ITW-2014.09.30-10Q


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

FORM 10-Q
(Mark One)
     [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2014
 
 
 
OR
 
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from _______________ to _______________
 

Commission File Number: 1-4797

ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)

Delaware
36-1258310
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
3600 West Lake Avenue, Glenview, IL
60026-1215
(Address of principal executive offices)
(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]                        No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]                        No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X                                                                                                Accelerated filer  ___
Non-accelerated filer  ___ (Do not check if a smaller reporting company)                                                                                                                     Smaller reporting company  ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]                        No [X]

The number of shares of registrant’s common stock, $0.01 par value, outstanding at September 30, 2014: 390,933,626.



Part I – Financial Information
Item 1 – Financial Statements
Illinois Tool Works Inc. and Subsidiaries
Statement of Income (Unaudited)


 
Three Months Ended
 
Nine Months Ended
(In millions except per share amounts)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating Revenues
$
3,692

 
$
3,568

 
$
10,980

 
$
10,581

Cost of revenues
2,182

 
2,148

 
6,559

 
6,381

Selling, administrative, and research and development expenses
675

 
676

 
2,034

 
2,126

Amortization of intangible assets
60

 
64

 
182

 
186

Impairment of goodwill and other intangible assets
3

 
2

 
3

 
2

Operating Income
772

 
678

 
2,202

 
1,886

Interest expense
(68
)
 
(60
)
 
(196
)
 
(179
)
Other income (expense)
20

 
10

 
36

 
67

Income from Continuing Operations Before Income Taxes
724

 
628

 
2,042

 
1,774

Income Taxes
217

 
222

 
613

 
551

Income from Continuing Operations
507

 
406

 
1,429

 
1,223

Income from Discontinued Operations
24

 
46

 
1,067

 
48

Net Income
$
531

 
$
452

 
$
2,496

 
$
1,271

 
 
 
 
 
 
 
 
Income Per Share from Continuing Operations:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
0.91

 
$
3.51

 
$
2.72

Diluted
$
1.28

 
$
0.90

 
$
3.49

 
$
2.70

Income Per Share from Discontinued Operations:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.10

 
$
2.62

 
$
0.11

Diluted
$
0.06

 
$
0.10

 
$
2.60

 
$
0.11

Net Income Per Share:
 
 
 
 
 
 
 
Basic
$
1.35

 
$
1.01

 
$
6.14

 
$
2.83

Diluted
$
1.34

 
$
1.01

 
$
6.09

 
$
2.81

Cash Dividends Per Share:
 
 
 
 
 
 
 
Paid
$
0.42

 
$
0.38

 
$
1.26

 
$
0.76

Declared
$
0.49

 
$
0.42

 
$
1.33

 
$
1.18

 
 
 
 
 
 
 
 
Shares of Common Stock Outstanding During the Period:
 
 
 
 
 
 
 
Average
394.0

 
445.9

 
406.8

 
449.0

Average assuming dilution
396.8

 
448.9

 
409.7

 
452.1


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

2



Illinois Tool Works Inc. and Subsidiaries
Statement of Comprehensive Income (Unaudited)

 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net Income
$
531

 
$
452

 
$
2,496

 
$
1,271

Other Comprehensive Income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(515
)
 
242

 
(537
)
 
(159
)
Pension and other postretirement benefit adjustments, net of tax
8

 
38

 
5

 
158

Comprehensive Income
$
24

 
$
732

 
$
1,964

 
$
1,270


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


3


Illinois Tool Works Inc. and Subsidiaries
Statement of Financial Position (Unaudited)

(In millions)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
4,820

 
$
3,618

Trade receivables
2,519

 
2,365

Inventories
1,265

 
1,247

Deferred income taxes
266

 
384

Prepaid expenses and other current assets
282

 
366

Assets held for sale
—

 
1,836

Total current assets
9,152

 
9,816

 
 
 
 
Net plant and equipment
1,693

 
1,709

Goodwill
4,771

 
4,886

Intangible assets
1,825

 
1,999

Deferred income taxes
329

 
359

Other assets
1,258

 
1,197

 
$
19,028

 
$
19,966

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
1,496

 
$
3,551

Accounts payable
594

 
634

Accrued expenses
1,307

 
1,272

Cash dividends payable
190

 
181

Income taxes payable
277

 
69

Deferred income taxes
10

 
10

Liabilities held for sale
—

 
317

Total current liabilities
3,874

 
6,034

 
 
 
 
Noncurrent Liabilities:
 

 
 

Long-term debt
6,034

 
2,793

Deferred income taxes
418

 
507

Other liabilities
901

 
923

Total noncurrent liabilities
7,353

 
4,223

 
 
 
 
Stockholders’ Equity:
 

 
 

Common stock
6

 
6

Additional paid-in-capital
1,076

 
1,046

Income reinvested in the business
16,909

 
14,943

Common stock held in treasury
(10,047
)
 
(6,676
)
Accumulated other comprehensive income
(148
)
 
384

Noncontrolling interest
5

 
6

Total stockholders’ equity
7,801

 
9,709

 
$
19,028

 
$
19,966


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

4


Illinois Tool Works Inc. and Subsidiaries
Statement of Cash Flows (Unaudited)

 
Nine Months Ended
(In millions)
September 30,
 
2014
 
2013
Cash Provided by (Used for) Operating Activities:
 
 
 
Net income
$
2,496

 
$
1,271

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation
202

 
229

Amortization and impairment of goodwill and other intangible assets
185

 
250

Change in deferred income taxes
9

 
102

Provision for uncollectible accounts
7

 
5

(Income) loss from investments
(7
)
 
(10
)
(Gain) loss on sale of plant and equipment
2

 
(2
)
(Gain) loss on discontinued operations
(1,719
)
 
92

(Gain) loss on sale of operations and affiliates
7

 
5

Stock-based compensation expense
30

 
26

Gain on acquisition of controlling interest in an equity investment
—

 
(30
)
Other non-cash items, net
8

 
8

Change in assets and liabilities, net of acquisitions and divestitures:
 

 
 

(Increase) decrease in-
 

 
 

Trade receivables
(239
)
 
(215
)
Inventories
(62
)
 
(36
)
Prepaid expenses and other assets
(43
)
 
68

Increase (decrease) in-
 

 
 

Accounts payable
24

 
43

Accrued expenses and other liabilities
66

 
78

Income taxes
267

 
(47
)
Other, net
(75
)
 
(17
)
Net cash provided by operating activities
1,158

 
1,820

Cash Provided by (Used for) Investing Activities:
 

 
 

Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
(43
)
 
(367
)
Additions to plant and equipment
(272
)
 
(257
)
Proceeds from investments
23

 
18

Proceeds from sale of plant and equipment
21

 
23

Net proceeds from sales of discontinued operations
3,191

 
188

Proceeds from sales of operations and affiliates
13

 
2

Other, net
15

 
(4
)
Net cash provided by (used for) investing activities
2,948

 
(397
)
Cash Provided by (Used for) Financing Activities:
 

 
 

Cash dividends paid
(521
)
 
(342
)
Issuance of common stock
93

 
186

Repurchases of common stock
(3,516
)
 
(1,034
)
Net proceeds from (repayments of) debt with original maturities of three months or less
(1,172
)
 
68

Proceeds from debt with original maturities of more than three months
3,329

 
1

Repayments of debt with original maturities of more than three months
(801
)
 
(1
)
Excess tax benefits from stock-based compensation
22

 
20

Other, net
(13
)
 
—

Net cash provided by (used for) financing activities
(2,579
)
 
(1,102
)
Effect of Exchange Rate Changes on Cash and Equivalents
(325
)
 
(82
)
Cash and Equivalents:
 

 
 

Increase (decrease) during the period
1,202

 
239

Beginning of period
3,618

 
2,779

End of period
$
4,820

 
$
3,018

Supplementary Cash and Non-Cash Information:
 
 
 
Cash Paid During the Period for Interest
$
166

 
$
140

Cash Paid During the Period for Income Taxes, Net of Refunds
$
1,093

 
$
396

Liabilities Assumed from Acquisitions
$
5

 
$
165


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

5


Illinois Tool Works Inc. and Subsidiaries
Notes to Financial Statements (Unaudited)

(1)    Financial Statements

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2013 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

(2)    Discontinued Operations

The Company periodically reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as discontinued operations. The following summarizes the Company's discontinued operations.
The Company has restated the statement of income and the notes to financial statements to present the operating results of businesses discussed below as discontinued operations.
Third Quarter 2013 Discontinued Operations - In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for its Industrial Packaging segment. In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell its Industrial Packaging segment to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014, subject to customary post-close adjustments.
In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business previously included in the Construction Products segment and a specialty coatings business previously included in the Polymers & Fluids segment. These businesses were classified as held for sale beginning in the third quarter of 2013. The specialty coatings business was sold in the fourth quarter of 2013. The construction distribution business was sold in the second quarter of 2014.
First Quarter 2013 Discontinued Operations - In the first quarter of 2013, the Company committed to plans for the divestiture of two transportation related businesses and a machine components business previously included in the Specialty Products segment, two construction distribution businesses previously included in the Construction Products segment, and a chemical manufacturing business previously included in the Polymers & Fluids segment. These businesses were classified as held for sale beginning in the first quarter of 2013.
The Company also reclassified certain previously divested businesses as discontinued operations in the first quarter of 2013. These included a consumer packaging business that was previously included in the Specialty Products segment, a packaging distribution business which was previously included in the former Industrial Packaging segment, and a welding manufacturing business previously included in the Welding segment.
In the second quarter of 2013, the Company divested one of the held for sale transportation related businesses, the machine components business, and the chemical manufacturing business. In the third quarter of 2013, the Company divested the second held for sale transportation related business. In the fourth quarter of 2013, the Company divested one construction distribution business and the remaining construction distribution business was sold in the second quarter of 2014.


6


Results of the discontinued operations for the three and nine months ended September 30, 2014 and 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
—

 
$
657

 
$
798

 
$
2,157

 
 
 
 
 
 
 
 
Income before income taxes
$
10

 
$
57

 
$
1,806

 
$
107

Income tax (expense) benefit
14

 
(11
)
 
(739
)
 
(59
)
Income from discontinued operations
$
24

 
$
46

 
$
1,067

 
$
48


Income before income taxes from discontinued operations was income of $1.8 billion and $107 million for the nine months ended September 30, 2014 and 2013, respectively. The income in the first nine months of 2014 included the pre-tax gain of $1.7 billion ($1.1 billion after-tax) on the sale of the Industrial Packaging segment recorded in the second quarter of 2014. Income tax expense in the first nine months of 2014 includes $175 million of U.S. income tax expense related to the repatriation of approximately $1.3 billion of international proceeds from the sale of the Industrial Packaging segment. The income in the first nine months of 2013 included a $42 million goodwill impairment charge recorded in connection with the anticipated sale of one of the transportation related businesses discussed above and loss reserves on assets held for sale of $74 million.

There were no businesses classified as held for sale as of September 30, 2014. As of December 31, 2013, the assets and liabilities of the Industrial Packaging business and the two construction distribution businesses discussed above were included in assets and liabilities held for sale in the statement of financial position, as follows:
(In millions)
 
December 31, 2013

Trade receivables
$
352

Inventories
244

Net plant and equipment
305

Goodwill and intangible assets
844

Other
91

Total assets held for sale
$
1,836

 
 
Accounts payable
$
87

Accrued expenses
139

Other
91

Total liabilities held for sale
$
317


(3)    Gain on Acquisition of Controlling Interest in Equity Investment

On January 31, 2013, the Company acquired the controlling interest of an existing consumer packaging business in the Specialty Products segment previously accounted for under the equity method. The Company recorded a pre-tax gain of $30 million in Other income (expense) in the first quarter of 2013 as a result of remeasuring the Company's existing equity interest to fair value by determining the implied equity value using a Level 3 valuation method.

(4)    Income Taxes

In the third quarter of 2013, the Company recorded a discrete tax charge of $40 million related to the tax treatment of intercompany financing transactions that impact the taxability of foreign earnings. The components of the effective tax rate for the three and nine months ended September 30, 2014 and 2013 were as follows:

7


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Tax rate based on estimated annual effective tax rate
30.0
%
 
29.0
%
 
30.0
%
 
28.8
%
Discrete tax adjustment
—
%
 
6.4
%
 
—
%
 
2.3
%
Effective tax rate
30.0
%
 
35.4
%
 
30.0
%
 
31.1
%

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service ("IRS"), Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. The Company has recorded its best estimate of the potential exposure for these issues. The Company believes it is reasonably possible that the amount of the Company’s unrecognized tax benefits will not change materially within the next twelve months.

On February 18, 2014, the Company received a Notice of Deficiency (“NOD”) from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case will proceed to court. Although the outcome of this process cannot be predicted with certainty, the Company believes it will be successful in defending its position.

(5)    Inventories

Inventories as of September 30, 2014 and December 31, 2013 were as follows:
(In millions) 
September 30, 2014
 
December 31, 2013
Raw material
$
445

 
$
445

Work-in-process
150

 
145

Finished goods
670

 
657

Total inventories
$
1,265

 
$
1,247


(6)    Goodwill and Intangible Assets

Goodwill represents the excess cost over fair value of the net assets of purchased businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. The Company performs an annual impairment assessment of goodwill and intangible assets with indefinite lives based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

When performing its annual impairment assessment, the Company evaluates the goodwill assigned to each of its reporting units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The Company uses various valuation techniques to determine the fair value of its reporting units, including discounting estimated future cash flows based on a detailed cash flow forecast prepared by the relevant reporting unit and market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit's goodwill.

The Company's indefinite-lived intangible assets consist of trademarks and brands. The estimated fair values of these intangible assets are determined based on a Level 3 valuation method using a relief-of-royalty income approach derived from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible asset.

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2014 and 2013, which resulted in no goodwill impairment charges and indefinite-lived intangible asset impairment charges of $3 million and $2 million, respectively. The charges in the third quarter of 2014 related to certain brands in the Polymers & Fluids and Test & Measurement and Electronics segments. The charges in the third quarter of 2013 related to a brand in the Test & Measurement and Electronics segment.

8



A summary of indefinite-lived intangible assets that were adjusted to fair value and the related impairment charges included in the statement of income in the third quarter of 2014 and 2013 is as follows:
(In millions)
Book Value
Fair Value
Total Impairment Charges
2014
$
11

$
8

$
3

2013
42

40

2


(7)    Retirement Plans and Postretirement Benefits

Pension and other postretirement benefit costs related to both continuing and discontinued operations for the three and nine months ended September 30, 2014 and 2013, were as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
Pension
 
Other Postretirement Benefits
 
Pension
 
Other Postretirement Benefits
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
20

 
$
21

 
$
3

 
$
3

 
$
60

 
$
67

 
$
8

 
$
9

Interest cost
26

 
26

 
5

 
6

 
78

 
74

 
17

 
18

Expected return on plan assets
(40
)
 
(39
)
 
(7
)
 
(5
)
 
(119
)
 
(117
)
 
(19
)
 
(16
)
Amortization of actuarial (gain) loss
12

 
14

 
—

 
—

 
36

 
52

 
(3
)
 
—

Amortization of prior service cost
—

 
—

 
1

 
—

 
—

 
—

 
1

 
1

Settlement/curtailment (gain) loss
—

 
10

 
—

 
—

 
2

 
44

 
(9
)
 
—

Net periodic benefit (income) cost
$
18

 
$
32

 
$
2

 
$
4

 
$
57

 
$
120

 
$
(5
)
 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts were included in the statement of income as follows:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Continuing operations
$
18

 
$
27

 
$
2

 
$
3

 
$
52

 
$
112

 
$
4

 
$
10

Discontinued operations
—

 
5

 
—

 
1

 
5

 
8

 
(9
)
 
2

Net periodic benefit (income) cost
$
18

 
$
32

 
$
2

 
$
4

 
$
57

 
$
120

 
$
(5
)
 
$
12


The Company recognized settlement charges of $34 million in the second quarter of 2013 and $8 million in the third quarter of 2013 primarily due to higher lump sum pension payments related to the exit of employees of the former Decorative Surfaces segment from the Company's U.S. primary pension plan. The settlement charges were included in Income from Continuing Operations.

In addition, the Company recognized a $9 million curtailment gain on the U.S. primary postretirement plan in the second quarter of 2014 and a $2 million curtailment charge on the U.S. primary pension plan in the third quarter of 2013 related to the Company's sale of the Industrial Packaging business and the reclassification of the Industrial Packaging business to discontinued operations. These curtailment charges were included in Income from Discontinued Operations.

The Company expects to contribute approximately $136 million to its pension plans and $7 million to its other postretirement plans in 2014. As of September 30, 2014, contributions of $117 million to pension plans and $5 million to other postretirement plans have been made.

(8)    Debt

Short-term debt represents obligations with a maturity date of one year or less and are stated at cost which approximates fair value. Short-term debt also includes current maturities of long-term debt. Short-term debt as of September 30, 2014 and December 31, 2013 included €750 million of 5.25% Euro notes due October 1, 2014, which were repaid on the due date, and

9


commercial paper of $503 million and $1.7 billion, respectively. In addition, at December 31, 2013, short-term debt included $800 million of 5.15% redeemable notes due April 1, 2014, which were repaid on the due date.

Long-term debt represents obligations with a maturity date greater than one year, and excludes current maturities that have been reclassified to short-term debt. In February 2014, the Company issued $650 million of 0.9% notes due February 25, 2017 at 99.861% of face value, $650 million of 1.95% notes due March 1, 2019 at 99.871% of face value, and $700 million of 3.5% notes due March 1, 2024 at 99.648% of face value. Net proceeds from the February 2014 debt issuance were used to repay commercial paper.
 
In May 2014, the Company issued €500 million of 1.75% Euro notes due May 20, 2022 at 99.16% of face value and €500 million of 3.0% Euro notes due May 19, 2034 at 98.089% of face value. The carrying values of the Euro notes were $626 million and $620 million, respectively, as of September 30, 2014. Net proceeds from the May 2014 debt issuances were used for general corporate purposes. The Company designated the €1.0 billion of Euro notes as a hedge of a portion of its net investment in Euro-denominated foreign operations to reduce foreign currency risk associated with the investment in these operations. Changes in the value of this debt resulting from fluctuations in the Euro to U.S. Dollar exchange rate have been recorded as foreign currency translation adjustments within Accumulated other comprehensive income. The unrealized gain recorded in Accumulated other comprehensive income related to the net investment hedge was $105 million and $106 million for the three and nine months end September 30, 2014, respectively.

The Company has committed lines of credit of $2.5 billion in the U.S. to support its commercial paper program. In May 2014, the Company amended its financial covenants within these agreements. The previous financial covenant, limiting total debt to total capitalization, was replaced with a minimum interest coverage ratio. As of September 30, 2014, the Company was in compliance with this covenant and there were no amounts outstanding under these credit agreements.

The approximate fair value and related carrying value of the Company's total long-term debt, including current maturities of long-term debt presented as short-term debt, as of September 30, 2014 and December 31, 2013 were as follows:

(In millions)
 
September 30, 2014
 
December 31, 2013
Fair value
$
7,261

 
$
4,670

Carrying value
6,985

 
4,627

 
The approximate fair values of the Company's long-term debt, including current maturities, were based on a Level 2 valuation model, using observable inputs which included market rates for comparable instruments for the respective periods.

(9)    Accumulated Other Comprehensive Income

The following table summarizes changes in Accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013:

10


 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
359

 
$
12

 
$
384

 
$
293

 
 
 
 
 
 
 
 
Foreign currency translation adjustments during the period
(514
)
 
241

 
(404
)
 
(166
)
Foreign currency translation adjustments reclassified to income
(1
)
 
1

 
(133
)
 
7

Total foreign currency translation adjustments
(515
)
 
242

 
(537
)
 
(159
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments during the period
(2
)
 
36

 
(43
)
 
147

Pension and other postretirement benefit adjustments reclassified to income
13

 
22

 
42

 
99

Income taxes
(3
)
 
(20
)
 
6

 
(88
)
Total pension and other postretirement benefit adjustments
8

 
38

 
5

 
158

 
 
 
 
 
 
 
 
Ending balance
$
(148
)
 
$
292

 
$
(148
)
 
$
292


Foreign currency translation adjustments reclassified to income are primarily related to the disposal of certain discontinued operations. Pension and other postretirement benefit adjustments reclassified to income primarily relate to the amortization of actuarial (gain) loss and prior service cost, and recognition of deferred actuarial losses related to plan settlements in net periodic benefit cost. Additionally, $6 million and $4 million of deferred actuarial losses were reclassified to income in the second quarter of 2014 and 2013, respectively, related to the disposal of certain discontinued operations. Refer to the Retirement Plans and Postretirement Benefits, and the Discontinued Operations notes for additional information.

The ending balance of accumulated other comprehensive income as of September 30, 2014 and 2013 consisted of cumulative translation adjustment income of $137 million and $708 million, respectively, and unrecognized pension and other postretirement benefits costs, net of tax, of $285 million and $416 million, respectively.

(10)    Segment Information

The Company has seven reportable segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenues and operating income for the Company's segments.



11


Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction

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.

The discussion of operating results should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Enterprise Strategy

During 2012, the Company embarked on an Enterprise Strategy that includes three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.

Portfolio Management - The Company's portfolio management initiative aims to construct a business portfolio that leverages the Company’s differentiated business model and growth potential. As part of this initiative, the Company reviews its operations for businesses that may no longer be aligned with its long-term objectives. As a result, the Company's divestiture activity increased in 2012, 2013 and 2014. With the sale of the Company's former Industrial Packaging segment on May 1, 2014, the divestiture element of the Company's portfolio management initiative is essentially complete. The Company has historically acquired businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. Going forward, the Company will emphasize organic growth and focus on acquisitions with sustainable differentiation and growth potential. Refer to the Discontinued Operations note in Item 1 - Financial Statements for discussion of the Company’s discontinued operations.

Another integral aspect of the Company's 80/20 business process and portfolio management initiative is the focus on product line and customer base simplification. Product line and customer base simplification focuses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. Product line and customer base simplification is a core element of the Company's 80/20 business process and is key to improving the Company's long-term operating and financial performance.

Business Structure Simplification - The business structure simplification initiative simplifies the Company's organizational model and adds scale to the Company's operating divisions in order to increase organic revenue growth, enhance global competitiveness and drive operational efficiencies. This initiative focuses on reducing the number of the Company's operating divisions and increasing 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.

Strategic Sourcing - The Company's strategic sourcing initiative focuses on building sourcing capability in order to leverage purchasing scale to enhance profitability and global competitiveness. It incorporates both enterprise-level and segment-level purchasing that cross the Company's many businesses. This initiative is transforming sourcing into a core strategic function in the Company.

12



Discontinued Operations

The Company periodically reviews its operations for businesses which may no longer be aligned with its enterprise initiatives and long-term objectives. As such, the Company may commit to a plan to exit or dispose of certain businesses and present them as discontinued operations.

In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013.
On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging segment to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014, subject to customary post-close adjustments.

In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business previously included in the Construction Products segment and a specialty coatings business previously included in the Polymers & Fluids segment. The construction distribution and specialty coatings businesses were classified as held for sale beginning in the third quarter of 2013.
In the first quarter of 2013, the Company committed to plans for the divestiture of two transportation related businesses and a machine components business previously included in the Specialty Products segment, two construction distribution businesses previously included in the Construction Products segment, and a chemical manufacturing business previously included in the Polymers & Fluids segment. These businesses were classified as held for sale beginning in the first quarter of 2013.

The businesses discussed above, as well as certain previously divested businesses, are reported as discontinued operations in the statement of income. As of the second quarter of 2014, the Company has completed the divestiture of all of the businesses previously classified as discontinued operations. Refer to the Discontinued Operations note in Item 1 - Financial Statements for discussion of the Company’s discontinued operations.

Consolidated Results of Operations

The Company’s consolidated results of operations for the third quarter and year-to-date periods of 2014 and 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
3,692

 
$
3,568

 
$
10,980

 
$
10,581

Operating income
772

 
678

 
2,202

 
1,886

Operating margin %
20.9
%
 
19.0
%
 
20.1
%
 
17.8
%


13


In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
3.5
 %
 
7.9
 %
 
0.8
%
 
2.7
%
 
6.6
%
 
0.7
 %
Changes in variable margins & overhead costs
—
 %
 
5.9
 %
 
1.1
%
 
—
%
 
8.7
%
 
1.5
 %
 
3.5
 %
 
13.8
 %
 
1.9
%
 
2.7
%
 
15.3
%
 
2.2
 %
Acquisitions and divestitures
(0.2
)%
 
(0.1
)%
 
—
%
 
0.8
%
 
0.2
%
 
(0.1
)%
Restructuring costs
—
 %
 
—
 %
 
—
%
 
—
%
 
0.9
%
 
0.2
 %
Impairment of goodwill & intangibles
—
 %
 
(0.1
)%
 
—
%
 
—
%
 
—
%
 
—
 %
Translation
0.2
 %
 
0.2
 %
 
—
%
 
0.3
%
 
0.4
%
 
—
 %
Total
3.5
 %
 
13.8
 %
 
1.9
%
 
3.8
%
 
16.8
%
 
2.3
 %

Operating Revenues

Operating revenues increased 3.5% and 3.8% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to an increase in organic revenues. Total organic revenues increased 3.5% and 2.7% in the third quarter and year-to-date periods, respectively. Product line and customer base simplification activities associated with the portfolio managment component of the Company's enterprise strategy reduced organic revenue growth by approximately one percentage point. North American organic revenues increased 3.7% and 2.0% in the third quarter and year-to-date periods, respectively, as growth in the Automotive OEM, Food Equipment and Welding segments was partially offset by a decline in revenues in Polymers & Fluids due to ongoing product line and customer base simplification for each of the respective periods. International organic revenues grew 3.4% and 3.8% in the third quarter and year-to-date periods. European organic revenues increased 3.1% and 2.8% in the third quarter and year-to-date periods, respectively, primarily driven by the Automotive OEM, Food Equipment and Test & Measurement and Electronics segments, partially offset by Welding and Polymers & Fluids. Asia Pacific organic revenues increased 4.7% and 6.1% in the respective periods, primarily due to growth in Automotive OEM in China and Construction Products in Australia. Acquisitions included the purchase of a European consumer packaging equipment business and a Chinese food equipment business in the third quarter of 2013.

Operating Income

Operating income increased 13.8% and 16.8% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs. Total base operating margins increased 190 and 220 basis points in the third quarter and year-to-date periods, respectively, due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased base margins by 110 and 150 basis points in the third quarter and year-to-date periods, respectively. The benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, contributed 120 basis points of operating margin improvement in each respective period, and base margins were favorably impacted by 30 basis points in the year-to-date period due to a pension settlement charge in the second quarter of 2013 tied primarily to higher lump sum pension payments related to the exit of employees of the former Decorative Surfaces segment. Lower restructuring expenses in the year-to-date period favorably impacted total operating margins by 20 basis points.

14



Results of Operations by Segment

Total operating revenues are as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Automotive OEM
$
631

 
$
589

 
$
1,970

 
$
1,792

Test & Measurement and Electronics
586

 
555

 
1,663

 
1,617

Food Equipment
575

 
542

 
1,623

 
1,500

Polymers & Fluids
490

 
504

 
1,475

 
1,521

Welding
459

 
438

 
1,392

 
1,390

Construction Products
445

 
440

 
1,305

 
1,295

Specialty Products
513

 
510

 
1,573

 
1,497

Intersegment revenues
(7
)
 
(10
)
 
(21
)
 
(31
)
Total Operating Revenues
$
3,692

 
$
3,568

 
$
10,980

 
$
10,581


Total operating income is as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Automotive OEM
$
148

 
$
124

 
$
462

 
$
367

Test & Measurement and Electronics
110

 
91

 
258

 
233

Food Equipment
133

 
108

 
333

 
278

Polymers & Fluids
99

 
91

 
278

 
259

Welding
120

 
111

 
363

 
361

Construction Products
84

 
71

 
226

 
180

Specialty Products
109

 
108

 
348

 
317

Unallocated
(31
)
 
(26
)
 
(66
)
 
(109
)
Total Operating Income
$
772

 
$
678

 
$
2,202

 
$
1,886


AUTOMOTIVE OEM

Businesses in this segment produce components and fasteners for automotive-related applications.

In the Automotive OEM segment, products and services include:

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

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

The results of operations for the Automotive OEM segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:


15


 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
631

 
$
589

 
$
1,970

 
$
1,792

Operating income
148

 
124

 
462

 
367

Operating margin %
23.4
%
 
21.1
%
 
23.5
%
 
20.5
%

In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
7.6
 %
 
13.4
 %
 
1.1
%
 
9.4
%
 
17.1
%
 
1.4
%
Changes in variable margins & overhead costs
—
 %
 
3.9
 %
 
0.8
%
 
—
%
 
5.4
%
 
1.0
%
 
7.6
 %
 
17.3
 %
 
1.9
%
 
9.4
%
 
22.5
%
 
2.4
%
Acquisitions and divestitures
(0.1
)%
 
—
 %
 
—
%
 
—
%
 
—
%
 
—
%
Restructuring costs
—
 %
 
2.1
 %
 
0.4
%
 
—
%
 
2.5
%
 
0.5
%
Impairment of goodwill & intangibles
—
 %
 
—
 %
 
—
%
 
—
%
 
—
%
 
—
%
Translation
(0.4
)%
 
(0.5
)%
 
—
%
 
0.5
%
 
0.8
%
 
0.1
%
Total
7.1
 %
 
18.9
 %
 
2.3
%
 
9.9
%
 
25.8
%
 
3.0
%

Operating Revenues

Operating revenues increased 7.1% and 9.9% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to the increase in organic revenues. As a result of product innovation and penetration gains, worldwide automotive organic revenue grew 7.6% and 9.4% for the third quarter and year-to-date periods, respectively, exceeding worldwide auto builds, which grew 2% and 4% over the respective periods. North American automotive organic revenues grew 7.7% and 8.7% for the third quarter and year-to-date periods, respectively, as North American auto builds increased 8% and 5% over the respective periods. European organic revenue growth of 8.5% and 10.5% for the third quarter and year-to-date periods, respectively, exceeded a decline in auto builds of 1% in the third quarter and growth of 4% in the year-to-date period. Organic revenues for Asia Pacific increased 9.3% and 14.1% in the third quarter and year-to-date periods, respectively, primarily due to organic revenue increases in China of 11.8% and 20.2%, respectively, which exceeded Chinese auto build growth of 8% and 9% versus the respective prior year periods.

Operating Income

Operating income increased 18.9% and 25.8% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to higher organic revenues, changes in variable margins and overhead costs and lower restructuring expenses. Total base operating margins increased 190 and 240 basis points for the third quarter and year-to-date periods, respectively, due to the positive operating leverage effect of the increase in organic revenues of 110 and 140 basis points in each respective period and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 80 and 100 basis points in the third quarter and year-to-date periods, respectively, primarily driven by the benefits of the Company's enterprise initiatives, partially offset by unfavorable selling price versus material cost comparisons of 20 and 30 basis points in each respective period. Lower restructuring expenses increased total operating margins by 40 and 50 basis points in each respective period.

16



TEST & MEASUREMENT AND ELECTRONICS

Businesses in this segment produce equipment, consumables, and related software for testing and measuring of materials and structures, and equipment and consumables used in the production of electronic subassemblies and microelectronics.

In the Test & Measurement and Electronics segment, products include:

•
equipment, consumables, and related software for testing and measuring of materials, structures, gases and fluids;
•
electronic assembly equipment and related consumable solder materials;
•
electronic components and component packaging;
•
static control equipment and consumables used for contamination control in clean room environments; and
•
pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.

This segment primarily serves the general industrial market, which includes industrial capital goods, energy, and other general industrial markets, electronics, automotive original equipment manufacturers and tiers, and consumer durables markets.

The results of operations for the Test & Measurement and Electronics segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:

 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
586

 
$
555

 
$
1,663

 
$
1,617

Operating income
110

 
91

 
258

 
233

Operating margin %
18.7
%
 
16.3
%
 
15.5
%
 
14.4
%

In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
5.2
%
 
14.5
 %
 
1.4
%
 
2.2
 %
 
6.8
 %
 
0.6
 %
Changes in variable margins & overhead costs
—
%
 
3.9
 %
 
0.6
%
 
—
 %
 
4.2
 %
 
0.6
 %
 
5.2
%
 
18.4
 %
 
2.0
%
 
2.2
 %
 
11.0
 %
 
1.2
 %
Acquisitions and divestitures
—
%
 
(0.1
)%
 
—
%
 
(0.1
)%
 
0.1
 %
 
—
 %
Restructuring costs
—
%
 
1.4
 %
 
0.2
%
 
—
 %
 
(1.9
)%
 
(0.3
)%
Impairment of goodwill & intangibles
—
%
 
0.7
 %
 
0.1
%
 
—
 %
 
0.3
 %
 
—
 %
Translation
0.4
%
 
0.7
 %
 
0.1
%
 
0.7
 %
 
1.2
 %
 
0.2
 %
Total
5.6
%
 
21.1
 %
 
2.4
%
 
2.8
 %
 
10.7
 %
 
1.1
 %

17



Operating Revenues
 
Operating revenues increased 5.6% and 2.8% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to the increase in organic revenues and the favorable effect of currency translation. Organic revenues for the worldwide test and measurement businesses increased 7.7% and 4.1% in the third quarter and year-to-date periods, respectively, primarily due to improved worldwide demand led by strength in the Instron business in the third quarter. Worldwide electronics organic revenues increased 2.7% in the third quarter and were flat in the year-to-date period, as the electronic assembly business grew 5.1% in the third quarter. Organic revenues for the remaining electronics businesses increased 1.3% and 2.1% in the third quarter and year-to-date periods, respectively.

Operating Income

Operating income increased 21.1% and 10.7% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs. Total base operating margins increased 200 and 120 basis points in the third quarter and year-to-date periods, respectively, due to the positive operating leverage effect of the increase in organic revenues and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 60 basis points in each respective period, primarily due to benefits resulting from the Company's enterprise initiatives, partially offset by higher operating expenses driven by a discrete claim recovery in the third quarter of 2013 that did not recur in 2014. Lower restructuring expenses increased total operating margins by 20 basis points in the third quarter while higher restructuring expenses in the year-to-date period diluted total operating margins by 30 basis points. The Company performed its annual impairment testing for indefinite-lived intangible assets in the third quarter of 2014. See the Goodwill and Intangible Assets note in Item 1 - Financial Statements for further discussion of the Company's annual impairment assessment.

FOOD EQUIPMENT

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

In the Food Equipment segment, products and services include:

•
warewashing equipment;
•
cooking equipment, including ovens, ranges and broilers;
•
refrigeration equipment, including refrigerators, freezers and prep tables;
•
food processing equipment, including slicers, mixers and scales;
•
kitchen exhaust, ventilation and pollution control systems; and
•
food equipment service, maintenance and repair.

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

The results of operations for the Food Equipment segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:

 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
575

 
$
542

 
$
1,623

 
$
1,500

Operating income
133

 
108

 
333

 
278

Operating margin %
23.1
%
 
19.9
%
 
20.5
%
 
18.5
%


18


In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
5.3
%
 
11.8
%
 
1.2
%
 
4.7
%
 
11.4
%
 
1.2
 %
Changes in variable margins & overhead costs
—
%
 
7.8
%
 
1.5
%
 
—
%
 
4.7
%
 
0.8
 %
 
5.3
%
 
19.6
%
 
2.7
%
 
4.7
%
 
16.1
%
 
2.0
 %
Acquisitions and divestitures
—
%
 
—
%
 
—
%
 
2.4
%
 
1.3
%
 
(0.2
)%
Restructuring costs
—
%
 
2.3
%
 
0.4
%
 
—
%
 
0.9
%
 
0.2
 %
Impairment of goodwill & intangibles
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
 %
Translation
0.7
%
 
1.2
%
 
0.1
%
 
1.1
%
 
1.6
%
 
—
 %
Total
6.0
%
 
23.1
%
 
3.2
%
 
8.2
%
 
19.9
%
 
2.0
 %

Operating Revenues

Operating revenues increased 6.0% and 8.2% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to the increase in organic revenues and the favorable effect of currency translation. In addition, the year-to-date period benefited from an increase in revenues from the acquisition of a Chinese food equipment business in the third quarter of 2013. North American organic revenues increased 5.5% and 5.1% in the third quarter and year-to-date periods, respectively, as equipment revenues increased 5.8% and 5.1%, respectively, primarily due to growth in the refrigeration and cooking businesses and product innovation. North American service revenues increased 3.5% and 4.3%, respectively. International organic revenues increased 5.6% and 4.6% in the third quarter and year-to-date periods, respectively, as equipment revenues increased 7.7% and 6.8%, respectively, primarily due to growth in warewash and refrigeration businesses and product innovation. International service organic revenues grew 0.8% and 0.1% in the third quarter and year-to-date periods, respectively.

Operating Income

Operating income increased 23.1% and 19.9% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs. Total base operating margins increased 270 and 200 basis points in the third quarter and year-to-date periods, respectively, due to the positive operating leverage effect of the increase in organic revenues of 120 basis points in each respective period and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 150 and 80 basis points in the third quarter and year-to-date periods, respectively, primarily due to the benefits of the Company's enterprise initiatives and favorable selling price versus material cost comparisons of 30 and 20 basis points in each respective period. Lower restructuring expenses increased total operating margins by 40 and 20 basis points in each respective period. Acquisitions diluted total operating margins by 20 basis points in the year-to-date period primarily due to amortization expense related to intangible assets.


19


POLYMERS & FLUIDS

Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, janitorial and hygiene products, and fluids and polymers for auto aftermarket maintenance and appearance.

In the Polymers & Fluids segment, products include:

•
adhesives for industrial, construction and consumer purposes;
•
chemical fluids which clean or add lubrication to machines;
•
epoxy and resin-based coating products for industrial applications;
•
hand wipes and cleaners for industrial applications;
•
fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
•
fillers and putties for auto body repair; and
•
polyester coatings and patch and repair products for the marine industry.

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

The results of operations for the Polymers & Fluids segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
490

 
$
504

 
$
1,475

 
$
1,521

Operating income
99

 
91

 
278

 
259

Operating margin %
20.2
%
 
18.1
%
 
18.8
%
 
17.1
%

In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
(2.0
)%
 
(4.9
)%
 
(0.5
)%
 
(1.8
)%
 
(4.7
)%
 
(0.5
)%
Changes in variable margins & overhead costs
—
 %
 
15.0
 %
 
2.8
 %
 
—
 %
 
12.0
 %
 
2.1
 %
 
(2.0
)%
 
10.1
 %
 
2.3
 %
 
(1.8
)%
 
7.3
 %
 
1.6
 %
Acquisitions and divestitures
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Restructuring costs
—
 %
 
(0.1
)%
 
—
 %
 
—
 %
 
0.9
 %
 
0.2
 %
Impairment of goodwill & intangibles
—
 %
 
(1.1
)%
 
(0.2
)%
 
—
 %
 
(0.4
)%
 
(0.1
)%
Translation
(0.8
)%
 
(0.7
)%
 
—
 %
 
(1.2
)%
 
(0.9
)%
 
—
 %
Total
(2.8
)%
 
8.2
 %
 
2.1
 %
 
(3.0
)%
 
6.9
 %
 
1.7
 %


20


Operating Revenues

Operating revenues decreased 2.8% and 3.0% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 due to a decrease in organic revenues and the unfavorable effect of currency translation. Ongoing product line and customer base simplification activities negatively impacted organic revenues by approximately two percentage points for the third quarter and year-to-date periods. Organic revenues for the automotive aftermarket businesses declined 4.0% and 1.0% in the third quarter and year-to-date periods, respectively. Organic revenues for the polymers businesses declined 0.8% and 5.0% for the respective periods. Organic revenues for the fluids and hygiene businesses decreased 0.7% in the third quarter, primarily due to weakness in Europe, and were flat in the year-to-date period.

Operating Income

Operating income increased 8.2% and 6.9% in the third quarter and year-to-date periods of 2014, respectively, versus 2013 primarily due to changes in variable margins and overhead costs, partially offset by declines in organic revenues. In addition, the year-to-date period was favorably impacted by lower restructuring expenses. Total base operating margins increased 230 and 160 basis points, respectively, primarily due to changes in variable margins and overhead costs, partially offset by the negative operating leverage effect of the decrease in organic revenues. The changes in variable margins and overhead costs increased base margins by 280 and 210 basis points in the third quarter and year-to-date periods, respectively, primarily due to lower operating expenses driven by the benefits of the Company's enterprise initiatives. Lower restructuring expenses increased total operating margins by 20 basis points in the year-to-date period. The Company performed its annual impairment testing for indefinite-lived intangible assets in the third quarter of 2014 and recorded an intangible asset impairment charge that negatively impacted total operating margins by 20 basis points in the third quarter. See the Goodwill and Intangible Assets note in Item 1 - Financial Statements for further discussion of the Company's annual impairment assessment.
WELDING

Businesses in this segment produce arc welding equipment, consumables and accessories for a wide array of industrial and commercial applications.

In the Welding segment, products include:

•
arc welding equipment;
•
metal arc welding consumables and related accessories; and
•
metal jacketing and other insulation products.

This segment primarily serves the general industrial market, which includes the energy, fabrication, industrial capital goods and other general industrial markets, maintenance, repair and operations or “MRO”, and construction markets.

The results of operations for the Welding segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
459

 
$
438

 
$
1,392

 
$
1,390

Operating income
120

 
111

 
363

 
361

Operating margin %
26.2
%
 
25.4
%
 
26.1
%
 
26.0
%


21


In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
5.0
 %
 
8.2
 %
 
0.8
%
 
0.3
 %
 
0.4
 %
 
—
 %
Changes in variable margins & overhead costs
—
 %
 
—
 %
 
—
%
 
—
 %
 
1.3
 %
 
0.4
 %
 
5.0
 %
 
8.2
 %
 
0.8
%
 
0.3
 %
 
1.7
 %
 
0.4
 %
Acquisitions and divestitures
—
 %
 
—
 %
 
—
%
 
0.4
 %
 
—
 %
 
(0.1
)%
Restructuring costs
—
 %
 
0.1
 %
 
—
%
 
—
 %
 
(0.7
)%
 
(0.2
)%
Impairment of goodwill & intangibles
—
 %
 
—
 %
 
—
%
 
—
 %
 
—
 %
 
—
 %
Translation
(0.3
)%
 
(0.3
)%
 
—
%
 
(0.5
)%
 
(0.5
)%
 
—
 %
Total
4.7
 %
 
8.0
 %
 
0.8
%
 
0.2
 %
 
0.5
 %
 
0.1
 %

Operating Revenues

Operating revenues increased 4.7% in the third quarter of 2014 versus 2013 due to an increase in organic revenues, partially offset by the unfavorable effect of currency translation. Operating revenues increased 0.2% in the year-to-date period due to increases in organic and acquisition revenues, partially offset by the unfavorable effect of currency translation. Organic revenues increased 5.0% and 0.3% in the third quarter and year-to-date periods, respectively, due to increased North American equipment sales. North American welding organic revenues increased 9.5% and 4.7% in the third quarter and year-to-date periods, respectively, primarily due to strength in equipment sales to general industrial and commercial customers and growth in the oil and gas business. International organic revenues decreased 6.8% and 10.5% in the third quarter and year-to-date periods, respectively, primarily due to a delay in China oil and gas pipeline projects and continued product line and customer base simplification activity in Europe. The increase from acquisition revenues in the year-to-date period was due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

Operating Income

Operating income increased 8.0% in the third quarter of 2014 versus 2013 primarily due to higher organic revenues. Operating income increased 0.5% in the year-to-date period due to changes in variable margins and overhead costs and higher organic revenues, partially offset by higher restructuring expenses and the unfavorable effect of currency translation. Total base operating margins increased 80 and 40 basis points in the third quarter and year-to-date periods, respectively. Changes in variable margins and overhead costs increased base margins by 40 basis points in the year-to-date period, resulting primarily from the benefits of the Company's enterprise initiatives and favorable selling price versus material cost comparisons of 50 basis points, partially offset by higher overhead expenses. Higher restructuring expenses diluted total operating margins by 20 basis points in the year-to-date period.


22


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.

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

The results of operations for the Construction Products segment for the third quarter and year-to-date periods of 2014 and 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
(Dollars in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
445

 
$
440

 
$
1,305

 
$
1,295

Operating income
84

 
71

 
226

 
180

Operating margin %
18.9
%
 
16.2
%
 
17.4
%
 
13.9
%

In the third quarter and year-to-date periods of 2014, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
% Increase (Decrease)
 
% Increase (Decrease)
 
% Point Increase (Decrease)
 
Operating Revenues
 
Operating Income
 
Operating Margins
 
Operating Revenues
 
Operating Income
 
Operating Margins
Base business (organic):
 
 
 
 
 
 
 
 
 
 
 
Revenue change/Operating leverage
2.1
 %
 
5.8
 %
 
0.6
 %
 
2.3
 %
 
7.3
 %
 
0.7
 %
Changes in variable margins & overhead costs
—
 %
 
17.0
 %
 
2.7
 %
 
—
 %
 
16.3
 %
 
2.2
 %
 
2.1
 %
 
22.8
 %
 
3.3
 %
 
2.3
 %
 
23.6
 %
 
2.9
 %
Acquisitions and divestitures
(1.4
)%
 
(1.3
)%
 
—
 %
 
(0.8
)%
 
(0.7
)%
 
—
 %
Restructuring costs
—
 %
 
(3.8
)%
 
(0.6
)%
 
—
 %
 
4.2
 %
 
0.7
 %
Impairment of goodwill & intangibles
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Translation
0.4
 %
 
0.5
 %
 
—
 %
 
(0.7
)%
 
(1.5
)%
 
(0.1
)%
Total
1.1
 %
 
18.2
 %
 
2.7
 %
 
0.8
 %
 
25.6
 %
 
3.5
 %

Operating Revenues

Operating revenues increased 1.1% in the third quarter of 2014 versus 2013 due to an increase in organic revenues and the favorable effect of currency translation, partially offset by divestitures. Operating revenues increased 0.8% in the year-to-date period due to an increase in organic revenues, partially offset by divestitures and the unfavorable effect of currency translation. International organic revenues increased 2.3% and 3.6% in the third quarter and year-to-date periods, respectively. Asia Pacific organic revenues increased 6.3% and 9.2% in the respective periods, primarily due to strong end market growth across all sectors in Australia and New Zealand. European organic revenues decreased 1.2% and 1.4% in the respective periods, primarily due to product line and customer base simplification activities. North American organic revenues increased 2.0% and 0.2% in the third quarter and year-to-date periods, respectively, as U.S. residential organic revenues increased 2.9% and 1.5%,

23


respectively. U.S. renovation organic rev