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| ITW > SEC Filings for ITW > Form 10-K on 19-Feb-2013 | All Recent SEC Filings |
19-Feb-2013
Annual Report
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 58 countries. As of December 31, 2012, these businesses are
internally reported as 40 operating segments to senior management. The Company's
40 operating segments have been aggregated into the following seven external
reportable segments: Transportation; Power Systems & Electronics; Industrial
Packaging; Food Equipment; Construction Products; Polymers & Fluids; and All
Other.
Due to the large number of diverse businesses and the Company's decentralized
operating structure, the Company does not require its businesses to provide
detailed information on operating results. Instead, the Company's corporate
management collects data on several key measurements: operating revenues,
operating income, operating margins, overhead costs, number of months on hand in
inventory, days sales outstanding in accounts receivable, past due receivables
and return on invested capital. These key measures are monitored by management
and significant changes in operating results versus current trends in end
markets and variances from forecasts are discussed with operating unit
management.
Management analyzes the Company's consolidated results of operations and the
results of each segment by identifying the effects of changes in the results of
the base businesses, newly acquired and recently divested companies,
restructuring costs, goodwill and intangible asset impairment charges, and
currency translation on the operating revenues and operating income of each
segment. Base businesses are those businesses that have been included in the
Company's results of operations for more than 12 months. The changes to base
business operating income include the estimated effects of both operating
leverage and changes in variable margins and overhead costs. Operating leverage
is the estimated effect of the base business revenue volume changes on operating
income, assuming variable margins remain the same as the prior period. As
manufacturing and administrative overhead costs usually do not significantly
change as a result of revenues increasing or decreasing, the percentage change
in operating income due to operating leverage is usually more than the
percentage change in the base business revenues. Changes in variable margins and
overhead costs represent the estimated effect of non-volume related changes in
base business operating income and may be driven by a number of factors,
including changes in product mix, the cost of raw materials, labor and overhead,
and pricing to customers. Selling price versus material cost comparisons
represent the estimated net impact of increases or decreases in the cost of
materials used in the Company's products versus changes in the selling price to
the Company's customers. Management reviews these price versus cost comparisons
by analyzing the net impact of changes to each segment's operating margin.
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.
INTERNATIONAL REPORTING CHANGE
Effective January 1, 2011, the Company eliminated the one-month lag for the
reporting of its international operations outside of North America. As a result,
the Company now reports both North American and international results on a
calendar year basis. Prior to this, the international fiscal reporting period
began on December 1st and ended on November 30th. The Company applied this
change in accounting principle retrospectively to all prior financial statement
periods presented. Refer to the International Reporting Lag note in Item 8.
Financial Statements and Supplementary Data for discussion of the international
reporting change.
DIVESTITURE OF MAJORITY INTEREST IN DECORATIVE SURFACES SEGMENT
On August 15, 2012, the Company entered into a definitive agreement (the
"Investment Agreement") to divest a 51% majority interest in its Decorative
Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC
("CD&R"). Under the terms of the Investment Agreement, the Company contributed
the assets and stock of the Decorative Surfaces segment to a newly formed joint
venture, Wilsonart International Holdings LLC ("Wilsonart"). The transaction
closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49%
immediately following the close of the transaction. The Company ceased
consolidating the results of the Decorative Surfaces segment as of October 31,
2012 and now reports its 49% ownership interest in Wilsonart using the equity
method of accounting. Effective November 1, 2012, the Company made changes to
its management reporting structure and Decorative Surfaces is no longer a
reportable segment of the Company. See the Divestiture of Majority Interest in
Decorative Surfaces Segment note in Item 8. Financial Statements and
Supplementary Data for further discussion of this transaction.
DISCONTINUED OPERATIONS
The Company periodically reviews its operations for businesses that may no
longer be aligned with its long-term objectives. For businesses reported as
discontinued operations in the statement of income, all related prior period
income statement information has been restated to conform to the current year
reporting of these businesses. Refer to the Discontinued Operations note in
Item 8. Financial Statements and Supplementary Data for discussion of the
Company's discontinued operations.
STRATEGIC REVIEW OF INDUSTRIAL PACKAGING SEGMENT
On February 19, 2013, the Company announced that it is initiating a review
process to explore strategic alternatives for its Industrial Packaging segment,
which may include a sale or spin-off of the business. The Company expects the
review process will last through the remainder of 2013.
2011 AND 2012 SEGMENT CHANGES
The Company periodically makes changes to its management reporting structure to
better align its businesses with Company objectives and operating strategies.
In the first quarter of 2011, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments. The pressure sensitive adhesives, and the static and contamination control reporting units were moved to the Power Systems & Electronics segment from the Polymers & Fluids and All Other segments, respectively. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2011.
In the first quarter of 2012, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments. These changes primarily related to the industrial fasteners reporting unit, formerly in the All Other segment, moving to the Transportation segment; certain businesses in a Latin American reporting unit, formerly in the Polymers & Fluids segment, moving to the Transportation segment; and a worldwide insulation reporting unit, formerly in the Industrial Packaging segment, moving to the Power Systems & Electronics segment. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2012.
The prior period segment results have been restated to conform to the current
year reporting of these businesses.
CONSOLIDATED RESULTS OF OPERATIONS
The Company's consolidated results of operations for 2012, 2011 and 2010 are
summarized as follows:
Dollars in millions 2012 2011 2010 Operating revenues $ 17,924 $ 17,787 $ 15,416 Operating income 2,847 2,731 2,254 Margin % 15.9 % 15.4 % 14.6 % |
In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
2012 Compared to 2011 2011 Compared to 2010
% 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 1.7 % 4.6 % 0.4 % 7.5 % 21.0 % 1.9 %
Changes in variable
margins and overhead costs - 4.4 0.7 - (4.9 ) (0.7 )
1.7 9.0 1.1 7.5 16.1 1.2
Acquisitions 3.1 0.6 (0.4 ) 4.9 2.3 (0.4 )
Divestitures (1.4 ) (0.9 ) 0.1 (0.1 ) - -
Restructuring costs - (1.9 ) (0.3 ) - (0.6 ) (0.1 )
Impairment of goodwill and
intangibles - (0.1 ) - - - -
Translation (2.7 ) (2.5 ) - 3.1 3.4 0.1
Other 0.1 - - - - -
0.8 % 4.2 % 0.5 % 15.4 % 21.2 % 0.8 %
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Operating Revenues
Revenues increased 0.8% in 2012 versus 2011 primarily due to higher base
revenues and revenues from acquisitions, partially offset by the unfavorable
effect of currency translation and the reduction of revenues due to
divestitures. Base revenues increased 1.7% in 2012 versus 2011 as North American
economic conditions were stronger than the European and Asia Pacific economic
environments. North American base revenues increased 4.3% in 2012 versus 2011.
International base revenues decreased 1.1% as Europe decreased 2.3% in 2012
versus 2011 primarily driven by weakness in Southern Europe. Asia Pacific base
revenues increased 1.3% in 2012 versus 2011 primarily due to growth in India.
Acquisitions contributed 3.1% to revenues primarily due to the purchase of a
manufacturer of specialty devices used to measure the flow of gases and fluids
in the first quarter of 2012 and a thermal processing and environmental
equipment manufacturer purchased in the third quarter of 2011. Currency
translation resulted in a 2.7% decline in revenues primarily due to a weaker
Euro versus the year ago period. Divestitures reduced revenues by 1.4% primarily
due to only ten months of operating results for the Decorative Surfaces segment
in 2012 versus twelve months of operating results in 2011 as the Company
divested a 51% interest in the Decorative Surfaces segment on October 31, 2012,
and the segment was deconsolidated as of that date.
Revenues increased 15.4% in 2011 versus 2010 primarily due to higher base
revenues, revenues from acquisitions, and the favorable impact of currency
translation. Base revenues increased 7.5% in 2011 versus 2010 as worldwide
economic conditions strengthened. North American and international base revenues
increased 8.7% and 6.1%, respectively, in 2011 versus 2010. Base revenues in
Europe and Asia Pacific increased 5.9% and 5.4%, respectively, in 2011 versus
2010; however, European economic conditions slowed in the second half of the
year. End markets associated with welding, transportation and test and
measurement businesses showed strength in 2011. Acquisitions contributed 4.9% to
revenues primarily due to a North American automotive aftermarket business
purchased in the first quarter of 2011, a South American chemical products
manufacturer purchased in the fourth quarter of 2010, and a North American
packaging business purchased in the second quarter of 2011. Currency translation
resulted in a 3.1% increase in revenues primarily due to a stronger Euro and
Australian dollar versus the year ago period.
Operating Income
Operating income increased 4.2% in 2012 versus 2011 primarily due to the
positive operating leverage effects of the base revenue increase noted above and
improved variable margins. Currency translation resulted in a 2.5% decline in
operating income primarily due to a weaker Euro versus the year ago period.
Higher restructuring expenses due to increased cost reduction activities also
negatively impacted operating income by 1.9%. Base margins increased 110 basis
points primarily due to improved variable margins and the positive operating
leverage effect of the increase in base revenues noted above. Changes in
variable margins and overhead costs improved base margins 70 basis points
primarily due to the favorable effect of selling
price versus material cost comparisons of 50 basis points and benefits of
restructuring projects. The increase in base margins was partially offset by a
40 basis point decline related to acquisitions, primarily due to amortization
expense related to intangible assets. Restructuring expenses diluted total
operating margins by 30 basis points primarily due to restructuring activities
related to continued improvements in operating structure and efficiencies.
Operating income increased 21.2% in 2011 versus 2010 primarily due to the
positive operating leverage effects of the base revenue increase noted above,
the favorable effect of currency translation and income from acquisitions,
partially offset by weaker variable margins. Currency translation resulted in a
3.4% increase in operating income primarily due to a stronger Euro and
Australian dollar versus the year ago period. Base margins increased 120 basis
points due to the positive operating leverage effect of the increase in base
revenues, partially offset by changes in variable margins and overhead costs of
70 basis points, which was primarily due to the negative impact of selling price
versus material cost comparisons of 60 basis points. Acquisitions diluted total
operating margins by 40 basis points primarily due to amortization expense
related to intangible assets.
RESULTS OF OPERATIONS BY SEGMENT
The reconciliation of segment operating revenues and operating income to total
operating revenues and operating income is as follows:
Operating Revenues
In millions 2012 2011 2010
Transportation $ 3,550 $ 3,444 $ 2,839
Power Systems & Electronics 3,151 2,988 2,518
Industrial Packaging 2,412 2,463 2,123
Food Equipment 1,939 1,985 1,860
Construction Products 1,902 1,959 1,753
Polymers & Fluids 1,230 1,250 1,001
All Other 2,883 2,690 2,407
Intersegment revenues (64 ) (76 ) (77 )
Total Segments 17,003 16,703 14,424
Decorative Surfaces 921 1,084 992
Total $ 17,924 $ 17,787 $ 15,416
Operating Income
In millions 2012 2011 2010
Transportation $ 560 $ 539 $ 427
Power Systems & Electronics 643 605 493
Industrial Packaging 282 249 208
Food Equipment 324 304 255
Construction Products 200 225 192
Polymers & Fluids 195 188 167
All Other 521 489 395
Total Segments 2,725 2,599 2,137
Decorative Surfaces 122 132 117
Total $ 2,847 $ 2,731 $ 2,254
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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:
• plastic and metal components, fasteners and assemblies for automobiles,
light trucks and other industrial uses;
• fluids, polymers and other supplies 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 2012, this segment primarily served the automotive original equipment
manufacturers and tiers (53%) and automotive aftermarket (31%) markets.
The results of operations for the Transportation segment for 2012, 2011 and 2010
were as follows:
Dollars in millions 2012 2011 2010 Operating revenues $ 3,550 $ 3,444 $ 2,839 Operating income 560 539 427 Margin % 15.8 % 15.7 % 15.0 % |
In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
2012 Compared to 2011 2011 Compared to 2010
% 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 3.5 % 8.0 % 0.7 % 9.7 % 23.3 % 1.9 %
Changes in variable
margins and overhead costs - (0.9 ) (0.2 ) - (6.0 ) (0.8 )
3.5 7.1 0.5 9.7 17.3 1.1
Acquisitions and
divestitures 2.4 1.5 (0.1 ) 9.2 7.4 (0.3 )
Restructuring costs - (1.5 ) (0.2 ) - (1.5 ) (0.2 )
Impairment of goodwill and
intangibles - - - - - -
Translation (2.8 ) (3.3 ) (0.1 ) 2.4 3.0 0.1
Other - - - - - -
3.1 % 3.8 % 0.1 % 21.3 % 26.2 % 0.7 %
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Operating Revenues
Revenues increased 3.1% in 2012 versus 2011 primarily due to the increase in
base business and revenues from acquisitions, partially offset by the
unfavorable effect of currency translation. Worldwide automotive base revenues
increased 9.4% in 2012 versus 2011 primarily due to an increase in worldwide
auto builds of approximately 6%, favorable customer mix and product penetration
gains in Europe, and growing product penetration with automotive original
equipment manufacturers in China. The automotive aftermarket base business
declined 4.1% in 2012 versus 2011 primarily due to the loss of a major product
line with a key customer and decreased demand for car care products in Europe,
partially offset by higher demand in the U.S. Base revenues for the truck
remanufacturing and related parts and service business increased 4.0% over the
prior year primarily due to strong energy development activity that increased
consumer demand in North America. The increase in acquisition revenue was
primarily due to the purchase of a North American automotive aftermarket
business in the first quarter of 2011 and a European automotive aftermarket
business in the third quarter of 2011.
Revenues increased 21.3% in 2011 versus 2010 primarily due to the increase in
base business, revenues from acquisitions and the favorable effect of currency
translation. Worldwide automotive base revenues increased 10.3% in 2011 versus
2010 primarily due to an increase in worldwide auto builds of 3% and improved
product penetration in European and Asian markets. The truck remanufacturing and
related parts and service business increased 19.7% over the prior year due to
increased demand in North America and Canada related to oil and gas exploration.
Automotive aftermarket base business increased 3.7% over the prior year. The
increase in acquisition revenue was primarily due to the purchase of a North
American automotive aftermarket business in the first quarter of 2011.
Operating Income
Operating income increased 3.8% in 2012 versus 2011 primarily due to the
positive operating leverage effect of the base revenue increase noted above and
income from acquisitions, partially offset by the unfavorable effect of currency
translation and higher restructuring expenses. Base margins increased 50 basis
points primarily due to the positive operating leverage effect of the increase
in base revenues described above, partially offset by changes in variable
margins and overhead costs. Improvements in variable margins were primarily due
to the favorable impact of selling price versus material cost comparisons of 40
basis points, which were more than offset by higher overhead costs of 60 basis
points, including costs related to business expansion in China. The increase in
total base margins was partially offset by a 20 basis point operating margin
decline due to the higher restructuring expenses noted above.
Operating income increased 26.2% in 2011 versus 2010 primarily due to the
positive operating leverage effects of the base revenue increase noted above,
income from acquisitions and the favorable effect of currency translation,
partially offset by lower variable margins and higher overhead costs. Base
margins increased 110 basis points primarily due to the positive operating
leverage effect of the increase in base revenues described above, partially
offset by the negative impact of selling price versus material cost comparisons
of 80 basis points. Acquisitions diluted total operating margins by 30 basis
points primarily due to amortization expense related to intangible assets.
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;
• static and contamination control equipment;
• airport ground support equipment;
• pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications; and
• metal jacketing and other insulation products.
In 2012, this segment primarily served the general industrial (43%), electronics
(17%) and construction (8%) markets.
The results of operations for the Power Systems & Electronics segment for 2012,
2011 and 2010 were as follows:
Dollars in millions 2012 2011 2010 Operating revenues $ 3,151 $ 2,988 $ 2,518 Operating income 643 605 493 Margin % 20.4 % 20.2 % 19.6 % |
In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
2012 Compared to 2011 2011 Compared to 2010
% 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 3.8 % 7.6 % 0.8 % 12.0 % 24.9 % 2.2 %
Changes in variable
margins and overhead costs - 1.5 0.3 - (2.7 ) (0.5 )
3.8 9.1 1.1 12.0 22.2 1.7
Acquisitions and
divestitures 3.0 (0.7 ) (0.7 ) 4.3 (1.0 ) (0.9 )
Restructuring costs - (1.2 ) (0.2 ) - (0.6 ) (0.1 )
. . .
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