Edgar Filing: ILLINOIS TOOL WORKS INC

ITW-2012.12.31-10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4797

ILLINOIS TOOL WORKS INC.

(Exact Name of Registrant as Specified in its Charter)



Delaware		36-1258310
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3600 W. Lake Avenue, Glenview, Illinois		60026-1215
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 724-7500

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2012 was approximately $20,600,000,000 based on the New York Stock Exchange closing sales price as of June 30, 2012.

Shares of Common Stock outstanding at January 31, 2013: 451,435,783.

Documents Incorporated by Reference



Portions of the 2013 Proxy Statement for Annual Meeting of Stockholders to be held on May 3, 2013.		Part III

PART I

ITEM 1. Business

General

Illinois Tool Works Inc. (the “Company” or “ITW”) was founded in 1912 and incorporated in 1915. The Company is a multinational manufacturer of a diversified range of industrial products and equipment with operations in 58 countries. As of December 31, 2012, these businesses are internally reported as 40 operating segments to senior management. The Company’s 40 operating segments have been aggregated into the following seven external reportable segments:

Transportation: Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.

In the Transportation segment, products and services include:


•	plastic and metal components, fasteners and assemblies for automobiles, light trucks, and other industrial uses;


•	fluids, polymers and other supplies for auto aftermarket maintenance and appearance;


•	fillers and putties for auto body repair;


•	polyester coatings and patch and repair products for the marine industry; and


•	truck remanufacturing and related parts and service.

Power Systems & Electronics: Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.

In the Power Systems & Electronics segment, products include:


•	arc welding equipment;


•	metal arc welding consumables and related accessories;


•	metal solder materials for PC board fabrication;


•	equipment and services for microelectronics assembly;


•	electronic components and component packaging;


•	static and contamination control equipment;


•	airport ground support equipment;


•	pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications; and


•	metal jacketing and other insulation products.

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; and


•	paper and plastic products that protect goods in transit.

Food Equipment: Businesses in this segment produce commercial food equipment and provide related service.

In the Food Equipment segment, products and services include:


•	warewashing equipment;


•	cooking equipment, including ovens, ranges and broilers;


•	refrigeration equipment, including refrigerators, freezers and prep tables;


•	food processing equipment, including slicers, mixers and scales;


•	kitchen exhaust, ventilation and pollution control systems; and


•	food equipment service, maintenance and repair.

Construction Products: Businesses in this segment produce construction fastening systems and truss products.

In the Construction Products segment, products include:


•	fasteners and related fastening tools for wood and metal applications;


•	anchors, fasteners and related tools for concrete applications;


•	metal plate truss components and related equipment and software; and


•	packaged hardware, fasteners, anchors and other products for retail.

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; and


•	hand wipes and cleaners for industrial applications.

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, structures, gases and fluids;


•	plastic reclosable packaging for consumer food storage;


•	plastic consumables that multi-pack cans and bottles and related equipment;


•	plastic and metal fasteners and components for appliances;


•	foil, film and related equipment used to decorate consumer products;


•	product coding and marking equipment and related consumables; and


•	line integration, conveyor systems and line automation for the food and beverage industries.

Divestiture of Majority Interest in Decorative Surfaces Segment

On August 15, 2012, the Company entered into a definitive agreement (the “Investment Agreement”) to divest a 51% majority interest in its Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC (“CD&R”). Under the terms of the Investment Agreement, the Company contributed the assets and stock of the Decorative Surfaces segment to a newly formed joint venture, Wilsonart International Holdings LLC (“Wilsonart”). The transaction closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49% immediately following the close of the transaction. The Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest in Wilsonart using the equity method of accounting. Effective November 1, 2012, the Company made changes to its management reporting structure and Decorative Surfaces is no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

The Decorative Surfaces business produces decorative high-pressure laminate surfacing materials for furniture, office and retail space, countertops, worktops and other applications. Principal end markets served included commercial, renovation and residential construction.

Enterprise Initiatives

During 2012, the Company embarked on three key initiatives - portfolio management, strategic sourcing, and business structure simplification. These initiatives are expected to enhance the business over the next five years and are targeted at organic revenue growth, and improving profitability and returns.

Portfolio Management

The Company's portfolio management initiative incorporates both acquisitions and divestitures. The Company has historically acquired businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. Going forward, the focus will be on businesses with strong differentiation and growth potential. The Company also reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As a result, the Company expects its divestiture activity in the 2012 to 2014 period to increase over historical periods. Refer to the Acquisitions note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's acquisitions, the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company's discontinued operations, and the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for discussion of the Decorative Surfaces divestiture.

Strategic Sourcing

The Company's strategic sourcing initiative focuses on costs that cross the Company's many businesses and is expected to leverage purchasing scale to enhance profitability and global competitiveness. This initiative will transform sourcing into a core strategic function in the Company and build capabilities at both the enterprise and segment levels.

Business Structure Simplification

The business structure simplification initiative simplifies and adds scale to the Company's operating divisions in order to improve focus, enhance global competitiveness and drive operational efficiencies. This initiative will reduce the number of the Company's operating divisions and increase the average revenue size of each division, while retaining the positive attributes of a decentralized operating model. The Company expects to enhance its profitability and returns through a combination of applying its 80/20 business process to the new divisions, more focused growth investments and reduced infrastructure.

80/20 Business Process

A key element of the Company’s business strategy is its continuous 80/20 business process for both existing businesses and new acquisitions. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company’s operations use this 80/20 business process to simplify and focus on the key parts of their business, and as a result, reduce complexity that often disguises what is truly important. The Company’s operations utilize the 80/20 process in various aspects of their business. Common applications of the 80/20 business process include:


•	Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products.


•	Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers.


•	Simplifying the supplier base by partnering with 80/20 suppliers and reducing the number of 20/80 suppliers.


•	Designing business processes, systems and measurements around the 80/20 activities.

The result of the application of this 80/20 business process is that the Company has over time improved its long-term operating and financial performance. These 80/20 efforts can result in restructuring projects that reduce costs and improve margins. Corporate management works closely with those businesses that have operating results below expectations to help those businesses better apply this 80/20 business process and improve their results.

Current Year Developments

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Information about Segments and Markets

Segment and operating results are included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Segment Information note in Item 8. Financial Statements and Supplementary Data.

The principal end markets served by the Company’s seven reportable segments by percentage of revenue are as follows:



End Markets Served	Transportation		Power Systems & Electronics		Industrial Packaging		Food Equipment		Construction Products		Polymers & Fluids		All Other		Total
General Industrial	5	%	43	%	27	%	1	%	2	%	33	%	27	%	20	%
Automotive OEM/Tiers	53		3		1		—		1		4		4		12
Automotive Aftermarket	31		2		—		—		—		1		—		7
Commercial Construction	1		6		6		—		25		11		1		6
Residential Construction	—		1		3		—		44		2		1		6
Renovation Construction	—		1		—		—		26		1		—		3
Food & Beverage	—		—		10		—		—		3		21		5
Food Institutional/Restaurant	—		—		—		42		—		1		—		5
Food Service	—		—		—		38		—		2		2		5
Food Retail	—		—		1		16		—		—		2		2
Consumer Durables	3		2		4		—		2		4		12		4
Electronics	—		17		1		—		—		2		1		4
Primary Metals	—		1		22		—		—		2		1		4
Other	7		24		25		3		—		34		28		17
	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%

Other includes several end markets, some of which are maintenance, repair and operations, or “MRO”, paper products, and printing and publishing.

The Company’s businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.

Backlog

Backlog generally is not considered a significant factor in the Company’s businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of its products. Backlog by reportable segment as of December 31, 2012 and 2011 was as follows:



In millions	2012		2011
Transportation	$	351	$	350
Power Systems & Electronics	235		258
Industrial Packaging	140		151
Food Equipment	192		213
Construction Products	22		32
Polymers & Fluids	57		55
All Other	445		390
Total	$	1,442	$	1,449

Backlog orders scheduled for shipment beyond calendar year 2013 were not material as of December 31, 2012.

The information set forth below is applicable to all reportable segments of the Company unless otherwise noted:

Competition

With operations in 58 countries, the Company offers a wide range of products in a myriad of markets, many of which are fragmented, and the Company encounters a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. Each of the Company's segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition to numerous smaller regional competitors, the welding

business in the Power Systems & Electronics segment competes globally with Lincoln Electric.

In virtually all segments, the Company differentiates its businesses from its competitors based on product innovation, product quality, brand preference, service delivery and price. Technical capability is also a competitive factor in most of its segments. The Company believes that for each of its segments, its primary competitive advantages derive from its decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling its businesses to respond rapidly to market dynamics. This structure enables the Company's businesses to drive operational excellence utilizing its 80/20 business process and leverages its product innovation capabilities. The Company also believes that its global footprint is a competitive advantage in many of its markets, especially in its Transportation segment.

Raw Materials

The Company uses raw materials of various types, primarily steel, resins, chemicals and paper, that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, and no such problems are currently anticipated.

Research and Development

Developing new and improved products, broadening the application of established products, and continuing efforts to improve and develop new methods, processes and equipment all contribute to the Company’s organic growth. Many new products are designed to reduce customers’ costs by eliminating steps in their manufacturing processes, reducing the number of parts in an assembly or by improving the quality of customers’ assembled products. Typically, the development of such products is accomplished by working closely with customers on specific applications. Research and development expenses were $266 million in 2012, $243 million in 2011 and $213 million in 2010.

Intellectual Property

The Company owns approximately 3,700 unexpired U.S. patents and 8,000 foreign patents covering articles, methods and machines. In addition, the Company has approximately 1,900 applications for patents pending in the U.S. Patent Office and 4,500 pending in foreign patent offices, but there is no assurance that any of these patents will be issued. The Company maintains an active patent department for the administration of patents and processing of patent applications.

The Company believes that many of its patents are valuable and important; however, the expiration of any one of the Company’s patents would not have a material effect on the Company’s results of operations or financial position. The Company also credits its leadership in the markets it serves to engineering capability; manufacturing techniques; skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.

In addition to patents, many of the Company’s products and services are sold under various owned or licensed trademarks, which are important to the Company in the aggregate. Some of the Company’s more significant trademarks include ITW, which is also used in conjunction with the trademarks of many of the Company's businesses; Deltar and Shakeproof in the Transportation segment; Miller in the Power Systems & Electronics segment; Signode in the Industrial Packaging segment; Hobart in the Food Equipment segment; Paslode in the Construction Products segment; and Instron in the All Other segment.

Environmental

The Company believes that its manufacturing plants and equipment are in substantial compliance with all applicable environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s capital expenditures, competitive position, financial position or results of operations.

Various legislative and administrative regulations concerning environmental issues have become effective or are under consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date, such developments have not had a substantial adverse impact on the Company’s revenues or earnings. The Company has made considerable efforts to develop and sell environmentally compatible products.

Employees

The Company employed approximately 60,000 persons as of December 31, 2012 and considers its employee relations to be excellent.

International

The Company’s international operations include subsidiaries and joint ventures in 57 foreign countries on six continents. These operations serve such end markets as general industrial, automotive, construction, food institutional/restaurant and service, food and beverage, consumer durables, electronics, primary metals, and others on a worldwide basis. The Company’s revenues from sales to customers outside the U.S. were approximately 57% of revenues in 2012, 59% of revenues in 2011 and 58% of revenues in 2010.

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Segment Information note in Item 8. Financial Statements and Supplementary Data for additional information on international activities. International operations are subject to certain risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates. Additional risks of the Company's international operations are described under “Item 1A. Risk Factors.”

Executive Officers

Executive Officers of the Company as of February 19, 2013 were as follows:



Name	Office	Age
Sharon M. Brady	Senior Vice President, Human Resources	62
Timothy J. Gardner	Executive Vice President	57
Maria C. Green	Senior Vice President, General Counsel & Secretary	60
John R. Hartnett	Executive Vice President	52
Craig A. Hindman	Executive Vice President	58
Ronald D. Kropp	Senior Vice President & Chief Financial Officer	47
Roland M. Martel	Executive Vice President	58
Steven L. Martindale	Executive Vice President	56
Sundaram Nagarajan	Executive Vice President	50
Christopher O’Herlihy	Executive Vice President	49
David C. Parry	Vice Chairman	59
E. Scott Santi	President & Chief Executive Officer	51
Randall J. Scheuneman	Vice President & Chief Accounting Officer	45
Juan Valls	Executive Vice President	51
Jane L. Warner	Executive Vice President	66

The executive officers of the Company serve at the pleasure of the Board of Directors. Except for Ms. Green and Messrs. Gardner, Martindale, Nagarajan, O’Herlihy, Scheuneman, and Hartnett, each of the foregoing officers has been employed by the Company in various elected executive capacities for more than five years. Ms. Green was elected Senior Vice President, General Counsel & Secretary of the Company in February 2012. She joined the Company in 1997 as an Associate General Counsel and Assistant Secretary, became Deputy General Counsel and Assistant Secretary in 2008, and was elected Vice President, General Counsel & Secretary in August 2011. Mr. Gardner was elected Executive Vice President in 2009. He joined the Company in 1997 and has held various sales and management positions in the consumer packaging businesses. Most recently, he served as Group President of the consumer packaging businesses. Mr. Martindale was elected Executive Vice President in 2008. Prior to joining the Company in 2005 as President of the test and measurement businesses, he was Chief Financial Officer and Chief Operating Officer of Instron. Mr. Nagarajan was elected Executive Vice President in 2010. He joined the Company in 1991 and has held various engineering and management positions in the welding businesses. Most recently, he served as Group President within the welding businesses. Mr. O’Herlihy was elected Executive Vice President in 2010. He joined the Company in 1989 and has held various operational, management and leadership positions of increasing responsibility. Most recently he served as President, international food equipment businesses. Mr. Scheuneman was appointed Vice President and Chief Accounting Officer in 2009. Prior to joining the Company in 2009, he held several financial leadership positions at W.W. Grainger, Inc., including Vice President, Finance, for the Lab Safety Supply business from 2006 to 2009, and Vice President, Internal Audit, from 2002 to 2006. He was appointed Principal Accounting Officer in 2009. Mr. Hartnett was elected Executive Vice President of Construction Products in 2012. He joined Signode in 1980, which was acquired by ITW in 1986, and has held various management positions of increasing responsibility. Most recently, he served as Group President of the Automotive Aftermarket businesses.

On November 17, 2012, David B. Speer, ITW Chairman & CEO since 2006, passed away after an illness. On November 18, 2012, E. Scott Santi was elected President & Chief Executive Officer as well as a director, after having been elected President and Chief Operating Officer in October 2012.

Available Information

The Company electronically files reports with the Securities and Exchange Commission (SEC). The public may read and copy any materials the Company has filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company’s website (www.itw.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any shareholder who requests them. Also posted on the Company’s website are the following:


•	Statement of Principles of Conduct;


•	Code of Ethics for CEO and key financial and accounting personnel;


•	Charters of the Audit, Corporate Governance and Nominating, and Compensation Committees of the Board of Directors;


•	Corporate Governance Guidelines;


•	Global Anti-Corruption Policy;


•	Corporate Citizenship Statement; and


•	Government Affairs Information.

ITEM 1A. Risk Factors

The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.

The Company's results are impacted by global economic conditions. Weakness or downturns in the markets served by the Company could adversely affect its business, results of operations or financial condition.

During 2012, North American economic conditions were stronger than the European and Asia Pacific economic environments as European sales declined and growth in Asia slowed. The Company cannot give assurance that it will not experience adverse effects from broad economic trends in Europe, Asia or other geographies. Instability in global economic conditions could have an adverse effect on the Company's business, results of operations or financial condition.

The global nature of the Company's operations subjects it to political and economic risks that could adversely affect its business, results of operations or financial condition.

The Company currently operates in 58 countries. In 2012, approximately 57% of the Company's revenues were generated from sales to customers outside of the U.S. As the Company continues to expand its global footprint, these sales may represent an increasing portion of the Company's revenues. The risks inherent in the Company's global operations include:


•	fluctuation in currency exchange rates;


•	limitations on ownership or participation in local enterprises;


•	price controls, exchange controls and limitations on repatriation of earnings;


•	transportation delays and interruptions;


•	political, social and economic instability and disruptions;


•	acts of terrorism;


•	government embargoes or foreign trade restrictions;


•	the imposition of duties and tariffs and other trade barriers;


•	import and export controls;


•	labor unrest and current and changing regulatory environments;


•	the potential for expropriation or nationalization of enterprises;


•	difficulties in staffing and managing multi-national operations;


•	limitations on its ability to enforce legal rights and remedies; and


•	potentially adverse tax consequences.

If the Company is unable to successfully manage these and other risks associated with managing and expanding its international businesses, the risks could have a material adverse effect on the Company's business, results of operations or financial condition.

If the Company is unable to successfully manage its enterprise initiatives, financial results could be adversely impacted.

The Company has begun executing the following new long-term enterprise initiatives: business structure simplification, strategic sourcing and portfolio management. These initiatives include the scaling up of smaller businesses into larger businesses, better leveraging of purchasing power, and divesting non-core assets while targeting acquisitions with strong differentiation and growth potential. If the Company is unable to retain its key employees, successfully integrate acquisitions, maintain productivity or otherwise implement these initiatives without material disruption to its businesses, financial results could be adversely impacted.

Divestitures could negatively impact the Company's business, and retained liabilities from businesses that the Company sells could adversely affect the Company's financial results.

As part of its portfolio management initiative, the Company reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As a result, the Company expects its divestiture activity in the 2012 to 2014 period to increase over historical periods. Divestitures pose risks and challenges that could negatively impact the Company's business, including the potentially dilutive effect on earnings per share, distraction of management's attention from core businesses, potential disputes with buyers and potential impairment charges. In addition, the Company may be required to retain responsibility for, or agree to indemnify buyers against contingent liabilities related to the businesses sold, such as lawsuits, tax liabilities, product liability claims and environmental matters.

The Company's acquisition of businesses could negatively impact its profitability and return on invested capital.

Acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect the Company's growth and profitability:


•	Any acquired business, technology, service or product could under-perform relative to the Company's expectations and the price paid for it, or not perform in accordance with the Company's anticipated timetable.


•	Acquisitions could cause the Company's financial results to differ from expectations in any given fiscal period, or over the long term.


•	Acquisition-related earnings charges could adversely impact operating results.


•	Acquisitions could place unanticipated demands on the Company's management, operational resources and financial and internal control systems.


•	The Company may assume unknown liabilities, known contingent liabilities that become realized or known liabilities that prove greater than anticipated. The realization of any of these liabilities may increase the Company's expenses or adversely affect its financial position.


•	As a result of acquisitions, the Company has in the past recorded significant goodwill and other identifiable intangible assets on its balance sheet. If the Company is not able to realize the value of these assets, it may incur charges relating to the impairment of these assets.

The Company may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate anti-bribery or other laws.

The Company cannot provide assurance that its internal controls will always protect it from reckless or criminal acts committed by its employees, agents or business partners that would violate U.S. and/or non-U.S. laws, including anti-bribery laws, competition, and export and import compliance. Any such improper actions could subject the Company to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal monetary and non-monetary penalties against the Company or its subsidiaries, and could damage its reputation.

A significant fluctuation between the U.S. Dollar and other currencies could adversely impact the Company's operating income.

Although the Company's financial results are reported in U.S. Dollars, a significant portion of its sales and operating costs are realized in other currencies, with the largest concentration of foreign sales occurring in Europe. The Company's profitability is affected by movements of the U.S. Dollar against the Euro and other foreign currencies in which it generates revenues and

incurs expenses. Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. Dollar against foreign currencies, could have an adverse effect on profitability and financial condition.

Diminished credit availability could adversely impact the Company's ability to readily obtain financing or to obtain cost-effective financing.

The Company may utilize the commercial paper markets for a portion of its short-term liquidity needs. If conditions in the financial markets decline, there is no assurance that the commercial paper markets will remain available to the Company or that the lenders participating in the Company's long-term credit facilities will be able to provide financing in accordance with the terms of its credit agreements. A failure of one or more of the syndicate members in the Company's credit facilities could reduce the availability of credit and adversely affect the Company's liquidity. If the Company determines that it is appropriate or necessary to raise capital in the future, funds may not be available on cost-effective terms.

Raw material price increases and supply shortages could adversely affect results.

The supply of raw materials to the Company and to its component parts suppliers could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company's results of operations and profit margins. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.

If the Company is unable to successfully introduce new products or adequately protect its intellectual property, its future growth may be adversely affected.

The Company's ability to develop new products based on innovation can affect its competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products and services or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect the Company's competitive position.

Protecting the Company's intellectual property is critical to its innovation efforts. The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-exclusive rights under patents owned by others. The Company's intellectual property may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected, or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company's intellectual property rights or inability to preserve existing intellectual property rights could adversely impact the Company's competitive position and results of operations.

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

The Company is subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The Company's effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or tax laws. The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.

The Company's defined benefit pension plans are subject to financial market risks that could adversely affect its results of operations and cash flows.

The performance of the financial markets and interest rates impact the Company's funding obligations under its defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase the Company's funding obligations and adversely impact its results of operations and cash flows.

Potential adverse outcome in legal proceedings may adversely affect results.

The Company's businesses expose it to potential toxic tort and other types of product liability claims that are inherent in the design, manufacture and sale of its products and the products of third-party vendors. The Company currently maintains insurance programs consisting of self insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the Company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the Company is subject to the risk that one or more of its insurers may become insolvent and become unable to pay claims that may be made in the future. Even if it maintains

adequate insurance programs, successful claims could have a material adverse effect on the Company's financial condition, liquidity and results of operations and on its ability to obtain suitable, adequate or cost-effective insurance in the future.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “believe,” “expect,” “plans,” “intends,” “may,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “guidance,” “forecast,” and other similar words, including, without limitation, statements regarding the expected acquisition or disposition of businesses, economic conditions in various geographic regions, the Company's ability to manage its strategic business initiatives, the adequacy of internally generated funds and credit facilities, the meeting of dividend payout objectives, the ability to fund debt service obligations, the Company's portion of future benefit payments related to pension and postretirement benefits, the availability of additional financing, the availability of raw materials and energy, the expiration of any one of the Company's patents, the cost of compliance with environmental regulations, the likelihood of future goodwill or intangible asset impairment charges, the outcome of outstanding legal proceedings, the impact of adopting new accounting pronouncements, and the estimated timing and amount related to the resolution of tax matters. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include those risks described above. These risks are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Any forward-looking statements made by ITW speak only as of the date on which they are made. ITW is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW's policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

As of December 31, 2012, the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:



	Number Of Properties	Floor Space
	Number Of Properties	Owned	Leased	Total
		(In millions of square feet)
Transportation	104	4.2	2.5	6.7
Power Systems & Electronics	115	5.5	2.0	7.5
Industrial Packaging	130	6.3	4.4	10.7
Food Equipment	46	3.2	0.6	3.8
Construction Products	89	3.1	1.0	4.1
Polymers & Fluids	103	3.6	1.9	5.5
All Other	179	6.0	3.4	9.4
Corporate	36	2.9	0.2	3.1
Total	802	34.8	16.0	50.8

The principal plants and office facilities outside of the U.S. are in Australia, Belgium, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Italy, Netherlands, Spain, Switzerland and the United Kingdom.

The Company’s properties are primarily of steel, brick or concrete construction and are maintained in good operating condition. Production capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds production capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the Company's businesses.

ITEM 3. Legal Proceedings

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Price and Dividend Data—The common stock of Illinois Tool Works Inc. was listed on the New York Stock Exchange for 2012 and 2011. Quarterly market price and dividend data for 2012 and 2011 were as shown below:



	Market Price Per Share				Dividends Declared
	High		Low		Per Share
2012:
Fourth quarter	$	63.33	$	58.20	$	0.38
Third quarter	62.09		49.07		0.38
Second quarter	58.27		50.35		0.36
First quarter	58.24		47.42		0.36
2011:
Fourth quarter	$	49.92	$	39.12	$	0.36
Third quarter	59.27		40.82		0.36
Second quarter	58.79		52.09		0.34
First quarter	56.36		52.42		0.34

The approximate number of holders of record of common stock as of January 31, 2013 was 8,916. This number does not include beneficial owners of the Company’s securities held in the name of nominees.

Repurchases of Common Stock - On May 6, 2011, the Company’s Board of Directors authorized a new stock repurchase program which provides for the buyback of up to $4 billion of the Company’s common stock over an open-ended period of time (the “2011 Program”). Initial buybacks under the 2011 program of $79 million were made in the third quarter of 2011. Buybacks resumed with an additional $474 million of repurchases made in the first quarter of 2012, $526 million in the second quarter of 2012, $416 million in the third quarter of 2012, and an additional $604 million in the fourth quarter of 2012 as summarized in the table below. As of December 31, 2012, there was approximately $1.9 billion of authorized repurchases remaining under the 2011 Program.

Share repurchase activity under this program for the fourth quarter of 2012 was as follows:



In millions except per share amounts
Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Value of Shares That May Yet Be Purchased Under Program
October 2012	2.2	$	59.91	2.2	$	2,371
November 2012	3.3	$	60.58	3.3	$	2,174
December 2012	4.4	$	61.58	4.4	$	1,901
Total	9.9			9.9

ITEM 6. Selected Financial Data



In millions except per share amounts	2012		2011		2010		2009		2008
Operating revenues	$	17,924	$	17,787	$	15,416	$	13,573	$	16,544
Income from continuing operations	2,495		2,017		1,452		969		1,624
Income from continuing operations per common share:
Basic	5.31		4.10		2.90		1.94		3.13
Diluted	5.27		4.08		2.89		1.93		3.12
Total assets at year-end	19,309		17,984		16,412		15,811		15,204
Long-term debt at year-end	4,589		3,488		2,542		2,861		1,248
Cash dividends declared per common share	1.48		1.40		1.30		1.24		1.18

Certain reclassifications of prior years’ data have been made to conform to current year reporting, including the elimination of the one-month lag effective January 1, 2011 for the reporting of the Company’s international operations outside of North America (fiscal years 2010 and 2009 only), and discontinued operations as discussed below.

Prior to 2011, the Company’s international operations outside of North America had a fiscal reporting period that began on December 1 and ended on November 30. Effective January 1, 2011, the Company eliminated the one-month lag for the reporting of its international operations outside of North America. As a result, the Company is now reporting both North American and international results on a calendar year basis. The Company determined that the elimination of the one-month reporting lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements of the North American and international businesses. The Company applied this change in accounting principle retrospectively to fiscal periods 2010 and 2009. Refer to the International Reporting Lag note in Item 8. Financial Statements and Supplementary Data for discussion of this change in accounting principle.

The Company periodically reviews its operations for businesses that may no longer be aligned with its long-term objectives. For businesses reported as discontinued operations in the statement of income, all related prior period income statement information has been restated to conform to the current year reporting of these businesses. Income (loss) from discontinued operations was $375 million, $54 million, $51 million, $4 million, and ($105 million) in the years 2012, 2011, 2010, 2009, and 2008, respectively. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

On August 15, 2012, the Company entered into a definitive agreement (the “Investment Agreement”) to divest a 51% majority interest in its Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC (“CD&R”). Under the terms of the Investment Agreement, the Company contributed the assets and stock of the Decorative Surfaces segment to a newly formed joint venture, Wilsonart International Holdings LLC (“Wilsonart”). The transaction closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49% immediately following the close of the transaction. The Company recorded a pre-tax gain of $933 million ($632 million after-tax) related to this transaction. The Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest in Wilsonart using the equity method of accounting. Effective November 1, 2012, the Company made changes to its management reporting structure and Decorative Surfaces is no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

On January 1, 2009, the Company adopted new accounting guidance related to business combinations. The new accounting guidance requires an entity to recognize assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. This new guidance also requires prospectively that (1) acquisition-related costs be expensed as incurred; (2) restructuring costs generally be recognized as post-acquisition expenses; and (3) changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period impact income tax expense. Adoption of this guidance did not have a material impact on the Company's financial statements.

On January 1, 2009, the Company adopted new accounting guidance on fair value measurements for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The new accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and provides guidance for measuring fair values and the necessary disclosures. Adoption of this guidance did not have a material impact on the Company's financial statements.

Information on the comparability of results is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Illinois Tool Works Inc. (the “Company” or “ITW”) is a multinational manufacturer of a diversified range of industrial products and equipment with operations in 58 countries. As of December 31, 2012, these businesses are internally reported as 40 operating segments to senior management. The Company’s 40 operating segments have been aggregated into the following seven external reportable segments: Transportation; Power Systems & Electronics; Industrial Packaging; Food Equipment; Construction Products; Polymers & Fluids; and All Other.

Due to the large number of diverse businesses and the Company’s decentralized operating structure, the Company does not require its businesses to provide detailed information on operating results. Instead, the Company’s corporate management collects data on several key measurements: operating revenues, operating income, operating margins, overhead costs, number of months on hand in inventory, days sales outstanding in accounts receivable, past due receivables and return on invested capital. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.

Management analyzes the Company's consolidated results of operations and the results of each segment by identifying the effects of changes in the results of the base businesses, newly acquired and recently divested companies, restructuring costs, goodwill and intangible asset impairment charges, and currency translation on the operating revenues and operating income of each segment. Base businesses are those businesses that have been included in the Company's results of operations for more than 12 months. The changes to base business operating income include the estimated effects of both operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the base business revenue volume changes on operating income, assuming variable margins remain the same as the prior period. As manufacturing and administrative overhead costs usually do not significantly change as a result of revenues increasing or decreasing, the percentage change in operating income due to operating leverage is usually more than the percentage change in the base business revenues. Changes in variable margins and overhead costs represent the estimated effect of non-volume related changes in base business operating income and may be driven by a number of factors, including changes in product mix, the cost of raw materials, labor and overhead, and pricing to customers. Selling price versus material cost comparisons represent the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers. Management reviews these price versus cost comparisons by analyzing the net impact of changes to each segment's operating margin.

A key element of the Company’s business strategy is its continuous 80/20 business process for both existing businesses and new acquisitions. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company’s operations use this 80/20 business process to simplify and focus on the key parts of their business, and as a result, reduce complexity that often disguises what is truly important. The Company’s operations utilize the 80/20 process in various aspects of their businesses. Common applications of the 80/20 business process include:


•	Simplifying product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating low-value products.


•	Segmenting the customer base by focusing on the 80/20 customers separately and finding alternative ways to serve the 20/80 customers.


•	Simplifying the supplier base by partnering with 80/20 suppliers and reducing the number of 20/80 suppliers.


•	Designing business processes, systems and measurements around the 80/20 activities.

INTERNATIONAL REPORTING CHANGE

Effective January 1, 2011, the Company eliminated the one-month lag for the reporting of its international operations outside of North America. As a result, the Company now reports both North American and international results on a calendar year basis. Prior to this, the international fiscal reporting period began on December 1st and ended on November 30th. The Company applied this change in accounting principle retrospectively to all prior financial statement periods presented. Refer to the International Reporting Lag note in Item 8. Financial Statements and Supplementary Data for discussion of the international reporting change.

DIVESTITURE OF MAJORITY INTEREST IN DECORATIVE SURFACES SEGMENT

DISCONTINUED OPERATIONS

The Company periodically reviews its operations for businesses that may no longer be aligned with its long-term objectives. For businesses reported as discontinued operations in the statement of income, all related prior period income statement information has been restated to conform to the current year reporting of these businesses. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

STRATEGIC REVIEW OF INDUSTRIAL PACKAGING SEGMENT

On February 19, 2013, the Company announced that it is initiating a review process to explore strategic alternatives for its Industrial Packaging segment, which may include a sale or spin-off of the business. The Company expects the review process will last through the remainder of 2013.

2011 AND 2012 SEGMENT CHANGES

The Company periodically makes changes to its management reporting structure to better align its businesses with Company objectives and operating strategies.

In the first quarter of 2011, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments. The pressure sensitive adhesives, and the static and contamination control reporting units were moved to the Power Systems & Electronics segment from the Polymers & Fluids and All Other segments, respectively. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2011.

In the first quarter of 2012, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments. These changes primarily related to the industrial fasteners reporting unit, formerly in the All Other segment, moving to the Transportation segment; certain businesses in a Latin American reporting unit, formerly in the Polymers & Fluids segment, moving to the Transportation segment; and a worldwide insulation reporting unit, formerly in the Industrial Packaging segment, moving to the Power Systems & Electronics segment. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2012.

The prior period segment results have been restated to conform to the current year reporting of these businesses.

CONSOLIDATED RESULTS OF OPERATIONS

The Company’s consolidated results of operations for 2012, 2011 and 2010 are summarized as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	17,924		$	17,787		$	15,416
Operating income	2,847			2,731			2,254
Margin %	15.9		%	15.4		%	14.6		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	1.7	%	4.6	%	0.4	%	7.5	%	21.0	%	1.9	%
Changes in variable margins and overhead costs	—		4.4		0.7		—		(4.9	)	(0.7	)
	1.7		9.0		1.1		7.5		16.1		1.2
Acquisitions	3.1		0.6		(0.4	)	4.9		2.3		(0.4	)
Divestitures	(1.4	)	(0.9	)	0.1		(0.1	)	—		—
Restructuring costs	—		(1.9	)	(0.3	)	—		(0.6	)	(0.1	)
Impairment of goodwill and intangibles	—		(0.1	)	—		—		—		—
Translation	(2.7	)	(2.5	)	—		3.1		3.4		0.1
Other	0.1		—		—		—		—		—
	0.8	%	4.2	%	0.5	%	15.4	%	21.2	%	0.8	%

Operating Revenues

Revenues increased 0.8% in 2012 versus 2011 primarily due to higher base revenues and revenues from acquisitions, partially offset by the unfavorable effect of currency translation and the reduction of revenues due to divestitures. Base revenues increased 1.7% in 2012 versus 2011 as North American economic conditions were stronger than the European and Asia Pacific economic environments. North American base revenues increased 4.3% in 2012 versus 2011. International base revenues decreased 1.1% as Europe decreased 2.3% in 2012 versus 2011 primarily driven by weakness in Southern Europe. Asia Pacific base revenues increased 1.3% in 2012 versus 2011 primarily due to growth in India. Acquisitions contributed 3.1% to revenues primarily due to the purchase of a manufacturer of specialty devices used to measure the flow of gases and fluids in the first quarter of 2012 and a thermal processing and environmental equipment manufacturer purchased in the third quarter of 2011. Currency translation resulted in a 2.7% decline in revenues primarily due to a weaker Euro versus the year ago period. Divestitures reduced revenues by 1.4% primarily due to only ten months of operating results for the Decorative Surfaces segment in 2012 versus twelve months of operating results in 2011 as the Company divested a 51% interest in the Decorative Surfaces segment on October 31, 2012, and the segment was deconsolidated as of that date.

Revenues increased 15.4% in 2011 versus 2010 primarily due to higher base revenues, revenues from acquisitions, and the favorable impact of currency translation. Base revenues increased 7.5% in 2011 versus 2010 as worldwide economic conditions strengthened. North American and international base revenues increased 8.7% and 6.1%, respectively, in 2011 versus 2010. Base revenues in Europe and Asia Pacific increased 5.9% and 5.4%, respectively, in 2011 versus 2010; however, European economic conditions slowed in the second half of the year. End markets associated with welding, transportation and test and measurement businesses showed strength in 2011. Acquisitions contributed 4.9% to revenues primarily due to a North American automotive aftermarket business purchased in the first quarter of 2011, a South American chemical products manufacturer purchased in the fourth quarter of 2010, and a North American packaging business purchased in the second quarter of 2011. Currency translation resulted in a 3.1% increase in revenues primarily due to a stronger Euro and Australian dollar versus the year ago period.

Operating Income

Operating income increased 4.2% in 2012 versus 2011 primarily due to the positive operating leverage effects of the base revenue increase noted above and improved variable margins. Currency translation resulted in a 2.5% decline in operating income primarily due to a weaker Euro versus the year ago period. Higher restructuring expenses due to increased cost reduction activities also negatively impacted operating income by 1.9%. Base margins increased 110 basis points primarily due to improved variable margins and the positive operating leverage effect of the increase in base revenues noted above. Changes in variable margins and overhead costs improved base margins 70 basis points primarily due to the favorable effect of selling

price versus material cost comparisons of 50 basis points and benefits of restructuring projects. The increase in base margins was partially offset by a 40 basis point decline related to acquisitions, primarily due to amortization expense related to intangible assets. Restructuring expenses diluted total operating margins by 30 basis points primarily due to restructuring activities related to continued improvements in operating structure and efficiencies.

Operating income increased 21.2% in 2011 versus 2010 primarily due to the positive operating leverage effects of the base revenue increase noted above, the favorable effect of currency translation and income from acquisitions, partially offset by weaker variable margins. Currency translation resulted in a 3.4% increase in operating income primarily due to a stronger Euro and Australian dollar versus the year ago period. Base margins increased 120 basis points due to the positive operating leverage effect of the increase in base revenues, partially offset by changes in variable margins and overhead costs of 70 basis points, which was primarily due to the negative impact of selling price versus material cost comparisons of 60 basis points. Acquisitions diluted total operating margins by 40 basis points primarily due to amortization expense related to intangible assets.

RESULTS OF OPERATIONS BY SEGMENT

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



	Operating Revenues
In millions	2012			2011			2010
Transportation	$	3,550		$	3,444		$	2,839
Power Systems & Electronics	3,151			2,988			2,518
Industrial Packaging	2,412			2,463			2,123
Food Equipment	1,939			1,985			1,860
Construction Products	1,902			1,959			1,753
Polymers & Fluids	1,230			1,250			1,001
All Other	2,883			2,690			2,407
Intersegment revenues	(64		)	(76		)	(77		)
Total Segments	17,003			16,703			14,424
Decorative Surfaces	921			1,084			992
Total	$	17,924		$	17,787		$	15,416



	Operating Income
In millions	2012		2011		2010
Transportation	$	560	$	539	$	427
Power Systems & Electronics	643		605		493
Industrial Packaging	282		249		208
Food Equipment	324		304		255
Construction Products	200		225		192
Polymers & Fluids	195		188		167
All Other	521		489		395
Total Segments	2,725		2,599		2,137
Decorative Surfaces	122		132		117
Total	$	2,847	$	2,731	$	2,254

TRANSPORTATION

Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.

In the Transportation segment, products and services include:


•	plastic and metal components, fasteners and assemblies for automobiles, light trucks and other industrial uses;


•	fluids, polymers and other supplies for auto aftermarket maintenance and appearance;


•	fillers and putties for auto body repair;


•	polyester coatings and patch and repair products for the marine industry; and


•	truck remanufacturing and related parts and service.

In 2012, this segment primarily served the automotive original equipment manufacturers and tiers (53%) and automotive aftermarket (31%) markets.

The results of operations for the Transportation segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	3,550		$	3,444		$	2,839
Operating income	560			539			427
Margin %	15.8		%	15.7		%	15.0		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	3.5	%	8.0	%	0.7	%	9.7	%	23.3	%	1.9	%
Changes in variable margins and overhead costs	—		(0.9	)	(0.2	)	—		(6.0	)	(0.8	)
	3.5		7.1		0.5		9.7		17.3		1.1
Acquisitions and divestitures	2.4		1.5		(0.1	)	9.2		7.4		(0.3	)
Restructuring costs	—		(1.5	)	(0.2	)	—		(1.5	)	(0.2	)
Impairment of goodwill and intangibles	—		—		—		—		—		—
Translation	(2.8	)	(3.3	)	(0.1	)	2.4		3.0		0.1
Other	—		—		—		—		—		—
	3.1	%	3.8	%	0.1	%	21.3	%	26.2	%	0.7	%

Operating Revenues

Revenues increased 3.1% in 2012 versus 2011 primarily due to the increase in base business and revenues from acquisitions, partially offset by the unfavorable effect of currency translation. Worldwide automotive base revenues increased 9.4% in 2012 versus 2011 primarily due to an increase in worldwide auto builds of approximately 6%, favorable customer mix and product penetration gains in Europe, and growing product penetration with automotive original equipment manufacturers in China. The automotive aftermarket base business declined 4.1% in 2012 versus 2011 primarily due to the loss of a major product line with a key customer and decreased demand for car care products in Europe, partially offset by higher demand in the U.S. Base revenues for the truck remanufacturing and related parts and service business increased 4.0% over the prior year primarily due to strong energy development activity that increased consumer demand in North America. The increase in acquisition revenue was primarily due to the purchase of a North American automotive aftermarket business in the first quarter of 2011 and a European automotive aftermarket business in the third quarter of 2011.

Revenues increased 21.3% in 2011 versus 2010 primarily due to the increase in base business, revenues from acquisitions and the favorable effect of currency translation. Worldwide automotive base revenues increased 10.3% in 2011 versus 2010 primarily due to an increase in worldwide auto builds of 3% and improved product penetration in European and Asian markets. The truck remanufacturing and related parts and service business increased 19.7% over the prior year due to increased demand in North America and Canada related to oil and gas exploration. Automotive aftermarket base business increased 3.7% over the prior year. The increase in acquisition revenue was primarily due to the purchase of a North American automotive aftermarket business in the first quarter of 2011.

Operating Income

Operating income increased 3.8% in 2012 versus 2011 primarily due to the positive operating leverage effect of the base revenue increase noted above and income from acquisitions, partially offset by the unfavorable effect of currency translation and higher restructuring expenses. Base margins increased 50 basis points primarily due to the positive operating leverage effect of the increase in base revenues described above, partially offset by changes in variable margins and overhead costs. Improvements in variable margins were primarily due to the favorable impact of selling price versus material cost comparisons of 40 basis points, which were more than offset by higher overhead costs of 60 basis points, including costs related to business expansion in China. The increase in total base margins was partially offset by a 20 basis point operating margin decline due to the higher restructuring expenses noted above.

Operating income increased 26.2% in 2011 versus 2010 primarily due to the positive operating leverage effects of the base revenue increase noted above, income from acquisitions and the favorable effect of currency translation, partially offset by lower variable margins and higher overhead costs. Base margins increased 110 basis points primarily due to the positive operating leverage effect of the increase in base revenues described above, partially offset by the negative impact of selling price versus material cost comparisons of 80 basis points. Acquisitions diluted total operating margins by 30 basis points primarily due to amortization expense related to intangible assets.

POWER SYSTEMS & ELECTRONICS

Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.

In the Power Systems & Electronics segment, products include:


•	arc welding equipment;


•	metal arc welding consumables and related accessories;


•	metal solder materials for PC board fabrication;


•	equipment and services for microelectronics assembly;


•	electronic components and component packaging;


•	static and contamination control equipment;


•	airport ground support equipment;


•	pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications; and


•	metal jacketing and other insulation products.

In 2012, this segment primarily served the general industrial (43%), electronics (17%) and construction (8%) markets.

The results of operations for the Power Systems & Electronics segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	3,151		$	2,988		$	2,518
Operating income	643			605			493
Margin %	20.4		%	20.2		%	19.6		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	3.8	%	7.6	%	0.8	%	12.0	%	24.9	%	2.2	%
Changes in variable margins and overhead costs	—		1.5		0.3		—		(2.7	)	(0.5	)
	3.8		9.1		1.1		12.0		22.2		1.7
Acquisitions and divestitures	3.0		(0.7	)	(0.7	)	4.3		(1.0	)	(0.9	)
Restructuring costs	—		(1.2	)	(0.2	)	—		(0.6	)	(0.1	)
Impairment of goodwill and intangibles	—		(0.1	)	—		—		—		—
Translation	(1.3	)	(0.9	)	—		2.4		2.1		(0.1	)
Other	—		—		—		—		—		—
	5.5	%	6.2	%	0.2	%	18.7	%	22.7	%	0.6	%

Operating Revenues

Revenues increased 5.5% in 2012 versus 2011 due to growth in base business and revenues from acquisitions, partially offset by the unfavorable effect of currency translation. Worldwide welding base revenues increased 6.8% in 2012 versus 2011, but softened in the fourth quarter, as worldwide revenues declined 1.2% in the fourth quarter, largely due to an 11.7% decline in the international welding base business. North American welding base revenues increased 10.2% in 2012 versus 2011 due to growth in oil and gas end markets for the full year and increased sales to heavy equipment OEM's in the first half of 2012, with slowed growth in heavy equipment OEM demand in the second half of the year. Base revenues for the international welding businesses decreased 2.1% in 2012 versus 2011 primarily due to a weak Chinese shipbuilding end market, partially offset by growth in Asian and European oil and gas markets. Base revenues for the electronics businesses increased 0.5% mainly due to base revenue growth of 8.0% in the electronics assembly businesses driven by strong order rates from a key electronics customer, partially offset by a 4.1% decline in the other electronics businesses as consumer demand for basic cell phones and computers was weaker. Acquisition revenue was primarily due to the purchase of a thermal processing and environmental equipment manufacturer in the third quarter of 2011.

Revenues increased 18.7% in 2011 versus 2010 due to growth in base business, revenues from acquisitions and the favorable effect of currency translation. Worldwide welding base revenues increased 19.5% in 2011 versus 2010. North American welding base revenues increased 22.4% due to improvements in a number of industrial-based end markets. In particular, increased sales in the oil and gas end market as well as sales to heavy equipment OEM’s and other manufacturers helped drive base revenues. Base revenues for the international welding businesses increased 11.9% in 2011 versus 2010 primarily due to growth in European and Asian oil and gas and infrastructure-related end markets. Base revenues for the electronics businesses increased 1.3% mainly due to base revenue growth of 6.3% in the electronics assembly businesses, though end markets significantly slowed for these businesses in the fourth quarter of 2011. Base revenues for the other electronics businesses decreased 1.3% due to weakening end markets and softer consumer demand. Acquisition revenue was primarily due to the purchase of a thermal processing and environmental equipment manufacturer in the third quarter of 2011 and an automated welding systems business in the fourth quarter of 2010.

Operating Income

Operating income increased 6.2% in 2012 versus 2011 primarily due to the favorable operating leverage effect of the growth in base revenues and improved variable margins, partially offset by higher restructuring expenses due to increased cost reduction activities and the unfavorable impact of currency translation. Base margins increased 110 basis points in 2012 versus 2011 primarily due to the favorable operating leverage effect of the growth in base business of 80 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 30 basis points primarily due to the positive impact of selling price versus material cost comparisons of 90 basis points, partially offset by higher overhead costs, including investments in emerging markets related to the oil and gas businesses. Acquisitions diluted

total operating margins by 70 basis points in 2012 versus 2011 primarily due to lower operating margins and the impact of intangible asset amortization from acquisitions made within the past year.

Operating income increased 22.7% in 2011 versus 2010 primarily due to the favorable operating leverage effect of the growth in base revenues and the favorable impact of currency translation, partially offset by lower variable margins. Base margins increased 170 basis points primarily due to the favorable operating leverage effect of the growth in base revenues, partially offset by the negative impact of selling price versus material cost comparisons of 40 basis points. Acquisitions diluted total operating margins by 90 basis points versus the prior year, primarily due to the impact of intangible asset amortization.

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; and


•	paper and plastic products that protect goods in transit.

In 2012, this segment primarily served the general industrial (27%), primary metals (22%), food and beverage (10%) and construction (9%) markets.

The results of operations for the Industrial Packaging segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	2,412		$	2,463		$	2,123
Operating income	282			249			208
Margin %	11.7		%	10.1		%	9.8		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	0.4	%	1.6	%	0.1	%	9.2	%	36.9	%	2.5	%
Changes in variable margins and overhead costs	—		16.4		1.7		—		(23.0	)	(2.1	)
	0.4		18.0		1.8		9.2		13.9		0.4
Acquisitions and divestitures	1.4		1.3		—		3.0		3.1		—
Restructuring costs	—		(1.3	)	(0.1	)	—		(2.5	)	(0.2	)
Impairment of goodwill and intangibles	—		—		—		—		—		—
Translation	(3.8	)	(4.6	)	(0.1	)	3.8		5.2		0.1
Other	—		—		—		—		—		—
	(2.0	)%	13.4	%	1.6	%	16.0	%	19.7	%	0.3	%

Operating Revenues

Revenues decreased 2.0% in 2012 versus 2011 due to the unfavorable effect of currency translation, which more than offset revenues from acquisitions and an increase in base revenues. The increase in acquisition revenue was primarily due to the purchase of a European protective packaging business in the fourth quarter of 2011 and a North American protective packaging business in the second quarter of 2011. Total North American base revenues increased 3.4% in 2012 versus 2011, while international base revenues declined 1.9% over the same period. Base revenues were virtually flat for the North American

strapping and equipment businesses due to unfavorable selling prices and lower equipment sales, partially offset by increased sales volume in steel and plastic strapping. Base revenues for the international strapping and equipment businesses decreased 3.4%, primarily due to a slowdown in consumable sales in the European steel and lumber markets. Worldwide stretch packaging base revenues increased 4.9% in 2012 versus 2011 primarily due to increased equipment sales in North America and Europe and consumable sales to agricultural customers in Europe, while worldwide protective packaging grew 3.2% over the same period primarily due to increased product penetration.

Revenues increased 16.0% in 2011 versus 2010 due to the increase in base revenues, the favorable effect of currency translation and revenues from acquisitions. Base revenues for the North American strapping and equipment businesses increased 11.6% in 2011 versus 2010 largely due to higher steel and plastic strapping prices and increased equipment sales. Base revenues for the international strapping and equipment businesses grew 7.0% primarily due to higher strapping prices and higher equipment sales. Base revenues for stretch packaging worldwide increased 14.0% in 2011 versus 2010 and worldwide protective packaging grew 7.9% over the prior period. The increase in acquisition revenue was primarily due to the purchase of a protective packaging business in the second quarter of 2011.

Operating Income

Operating income increased 13.4% in 2012 versus 2011 primarily due to lower operating expenses, partially offset by the unfavorable impact of currency translation. Base operating margins increased 180 basis points primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 170 basis points primarily due to the positive impact of selling price versus material cost comparisons of 70 basis points, the benefits of restructuring projects, primarily within the strapping business, and other overhead cost reductions.

Operating income increased 19.7% in 2011 versus 2010 primarily due to the increase in base revenues, the favorable impact of currency translation and income from acquisitions, partially offset by lower variable margins and higher restructuring expenses. Base operating margins increased 40 basis points primarily due to the positive operating leverage effect of the increase in base revenues of 250 basis points, partially offset by changes in variable margins and overhead costs. The changes in variable margins and overhead costs decreased base margins by 210 basis points, primarily due to unfavorable selling price versus material cost comparisons of 110 basis points and higher operating expenses in North America.

FOOD EQUIPMENT

Businesses in this segment produce commercial food equipment and provide related service.

In the Food Equipment segment, products and services include:


•	warewashing equipment;


•	cooking equipment, including ovens, ranges and broilers;


•	refrigeration equipment, including refrigerators, freezers and prep tables;


•	food processing equipment, including slicers, mixers and scales;


•	kitchen exhaust, ventilation and pollution control systems; and


•	food equipment service, maintenance and repair.

In 2012, this segment primarily served the food institutional/restaurant (42%), service (38%) and food retail (16%) markets.

The results of operations for the Food Equipment segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	1,939		$	1,985		$	1,860
Operating income	324			304			255
Margin %	16.7		%	15.3		%	13.7		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	0.6	%	1.7	%	0.2	%	2.8	%	8.9	%	0.8	%
Changes in variable margins and overhead costs	—		8.3		1.2		—		10.6		1.4
	0.6		10.0		1.4		2.8		19.5		2.2
Acquisitions and divestitures	—		—		—		1.2		(0.4	)	(0.2	)
Restructuring costs	—		—		—		—		(3.0	)	(0.4	)
Impairment of goodwill and intangibles	—		(0.3	)	—		—		—		—
Translation	(2.9	)	(3.0	)	—		2.7		3.0		—
Other	—		—		—		—		—		—
	(2.3	)%	6.7	%	1.4	%	6.7	%	19.1	%	1.6	%

Operating Revenues

Revenues decreased 2.3% in 2012 versus 2011 due to the unfavorable effect of currency translation, which more than offset the growth in base business. North American base revenues increased 3.0% in 2012 versus 2011 as equipment revenues increased 2.7% and service revenues increased 3.6%. The increase in equipment revenues was driven by growth in certain institutional, restaurant and retail markets, but declined in the fourth quarter of 2012, largely due to slower demand from institutional customers in budget constrained sectors. The increase in service revenues was partly due to expanded service capabilities and improved market penetration. International base revenues decreased 2.0% in 2012 versus 2011 as equipment revenues decreased 4.2%, driven by lower European sales in the cooking businesses, partially offset by product penetration gains in China and Brazil. International service revenues increased 3.4% driven by sales in Europe due to expanded service capabilities.

Revenues increased 6.7% in 2011 versus 2010 due to the growth in base business, the favorable effect of currency translation and revenues from acquisitions. North American food equipment base revenues increased 3.9% in 2011 versus 2010 as equipment revenues increased 4.6% and service revenues grew 2.7%. Equipment revenues increased primarily due to better, but still modest growth in the casual dining restaurant category, partially offset by weakness in institutional categories where government budgets were constrained. International base revenues increased 1.7% for the period as equipment revenues increased 1.0% and service revenues increased 3.3%. Growth in Asian and Latin American revenues was partially offset by lower European sales in 2011 versus 2010. The increase in acquisition revenue was primarily due to the purchase of a European food equipment business in the third quarter of 2010.

Operating Income

Operating income increased 6.7% in 2012 versus 2011 primarily due to improved variable margins and productivity improvements, partially offset by the unfavorable effect of currency translation. Base operating margins increased 140 basis points primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 120 basis points in 2012 versus 2011, primarily due to the positive impact of selling price versus material cost comparisons of 60 basis points and a 50 basis point improvement from lower operating expenses due to productivity improvements in North America and Europe.

Operating income increased 19.1% in 2011 versus 2010 primarily due to lower operating expenses, the increase in base revenues and the favorable effect of currency translation, partially offset by higher restructuring expenses. Base business margins increased 220 basis points primarily due to lower operating expenses and adjustments related to a European business in 2010, and the positive operating leverage effect of the increase in base revenues of 80 basis points noted above. Higher restructuring expenses in 2011 versus 2010 decreased total operating margins by 40 basis points.

CONSTRUCTION PRODUCTS

Businesses in this segment produce construction fastening systems and truss products.

In the Construction Products segment, products include:


•	fasteners and related fastening tools for wood and metal applications;


•	anchors, fasteners and related tools for concrete applications;


•	metal plate truss components and related equipment and software; and


•	packaged hardware, fasteners, anchors and other products for retail.

In 2012, this segment primarily served the residential construction (44%), renovation construction (26%), and commercial construction (25%) markets.

The results of operations for the Construction Products segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	1,902		$	1,959		$	1,753
Operating income	200			225			192
Margin %	10.5		%	11.5		%	11.0		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	(0.5	)%	(1.9	)%	(0.2	)%	2.7	%	10.7	%	0.9	%
Changes in variable margins and overhead costs	—		(0.7	)	—		—		(7.4	)	(0.8	)
	(0.5	)	(2.6	)	(0.2	)	2.7		3.3		0.1
Acquisitions and divestitures	0.2		1.8		0.2		3.0		0.1		(0.3	)
Restructuring costs	—		(8.4	)	(1.0	)	—		4.4		0.5
Impairment of goodwill and intangibles	—		—		—		—		—		—
Translation	(2.6	)	(2.1	)	—		6.0		9.5		0.3
Other	—		—		—		—		0.1		(0.1	)
	(2.9	)%	(11.3	)%	(1.0	)%	11.7	%	17.4	%	0.5	%

Operating Revenues

Revenues decreased 2.9% in 2012 versus 2011 primarily due to the negative impact of currency translation and lower base revenues. International base revenues declined 3.4% in 2012 versus 2011 as European base revenues declined 5.1% due to lower sales of consumable products driven by a slowdown in construction activity in all European end markets. Base revenues in Asia Pacific declined 1.4% in 2012 versus 2011 primarily due to lower renovation and commercial construction activity in Australia and New Zealand. In North America, base revenue growth for residential, renovation and commercial construction was 9.5%, 5.6% and 4.1%, respectively. The North American base revenue increase was driven by improved U.S. housing starts as well as a modest increase in commercial construction square footage activity.

Revenues increased 11.7% in 2011 versus 2010 primarily due to the favorable effect of currency translation, revenues from acquisitions and an increase in base revenues. The increase in acquisition revenue was primarily due to the purchase of a European retail distribution business in the second quarter of 2010 and a North American fastener business in the second quarter of 2011. European base revenues increased 7.2% due to improved conditions in commercial construction in the first half of the year; however, the rate of growth moderated in the second half of the year compared to early 2011. North American base revenues increased 2.3% primarily due to price increases implemented to offset higher steel prices, partially offset by the one-time licensing agreement settlement in the commercial construction business that positively impacted revenues in 2010. In

North America, renovation base revenue growth was 5.5%, residential base revenue growth was 2.7% and commercial construction base revenue declined 3.0%. North American base revenue was impacted by 1% growth in remodeling expenditures, 3% annualized growth in U.S. housing starts as well as a 2% decline in commercial construction square footage activity. Base revenues for the Asia-Pacific region declined 1.7% as market conditions in the Australian residential construction market progressively softened throughout the year.

Operating Income

Operating income decreased 11.3% in 2012 versus 2011 primarily due to higher restructuring expenses, the unfavorable impact of currency translation and lower base revenues, partially offset by income from acquisitions. Total base margins decreased 20 basis points in 2012 versus 2011 due to the negative operating leverage effect of the decrease in base revenues. The impact of changes in variable margins and overhead costs on total base margins was flat in 2012 versus 2011, as the favorable impact of selling price versus material cost comparisons of 20 basis points was offset by higher operating expenses in Europe. Restructuring expenses reduced total operating margins by 100 basis points due to increased cost reduction activities worldwide.

Operating income increased 17.4% in 2011 versus 2010 primarily due to the positive operating leverage effect from the increase in base revenues described above, the favorable effect of currency translation, and lower restructuring expenses. Base margins increased 10 basis points versus the prior year primarily due to the favorable operating leverage effect of the increase in base revenues, partially offset by a one-time licensing agreement settlement in the commercial construction business that favorably affected margins in 2010, and the negative impact of selling price versus material cost comparisons of 30 basis points.

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; and


•	hand wipes and cleaners for industrial applications.

In 2012, this segment primarily served the general industrial (33%), construction (14%) and maintenance, repair and operations, or "MRO", (18%) markets.

The results of operations for the Polymers & Fluids segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	1,230		$	1,250		$	1,001
Operating income	195			188			167
Margin %	15.8		%	15.0		%	16.7		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	(3.1	)%	(9.0	)%	(0.9	)%	4.7	%	12.4	%	1.2	%
Changes in variable margins and overhead costs	—		16.9		2.6		—		(9.2	)	(1.4	)
	(3.1	)	7.9		1.7		4.7		3.2		(0.2	)
Acquisitions and divestitures	6.1		1.2		(0.8	)	16.2		8.7		(0.9	)
Restructuring costs	—		(1.2	)	(0.2	)	—		(3.5	)	(0.6	)
Impairment of goodwill and intangibles	—		—		—		—		—		—
Translation	(4.6	)	(4.2	)	0.1		4.0		4.2		—
Other	—		—		—		—		—		—
	(1.6	)%	3.7	%	0.8	%	24.9	%	12.6	%	(1.7	)%

Operating Revenues

Revenues decreased 1.6% in 2012 versus 2011 primarily due to the negative effect of currency translation and a decrease in base revenues, partially offset by revenues from acquisitions. Worldwide base revenues for the polymers and hygiene businesses decreased 4.0% in 2012 versus 2011 primarily driven by a decrease in European sales, especially in Spain, and from exiting low margin business. Worldwide base revenues for the fluids business decreased 1.4% in 2012 versus 2011 primarily due to decreased sales in Europe, partially offset by modest growth in North America and Brazil. The increase in acquisition revenue was primarily due to the purchase of a manufacturer of advanced technology silicone materials in the second quarter of 2012 and a European specialty chemical business in the first quarter of 2012.

Revenues increased 24.9% in 2011 versus 2010 primarily due to revenues from acquisitions, an increase in base revenues and the favorable effect of currency translation. Acquisition revenue was primarily the result of the purchase of a Latin American fluids business and a European polymers business in the fourth quarter of 2010. End market demand was stronger in North America and Asia Pacific but weaker in Europe. Total base revenues for the polymers businesses increased 2.7% while the fluids businesses increased 6.2% in 2011 versus 2010. North American base revenues increased 7.4% and European base revenues increased 3.2%, while Asia-Pacific base revenues increased 5.0% primarily due to growth in China.

Operating Income

Operating income increased 3.7% in 2012 versus 2011 primarily due to improvements in variable margins and income from acquisitions, partially offset by the decrease in base revenues noted above, the unfavorable effect of currency translation, and higher restructuring expenses. Total base margins increased 170 basis points versus last year primarily due to changes in variable margins and overhead costs of 260 basis points, partially offset by the impact of the decrease in base revenues noted above. The positive impact from changes in variable margins and overhead costs was primarily due to the favorable impact of selling price versus material cost comparisons of 90 basis points, lower overhead costs of 110 basis points primarily due to the benefits of restructuring projects, and the loss on an international polymers contract that negatively impacted margins in 2011. Acquisitions diluted total operating margins by 80 basis points primarily due to the impact of intangible asset amortization from acquisitions made within the past year.

Operating income increased 12.6% in 2011 versus 2010 primarily due to the increase in base revenues, income from acquisitions and the favorable effect of currency translation, partially offset by higher operating costs and restructuring expenses. Base margins declined 20 basis points versus the prior year primarily due to the negative impact of selling price versus material cost comparisons of 90 basis points and a loss on an international polymers contract, partially offset by the positive operating leverage effect of the increase in base revenues. Acquisitions diluted total operating margins by 90 basis points primarily due to the impact of intangible asset amortization.

ALL OTHER

This segment includes all other operating segments.

In the All Other segment, products include:


•	equipment and related software for testing and measuring of materials, structures, gases and fluids;


•	plastic reclosable packaging for consumer food storage;


•	plastic consumables that multi-pack cans and bottles and related equipment;


•	plastic and metal fasteners and components for appliances;


•	foil, film and related equipment used to decorate consumer products;


•	product coding and marking equipment and related consumables; and


•	line integration, conveyor systems and line automation for the food and beverage industries.

In 2012, this segment primarily served the general industrial (27%), food and beverage (21%), consumer durables (12%), and food retail/service (4%) markets.

The results of operations for the All Other segment for 2012, 2011 and 2010 were as follows:



Dollars in millions	2012			2011			2010
Operating revenues	$	2,883		$	2,690		$	2,407
Operating income	521			489			395
Margin %	18.1		%	18.2		%	16.4		%

In 2012 and 2011, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:



	2012 Compared to 2011						2011 Compared to 2010
	% Increase (Decrease)				% Point Increase (Decrease)		% Increase (Decrease)				% Point Increase (Decrease)
	Operating Revenues		Operating Income		Operating Margins		Operating Revenues		Operating Income		Operating Margins
Base business:
Revenue change/Operating leverage	2.9	%	7.2	%	0.7	%	6.9	%	19.3	%	1.9	%
Changes in variable margins and overhead costs	—		4.9		0.9		—		1.1		0.2
	2.9		12.1		1.6		6.9		20.4		2.1
Acquisitions and divestitures	6.5		(0.9	)	(1.3	)	2.9		1.0		(0.3	)
Restructuring costs	—		(2.2	)	(0.4	)	—		—		—
Impairment of goodwill and intangibles	—		—		—		—		0.3		—
Translation	(2.2	)	(2.3	)	—		2.0		2.1		—
Other	—		—		—		—		—		—
	7.2	%	6.7	%	(0.1	)%	11.8	%	23.8	%	1.8	%

Operating Revenues

Revenues increased 7.2% in 2012 versus 2011 due to revenues from acquisitions and an increase in base business, partially offset by the unfavorable effect of currency translation. Acquisition revenue was primarily due to the first quarter 2012 purchase of a manufacturer of specialty devices used to measure the flow of gases and fluids. Base revenues increased 7.2% for the worldwide test and measurement businesses primarily due to increased equipment orders in North America, Europe, and China, and a one-time sale of equipment to a consumer electronics customer. Base revenues for the consumer packaging businesses were virtually flat as increased sales in both the global packaging solutions business and plastics and security business were offset by lower sales related to the reclosable packaging business and the worldwide foils and transfer ribbon business. Worldwide appliance base revenue growth was 8.0% primarily due to market penetration and improved customer demand in North America in 2012 versus 2011.

Revenues increased 11.8% in 2011 versus 2010 due to an increase in base business revenues, revenues from acquisitions and

the favorable effect of currency translation. Acquisition revenue was primarily due to the purchase of a test and measurement business in the fourth quarter of 2010, a heat transfer business in the second quarter of 2011, and a plastics and security business in the second quarter of 2010. Base business revenues for the test and measurement businesses increased 15.5% due to increased equipment orders both internationally and in North America. Growing worldwide product regulatory standards contributed to growth in these businesses. Base revenues for the consumer packaging business increased 4.7% in 2011 versus 2010 due to growth in the beverage packaging solutions, decorating equipment and marking and labels businesses. Base revenues for the worldwide appliance businesses declined 9.1% due to prolonged construction-associated weakness in the appliance end market.

Operating Income

Operating income increased 6.7% in 2012 versus 2011 primarily due to the growth in base revenues and improved variable margins, partially offset by the unfavorable impact of currency translation, higher restructuring expenses, and the loss of income due to divestitures partially offset by income from acquisitions. Total base margins increased 160 basis points primarily due to changes in variable margins and overhead costs of 90 basis points and the increase in base revenues noted above. The positive impact from changes in variable margins and overhead costs was primarily due to favorable selling price versus material cost comparisons of 40 basis points and other variable margin improvements of 40 basis points primarily due to product mix. Acquisitions (net of divestitures) diluted total operating margins by 130 basis points primarily due to amortization expense related to intangible assets from acquisitions made within the past year. Higher restructuring expenses decreased operating margins by 40 basis points due to increased cost reduction activities in 2012.

Operating income increased 23.8% in 2011 versus 2010 primarily due to the growth in base revenues. Base margins increased 210 basis points primarily due to the positive operating leverage effect from the increase in base revenues of 190 basis points and changes in variable margins and overhead costs of 20 basis points. The positive impact from changes in variable margins and overhead costs was primarily due to the benefits from past restructuring projects. Acquisitions (net of divestitures) diluted total operating margins by 30 basis points in 2011.

DECORATIVE SURFACES

The Decorative Surfaces business produces decorative high-pressure laminate surfacing materials for furniture, office and retail space, countertops, worktops and other applications. Principal end markets served include commercial, renovation and residential construction.

On August 15, 2012, the Company entered into the Investment Agreement to divest a 51% majority interest in its Decorative Surfaces segment to certain funds managed by CD&R. Under the terms of the Investment Agreement, the Company contributed the assets and stock of the Decorative Surfaces segment to a newly formed joint venture, Wilsonart. The transaction closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49% immediately following the close of the transaction. The Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest in Wilsonart using the equity method of accounting. Effective November 1, 2012, the Company made changes to its management reporting structure and Decorative Surfaces is no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

Historical operating results of Decorative Surfaces for 2012, 2011 and 2010 were as follows:



	For the Ten Months Ended October 31,			For the Twelve Months Ended December 31,
In millions	2012			2011			2010
Operating revenues	$	921		$	1,084		$	992
Operating income	122			132			117
Margin %	13.3		%	12.2		%	11.8		%

Revenues declined 15.0% and operating income decreased 7.5% in 2012 versus 2011 due to there being only ten months of operating results in 2012 versus twelve months of operating results in 2011 as the Company divested a 51% interest in the Decorative Surfaces segment on October 31, 2012.

Revenues increased 9.3% in 2011 versus 2010 primarily due to the increase in base revenues and the favorable effect of currency translation. Operating income increased 12.8% in 2011 versus 2010 primarily due to the increase in base revenues, lower restructuring expenses and the favorable effect of currency translation, partially offset by higher operating costs.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets increased to $288 million in 2012 from $255 million in 2011, due to newly acquired businesses, most notably a manufacturer of specialty devices used to measure the flow of gases and fluids in the All Other segment acquired in the beginning of 2012. Amortization of intangible assets increased in 2011 versus $207 million in 2010, due to intangible asset amortization for newly acquired businesses, most notably a North American automotive aftermarket business in the Transportation segment and a thermal processing and environmental equipment manufacturer in the Power Systems & Electronics segment.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

In 2012, the Company performed its annual goodwill and indefinite-lived intangible asset impairment assessment, which resulted in a goodwill impairment charge of approximately $1 million related to the pressure sensitive adhesives reporting unit in the Power Systems & Electronics segment and an intangible asset impairment charge of approximately $1 million related to an international reporting unit in the Food Equipment segment. There were no impairment charges in 2011. In 2010, there was an intangible asset impairment charge of approximately $1 million related to the test and measurement reporting unit in the All Other segment. See the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for further details of the impairment charges.

INTEREST EXPENSE

Interest expense increased to $214 million in 2012, which includes the full year impact of interest expense on the 3.375% notes and 4.875% notes issued in late August 2011 and the interest expense related to the 3.9% notes issued in late August 2012, versus $192 million in 2011. The increase was partially offset by lower interest expense on the 6.55% preferred debt securities which were fully paid on the first business day in 2012. Interest expense increased to $192 million in 2011 versus $175 million in 2010 primarily due to interest expense on the 3.375% notes and 4.875% notes issued in late August 2011. The weighted-average interest rate on the Company's commercial paper was 0.2% in 2012, 0.1% in 2011 and 0.2% in 2010.

GAIN ON SALE OF INTEREST IN DECORATIVE SURFACES

In the fourth quarter of 2012, the Company recorded a pre-tax gain of $933 million ($632 million after-tax) related to the sale of a 51% majority interest in the Decorative Surfaces segment. See the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

OTHER INCOME (EXPENSE)

Other income (expense) was income of $37 million in 2012 versus $54 million in 2011. This decrease was primarily due to an equity loss related to Wilsonart of $30 million in 2012, lower income from investments of $11 million (versus $17 million in 2011), and losses on foreign currency transactions of $11 million (versus $4 million in 2011), partially offset by gains on the disposal of operations and affiliates of $22 million (versus $2 million in 2011). See the Divestiture of Majority Interest in Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of the Wilsonart transaction.

Other income (expense) was income of $54 million in 2011 versus $10 million in 2010. This increase was primarily due to higher interest income of $40 million (versus $24 million in 2010), lower losses on foreign currency transactions of $4 million (versus $17 million in 2010) and gains on disposal of operations and affiliates of $2 million (versus losses of $8 million in 2010).

INCOME TAXES

The effective tax rate was 30.7% in 2012, 22.2% in 2011, and 30.5% in 2010. The effective tax rate for 2012 was unfavorably impacted by discrete tax charges totaling $36 million in the fourth quarter of 2012, which included $35 million for the settlement of an IRS tax audit for the years 2008-2009. The effective tax rate for 2011 was favorably impacted by the discrete non-cash tax benefit of $166 million in the first quarter of 2011 related to the decision in the Company’s favor by the Federal Court of Australia, Victoria with respect to a significant portion of the income tax deductions that had been challenged by the Australian Tax Office. The effective tax rate for 2010 was unfavorably impacted by the discrete tax charge of $22 million in the first quarter of 2010 related to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.

See the Income Taxes note in Item 8. Financial Statements and Supplementary Data for further details on these discrete tax adjustments and a reconciliation of the U.S. federal statutory rate to the effective tax rate.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations in 2012 of $2.5 billion ($5.27 per diluted share) was 23.7% higher than 2011 income of $2.0 billion ($4.08 per diluted share). Income from continuing operations in 2011 was 38.9% higher than 2010 income of $1.5 billion ($2.89 per diluted share).

FOREIGN CURRENCY

The strengthening of the U.S. Dollar against foreign currencies in 2012 versus 2011 decreased operating revenues by approximately $466 million in 2012 and decreased income from continuing operations by approximately $44 million ($0.09 per diluted share). The weakening of the U.S. Dollar against foreign currencies in 2011 versus 2010 increased operating revenues by approximately $460 million in 2011 and increased income from continuing operations by approximately $51 million ($0.10 per diluted share).

INCOME FROM DISCONTINUED OPERATIONS

Income from discontinued operations was $375 million in 2012 versus $54 million in 2011 primarily due to an after-tax gain of $372 million on the sale of the finishing business in the second quarter of 2012. Income from discontinued operations in 2011 was higher than 2010 income of $51 million primarily due to improved operating results in the held for sale finishing business partially offset by an after-tax loss of $3 million on the sale of a discontinued operation in 2011 versus an after-tax gain of $5 million on the sale of a discontinued operation in 2010. See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

2013 SEGMENT CHANGES

Effective January 1, 2013, the Company made certain changes in how its operations are reported to senior management in order to better align its portfolio of businesses with its enterprise-wide portfolio management initiative.

As a result of this reorganization, the Company's operations will be prospectively aggregated into the following eight external reportable segments: Industrial Packaging; Test & Measurement and Electronics; Automotive OEM; Polymers & Fluids; Food Equipment; Construction Products; Welding; and Specialty Products.

The significant changes resulting from this reorganization include the following:


•	Certain businesses within the former Transportation segment, primarily related to the automotive aftermarket business, will be reported in the Polymers & Fluids segment and the Transportation segment will be renamed Automotive OEM.


•	The Welding business, which was formerly reported in the Power Systems & Electronics segment, will be reported separately as the Welding segment.


•	The Electronics business, which was formerly reported in the Power Systems & Electronics segment, will be combined with the Test & Measurement business, which was formerly reported in the All Other segment, to form a new Test & Measurement and Electronics segment.


•	The All Other segment will be renamed Specialty Products.

The 2012 Annual Report on Form 10-K has not been restated for these changes in segment reporting. Results for 2012 and prior periods are reported on the basis under which the Company managed its business in 2012 and do not reflect the January 2013 reorganization described above.

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, to finance internal growth, to continue to pay dividends, and to fund small to medium-sized acquisitions.

The primary uses of liquidity are:


•	dividend payments – the Company’s dividend payout guidelines are 30% to 45% of the average of the last two years’ free operating cash flow;


•	acquisitions; and


•	share repurchases.

Cash Flow

The Company uses free operating cash flow to measure cash flow generated by operations that is available for dividends, acquisitions, share repurchases and debt repayment. The Company believes this non-GAAP financial measure is useful to investors in evaluating the Company's financial performance and measures the Company's ability to generate cash internally to fund Company initiatives. Free operating cash flow represents net cash provided by operating activities less additions to plant and equipment. Free operating cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies.

Summarized cash flow information for the three years ended December 31, 2012, 2011 and 2010 was as follows:



In millions	2012			2011			2010
Net cash provided by operating activities	$	2,072		$	1,956		$	1,488
Additions to plant and equipment	(382		)	(353		)	(288		)
Free operating cash flow	$	1,690		$	1,603		$	1,200

Cash dividends paid	$	(865	)	$	(680	)	$	(636	)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates	(723		)	(1,308		)	(497		)
Repurchases of common stock	(2,020		)	(950		)	(350		)
Proceeds from investments	281			37			27
Net proceeds from sale of discontinued operations	723			—			—
Proceeds from sale of operations and affiliates	1,120			22			63
Net proceeds (repayments) of debt	1,015			1,148			(190		)
Other	327			184			146
Effect of exchange rate changes on cash and equivalents	53			(64		)	77
Net increase (decrease) in cash and equivalents	$	1,601		$	(8	)	$	(160	)

On August 20, 2007, the Company’s Board of Directors authorized a stock repurchase program which provided for the buyback of up to $3.0 billion of the Company’s common stock over an open-ended period of time (the “2007 Program”). Under the 2007 Program, the Company made repurchases of approximately 16.3 million shares of its common stock at an average price of $53.51 per share and approximately 8.1 million shares of its common stock at an average price of $43.29 per share during the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, there were no authorized repurchases remaining under the 2007 Program.

On May 6, 2011, the Company’s Board of Directors authorized a new stock repurchase program which provides for the buyback of up to an additional $4.0 billion of the Company’s common stock over an open-ended period of time (the “2011 Program”). Under the 2011 Program, the Company made repurchases of approximately 1.8 million shares of its common stock at an average price of $43.20 per share during 2011 and approximately 35.5 million shares of its common stock at an average price of $56.93 per share during 2012. As of December 31, 2012, there was approximately $1.9 billion of authorized repurchases remaining under the 2011 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. ROIC is a non-GAAP financial measure that the Company believes 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 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 period and at the end of each quarter.

ROIC for the years ended December 31, 2012, 2011, and 2010 was as follows:



Dollars in millions	2012			2011			2010
Operating income	$	2,847		$	2,731		$	2,254
Taxes (30.7% for 2012, 22.2% for 2011, and 30.5% for 2010)	(874		)	(606		)	(687		)
Operating income after taxes	$	1,973		$	2,125		$	1,567
Invested Capital:
Trade receivables	$	2,742		$	2,819		$	2,582
Inventories	1,585