an after-tax gain
to accumulated other comprehensive income of $3,573,000 related
to the three months ended December 31, 2007.
56
Table of Contents
Notes to
Financial Statements — (Continued)
Summarized information regarding the Company’s significant
defined benefit pension and other postretirement benefit plans
is as follows:
|
Other Postretirement
|
||||||||||||||||||||||||
| Pension | Benefits | |||||||||||||||||||||||
| In Thousands | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Components of net periodic benefit cost:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 94,156 | $ | 97,805 | $ | 110,381 | $ | 13,941 | $ | 12,567 | $ | 14,340 | ||||||||||||
|
Interest cost
|
110,609 | 119,855 | 119,436 | 29,995 | 30,506 | 32,615 | ||||||||||||||||||
|
Expected return on plan assets
|
(149,937 | ) | (153,974 | ) | (167,391 | ) | (18,183 | ) | (13,612 | ) | (15,391 | ) | ||||||||||||
|
Amortization of actuarial loss (gain)
|
26,110 | 8,408 | 2,543 | 40 | 40 | (914 | ) | |||||||||||||||||
|
Amortization of prior service cost (income)
|
737 | (1,587 | ) | (2,420 | ) | 6,445 | 6,423 | 6,261 | ||||||||||||||||
|
Amortization of transition amount
|
47 | 163 | 92 | — | — | — | ||||||||||||||||||
|
Settlement/curtailment loss (income)
|
515 | (11,941 | ) | 13,226 | — | — | (1,929 | ) | ||||||||||||||||
| $ | 82,237 | $ | 58,729 | $ | 75,867 | $ | 32,238 | $ | 35,924 | $ | 34,982 | |||||||||||||
57
Table of Contents
Notes to
Financial Statements — (Continued)
| Pension | Other Postretirement Benefits | |||||||||||||||
| In Thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at January 1
|
$ | 2,193,645 | $ | 1,912,662 | $ | 533,834 | $ | 486,019 | ||||||||
|
Service cost
|
94,156 | 97,805 | 13,941 | 12,567 | ||||||||||||
|
Interest cost
|
110,609 | 119,855 | 29,995 | 30,506 | ||||||||||||
|
Plan participants’ contributions
|
4,655 | 5,497 | 15,241 | 16,262 | ||||||||||||
|
Actuarial loss
|
31,902 | 202,795 | 10,824 | 33,213 | ||||||||||||
|
Acquisitions
|
30,845 | — | — | — | ||||||||||||
|
Benefits paid
|
(137,853 | ) | (199,600 | ) | (48,465 | ) | (48,309 | ) | ||||||||
|
Medicare subsidy received
|
— | — | 4,053 | 3,822 | ||||||||||||
|
Liabilities to other immaterial plans
|
(3,457 | ) | — | — | (246 | ) | ||||||||||
|
Settlement/curtailment loss (gain)
|
515 | (13,598 | ) | — | — | |||||||||||
|
Foreign currency translation
|
(37,133 | ) | 68,229 | — | — | |||||||||||
|
Benefit obligation at December 31
|
$ | 2,287,884 | $ | 2,193,645 | $ | 559,423 | $ | 533,834 | ||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at January 1
|
$ | 1,759,953 | $ | 1,422,478 | $ | 259,753 | $ | 194,453 | ||||||||
|
Actual return on plan assets
|
187,804 | 271,520 | 34,023 | 38,600 | ||||||||||||
|
Company contributions
|
73,878 | 217,823 | 33,224 | 58,747 | ||||||||||||
|
Plan participants’ contributions
|
4,655 | 5,497 | 15,241 | 16,262 | ||||||||||||
|
Acquisitions
|
26,115 | — | — | — | ||||||||||||
|
Benefits paid
|
(137,853 | ) | (199,600 | ) | (48,465 | ) | (48,309 | ) | ||||||||
|
Assets from other immaterial plans
|
38,512 | — | — | — | ||||||||||||
|
Settlement/curtailment loss
|
— | (901 | ) | — | — | |||||||||||
|
Foreign currency translation
|
(21,238 | ) | 43,136 | — | — | |||||||||||
|
Fair value of plan assets at December 31
|
$ | 1,931,826 | $ | 1,759,953 | $ | 293,776 | $ | 259,753 | ||||||||
|
Funded status
|
$ | (356,058 | ) | $ | (433,692 | ) | $ | (265,647 | ) | $ | (274,081 | ) | ||||
|
Other immaterial plans
|
(63,316 | ) | (19,121 | ) | (3,077 | ) | (2,744 | ) | ||||||||
|
Net liability at December 31
|
$ | (419,374 | ) | $ | (452,813 | ) | $ | (268,724 | ) | $ | (276,825 | ) | ||||
|
The amounts recognized in the statement of financial position as
of December 31 consist of:
|
||||||||||||||||
|
Other assets
|
$ | 16,677 | $ | 15,907 | $ | — | $ | — | ||||||||
|
Accrued expenses
|
(15,378 | ) | (17,802 | ) | (9,025 | ) | (9,025 | ) | ||||||||
|
Other noncurrent liabilities
|
(420,673 | ) | (450,918 | ) | (259,699 | ) | (267,800 | ) | ||||||||
|
Net liability at end of year
|
$ | (419,374 | ) | $ | (452,813 | ) | $ | (268,724 | ) | $ | (276,825 | ) | ||||
|
The pre-tax amounts recognized in accumulated other
comprehensive income consist of:
|
||||||||||||||||
|
Net actuarial loss (gain)
|
$ | 758,901 | $ | 783,449 | $ | (1,840 | ) | $ | 3,216 | |||||||
|
Prior service cost
|
4,758 | 6,782 | 11,292 | 17,737 | ||||||||||||
|
Net transition obligation
|
68 | 1,895 | — | — | ||||||||||||
| $ | 763,727 | $ | 792,126 | $ | 9,452 | $ | 20,953 | |||||||||
|
Accumulated benefit obligation
|
$ | 2,075,492 | $ | 1,936,088 | ||||||||||||
|
Plans with accumulated benefit obligation in excess of plan
assets as of December 31:
|
||||||||||||||||
|
Projected benefit obligation
|
$ | 1,691,575 | $ | 1,572,100 | ||||||||||||
|
Accumulated benefit obligation
|
$ | 1,555,577 | $ | 1,400,491 | ||||||||||||
|
Fair value of plan assets
|
$ | 1,372,099 | $ | 1,214,826 | ||||||||||||
58
Table of Contents
Notes to
Financial Statements — (Continued)
Assumptions
The weighted-average assumptions used in the valuations of
pension and other postretirement benefits were as follows:
| Pension | Other Postretirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Assumptions used to determine benefit obligations at December 31:
|
||||||||||||||||||||||||
|
Discount rate
|
5.05 | % | 5.57 | % | 6.59 | % | 5.45 | % | 5.80 | % | 6.50 | % | ||||||||||||
|
Rate of compensation increases
|
3.94 | 4.18 | 4.19 | — | — | — | ||||||||||||||||||
|
Assumptions used to determine net periodic benefit cost for
years ended December 31:
|
||||||||||||||||||||||||
|
Discount rate
|
5.57 | % | 6.59 | % | 6.18 | % | 5.80 | % | 6.50 | % | 6.75 | % | ||||||||||||
|
Expected return on plan assets
|
7.63 | 8.28 | 8.32 | 7.00 | 7.00 | 7.00 | ||||||||||||||||||
|
Rate of compensation increases
|
4.18 | 4.19 | 4.35 | — | — | — | ||||||||||||||||||
The expected long-term rates of return for pension and other
postretirement benefit plans were developed using historical
asset class returns while factoring in current market conditions
such as inflation, interest rates and asset class performance.
Assumed health care cost trend rates have an effect on the
amounts reported for the postretirement health care benefit
plans.
The
assumed health care cost trend rates used to determine the
postretirement benefit obligation at December 31, 2010,
2009 and 2008 were as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Health care cost trend rate assumed for the next year
|
8.71 | % | 8.21 | % | 8.71 | % | ||||||
|
Ultimate trend rate
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Year that the rate reaches the ultimate trend rate
|
2020 | 2020 | 2016 | |||||||||
A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
|
1-Percentage-
|
1-Percentage-
|
|||||||
| In Thousands | Point Increase | Point Decrease | ||||||
|
Effect on total of service and interest cost components for 2010
|
$ | 923 | $ | (1,254 | ) | |||
|
Effect on postretirement benefit obligation at December 31,
2010
|
$ | 14,089 | $ | (16,501 | ) | |||
Plan
Assets
The Company’s overall investment strategy for the assets in
the pension funds is to achieve a balance between the goals of
growing plan assets and keeping risk at a reasonable level over
a long-term investment horizon. In order to reduce unnecessary
risk, the pension funds are diversified across several asset
classes, securities and investment managers. The target
allocations for plan assets are
55-70%
equity securities,
30-45%
debt
securities, 0-1% real estate and 0-10% in other types of
investments. The Company does not use derivatives for the
purpose of speculation, leverage, circumventing investment
guidelines or taking risks that are inconsistent with specified
guidelines.
The assets in the Company’s postretirement health care plan
are primarily invested in life insurance policies. The
Company’s overall investment strategy for the assets in the
postretirement health care fund is to invest in assets that
provide a reasonable tax exempt rate of return while preserving
capital.
The following tables present the fair value of the
Company’s pension and other postretirement benefit plan
assets at December 31, 2010 and 2009, by asset category and
valuation methodology. Level 1 assets are valued using
unadjusted quoted prices for identical assets in active markets.
Level 2 assets are valued using quoted
59
Table of Contents
Notes to
Financial Statements — (Continued)
prices or other observable inputs for similar assets.
Level 3 assets are valued using unobservable inputs, but
reflect the assumptions market participants would use in pricing
the assets. Each financial instrument’s categorization is
based on the lowest level of input that is significant to the
fair value measurement.
| 2010 | ||||||||||||||||
| In Thousands | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Pension Plan Assets:
|
||||||||||||||||
|
Cash and equivalents
|
$ | 49,426 | $ | — | $ | — | $ | 49,426 | ||||||||
|
Equity securities:
|
||||||||||||||||
|
Domestic
|
125,752 | — | — | 125,752 | ||||||||||||
|
Foreign
|
161,643 | — | — | 161,643 | ||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Government securities
|
— | 193,940 | 1,025 | 194,965 | ||||||||||||
|
Corporate debt securities
|
— | 219,546 | 2,667 | 222,213 | ||||||||||||
|
Mortgage-backed securities
|
— | 9,621 | — | 9,621 | ||||||||||||
|
Investment contracts with insurance companies
|
— | 112,609 | — | 112,609 | ||||||||||||
|
Commingled funds:
|
||||||||||||||||
|
Mutual funds
|
300,447 | — | — | 300,447 | ||||||||||||
|
Collective trust funds
|
— | 677,349 | — | 677,349 | ||||||||||||
|
Partnerships/private equity interests
|
— | — | 77,587 | 77,587 | ||||||||||||
|
Other
|
— | 204 | 10 | 214 | ||||||||||||
| $ | 637,268 | $ | 1,213,269 | $ | 81,289 | $ | 1,931,826 | |||||||||
|
Other Postretirement Benefit Plan Assets:
|
||||||||||||||||
|
Cash and equivalents
|
$ | 28,065 | $ | — | $ | — | $ | 28,065 | ||||||||
|
Life insurance policies
|
— | — | 265,711 | 265,711 | ||||||||||||
| $ | 28,065 | $ | — | $ | 265,711 | $ | 293,776 | |||||||||
60
Table of Contents
Notes to
Financial Statements — (Continued)
| 2009 | ||||||||||||||||
| In Thousands | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Pension Plan Assets:
|
||||||||||||||||
|
Cash and equivalents
|
$ | 65,986 | $ | — | $ | — | $ | 65,986 | ||||||||
|
Equity securities:
|
||||||||||||||||
|
Domestic
|
118,872 | — | — | 118,872 | ||||||||||||
|
Foreign
|
149,908 | — | — | 149,908 | ||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Government securities
|
— | 105,505 | 1,285 | 106,790 | ||||||||||||
|
Corporate debt securities
|
— | 235,401 | 2,092 | 237,493 | ||||||||||||
|
Mortgage-backed securities
|
— | 26,220 | 3,372 | 29,592 | ||||||||||||
|
Investment contracts with insurance companies
|
— | 12,560 | — | 12,560 | ||||||||||||
|
Commingled funds:
|
||||||||||||||||
|
Mutual funds
|
286,315 | — | — | 286,315 | ||||||||||||
|
Collective trust funds
|
— | 673,472 | — | 673,472 | ||||||||||||
|
Partnerships/private equity interests
|
— | — | 68,847 | 68,847 | ||||||||||||
|
Other
|
— | 7,892 | 2,226 | 10,118 | ||||||||||||
| $ | 621,081 | $ | 1,061,050 | $ | 77,822 | $ | 1,759,953 | |||||||||
|
Other Postretirement Benefit Plan Assets:
|
||||||||||||||||
|
Cash and equivalents
|
$ | 26,711 | $ | — | $ | — | $ | 26,711 | ||||||||
|
Life insurance policies
|
— | — | 233,042 | 233,042 | ||||||||||||
| $ | 26,711 | $ | — | $ | 233,042 | $ | 259,753 | |||||||||
Cash and equivalents include cash on hand and investments with
maturities of 90 days or less and are valued at cost which
approximates fair value. Equity securities primarily include
common and preferred equity securities covering a wide range of
industries and geographies which are traded in active markets
and are valued based on quoted prices. Fixed income securities
primarily consist of U.S. and foreign government bills,
notes and bonds, corporate debt securities, asset-backed
securities, and investment contracts. The majority of the assets
in this category are valued using a bid evaluation process with
bid data provided by independent pricing sources. For securities
where market data is not readily available, unobservable market
data is used to value the security. Commingled funds include
investments in public and private pooled funds. Mutual funds are
traded in active markets and are valued based on quoted prices.
The underlying investments include small-cap equity,
international equity and long- and short-term fixed income
instruments. Collective trust funds are private funds that are
valued at the net asset value which is determined based on the
fair value of the underlying investments. The underlying
investments include both passively and actively managed
U.S. and foreign large- and mid-cap equity funds and
short-term investment funds. Partnerships/private equity
interests are investments in partnerships where the benefit plan
is a limited partner. The investments are valued by the
investment managers on a periodic basis using pricing models
that use market, income and cost valuation methods. Life
insurance policies are used to fund other postretirement
benefits in order to obtain favorable tax treatment. In
accordance with accounting guidance related to pension and other
postretirement benefit plans, the investments are valued based
on the cash surrender value of the underlying policies.
61
Table of Contents
Notes to
Financial Statements — (Continued)
The following table presents a reconciliation of Level 3
assets measured at fair value for pension and other
postretirement benefit plans during the years ended
December 31, 2010 and 2009:
|
Mortgage-
|
Partnerships/
|
|||||||||||||||||||||||||||||||||||
|
Government
|
Corporate
|
backed
|
Private Equity
|
Life Insurance
|
||||||||||||||||||||||||||||||||
| In Thousands | Securities | Debt Securities | Securities | Interests | Policies | Other | Total | |||||||||||||||||||||||||||||
|
Balance Dec 31, 2008
|
$ | 460 | $ | 729 | $ | 1,373 | $ | 73,168 | $ | 159,284 | $ | 1,429 | $ | 236,443 | ||||||||||||||||||||||
|
2009 Activity:
|
||||||||||||||||||||||||||||||||||||
|
Realized gains
|
— | — | 64 | 736 | — | 3 | 803 | |||||||||||||||||||||||||||||
|
Unrealized gains (losses)
|
266 | 363 | 175 | (11,018 | ) | 43,253 | 1,181 | 34,220 | ||||||||||||||||||||||||||||
|
Purchases and sales
|
559 | 1,000 | 1,760 | 5,961 | 30,505 | (387 | ) | 39,398 | ||||||||||||||||||||||||||||
|
Balance Dec 31, 2009
|
1,285 | 2,092 | 3,372 | 68,847 | 233,042 | 2,226 | 310,864 | |||||||||||||||||||||||||||||
|
2010 Activity:
|
||||||||||||||||||||||||||||||||||||
|
Realized gains (losses)
|
100 | (452 | ) | (947 | ) | 3,547 | — | (17 | ) | 2,231 | ||||||||||||||||||||||||||
|
Unrealized gains (losses)
|
(49 | ) | 624 | 844 | (538 | ) | 32,669 | 319 | 33,869 | |||||||||||||||||||||||||||
|
Purchases and sales
|
(311 | ) | (1,137 | ) | (3,269 | ) | 5,731 | — | (2,518 | ) | (1,504 | ) | ||||||||||||||||||||||||
|
Transfers
|
— | 1,540 | — | — | — | — | 1,540 | |||||||||||||||||||||||||||||
|
Balance Dec 31, 2010
|
$ | 1,025 | $ | 2,667 | $ | — | $ | 77,587 | $ | 265,711 | $ | 10 | $ | 347,000 | ||||||||||||||||||||||
Cash
Flows
The Company generally funds its pension and other postretirement
benefit plans as required by law or to the extent such
contributions are tax deductible. The Company expects to
contribute approximately $59,300,000 to its pension plans and
$39,500,000 to its other postretirement benefit plans in 2011.
The Company has not yet determined the extent of voluntary
contributions, if any, to be made in 2011.
The Company’s portion of the benefit payments that are
expected to be paid during the years ending December 31 is as
follows:
|
Other
|
||||||||
|
Postretirement
|
||||||||
| In Thousands | Pension | Benefits | ||||||
|
2011
|
$ | 174,217 | $ | 39,470 | ||||
|
2012
|
174,797 | 40,317 | ||||||
|
2013
|
179,564 | 41,102 | ||||||
|
2014
|
183,932 | 42,149 | ||||||
|
2015
|
187,515 | 43,225 | ||||||
|
Years
2016-2020
|
976,031 | 231,311 | ||||||
Short-Term Debt
as of December 31, 2010 and 2009
consisted of the following:
| In Thousands | 2010 | 2009 | ||||||
|
Bank overdrafts
|
$ | 48,881 | $ | 36,069 | ||||
|
Commercial paper
|
— | 135,498 | ||||||
|
Current maturities of long-term debt
|
252,236 | 8,120 | ||||||
|
Other borrowings
|
16,670 | 33,994 | ||||||
| $ | 317,787 | $ | 213,681 | |||||
In June 2010, the Company entered into a $1,000,000,000 line of
credit agreement with a termination date of June 10, 2011
which replaced the prior line of credit. This amount, along with
the revolving credit facility and line of credit agreement
discussed in the Long-Term Debt note, support the issuance of
commercial paper. No amount was outstanding under the facility
at December 31, 2010.
62
Table of Contents
Notes to
Financial Statements — (Continued)
The weighted-average interest rate on other borrowings was 6.5%
at December 31, 2010 and 4.1% at December 31, 2009.
As of December 31, 2010, the Company had unused capacity of
approximately $318,000,000 under international debt facilities.
Accrued Expenses
as of
December 31, 2010 and 2009 consisted of accruals for:
| In Thousands | 2010 | 2009 | ||||||
|
Compensation and employee benefits
|
$ | 572,442 | $ | 504,808 | ||||
|
Deferred revenue and customer deposits
|
239,262 | 233,281 | ||||||
|
Rebates
|
137,059 | 115,009 | ||||||
|
Warranties
|
62,937 | 63,028 | ||||||
|
Current portion of pension and other postretirement benefit
obligations
|
24,403 | 26,827 | ||||||
|
Other
|
357,296 | 416,441 | ||||||
| $ | 1,393,399 | $ | 1,359,394 | |||||
The Company accrues for product warranties based on
historical
experience.
The
changes in accrued warranties during 2010, 2009 and 2008 were as
follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance
|
$ | 63,028 | $ | 65,961 | $ | 71,210 | ||||||
|
Charges
|
(45,406 | ) | (44,190 | ) | (50,657 | ) | ||||||
|
Provision charged to expense
|
47,522 | 35,596 | 45,276 | |||||||||
|
Acquisitions and divestitures
|
652 | 1,711 | 4,430 | |||||||||
|
Foreign currency translation
|
(2,859 | ) | 3,950 | (4,298 | ) | |||||||
|
Ending balance
|
$ | 62,937 | $ | 63,028 | $ | 65,961 | ||||||
Long-Term Debt
at December 31, 2010 and 2009
consisted of the following:
| In Thousands | 2010 | 2009 | ||||||
|
6.55% preferred debt securities due December 31, 2011
|
$ | 249,949 | $ | 249,902 | ||||
|
5.15% notes due April 1, 2014
|
799,567 | 799,447 | ||||||
|
5.25% Euro notes due October 1, 2014
|
972,848 | 1,125,241 | ||||||
|
6.25% notes due April 1, 2019
|
699,903 | 699,894 | ||||||
|
4.88% senior notes due thru December 31, 2020
|
21,954 | 27,667 | ||||||
|
Other borrowings
|
19,974 | 20,843 | ||||||
| 2,764,195 | 2,922,994 | |||||||
|
Current maturities
|
(252,236 | ) | (8,120 | ) | ||||
| $ | 2,511,959 | $ | 2,914,874 | |||||
In 2002, a subsidiary of the Company issued $250,000,000 of
6.55% preferred debt securities at 99.849% of face value. The
effective interest rate of the preferred debt securities is 6.7%.
In 2005, the Company issued $53,735,000 of 4.88% senior
notes at 100% of face value.
In 2007, the Company, through its wholly-owned subsidiary ITW
Finance Europe S.A., issued €750,000,000 of 5.25% Euro
notes due October 1, 2014, at 99.874% of face value. The
effective interest rate of the notes is 5.3%.
63
Table of Contents
Notes to
Financial Statements — (Continued)
In 2009, the Company issued $800,000,000 of 5.15% redeemable
notes due April 1, 2014 at 99.92% of face value and
$700,000,000 of 6.25% redeemable notes due April 1, 2019 at
99.98% of face value. The effective interest rates of the notes
are 5.2% and 6.3%, respectively.
Other debt outstanding at December 31, 2010, bears interest
at rates ranging from 0.3% to 15.6%, with maturities through the
year 2029.
Based on rates for comparable instruments, the approximate fair
value and related carrying value of the Company’s long-term
debt, including current maturities, as of December 31, 2010
and 2009 were as follows:
| 2010 | 2009 | |||||||||||||||
| In Thousands | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||
|
6.55% preferred debt securities due December 31, 2011
|
$ | 263,750 | $ | 249,949 | $ | 267,500 | $ | 249,902 | ||||||||
|
5.15% notes due April 1, 2014
|
882,480 | 799,567 | 870,176 | 799,447 | ||||||||||||
|
5.25% Euro notes due October 1, 2014
|
1,066,454 | 972,848 | 1,192,860 | 1,125,241 | ||||||||||||
|
6.25% notes due April 1, 2019
|
816,200 | 699,903 | 781,158 | 699,894 | ||||||||||||
|
4.88% senior notes due thru December 31, 2020
|
23,471 | 21,954 | 28,815 | 27,667 | ||||||||||||
|
Other borrowings
|
19,974 | 19,974 | 20,843 | 20,843 | ||||||||||||
| $ | 3,072,329 | $ | 2,764,195 | $ | 3,161,352 | $ | 2,922,994 | |||||||||
In 2007, the Company entered into a $500,000,000 revolving
credit facility with a termination date of June 15, 2012.
No amounts were outstanding under this facility at
December 31, 2010.
In 2010, the Company entered into a $1,000,000,000 line of
credit agreement with a termination date of June 11, 2013.
No amounts were outstanding under this facility at
December 31, 2010.
The Company’s debt agreements’ financial covenants
limit total debt, including guarantees, to 50% of total
capitalization. The Company’s total debt, including
guarantees, was 25% of total capitalization as defined in our
debt agreements as of December 31, 2010, which was in
compliance with these covenants.
Scheduled maturities of long-term debt for the years ending
December 31 are as follows:
| In Thousands | ||||
|
2012
|
$ | 16,572 | ||
|
2013
|
6,132 | |||
|
2014
|
1,776,592 | |||
|
2015
|
2,688 | |||
|
2016 and future years
|
709,975 | |||
| $ | 2,511,959 | |||
At December 31, 2010, the Company had open stand-by letters
of credit of $181,400,000, substantially all of which expire in
2011.
64
Table of Contents
Notes to
Financial Statements — (Continued)
Other Noncurrent Liabilities
at December 31, 2010
and 2009 consisted of the following:
| In Thousands | 2010 | 2009 | ||||||
|
Pension benefit obligation
|
$ | 420,673 | $ | 450,918 | ||||
|
Postretirement benefit obligation
|
259,699 | 267,800 | ||||||
|
Noncurrent tax reserves
|
— | 197,957 | ||||||
|
Other
|
396,169 | 389,244 | ||||||
| $ | 1,076,541 | $ | 1,305,919 | |||||
Commitments and
Contingencies
— The Company is
subject to various legal proceedings and claims that arise in
the ordinary course of business, including those involving
environmental, product liability (including toxic tort) and
general liability claims.
The
Company accrues for such liabilities when it is probable that
future costs will be incurred and such costs can be reasonably
estimated.
Such accruals are based on
developments to date, the Company’s estimates of the
outcomes of these matters and its experience in contesting,
litigating and settling other similar matters. The Company
believes resolution of these matters, individually and in the
aggregate, will not have a material adverse effect on the
Company’s financial position, liquidity or future
operations.
Among the toxic tort cases in which the Company is a defendant,
the Company as well as its subsidiaries Hobart Brothers Company
and Miller Electric Mfg. Co., have been named, along with
numerous other defendants, in lawsuits alleging injury from
exposure to welding consumables. The plaintiffs in these suits
claim unspecified damages for injuries resulting from the
plaintiffs’ alleged exposure to asbestos, manganese
and/or
toxic
fumes in connection with the welding process. Based upon the
Company’s experience in defending these claims, the Company
believes that the resolution of these proceedings will not have
a material adverse effect on the Company’s financial
position, liquidity or future operations. The Company has not
recorded any significant reserves related to these cases.
Preferred Stock
, without par value, of which
300,000 shares are authorized, is issuable in series. The
Board of Directors is authorized to fix by resolution the
designation and characteristics of each series of preferred
stock. The Company has no present commitment to issue its
preferred stock.
65
Table of Contents
Notes to
Financial Statements — (Continued)
Common Stock
, with a par value of $.01,
Additional
Paid-In-Capital
and
Common Stock Held in Treasury
transactions during
2010, 2009 and 2008 are shown below.
|
Additional
|
||||||||||||||||||||
| Common Stock | Paid-In-Capital | Common Stock Held in Treasury | ||||||||||||||||||
| In Thousands except shares | Shares | Amount | Amount | Shares | Amount | |||||||||||||||
|
Balance, December 31, 2007
|
562,522,026 | $ | 5,625 | $ | 173,610 | (32,425,297 | ) | $ | (1,757,761 | ) | ||||||||||
|
During 2008 —
|
||||||||||||||||||||
|
Retirement of treasury shares
|
(32,425,297 | ) | (324 | ) | (173,610 | ) | 32,425,297 | 1,757,761 | ||||||||||||
|
Shares issued for stock options
|
1,669,780 | 17 | 54,972 | — | — | |||||||||||||||
|
Shares issued for stock compensation
|
23,221 | — | 1,201 | — | — | |||||||||||||||
|
Stock compensation expense
|
— | — | 41,686 | — | — | |||||||||||||||
|
Tax benefits related to stock options
|
— | — | 4,844 | — | — | |||||||||||||||
|
Tax benefits related to defined contribution plans
|
— | — | 2,794 | — | — | |||||||||||||||
|
Repurchases of common stock
|
— | — | — | (32,674,759 | ) | (1,390,594 | ) | |||||||||||||
|
Balance, December 31, 2008
|
531,789,730 | 5,318 | 105,497 | (32,674,759 | ) | (1,390,594 | ) | |||||||||||||
|
During 2009 —
|
||||||||||||||||||||
|
Shares issued for stock options
|
3,204,212 | 32 | 101,581 | — | — | |||||||||||||||
|
Shares issued for stock compensation and vesting of
|
||||||||||||||||||||
|
restricted stock
|
17,018 | — | 120 | — | — | |||||||||||||||
|
Stock compensation expense
|
— | — | 51,858 | — | — | |||||||||||||||
|
Noncontrolling interest
|
— | — | (2,591 | ) | — | — | ||||||||||||||
|
Tax benefits related to stock options
|
11,416 | |||||||||||||||||||
|
Tax benefits related to defined contribution plans
|
— | — | 3,104 | — | — | |||||||||||||||
|
Balance, December 31, 2009
|
535,010,960 | 5,350 | 270,985 | (32,674,759 | ) | (1,390,594 | ) | |||||||||||||
|
During 2010 —
|
||||||||||||||||||||
|
Shares issued for stock options
|
3,445,891 | 34 | 113,592 | — | — | |||||||||||||||
|
Shares issued for stock compensation and vesting of
|
||||||||||||||||||||
|
restricted stock
|
48,931 | 1 | 1,217 | (1,998 | ) | (88 | ) | |||||||||||||
|
Stock compensation expense
|
— | — | 56,443 | — | — | |||||||||||||||
|
Noncontrolling interest
|
— | — | (287 | ) | — | — | ||||||||||||||
|
Tax benefits related to stock options
|
— | — | 15,619 | — | — | |||||||||||||||
|
Tax benefits related to defined contribution plans
|
— | — | 3,237 | — | — | |||||||||||||||
|
Repurchases of common stock
|
— | — | — | (8,084,724 | ) | (350,000 | ) | |||||||||||||
|
Balance, December 31, 2010
|
538,505,782 | $ | 5,385 | $ | 460,806 | (40,761,481 | ) | $ | (1,740,682 | ) | ||||||||||
|
Authorized, December 31, 2010
|
700,000,000 | |||||||||||||||||||
On August 20, 2007, the Company’s Board of Directors
authorized a stock repurchase program, which provides for the
buyback of up to $3,000,000,000 of the Company’s common
stock over an open-ended period of time. Through
December 31, 2010, the Company had repurchased
47,865,511 shares of its common stock for $2,128,942,000 at
an average price of $44.48 per share.
Cash Dividends
declared were $1.30 per share in 2010,
$1.24 per share in 2009 and $1.18 per share in 2008. Cash
dividends paid were $1.27 per share in 2010, $1.24 per share in
2009 and $1.15 per share in 2008.
Accumulated Other Comprehensive Income
—
Comprehensive income is defined as the changes in equity during
a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by stockholders
and
66
Table of Contents
Notes to
Financial Statements — (Continued)
distributions to stockholders.
The
changes in accumulated other comprehensive income during 2010,
2009 and 2008 were as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Beginning balance
|
$ | 400,726 | $ | (253,211 | ) | $ | 1,050,786 | |||||
|
Foreign currency translation adjustments
|
(180,149 | ) | 716,208 | (874,952 | ) | |||||||
|
Adjustment to initially apply new accounting guidance related to
defined benefit plans, net of tax of $(3,954) in 2008
|
— | — | 3,573 | |||||||||
|
Pension and other postretirement benefits actuarial gains
(losses) net of tax of $(2,978) in 2010, $23,213 in 2009 and
$249,724 in 2008
|
3,543 | (71,197 | ) | (433,430 | ) | |||||||
|
Amortization of unrecognized pension and other postretirement
benefits costs, net of tax of $(11,956) in 2010, $(5,089) in
2009 and $(3,034) in 2008
|
21,423 | 8,357 | 2,532 | |||||||||
|
Pension and other postretirement benefits settlements,
curtailments and other, net of tax of $0 in 2010, $(225) in 2009
and $1,019 in 2008
|
— | 569 | (1,720 | ) | ||||||||
|
Ending balance
|
$ | 245,543 | $ | 400,726 | $ | (253,211 | ) | |||||
As of December 31, 2010 and 2009, the ending balance of
accumulated comprehensive income consisted of cumulative
translation adjustment income of $732,276,000 and $912,425,000,
respectively, and unrecognized pension and other postretirement
benefits costs of $486,733,000 and $511,699,000, respectively.
The estimated unrecognized benefit cost that will be amortized
from accumulated other comprehensive income into net periodic
benefit cost in 2011 is $38,286,000 for pension and $6,864,000
for other postretirement benefits.
Noncontrolling Interest
— On January 1,
2009, the Company adopted new accounting guidance on
noncontrolling interests. Upon adoption, the Company
reclassified noncontrolling interest from noncurrent liabilities
to stockholders’ equity. The financial statements for all
periods presented have been restated to reflect noncontrolling
interest as a component of equity. The noncontrolling interest
balance was $10,970,000 and $9,669,000 at December 31, 2010
and 2009, respectively.
Stock-Based Compensation
— Stock options and
restricted stock units have been issued to officers and other
management employees under ITW’s 2006 Stock Incentive Plan
(the “Plan”). The stock options generally vest over a
four-year period and have a maturity of ten years from the
issuance date. Restricted stock units generally vest after a
three-year period and include units with and without performance
criteria. To cover the exercise of vested options and vesting of
restricted stock units, the Company generally issues new shares
from its authorized but unissued share pool. At
December 31, 2010, 55,618,217 shares of ITW common
stock were reserved for issuance under this Plan. The Company
records compensation expense for the grant date fair value of
stock awards over the remaining service periods of those awards.
The following summarizes the Company’s stock-based
compensation expense:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Pre-tax compensation expense
|
$ | 56,443 | $ | 51,858 | $ | 41,612 | ||||||
|
Tax benefit
|
(17,822 | ) | (15,565 | ) | (12,536 | ) | ||||||
|
Total stock-based compensation recorded as expense, net of tax
|
$ | 38,621 | $ | 36,293 | $ | 29,076 | ||||||
Discontinued operations pre-tax stock-based compensation was
$74,000 in 2008 and was reflected in loss from discontinued
operations.
67
Table of Contents
Notes to
Financial Statements — (Continued)
The following table summarizes activity related to non-vested
restricted stock units during 2010:
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Number of
|
Grant-Date
|
|||||||
| Shares | Fair Value | |||||||
|
Unvested, January 1, 2010
|
1,084,377 | $ | 31.39 | |||||
|
Granted
|
711,262 | 39.92 | ||||||
|
Vested
|
(19,943 | ) | 31.70 | |||||
|
Cancelled
|
(54,215 | ) | 33.58 | |||||
|
Unvested, December 31, 2010
|
1,721,481 | 34.84 | ||||||
The following table summarizes stock option activity under the
Plan as of December 31, 2010, and changes during the year
then ended:
|
Weighted-
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Weighted-
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number of
|
Average
|
Contractual
|
Intrinsic
|
|||||||||||||
| Shares | Exercise Price | Term | Value | |||||||||||||
|
Under option, January 1, 2010
|
21,316,182 | $ | 42.42 | |||||||||||||
|
Granted
|
2,287,974 | 43.64 | ||||||||||||||
|
Exercised
|
(3,445,891 | ) | 32.97 | |||||||||||||
|
Cancelled or expired
|
(502,848 | ) | 47.74 | |||||||||||||
|
Under option, December 31, 2010
|
19,655,417 | 44.08 | 5.76 years | $ | 183,228,022 | |||||||||||
|
Exercisable, December 31, 2010
|
13,438,512 | 44.19 | 4.74 years | $ | 123,709,403 | |||||||||||
On December 16, 2010, the 2006 Stock Incentive Plan was
amended and restated, including a change in the name of the plan
to the 2011 Long-Term Incentive Plan, effective for all grants
under the plan on or after January 1, 2011. The significant
terms of options, restricted stock units (“RSUs”) and
performance restricted stock units (“PRSUs”) granted
under the amended and restated plan were not changed. As of
February 11, 2011, the Compensation Committee of the Board
of Directors approved an annual equity award consisting of stock
options, RSUs and PRSUs. The form of RSU provides for full
“cliff” vesting three years from the date of grant.
The form of PRSU provides for full “cliff” vesting
after three years if the Compensation Committee certifies that
the performance goals set with respect to the PRSU have been
met. Upon vesting, the holder will receive one share of common
stock of the Company for each vested RSU or PRSU. Option
exercise prices are equal to the common stock fair market value
on the date of grant. Stock options were granted on
1,873,409 shares at an exercise price of $55.81 per share.
Additionally, 591,101 RSUs and PRSUs were issued at the grant
date share price of $55.81. The fair value of RSUs and PRSUs is
determined by reducing the closing market price on the date of
the grant by the present value of projected dividends over the
vesting period.
The
Company uses a binomial option pricing model to estimate the
fair value of the stock options granted. The following
summarizes the assumptions used in the models:
| 2011 | 2010 | 2009 | ||||||||||
|
Risk-free interest rate
|
0.3-3.8 | % | 0.4-3.9 | % | 0.6-3.3 | % | ||||||
|
Weighted-average volatility
|
25.0 | % | 25.0 | % | 33.0 | % | ||||||
|
Dividend yield
|
2.80 | % | 2.78 | % | 2.34 | % | ||||||
|
Expected years until exercise
|
7.6-7.9 | 7.5-7.8 | 7.3-7.7 | |||||||||
Lattice-based option valuation models, such as the binomial
option pricing model, incorporate ranges of assumptions for
inputs. The risk-free rate of interest for periods within the
contractual life of the option is based on a zero-coupon
U.S. government instrument over the contractual term of the
equity instrument. Expected volatility is based on implied
volatility from traded options on the Company’s stock and
historical
68
Table of Contents
Notes to
Financial Statements — (Continued)
volatility of the Company’s stock. The Company uses
historical data to estimate option exercise timing and employee
termination rates within the valuation model. Separate groups of
employees that have similar historical exercise behavior are
considered separately for valuation purposes. The
weighted-average dividend yield is based on historical
information. The expected term of options granted is derived
from the output of the option valuation model and represents the
period of time that options granted are expected to be
outstanding. The ranges presented result from separate groups of
employees assumed to exhibit different behavior.
The weighted-average grant-date fair value of options granted
during 2011, 2010, 2009 and 2008 was $12.34, $9.59, $10.24 and
$13.32 per share, respectively. The aggregate intrinsic value of
options exercised during the years ended December 31, 2010,
2009, and 2008 was $56,191,000, $38,609,000 and $23,502,000,
respectively. As of December 31, 2010 there was $34,078,000
of total unrecognized compensation cost related to unvested
stock options. That cost is expected to be recognized over a
weighted-average period of 2.1 years. Exercise of options
during the years ended December 31, 2010, 2009, and 2008
resulted in cash receipts of $113,627,000, $101,613,000 and
$54,989,000, respectively. The total fair value of vested stock
option awards during the years ended December 31, 2010,
2009 and 2008 was $29,545,000, $38,999,000 and $30,185,000,
respectively.
As of December 31, 2010 there was $27,723,000 of total
unrecognized compensation cost related to unvested restricted
stock units. That cost is expected to be recognized over a
weighted-average remaining contractual life of 1.7 years.
The total fair value of vested restricted stock unit awards
during the years ended December 31, 2010 and 2009 was
$632,000 and $468,000, respectively.
Segment Information
— The Company has
approximately 810 operations in 57 countries. These businesses
are internally reported as 60 operating segments to senior
management. The Company’s 60 operating segments have been
aggregated into the following eight external reportable
segments: Transportation; Industrial Packaging; Power
Systems & Electronics; Food Equipment; Construction
Products; Polymers & Fluids; Decorative Surfaces; and
All Other.
Transportation
—
Transportation-related components, fasteners, fluids and
polymers, as well as truck remanufacturing and related parts and
service.
Industrial Packaging
-
Steel, plastic and
paper products and equipment used for bundling, shipping and
protecting goods in transit.
Power Systems & Electronics
—
Equipment and consumables associated with specialty power
conversion, metallurgy and electronics.
Food Equipment
— Commercial food
equipment and related service.
Construction Products
— Tools,
fasteners and other products for construction applications.
Polymers & Fluids
—
Adhesives, sealants, lubrication and cutting fluids, and hygiene
products.
Decorative Surfaces
— Decorative
surfacing materials for furniture, office and retail space,
countertops, flooring and other applications.
All Other
— All other operating
segments.
69
Table of Contents
Notes to
Financial Statements — (Continued)
Segment information for 2010, 2009 and 2008 was as follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues:
|
||||||||||||
|
Transportation
|
$ | 2,531,304 | $ | 2,066,446 | $ | 2,352,273 | ||||||
|
Industrial Packaging
|
2,276,774 | 1,927,442 | 2,618,922 | |||||||||
|
Power Systems & Electronics
|
1,942,054 | 1,601,587 | 2,334,121 | |||||||||
|
Food Equipment
|
1,871,511 | 1,859,277 | 2,133,186 | |||||||||
|
Construction Products
|
1,755,028 | 1,529,509 | 1,990,683 | |||||||||
|
Polymers & Fluids
|
1,359,542 | 1,195,750 | 1,295,972 | |||||||||
|
Decorative Surfaces
|
1,007,848 | 998,191 | 1,230,995 | |||||||||
|
All Other
|
3,219,272 | 2,764,141 | 3,198,433 | |||||||||
|
Intersegment revenues
|
(92,957 | ) | (65,275 | ) | (54,244 | ) | ||||||
| $ | 15,870,376 | $ | 13,877,068 | $ | 17,100,341 | |||||||
|
Operating income:
|
||||||||||||
|
Transportation
|
$ | 373,864 | $ | 143,571 | $ | 273,088 | ||||||
|
Industrial Packaging
|
235,643 | 88,754 | 281,134 | |||||||||
|
Power Systems & Electronics
|
410,352 | 216,863 | 461,300 | |||||||||
|
Food Equipment
|
259,707 | 255,093 | 320,867 | |||||||||
|
Construction Products
|
200,927 | 97,871 | 244,822 | |||||||||
|
Polymers & Fluids
|
200,295 | 80,231 | 190,805 | |||||||||
|
Decorative Surfaces
|
104,675 | 113,725 | 142,582 | |||||||||
|
All Other
|
571,215 | 389,871 | 586,688 | |||||||||
| $ | 2,356,678 | $ | 1,385,979 | $ | 2,501,286 | |||||||
| Depreciation and amortization and impairment of goodwill and intangible assets: | ||||||||||||
|
Transportation
|
$ | 97,331 | $ | 115,403 | $ | 101,415 | ||||||
|
Industrial Packaging
|
69,785 | 69,873 | 67,570 | |||||||||
|
Power Systems & Electronics
|
48,120 | 83,021 | 55,048 | |||||||||
|
Food Equipment
|
43,938 | 40,759 | 41,493 | |||||||||
|
Construction Products
|
59,236 | 65,144 | 80,367 | |||||||||
|
Polymers & Fluids
|
63,258 | 119,735 | 52,885 | |||||||||
|
Decorative Surfaces
|
20,599 | 33,725 | 15,910 | |||||||||
|
All Other
|
146,011 | 147,265 | 138,008 | |||||||||
| $ | 548,278 | $ | 674,925 | $ | 552,696 | |||||||
|
Plant and equipment additions:
|
||||||||||||
|
Transportation
|
$ | 68,909 | $ | 50,072 | $ | 83,519 | ||||||
|
Industrial Packaging
|
35,616 | 26,139 | 34,404 | |||||||||
|
Power Systems & Electronics
|
19,054 | 22,899 | 43,780 | |||||||||
|
Food Equipment
|
29,604 | 39,925 | 49,430 | |||||||||
|
Construction Products
|
27,389 | 24,528 | 35,767 | |||||||||
|
Polymers & Fluids
|
16,753 | 9,554 | 22,462 | |||||||||
|
Decorative Surfaces
|
23,088 | 12,384 | 18,116 | |||||||||
|
All Other
|
65,759 | 61,601 | 74,834 | |||||||||
| $ | 286,172 | $ | 247,102 | $ | 362,312 | |||||||
|
Identifiable assets:
|
||||||||||||
|
Transportation
|
$ | 2,105,235 | $ | 1,944,995 | $ | 1,898,067 | ||||||
|
Industrial Packaging
|
1,892,207 | 1,884,152 | 1,849,403 | |||||||||
|
Power Systems & Electronics
|
1,310,936 | 1,256,764 | 1,315,727 | |||||||||
|
Food Equipment
|
1,032,418 | 1,042,140 | 1,080,487 | |||||||||
|
Construction Products
|
1,474,218 | 1,440,840 | 1,357,493 | |||||||||
|
Polymers & Fluids
|
1,863,367 | 1,823,235 | 1,737,022 | |||||||||
|
Decorative Surfaces
|
358,581 | 364,991 | 427,172 | |||||||||
|
All Other
|
3,570,765 | 3,525,241 | 3,153,969 | |||||||||
|
Corporate
|
2,642,546 | 2,799,626 | 2,302,140 | |||||||||
|
Assets held for sale
|
— | — | 82,071 | |||||||||
| $ | 16,250,273 | $ | 16,081,984 | $ | 15,203,551 | |||||||
70
Table of Contents
Notes to
Financial Statements — (Continued)
Identifiable assets by segment are those assets that are
specifically used in that segment. Corporate assets are
principally cash and equivalents, investments and other general
corporate assets.
Enterprise-wide information for 2010, 2009 and 2008 was as
follows:
| In Thousands | 2010 | 2009 | 2008 | |||||||||
|
Operating Revenues by Geographic Region:
|
||||||||||||
|
United States
|
$ | 6,657,963 | $ | 5,901,382 | $ | 7,135,126 | ||||||
|
Europe
|
4,955,459 | 4,574,204 | 5,878,241 | |||||||||
|
Asia
|
1,781,385 | 1,366,737 | 1,645,868 | |||||||||
|
Other North America
|
1,025,960 | 827,182 | 1,026,153 | |||||||||
|
Australia/New Zealand
|
787,996 | 690,845 | 769,974 | |||||||||
|
Other
|
661,613 | 516,718 | 644,979 | |||||||||
| $ | 15,870,376 | $ | 13,877,068 | $ | 17,100,341 | |||||||
Operating revenues by geographic region are based on the
customers’ location.
The Company has thousands of product lines within its
businesses; therefore, providing operating revenues by product
line is not practicable.
Total noncurrent assets excluding deferred tax assets and
financial instruments were $9,288,000,000 and $9,344,000,000 at
December 31, 2010 and 2009, respectively. Of these amounts,
approximately 49% was attributed to U.S. operations for
2010 and 2009. The remaining amounts were attributed to the
Company’s foreign operations, with no single country
accounting for a significant portion.
71
Table of Contents
QUARTERLY
AND COMMON STOCK DATA (Unaudited)
Quarterly
Financial Data
The unaudited quarterly financial data included as supplementary
data reflects all adjustments that are, in the opinion of
management, necessary for a fair statement of the results for
the interim periods presented.
| Three Months Ended | ||||||||||||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||||||||||||||||||
| In Thousands except per share amounts | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Operating revenues
|
$ | 3,606,389 | $ | 3,146,379 | $ | 4,076,252 | $ | 3,392,906 | $ | 4,018,466 | $ | 3,580,354 | $ | 4,169,269 | $ | 3,757,429 | ||||||||||||||||
|
Cost of revenues
|
2,320,752 | 2,152,827 | 2,595,954 | 2,248,253 | 2,584,901 | 2,315,175 | 2,738,841 | 2,428,597 | ||||||||||||||||||||||||
|
Operating income
|
483,930 | 91,294 | 652,738 | 334,835 | 640,522 | 483,595 | 579,488 | 476,255 | ||||||||||||||||||||||||
|
Income (loss) from continuing operations
|
294,331 | (8,016 | ) | 420,792 | 178,943 | 419,276 | 302,964 | 392,794 | 495,599 | |||||||||||||||||||||||
|
Income (loss) from discontinued operations
|
— | (31,358 | ) | — | (2,378 | ) | — | (546 | ) | — | 11,801 | |||||||||||||||||||||
|
Net income (loss)
|
294,331 | (39,374 | ) | 420,972 | 176,565 | 419,276 | 302,418 | 392,794 | 507,400 | |||||||||||||||||||||||
|
Income (loss) per share from continuing operations:
|
||||||||||||||||||||||||||||||||
|
Basic
|
0.59 | (0.02 | ) | 0.84 | 0.36 | 0.84 | 0.61 | 0.79 | 0.99 | |||||||||||||||||||||||
|
Diluted
|
0.58 | (0.02 | ) | 0.83 | 0.36 | 0.83 | 0.60 | 0.79 | 0.98 | |||||||||||||||||||||||
|
Net income (loss) per share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
0.59 | (0.08 | ) | 0.84 | 0.35 | 0.84 | 0.60 | 0.79 | 1.01 | |||||||||||||||||||||||
|
Diluted
|
0.58 | (0.08 | ) | 0.83 | 0.35 | 0.83 | 0.60 | 0.79 | 1.01 | |||||||||||||||||||||||
In the first quarter of 2009, the Company recorded pre-tax
impairment charges of $90.0 million related to goodwill and
other intangible assets. In the fourth quarter of 2009, the
Company recorded favorable discrete tax adjustments of
$163.0 million related to a German tax audit settlement and
additional foreign tax credits as a result of a global legal
structure reorganization.
72
Table of Contents
| ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
Not applicable.
| ITEM 9A. | Controls and Procedures |
Controls
and Procedures
The Company’s management, with the participation of the
Company’s Chairman & Chief Executive Officer and
Senior Vice President & Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act
Rule 13a-15(e))
as of December 31, 2010. Based on such evaluation, the
Company’s Chairman & Chief Executive Officer and
Senior Vice President & Chief Financial Officer have
concluded that, as of December 31, 2010, the Company’s
disclosure controls and procedures were effective.
Management
Report on Internal Control over Financial Reporting
The Management Report on Internal Control Over Financial
Reporting and the Report of Independent Registered Public
Accounting Firm are found in Item 8. Financial Statements
and Supplementary Data.
In connection with the evaluation by management, including the
Company’s Chairman & Chief Executive Officer and
Senior Vice President & Chief Financial Officer, no
changes in the Company’s internal control over financial
reporting (as defined in Exchange Act
Rule 13a-15(f))
during the quarter ended December 31, 2010 were identified
that have materially affected or are reasonably likely to
materially affect the Company’s internal control over
financial reporting.
| ITEM 9B. | Other Information |
Not applicable.
73.1
Table of Contents
PART III
| ITEM 10. | Directors, Executive Officers and Corporate Governance |
Information regarding the Directors of the Company is
incorporated by reference from the information under the
captions “Election of Directors” and “Corporate
Governance Policies and Practices” in the Company’s
Proxy Statement for the 2011 Annual Meeting of Stockholders.
Information regarding the Audit Committee and its Financial
Experts is incorporated by reference from the information under
the captions “Board of Directors and Its Committees”
and “Audit Committee Report” in the Company’s
Proxy Statement for the 2011 Annual Meeting of Stockholders.
Information regarding the Executive Officers of the Company can
be found in Part I of this Annual Report on
Form 10-K.
Information regarding compliance with Section 16(a) of the
Exchange Act is incorporated by reference from the information
under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company’s Proxy Statement
for the 2011 Annual Meeting of Stockholders.
Information regarding the Company’s code of ethics that
applies to the Company’s Chairman & Chief
Executive Officer, Senior Vice President & Chief
Financial Officer, and key financial and accounting personnel is
incorporated by reference from the information under the caption
“Corporate Governance Policies and Practices” in the
Company’s Proxy Statement for the 2011 Annual Meeting of
Stockholders.
| ITEM 11. | Executive Compensation |
This information is incorporated by reference from the
information under the captions “Executive
Compensation,” “Director Compensation,”
“Compensation Discussion and Analysis” and
“Compensation Committee Report” in the Company’s
Proxy Statement for the 2011 Annual Meeting of Stockholders.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
This information is incorporated by reference from the
information under the captions “Ownership of ITW
Stock” and “Equity Compensation Plan Information”
in the Company’s Proxy Statement for the 2011 Annual
Meeting of Stockholders.
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
Information regarding certain relationships and related
transactions is incorporated by reference from the information
under the captions “Ownership of ITW Stock,”
“Certain Relationships and Related Transactions” and
“Corporate Governance Policies and Practices” in the
Company’s Proxy Statement for the 2011 Annual Meeting of
Stockholders.
Information regarding director independence is incorporated by
reference from the information under the captions
“Corporate Governance Policies and Practices” and
“Categorical Standards for Director Independence” in
the Company’s Proxy Statement for the 2011 Annual Meetings
of Stockholders.
| ITEM 14. | Principal Accounting Fees and Services |
This information is incorporated by reference from the
information under the caption “Ratification of the
Appointment of Independent Registered Public Accounting
Firm” in the Company’s Proxy Statement for the 2011
Annual Meeting of Stockholders.
74
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PART IV
| ITEM 15. | Exhibits and Financial Statement Schedules |
(a)(1)
Financial Statements
The following information is included as part of Item 8.
Financial Statements and Supplementary Data:
|
Management Report on Internal Control over Financial Reporting
|
||||
|
Report of Independent Registered Public Accounting Firm
|
||||
|
Statement of Income
|
||||
|
Statement of Income Reinvested in the Business
|
||||
|
Statement of Comprehensive Income
|
||||
|
Statement of Financial Position
|
||||
|
Statement of Cash Flows
|
||||
|
Notes to Financial Statements
|
(2) Financial Statement Schedules
Not applicable.
(3) Exhibits
(i) See the Exhibit Index within this Annual
Report on
Form 10-K.
(ii) Pursuant to
Regulation S-K,
Item 601(b)(4)(iii), the Company has not filed with
Exhibit 4 any debt instruments for which the total amount
of securities authorized thereunder is less than 10% of the
total assets of the Company and its subsidiaries on a
consolidated basis as of December 31, 2010, with the
exception of the agreements related to the 5.15% Notes due
2014 and the 6.25% Notes due 2019 which are described as
Exhibit numbers 4(a) through (d) in the Exhibit Index.
The Company agrees to furnish a copy of the agreement related to
the debt instruments which have not been filed with
Exhibit 4 to the Securities and Exchange Commission upon
request.
75
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 25th day of February 2011.
ILLINOIS TOOL WORKS INC.
| By: |
/s/
DAVID
B. SPEER
|
David B. Speer
Chairman & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities indicated on this
25th day of February 2011.
| Signatures | Title | |||
|
/s/
David
B. Speer
|
Chairman & Chief Executive Officer
(Principal Executive Officer) |
|||
|
/s/
Ronald
D. Kropp
|
Senior Vice President & Chief Financial Officer (Principal Financial Officer) | |||
|
/s/
Randall
J. Scheuneman
|
Vice President & Chief Accounting Officer (Principal Accounting Officer) | |||
| MARVIN D. BRAILSFORD | Director | |||
| SUSAN CROWN | Director | |||
| DON H. DAVIS, JR. | Director | |||
| ROBERT C. MCCORMACK | Director | |||
| ROBERT S. MORRISON | Director | |||
| JAMES A. SKINNER | Director | |||
| DAVID B. SMITH, JR. | Director | |||
| PAMELA B. STROBEL | Director | |||
| KEVIN M. WARREN | Director | |||
| ANRÉ D. WILLIAMS | Director | |||
|
By
/s/
DAVID
B. SPEER
(David
B. Speer,
as
Attorney-in-Fact)
|
||||
Original powers of attorney authorizing David B. Speer to sign
the Company’s Annual Report on
Form 10-K
and amendments thereto on behalf of the above-named directors of
the registrant have been filed with the Securities and Exchange
Commission as part of this Annual Report on
Form 10-K
(Exhibit 24).
76
Table of Contents
EXHIBIT INDEX
ANNUAL
REPORT on
FORM 10-K
2010
|
Exhibit
|
||||
| Number | Description | |||
| 3 | (a) | Restated Certificate of Incorporation of Illinois Tool Works Inc., filed as Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 3 | (b) | By-laws of Illinois Tool Works Inc., as amended and restated as of August 5, 2010, filed as Exhibit 3 to the Company’s Current Report on Form 8-K filed on August 11, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 4 | (a) | Indenture between Illinois Tool Works Inc. and The First National Bank of Chicago, as Trustee, dated as of November 1, 1986, filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed on January 15, 1999 (Commission File No. 333-70691) and incorporated herein by reference. | ||
| 4 | (b) | First Supplemental Indenture between Illinois Tool Works Inc. and Harris Trust and Savings Bank, as Trustee, dated as of May 1, 1990, filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-3 filed on January 15, 1999 (Commission File No. 333-70691) and incorporated herein by reference. | ||
| 4 | (c) | Officers’ Certificate dated March 26, 2009 establishing the terms, and setting forth the forms, of the 5.15% Notes due 2014 and the 6.25% Notes due 2019 filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 27, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 4 | (d) | Registration Rights Agreement dated March 26, 2009, by and among the Company and HSBC Securities (USA) Inc. and Banc of America Securities LLC filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on March 27, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (a)* | Illinois Tool Works Inc. 1996 Stock Incentive Plan dated February 16, 1996, as amended on December 12, 1997, October 29, 1999, January 3, 2003, March 18, 2003, January 2, 2004, December 10, 2004 and December 7, 2005, filed as Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (b)* | Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 10, 2006, as amended on May 5, 2006, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (c)* | Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 8, 2008, filed as Exhibit 10(q) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (d)* | Second Amendment to Illinois Tool Works Inc. 2006 Stock Incentive Plan dated February 13, 2009, filed as Exhibit 10(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (e)* | Illinois Tool Works Inc. 2011 Long-Term Incentive Plan filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (f)* | Form of stock option terms filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 16, 2004 and incorporated herein by reference. | ||
| 10 | (g)* | Form of stock option terms filed as Exhibit 10(m) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (Commission File No. 1-4797) and incorporated herein by reference. | ||
Table of Contents
|
Exhibit
|
||||
| Number | Description | |||
| 10 | (h)* | Form of stock option terms filed as Exhibit 10(o) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (i)* | Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 5, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (j)* | Form of stock option terms filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 9, 2011 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (k)* | Form of restricted stock unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on February 5, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (l)* | Form of restricted stock unit terms filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on February 9, 2011 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (m)* | Form of qualifying or performance restricted stock unit terms filed as Exhibit 10(j) to the Company’s Annual Report on Form 10-K filed on February 26, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (n)* | Form of performance restricted stock unit terms filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on February 9, 2011 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (o)* | Form of company-wide growth plan grant filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 3, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (p)* | Form of company-wide growth plan grant filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on February 9, 2011 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (q)* | Illinois Tool Works Inc. Executive Incentive Plan adopted February 16, 1996, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (r)* | Illinois Tool Works Inc. 2011 Executive Incentive Plan filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (s)* | Illinois Tool Works Inc. 1982 Executive Contributory Retirement Income Plan adopted December 13, 1982, filed as Exhibit 10(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (t)* | Illinois Tool Works Inc. 1985 Executive Contributory Retirement Income Plan adopted December 1985, filed as Exhibit 10(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (u)* | Amendment to the Illinois Tool Works Inc. 1985 Executive Contributory Retirement Income Plan dated May 1, 1996, filed as Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (v)* | Illinois Tool Works Inc. Executive Contributory Retirement Income Plan as amended and restated, effective January 1, 2010, filed as exhibit 10 to the Company’s Current Report on Form 8-K filed on November 5, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
Table of Contents
|
Exhibit
|
||||
| Number | Description | |||
| 10 | (w)* | Illinois Tool Works Inc. Nonqualified Pension Plan, effective January 1, 2008, as amended and approved by the Board of Directors on December 22, 2008, filed as Exhibit 10(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (x)* | Illinois Tool Works Inc. 2011 Change-in-Control Severance Compensation Policy filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 16, 2010 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (y)* | Illinois Tool Works Inc. Directors’ Deferred Fee Plan effective May 5, 2006, as amended and approved by the Board of Directors on February 9, 2007, filed as Exhibit 10(h) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (z)* | Amendment to the Illinois Tool Works Inc. Directors’ Deferred Fee Plan, effective February 8, 2008, filed as Exhibit 10(j) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (aa)* | Illinois Tool Works Inc. Phantom Stock Plan for Non-Officer Directors, as approved by the Board of Directors on December 5, 2008, filed as Exhibit 10(s) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (bb)* | Consulting agreement dated January 5, 2009 between Illinois Tool Works Inc. and Hugh J. Zentmyer, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 10 | (cc)* | Severance, Release and Proprietary Interests Protection Agreement between Russell M. Flaum and Illinois Tool Works Inc. filed as Exhibit 10 to the Company’s Current Report on Form 8-K filed on June 19, 2009 (Commission File No. 1-4797) and incorporated herein by reference. | ||
| 21 | Subsidiaries and Affiliates of the Company. | |||
| 23 | Consent of Independent Registered Public Accounting Firm. | |||
| 24 | Powers of Attorney. | |||
| 31 | Rule 13a-14(a) Certifications. | |||
| 32 | Section 1350 Certification. | |||
| 99 | (a) | Description of the capital stock of Illinois Tool Works Inc. filed as Exhibit 99a to the Company’s Annual Report on Form 10-K filed on February 26, 2010 ( Commission File No. 1-4797) and incorporated herein by reference. | ||
| 101 | ** | Interactive Data File. | ||
| * | Management contract or compensatory plan or arrangement. | |
| ** | As provided in Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections. |
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accounting Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint