itw10q3q10.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 September 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 September 30, 2010: 495,930,946.

 
 

 

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
September 30
   
Nine Months Ended
September 30
 
   
2010
   
2009
   
2010
   
2009
 
Operating Revenues
  $ 4,018,466     $ 3,580,354     $ 11,701,107     $ 10,119,639  
Cost of revenues
    2,584,901       2,315,175       7,501,607       6,716,255  
Selling, administrative, and research and development expenses
    739,984       720,042       2,262,237       2,239,604  
Amortization of intangible assets
    52,053       49,542       159,067       152,059  
Impairment of goodwill and other intangible assets
    1,006       12,000       1,006       101,997  
Operating Income
    640,522       483,595       1,777,190       909,724  
Interest expense
    (43,166 )     (45,670 )     (131,430 )     (120,992 )
Other income (expense)
    15,920       11,139       27,639       (13,041 )
Income from Continuing Operations
                               
Before Income Taxes
    613,276       449,064       1,673,399       775,691  
Income Taxes
    194,000       146,100       539,000       301,800  
Income from Continuing Operations
    419,276       302,964       1,134,399       473,891  
Loss from Discontinued Operations
          (546 )           (34,282 )
Net Income
  $ 419,276     $ 302,418     $ 1,134,399     $ 439,609  
                                 
Income Per Share from Continuing
                               
Operations:
                               
Basic
  $ 0.84     $ 0.61     $ 2.26     $ 0.95  
Diluted
  $ 0.83     $ 0.60     $ 2.25     $ 0.95  
Loss Per Share from Discontinued
                               
Operations:
                               
Basic
        $ (0.00 )         $ (0.07 )
Diluted
        $ (0.00 )         $ (0.07 )
Net Income Per Share:
                               
Basic
  $ 0.84     $ 0.60     $ 2.26     $ 0.88  
Diluted
  $ 0.83     $ 0.60     $ 2.25     $ 0.88  
Cash Dividends:
                               
Paid
  $ 0.31     $ 0.31     $ 0.93     $ 0.93  
Declared
  $ 0.34     $ 0.31     $ 0.96     $ 0.93  
Shares of Common Stock Outstanding
                               
During the Period:
                               
Average
    500,751       500,313       502,141       499,635  
Average assuming dilution
    503,149       502,187       504,690       501,184  

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)
 
September 30, 2010
   
December 31, 2009
 
ASSETS
           
Current Assets:
           
Cash and equivalents
  $ 1,649,101     $ 1,318,772  
Trade receivables
    2,627,696       2,491,492  
Inventories
    1,544,728       1,356,233  
Deferred income taxes
    227,338       231,858  
Prepaid expenses and other current assets
    285,977       276,240  
  Total current assets
    6,334,840       5,674,595  
                 
Plant and Equipment:
               
Land
    239,520       247,911  
Buildings and improvements
    1,500,989       1,589,534  
Machinery and equipment
    3,781,455       3,945,692  
Equipment leased to others
    181,718       182,485  
Construction in progress
    97,995       90,908  
  Gross plant and equipment
    5,801,677       6,056,530  
    Accumulated depreciation
    (3,849,110 )     (3,920,003 )
  Net plant and equipment
    1,952,567       2,136,527  
                 
Investments
    437,967       451,293  
Goodwill
    4,729,679       4,860,732  
Intangible Assets
    1,669,529       1,723,417  
Deferred Income Taxes
    594,044       673,044  
Other Assets
    585,098       562,376  
    $ 16,303,724     $ 16,081,984  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Short-term debt
  $ 644,883     $ 213,681  
Accounts payable
    722,923       689,572  
Accrued expenses
    1,392,438       1,359,394  
Cash dividends payable
    168,617       155,724  
Income taxes payable
    292,480       417,267  
  Total current liabilities
    3,221,341       2,835,638  
Noncurrent Liabilities:
               
Long-term debt
    2,737,374       2,914,874  
Deferred income taxes
    182,329       207,677  
Other liabilities
    1,271,918       1,305,919  
  Total noncurrent liabilities
    4,191,621       4,428,470  
                 
Stockholders’ Equity:
               
Common stock
    5,367       5,350  
Additional paid-in-capital
    377,412       270,985  
Income reinvested in the business
    10,175,663       9,521,740  
Common stock held in treasury
    (1,740,682 )     (1,390,594 )
Accumulated other comprehensive income
    62,670       400,726  
Noncontrolling interest
    10,332       9,669  
  Total stockholders’ equity
    8,890,762       8,817,876  
    $ 16,303,724     $ 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)
 
Nine Months Ended
September 30
 
   
2010
   
2009
 
Cash Provided by (Used for) Operating Activities:
           
Net income
  $ 1,134,399     $ 439,609  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation
    248,718       272,336  
Amortization and impairment of goodwill and other intangible assets
    160,073       254,056  
Change in deferred income taxes
    (24,858 )     (87,050 )
Provision for uncollectible accounts
    11,124       13,188  
(Gain) loss on sale of plant and equipment
    (1,435 )     444  
(Income) loss from investments
    (13,406 )     2,194  
(Gain) loss on disposal of operations and affiliates
    (17,763 )     34,171  
Stock compensation expense
    42,319       35,657  
Other non-cash items, net
    (1,153 )     3,218  
Change in assets and liabilities:
               
(Increase) decrease in--
               
Trade receivables
    (259,186 )     324,088  
Inventories
    (223,253 )     525,497  
Prepaid expenses and other assets
    (73,710 )     (18,512 )
Increase (decrease) in--
               
Accounts payable
    62,758       (117,826 )
Accrued expenses and other liabilities
    124,104       (123,969 )
Income taxes receivable and payable
    (66,971 )     82,727  
Other, net
    18       451  
Net cash provided by operating activities
    1,101,778       1,640,279  
Cash Provided by (Used for) Investing Activities:
               
Acquisition of businesses (excluding cash and equivalents)
    (225,056 )     (118,342 )
Additions to plant and equipment
    (195,539 )     (174,353 )
Purchases of investments
    (1,561 )     (1,487 )
Proceeds from investments
    17,550       10,564  
Proceeds from sale of plant and equipment
    12,664       22,683  
Proceeds from sale of operations and affiliates
    62,153       16,316  
Other, net
    22,229       (36,080 )
Net cash used for investing activities
    (307,560 )     (280,699 )
Cash Provided by (Used for) Financing Activities:
               
Cash dividends paid
    (467,583 )     (464,399 )
Issuance of common stock
    58,661       55,328  
Repurchases of common stock
    (350,000 )      
Net proceeds (repayments) of debt with original maturities 3 months or less
    407,617       (1,753,883 )
Proceeds from debt with original maturities greater than 3 months
    1,255       2,158,119  
Repayments of debt with original maturities greater than 3 months
    (25,307 )     (1,278,674 )
Excess tax benefits from share-based compensation
    3,465       609  
Net cash used for financing activities
    (371,892 )     (1,282,900 )
Effect of Exchange Rate Changes on Cash and Equivalents
    (91,997 )     123,226  
Cash and Equivalents:
               
Increase during the period
    330,329       199,906  
Beginning of period
    1,318,772       742,950  
End of period
  $ 1,649,101     $ 942,856  
Cash Paid During the Period for Interest
  $ 68,720     $ 40,607  
Cash Paid During the Period for Income Taxes
  $ 609,260     $ 267,787  
Liabilities Assumed from Acquisitions
  $ 120,162     $ 34,659  

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
September 30
   
Nine Months Ended
September 30
 
   
2010
   
2009
   
2010
   
2009
 
Net income
  $ 419,276     $ 302,418     $ 1,134,399     $ 439,609  
Other comprehensive income:
                               
Foreign currency translation adjustments
    218,894       116,929       (356,001 )     498,567  
Pension and other postretirement benefit adjustments, net of tax
    5,957       2,181       17,945       4,115  
Comprehensive income
  $ 644,127     $ 421,528     $ 796,343     $ 942,291  

(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 third quarter and year-to-date periods of 2009 were as follows:

(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
   
September 30, 2009
 
September 30, 2009
 
Operating revenues
 
$
2,794
 
$
25,963
 
               
Loss before taxes
 
$
(1,043
)
$
(36,107
)
Income tax benefit
   
497
   
1,825
 
Loss from discontinued operations
 
$
(546
)
$
(34,282
)

In the first nine months of 2009, the Company recorded a pre-tax loss on the disposal of the Click Commerce business of $29,626,000.

(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 third quarter of 2010, the Company recorded a discrete charge of $7,308,000 related to the gain on a sale of a business that had non-deductible goodwill.

In the first nine months of 2009, the Company incurred charges related to the impairment of goodwill and intangible assets of $101,997,000 that were mostly non-deductible and discrete tax items of $46,849,000 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 nine month periods ended September 30, 2010 and 2009 were as follows:

 
September 30, 2010
   
September 30, 2009
 
Estimated annual effective tax rate
30.5
%
 
29.6
%
Discrete tax adjustments
1.7
   
6.0
 
Goodwill and intangible asset impairment charges
   
3.3
 
Effective tax rate
32.2
%
 
38.9
%

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. This case was heard before the Federal Court of Australia 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 have agreed to defer the appeal of that determination until a decision is made on the earlier years. The Company expects a judgment by the end of 2010. 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 $173,150,000.

(5)           INVENTORIES

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

(In thousands)
   
September 30, 2010
 
December 31, 2009
 
Raw material
 
$
523,827
 
$
417,314
 
Work-in-process
   
154,651
   
137,463
 
Finished goods
   
866,250
   
801,456
 
   
$
1,544,728
 
$
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.

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 third quarter of 2010, the Company performed its goodwill and indefinite-lived intangible asset impairment assessment which resulted in immaterial intangible asset impairment charges.

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. During 2009, the Company changed the date of its annual goodwill impairment assessment from the first quarter to the third quarter. In the third quarter of 2009, the Company performed a goodwill impairment assessment which resulted in an impairment charge of $12,000,000 related to the truck remanufacturing reporting unit in the Transportation 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 2009 is as follows:

(In thousands)
   
Book Value
 
 
Fair Value
 
Total Impairment Charges
 
First quarter 2009:
                   
Goodwill
 
$
353,000
 
$
275,000
 
$
78,000
 
Indefinite-lived intangible assets
   
94,973
   
82,976
   
11,997
 
                     
Third quarter 2009:
                   
Goodwill
 
$
96,000
 
$
84,000
 
$
12,000
 

(7)   RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

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

(In thousands)
 
Three Months Ended
September 30
   
Nine Months Ended
September 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
  $ 23,298     $ 23,348     $ 3,485     $ 3,142     $ 70,057     $ 69,270     $ 10,455     $ 9,426  
Interest cost
    27,280       29,399       7,498       7,718       82,258       86,582       22,495       23,154  
Expected return on plan assets
    (37,168 )     (38,547 )     (4,545 )     (3,403 )     (111,817 )     (113,477 )     (13,636 )     (10,209 )
Amortization of actuarial loss
    6,467       1,876       10       64       19,453       5,647       30       192  
Amortization of prior service cost (income)
    194       (416 )     1,611       1,606       585       (1,260 )     4,834       4,818  
Amortization of net transition amount
    7       3                   23       9              
Curtailment/settlement gain
                                  (12,000 )            
Net periodic benefit cost
  $ 20,078     $ 15,663     $ 8,059     $ 9,127     $ 60,559     $ 34,771     $ 24,178     $ 27,381  

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 September 30, 2010, contributions of $64,800,000 to pension plans and $26,900,000 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 September 30, 2010.

The Company had outstanding commercial paper of $552,463,000 at September 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)
     
September 30, 2010
 
December 31, 2009
 
Fair value
 
$
3,120,115
 
$
3,161,352
 
Carrying value
   
2,745,131
   
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 September 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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 4,018,466     $ 3,580,354     $ 11,701,107     $ 10,119,639  
Operating income
    640,522       483,595       1,777,190       909,724  
Margin %
    15.9 %     13.5 %     15.2 %     9.0 %

In the third 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
September 30
   
Nine Months Ended
September 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
    11.2 %     2.9 %     11.4 %     3.3 %
Changes in variable margins and overhead costs
          (1.3 )           1.4  
Total
    11.2       1.6       11.4       4.7  
                                 
Acquisitions and divestitures
    3.5       (0.3 )     2.8       (0.2 )
Restructuring costs
          0.6             0.8  
Impairment of goodwill and intangibles
          0.3             0.9  
Translation
    (2.4 )     0.2       1.6        
Other
    (0.1 )           (0.2 )      
Total
    12.2 %     2.4 %     15.6 %     6.2 %

Operating Revenues
Revenues increased 12.2% and 15.6% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to higher base revenues and revenues from acquisitions. The effect of currency translation was unfavorable for the quarter but remained favorable for the year-to-date period. Base revenues increased 11.2% and 11.4% in the third 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 11.5% and 11.6% in the third quarter and year-to-date periods, respectively, while international base revenues increased 10.8% and 11.0% in the same periods. End markets associated with transportation, industrial packaging, welding and PC board/electronics showed strength in the quarter and year-to-date periods.

Operating Income
Operating income increased $156.9 million and $867.5 million in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues, lower restructuring expenses, income from acquisitions and lower goodwill and intangible asset impairment charges. Base margins increased 160 basis points in the third quarter primarily due to the positive leverage effect of the increase in base revenues partially offset by unfavorable selling price versus material cost comparisons. For the year-to-date period, base margins increased 470 basis points primarily due to the positive leverage effect from the increase in base revenues and the cumulative benefits of restructuring projects, partially offset by unfavorable selling price versus material cost comparisons. In the prior year, the Company recorded a $12 million goodwill impairment charge in the third quarter. In the first quarter of 2009, the Company recorded goodwill and intangible asset impairment charges of $90 million.

 
 

 


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

(In thousands)
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2010
   
2009
   
2010
   
2009
 
Transportation
  $ 627,411     $ 539,395     $ 1,887,222     $ 1,474,261  
Industrial Packaging
    580,225       498,276       1,681,262       1,398,367  
Food Equipment
    476,356       487,325       1,360,219       1,369,878  
Power Systems & Electronics
    497,574       402,396       1,436,315       1,189,785  
Construction Products
    446,553       402,622       1,275,834       1,097,191  
Polymers & Fluids
    334,737       317,938       992,964       863,405  
Decorative Surfaces
    252,670       252,875       752,262       742,318  
All Other
    826,319       696,987       2,382,946       2,030,362  
Intersegment revenues
    (23,379 )     (17,460 )     (67,917 )     (45,928 )
Total operating revenues
  $ 4,018,466     $ 3,580,354     $ 11,701,107     $ 10,119,639  

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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 627,411     $ 539,395     $ 1,887,222     $ 1,474,261  
Operating income
    93,218       54,674       282,658       57,028  
Margin %
    14.9 %     10.1 %     15.0 %     3.9 %


 
 

 


In the third 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
September 30
   
Nine Months Ended
September 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
    15.8 %     3.7 %     25.1 %     6.2 %
Changes in variable margins and overhead costs
          (1.4 )           2.8  
Total
    15.8       2.3       25.1       9.0  
                                 
Acquisitions and divestitures
    3.2       0.2       2.2       0.2  
Restructuring costs
          0.3             1.4  
Impairment of goodwill and intangibles
          1.9             0.8  
Translation
    (2.6 )           0.8       (0.2 )
Other
    (0.1 )     0.1       (0.1 )     (0.1 )
Total
    16.3 %     4.8 %     28.0 %     11.1 %

Operating Revenues
Revenues increased 16.3% and 28.0% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues and revenues from acquisitions, partially offset by a year-to-date decline in revenue for the truck remanufacturing business. In addition, the effect of currency translation was unfavorable for the quarter, but remained favorable for the year-to-date period. 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 28.5% and 49.3% in the third quarter and year-to-date periods of 2010, respectively, due to a year-to-date increase in car builds. International automotive base revenues increased 15.5% and 33.6%, respectively, due to a year-to-date increase in European car builds. The automotive aftermarket businesses, which were less impacted in 2009 by the economic downturn, decreased in the third quarter by 2.5% and were virtually flat for the year-to-date period.

Operating Income
Operating income increased $38.5 million and $225.6 million in the third quarter and year-to-date periods of 2010, respectively, primarily due to the increase in base revenues, lower operating costs and 2009 goodwill impairment charges. During the third quarter of 2009, a $12.0 million goodwill impairment charge was recorded in the truck remanufacturing business. Base margins increased 230 basis points in the third quarter primarily as a result of positive leverage from the increase in base revenues partially offset by unfavorable selling price versus material cost comparisons and higher overhead costs. For the year-to-date period, base margins increased 900 basis points primarily due to the positive leverage effect of increased base revenues, restructuring benefits, and favorable inventory obsolescence expense comparisons, partially offset by unfavorable selling price versus material cost comparisons.

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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 580,225     $ 498,276     $ 1,681,262     $ 1,398,367  
Operating income
    67,130       37,193       179,538       50,856  
Margin %
    11.6 %     7.5 %     10.7 %     3.6 %

In the third 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
September 30
   
Nine Months Ended
September 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
    16.4 %     4.8 %     15.2 %     4.5 %
Changes in variable margins and overhead costs
          (2.3 )           1.7  
Total
    16.4       2.5       15.2       6.2  
                                 
Acquisitions
    2.4       (0.1 )     2.9       (0.1 )
Restructuring costs
          1.5             1.0  
Translation
    (2.4 )     0.2       2.2       (0.1 )
Other
                (0.1 )     0.1  
Total
    16.4 %     4.1 %     20.2 %     7.1 %

Operating Revenues
Operating revenues increased 16.4% and 20.2% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues and revenues from acquisitions. Currency translation had an unfavorable impact in the third quarter but remained favorable in the year-to-date period. Base revenues increased 24.0% and 23.9% for the North American strapping businesses in the third quarter and year-to-date periods, respectively, largely due to an increase in plastic and steel strap volume driven by increased demand in key industries such as automotive and appliance. In addition, equipment revenues increased versus the third quarter and year-to-date periods of 2009. The international strapping businesses increased 13.4% and 12.0% in the third quarter and year-to-date periods, respectively, while worldwide protective packaging increased 17.3% and 18.7% 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 $29.9 million in the third quarter of 2010 primarily due to the increase in base revenues and increased $128.7 million in the year-to-date period primarily due to the increase in base revenues and lower operating expenses. Base operating margins increased 250 and 620 basis points in the third quarter and year-to-date periods, respectively, primarily driven by leverage from the increase in base revenues and restructuring benefits, partially offset by unfavorable third quarter and 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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 476,356     $ 487,325     $ 1,360,219     $ 1,369,878  
Operating income
    83,966       83,661       195,432       186,492  
Margin %
    17.6 %     17.2 %     14.4 %     13.6 %

In the third 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
September 30
   
Nine Months Ended
September 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
    1.4 %     0.4 %     (1.2 )%     (0.4 )%
Changes in variable margins and overhead costs
          0.2             0.3  
Total
    1.4       0.6       (1.2 )     (0.1 )
                                 
Restructuring costs
          (0.4 )           0.7  
Translation
    (3.6 )     0.3       0.5       0.1  
Other
    (0.1 )     (0.1 )           0.1  
Total
    (2.3 )%     0.4 %     (0.7 )%     0.8 %

Operating Revenues
Revenues decreased 2.3% in the third quarter of 2010 versus 2009, primarily due to the unfavorable effect of currency translation partially offset by a 1.4% increase in base revenues. Revenues decreased 0.7% in the year-to-date period of 2010, primarily due to a 1.2% decrease in base revenues partially offset by the favorable effect of currency translation. North American base revenues were virtually flat in the third quarter and declined 2.1% for the year-to date period, primarily due to declines in the lodging and casino markets. Base revenues in the service portion of the business increased 3.6% and 2.5% in the third quarter and year-to-date periods, respectively. International base revenues increased 2.7% in the third quarter while declining 0.2% 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 $0.3 million and $8.9 million in the third quarter and year-to-date periods of 2010, respectively, versus 2009. In the third quarter, the positive leverage effect of increased revenues was partially offset by higher restructuring costs. For the year-to-date period, lower restructuring and operating expenses were partially offset by the negative leverage effect of lower revenues. Base margins remained relatively flat in the third quarter and year-to-date periods as operating margin improvements in the International businesses were offset by higher North American overhead spend.

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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 497,574     $ 402,396     $ 1,436,315     $ 1,189,785  
Operating income
    109,332       70,003       309,313       156,192  
Margin %
    22.0 %     17.4 %     21.5 %     13.1 %

In the third 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
September 30
   
Nine Months Ended
September 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
    23.8 %     4.5 %     19.1 %     4.3 %
Changes in variable margins and overhead costs
          (0.3 )           1.6  
Total
    23.8       4.2       19.1       5.9  
                                 
Acquisitions
    0.1             0.1        
Restructuring costs
          0.2             0.8  
Impairment of goodwill and intangibles
                      1.8  
Translation
    (0.3 )     0.2       1.5       (0.1 )
Other
    0.1                    
Total
    23.7 %     4.6 %     20.7 %     8.4 %


 
 

 


Operating Revenues
Revenues increased 23.7% and 20.7% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to growth in base business. North American welding base revenues increased 19.4% and 13.5%, respectively, as a number of industrial-based end markets experienced improved recovery. Base revenues for the international welding businesses increased 5.3% in the third quarter and declined 1.0% for the year-to-date period, primarily due to strong oil and gas end market activity in the third quarter offset by year-to-date declines in Asian shipyard activity. Base revenues for the PC board fabrication businesses increased 68.6% and 81.1% in the third quarter and year-to-periods, respectively, as demand for consumer electronics and capital equipment increased significantly.

Operating Income
Operating income increased $39.3 million and $153.1 million in the third 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 and 2009 year-to-date goodwill impairment charges. During the first quarter of 2009, a $23.8 million goodwill and intangible asset impairment charge was recorded in the PC Board fabrication business. Base income and margins increased in the third quarter and year-to-date periods primarily due to the cumulative benefits of restructuring projects, favorable year-to-date inventory obsolescence expense comparisons and favorable sales mix. However, in the third quarter these increases were offset by the negative impact of 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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 446,553     $ 402,622     $ 1,275,834     $ 1,097,191  
Operating income
    52,487       43,712       145,613       55,230  
Margin %
    11.8 %     10.9 %     11.4 %     5.0 %


 
 

 


In the third 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
September 30
   
Nine Months Ended
September 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
    4.0 %     1.2 %     6.0 %     2.0 %
Changes in variable margins and overhead costs
          (0.7 )           4.9  
Total
    4.0       0.5       6.0       6.9  
                                 
Acquisitions
    8.1       (1.0 )     4.2       (0.5 )
Restructuring costs
          0.4             (0.4 )
Translation
    (1.3 )     1.0       6.1       0.4  
Other
    0.1                    
Total
    10.9 %     0.9 %     16.3 %     6.4 %

Operating Revenues
Revenues increased 10.9% and 16.3% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base revenues, revenues from acquisitions, and the year-to-date favorable effect of currency translation. The effect of currency translation was unfavorable in the third quarter of 2010. Base revenues for the Asia-Pacific region increased 5.1% and 5.2% in the third quarter and year-to-date periods, respectively, as market conditions in the residential market improved. North American base revenues decreased 6.7% in the third quarter due to declines for both residential and commercial construction. For the year-to-date period, North American revenues increased 2.8% on 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 13.3% and 8.4% in the third quarter and year-to-date periods, respectively, primarily due to improved market conditions.

Operating Income
Operating income increased $8.8 million and $90.4 million in the third 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 year-to-date operating expenses and the favorable effect of currency translation, partially offset by higher year-to-date restructuring expenses. Base margins increased 50 basis points in the third quarter primarily due to the favorable leverage effect of the increase in base revenues described above, partially offset by higher overhead expenses. Base margins increased 690 basis points in the year-to-date period primarily due to 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.

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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 334,737     $ 317,938     $ 992,964     $ 863,405  
Operating income (loss)
    55,030       50,901       150,938       33,926  
Margin %
    16.4 %     16.0 %     15.2 %     3.9 %

In the third 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
September 30
   
Nine Months Ended
September 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
    4.3 %     1.1 %     9.1 %     3.1 %
Changes in variable margins and overhead costs
          (1.0 )           0.9  
Total
    4.3       0.1       9.1       4.0  
                                 
Acquisitions
    3.8       (0.5 )     4.0       (0.2 )
Restructuring costs
          0.7             1.1  
Impairment of goodwill and intangibles
                      6.4  
Translation
    (2.8 )     0.2       1.9        
Other
          (0.1 )            
Total
    5.3 %     0.4 %     15.0 %     11.3 %

Operating Revenues
Revenues increased 5.3% and 15.0% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base revenues and revenues from acquisitions. The effect of currency translation was unfavorable in the third quarter but remained favorable for the year-to-date period. Acquisition revenue was primarily the result of the purchase of four Latin American adhesive businesses in 2009. Total base revenues increased in the third quarter and year-to-date periods due to recovery in many end markets served by the worldwide polymers and fluids businesses. Worldwide base revenues for the fluids businesses increased 3.7% and 9.6% in the third quarter and year-to-date periods, respectively, while base revenues for the worldwide polymers businesses increased 4.4% and 8.4%, respectively, in the same periods.

Operating Income
Operating income increased $4.1 million and $117.0 million in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to the increase in base revenues described above, lower restructuring costs and 2009 year-to-date goodwill and intangible asset impairment charges. During the first quarter of 2009, a $60.0 million goodwill impairment charge was taken against the goodwill of the pressure sensitive adhesive reporting unit. Base margins increased 10 and 400 basis points in the third quarter and year-to-date periods, respectively, primarily due to the positive leverage effect of the increase in base revenues and benefits of restructuring projects, offset in the third quarter by unfavorable 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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 252,670     $ 252,875     $ 752,262     $ 742,318  
Operating income
    26,921       27,664       81,204       89,689  
Margin %
    10.7 %     10.9 %     10.8 %     12.1 %

In the third 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
September 30
   
Nine Months Ended
September 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
    3.1 %     0.9 %     0.8 %     0.2 %
Changes in variable margins and overhead costs
          (0.9 )           (0.9 )
Total
    3.1             0.8       (0.7 )
                                 
Restructuring costs
          (0.5 )           (0.7 )
Translation
    (3.2 )     0.2       0.6       0.1  
Other
    0.1       0.1       (0.1 )      
Total
    %     (0.2 )%     1.3 %     (1.3 )%

Operating Revenues
Revenues were flat in the third quarter of 2010 versus 2009, as the unfavorable effect of currency translation offset the 3.1% increase in base revenues. Revenues increased 1.3% in the year-to-date period primarily due to a modest increase in base revenues and a year-to-date favorable effect of currency translation. Base revenues increased 5.0% and 2.2% for the North American laminate businesses in the third quarter and year-to-date periods, respectively, primarily due to improvement in the office equipment end market. Base revenues for the flooring business declined 57.4% and 25.4% in the third quarter and year-to-date periods, respectively, as the Company is in the process of closing its flooring business. International base revenues increased 4.9% and 0.7% in the third quarter and year-to-date periods, respectively, primarily due to improvements in Asian markets.

Operating Income
Operating income decreased $0.7 million and $8.5 million in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to higher operating costs and increased restructuring costs. Base margins were flat in the third quarter as the positive leverage effect of the increase in base revenues was offset by higher operating expenses. For the year-to-date period, base margins decreased as a second quarter fixed asset impairment, unfavorable depreciation comparisons, and unfavorable selling price versus material cost comparisons offset the benefits of restructuring projects and the positive leverage of the increase in base revenues.

 
 

 


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 third quarter and year-to-date periods of 2010 and 2009 were as follows:

(Dollars in thousands)
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
2010
 
2009
 
2010
 
2009
 
Operating revenues
  $ 826,319     $ 696,987     $ 2,382,946     $ 2,030,362  
Operating income
    152,438       115,787       432,494       280,311  
Margin %
    18.4 %     16.6 %     18.1 %     13.8 %

In the third 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
September 30
   
Nine Months Ended
September 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
    13.7 %     3.8 %     10.3 %     3.1 %
Changes in variable margins and overhead costs
          (2.7 )           0.6  
Total
    13.7       1.1       10.3       3.7  
                                 
Acquisitions and divestitures
    7.5       (0.6 )     6.7       (0.7 )
Restructuring costs
          1.4             1.3  
Impairment of goodwill and intangibles
          (0.1 )            
Translation
    (2.7 )     0.1       0.4        
Other
    0.1       (0.1 )            
Total
    18.6 %     1.8 %     17.4 %     4.3 %


 
 

 

Operating Revenues
Revenues increased 18.6% and 17.4% in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to an increase in base revenues and revenues from acquisitions, partially offset in the third quarter by the unfavorable effect of currency translation. The acquisition revenue is primarily due to the purchase of two consumer packaging businesses and a marking business. Base revenues increased 9.9% and 7.3% in the third quarter and year-to-date periods, respectively, for the consumer packaging business largely as a result of increased revenues in the graphics and decorating end markets. Base revenues for the industrial plastics and metals businesses improved 18.6% and 17.8% in the third quarter and year-to-date periods, respectively, due to increased demand for domestic appliances. Base revenues increased 8.9% and 3.8% in the third quarter and year-to-date periods, respectively, for the test and measurement businesses due to increased demand for capital equipment. Base revenues increased 31.0% and 16.1%, respectively, for the finishing businesses due to improved international end market demand.

Operating Income
Operating income increased $36.7 million and $152.2 million in the third quarter and year-to-date periods of 2010, respectively, versus 2009 primarily due to growth in base revenues. Base margins increased 110 basis points in the third quarter as the positive leverage effect of the increase in base revenues was partially offset by unfavorable selling price versus material cost comparisons and higher operating expenses. For the year-to-date period, base margins increased by 370 basis points as benefits from past restructuring projects offset the unfavorable selling price versus material cost comparisons. In addition, lower restructuring costs increased total operating margins 140 and 130 basis points in the third quarter and year-to-date periods, respectively. Acquisitions diluted total operating margins 60 and 70 basis points in the third quarter and year-to-date periods, respectively.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense increased to $159.1 million in the first nine months of 2010 versus $152.1 million in the first nine 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. The Company performed an impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2010 which resulted in immaterial intangible asset impairment charges. Total goodwill and intangible asset impairment charges by segment for the nine months ended September 30, 2009 were as follows:

(In thousands)
 
Nine Months Ended
 
     
September 30, 2009
 
Transportation
 
$
14,414
 
Industrial Packaging
   
386
 
Food Equipment
   
46
 
Power Systems & Electronics
   
24,766
 
Polymers & Fluids
   
60,416
 
All Other
   
1,969
 
   
$
101,997
 

Impairment of goodwill and other intangible assets was $102.0 million in the first nine 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. A goodwill impairment charge of $12.0 million was recorded in the third quarter of 2009 related to the truck remanufacturing reporting unit.

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

INTEREST EXPENSE

Interest expense increased to $131.4 million in the first nine months of 2010 from $121.0 million in the first nine 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 $27.6 million for the first nine months of 2010 versus expense of $13.0 million in 2009, primarily due to gains on disposal of operating affiliates and gains on investments in 2010 versus losses in 2009.
 
 

 
INCOME TAXES

The effective tax rate for the first nine months of 2010 was 32.2% which included the discrete tax charges 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 nine months of 2010 decreased compared to 38.9% for the first nine 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 nine months of 2009.

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’s dispute was heard before the Federal Court of Australia in September 2010. The Company expects a judgment by the end of 2010. The Company has recorded its best estimate of the exposure for this audit; however, depending upon the outcome, the Company could have a favorable or unfavorable impact on its tax provision of approximately $173.2 million. See the Income Tax note for further details regarding this matter.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations was $1.1 billion ($2.25 per diluted share) in the first nine months of 2010 compared to the 2009 income from continuing operations of $473.9 million ($0.95 per diluted share).

FOREIGN CURRENCY

The weakening of the U.S. dollar against foreign currencies in 2010 increased operating revenues for the first nine months of 2010 by approximately $202 million and increased net income by approximately 6 cents per diluted share.

DISCONTINUED OPERATIONS

Loss from discontinued operations was $34.3 million in the first nine months of 2009 primarily due to the loss on sale of the Click Commerce industrial software business of $29.6 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 were revised in the third quarter of 2010 from 25% to 35% of the last two years’ average income from continuing operations to 30% to 45% of the last two years’ average free operating cash flow;
·  
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 third quarter of 2010 and 2009 was as follows:

(In thousands)
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2010
   
2009
   
2010
   
2009
 
Net cash provided by operating activities
  $ 483,930     $ 569,196     $ 1,101,778     $ 1,640,279  
Additions to plant and equipment
    (72,154 )     (53,015 )     (195,539 )     (174,353 )
Free operating cash flow
  $ 411,776     $ 516,181     $ 906,239     $ 1,465,926  
                                 
Cash dividends paid
  $ (156,088 )   $ (154,892 )   $ (467,583 )   $ (464,399 )
Acquisitions
    (7,685 )     (4,702 )     (225,056 )     (118,342 )
Proceeds from sale of operations and affiliates
    60,750       631       62,153       16,316  
Issuance of common stock
    15,809       39,373       58,661       55,328  
Repurchases of common stock
    (350,000 )           (350,000 )      
Net proceeds (repayments) of debt
    306,880       (104,832 )     383,565       (874,438 )
Effect of exchange rates on cash & equivalents
    86,711       25,725       (91,997 )     123,226  
Other
    15,711       8,968       54,347       (3,711 )
Net increase in cash and equivalents
  $ 383,864     $ 326,452     $ 330,329     $ 199,906  

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. In the first nine months of 2010, the Company repurchased approximately 8.1 million shares of its common stock at an average price of $43.29 per share. As of September 30, 2010 there are approximately $871.0 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. For the third quarter and year-to-date periods of 2010 and 2009, ROIC was as follows:

(Dollars in thousands)
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2010
   
2009
   
2010
   
2009
 
                         
Operating income as adjusted
  $ 640,522     $ 483,595     $ 1,777,190     $ 999,721  
Taxes (31.6%, 32.5%, 30.9% and 32.2%,
                               
  respectively)
    (202,405 )     (157,313 )     (549,152 )     (321,910 )
Operating income after taxes
  $ 438,117     $ 326,282     $ 1,228,038     $ 677,811  
Invested capital:
                               
Trade receivables