itw10q2q10.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________

FORM 10-Q

(Mark One)
 
    [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 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
 
36-1258310
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
3600 West Lake Avenue, Glenview, IL
 
60026-1215
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number, including area code) 847-724-7500

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]                        No [   ]

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.
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 number of shares of registrant’s common stock, $0.01 par value, outstanding at June 30, 2010: 503,511,009.

 
 

 

Part I – Financial Information

Item 1 – Financial Statements

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)

(In thousands except for per share amounts)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
   
2009
   
2010
   
2009
 
Operating Revenues
  $ 4,076,252     $ 3,392,906     $ 7,682,641     $ 6,539,285  
Cost of revenues
    2,595,954       2,248,253       4,916,706       4,401,080  
Selling, administrative, and research
                               
    and development expenses
    773,649       757,871       1,522,253       1,519,562  
Amortization of intangible assets
    53,911       51,947       107,014       102,517  
Impairment of goodwill and
                               
other intangible assets
                      89,997  
Operating Income
    652,738       334,835       1,136,668       426,129  
Interest expense
    (43,687 )     (43,886 )     (88,264 )     (75,322 )
Other income (expense)
    5,741       (19,839 )     11,719       (24,180 )
Income from Continuing Operations
                               
Before Income Taxes
    614,792       271,110       1,060,123       326,627  
Income Taxes
    194,000       92,167       345,000       155,700  
Income from Continuing Operations
    420,792       178,943       715,123       170,927  
Loss from Discontinued Operations
          (2,378 )           (33,736 )
Net Income
  $ 420,792     $ 176,565     $ 715,123     $ 137,191  
                                 
Income Per Share from Continuing
                               
Operations:
                               
Basic
  $ 0.84     $ 0.36     $ 1.42     $ 0.34  
Diluted
  $ 0.83     $ 0.36     $ 1.41     $ 0.34  
Loss Per Share from Discontinued
                               
Operations:
                               
Basic
        $ (0.00 )         $ (0.07 )
Diluted
        $ (0.00 )         $ (0.07 )
Net Income Per Share:
                               
Basic
  $ 0.84     $ 0.35     $ 1.42     $ 0.27  
Diluted
  $ 0.83     $ 0.35     $ 1.41     $ 0.27  
Cash Dividends:
                               
Paid
  $ 0.31     $ 0.31     $ 0.62     $ 0.62  
Declared
  $ 0.31     $ 0.31     $ 0.62     $ 0.62  
Shares of Common Stock Outstanding
                               
During the Period:
                               
Average
    503,265       499,389       502,847       499,290  
Average assuming dilution
    506,297       500,875       505,479       500,617  

The Notes to Financial Statements are an integral part of these statements.

 
 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)

(In thousands)
 
June 30, 2010
   
December 31, 2009
 
ASSETS
           
Current Assets:
           
Cash and equivalents
  $ 1,265,237     $ 1,318,772  
Trade receivables
    2,582,663       2,491,492  
Inventories
    1,458,179       1,356,233  
Deferred income taxes
    217,032       231,858  
Prepaid expenses and other current assets
    243,359       276,240  
Total current assets
    5,766,470       5,674,595  
                 
Plant and Equipment:
               
Land
    232,117       247,911  
Buildings and improvements
    1,486,924       1,589,534  
Machinery and equipment
    3,718,827       3,945,692  
Equipment leased to others
    176,891       182,485  
Construction in progress
    89,077       90,908  
   Gross plant and equipment
    5,703,836       6,056,530  
    Accumulated depreciation
    (3,759,958 )     (3,920,003 )
   Net plant and equipment
    1,943,878       2,136,527  
                 
Investments
    445,156       451,293  
Goodwill
    4,672,253       4,860,732  
Intangible Assets
    1,712,933       1,723,417  
Deferred Income Taxes
    589,752       673,044  
Other Assets
    541,517       562,376  
    $ 15,671,959     $ 16,081,984  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Short-term debt
  $ 305,917     $ 213,681  
Accounts payable
    731,714       689,572  
Accrued expenses
    1,273,037       1,359,394  
Cash dividends payable
    156,088       155,724  
Income taxes payable
    309,804       417,267  
Total current liabilities
    2,776,560       2,835,638  
Noncurrent Liabilities:
               
Long-term debt
    2,724,342       2,914,874  
Deferred income taxes
    179,674       207,677  
Other liabilities
    1,259,519       1,305,919  
Total noncurrent liabilities
    4,163,535       4,428,470  
                 
Stockholders’ Equity:
               
Common stock
    5,362       5,350  
Additional paid-in-capital
    344,473       270,985  
Income reinvested in the business
    9,925,004       9,521,740  
Common stock held in treasury
    (1,390,594 )     (1,390,594 )
Accumulated other comprehensive income
    (162,181 )     400,726  
Noncontrolling interest
    9,800       9,669  
Total stockholders’ equity
    8,731,864       8,817,876  
    $ 15,671,959     $ 16,081,984  

The Notes to Financial Statements are an integral part of these statements.


 
 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended
June 30
 
   
2010
   
2009
 
Cash Provided by (Used for) Operating Activities:
           
Net income
  $ 715,123     $ 137,191  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation
    167,298       182,633  
Amortization and impairment of goodwill and other intangible assets
    107,014       192,514  
Change in deferred income taxes
    (17,148 )     (11,302 )
Provision for uncollectible accounts
    9,657       6,784  
Loss on sale of plant and equipment
    14       2,322  
(Income) loss from investments
    (10,232 )     13,956  
(Gain) loss on sale of operations and affiliates
    (1,611 )     29,773  
Stock compensation expense
    27,399       23,969  
Other non-cash items, net
    576       27  
Change in assets and liabilities:
               
(Increase) decrease in--
               
Trade receivables
    (266,084 )     322,425  
Inventories
    (168,522 )     428,659  
Prepaid expenses and other assets
    (3,831 )     (23,114 )
Increase (decrease) in--
               
Accounts payable
    89,895       (156,461 )
Accrued expenses and other liabilities
    14,694       (32,799 )
Income taxes receivable and payable
    (46,967 )     (56,777 )
Other, net
    573       11,283  
Net cash provided by operating activities
    617,848       1,071,083  
Cash Provided by (Used for) Investing Activities:
               
Acquisition of businesses (excluding cash and equivalents)
    (217,371 )     (113,640 )
Additions to plant and equipment
    (123,385 )     (121,338 )
Purchases of investments
    (1,257 )     (523 )
Proceeds from investments
    9,427       4,076  
Proceeds from sale of plant and equipment
    8,253       14,905  
Proceeds from sale of operations and affiliates
    1,403       15,685  
Other, net
    19,902       (31,166 )
Net cash used for investing activities
    (303,028 )     (232,001 )
Cash Provided by (Used for) Financing Activities:
               
Cash dividends paid
    (311,495 )     (309,507 )
Issuance of common stock
    42,852       15,955  
Net proceeds (repayments) of debt with original maturities 3 months or less
    84,234       (1,668,982 )
Proceeds from debt with original maturities greater than 3 months
    1,228       2,157,995  
Repayments of debt with original maturities greater than 3 months
    (8,777 )     (1,258,619 )
Excess tax benefits from share-based compensation
    2,311       28  
Net cash used for financing activities
    (189,647 )     (1,063,130 )
Effect of Exchange Rate Changes on Cash and Equivalents
    (178,708 )     97,501  
Cash and Equivalents:
               
Decrease during the period
    (53,535 )     (126,547 )
Beginning of period
    1,318,772       742,950  
End of period
  $ 1,265,237     $ 616,403  
Cash Paid During the Period for Interest
  $ 64,535     $ 26,565  
Cash Paid During the Period for Income Taxes
  $ 378,179     $ 182,850  
Liabilities Assumed from Acquisitions
  $ 106,878     $ 38,233  

The Notes to Financial Statements are an integral part of these statements.

 
 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

(1)           FINANCIAL STATEMENTS

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2009 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform to current year reporting.

(2)           COMPREHENSIVE INCOME

The components of comprehensive income in the periods presented were:

(In thousands)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
   
2009
   
2010
   
2009
 
Net income
  $ 420,792     $ 176,565     $ 715,123     $ 137,191  
Other comprehensive income:
                               
Foreign currency translation adjustments
    (337,625 )     504,626       (574,895 )     381,638  
Pension and other postretirement benefit adjustments, net of tax
    5,951       1,954       11,988       1,934  
Comprehensive income
  $ 89,118     $ 683,145     $ 152,216     $ 520,763  

(3)           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 2007, the Company classified an automotive components business as held for sale which was sold in the third quarter of 2009.

Results of the discontinued operations for the second quarter and year-to-date periods of 2009 were as follows:

(In thousands)
 
Three Months Ended
   
Six Months Ended
 
   
June 30, 2009
   
June 30, 2009
 
Operating revenues
  $ 9,542     $ 23,169  
                 
Loss before taxes
  $ (1,252 )   $ (35,064 )
Income tax (expense) benefit
    (1,126 )     1,328  
Loss from discontinued operations
  $ (2,378 )   $ (33,736 )

In 2009, the Company recorded a pre-tax loss on the disposal of the Click Commerce business of $29,827,000.

(4)           INCOME TAXES

In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act were signed into law. As a result, future tax deductions for retiree prescription drug coverage will be reduced by the amount of subsidies received starting in 2013. In the first quarter of 2010, the Company recorded a discrete charge of $21,881,000 for the impact of the health care reform legislation.

In the first half of 2009, the Company incurred significant charges related to the impairment of goodwill and intangible assets of $89,997,000 that were mostly non-deductible and discrete tax items of $43,540,000 to record reserves on net operating loss carryforwards no longer expected to be utilized and other tax adjustments.

 
 

 

The components of the effective tax rate for the six month periods ended June 30, 2010 and 2009 were as follows:

   
June 30, 2010
   
June 30, 2009
 
Estimated annual effective tax rate
    30.5 %     28.1 %
Discrete tax adjustments
    2.0       13.4  
Goodwill and intangible asset impairment charges
          6.2  
Effective tax rate
    32.5 %     47.7 %

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions and a number of these audits are currently ongoing.

The Company is litigating its dispute with the Australian Tax Office over the treatment of an intercompany financing transaction between the U.S. and Australia. The Company has recorded its best estimate of the exposure for this audit; however, it is reasonably possible that the Company will resolve the Australian financing issue within the next 12 months and that the amount of the Company’s unrecognized tax benefits may decrease by approximately $163,000,000.

(5)           INVENTORIES

Inventories at June 30, 2010 and December 31, 2009 were as follows:

(In thousands)
   
June 30, 2010
   
December 31, 2009
 
Raw material
  $ 477,755     $ 417,314  
Work-in-process
    141,645       137,463  
Finished goods
    838,779       801,456  
    $ 1,458,179     $ 1,356,233  

(6)           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.

When performing its annual 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. During 2009, the Company changed the date of its annual goodwill impairment assessment from the first quarter to the third quarter.

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.

In the first quarter of 2009, the Company performed a 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 the first quarter of 2009, intangible asset impairments of $11,997,000 were recorded to reduce to the estimated fair value the carrying value of certain trademarks and brands. Approximately $5,800,000 of this total charge related to the PC board fabrication reporting unit and the remainder to various trademarks and brands of other reporting units.

The impairments during 2009 were primarily related to new reporting units which had been acquired 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 indefinite-lived intangible assets that were adjusted to fair value and the related impairment charges included in earnings for the first quarter of 2009 were as follows:

(In thousands)
 
Book Value
   
Fair Value
   
Total Impairment
Charges
 
Goodwill
  $ 353,000     $ 275,000     $ 78,000  
Indefinite-lived intangible assets
    94,973       82,976       11,997  

(7)           RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

Pension and other postretirement benefit costs for the periods ended June 30, 2010 and 2009 were as follows:

(In thousands)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
Pension
   
Other Postretirement Benefits
   
Pension
   
Other Postretirement Benefits
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Components of net periodic
                                               
 benefit cost:
                                               
Service cost
  $ 23,268     $ 23,000     $ 3,485     $ 3,142     $ 46,759     $ 45,922     $ 6,970     $ 6,284  
Interest cost
    27,243       28,467       7,498       7,718       54,978       57,183       14,997       15,436  
Expected return on plan assets
    (37,059 )     (37,554 )     (4,545 )     (3,403 )     (74,649 )     (74,930 )     (9,091 )     (6,806 )
Amortization of actuarial loss
    6,453       1,882       10       64       12,986       3,771       20       128  
Amortization of prior service
                                                               
  cost (income)
    194       (444 )     1,612       1,606       391       (844 )     3,223       3,212  
Amortization of net transition
                                                               
  amount
    8       3                   16       6              
Curtailment gain
          (12,000 )                       (12,000 )            
Net periodic benefit cost
  $ 20,107     $ 3,354     $ 8,060     $ 9,127     $ 40,481     $ 19,108     $ 16,119     $ 18,254  

The Company expects to contribute $70,500,000 to its pension plans and $37,900,000 to its other postretirement plans in 2010. As of June 30, 2010, contributions of $35,800,000 to pension plans and $18,400,000 to other postretirement plans have been made.

(8)           SHORT-TERM DEBT

In June 2009, the Company entered into a $2,000,000,000 Line of Credit Agreement with a termination date of June 11, 2010. This line of credit was replaced on June 11, 2010 by a $1,000,000,000 Line of Credit Agreement with a termination date of June 10, 2011. No amounts were outstanding under this facility at June 30, 2010.

The Company had outstanding commercial paper of $248,491,000 at June 30, 2010 and $135,498,000 at December 31, 2009.
 
 
 

 

(9)           LONG-TERM DEBT

Based on rates for comparable instruments the approximate fair value and related carrying value of the Company’s long-term debt, including current maturities, were as follows:

(In thousands)
   
June 30, 2010
   
December 31, 2009
 
Fair value
  $ 3,071,363     $ 3,161,352  
Carrying value
    2,732,180       2,922,994  

On June 11, 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 June 30, 2010.

(10)           SEGMENT INFORMATION

See Management’s Discussion and Analysis for information regarding operating revenues and operating income for the Company’s segments.

 
 

 

Item 2 - Management’s Discussion and Analysis

CONSOLIDATED RESULTS OF OPERATIONS

The Company’s consolidated results of operations for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 4,076,252     $ 3,392,906     $ 7,682,641     $ 6,539,285  
Operating income
    652,738       334,835       1,136,668       426,129  
Margin %
    16.0 %     9.9 %     14.8 %     6.5 %

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    15.1 %     4.1 %     11.5 %     3.5 %
Changes in variable margins and overhead costs
          0.6             2.9  
Total
    15.1       4.7       11.5       6.4  
                                 
Acquisitions and divestitures
    2.9       (0.2 )     2.4       (0.1 )
Restructuring costs
          1.6             0.9  
Impairment of goodwill and intangibles
                      1.2  
Translation
    2.3             3.8       (0.2 )
Other
    (0.2 )           (0.2 )     0.1  
Total
    20.1 %     6.1 %     17.5 %     8.3 %

Operating Revenues
Revenues increased 20.1% and 17.5% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to higher base revenues, the favorable effect of currency translation and revenues from acquisitions. Base revenues increased 15.1% and 11.5% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 as the Company saw improvement in macroeconomic data across many worldwide end markets. North American base revenues increased 15.8% and 11.7% in the second quarter and year-to-date periods, respectively, while international base revenues increased 14.2% and 11.1% in the same periods. End markets including transportation, polymers and fluids, industrial packaging and PC board/electronics showed strength in the second quarter and year-to-date periods.

Operating Income
Operating income increased $317.9 million and $710.5 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues, lower operating expenses, lower restructuring expenses and lower year-to-date goodwill and intangible asset impairment charges. Base margins increased 4.7% and 6.4% in the second quarter and year-to-date periods of 2010, respectively, primarily due to the positive leverage effect of the increase in base revenues and the cumulative benefits of restructuring projects. Selling price versus material cost comparisons were unfavorable in the second quarter but remained favorable for the year-to-date period. In the prior year first quarter, the Company recorded goodwill and intangible asset impairment charges of $90.0 million.

 
 

 

The reconciliation of segment operating revenues to total operating revenues is as follows:

(In thousands)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
   
2009
   
2010
   
2009
 
Transportation
  $ 672,026     $ 501,324     $ 1,259,811     $ 934,866  
Industrial Packaging
    577,651       467,679       1,101,037       900,091  
Food Equipment
    454,472       451,353       883,863       882,553  
Power Systems & Electronics
    493,368       395,815       938,741       787,389  
Construction Products
    459,413       370,587       829,281       694,569  
Polymers & Fluids
    353,228       287,732       658,227       545,467  
Decorative Surfaces
    264,029       257,332       499,592       489,443  
All Other
    824,842       676,597       1,556,627       1,333,375  
Intersegment revenues
    (22,777 )     (15,513 )     (44,538 )     (28,468 )
Total operating revenues
  $ 4,076,252     $ 3,392,906     $ 7,682,641     $ 6,539,285  

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.

This segment primarily serves the automotive original equipment manufacturers and tiers and automotive aftermarket markets.

The results of operations for the Transportation segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 672,026     $ 501,324     $ 1,259,811     $ 934,866  
Operating income
    108,801       21,384       189,440       2,354  
Margin %
    16.2 %     4.3 %     15.0 %     0.3 %


 
 

 
 
In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    29.3 %     6.9 %     30.5 %     7.8 %
Changes in variable margins and overhead costs
          3.2             5.0  
Total
    29.3       10.1       30.5       12.8  
                                 
Acquisitions and divestitures
    3.1       0.2       1.5       0.3  
Restructuring costs
          1.9             1.9  
Impairment of goodwill and intangibles
                      0.2  
Translation
    1.6       (0.2 )     2.7       (0.4 )
Other
    0.1       (0.1 )     0.1       (0.1 )
Total
    34.1 %     11.9 %     34.8 %     14.7 %

Operating Revenues
Revenues increased 34.1% and 34.8% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues, revenues from acquisitions and the favorable effect of currency translation, partially offset by a decline in revenue for the truck remanufacturing business. The increase in acquisition revenue is primarily due to the purchase of a North American automotive aftermarket business in the second quarter of 2010.  North American automotive base revenues increased 38.2% and 30.4% in the second quarter and year-to-date periods, respectively, due to a year-to-date increase in car builds of 72%. International automotive base revenues increased 30.6% and 44.6% in the second quarter and year-to-date periods, respectively, due to a year-to-date increase in European car builds of 29%. The automotive aftermarket businesses, which were less impacted in 2009 by the economic downturn, increased 4.2% and 2.5% in the same periods, respectively.

Operating Income
Operating income increased $87.4 million and $187.1 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009, primarily due to the increase in base revenues and lower operating costs. Total base margins increased 10.1% and 12.8% for the second quarter and year-to-date periods, respectively, as a result of leverage from the increase in base revenues and an improved cost structure due to business unit consolidations and restructurings. In addition, favorable inventory obsolescence expense comparisons in the year-to-date period improved margins. In the second quarter of 2010, unfavorable selling price versus material cost comparisons were more than offset by productivity gains.

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.

This segment primarily serves the general industrial, primary metals, food and beverage and construction markets.

 
 

 


The results of operations for the Industrial Packaging segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 577,651     $ 467,679     $ 1,101,037     $ 900,091  
Operating income
    61,035       16,273       112,408       13,663  
Margin %
    10.6 %     3.5 %     10.2 %     1.5 %

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    17.7 %     5.3 %     14.4 %     4.4 %
Changes in variable margins and overhead costs
          0.5             3.9  
Total
    17.7       5.8       14.4       8.3  
                                 
Acquisitions
    2.5       (0.1 )     3.1       (0.1 )
Restructuring costs
          1.6             0.8  
Translation
    3.2       (0.2 )     4.8       (0.3 )
Other
    0.1                    
Total
    23.5 %     7.1 %     22.3 %     8.7 %

Operating Revenues
Operating revenues increased 23.5% and 22.3% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues, the favorable impact of currency translation and revenues from acquisitions. Base revenues increased 28.7% and 23.3% for the North American strapping businesses in the second quarter and year-to-date periods, respectively, largely due to an increase in steel and plastic strap volume driven by increased demand in key industries such as automotive, construction and appliance. In addition, equipment revenues increased versus the second quarter and year-to-date periods of 2009. The international strapping businesses increased 15.1% and 11.3% in the second quarter and year-to-date periods, respectively, primarily due to a partial recovery in the worldwide steel industry, particularly in the European, Brazilian, Indian and Australasian regions. Worldwide protective packaging increased 13.0% and 19.5% in the second quarter and year-to-date periods, respectively, while worldwide stretch packaging increased 10.3% and 3.9% in the same periods. Acquisition revenue increased primarily due to the purchase of a North American protective packaging business in the fourth quarter of 2009.

Operating Income
Operating income increased $44.8 million and $98.7 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues and lower operating expenses. Base operating margins increased 5.8% and 8.3% in the second quarter and year-to-date periods of 2010, respectively, primarily driven by leverage from the increase in base revenues, restructuring benefits and favorable year-to-date inventory obsolescence expense comparisons, partially offset by unfavorable year-to-date selling price versus material cost comparisons.

 
 

 

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.

This segment primarily serves the food institutional/restaurant, service and food retail markets.

The results of operations for the Food Equipment segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 454,472     $ 451,353     $ 883,863     $ 882,553  
Operating income
    60,850       58,428       111,466       102,831  
Margin %
    13.4 %     12.9 %     12.6 %     11.7 %

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    (0.2 )%     (0.1 )%     (2.6 )%     (0.8 )%
Changes in variable margins and overhead costs
          (2.4 )           0.3  
Total
    (0.2 )     (2.5 )     (2.6 )     (0.5 )
                                 
Restructuring costs
          2.6             1.3  
Translation
    0.9       0.3       2.8       0.1  
Other
          0.1       (0.1 )      
Total
    0.7 %     0.5 %     0.1 %     0.9 %

Operating Revenues
Revenues increased 0.7% and 0.1% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the favorable effect of currency translation partially offset by the decline in base business. North American base revenues declined 3.7% and 3.2% in the second quarter and year-to-date periods, respectively, primarily due to declines in the lodging and casino markets partially offset by strong growth in the government and school markets. Base revenues in the service portion of the business increased 2.8% and 1.9% in the second quarter and year-to-date periods, respectively. International base revenues increased 3.3% in the second quarter while declining 1.8% for the year-to date period largely due to strong Asian revenue offset in the year-to-date period by lower European equipment sales in 2010 versus 2009.

 
 

 

Operating Income
Operating income increased $2.4 million and $8.6 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to lower restructuring expenses and the favorable effect of currency translation partially offset by the negative leverage effect of the lower revenues described above. Total operating margins increased 0.5% and 0.9% in the second quarter and year-to-date periods, respectively, primarily due to lower restructuring expenses partially offset by lower base business operating margins.

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.

This segment primarily serves the general industrial, electronics and construction markets.

The results of operations for the Power Systems & Electronics segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 493,368     $ 395,815     $ 938,741     $ 787,389  
Operating income
    107,481       61,167       199,981       86,189  
Margin %
    21.8 %     15.5 %     21.3 %     10.9 %

In the second quarter and year-to-date periods of 2010, the changes in operating revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    22.6 %     4.6 %     16.7 %     4.1 %
Changes in variable margins and overhead costs
          0.8             2.7  
Total
    22.6       5.4       16.7       6.8  
                                 
Acquisitions
    0.1             0.1        
Restructuring costs
          1.2             1.2  
Impairment of goodwill and intangibles
                      2.7  
Translation
    1.9       (0.2 )     2.5       (0.2 )
Other
          (0.1 )     (0.1 )     (0.1 )
Total
    24.6 %     6.3 %     19.2 %     10.4 %

 
 

 

Operating Revenues
Revenues increased 24.6% and 19.2% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to growth in base business and the favorable effect of currency translation. Base revenues for the PC board fabrication businesses increased 89.8% and 89.6% in the second quarter and year-to-date periods, respectively, as demand for consumer electronics and capital equipment increased significantly. North American welding base business revenues increased 20.6% and 10.7% in the second quarter and year-to-date periods, respectively, as end markets experienced improved recovery. Base business revenues for the international welding businesses declined 0.1% and 4.1% in the same periods primarily due to softening in end markets in both Europe and Asia.

Operating Income
Operating income increased $46.3 million and $113.8 million, in the second quarter and year-to-date periods of 2010, respectively, versus 2009 mainly due to the favorable leverage effect of the growth in base revenues, lower restructuring expenses, lower operating expenses, and favorable year-to-date goodwill impairment comparisons. During the first quarter of 2009, a $23.8 million goodwill and intangible asset impairment charge was recorded in the PC Board fabrication business. In addition, base income and margins increased primarily due to the cumulative benefits of restructuring projects, favorable year-to-date inventory obsolescence expense comparisons and favorable sales mix. These increases were partially offset by unfavorable selling price versus material cost comparisons.

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.

This segment primarily serves the residential construction, commercial construction and renovation construction markets.

The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 459,413     $ 370,587     $ 829,281     $ 694,569  
Operating income
    67,743       21,738       93,126       11,518  
Margin %
    14.7 %     5.9 %     11.2 %     1.7 %


 
 

 

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    12.9 %     4.0 %     7.1 %     2.5 %
Changes in variable margins and overhead costs
          4.5             8.1  
Total
    12.9       8.5       7.1       10.6  
                                 
Acquisitions
    3.3       (0.3 )     1.9       (0.1 )
Restructuring costs
          0.5             (0.9 )
Translation
    7.8       0.2       10.4        
Other
          (0.1 )           (0.1 )
Total
    24.0 %     8.8 %     19.4 %     9.5 %

Operating Revenues
Revenues increased 24.0% and 19.4% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base revenues, the favorable effect of currency translation and revenues from acquisitions. Base revenues for the Asia-Pacific region increased 6.3% and 5.3% in the second quarter and year-to-date periods, respectively, as market conditions in the residential market improved. North American base revenues increased 17.2% and 8.1% in the second quarter and year-to-date periods, respectively, primarily due to slightly better year-over-year housing starts, modest inventory restocking, and a one-time licensing agreement settlement in the second quarter of 2010 in the commercial construction business. European base revenues increased 11.6% and 5.8% in the second quarter and year-to-date periods, respectively, primarily due to improved market conditions.

Operating Income
Operating income increased $46.0 million and $81.6 million in the second quarter and year-to-date periods of 2010, respectively, 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 year-to-date restructuring expenses. Base margins increased 8.5% and 10.6% in the second quarter and year-to-date periods, primarily due to favorable selling price versus material cost comparisons, favorable year-to-date 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.

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.

This segment primarily serves the general industrial, construction, maintenance, repair and operations and automotive aftermarket markets.

 
 

 

The results of operations for the Polymers & Fluids segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 353,228     $ 287,732     $ 658,227     $ 545,467  
Operating income (loss)
    57,819       31,128       95,908       (16,975 )
Margin %
    16.4 %     10.8 %     14.6 %     (3.1 )%

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    15.6 %     4.2 %     11.8 %     4.7 %
Changes in variable margins and overhead costs
                      2.0  
Total
    15.6       4.2       11.8       6.7  
                                 
Acquisitions
    4.4       (0.2 )     4.1       (0.1 )
Restructuring costs
          1.5             1.3  
Impairment of goodwill and intangibles
                      9.9  
Translation
    2.7             4.7       (0.1 )
Other
    0.1       0.1       0.1        
Total
    22.8 %     5.6 %     20.7 %     17.7 %

Operating Revenues
Revenues increased 22.8% and 20.7% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base revenues, the favorable effect of currency translation and revenues from acquisitions. Acquisition revenue was primarily the result of the purchase of four Latin American adhesive businesses in 2009. Total base revenues increased 15.6% and 11.8% in the second quarter and year-to-date periods, respectively, due to recovery in most end markets served by this segment, with particularly strong growth in Brazil, Russia and China. Worldwide base revenues for the fluids businesses increased 10.8% and 12.3% in the second quarter and year-to-date periods, respectively, while base revenues for the polymers businesses increased 16.1% and 10.6% in the same periods.

Operating Income
Operating income increased $26.7 million and $112.9 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to favorable goodwill and intangible asset impairment comparisons, the increase in base revenues described above, and lower operating expenses. During the first quarter of 2009, a $60.0 million goodwill impairment charge was taken against the goodwill of the pressure sensitive adhesive business. Base margins increased 4.2% and 6.7% in the second quarter and year-to-date periods, respectively, due to the positive leverage effect of the increase in base revenues, benefits of restructuring projects and favorable year-to-date selling price versus material cost comparisons.

 
 

 

DECORATIVE SURFACES

Businesses in this segment produce decorative surfacing materials for furniture, office and retail space, countertops, flooring, and other applications.

In the Decorative Surfaces segment, products include:
decorative high-pressure laminate for furniture, office and retail space and countertops;
high-pressure laminate flooring; and
high-pressure laminate worktops.

This segment serves the commercial construction, renovation construction and residential construction markets.

The results of operations for the Decorative Surfaces segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 264,029     $ 257,332     $ 499,592     $ 489,443  
Operating income
    31,921       34,041       54,283       62,025  
Margin %
    12.1 %     13.2 %     10.9 %     12.7 %

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    1.5 %     0.4 %     (0.4 )%     (0.1 )%
Changes in variable margins and overhead costs
          (2.4 )           (0.9 )
Total
    1.5       (2.0 )     (0.4 )     (1.0 )
                                 
Restructuring costs
          0.7             (0.8 )
Translation
    1.1       0.2       2.5        
Total
    2.6 %     (1.1 )%     2.1 %     (1.8 )%

Operating Revenues
Revenues increased 2.6% and 2.1% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the favorable year-to-date effect of currency translation and a modest second quarter increase in base revenue. Base revenues increased 4.1% and 0.8% for the North American laminate businesses in the second quarter and year-to-date periods, respectively, primarily due to improvement in the office equipment end market. International base revenues declined 0.5% and 1.5% in the second quarter and year-to-date periods, respectively, primarily due to weakening in the French and U.K. markets partially offset by improvements in Asian markets.

Operating Income
Operating income decreased $2.1 million and $7.7 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to higher operating costs and increased year-to-date restructuring costs. Base margins declined 2.0% and 1.0% in the second quarter and year-to-date periods, respectively, primarily due to a second quarter fixed asset impairment, year-to-date unfavorable depreciation comparisons and unfavorable selling price versus material cost comparisons partially offset by cumulative benefits from restructuring projects.

 
 

 

ALL OTHER

This segment contains 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.

This segment primarily serves the general industrial, food and beverage, consumer durables, electronics and food institutional/restaurants markets.

The results of operations for the All Other segment for the second quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 824,842     $ 676,597     $ 1,556,627     $ 1,333,375  
Operating income
    157,088       90,676       280,056       164,524  
Margin %
    19.0 %     13.4 %     18.0 %     12.3 %

In the second quarter and year-to-date periods of 2010, the changes in revenues and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Margins
   
Operating Revenues
   
Operating Margins
 
Base business:
                       
Revenue change/Operating leverage
    14.2 %     4.1 %     8.5 %     2.7 %
Changes in variable margins and overhead costs
          0.5             2.5  
Total
    14.2       4.6       8.5       5.2  
                                 
Acquisitions
    7.0       (0.7 )     6.2       (0.8 )
Restructuring costs
          1.8             1.3  
Impairment of goodwill and intangibles
                      0.1  
Translation
    0.6             2.0       (0.1 )
Other
    0.1       (0.1 )            
Total
    21.9 %     5.6 %     16.7 %     5.7 %

 
 

 

Operating Revenues
Revenues increased 21.9% and 16.7% in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base business revenues, revenues from acquisitions and the favorable effect of currency translation. The acquisition revenue is primarily due to the purchase of a consumer packaging business in the fourth quarter of 2009. Base revenues increased 7.6% and 6.0% in the second quarter and year-to-date periods, respectively, for the consumer packaging business. Base revenues in the industrial plastics and metals businesses improved 21.6% and 17.4% in the second quarter and year-to-date periods, respectively, due to increased demand for domestic appliances. Base business revenues increased 10.4% and 1.4% in the second quarter and year-to-date periods, respectively, for the test and measurement businesses and 25.6% and 9.0%, respectively, for the finishing businesses due to increased demand for capital equipment.

Operating Income
Operating income increased $66.4 million and $115.5 million in the second quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to growth in base revenues, cost reduction initiatives, benefits of restructuring projects and income from acquisitions. Base margins increased 4.6% and 5.2% in the second quarter and year-to-date periods, respectively, as cost reductions more than offset unfavorable selling price versus material cost comparisons. Acquisitions diluted total operating margins by 0.7% and 0.8% in the second quarter and year-to-date periods, respectively.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense increased to $107.0 million in the first six months of 2010 versus $102.5 million in the first six months of 2009, due to intangible amortization related to newly acquired businesses.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

During 2009, the Company changed the date of its annual goodwill impairment assessment from the first quarter to the third quarter.

Total goodwill and intangible asset impairment charges by segment for the six months ended June 30, 2009 were as follows:

(In thousands)
 
Six Months Ended
 
   
June 30, 2009
 
Transportation
 
$
2,414
 
Industrial Packaging
   
386
 
Food Equipment
   
46
 
Power Systems & Electronics
   
24,766
 
Polymers & Fluids
   
60,416
 
All Other
   
1,969
 
   
$
89,997
 

Impairment of goodwill and other intangible assets was $90.0 million in the first six months of 2009, primarily due to goodwill impairment charges in the first quarter of 2009 related to the pressure sensitive adhesives reporting unit of $60.0 million and the PC board fabrication reporting unit of $18.0 million.

See the Goodwill and Intangible Assets note for further details of the impairment charges.

INTEREST EXPENSE

Interest expense increased to $88.3 million in the first six months of 2010 from $75.3 million in the first six months of 2009 primarily due to interest on the 6.25% and 5.15% notes 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 and rates.

OTHER INCOME (EXPENSE)

Other income (expense) was income of $11.7 million for the first six months of 2010 versus expense of $24.2 million in 2009, primarily due to gains on investments in 2010 versus losses in 2009 and lower currency translation losses in 2010 versus 2009.

 
 

 

INCOME TAXES

The effective tax rate for the first six months of 2010 was 32.5% which included the discrete tax charge of $21.9 million in the first quarter of 2010 related to the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act. The effective tax rate for the first six months of 2010 decreased compared to 47.7% for the first six months of 2009. The decrease in the effective tax rate resulted primarily from the impairment of non-deductible goodwill and discrete tax adjustments recorded in the first quarter of 2009.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations was $715.1 million ($1.41 per diluted share) in the first six months of 2010 compared to the 2009 income from continuing operations of $170.9 million ($0.34 per diluted share).

FOREIGN CURRENCY

The weakening of the U.S. dollar against foreign currencies in 2010 increased operating revenues for the first six months of 2010 by approximately $277 million and increased net income by approximately 6 cents per diluted share.

DISCONTINUED OPERATIONS

Loss from discontinued operations was $33.7 million in the first six months of 2009 primarily due to the loss on sale of the Click Commerce industrial software business of $29.8 million.

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 25% to 35% of the last two years’ average income from continuing operations;
·  
acquisitions; and
·  
any excess liquidity may be used for share repurchases. The Company’s open-ended share repurchase program allows it flexibility in achieving the targeted debt-to-capital ratio.

Cash Flow

The Company uses free operating cash flow to measure normal 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 second quarter of 2010 and 2009 was as follows:

(In thousands)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
   
2009
   
2010
   
2009
 
Net cash provided by operating activities
  $ 338,442     $ 624,082     $ 617,848     $ 1,071,083  
Additions to plant and equipment
    (62,663 )     (57,402 )     (123,385 )     (121,338 )
Free operating cash flow
  $ 275,779     $ 566,680     $ 494,463     $ 949,745  
                                 
Cash dividends paid
  $ (155,771 )   $ (154,781 )   $ (311,495 )   $ (309,507 )
Acquisitions
    (189,785 )     (49,131 )     (217,371 )     (113,640 )
Proceeds from sale of operations and affiliates
    1,445       17,233       1,403       15,685  
Issuance of common stock
    37,711       10,572       42,852       15,955  
Net proceeds (repayments) of debt
    (34,775 )     (965,728 )     76,685       (769,606 )
Effect of exchange rates on cash & equivalents
    (108,606 )     76,852       (178,708 )     97,501  
Other
    21,673       (6,393 )     38,636       (12,680 )
Net decrease in cash and equivalents
  $ (152,329 )   $ (504,696 )   $ (53,535 )   $ (126,547 )

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. There are approximately $1.2 billion 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. For the second quarter and year-to-date periods of 2010 and 2009, ROIC was as follows:

(Dollars in thousands)
 
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
   
2009
   
2010
   
2009
 
                         
Operating income as adjusted
  $ 652,738     $ 334,835     $ 1,136,668     $ 516,126  
Taxes (31.6%, 34.0%, 30.5% and 31.9%, respectively)
    (206,265      (113,844      (346,684      (164,644 
Operating income after taxes
  $ 446,473     $ 220,991     $ 789,984     $ 351,482  
Invested capital: