Table of Contents

 
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, 2009
        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 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       
 
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                 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       
 
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 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       
 
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 aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2009 was approximately $15,100,000,000, based on the New York Stock Exchange closing sales price as of June 30, 2009.
 
Shares of Common Stock outstanding at January 31, 2010: 502,408,086.
 
Documents Incorporated by Reference
 
     
2010 Proxy Statement for Annual Meeting of Stockholders to be held on May 7, 2010
  Part III
 


TABLE OF CONTENTS

PART I
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9A(T). Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accounting Fees and Services
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
EX-10.J
EX-21
EX-23
EX-24
EX-31
EX-32
EX-99.A
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT


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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 approximately 840 operations in 57 countries. These 840 businesses are internally reported as 60 operating segments to senior management. The Company’s 60 operating segments have been aggregated into the following eight 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:
 
  •  metal and plastic components, fasteners and assemblies for automobiles and light trucks;
  •  fluids and polymers for auto aftermarket maintenance and appearance;
  •  fillers and putties for auto body repair;
  •  polyester coatings and patch and repair products for the marine industry; and
  •  truck remanufacturing and related parts and service.
 
Industrial Packaging:  Businesses in this segment produce steel, plastic and paper products and equipment used for bundling, shipping and protecting goods in transit.
 
In the Industrial Packaging segment, products include:
 
  •  steel and plastic strapping and related tools and equipment;
  •  plastic stretch film and related equipment;
  •  paper and plastic products that protect goods in transit; and
  •  metal jacketing and other insulation products.
 
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.
 
Power Systems & Electronics:  Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.
 
In the Power Systems & Electronics segment, products include:
 
  •  arc welding equipment;
  •  metal arc welding consumables and related accessories;
  •  metal solder materials for PC board fabrication;
  •  equipment and services for microelectronics assembly;
  •  electronic components and component packaging; and
  •  airport ground support equipment.
 
Construction Products:  Businesses in this segment produce tools, fasteners and other products for construction applications.
 
In the Construction Products segment, products include:
 
  •  fasteners and related fastening tools for wood and metal applications;


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  •  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 fluid, and hygiene products.
 
In the Polymers & Fluids segment, products include:
 
  •  adhesives for industrial, construction and consumer purposes;
  •  chemical fluids that clean or add lubrication to machines;
  •  epoxy and resin-based coating products for industrial applications;
  •  hand wipes and cleaners for industrial applications; and
  •  pressure-sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.
 
Decorative Surfaces:  Businesses in this segment produce decorative surfacing materials for furniture, office and retail space, countertops, flooring and other applications.
 
In the Decorative Surfaces segment, products include:
 
  •  decorative high-pressure laminate for furniture, office and retail space, and countertops;
  •  high-pressure laminate flooring; and
  •  high-pressure laminate worktops.
 
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 and structures;
  •  plastic reclosable packaging for consumer food storage;
  •  plastic reclosable bags for storage of clothes and home goods;
  •  plastic consumables that multi-pack cans and bottles and related equipment;
  •  plastic fasteners and components for appliances, furniture and industrial uses;
  •  metal fasteners and components for appliances and industrial applications;
  •  swabs, wipes and mats for clean room usage;
  •  foil, film and related equipment used to decorate consumer products;
  •  product coding and marking equipment and related consumables;
  •  paint spray and adhesive dispensing equipment;
  •  static and contamination control equipment; and
  •  line integration, conveyor systems and line automation for the food and beverage industries.
 
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 840 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.


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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.
 
Discontinued Operations
 
In August 2008, the Company’s Board of Directors authorized the divestiture of the Click Commerce industrial software business which was previously reported in the All Other segment. In the second quarter of 2009, the Company completed the sale of the Click Commerce business.
 
In 2006, the Company divested a construction business. In 2007, the Company divested an automotive machinery business and a consumer packaging business. In the fourth quarter of 2007, the Company classified an automotive components business and a second consumer packaging business as held for sale. The second consumer packaging business was sold in 2008. The Company completed the divestiture of the automotive components business in 2009.
 
Additionally, in August 2008, the Company’s Board of Directors authorized the divestiture of the Decorative Surfaces segment which was subsequently classified as a discontinued operation. In May 2009, the Company’s Board of Directors rescinded its earlier resolution to divest the Decorative Surfaces segment and, accordingly, all periods presented have been restated to present the Decorative Surfaces segment as a continuing operation.
 
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 of the segments 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 eight segments by percentage of revenue are as follows:
 
                                                                         
                      Power
                               
    Transpor-
    Industrial
    Food
    Systems &
    Construction
    Polymers
    Decorative
    All
    Total
 
End Markets Served   tation     Packaging     Equipment     Electronics     Products     & Fluids     Surfaces     Other     Company  
 
                                                                         
Commercial Construction
    1 %     8 %     %     6 %     26 %     11 %     55 %     1 %     10 %
                                                                         
Residential Construction
          2             1       47       2       15             7  
                                                                         
Renovation Construction
                            24       1       28             5  
                                                                         
General Industrial
    3       29       1       46       1       31       1       25       18  
                                                                         
Automotive OEM/Tiers
    56                   2             4             4       10  
                                                                         
Automotive Aftermarket
    28                   1             7             1       5  
                                                                         
Food Institutional/Restaurant
                47                   1                   6  
                                                                         
Food Service
                32                   2             2       5  
                                                                         
Food Retail
          1       15                               3       3  
                                                                         
Consumer Durables
    1       2             1             3             14       3  
                                                                         
Food & Beverage
          12       1                   3             16       5  
                                                                         
Electronics
          1             16             5             5       4  
                                                                         
Primary Metals
          20             1       1       2             1       3  
                                                                         
Other
    11       25       4       26       1       28       1       28       16  
                                                                         
                                                                         
      100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
                                                                         
 
The Company’s businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.


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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 segment as of December 31, 2009 and 2008 is summarized as follows:
 
                 
In Thousands
  2009     2008  
 
Transportation
  $ 231,000     $ 237,000  
Industrial Packaging
    123,000       158,000  
Food Equipment
    179,000       220,000  
Power Systems & Electronics
    129,000       124,000  
Construction Products
    24,000       32,000  
Polymers & Fluids
    73,000       81,000  
Decorative Surfaces
    19,000       28,000  
All Other
    341,000       351,000  
                 
Total
  $ 1,119,000     $ 1,231,000  
                 
 
Backlog orders scheduled for shipment beyond calendar year 2010 were not material as of December 31, 2009.
 
The information set forth below is applicable to all industry segments of the Company unless otherwise noted:
 
Competition
 
With approximately 840 business units operating in 57 countries, the Company has a wide diversity of products in a myriad of markets, many of which are fragmented, and we encounter a wide variety of competitors that vary by product line, end market and geographic area. Our 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 our segments generally has several main competitors and numerous smaller ones in most of their end markets and geographic areas. In addition, our Decorative Surfaces and Power Systems & Electronics segments each has one global competitor and numerous smaller regional competitors.
 
In virtually all segments, we compete on the basis of product innovation, product quality, brand preference, delivery service and price. Technical capability is also a competitive factor in most of our segments. We believe that for each of our segments, our primary competitive advantages derive from our decentralized operating structure, which creates a strong focus on end markets and customers at the local level, enabling our businesses to respond rapidly to market dynamics. This structure enables our business units to drive operational excellence utilizing our 80/20 business process and leverages our product innovation capabilities. We also believe that our global footprint is a competitive advantage in many of our markets, especially in our Transportation and Decorative Surfaces segments.
 
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
 
The Company’s growth has resulted from developing new and improved products, broadening the application of established products, continuing efforts to improve and develop new methods, processes and equipment, and from acquisitions. 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


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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 $198,536,000 in 2009, $212,658,000 in 2008 and $197,595,000 in 2007.
 
The Company owns approximately 3,800 unexpired United States patents covering articles, methods and machines. Many counterparts of these patents have also been obtained in various foreign countries. In addition, the Company has approximately 1,700 applications for patents pending in the United States Patent Office, but there is no assurance that any patent 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. Nevertheless, the Company 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. 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.
 
Trademarks
 
Many of the Company’s products are sold under various owned or licensed trademarks, which are important to the Company. Among the most significant are: ITW, Acme, Alpine, Anaerobicos, Angleboard, Apex, Arborite, Ark-Les, Avery Berkel, Avery Weigh-Tronix, Bernard, Betaprint, Binks, Buehler, Buildex, Bycotest, Chemtronics, Covid, Cullen, Deltar, Densit, Devcon, DeVilbiss, Dymon, Dynatec, Dynatruss, Electrocal, Euromere, Evercoat, E-Z Anchor, Fastex, Filtertek, Foilmark, Forte, Foster, Franklynn, Futura Coatings, Gamko, Gema, GSE, Gymcol, Hartness, Hi-Cone, Hobart, Instron, Intellibuild, Keps, Kester, Krafft, Lachenmeier, Lebo, Loma, LPS, Luvex, Magna, Magnaflux, Meyercord, Miller, Mima, Minigrip, Nexus, NorDen, Nylex, Orbitalum, Orgapack, Pacific Polymers, Paktron, Paslode, Peerless, Permatex, Plexus, Polymark, Polyrey, Pro/Mark, Pryda, QMI, QSA, Quipp, Racor, Ramset, Ransburg, Red Head, Resopal, Reyflex, Riderite, Rippey, Rockwell, Rocol, Sentinel, Shakeproof, Shore, Signode, Simco, Solplas, Sonotech, Space Bag, Spectrum, Speedline, Spiroid, SPIT, Spray Nine, Stero, Stokvis, Strapex, Tapcon, Teks, Tempil, Tenax, Texwipe, Traulsen, Tregaskiss, Truswal Systems, Trymer, Valeron, Versachem, Vitronics Soltec, Vulcan, Wachs, WERCS, Wilsonart, Wynn’s and Zip-Pak.
 
Environmental
 
The Company believes that its 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 59,000 persons as of December 31, 2009 and considers its employee relations to be excellent.
 
International
 
The Company’s international operations include subsidiaries and joint ventures in 56 foreign countries on six continents. These operations serve such end markets as construction, general industrial, automotive, food institutional/restaurant and service, food and beverage, electronics, consumer durables, primary metals, and others on a worldwide basis. The Company’s revenues from sales to customers outside the United States were approximately 57% of revenues in 2009, 58% of revenues in 2008 and 55% of revenues in 2007.


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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 our international operations are described under “Item 1A. Risk Factors.”
 
Executive Officers
 
Executive Officers of the Company as of February 26, 2010 were as follows:
 
             
Name
 
Office
  Age
 
Sharon M. Brady
  Senior Vice President, Human Resources     59  
Robert E. Brunner
  Executive Vice President     52  
Timothy J. Gardner
  Executive Vice President     54  
Philip M. Gresh, Jr.
  Executive Vice President     61  
Thomas J. Hansen
  Vice Chairman     61  
Craig A. Hindman
  Executive Vice President     55  
Ronald D. Kropp
  Senior Vice President & Chief Financial Officer     44  
Roland M. Martel
  Executive Vice President     55  
Steven L. Martindale
  Executive Vice President     53  
David C. Parry
  Executive Vice President     56  
E. Scott Santi
  Vice Chairman     48  
Randall J. Scheuneman
  Vice President & Chief Accounting Officer     42  
David B. Speer
  Chairman & Chief Executive Officer     58  
Allan C. Sutherland
  Senior Vice President, Taxes & Investments     46  
Juan Valls
  Executive Vice President     48  
Jane L. Warner
  Executive Vice President     63  
James H. Wooten, Jr.
  Senior Vice President, General Counsel & Corporate Secretary     61  
 
The executive officers of the Company serve at the pleasure of the Board of Directors. Except for Mses. Brady and Warner and Messrs. Brunner, Gardner, Kropp, Martel, Martindale, Parry, Scheuneman, Valls and Wooten, each of the foregoing officers has been employed by the Company in various elected executive capacities for more than five years. Ms. Brady was elected Senior Vice President of Human Resources in 2006. From 1998 to 2006, she was Vice President and Chief Human Resource Officer of Snap-On Inc. Ms. Warner was elected Executive Vice President in 2007. Prior to joining the Company in 2005 as President of worldwide finishing, she was President of Plexus Systems and a Vice President of EDS. Mr. Brunner was elected Executive Vice President in 2006. He joined the Company in 1980 and has held various management positions with the automotive fasteners businesses. 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. Kropp was elected Senior Vice President & Chief Financial Officer in 2006. He joined the Company in 1993. He has held various financial management positions and was appointed as Vice President and Controller, Financial Reporting in 2002 and was designated Principal Accounting Officer from 2005 to 2009. Mr. Martel was elected Executive Vice President in 2006. He joined the Company in 1994 and has held various management positions in the automotive and metal components businesses. Mr. Martindale was elected Executive Vice President in 2008. Prior to joining the Company in 2005 as President of test and measurement, he was Chief Financial Officer and Chief Operating Officer of Instron. Mr. Parry was elected Executive Vice President in 2006. He joined the Company in 1994 and has held various management positions in the performance polymers businesses. Mr. Scheuneman was


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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. Valls was elected Executive Vice President in 2007. Prior to this, he was Vice President and General Manager of ITW Delfast International. He joined the Company in 1989 and has held various management positions in the European automotive businesses. Mr. Wooten was elected Senior Vice President, General Counsel & Corporate Secretary in 2006. He joined the Company in 1988 and has held positions of increasing responsibility in the legal department.
 
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 it. 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; and
  •  Corporate Governance Guidelines.
 
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.
 
A downturn or further downturn in the markets served by the Company could materially adversely affect results.
 
Substantially all of the Company’s businesses directly or indirectly serve markets that were adversely impacted by the recent global economic crisis. Although improvement is expected, the timing of any economic recovery in the markets we serve remains uncertain. A further downturn in one or more of our significant markets could have a material adverse effect on the Company’s business, results of operations or financial condition.
 
The global nature of our operations subjects the Company to political and economic risks that could adversely affect our business, results of operations or financial condition.
 
The Company currently operates in 57 countries. In 2009, approximately 57% of the Company’s revenues were generated from sales to customers outside of the United States. 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 our global operations include:
 
  •  fluctuation in currency exchange rates;
  •  limitations on ownership and on repatriation of earnings;


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  •  transportation delays and interruptions;
  •  political, social and economic instability and disruptions;
  •  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 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.
 
Our acquisition of businesses could negatively impact our profitability and return on invested capital.
 
As part of our business strategy, we acquire businesses in the ordinary course. Our acquisitions involve a number of risks and financial, accounting, managerial and operational challenges, including the following, any of which could adversely affect our growth and profitability:
 
  •  Any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable.
  •  Acquisitions could cause our financial results to differ from our expectations in any given fiscal period, or over the long term.
  •  Acquisition-related earnings charges could adversely impact operating results, particularly in light of the adoption of the new accounting guidance related to business combinations, which applies to any acquisition completed in 2009 or later. Under the new accounting guidance, we are required to expense a number of acquisition-related items that under previous accounting rules did not impact our income statement.
  •  Acquisitions could place unanticipated demands on our management, operational resources and financial and internal control systems.
  •  We may assume by acquisition 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 our expenses or adversely affect our financial position.
  •  As a result of our acquisitions, we have recorded significant goodwill and other identifiable intangible assets on our balance sheet. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets.
 
Our defined benefit pension plans are subject to financial market risks that could adversely affect our results of operations and cash flows.
 
The performance of the financial markets and interest rates impact our funding obligations under our 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 our funding obligations and adversely impact our results of operations and cash flows.
 
A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating income.
 
Although the Company’s financial results are reported in U.S. dollars, a significant portion of our 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 we generate revenues and incur expenses. Significant long-term fluctuations in


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relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability and financial condition.
 
Further diminished credit availability could adversely impact our ability to readily obtain financing.
 
A further deterioration in world financial markets and decreases in credit availability could make it more difficult for us to obtain financing when desired or cause the cost of financing to increase.
 
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 impaired.
 
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.
 
An unfavorable environment for making acquisitions may adversely affect the Company’s growth rate.
 
The Company has historically followed a strategy of identifying and acquiring businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. There can be no assurance that the Company will be able to continue to find suitable businesses to purchase or that it will be able to acquire such businesses on acceptable terms. If the Company is unsuccessful in its efforts, its growth rate could be adversely affected.
 
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 subject to the allocation of income among 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.


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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 the ability to obtain suitable or adequate 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, that may be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “guidance,” and other similar words, including, without limitation, statements regarding 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 anticipated improvement of worldwide end markets in 2010, the adequacy of internally generated funds and credit facilities, the meeting of dividend payout objectives, the ability to fund debt service obligations, payments under guarantees, the Company’s portion of future benefit payments related to pension and postretirement benefits, expected contributions to defined benefit plans, the availability of additional financing, 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 includes 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.
 
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.


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ITEM 2.  Properties
 
As of December 31, 2009, the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:
 
                                 
    Number
                   
    Of
    Floor Space  
    Properties     Owned     Leased     Total  
          (In millions of square feet)  
 
Transportation
    105       4.5       2.7       7.2  
Industrial Packaging
    117       8.1       3.7       11.8  
Food Equipment
    41       3.6       0.6       4.2  
Power Systems & Electronics
    83       5.2       1.3       6.5  
Construction Products
    86       2.9       1.6       4.5  
Polymers & Fluids
    90       1.6       1.5       3.1  
Decorative Surfaces
    12       4.1             4.1  
All Other
    183       6.7       3.1       9.8  
Corporate
    38       3.0       0.3       3.3  
                                 
Total
    755       39.7       14.8       54.5  
                                 
 
The principal plants outside of the U.S. are in Australia, Belgium, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Ireland, 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. Productive 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 productive 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 businesses.
 
ITEM 3.  Legal Proceedings
 
Not applicable.
 
ITEM 4.  Submission of Matters to a Vote of Security Holders
 
Not applicable.


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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 2009 and 2008. Quarterly market price and dividend data for 2009 and 2008 were as shown below:
 
                         
    Market Price
    Dividends
 
    Per Share     Declared
 
    High     Low     Per Share  
 
2009:
                       
Fourth quarter
  $ 51.16     $ 40.77     $ .31  
Third quarter
    44.91       34.47       .31  
Second quarter
    38.97       29.69       .31  
First quarter
    37.47       25.60       .31  
                         
2008:
                       
Fourth quarter
  $ 43.90     $ 28.50     $ .31  
Third quarter
    51.00       41.95       .31  
Second quarter
    55.59       46.22       .28  
First quarter
    53.98       45.02       .28  
 
 
The approximate number of holders of record of common stock as of January 29, 2010 was 10,431. This number does not include beneficial owners of the Company’s securities held in the name of nominees.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
(PERFORMANCE GRAPH)
 
* $100 Invested on 12/31/04 in stock or index funds, including reinvestment of dividends. Fiscal year ending December 31.


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ITEM 6.  Selected Financial Data
 
                                         
In Thousands except per share amounts
  2009     2008     2007     2006     2005  
 
Operating revenues
  $ 13,877,068     $ 17,100,341     $ 16,110,267     $ 13,788,346     $ 12,540,360  
Income from continuing operations
    969,490       1,691,093       1,827,691       1,680,551       1,480,435  
Income from continuing operations per common share:
                                       
Basic
    1.94       3.26       3.31       2.97       2.59  
Diluted
    1.93       3.24       3.29       2.95       2.57  
Total assets at year-end
    16,081,984       15,203,551       15,525,862       13,880,439       11,445,643  
Long-term debt at year-end
    2,914,874       1,247,883       1,888,839       955,610       958,321  
Cash dividends declared per common share
    1.24       1.18       .98       .75       .61  
 
Certain reclassifications of prior years’ data have been made to conform with current year reporting.
 
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. Refer to the Acquisitions note in Item 8. Financial Statements and Supplementary Data for discussion of the change in accounting principle.
 
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. Refer to the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for discussion of the change in accounting principle.
 
On January 1, 2008, the Company adopted new accounting guidance related to defined benefit plans which required the Company to change its measurement date to correspond with the Company’s fiscal year-end. The Company previously used a September 30 measurement date. Refer to the Pension and Other Postretirement Benefits note in Item 8. Financial Statements and Supplementary Data for discussion of the effect of the change in accounting principle.
 
On January 1, 2007, the Company adopted new accounting guidance that addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease. Refer to the Investments note in Item 8. Financial Statements and Supplementary Data for discussion of the change in accounting principle.
 
On December 31, 2006, the Company adopted new accounting guidance that requires employers to recognize the overfunded or underfunded status of defined benefit pension and other postretirement plans as an asset or liability in its statement of financial position and previously unrecognized changes in that funded status through accumulated other comprehensive income.
 
Information on the comparability of results is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


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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 approximately 840 operations in 57 countries. These 840 businesses are internally reported as 60 operating segments to senior management. The Company’s 60 operating segments have been aggregated into the following eight external reportable segments: Transportation; Industrial Packaging; Food Equipment; Power Systems & Electronics; Construction Products; Polymers & Fluids; Decorative Surfaces; and All Other.
 
In August 2008, the Company’s Board of Directors authorized the divestiture of the Decorative Surfaces segment which was subsequently classified as a discontinued operation. In May 2009, the Company’s Board of Directors rescinded its earlier resolution to divest the Decorative Surfaces segment and, accordingly, all periods presented have been restated to present the Decorative Surfaces segment as a continuing operation.
 
Due to the large number of diverse businesses and the Company’s highly decentralized operating style, 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.
 
The results of each segment are analyzed by identifying the effects of changes in the results of the base businesses, newly acquired companies, restructuring costs, goodwill and intangible 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 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.
 
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 840 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.


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CONSOLIDATED RESULTS OF OPERATIONS
 
The Company’s consolidated results of operations for 2009, 2008 and 2007 are summarized as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 13,877,068     $ 17,100,341     $ 16,110,267  
Operating income
    1,385,979       2,501,286       2,627,766  
Margin %
    10.0 %     14.6 %     16.3 %
 
In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (18.4 )%     (51.8 )%     (6.0 )%     (2.6 )%     (6.0 )%     (0.6 )%
Changes in variable margins and overhead costs
          21.2       3.8             (1.7 )     (0.3 )
                                                 
      (18.4 )     (30.6 )     (2.2 )     (2.6 )     (7.7 )     (0.9 )
                                                 
Acquisitions and divestitures
    4.2             (0.6 )     6.0       1.4       (0.7 )
Restructuring costs
          (4.1 )     (0.7 )           (1.0 )     (0.2 )
Impairment of goodwill and intangibles
          (4.1 )     (0.7 )                  
Translation
    (4.8 )     (5.8 )     (0.4 )     2.8       2.5        
Other
    0.2                   (0.1 )           0.1  
                                                 
      (18.8 )%     (44.6 )%     (4.6 )%     6.1 %     (4.8 )%     (1.7 )%
                                                 
 
Operating Revenues
 
Revenues decreased 18.8% in 2009 versus 2008 primarily due to lower base revenues and the unfavorable effect of currency translation, mainly due to the strengthening of the dollar, partially offset by revenues from acquisitions. Total base revenues declined 18.4% in 2009 versus 2008. Base revenues declined 21.6% and 14.9% for North American and international businesses, respectively, as both were adversely affected by the global recession and weak industrial production in related end markets throughout 2009. The Company anticipates modest expansion in a variety of worldwide end markets in 2010.
 
Revenues increased 6.1% in 2008 over 2007 primarily due to revenues from acquisitions and the favorable effect of currency translation in the first three quarters of 2008, due to a weakened dollar, partially offset by a decrease in base revenues. During 2008, 50 businesses were acquired worldwide with international businesses representing approximately 39% of the annualized acquired revenues. Base revenues decreased in 2008 versus 2007 due to a 4.8% decline in North American base revenues and flat international base revenues. North American base businesses were adversely affected by steep declines in macro economic trends and related weak industrial production, and a continued decline in the construction and automotive markets. In addition, there was a significant decrease in international industrial production in the fourth quarter of 2008.
 
Operating Income
 
Operating income declined 44.6% in 2009 versus 2008 due to the decline in base revenues, the negative effect of currency translation, increased restructuring charges and increased goodwill and intangible


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impairment charges. In 2009, the Company recorded impairment charges of $90.0 million and $15.6 million against goodwill and intangibles, respectively. The goodwill and intangible impairments were primarily related to new reporting units which were acquired over the last few years before the recent economic downturn. These charges were driven primarily by lower current forecasts compared to the expected forecasts at the time the reporting units were acquired. The higher restructuring charges reflect the Company’s efforts to reduce costs in response to weak economic conditions. Improvements in base variable margins and lower overhead costs increased base margins 3.8% in 2009, as the cumulative benefits of restructuring projects began to be realized and selling price versus material cost comparisons were favorable. Total margins declined by 4.6% in 2009 primarily due to the declines in base revenues, restructuring charges and the goodwill and intangible impairment charges.
 
Operating income in 2008 declined 4.8% versus 2007 due to the decline in base revenues and increased restructuring charges, partially offset by the positive effect of currency translation and income from acquisitions. Total margins declined 1.7% primarily due to the declines in base revenues and the lower margins of acquired companies including acquisition-related expenses, which reduced overall margins. Restructuring projects and other cost control measures were implemented in 2008 to better align operating businesses with declining economic conditions, which helped keep overhead expenses favorable to 2007 and partially offset declines in variable margins.
 
TRANSPORTATION
 
Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.
 
In the Transportation segment, products and services include:
 
  •  metal and plastic components, fasteners and assemblies for automobiles and light trucks;
  •  fluids and polymers for auto aftermarket maintenance and appearance;
  •  fillers and putties for auto body repair;
  •  polyester coatings and patch and repair products for the marine industry; and
  •  truck remanufacturing and related parts and service.
 
In 2009, this segment primarily served the automotive original equipment manufacturers and tiers (56%) and automotive aftermarket (28%) markets.
 
The results of operations for the Transportation segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 2,070,938     $ 2,347,366     $ 2,214,413  
Operating income
    153,674       276,900       372,567  
Margin %
    7.4 %     11.8 %     16.8 %


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In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (15.8 )%     (49.2 )%     (4.7 )%     (8.5 )%     (19.6 )%     (2.0 )%
Changes in variable margins and overhead costs
          23.1       3.3             (7.8 )     (1.4 )
                                                 
                                                 
      (15.8 )     (26.1 )     (1.4 )     (8.5 )     (27.4 )     (3.4 )
                                                 
Acquisitions and divestitures
    9.1       (0.5 )     (1.0 )     10.9       0.2       (1.4 )
Restructuring costs
          (4.0 )     (0.6 )           (1.9 )     (0.4 )
Impairment of goodwill and intangibles
          (5.2 )     (0.7 )                  
Translation
    (5.1 )     (8.6 )     (0.7 )     3.6       3.5       0.2  
Other
          (0.1 )                 (0.1 )      
                                                 
      (11.8 )%     (44.5 )%     (4.4 )%     6.0 %     (25.7 )%     (5.0 )%
                                                 
 
Operating Revenues
 
Revenues declined 11.8% in 2009 versus 2008 due to declines in base revenues and the unfavorable effect of currency translation. Acquisition revenues partially mitigated the base revenue decrease and was primarily related to the purchase of a North American truck remanufacturing and related parts and service business in the third quarter of 2008. Worldwide automotive base revenues declined 19.4% for the full year. North American automotive base revenues declined 24.0% in 2009 due to a decline in car builds of 32%. International automotive base revenues declined 14.6% in 2009 due to a 24% decline in European car builds. The automotive aftermarket businesses, which were less impacted by the economic downturn, declined 7.8%.
 
Revenues increased 6.0% in 2008 over 2007 due to acquisitions and the favorable effect of currency translation partially offset by an 8.5% decline in base revenues. Acquisition revenue was primarily related to the purchase of a North American truck remanufacturing and related parts and service business and a worldwide components business. Base revenues for the North American automotive businesses declined 15.2% primarily due to a 16% decline in automotive production by the North American automotive manufacturers. The decline in automotive builds was driven by low consumer demand and existing high inventory levels. International base automotive revenues declined 6.3% due to unfavorable customer mix and a 3% decline in European vehicle production. Base revenues for the automotive aftermarket businesses in this segment increased 2.3% mainly due to strong sales of automotive additives from North American businesses to Chinese end markets.
 
Operating Income
 
Operating income decreased 44.5% in 2009 versus 2008 primarily due to the decline in base revenues described above, the unfavorable effect of currency translation and higher restructuring charges. In addition, a $12.0 million goodwill impairment charge was recorded in the third quarter of 2009 related to the North American truck remanufacturing and related parts and service business. The increase in restructuring charges is primarily due to continued efforts to reduce costs in response to the decline in worldwide automotive production. Total operating margins declined by 4.4% primarily due to the decline in base revenues described above, partially offset by reductions in overhead expenses, favorable selling price versus material cost comparisons and benefits of restructuring projects.


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Operating income decreased 25.7% in 2008 versus 2007 primarily due to the negative leverage effect of the decline in base revenues described above, lower base margins and higher restructuring charges partially offset by the favorable impact of currency translation. The increase in operating expenses is primarily due to unrecovered raw material price increases and competitive pricing pressure. Base margins declined 3.4% primarily due to the reduction in base revenues, start up costs to support production at foreign-owned manufacturers operating in North America and additional accounts receivable bad debt reserves.
 
INDUSTRIAL PACKAGING
 
Businesses in this segment produce steel, plastic and paper products and equipment used for bundling, shipping and protecting goods in transit.
 
In the Industrial Packaging segment, products include:
 
  •  steel and plastic strapping and related tools and equipment;
  •  plastic stretch film and related equipment;
  •  paper and plastic products that protect goods in transit; and
  •  metal jacketing and other insulation products.
 
In 2009, this segment primarily served the general industrial (29%), primary metals (20%), food and beverage (12%) and construction (10%) markets.
 
The results of operations for the Industrial Packaging segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 1,895,704     $ 2,618,922     $ 2,414,860  
Operating income
    88,755       281,134       301,251  
Margin %
    4.7 %     10.7 %     12.5 %
 
In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (22.8 )%     (86.4 )%     (8.9 )%     0.2 %     0.2 %     %
Changes in variable margins and overhead costs
          30.7       4.3             (9.1 )     (1.1 )
                                                 
      (22.8 )     (55.7 )     (4.6 )     0.2       (8.9 )     (1.1 )
                                                 
Acquisitions
    1.2       (0.2 )     (0.1 )     4.8       2.9       (0.2 )
Restructuring costs
          (4.4 )     (0.6 )           (3.7 )     (0.5 )
Impairment of goodwill and intangibles
                            0.1        
Translation
    (6.0 )     (8.1 )     (0.8 )     3.5       2.8        
Other
                0.1             0.1        
                                                 
      (27.6 )%     (68.4 )%     (6.0 )%     8.5 %     (6.7 )%     (1.8 )%
                                                 
 
Operating Revenues
 
Revenues decreased 27.6% in 2009 versus 2008 primarily due to lower base revenues and the unfavorable impact of currency translation. Base revenues declined 34.6% for the North American strapping businesses largely due to declines in consumable and equipment volume in key end markets such as primary metals,


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construction and general industrial. The international strapping businesses declined 25.4% which were adversely affected by the continued global decline in the industrial production and construction end markets. Worldwide stretch and protective packaging declined 20.0% and 4.7%, respectively.
 
Revenues increased 8.5% in 2008 over 2007 primarily due to revenues from acquired companies and the favorable effect of currency translation. The increase in acquisition revenue was primarily due to the purchase of a European industrial packaging business, a European stretch packaging business, a U.S. protective packaging business and a U.S. equipment business. Total base revenues were virtually flat as a 1.2% and 30.9% increase related to international strapping and worldwide insulation systems, respectively, were offset by a 6.0% and 2.7% decrease related to North American strapping and worldwide protective packaging, respectively. These businesses were especially affected by weakness in the North American primary metals and construction end markets.
 
Operating Income
 
Operating income decreased 68.4% in 2009 versus 2008 primarily due to the negative leverage effect of the decline in base revenues described above, the negative effect of currency translation and higher restructuring charges. Base margins declined 4.6% primarily due to the decline in base revenues discussed above, partially offset by favorable selling price versus material cost comparisons and reduced overhead costs as the benefits of restructuring projects began to be realized.
 
Operating income declined 6.7% in 2008 versus 2007 primarily due to a decrease in base variable margins and increased restructuring charges partially offset by income from acquisitions and the favorable effect of currency translation. The decrease in base variable margins is primarily due to unfavorable selling price versus material cost comparisons and unfavorable product mix.
 
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.
 
In 2009, this segment primarily served the food institutional/restaurant (47%), service (32%) and food retail (15%) markets.
 
The results of operations for the Food Equipment segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 1,859,277     $ 2,133,186     $ 1,930,281  
Operating income
    255,094       320,867       303,349  
Margin %
    13.7 %     15.0 %     15.7 %


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In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (9.1 )%     (25.4 )%     (2.7 )%     1.8 %     4.9 %     0.5 %
Changes in variable margins and overhead costs
          13.8       2.3                    
                                                 
      (9.1 )     (11.6 )     (0.4 )     1.8       4.9       0.5  
                                                 
Acquisitions
    1.3             (0.2 )     6.3       1.9       (0.6 )
Restructuring costs
          (3.5 )     (0.6 )           (3.1 )     (0.5 )
Translation
    (5.0 )     (5.4 )     (0.1 )     2.4       2.1        
Other
                                  (0.1 )
                                                 
      (12.8 )%     (20.5 )%     (1.3 )%     10.5 %     5.8 %     (0.7 )%
                                                 
 
Operating Revenues
 
Revenues decreased 12.8% in 2009 versus 2008 due to the decline in base business and the unfavorable effect of currency translation, partially offset by revenues from acquisitions. The acquired revenues were attributable to the acquisition of a European food equipment business. North American food equipment base revenues declined 11.2% while international food equipment base revenues declined 7.9% in 2009 as a result of weak demand across all worldwide markets. Base revenues for the North American institutional/restaurant businesses declined 14.7% as customers delayed equipment purchases. Base service revenues declined a moderate 1.2% as customers continued to maintain existing equipment.
 
Revenues increased 10.5% in 2008 over 2007 due to revenues from acquisitions, the favorable effect of currency translation and base revenue growth. The acquired revenues were primarily attributable to the acquisition of two food processing businesses and two European food equipment businesses. Internationally, base revenues increased 3.2% primarily due to strong institutional and service revenue growth in Asia-Pacific and Europe. North American base revenues were flat over 2007 as increased service revenues and retail sales were offset by lower demand for equipment in areas such as casual dining restaurants, hotels and airports.
 
Operating Income
 
Operating income declined 20.5% in 2009 versus 2008 due to the decrease in base revenues described above and the unfavorable effect of currency translation and restructuring charges. Base margins decreased 0.4% primarily due to the decline in base revenues, partially offset by margin gains from favorable selling price versus material cost comparisons, benefits from restructuring projects and favorable product mix.
 
Operating income increased 5.8% in 2008 over 2007 due to the positive effect of leverage from the revenue increase described above, the favorable effect of currency translation and income from acquisitions, partially offset by higher restructuring charges. Operating margins decreased 0.7% due to lower margins of acquired businesses and higher restructuring charges partially offset by margin gains from growth in base revenues.
 
POWER SYSTEMS & ELECTRONICS
 
Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.


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In the Power Systems & Electronics segment, products include:
 
  •  arc welding equipment;
  •  metal arc welding consumables and related accessories;
  •  metal solder materials for PC board fabrication;
  •  equipment and services for microelectronics assembly;
  •  electronic components and component packaging; and
  •  airport ground support equipment.
 
In 2009, this segment primarily served the general industrial (46%), electronics (16%) and construction (7%) markets.
 
The results of operations for the Power Systems & Electronics segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 1,614,472     $ 2,356,853     $ 2,245,514  
Operating income
    216,840       464,328       451,714  
Margin %
    13.4 %     19.7 %     20.1 %
 
In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (31.6 )%     (60.7 )%     (8.4 )%     0.2 %     0.5 %     %
Changes in variable margins and overhead costs
          20.0       5.7             1.9       0.4  
                                                 
      (31.6 )     (40.7 )     (2.7 )     0.2       2.4       0.4  
                                                 
Acquisitions
    2.4       (0.9 )     (0.7 )     3.2       (0.5 )     (0.7 )
Restructuring costs
          (3.5 )     (1.0 )           (0.2 )      
Impairment of goodwill and intangibles
          (5.9 )     (1.7 )           (0.2 )      
Translation
    (2.4 )     (2.3 )     (0.2 )     1.5       1.3        
Other
    0.1                   0.1             (0.1 )
                                                 
      (31.5 )%     (53.3 )%     (6.3 )%     5.0 %     2.8 %     (0.4 )%
                                                 
 
Operating Revenues
 
Revenues declined 31.5% in 2009 versus 2008 mainly due to declines in base revenues and the negative effect of currency translation. Revenues fell as end market demand continued to decline across the broad spectrum of industries that this segment serves, including key end markets such as commercial construction and general industrial. The revenue decrease was partially offset by 2008 acquisitions, including a welding equipment business and a PC board fabrication business. Worldwide base welding revenues declined 32.7% in 2009. North American welding base businesses declined 36.3% while international welding base businesses declined 23.5%. Base revenues for the electronics businesses fell 30.0% while base revenues in the PC board fabrication businesses fell 44.7%, both largely due to the decline in consumer demand for electronics during 2009.


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Revenues increased 5.0% in 2008 over 2007 primarily due to revenues from acquisitions and the favorable effect of currency translation. Acquisitions included a worldwide PC board fabrication business and a welding accessories business. Overall base revenues grew a modest 0.2% mainly due to a 19.7% growth in international welding base businesses driven by strong demand in the energy, heavy fabrications and ship building end markets. North American welding base business declined 3.6% primarily due to weak North American industrial production and falling end market demand in key areas such as fabrication, construction, automotive and general industrial. Base revenues for the ground support businesses grew 4.4% related to higher worldwide demand for both military and commercial airport products. Base revenues for the PC board fabrication and electronics related businesses declined 9.4% and 2.4%, respectively, due to lower worldwide market demand, especially in consumer electronics.
 
Operating Income
 
Operating income decreased 53.3% in 2009 versus 2008 primarily due to the declines in base revenues described above, 2009 impairment charges, higher restructuring charges and the negative effect of currency translation. Goodwill and intangible asset impairment charges of $18.0 million and $6.7 million, respectively, were incurred in the PC board fabrication and welding accessories businesses in the first quarter of 2009. Base margins decreased 2.7% primarily due to the declines in base revenues, partially offset by favorable selling price versus material cost comparisons, benefits of restructuring projects and lower overhead costs.
 
Operating income increased 2.8% in 2008 over 2007 primarily due to lower operating expenses and reduced overhead spending within the PC board fabrication businesses as a result of 2007 and 2008 restructuring projects, and the favorable effect of currency translation. Total operating margins decreased 0.4% primarily due to lower margins from acquisitions after acquisition-related expenses.
 
CONSTRUCTION PRODUCTS
 
Businesses in this segment produce tools, fasteners and other products for construction applications.
 
In the Construction Products segment, products include:
 
  •  fasteners and related fastening tools for wood and metal applications;
  •  anchors, fasteners and related tools for concrete applications;
  •  metal plate truss components and related equipment and software; and
  •  packaged hardware, fasteners, anchors and other products for retail.
 
In 2009, this segment primarily served the residential construction (47%), commercial construction (26%) and renovation construction (24%) markets.
 
The results of operations for the Construction Products segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 1,529,510     $ 1,990,683     $ 2,064,477  
Operating income
    97,864       244,822       289,064  
Margin %
    6.4 %     12.3 %     14.0 %


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In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (16.9 )%     (59.2 )%     (6.3 )%     (7.3 )%     (21.8 )%     (2.2 )%
Changes in variable margins and overhead costs
          13.3       2.0             1.7       0.3  
                                                 
                                                 
      (16.9 )     (45.9 )     (4.3 )     (7.3 )     (20.1 )     (1.9 )
                                                 
Acquisitions
    0.7       (1.0 )     (0.2 )     0.5       (0.9 )     (0.2 )
Restructuring costs
          (1.9 )     (0.3 )           2.2       0.3  
Impairment of goodwill and intangibles
                                   
Translation
    (7.0 )     (11.2 )     (1.1 )     3.3       3.5       0.1  
Other
                      (0.1 )            
                                                 
      (23.2 )%     (60.0 )%     (5.9 )%     (3.6 )%     (15.3 )%     (1.7 )%
                                                 
 
Operating Revenues
 
Revenues declined 23.2% in 2009 versus 2008 primarily as a result of the decline in base revenues and the unfavorable effect of currency translation. Base revenues for the North American, European and Asia-Pacific regions decreased 26.7%, 22.9% and 1.1%, respectively, primarily due to ongoing weakness in the residential and commercial construction markets in North America and Europe. U.S. housing starts declined 14% on an annualized basis in 2009. In addition, U.S. commercial construction square footage activity fell 46% for the year versus 2008. The Asia-Pacific region outperformed other regions largely due to better customer activity in Australia and New Zealand.
 
Revenues declined 3.6% in 2008 versus 2007 largely as a result of a 7.3% decline in base business partially offset by the favorable effect of currency translation. Base revenues for the North American and European businesses declined 14.6% and 7.0%, respectively, in 2008 while revenues for the Asia-Pacific region increased 4.4% on strong first half 2008 market demand and new product introductions. This decline in base revenues was a result of weakness in the residential and commercial construction markets in North America and Europe as indicated by a 31% and 19% decline in U.S. housing starts and commercial construction square footage activity, respectively, in 2008. European construction activity slowed substantially in the fourth quarter of 2008.
 
Operating Income
 
Operating income decreased 60.0% in 2009 versus 2008 primarily due to the base revenue decline described above. In addition, the unfavorable effect of currency translation and higher restructuring charges contributed to the lower income and margins. Base margins declined 4.3% as reduced operating expenses, including favorable selling price versus material cost comparisons and benefits from restructuring projects were more than offset by the effect of lower base revenues.
 
Operating income and margins decreased 15.3% and 1.7%, respectively, in 2008 versus 2007 primarily due to the revenue decline described above partially offset by the favorable effect of currency translation, lower restructuring charges and lower operating costs resulting from prior year restructuring projects and tight cost controls.


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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 that clean or add lubrication to machines;
  •  epoxy and resin-based coating products for industrial applications;
  •  hand wipes and cleaners for industrial applications; and
  •  pressure-sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.
 
In 2009, this segment primarily served the general industrial (31%), construction (14%), maintenance, repair and operations “MRO” (12%) and automotive aftermarket (7%) markets.
 
The results of operations for the Polymers & Fluids segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 1,155,838     $ 1,249,653     $ 944,851  
Operating income
    70,396       180,040       158,813  
Margin %
    6.1 %     14.4 %     16.8 %
 
In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (12.4 )%     (36.3 )%     (3.9 )%     (0.5 )%     0.6 %     0.2 %
Changes in variable margins and overhead costs
          22.4       3.7             (0.5 )     (0.1 )
                                                 
      (12.4 )     (13.9 )     (0.2 )     (0.5 )     0.1       0.1  
                                                 
Acquisitions
    11.0       (1.9 )     (1.2 )     28.9       9.8       (2.6 )
Restructuring costs
          (4.4 )     (0.7 )                  
Impairment of goodwill and intangibles
          (33.4 )     (5.5 )           0.5       0.1  
Translation
    (6.1 )     (7.3 )     (0.7 )     3.6       3.0        
Other
                      0.3              
                                                 
      (7.5 )%     (60.9 )%     (8.3 )%     32.3 %     13.4 %     (2.4 )%
                                                 
 
Operating Revenues
 
Revenues decreased 7.5% in 2009 versus 2008 due to lower base revenues and the unfavorable effect of currency translation partially offset by revenues from acquisitions. Acquisition revenue was primarily the result of the purchase of a pressure sensitive adhesives business and two construction adhesives businesses in 2008. Total base revenues declined 12.4% primarily due to continued weakness in worldwide industrial production and construction end markets. Worldwide base revenues for the fluids businesses declined 10.1% while base revenues for the polymers businesses declined 15.0% in 2009.
 
Revenues increased 32.3% in 2008 over 2007 primarily due to revenues from acquisitions and the favorable effect of currency translation. Acquisition revenue was primarily the result of the purchase of two pressure


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sensitive adhesives businesses, an international fluid products business, two polymers businesses, two North American construction adhesives businesses and a South American sealant business. Total base revenues were essentially flat as a 2.2% increase in worldwide polymers revenues was offset by a 3.6% decline in worldwide fluids revenues. Strong growth in North American polymers and industrial adhesives businesses, as well as increased demand in Brazil, India and China, was offset by substantially weaker demand for fluid products in North American and European industrial based end markets.
 
Operating Income
 
Operating income decreased 60.9% in 2009 versus 2008 primarily due to the decline in base revenues and a $60.0 million goodwill impairment charge against the pressure sensitive adhesives business in the first quarter of 2009. Base margins decreased 0.2% as favorable selling price versus material cost comparisons and the benefits of restructuring projects were more than offset by the effect of lower base revenues. The first quarter 2009 goodwill impairment charge reduced margins by 5.5%. Additionally, acquisitions diluted margins 1.2% for the year.
 
Operating income increased 13.4% in 2008 over 2007 primarily due to income from acquisitions and the favorable effect of currency translation. Total operating margins declined 2.4% primarily due to the dilutive effect of the lower margins of acquired businesses. Variable margins decreased slightly due to higher material costs and unfavorable product mix, offset by overhead cost reductions.
 
DECORATIVE SURFACES
 
Businesses in this segment produce decorative surfacing materials for furniture, office and retail space, countertops, flooring and other applications.
 
In the Decorative Surfaces segment, products include:
 
  •  decorative high-pressure laminate for furniture, office and retail space, and countertops;
  •  high-pressure laminate flooring; and
  •  high-pressure laminate worktops.
 
In 2009, this segment served the commercial construction (55%), renovation construction (28%) and residential construction (15%) markets.
 
The results of operations for the Decorative Surfaces segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 998,191     $ 1,230,995     $ 1,239,190  
Operating income
    113,727       142,582       160,973  
Margin %
    11.4 %     11.6 %     13.0 %


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In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
                % Point Increase
                % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (14.9 )%     (51.4 )%     (5.0 )%     (3.1 )%     (9.4 )%     (0.8 )%
Changes in variable margins and overhead costs
          39.3       5.4             (2.7 )     (0.4 )
                                                 
      (14.9 )     (12.1 )     0.4       (3.1 )     (12.1 )     (1.2 )
                                                 
Acquisitions
                                   
Restructuring costs
          (5.3 )     (0.7 )           (0.5 )     (0.1 )
Translation
    (4.0 )     (2.9 )     0.2       2.5       1.2       (0.1 )
Other
          0.1       (0.1 )     (0.1 )            
                                                 
      (18.9 )%     (20.2 )%     (0.2 )%     (0.7 )%     (11.4 )%     (1.4 )%
                                                 
 
Operating Revenues
 
Revenues decreased 18.9% in 2009 versus 2008 due to lower base revenues and the unfavorable effect of currency translation. North American laminate base revenues declined 18.9% as a result of the continued downturn in North American commercial and residential construction. These declines were partially offset by product penetration in the premium high-definition laminate product market. International base revenues declined 9.7% due to European volume declines.
 
Revenues declined 0.7% in 2008 versus 2007 due to the decline in base revenues partially offset by the favorable effect of currency translation. North American laminate revenues decreased 3.4% as a result of laminate volume drop off in the second half of 2008 partially offset by a customer shift to higher priced premium products. Flooring revenues decreased 28.3% on steep volume declines. International laminate revenues decreased 2.0% over the prior year as new product introductions partially offset lower volumes.
 
Operating Income
 
Operating income decreased 20.2% in 2009 versus 2008 primarily due to the decline in base revenues, increased restructuring charges and the unfavorable effect of currency translation. Base margins increased 0.4% primarily due to favorable selling price versus material cost comparisons, benefits from restructuring projects and higher margins on the high-definition laminate product, partially offset by the effect of lower base revenues.
 
Operating income decreased 11.4% in 2008 versus 2007 primarily due to the negative leverage effect of the decline in base revenues described above. Lower selling expenses in 2008 versus 2007 were more than offset by significant raw material increases which contributed to an overall reduction in variable margins. Base margins declined 1.2% due to both the revenue decline and cost increases.
 
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 and structures;
  •  plastic reclosable packaging for consumer food storage;


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  •  plastic reclosable bags for storage of clothes and home goods;
  •  plastic consumables that multi-pack cans and bottles and related equipment;
  •  plastic fasteners and components for appliances, furniture and industrial uses;
  •  metal fasteners and components for appliances and industrial applications;
  •  swabs, wipes and mats for clean room usage;
  •  foil, film and related equipment used to decorate consumer products;
  •  product coding and marking equipment and related consumables;
  •  paint spray and adhesive dispensing equipment;
  •  static and contamination control equipment; and
  •  line integration, conveyor systems and line automation for the food and beverage industries.
 
In 2009, this segment primarily served the general industrial (25%), food and beverage (16%), consumer durables (14%), electronics (5%) and food institutional/restaurants (5%) markets.
 
The results of operations for the All Other segment for 2009, 2008 and 2007 were as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating revenues
  $ 2,786,695     $ 3,226,927     $ 3,103,337  
Operating income
    389,629       590,613       590,035  
Margin %
    14.0 %     18.3 %     19.0 %
 
In 2009 and 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:
 
                                                 
    2009 Compared to 2008     2008 Compared to 2007  
          % Point Increase
          % Point Increase
 
    % Increase (Decrease)     (Decrease)     % Increase (Decrease)     (Decrease)  
    Operating
    Operating
    Operating
    Operating
    Operating
    Operating
 
    Revenues     Income     Margins     Revenues     Income     Margins  
 
Base business:
                                               
Revenue change/Operating leverage
    (17.5 )%     (43.8 )%     (5.8 )%     (2.6 )%     (6.7 )%     (0.8 )%
Changes in variable margins and overhead costs
          17.6       3.9             3.3       0.6  
                                                 
      (17.5 )     (26.2 )     (1.9 )     (2.6 )     (3.4 )     (0.2 )
                                                 
Acquisitions and divestitures
    7.4       2.0       (0.8 )     4.3       1.6       (0.5 )
Restructuring costs
          (5.3 )     (1.2 )           (0.5 )     (0.1 )
Impairment of goodwill and intangibles
          (0.3 )     (0.1 )                  
Translation
    (3.6 )     (4.2 )     (0.3 )     2.2       2.4       0.1  
Other
    0.1                   0.1              
                                                 
      (13.6 )%     (34.0 )%     (4.3 )%     4.0 %     0.1 %     (0.7 )%
                                                 
 
Operating Revenues
 
Revenues decreased 13.6% in 2009 versus 2008 primarily due to the decline in base business revenues and the unfavorable effect of currency translation, partially offset by an increase in revenues from acquired companies. The acquisition revenue was primarily related to the purchase of two test and measurement businesses in 2008. Base revenues declined 15.7%, 12.1%, 19.6% and 32.0%, for the test and measurement, consumer packaging, industrial plastics and metals and finishing businesses, respectively, due to negative industrial production trends and the related impact of weak end market and capital equipment demand across the broad spectrum of industries this segment serves.


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Revenues increased 4.0% in 2008 versus 2007 primarily due to revenues from acquired companies and the favorable effect of currency translation partially offset by a decline in base revenues. The increase in acquisition revenue was primarily due to the purchase of three test and measurement businesses and a label business. Base revenues declined 7.8%, 3.2% and 3.0% for the industrial plastics and metals, consumer packaging and finishing businesses, respectively, due to a notable decrease in end market demand in the second half of the year. These decreases were partially offset by an 8.0% base business increase in test and measurement due to strong sales of equipment used in the materials and structural testing markets, particularly in Asia.
 
Operating Income
 
Operating income declined 34.0% in 2009 versus 2008 primarily due to the decline in base revenues described above, higher restructuring charges and the unfavorable effect of currency translation, partially offset by increased income from acquisitions. Base margins decreased 1.9% as favorable selling price versus material cost comparisons and benefits from restructuring projects were more than offset by the effect of lower base revenues. Additionally, acquisitions diluted total margins by 0.8%.
 
Operating income was essentially flat in 2008 over 2007 primarily due to the negative leverage effect of the decrease in revenues described above, partially offset by the favorable effect of currency translation and income from acquired companies. Total operating margins declined 0.7% primarily due to lower margins for both base business and acquired businesses. Base operating margins decreased 0.2% as the gains from tight cost controls and the benefits of prior year restructuring projects were offset by the impact of lower revenues.
 
AMORTIZATION OF INTANGIBLE ASSETS
 
Amortization expense increased to $203.2 million in 2009 and $184.4 million in 2008, versus $145.7 million in 2007, due to intangible amortization related to newly acquired businesses.
 
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
 
Total goodwill and intangible asset impairment charges by segment for the years ended December 31, 2009, 2008 and 2007 were as follows:
 
                         
In Thousands
  2009     2008     2007  
 
Transportation
  $ 14,414     $ 13     $ 258  
Industrial Packaging
    386              
Food Equipment
    46              
Power Systems & Electronics
    28,337       824        
Construction Products
                394  
Polymers & Fluids
    60,416       251       884  
All Other
    1,969       487       618  
                         
    $ 105,568     $ 1,575     $ 2,154  
                         
 
Impairment of goodwill and other intangible assets increased to $105.6 million in 2009 versus $1.6 million in 2008, primarily due to goodwill impairment charges related to the pressure sensitive adhesives reporting unit of $60.0 million, the PC board fabrication reporting unit of $18.0 million and the truck remanufacturing and related parts and service reporting unit of $12.0 million. Impairment of goodwill and other intangible assets was $1.6 million in 2008 versus $2.2 million in 2007. See the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for further details of the impairment charges.


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INTEREST EXPENSE
 
Interest expense increased to $164.8 million in 2009 versus $154.5 million in 2008 primarily due to interest on the 6.25% and 5.15% notes which were issued in March 2009, partially offset by lower interest related to the 5.75% notes and 6.875% notes repaid at maturity in March 2009 and November 2008, respectively, and lower commercial paper rates and borrowings. Interest expense increased to $154.5 million in 2008 versus $102.1 million in 2007 primarily as a result of interest expense on the 5.25% Euro notes issued in October 2007 and higher average borrowings of short-term commercial paper, partially offset by lower market rates in 2008. The weighted-average interest rate on commercial paper was 0.3% in 2009, 2.4% in 2008 and 5.2% in 2007.
 
OTHER INCOME (EXPENSE)
 
Other income (expense) was expense of $7.4 million in 2009 versus income of $4.7 million in 2008. The decrease was primarily due to 2009 losses on foreign currency transactions of $24.9 million, lower income from investments of $4.9 million (versus $17.0 million in 2008) and lower interest income of $17.6 million (versus $29.4 million in 2008), partially offset by the impact of the German transfer tax charge of $44.0 million in 2008.
 
Other income decreased to $4.7 million in 2008 from $58.3 million in 2007, primarily due to a German transfer tax charge of $44.0 million in 2008. Additionally, income from a venture capital limited partnership was $0.2 million in 2008 versus income of $25.3 million in 2007 related to mark-to-market adjustments; and the Company incurred a charge of $18.8 million related to the timing of tax deductions of leveraged leases in 2008. This was partially offset by higher income of $10.7 million related to a mortgage-backed security and a $9.4 million increase in interest income.
 
INCOME TAXES
 
The effective tax rate was 20.1% in 2009, 28.1% in 2008 and 29.3% in 2007. The effective tax rate for 2009 was favorably impacted by discrete tax adjustments in the fourth quarter of $85.5 million related to a global legal structure reorganization and $77.5 million related to a favorable settlement reached with the German tax authorities. In the above mentioned reorganization, the Company reorganized its ownership structure in certain U.S. and foreign subsidiaries in the fourth quarter of 2009 and made an election regarding the U.S. tax treatment of a foreign subsidiary. The Company recorded a reduction in tax expense primarily for the effect of the resulting foreign tax credits. Also during the fourth quarter of 2009, the Company finalized a settlement with the German tax authorities primarily regarding the treatment of an intercompany financing transaction which resulted in the reversal of previously established tax reserves as a reduction of tax expense.
 
See the Income Taxes note in Item 8. Financial Statements and Supplementary Data for a reconciliation of the U.S. Federal statutory rate to the effective tax rate.
 
INCOME FROM CONTINUING OPERATIONS
 
Income from continuing operations in 2009 of $969.5 million ($1.93 per diluted share) was 42.7% lower than 2008 income of $1.7 billion ($3.24 per diluted share). Income from continuing operations in 2008 was 7.5% lower than 2007 income of $1.8 billion ($3.29 per diluted share).
 
FOREIGN CURRENCY
 
The strengthening of the U.S. dollar against foreign currencies decreased operating revenues by approximately $653 million in 2009 and decreased income from continuing operations by approximately 10 cents per diluted share. The weakening of the U.S. dollar against foreign currencies increased operating revenues by approximately $425 million in 2008 and increased income from continuing operations by approximately 8 cents per diluted share.
 
DISCONTINUED OPERATIONS
 
Loss from discontinued operations was $22.5 million in 2009 versus $172.1 million in 2008, primarily due to 2008 impairment on goodwill of $132.6 million, loss reserve on assets held for sale of $64.0 million partially offset by gains on sales of discontinued operations in 2008 versus losses in 2009. The results from discontinued


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operations was a loss of $172.1 million in 2008 versus income of $42.2 million in 2007. See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for further information.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
In October 2009, new accounting guidance was issued on multiple-deliverable revenue arrangements. The new accounting guidance amends the accounting for multiple-deliverable arrangements to enable the vendor to account for products or services separately rather than as a combined unit. The guidance establishes a hierarchy for determining the selling price of a deliverable, which is based on: (1) vendor-specific objective evidence, (2) third-party evidence or (3) estimates. The Company will adopt the new accounting guidance on January 1, 2011 and does not anticipate the change will materially affect the Company’s financial position or results of operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company’s primary sources of liquidity are free operating cash flows and short-term credit facilities. Management continues to believe that internally generated cash flows will be adequate to service debt, continue to pay dividends, to finance internal growth and to fund small to medium-sized acquisitions.
 
The primary uses of liquidity are:
 
  •  dividend payments — the Company’s dividend payout guidelines are 25% to 35% of the last two years’ average income from continuing operations;
  •  acquisitions; and
  •  any excess liquidity may be used for share repurchases. The Company’s open-ended share repurchase program allows it flexibility in achieving the targeted debt-to-capital ratio.
 
Cash Flow
 
The Company uses free operating cash flow to measure cash flow generated by operations that is available for dividends, acquisitions, share repurchases and debt repayment. 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, 2009, 2008 and 2007 was as follows:
 
                         
In Thousands
  2009     2008     2007  
 
Net cash provided by operating activities
  $ 2,146,589     $ 2,222,224     $ 2,484,297  
Additions to plant and equipment
    (247,102 )     (362,312 )     (353,355 )
                         
Free operating cash flow
  $ 1,899,487     $ 1,859,912     $ 2,130,942  
                         
Cash dividends paid
  $ (619,681 )   $ (598,690 )   $ (502,430 )
Acquisitions
    (281,674 )     (1,546,982 )     (812,757 )
Repurchases of common stock
          (1,390,594 )     (1,757,761 )
Purchases of investments
    (17,586 )     (19,583 )     (28,734 )
Proceeds from investments
    20,215       26,932       91,184  
Net proceeds (repayments) of debt
    (736,470 )     1,467,613       777,386  
Effect of exchange rate changes on cash and equivalents
    183,722       (82,002 )     66,996  
Other
    127,809       198,820       272,491  
                         
Net increase (decrease) in cash and equivalents
  $ 575,822     $ (84,574 )   $ 237,317  
                         
 
On August 20, 2007, the Company’s Board of Directors authorized a stock repurchase program, which provides for the buyback of up to $3.0 billion of the Company’s common stock over an open-ended period


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of time. Through December 31, 2009, the Company repurchased 39.8 million shares of its common stock under this program at an average price of $44.72 per share. There are approximately $1.2 billion of authorized repurchases remaining under this program.
 
On August 4, 2006, the Company’s Board of Directors authorized a stock repurchase program which provided for the buyback of up to 35.0 million shares. This stock repurchase program was completed in November 2007.
 
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. We believe that ROIC is a meaningful metric to investors and may be different than the method used by other companies to calculate ROIC. ROIC for the three years ended December 31, 2009, 2008 and 2007 was as follows:
 
                         
Dollars in thousands
  2009     2008     2007  
 
Operating income
  $ 1,385,979     $ 2,501,286     $ 2,627,766  
Taxes (20.1%, 28.1% and 29.3%, respectively)
    (278,998 )     (702,611 )     (769,147 )
                         
Operating income after taxes
  $ 1,106,981     $ 1,798,675     $ 1,858,619  
                         
Invested Capital:
                       
Trade receivables
  $ 2,491,492     $ 2,571,987     $ 2,915,546  
Inventories
    1,356,233       1,774,697       1,625,820  
Net plant and equipment
    2,136,527       2,109,432       2,194,010  
Investments
    451,293       465,894       507,567  
Goodwill and intangible assets
    6,584,149       6,297,219       5,683,341  
Accounts payable and accrued expenses
    (2,048,966 )     (1,999,097 )     (2,190,121 )
Net assets held for sale
          61,525       137,685  
Other, net
    (343,069 )     (667,660 )     (43,790 )
                         
Total invested capital
  $ 10,627,659     $ 10,613,997     $ 10,830,058  
                         
Average invested capital
  $ 10,390,424     $ 11,235,625     $ 10,331,512  
                         
Return on average invested capital
    10.7 %     16.0 %     18.0 %
                         
 
The 530 basis point decrease in ROIC in 2009 versus 2008 was the result of after-tax operating income decreasing 38.5%, resulting from the economic downturn, while average invested capital decreased 7.5%.
 
The 200 basis point decrease in ROIC in 2008 versus 2007 was the result of average invested capital increasing 8.8%, primarily due to acquisitions, while after-tax operating income decreased 3.2%, primarily due to a decrease in base business operating income.


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Working Capital
 
Net working capital at December 31, 2009 and 2008 is summarized as follows:
 
                         
                Increase
 
Dollars in thousands
  2009     2008     (Decrease)  
 
Current Assets:
                       
Cash and equivalents
  $ 1,318,772     $ 742,950     $ 575,822  
Trade receivables
    2,491,492       2,571,987       (80,495 )
Inventories
    1,356,233       1,774,697       (418,464 )
Other
    508,098       582,274       (74,176 )
Assets held for sale
          82,071       (82,071 )
                         
      5,674,595       5,753,979       (79,384 )
                         
Current Liabilities:
                       
Short-term debt
    213,681       2,433,973       (2,220,292 )
Accounts payable and accrued expenses
    2,048,966       1,999,097       49,869  
Other
    572,991       371,477       201,514  
Liabilities held for sale
          20,546       (20,546 )
                         
      2,835,638       4,825,093       (1,989,455 )
                         
Net Working Capital
  $ 2,838,957     $ 928,886     $ 1,910,071  
                         
Current Ratio
    2.00       1.19          
                         
 
Net working capital increased primarily due to the pay down of commercial paper and repayment of the 5.75% notes.
 
Debt
 
Total debt at December 31, 2009 and 2008 was as follows:
 
                         
                Increase
 
Dollars in thousands
  2009     2008     (Decrease)  
 
Short-term debt
  $ 213,681     $ 2,433,973     $ (2,220,292 )
Long-term debt
    2,914,874       1,247,883       1,666,991  
                         
Total debt
  $ 3,128,555     $ 3,681,856     $ (553,301 )
                         
Total debt to total capitalization
    26.2 %     32.4 %        
                         
 
The Company issues commercial paper to fund general corporate needs and to fund small and medium-sized acquisitions. As of December 31, 2009, the Company had approximately $135.5 million outstanding under its commercial paper program. The Company also has committed lines of credit of $2.5 billion in the U.S. to support the issuances of commercial paper. Of this amount, $2.0 billion is provided under a line of credit agreement with a termination date of June 11, 2010 and the remaining $500.0 million is under a revolving credit facility that terminates on June 15, 2012. No amounts are outstanding under these two facilities. The Company’s foreign operations also have unused capacity on uncommitted facilities of approximately $370 million.
 
The Company had $500.0 million of 5.75% redeemable notes due March 1, 2009, which were outstanding at December 31, 2008, that were repaid at maturity.
 
In 2009, the Company issued $800.0 million of 5.15% redeemable notes due April 1, 2014 at 99.92% of face value and $700.0 million of 6.25% redeemable notes due April 1, 2019 at 99.98% of face value. The net proceeds from the offering were used to pay down the Company’s commercial paper balance.


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The Company believes that based on its current free operating cash flow, debt-to-capitalization ratios and credit ratings, it could readily obtain additional financing if necessary. The Company’s targeted debt-to-capital ratio is 20% to 30%, excluding the impact of any larger acquisitions.
 
Stockholders’ Equity
 
The changes to stockholders’ equity during 2009 and 2008 were as follows:
 
                 
In Thousands
  2009     2008  
 
Beginning balance
  $ 7,675,091     $ 9,358,231  
Net income
    947,009       1,519,003  
Cash dividends declared
    (620,679 )     (604,988 )
Repurchases of common stock
          (1,390,594 )
Stock option and restricted stock activity
    168,111       105,514  
Pension and other postretirement benefit adjustments, net of tax
    (62,271 )     (432,618 )
Noncontrolling interest
    (4,538 )     4,710  
Currency translation adjustments
    716,208       (874,952 )
Cumulative effect of adopting new accounting guidance, net of tax
    (1,055 )     (9,215 )
                 
Ending balance
  $ 8,817,876     $ 7,675,091  
                 
 
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
 
The Company’s significant contractual obligations as of December 31, 2009 were as follows:
 
                                                 
                                  2015 and
 
In Thousands
  2010     2011     2012     2013     2014     Future Years  
 
Total debt
  $ 8,120     $ 258,475     $ 7,076     $ 6,193     $ 1,929,012     $ 714,118  
Interest payments on notes and preferred debt securities
    161,805       161,526       144,890       144,651       113,986       197,988  
Minimum lease payments
    150,881       106,430       75,920       56,747       43,864       68,249  
                                                 
    $ 320,806     $ 526,431     $ 227,886     $ 207,591     $ 2,086,862     $ 980,355  
                                                 
 
The Company has recorded current income taxes payable of $417.3 million and non-current tax liabilities of $198.0 million including liabilities for unrecognized tax benefits. The Company is not able to reasonably estimate the timing of payments related to the non-current tax obligations.
 
The Company has provided guarantees related to the debt of certain unconsolidated affiliates of $24.0 million at December 31, 2009. In the event one of these affiliates defaults on its debt, the Company would be liable for the debt repayment. The Company has recorded liabilities related to these guarantees of $17.0 million at December 31, 2009. At December 31, 2009, the Company had open stand-by letters of credit of $173.0 million, substantially all of which expire in 2010. The Company had no other significant off-balance sheet commitments at December 31, 2009.
 
CRITICAL ACCOUNTING POLICIES
 
The Company has six accounting policies which it believes are most important to the Company’s financial condition and results of operations, and which require the Company to make estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.


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These critical accounting policies are as follows:
 
Realizability of Inventories — Inventories are stated at the lower of cost or market. Generally, the Company’s businesses perform an analysis of the historical sales usage of the individual inventory items on hand and a reserve is recorded to adjust inventory cost to market value based on the following usage criteria:
 
             
Usage Classification
 
Criteria
  Reserve %
 
Active
  Quantity on hand is less than prior 6 months’ usage     0 %
Slow-moving
  Some usage in last 12 months, but quantity on hand exceeds prior 6 months’ usage     50 %
Obsolete
  No usage in the last 12 months     90 %
 
In addition, for approximately half of the U.S. operations, the Company has elected to use the last-in, first-out (“LIFO”) method of inventory costing. Generally, this method results in a lower inventory value than the first-in, first-out (“FIFO”) method due to the effects of inflation.
 
Collectibility of Accounts Receivable — The Company estimates the allowance for uncollectible accounts based on the greater of a specific reserve or a reserve calculated based on the historical write-off percentage over the last two years. In addition, the allowance for uncollectible accounts includes reserves for customer credits and cash discounts, which are also estimated based on past experience.
 
Depreciation of Plant and Equipment — The Company’s U.S. businesses compute depreciation on an accelerated basis, as follows:
 
     
Buildings and improvements
  150% declining balance
Machinery and equipment
  200% declining balance
 
The majority of the international businesses compute depreciation on a straight-line basis to conform to their local statutory accounting and tax regulations.
 
Income Taxes — The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense and liabilities recognized by the Company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income and effect of the Company’s various tax planning strategies. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.
 
Goodwill and Intangible Assets — The Company’s business acquisitions typically result in recording goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment expense that the Company will incur in future periods. The Company follows the guidance prescribed in the accounting standards to test goodwill and intangible assets for impairment. On an annual basis, or more frequently if triggering events occur, the Company compares the estimated fair value of its 60 reporting units to the carrying value of each reporting unit to determine if a goodwill impairment exists. 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. In calculating the fair value of the reporting units, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill and other intangible assets.
 
In the third quarter of 2009, the Company changed the date of its annual goodwill impairment assessment from the first quarter to the third quarter. This constitutes a change in method of applying an accounting principle that the Company believes is preferable. The change was made to better align the timing of the


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Company’s goodwill impairment assessment with the Company’s annual business planning and forecasting process.
 
As of December 31, 2009, the Company had goodwill and intangible assets of $6.6 billion allocated to its 60 reporting units. The Company’s risk of significant impairment charges is mitigated by the number of diversified businesses and end markets represented by its 60 reporting units. In addition, the individual businesses in most of its reporting units have been acquired over a long period of time, and therefore have been able to improve their performance, primarily as a result of the application of the Company’s 80/20 business simplification process. The amount of goodwill and intangibles allocated to individual reporting units range from approximately $5 million to $700 million, with the average amount equal to $110 million.
 
Goodwill and intangible asset impairment charges related to continuing operations were $105.6 million in 2009, $1.6 million in 2008 and $2.2 million in 2007. The impairment charges during 2009 were primarily related to new reporting units which were acquired over the last few years before the recent economic downturn. These charges were driven primarily by lower current forecasts compared to the expected forecasts at the time the reporting units were acquired. See the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for further discussion of the relative carrying values and fair values of the reporting units related to these impairment charges.
 
Fair value determinations require considerable judgment and are sensitive to changes in the factors described above. Due to the inherent uncertainties associated with these factors and economic conditions in the Company’s global end markets, impairment charges related to one or more reporting units could occur in future periods.
 
Pension and Other Postretirement Benefits — The Company has various company-sponsored defined benefit retirement plans covering a substantial portion of U.S. employees and many employees outside the United States. Pension and other postretirement expense and obligations are determined based on actuarial valuations. Pension benefit obligations are generally based on each participant’s years of service, future compensation, and age at retirement or termination. Important assumptions in determining pension and postretirement expense and obligations are the discount rate, the expected long-term return on plan assets and healthcare cost trend rates. See the Pension and Other Postretirement Benefits note in Item 8. Financial Statements and Supplementary Data for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.
 
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the U.S. pension and postretirement benefit plans. The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. A 25 basis point decrease in the discount rate would increase the present value of the U.S. primary pension plan obligation by approximately $30 million.
 
The expected long-term return on plan assets is based on historical and expected long-term returns for similar investment allocations among asset classes. For the U.S. primary pension plan, the Company’s assumption for the expected return on plan assets was 8.5% for 2009 and will be 8.0% for 2010. A 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately $3 million. See the Pension and Other Postretirement Benefits note in Item 8. Financial Statements and Supplementary Data for information on how this rate is determined.


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ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
MARKET RISK
 
Interest Rate Risk
 
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s debt.
 
The Company had commercial paper outstanding of $135.5 million and $1.8 billion as of December 31, 2009 and 2008, respectively. The weighted average interest rate on commercial paper was 0.1% at December 31, 2009 and 1.4% at December 31, 2008.
 
The following table presents the Company’s debt for which fair value is subject to changing market interest rates:
 
                                         
                6.55%
   
    5.25%
  5.15%
  6.25%
  Preferred Debt
  4.88%
    Euro Notes Due
  Notes Due
  Notes Due
  Securities Due
  Notes Due thru
In Thousands
  Oct 1, 2014   April 1, 2014   April 1, 2019   Dec 31, 2011   Dec 31, 2020
 
As of December 31, 2009:
                                       
Estimated cash outflow by year
of principal maturity
                                       
2010
  $     $     $     $     $ 5,713  
2011
                      250,000       5,351  
2012
                            4,882  
2013
                            4,312  
2014
    1,126,275       800,000                   2,664  
2015 and thereafter
                700,000             4,745  
Estimated fair value
    1,192,860       870,176       781,158       267,500       28,815  
Carrying value
    1,125,241       799,447       699,894       249,902       27,667  
                                         
As of December 31, 2008:
                                       
Total estimated cash outflow
  $ 952,575     $     $     $ 250,000     $ 33,346  
Estimated fair value
    856,355                   269,598       31,555  
Carrying value
    951,545                   249,857       33,346  
 
Foreign Currency Risk
 
The Company operates in the United States and 56 other countries. In general, the Company’s products are primarily manufactured and sold within the same country. The initial funding for the foreign manufacturing operations was provided primarily through the permanent investment of equity capital from the U.S. parent company. Therefore, the Company and its subsidiaries do not have significant assets or liabilities denominated in currencies other than their functional currencies. As such, the Company does not have any significant derivatives or other financial instruments that are subject to foreign currency risk at December 31, 2009 or 2008.
 
In October 2007, the Company issued €750.0 million of 5.25% Euro notes due October 1, 2014. The Company has significant operations with the Euro as their functional currency. The Company believes that the Euro cash flows from these businesses will be adequate to fund the debt obligations under these notes.


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ITEM 8.  Financial Statements and Supplementary Data
 
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of Illinois Tool Works Inc. (the “Company” or “ITW”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). ITW’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment we believe that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.
 
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report herein.
 
     
/s/  David B. Speer
 
/s/  Ronald D. Kropp
David B. Speer
  Ronald D. Kropp
Chairman & Chief Executive Officer
February 26, 2010
  Senior Vice President & Chief Financial Officer
February 26, 2010


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Illinois Tool Works Inc.:
 
We have audited the accompanying statement of financial position of Illinois Tool Works Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related statements of income, income reinvested in the business, comprehensive income and cash flows for each of the three years in the period ended December 31, 2009. We also have audited the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Tool Works Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
/s/  Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
February 26, 2010


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Statement of Income
Illinois Tool Works Inc. and Subsidiaries
 
                         
    For the Years Ended December 31  
    2009     2008     2007  
In Thousands except for per share amounts  
 
Operating Revenues
  $ 13,877,068     $ 17,100,341     $ 16,110,267  
Cost of revenues
    9,144,852       11,186,871       10,430,965  
Selling, administrative, and research and development expenses
    3,037,439       3,226,199       2,903,680  
Amortization of intangible assets
    203,230       184,410       145,702  
Impairment of goodwill and other intangible assets
    105,568       1,575       2,154  
                         
Operating Income
    1,385,979       2,501,286       2,627,766  
Interest expense
    (164,839 )     (154,458 )     (102,095 )
Other income (expense)
    (7,350 )     4,710       58,269  
                         
Income from Continuing Operations Before Income Taxes
    1,213,790       2,351,538       2,583,940  
Income taxes
    244,300       660,445       756,249  
                         
Income from Continuing Operations
    969,490       1,691,093       1,827,691  
Income (Loss) from Discontinued Operations
    (22,481 )     (172,090 )     42,171  
                         
Net Income
  $ 947,009     $ 1,519,003     $ 1,869,862  
                         
Income Per Share from Continuing Operations:
                       
Basic
  $ 1.94     $ 3.26     $ 3.31  
                         
Diluted
  $ 1.93     $ 3.24     $ 3.29  
                         
Income (Loss) Per Share from Discontinued Operations:
                       
Basic
  $ (0.04 )   $ (0.33 )   $ 0.08  
                         
Diluted
  $ (0.04 )   $ (0.33 )   $ 0.08  
                         
Net Income Per Share:
                       
Basic
  $ 1.89     $ 2.93     $ 3.39  
                         
Diluted
  $ 1.89     $ 2.91     $ 3.36  
                         
 
The Notes to Financial Statements are an integral part of this statement.


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Statement of Income Reinvested in the Business
Illinois Tool Works Inc. and Subsidiaries
 
                         
    For the Years Ended December 31  
    2009     2008     2007  
In Thousands  
 
Beginning Balance
  $ 9,196,465     $ 9,879,065     $ 10,406,511  
Net income
    947,009       1,519,003       1,869,862  
Cash dividends declared
    (620,679 )     (604,988 )     (533,519 )
Retirement of treasury shares
          (1,583,827 )     (1,841,230 )
Cumulative effect of adopting new accounting guidance, net of tax
    (1,055 )     (12,788 )     (22,559 )
                         
Ending Balance
  $ 9,521,740     $ 9,196,465     $ 9,879,065  
                         
 
Statement of Comprehensive Income
Illinois Tool Works Inc. and Subsidiaries
 
                         
    For the Years Ended December 31  
    2009     2008     2007  
In Thousands  
 
Net Income
  $ 947,009     $ 1,519,003     $ 1,869,862  
Other Comprehensive Income:
                       
Foreign currency translation adjustments
    716,208       (874,952 )     424,037  
Pension and other postretirement benefit adjustments, net of tax
    (62,271 )     (432,618 )     180,110  
                         
Comprehensive Income
  $ 1,600,946     $ 211,433     $ 2,474,009  
                         
 
The Notes to Financial Statements are an integral part of these statements.


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Statement of Financial Position
Illinois Tool Works Inc. and Subsidiaries
 
                 
    December 31  
In Thousands except shares   2009     2008  
 
Assets
                 
Current Assets:
               
Cash and equivalents
  $ 1,318,772     $ 742,950  
Trade receivables
    2,491,492       2,571,987  
Inventories
    1,356,233       1,774,697  
Deferred income taxes
    231,858       206,496  
Prepaid expenses and other current assets
    276,240       375,778  
Assets held for sale
          82,071  
                 
Total current assets
    5,674,595       5,753,979  
                 
Plant and Equipment:
               
Land
    247,911       227,167  
Buildings and improvements
    1,589,534       1,457,732  
Machinery and equipment
    3,945,692       3,714,456  
Equipment leased to others
    182,485       164,504  
Construction in progress
    90,908       98,876  
                 
      6,056,530       5,662,735  
Accumulated depreciation
    (3,920,003 )     (3,553,303 )
                 
Net plant and equipment
    2,136,527       2,109,432  
                 
Investments
    451,293       465,894  
Goodwill
    4,860,732       4,517,550  
Intangible Assets
    1,723,417       1,779,669  
Deferred Income Taxes
    673,044       75,999  
Other Assets
    562,376       501,028  
                 
    $ 16,081,984     $ 15,203,551  
                 
 
Liabilities and Stockholders’ Equity
                 
Current Liabilities:
               
Short-term debt
  $ 213,681     $ 2,433,973  
Accounts payable
    689,572       683,991  
Accrued expenses
    1,359,394       1,315,106  
Cash dividends payable
    155,724       154,726  
Income taxes payable
    417,267       216,751  
Liabilities held for sale
          20,546  
                 
Total current liabilities
    2,835,638       4,825,093  
                 
Noncurrent Liabilities:
               
Long-term debt
    2,914,874       1,247,883  
Deferred income taxes
    207,677       125,089  
Other
    1,305,919       1,330,395  
                 
Total noncurrent liabilities
    4,428,470       2,703,367  
                 
Stockholders’ Equity:
               
Common stock:
               
Issued — 535,010,960 shares in 2009 and 531,789,730 shares in 2008
    5,350       5,318  
Additional paid-in-capital
    270,985       105,497  
Income reinvested in the business
    9,521,740       9,196,465  
Common stock held in treasury
    (1,390,594 )     (1,390,594 )
Accumulated other comprehensive income
    400,726       (253,211 )
Noncontrolling interest
    9,669       11,616  
                 
Total stockholders’ equity
    8,817,876       7,675,091  
                 
    $ 16,081,984     $ 15,203,551  
                 
 
The Notes to Financial Statements are an integral part of this statement.


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Statement of Cash Flows
Illinois Tool Works Inc. and Subsidiaries
 
                         
    For the Years Ended December 31  
    2009     2008     2007  
In Thousands                  
 
Cash Provided by (Used for) Operating Activities:
                       
Net income
  $ 947,009     $ 1,519,003     $ 1,869,862  
Adjustments to reconcile net income to cash provided by operating activities:
                       
Depreciation
    366,127       367,615       363,701  
Amortization and impairment of goodwill and other intangible assets
    308,798       324,292       161,043  
Change in deferred income taxes
    (477,582 )     (97,807 )     (5,522 )
Provision for uncollectible accounts
    16,191       15,405       5,998  
Loss on sale of plant and equipment
    1,856       4,245       743  
Income from investments
    (4,944 )     (17,017 )     (47,880 )
(Gain) loss on sale of operations and affiliates
    34,315       43,522       (34,807 )
Stock compensation expense
    51,858       41,686       30,471  
Other non-cash items, net
    (1,548 )     2,731       (3,141 )
Change in assets and liabilities:
                       
(Increase) decrease in —
                       
Trade receivables
    336,873       263,478       (56,971 )
Inventories
    572,679       (97,319 )     (4,543 )
Prepaid expenses and other assets
    8,939       (76,146 )     (15,676 )
Increase (decrease) in —
                       
Accounts payable
    (84,526 )     (191,856 )     (37,823 )
Accrued expenses and other liabilities
    (256,171 )     (21,141 )     (2,301 )
Income taxes receivable and payable
    324,231       147,660       260,427  
Other, net
    2,484       (6,127 )     716  
                         
Net cash provided by operating activities
    2,146,589       2,222,224       2,484,297  
                         
Cash Provided by (Used for) Investing Activities:
                       
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates
    (281,674 )     (1,546,982 )     (812,757 )
Additions to plant and equipment
    (247,102 )     (362,312 )     (353,355 )
Purchases of investments
    (17,586 )     (19,583 )     (28,734 )
Proceeds from investments
    20,215       26,932       91,184  
Proceeds from sale of plant and equipment
    28,590       23,393       21,821  
Proceeds from sale of operations and affiliates
    17,259       106,053       160,457  
Other, net
    (23,824 )     9,182       (2,664 )
                         
Net cash used for investing activities
    (504,122 )     (1,763,317 )     (924,048 )
                         
Cash Provided by (Used for) Financing Activities:
                       
Cash dividends paid
    (619,681 )     (598,690 )     (502,430 )
Issuance of common stock
    101,733       56,189       116,665  
Repurchases of common stock
          (1,390,594 )     (1,757,761 )
Net proceeds (repayments) of debt with original maturities of three months or less
    (1,610,262 )     1,510,374       (266,968 )
Proceeds from debt with original maturities of more than three months
    2,159,140       118,662       1,062,108  
Repayments of debt with original maturities of more than three months
    (1,285,348 )     (161,423 )     (17,754 )
Excess tax benefits from share-based compensation
    4,051       4,003       16,212  
Repayment of preferred stock of subsidiary
                (40,000 )
                         
Net cash used for financing activities
    (1,250,367 )     (461,479 )     (1,389,928 )
                         
Effect of Exchange Rate Changes on Cash and Equivalents
    183,722       (82,002 )     66,996  
                         
Cash and Equivalents:
                       
Increase (decrease) during the year
    575,822       (84,574 )     237,317  
Beginning of year
    742,950       827,524       590,207  
                         
End of year
  $ 1,318,772     $ 742,950     $ 827,524  
                         
Cash Paid During the Year for Interest
  $ 153,971     $ 157,175     $ 132,757  
                         
Cash Paid During the Year for Income Taxes, Net of Refunds
  $ 364,383     $ 619,885     $ 448,102  
                         
Liabilities Assumed from Acquisitions
  $ 57,863     $ 577,035     $ 465,303  
                         
 
The Notes to Financial Statements are an integral part of this statement.


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Notes to Financial Statements
Nature of Operations

 
The Notes to Financial Statements furnish additional information on items in the financial statements. The notes have been arranged in the same order as the related items appear in the statements.
 
Illinois Tool Works Inc. (the “Company” or “ITW”) is a multinational manufacturer of a diversified range of industrial products and equipment with approximately 840 operations in 57 countries. The Company primarily serves the construction, general industrial, automotive and food institutional/restaurant markets.
Significant Accounting Policies

 
Significant accounting principles and policies of the Company are in italics. Certain reclassifications of prior years’ data have been made to conform to current year reporting.
 
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to financial statements. Actual results could differ from those estimates. The significant estimates included in the preparation of the financial statements are related to inventories, trade receivables, plant and equipment, income taxes, goodwill and intangible assets, product liability matters, litigation, product warranties, pensions, other postretirement benefits, environmental matters and stock options.
Consolidation and Translation

 
Consolidation and Translation — The financial statements include the Company and substantially all of its majority-owned subsidiaries. All significant intercompany transactions are eliminated from the financial statements. Substantially all of the Company’s foreign subsidiaries outside North America have November 30 fiscal year-ends to facilitate inclusion of their financial statements in the December 31 consolidated financial statements.
 
Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates for the period. Translation adjustments are reported as a component of accumulated other comprehensive income in stockholders’ equity.
Discontinued Operations

 
Discontinued Operations — The Company periodically reviews its 840 operations for businesses which may no longer be aligned with its long-term objectives. In August 2008, the Company’s Board of Directors authorized the divestiture of the Click Commerce industrial software business which was previously reported in the All Other segment. In the second quarter of 2009, the Company completed the sale of the Click Commerce business.
 
In 2007, the Company divested an automotive machinery business and a consumer packaging business. In the fourth quarter of 2007, the Company classified an automotive components business and a second consumer packaging business as held for sale. The consumer packaging business was sold in 2008. The Company completed the sale of the automotive components business in the third quarter of 2009.
 
In May 2009, the Company’s Board of Directors rescinded a resolution from August 2008 to divest the Decorative Surfaces segment. The consolidated financial statements and related notes for all periods have been restated to present the results related to the Decorative Surfaces segment as continuing operations.
 
Results of the discontinued operations for the years ended December 31, 2009, 2008 and 2007 were as follows:
 
                         
In Thousands
  2009     2008     2007  
 
Operating revenues
  $ 26,498     $ 117,553     $ 168,597  
                         
Income (loss) before taxes
  $ (33,678 )   $ (171,629 )   $ 35,928  
Income tax (expense) benefit
    11,197       (461 )     6,243  
                         
Income (loss) from discontinued operations
  $ (22,481 )   $ (172,090 )   $ 42,171  
                         
 
In 2009, income (loss) before taxes includes losses on disposals of $27,665,000 on the Click Commerce and automotive components businesses.


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Notes to Financial Statements — (Continued)
 
In 2008, income (loss) before taxes includes goodwill impairment charges of $132,563,000 related to the Click Commerce business and losses on anticipated sale of $64,000,000 related to the Click Commerce and the automotive components businesses. Also included are gains on disposals of $19,942,000, primarily related to the completed divestiture of a consumer packaging business.
 
In 2007, income (loss) before taxes includes gains on disposals of $33,168,000 related to the completed divestitures of an automotive machinery business and a consumer packaging business.
 
As of December 31, 2008, the assets and liabilities of the Click Commerce business and a certain automotive components business were included in assets and liabilities held for sale. The total assets and liabilities held for sale as of December 31, 2008 were as follows:
 
         
In Thousands
  2008  
 
Trade receivables
  $ 18,122  
Inventories
    2,369  
Net plant and equipment
    11,308  
Net goodwill and intangible assets
    108,405  
Other
    5,867  
Loss reserve on assets held for sale
    (64,000 )
         
Total assets held for sale
  $ 82,071  
         
Accounts payable
  $ 1,119  
Accrued expenses
    19,427  
         
Total liabilities held for sale
  $ 20,546  
         
Acquisitions

 
Acquisitions — The Company accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition. Acquisitions, individually and in the aggregate, did not materially affect the Company’s results of operations or financial position for all periods presented. Summarized information related to acquisitions is as follows:
 
                         
In Thousands except number of acquisitions
  2009     2008     2007  
 
Number of acquisitions
    20       50       52  
Net cash paid during the year
  $ 281,674     $ 1,546,982     $ 812,757  
 
The premium over tangible net assets recorded for acquisitions based on purchase price allocations during 2009, 2008 and 2007 were as follows:
 
                                                 
    2009     2008     2007  
    Weighted-
          Weighted-
          Weighted-
       
    Average
    Premium
    Average
    Premium
    Average
    Premium
 
In Thousands except for weighted-average lives (years)
  Life     Recorded     Life     Recorded     Life     Recorded  
 
Goodwill
          $ 94,694             $ 675,356             $ 396,704  
Amortizable intangible assets:
                                               
Customer lists and relationships
    10.6       44,416       12.6       416,904       10.6       182,942  
Patents and proprietary technology
    12.2       33,812       12.7       111,593       8.7       64,033  
Trademarks and brands
    13.3       21,385       16.0       140,158       16.8       52,771  
Noncompete agreements
    6.8       7,021       3.2       25,637       3.9       12,362  
Other
    4.4       6,909       2.3       15,326       4.3       16,997  
                                                 
Total amortizable intangible assets
    10.9       113,543       12.7       709,618       10.6       329,105  
Indefinite-lived intangible assets:
                                               
Trademarks and brands
            13,218               39,488               28,426  
                                                 
Total premium recorded
          $ 221,455             $ 1,424,462             $ 754,235  
                                                 


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Notes to Financial Statements — (Continued)
 
Of the total goodwill recorded for acquisitions, the Company expects goodwill of $71,529,000 in 2009, $83,694,000 in 2008, and $104,276,000 in 2007 will be tax deductible.
 
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. The new guidance also requires prospectively that (1) acquisition-related costs be expensed as incurred; (2) restructuring costs generally be recognized as a post-acquisition expense; and (3) changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period impact income tax expense. Upon adoption of the new guidance, the Company recorded an after-tax charge to equity of $1,055,000.
Operating Revenues

 
Operating Revenues are recognized when the risks and rewards of ownership are transferred to the customer, which is generally at the time of product shipment. No single customer accounted for more than 5% of consolidated revenues in 2009, 2008 or 2007.
Research and Development Expenses

 
Research and Development Expenses are recorded as expense in the year incurred. These costs were $198,536,000 in 2009, $212,658,000 in 2008 and $197,595,000 in 2007.
Rental Expense

 
Rental Expense was $175,092,000 in 2009, $161,810,000 in 2008 and $145,353,000 in 2007. Future minimum lease payments for the years ending December 31 are as follows:
 
         
In Thousands
     
 
2010
  $ 150,881  
2011
    106,430  
2012
    75,920  
2013
    56,747  
2014
    43,864  
2015 and future years
    68,249  
         
    $ 502,091  
         
Advertising Expenses

 
Advertising Expenses are recorded as expense in the year incurred. These costs were $79,259,000 in 2009, $107,395,000 in 2008 and $113,026,000 in 2007.
Other Income (Expense)

 
Other Income (Expense) consisted of the following:
 
                         
In Thousands
  2009     2008     2007  
 
Interest income
  $ 17,551     $ 29,392     $ 19,975  
Investment income
    4,944       17,017       47,880  
Losses on foreign currency transactions
    (24,948 )     (1,407 )     (14,180 )
German transfer tax settlement
          (44,002 )      
Other, net
    (4,897 )     3,710       4,594  
                         
    $ (7,350 )   $ 4,710     $ 58,269  
                         


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Table of Contents

 
Notes to Financial Statements — (Continued)
 
Income Taxes

 
Income Taxes — The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities given the provisions of the enacted tax laws. The components of the provision for income taxes were as shown below:
 
                         
In Thousands
  2009     2008     2007  
 
U.S. Federal income taxes:
                       
Current
  $ 229,929     $ 329,200     $ 435,013  
Deferred
    (13,861 )     (8,866 )     57,397  
Benefit of net operating loss and foreign tax credits carryforwards
    (86,022 )           (2,212 )
                         
    $ 130,046     $ 320,334     $ 490,198  
                         
Foreign income taxes:
                       
Current
  $ 369,766     $ 285,476     $ 262,163  
Deferred
    (235,341 )     6,189       (22,487 )
Benefit of net operating loss carryforwards
    (32,910 )     (1,532 )     (22,128 )
                         
    $ 101,515     $ 290,133     $ 217,548  
                         
State income taxes:
                       
Current
  $ 42,182     $ 78,285     $ 46,210  
Deferred
    (25,500 )     (28,307 )     2,293  
Benefit of net operating loss carryforwards
    (3,943 )            
                         
    $ 12,739     $ 49,978     $ 48,503  
                         
    $ 244,300     $ 660,445     $ 756,249  
                         
 
Income from continuing operations before income taxes for domestic and foreign operations was as follows:
 
                         
In Thousands
  2009     2008     2007  
 
Domestic
  $ 499,654     $ 1,198,006     $ 1,646,964  
Foreign
    714,136       1,153,532       936,976  
                         
    $ 1,213,790     $ 2,351,538     $ 2,583,940  
                         
 
The reconciliation between the U.S. Federal statutory tax rate and the effective tax rate was as follows:
 
                         
    2009     2008     2007  
 
U.S. Federal statutory tax rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of U.S. Federal tax benefit
    0.8       1.6       1.5  
Nondeductible goodwill impairment
    2.5              
Differences between U.S. Federal statutory and foreign tax rates
    (3.3 )     (3.2 )     (1.7 )
Nontaxable foreign interest income
    (4.6 )     (3.1 )     (2.7 )
Foreign tax credit related to a global legal structure reorganization
    (7.0 )            
German tax audit settlement
    (4.7 )            
Tax effect of foreign dividends
    1.3       0.2       0.3  
Tax relief for U.S. manufacturers
    (0.8 )     (1.0 )     (0.9 )
Other, net
    0.9       (1.4 )     (2.2 )
                         
Effective tax rate
    20.1 %     28.1 %     29.3 %
                         
 
Deferred U.S. Federal income taxes and foreign withholding taxes have not been provided on the remaining undistributed earnings of certain international subsidiaries of approximately $5,700,000,000 and


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Table of Contents

 
Notes to Financial Statements — (Continued)
 
$4,500,000,000 as of December 31, 2009 and 2008, respectively, as these earnings are considered permanently invested. Upon repatriation of these earnings to the U.S. in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign withholding taxes. The actual U.S. tax cost would depend on income tax laws and circumstances at the time of distribution. Determination of the related tax liability is not practicable because of the complexities associated with the hypothetical calculation.
 
The components of deferred income tax assets and liabilities at December 31, 2009 and 2008 were as follows:
 
                                 
    2009     2008  
In Thousands
  Asset     Liability     Asset     Liability  
 
Goodwill and intangible assets
  $ 524,899     $ (792,361 )   $ 211,838     $ (750,830 )
Inventory reserves, capitalized tax cost and LIFO inventory
    65,598       (15,745 )     57,365       (16,808 )
Investments
    33,133       (59,324 )     13,940       (118,047 )
Plant and equipment
    36,879       (91,672 )     30,408       (91,872 )
Accrued expenses and reserves
    114,242             116,220        
Employee benefit accruals
    327,991             306,803        
Foreign tax credit carryforwards
    211,301             94,653        
Net operating loss carryforwards
    511,576             365,473        
Capital loss carryforwards
    31,055             52,626        
Allowances for uncollectible accounts
    17,992             18,716        
Pension liabilities
    131,647             148,576        
Other
    119,128       (34,388 )     101,886       (33,261 )
                                 
Gross deferred income tax assets (liabilities)
    2,125,441       (993,490 )     1,518,504       (1,010,818 )
Valuation allowances
    (434,726 )           (350,280 )      
                                 
Total deferred income tax assets (liabilities)
  $ 1,690,715     $ (993,490 )   $ 1,168,224     $ (1,010,818 )
                                 
 
Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The valuation allowances recorded at December 31, 2009 and 2008 relate primarily to certain net operating loss carryforwards and capital loss carryforwards.


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Table of Contents

 
Notes to Financial Statements — (Continued)
 
At December 31, 2009, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:
 
         
    Gross Net
 
    Operating Loss
 
In Thousands
  Carryforwards  
 
2010
  $ 3,374  
2011
    6,484  
2012
    11,919  
2013
    14,907  
2014
    11,143  
2015
    3,308  
2016
    10,421  
2017
    5,155  
2018
    21,854  
2019
    59,891  
2020
    69,430  
2021
    73,808  
2022
    23,110  
2023
    19,626  
2024
    18,031  
2025
    8,306  
2026
    650  
2027
    2,163  
2028
    3,718  
2029
    2,096  
Do not expire
    1,241,324  
         
    $ 1,610,718  
         
 
The Company has foreign tax credit carryovers of $211,301,000 as of December 31, 2009 and $94,653,000 as of December 31, 2008 that are available for use by the Company between 2010 and 2019.
 
The changes in the amount of unrecognized tax benefits during 2009, 2008 and 2007 were as follows:
 
                         
In Thousands
  2009     2008     2007  
 
Beginning balance
  $ 800,000     $ 773,000     $ 688,000  
Additions based on tax positions related to the current year
    123,000       67,000       55,000  
Additions for tax positions of prior years
    122,000       107,000       116,000  
Reductions for tax positions of prior years
    (18,000 )     (66,000 )     (86,000 )
Settlements
    (383,000 )           (26,000 )
Foreign currency translation
    81,000       (81,000 )     26,000  
                         
Ending balance
  $ 725,000     $ 800,000     $ 773,000  
                         
 
Included in the balance at December 31, 2009, are approximately $546,000,000 of tax positions that, if recognized, would impact the Company’s effective tax rate.
 
The Company settled several items during 2009 related to its German and U.S. tax audits. The most significant of which related to a financing transaction, leveraged leases and mortgage-backed securities.
 
The Company is litigating its dispute with the Australian Tax Office over the treatment of an intercompany financing transaction between the U.S. and Australia. The Company has recorded its best estimate of the exposure for this audit; however, it is reasonably possible that the Company will resolve the Australian


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Table of Contents

 
Notes to Financial Statements — (Continued)
 
financing issue within the next 12 months and that the amount of the Company’s unrecognized tax benefits may decrease by approximately $159,000,000.
 
The Company files numerous consolidated and separate tax returns in the U.S. Federal jurisdiction and in many state and foreign jurisdictions. The following table summarizes the open tax years for the Company’s major jurisdictions:
 
         
    Open
 
Jurisdiction
  Tax Years  
 
United States — Federal
    2001-2009  
United Kingdom
    2000-2009  
Germany
    2002-2009  
France
    2000-2009  
Australia
    2002-2009  
 
The Company recognizes interest and penalties related to income tax matters in income tax expense.  The accrual for interest and penalties as of December 31, 2009 and 2008 was $45,000,000 and $7,000,000, respectively.
Income from Continuing Operations Per Share

 
Income from Continuing Operations Per Share is computed by dividing income from continuing operations by the weighted-average number of shares outstanding for the period. Income from continuing operations per diluted share is computed by dividing income from continuing operations by the weighted-average number of shares assuming dilution for stock options and restricted stock. Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised and the unvested restricted stock vested during the period. The computation of income from continuing operations per share was as follows: