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 global manufacturer of a diversified range of industrial products and equipment with approximately 90 divisions in 57 countries. As of December 31, 2014, the Company employed approximately 49,000 persons.

The Company's operations are organized and managed based on similar product offerings and similar end markets, and are reported to senior management as the following seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

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

Management analyzes the Company's consolidated results of operations and the results of each segment by identifying the effects of changes in the results of the organic business (businesses that have been included in the Company's results of operations for more than 12 months), newly acquired and recently divested companies, restructuring costs, goodwill and intangible asset impairment charges, and currency translation on the operating revenues and operating income of each segment. The changes to operating income of organic businesses include the estimated effects of both operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the organic revenue volume changes on organic 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 revenues. Changes in variable margins and overhead costs represent the estimated effect of non-volume related changes in the operating income of organic businesses and may be driven by a number of factors, including changes in product mix, the cost of raw materials, labor and overhead, and pricing to customers. Selling price versus material cost comparisons represent the estimated net impact of increases or decreases in the cost of materials used in the Company's products versus changes in the selling price to the Company's customers. Management reviews these price versus cost comparisons by analyzing the net impact of changes to each segment's operating margin.

ENTERPRISE STRATEGY

In 2012, the Company embarked on an Enterprise Strategy with the objective of fully leveraging ITW’s core capabilities to deliver strong financial performance. ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.

The foundation of this strategy is a set of business practices referred to as the ITW Business Model consisting of three core elements:

80/20 Business Process - The concept of the 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 uses this 80/20 business process to simplify and focus on the key drivers of business profitability, and as a result, reduces complexity that often creates unnecessary expense and disguises what is truly important. The Company utilizes the 80/20 process in all aspects of its 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 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 profitability and returns.

Customer-Back Innovation - ITW’s customer-back approach to innovation builds on the Company’s 80/20 business process to help ITW businesses focus on the most profitable customers and invent solutions to solve their specific problems. ITW businesses are focused on building relationships with these major customers to develop deep knowledge and insight around their needs. These customer insights and learnings drive innovation at ITW. The Company actively protects its innovation through a patent portfolio of approximately 10,000 active patents.

Decentralized Entrepreneurial Culture - ITW businesses have significant flexibility within the framework of the ITW Business Model to customize their approach in order to best serve their customers. This leads to a focused and simple organizational structure that can deliver operational excellence adapted to their customers and end markets.

KEY INITIATIVES

ITW’s Enterprise Strategy is centered on three key initiatives - portfolio management, business structure simplification, and strategic sourcing. These enterprise initiatives are expected to enhance the business through 2017 and are targeted at expanding organic revenue growth and improving profitability and returns.

Portfolio Management - The Company's portfolio management initiative aims to construct a business portfolio that leverages the Company’s differentiated business model and growth potential. As part of this initiative, the Company reviews its operations for businesses that may no longer be aligned with its long-term objectives. As a result, the Company's divestiture activity increased in 2012, 2013 and 2014. With the sale of the Company's former Industrial Packaging segment on May 1, 2014, the divestiture element of the Company's portfolio management initiative is essentially complete. The Company has historically acquired businesses with complementary products and services as well as larger acquisitions that represent potential new platforms. Going forward, the Company will emphasize organic growth, while acquisitions will be targeted to bolt-on acquisitions that support and accelerate organic growth in existing segments, and new platforms that expand the Company’s long-term growth and earnings potential. Refer to the Discontinued Operations note in Item 8 - Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

Another key aspect of the portfolio management initiative is the focus on product line and customer base simplification. Product line and customer base simplification focuses on eliminating the complexity and overhead costs associated with smaller product lines and customers, and focuses businesses on supporting and growing their largest customers and product lines. Product line and customer base simplification is a core element of the Company's 80/20 business process. In the short-term, product line and customer base simplification may result in a decrease in revenue and overhead costs while improving operating margin. Over the long-term, product line and customer base simplification results in growth in revenue, profitability and returns, and is key to improving the Company's long-term operating and financial performance.

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

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

DIVESTITURE OF MAJORITY INTEREST IN FORMER DECORATIVE SURFACES SEGMENT

On October 31, 2012, the Company divested a 51% majority interest in the Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest, the historical operating results of Decorative Surfaces are presented in continuing operations. Effective November 1, 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

DISCONTINUED OPERATIONS

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

In February 2013, the Company announced that it was initiating a review process to explore strategic alternatives for the Industrial Packaging segment. In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging segment. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented this segment as part of its continuing operations.

On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations.

In the third quarter of 2013, the Company also committed to plans for the divestiture of a construction distribution business previously included in the Construction Products segment and a specialty coatings business previously included in the Polymers & Fluids segment. The construction distribution and specialty coatings businesses were classified as held for sale beginning in the third quarter of 2013.

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

The operating results of the businesses discussed above, as well as certain previously divested businesses, are reported as discontinued operations in the statement of income for all periods presented. As of the second quarter of 2014, the Company has completed the divestiture of all of the businesses previously classified as discontinued operations. Refer to the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

CONSOLIDATED RESULTS OF OPERATIONS

The Company’s consolidated results of operations for 2014, 2013 and 2012 are summarized as follows:

Dollars in millions	2014				2013				2012
Operating revenues	$	14,484			$	14,135			$	14,791
Operating income	2,888				2,514				2,475
Margin %	19.9		%		17.8		%		16.7		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

	2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
	Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage	2.6	%		6.3	%		0.6	%		0.2	%		0.6	%		0.1	%
Changes in variable margins and overhead costs	—			8.2			1.4			—			6.4			1.1
	2.6			14.5			2.0			0.2			7.0			1.2
Acquisitions and divestitures	0.6			0.2			(0.1	)		(4.6	)		(4.7	)		0.1
Restructuring costs	—			0.9			0.2			—			(1.0	)		(0.2	)
Impairment of goodwill and intangibles	—			—			—			—			—			—
Translation	(0.7	)		(0.7	)		—			—			0.3			—
Total	2.5	%		14.9	%		2.1	%		(4.4	)%		1.6	%		1.1	%

Operating Revenues

Operating revenues increased 2.5% in 2014 versus 2013 due to an increase in organic and acquisition revenues, partially offset by the unfavorable effect of currency translation which primarily occurred in the fourth quarter. Total organic revenues increased 2.6% in 2014 versus 2013 primarily due to 8.9% growth in the Automotive OEM segment and 4.7% growth in the Food Equipment segment, partially offset by modest declines in the Polymers & Fluids and Specialty Products segments. Product line and customer base simplification activities associated with the portfolio management component of the Company's enterprise strategy reduced organic revenue growth by approximately one percentage point. International organic revenues increased 3.2% versus the prior year. European organic revenues increased 2.4% primarily driven by the Automotive OEM, Food Equipment and Test & Measurement and Electronics segments, partially offset by Welding, Polymers & Fluids and Construction Products. Asia Pacific organic revenues increased 4.9% primarily due to growth in Automotive OEM in China and Construction Products in Australia. North American organic revenues increased 2.3% primarily due to growth in the Automotive OEM, Welding and Food Equipment segments. Acquisitions primarily included the purchase of a European consumer packaging equipment business and a Chinese food equipment business in the third quarter of 2013.

Operating revenues decreased 4.4% in 2013 versus 2012 primarily due to divestitures which reduced revenues by 6.3% over the prior year. On October 31, 2012, the Company divested a 51% majority interest in the former Decorative Surfaces segment. Accordingly, the Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest using the equity method of accounting. Due to the Company's continuing involvement through its 49% ownership interest in Wilsonart, the historical operating results of Decorative Surfaces are presented in continuing operations. Excluding the 2012 revenues of the former Decorative Surfaces segment of $921 million, 2013 revenues increased by $265 million, or 1.9%, over the prior year, primarily driven by higher revenues from acquisitions and higher organic revenues (see "Results of Operations by Segment" table below). Acquisitions contributed 1.7% to revenues in 2013 versus 2012 primarily due to the purchase of a European consumer packaging equipment business and a Chinese food equipment business. Worldwide organic revenues increased 0.2% in 2013 versus 2012 primarily due to growth in the Automotive OEM segment, partially offset by lower revenues in the electronic assembly equipment businesses within the Test & Measurement and Electronics segment. International organic revenues increased 1.2% due to growth in Asia Pacific of 3.6%, primarily due to the result of strong growth in China in 2013 versus 2012. European organic revenues declined 0.8% due to weakness in the European economic environment in the first half of 2013 which moderately improved in the second half of the year. North American organic revenues were lower by 0.5% primarily due to the electronic assembly business within the Test & Measurement and Electronics segment. This was partially offset by growth in the North American Automotive OEM, Food Equipment, and Construction Products businesses.

Operating Income

Operating income increased 14.9% in 2014 versus 2013 primarily due to changes in variable margins and overhead costs, an increase in organic revenues and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Operating margins were 19.9% for 2014, an increase of 210 basis points versus the prior year. Total organic business margins increased 200 basis points primarily due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased margins by 140 basis points over the prior year primarily due to the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, which contributed 120 basis points of margin improvement, favorable selling price versus material cost comparisons of 10 basis points, and lower operating expenses. Operating expenses in 2014 included the impact of lower employee benefit expenses, offset by costs related to continued investment in the business. The positive operating leverage effect of the increase in organic revenues contributed 60 basis points of improvement. Lower restructuring expenses increased total operating margins by 20 basis points.

Operating income increased 1.6% in 2013 versus 2012 primarily due to lower overhead expenses and an increase in organic revenues, partially offset by the divestiture of the former Decorative Surfaces segment and higher restructuring expenses. Total organic business margins increased 120 basis points in 2013 versus 2012 primarily due to lower overhead costs. The changes in variable margins and overhead costs increased organic business margins by 110 basis points, driven by reductions in overhead expenses from the Company's enterprise initiatives of 80 basis points, resulting primarily from the benefits of business structure simplification activities, and the favorable effect of selling price versus material cost comparisons of 40 basis points.

RESULTS OF OPERATIONS BY SEGMENT

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

	Operating Revenues
In millions	2014				2013				2012
Automotive OEM	$	2,590			$	2,396			$	2,171
Test & Measurement and Electronics	2,204				2,176				2,299
Food Equipment	2,177				2,047				1,939
Polymers & Fluids	1,927				1,993				2,063
Welding	1,850				1,837				1,847
Construction Products	1,707				1,717				1,724
Specialty Products	2,055				2,007				1,871
Intersegment revenues	(26		)		(38		)		(44		)
Total Segments	14,484				14,135				13,870
Decorative Surfaces	—				—				921
Total	$	14,484			$	14,135			$	14,791

	Operating Income
In millions	2014				2013				2012
Automotive OEM	$	600			$	490			$	421
Test & Measurement and Electronics	340				321				342
Food Equipment	453				385				332
Polymers & Fluids	357				335				327
Welding	479				464				470
Construction Products	289				238				201
Specialty Products	440				408				365
Total Segments	2,958				2,641				2,458
Decorative Surfaces	—				—				143
Unallocated	(70		)		(127		)		(126		)
Total	$	2,888			$	2,514			$	2,475

Segments are allocated a fixed overhead charge based on the segment's revenues. Expenses not charged to the segments are reported separately as Unallocated. Because the Unallocated category includes a variety of items, it is subject to fluctuations on a quarterly and annual basis.

AUTOMOTIVE OEM

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

In the Automotive OEM segment, products and services include:

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

In 2014, this segment primarily served the automotive original equipment manufacturers and tiers (91%) market.

The results of operations for the Automotive OEM segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	2,590			$	2,396			$	2,171
Operating income		600				490				421
Margin %		23.2		%		20.5		%		19.4		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

	2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
	Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage	8.9	%		16.2	%		1.4	%		9.5	%		17.8	%		1.5	%
Changes in variable margins and overhead costs	—			4.0			0.8			—			0.2			—
	8.9			20.2			2.2			9.5			18.0			1.5
Acquisitions and divestitures	(0.1	)		—			—			—			—			—
Restructuring costs	—			2.9			0.5			—			(3.2	)		(0.6	)
Impairment of goodwill and intangibles	—			—			—			—			—			—
Translation	(0.7	)		(0.6	)		—			0.9			1.7			0.2
Total	8.1	%		22.5	%		2.7	%		10.4	%		16.5	%		1.1	%

Operating Revenues

Operating revenues increased 8.1% in 2014 versus 2013 primarily due to an increase in organic revenues, partially offset by the unfavorable effect of currency translation. As a result of product innovation and penetration gains, worldwide automotive organic revenues grew 8.9%, exceeding auto builds which grew 3%. European organic revenue growth of 10.8% exceeded auto build growth of 3%. North American automotive organic revenues grew 7.6% as North American auto builds increased 5% over the prior year. Organic revenues for Asia Pacific increased 12.1% over the prior year primarily due to revenue growth in China of 17.2%, which exceeded Chinese auto build growth of 8%.

Operating revenues increased 10.4% in 2013 versus 2012 due to the increase in organic revenues and the favorable effect of currency translation. Worldwide automotive organic revenue growth of 9.5% in 2013 versus 2012 exceeded auto builds of approximately 4% primarily due to worldwide product penetration gains. International automotive organic revenues increased 10.9% over the prior year. Organic revenues for Asia Pacific increased 20.8% over the prior year primarily due to revenue growth in China of 37.7%, which exceeded Chinese auto build growth of 14%. European organic revenue growth was 6.8% while auto build growth was flat in 2013 versus 2012. North American automotive organic revenue growth of 8.0% exceeded auto build growth of 5% over the prior year.

Operating Income

Operating income increased 22.5% in 2014 versus 2013 due to higher organic revenues, changes in variable margins and overhead costs and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Total organic business margins increased 220 basis points primarily due to the positive operating leverage effect of the increase in organic revenues of 140 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 80 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by unfavorable selling price versus material cost comparisons of 30 basis points. Lower restructuring expenses increased total operating margins by 50 basis points.

Operating income increased 16.5% in 2013 versus 2012 primarily due to higher organic revenues and the favorable effect of currency translation, partially offset by higher restructuring expenses. Total organic business margins increased 150 basis points due to the positive operating leverage effect of the increase in organic revenues described above. The changes in variable margins and overhead costs had no significant effect on organic business margins as the benefits of business structure simplification activities were offset by higher overhead costs primarily related to business expansion in China. Higher restructuring expenses diluted total operating margins by 60 basis points in 2013 versus 2012.

TEST & MEASUREMENT AND ELECTRONICS

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

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

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

•	electronic assembly equipment and related consumable solder materials;

•	electronic components and component packaging;

•	static control equipment and consumables used for contamination control in clean room environments; and

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

In 2014, this segment primarily served the electronics (23%), general industrial (18%), industrial capital goods (8%), automotive original equipment manufacturers and tiers (8%) and consumer durables (7%) markets.

The results of operations for the Test & Measurement and Electronics segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	2,204			$	2,176			$	2,299
Operating income		340				321				342
Margin %		15.4		%		14.8		%		14.9		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

		2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
		Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage		1.5	%		4.5	%		0.4	%		(6.0	)%		(18.3	)%		(1.9	)%
Changes in variable margins and overhead costs		—			3.4			0.5			—			10.6			1.7
		1.5			7.9			0.9			(6.0	)		(7.7	)		(0.2	)
Acquisitions and divestitures		(0.1	)		0.1			—			0.9			0.7			—
Restructuring costs		—			(2.4	)		(0.3	)		—			1.3			0.2
Impairment of goodwill and intangibles		—			0.2			—			—			(0.7	)		(0.1	)
Translation		(0.1	)		—			—			(0.2	)		—			—
Total		1.3	%		5.8	%		0.6	%		(5.3	)%		(6.4	)%		(0.1	)%

Operating Revenues

Operating revenues increased 1.3% in 2014 versus 2013 primarily due to an increase in organic revenues. Organic revenues for the worldwide test and measurement businesses increased 1.8% primarily due to strength in the Instron business. Worldwide electronics organic revenues increased 1.2% primarily due to a 2.0% increase in the other electronics businesses, which was driven by growth in the contamination control businesses, resulting primarily from increased demand across all major regions, the pressure sensitive adhesives businesses, primarily due to higher market demand in Europe, and the static control businesses, primarily due to increased sales to the industrial end market in Asia and North America. Organic revenues for the electronic assembly businesses declined 0.7% but showed improvement in the second half of the year.

Operating revenues decreased 5.3% in 2013 versus 2012 primarily due to a decline in organic revenues, partially offset by revenues from acquisitions. Worldwide electronics organic revenues decreased 14.0% in 2013 versus 2012 primarily due to a

36.1% decrease in revenues in the electronic assembly businesses resulting primarily from strong order rates from a key customer in 2012 that did not recur in 2013. Organic revenues for the other electronics businesses increased 3.1% in 2013 versus 2012 primarily due to increased demand from consumer electronics customers in China. Organic revenues for the worldwide test and measurement businesses increased 2.0% in 2013 versus 2012 primarily due to increased order rates during the fourth quarter of 2013. The acquisition revenue was primarily due to the purchase of a European food and pharmaceutical inspection business in the fourth quarter of 2012.

Operating Income

Operating income increased 5.8% in 2014 versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs, partially offset by higher restructuring expenses. Total organic business margins increased 90 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased organic business margins by 50 basis points primarily due to benefits resulting from the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by the impact of the discrete claim recovery in 2013 noted below. Higher restructuring expenses decreased total operating margins by 30 basis points.

Operating income decreased 6.4% in 2013 versus 2012 primarily due to the lower organic revenues noted above. Total organic business margins decreased 20 basis points primarily due to the negative operating leverage effect of the decrease in organic revenues of 190 basis points, partially offset by changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 170 basis points primarily due to benefits from business structure simplification activities and overhead cost management of 60 basis points, lower intangible asset amortization expense of 40 basis points, favorable selling price versus material cost comparisons of 30 basis points, and a discrete claim recovery of 30 basis points in 2013.

FOOD EQUIPMENT

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

In the Food Equipment segment, products and services include:

•	warewashing equipment;

•	cooking equipment, including ovens, ranges and broilers;

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

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

•	kitchen exhaust, ventilation and pollution control systems; and

•	food equipment service, maintenance and repair.

In 2014, this segment primarily served the food institutional/restaurant (40%), food service (33%) and food retail (14%) markets.

The results of operations for the Food Equipment segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	2,177			$	2,047			$	1,939
Operating income		453				385				332
Margin %		20.8		%		18.8		%		17.1		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

		2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
		Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage		4.7	%		11.2	%		1.2	%		1.9	%		5.0	%		0.5	%
Changes in variable margins and overhead costs		—			4.8			0.8			—			10.3			1.7
		4.7			16.0			2.0			1.9			15.3			2.2
Acquisitions and divestitures		1.7			1.0			(0.2	)		3.2			0.3			(0.5	)
Restructuring costs		—			1.0			0.2			—			(0.5	)		(0.1	)
Impairment of goodwill and intangibles		—			—			—			—			—			—
Translation		—			—			—			0.4			0.6			0.1
Total		6.4	%		18.0	%		2.0	%		5.5	%		15.7	%		1.7	%

Operating Revenues

Operating revenues increased 6.4% in 2014 versus 2013 due to an increase in organic and acquisition revenues. North American organic revenues increased 5.1% as North American equipment revenues increased 5.3%, primarily due to product innovation and penetration gains in refrigeration and cooking. North American service revenues increased 4.0%. International organic revenues increased 4.6% as equipment revenues increased 6.4% primarily due to growth in warewash and refrigeration businesses and product innovation. International service revenue growth of 0.6% was impacted by slower demand in southern Europe. The increase in revenues from acquisitions was due to the purchase of a Chinese food equipment business in the third quarter of 2013.

Organic revenues increased 5.5% in 2013 versus 2012 primarily due to revenues from acquisitions and an increase in organic revenues. North American organic revenues increased 3.8% in 2013 versus 2012 as North American service revenues increased 5.5% due to expanded service capabilities and improved market penetration, and equipment revenues increased 2.6% due to stronger growth in the second half of 2013. International organic revenues declined 0.2% in 2013 versus 2012. International service revenues increased 3.9% primarily due to expanded service capabilities in Europe. International equipment revenues declined 2.0% over the prior year primarily due to lower European sales in the cooking businesses in France and Italy. Improved European equipment sales in the second half of 2013 partially offset the revenue decline in the first half of 2013. The increase in revenues from acquisitions was due to the purchase of a Brazilian manufacturer of cooking equipment in the fourth quarter of 2012 and a Chinese food equipment business in the third quarter of 2013.

Operating Income

Operating income increased 18.0% in 2014 versus 2013 primarily due to higher organic revenues and changes in variable margins and overhead costs. Total organic business margins increased 200 basis points due to the positive operating leverage effect of the increase in organic revenues of 120 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 80 basis points primarily due to the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 20 basis points. Lower restructuring expenses increased total operating margins by 20 basis points.

Operating income increased 15.7% in 2013 versus 2012 primarily due to lower operating expenses and higher organic revenues. Total organic business margins increased 220 basis points due to the positive operating leverage effect of the increase in organic revenues of 50 basis points and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 170 basis points primarily due to higher variable margins of 120 basis points, driven by favorable selling price versus material cost comparisons of 60 basis points and operating efficiencies primarily in the North American service business, and lower overhead expenses of 50 basis points resulting primarily from the benefits of business structure simplification activities.

POLYMERS & FLUIDS

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

In the Polymers & Fluids segment, products include:

•	adhesives for industrial, construction and consumer purposes;

•	chemical fluids which clean or add lubrication to machines;

•	epoxy and resin-based coating products for industrial applications;

•	hand wipes and cleaners for industrial applications;

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

•	fillers and putties for auto body repair; and

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

In 2014, this segment primarily served the automotive aftermarket (42%), general industrial (14%), maintenance, repair and operations, or "MRO" (12%) and construction (9%) markets.

The results of operations for the Polymers & Fluids segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	1,927			$	1,993			$	2,063
Operating income		357				335				327
Margin %		18.5		%		16.8		%		15.8		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

		2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
		Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage		(1.2	)%		(3.2	)%		(0.3	)%		(2.9	)%		(8.1	)%		(0.8	)%
Changes in variable margins and overhead costs		—			10.2			1.7			—			11.9			1.9
		(1.2	)		7.0			1.4			(2.9	)		3.8			1.1
Acquisitions and divestitures		—			—			—			0.5			—			—
Restructuring costs		—			1.7			0.3			—			(0.5	)		(0.1	)
Impairment of goodwill and intangibles		—			(0.3	)		—			—			—			—
Translation		(2.1	)		(2.1	)		—			(1.0	)		(0.8	)		—
Total		(3.3	)%		6.3	%		1.7	%		(3.4	)%		2.5	%		1.0	%

Operating Revenues

Operating revenues decreased 3.3% in 2014 versus 2013 primarily due to the unfavorable effect of currency translation and lower organic revenues. Ongoing product line and customer base simplification activities negatively impacted organic revenues by approximately two percentage points. Organic revenue decreases in North America and Europe were partially offset by growth in China and South America. Worldwide polymers organic revenues decreased 3.8% primarily due to revenue declines in North America and Europe, partially offset by growth in China and Brazil. Worldwide fluids and hygiene organic revenues decreased 0.4% primarily due to a decrease in revenues in Europe, partially offset by growth in Brazil. Automotive aftermarket organic revenues declined 0.2% driven by a decrease in revenues in North America, partially offset by growth in Asia Pacific and South America.

Operating revenues decreased 3.4% in 2013 versus 2012 primarily due to lower organic revenues and the unfavorable effect of currency translation. Organic revenues for the polymers and hygiene businesses decreased 5.3%, worldwide fluids decreased 2.3% and the automotive aftermarket businesses declined 1.6% in 2013 versus 2012. Revenue declines were primarily due to product line and customer base simplification activities, exiting low margin business and the loss of certain product sales. Acquisition revenue was primarily due to the purchase of a manufacturer of advanced technology silicone materials in the second quarter of 2012.

Operating Income

Operating income increased 6.3% in 2014 versus 2013 primarily due to changes in variable margins and overhead costs and lower restructuring expenses, partially offset by lower organic revenues and the unfavorable effect of currency translation. Total organic business margins increased 140 basis points primarily due to changes in variable margins and overhead costs, partially offset by the negative operating leverage effect of the decrease in organic revenues of 30 basis points. The changes in variable margins and overhead costs increased organic business margins by 170 basis points due to lower operating expenses, primarily driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing. Lower restructuring expenses increased total operating margins by 30 basis points.

Operating income increased 2.5% in 2013 versus 2012 primarily due to lower operating expenses, partially offset by lower organic revenues, the unfavorable effect of currency translation and higher restructuring expenses. Total organic business margins increased 110 basis points in 2013 versus 2012 primarily due to changes in variable margins and overhead costs, partially offset by the negative operating leverage effect of the decrease in organic revenues. The changes in variable margins and overhead costs increased organic business margins by 190 basis points primarily due to lower overhead expenses of 130 basis points, primarily driven by the benefits of business structure simplification activities and overhead cost management, and favorable selling price versus material cost comparisons of 50 basis points.

WELDING

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

In the Welding segment, products include:

•	arc welding equipment;

•	metal arc welding consumables and related accessories; and

•	metal jacketing and other insulation products.

In 2014, this segment primarily served the general industrial (35%) market, which included fabrication, shipbuilding and other general industrial markets, energy (14%), maintenance, repair and operations, or "MRO" (10%), construction (10%) and industrial capital goods (5%) markets.

The results of operations for the Welding segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	1,850			$	1,837			$	1,847
Operating income		479				464				470
Margin %		25.9		%		25.3		%		25.4		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

	2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
	Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage	1.2	%		2.0	%		0.2	%		(2.3	)%		(3.7	)%		(0.4	)%
Changes in variable margins and overhead costs	—			2.3			0.6			—			3.2			0.9
	1.2			4.3			0.8			(2.3	)		(0.5	)		0.5
Acquisitions and divestitures	0.3			—			(0.1	)		1.9			(0.4	)		(0.5	)
Restructuring costs	—			(0.5	)		(0.1	)		—			(0.3	)		(0.1	)
Impairment of goodwill and intangibles	—			—			—			—			—			—
Translation	(0.8	)		(0.6	)		—			—			(0.1	)		—
Total	0.7	%		3.2	%		0.6	%		(0.4	)%		(1.3	)%		(0.1	)%

Operating Revenues

Operating revenues increased 0.7% in 2014 versus 2013 primarily due to an increase in organic revenues, partially offset by the unfavorable effect of currency translation. Worldwide welding organic revenues increased 1.2%. North American welding organic revenues increased 6.0% primarily due to strength in equipment sales to general industrial and commercial customers. International organic revenues decreased 10.4% primarily due to a delay in China oil and gas pipeline projects and continued product line and customer base simplification activity in Europe. The increase from acquisition revenues was due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

Operating revenues decreased 0.4% in 2013 versus 2012 primarily due to a decline in organic revenues, partially offset by revenues from acquisitions. Worldwide welding organic revenues declined 2.3% in 2013 versus 2012. North American welding organic revenues were lower by 2.2% due to heavy equipment OEM and general industrial end market declines. International organic revenues decreased 2.6% in 2013 versus 2012 primarily due to the ongoing strategic exit from the Chinese ship building end market. The increase from acquisition revenues was due to the purchase of a European supplier of welding consumables in the first quarter of 2013.

Operating Income

Operating income increased 3.2% in 2014 versus 2013 due to the changes in variable margins and overhead expenses and higher organic revenues, partially offset by the unfavorable effect of currency translation and higher restructuring expenses. Total organic business margins increased 80 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. Changes in variable margins and overhead costs increased organic business margins by 60 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 40 basis points, partially offset by higher overhead expenses driven by continued investment in product innovation.

Operating income decreased 1.3% in 2013 versus 2012 primarily due to lower organic revenues, lower income from acquisitions, and higher restructuring expenses, partially offset by lower operating expenses. Total organic business margins increased 50 basis points primarily due to lower operating expenses, partially offset by the negative operating leverage effect of organic revenue declines. Changes in variable margins and overhead costs increased organic business margins by 90 basis points driven by favorable selling price versus material cost comparisons of 70 basis points and lower overhead costs including the benefits of business structure simplification activities. Acquisitions diluted total operating margins by 50 basis points in 2013 versus 2012 primarily due to lower operating margins and the impact of intangible asset amortization expense.

CONSTRUCTION PRODUCTS

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

In the Construction Products segment, products include:

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

•	anchors, fasteners and related tools for concrete applications;

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

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

In 2014, this segment primarily served the residential construction (37%), renovation construction (33%) and commercial construction (27%) markets.

The results of operations for the Construction Products segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	1,707			$	1,717			$	1,724
Operating income		289				238				201
Margin %		17.0		%		13.9		%		11.6		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

		2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
		Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage		2.2	%		6.8	%		0.6	%		0.5	%		2.0	%		0.2	%
Changes in variable margins and overhead costs		—			15.7			2.2			—			22.5			2.6
		2.2			22.5			2.8			0.5			24.5			2.8
Acquisitions and divestitures		(0.9	)		(0.7	)		0.1			0.1			—			—
Restructuring costs		—			2.4			0.3			—			(2.6	)		(0.3	)
Impairment of goodwill and intangibles		—			—			—			—			—			—
Translation		(1.9	)		(2.9	)		(0.1	)		(1.1	)		(2.5	)		(0.2	)
Total		(0.6	)%		21.3	%		3.1	%		(0.5	)%		19.4	%		2.3	%

Operating Revenues

Operating revenues decreased 0.6% in 2014 versus 2013 primarily due to the negative impact of currency translation and divestitures, partially offset by an increase in organic revenues. Ongoing product line and customer base simplification activities negatively impacted organic revenues by approximately one percentage point. International organic revenues increased 2.2% as Asia Pacific increased 7.0% primarily due to strong end market growth in Australia and New Zealand. European organic revenues declined 2.1% primarily due to lower end market demand in the region and product line and customer base simplification activities. North American organic revenues increased 2.1% primarily due to U.S. renovation organic revenue growth of 4.6%, driven by increased sales to big box retailers, partially offset by a decrease in organic revenues in Canada, primarily due to lower demand in the residential market.

Operating revenues decreased 0.5% in 2013 versus 2012 primarily due to the unfavorable effect of currency translation, partially offset by an increase in organic revenues. North American organic revenues increased 4.6% in 2013 versus 2012 as U.S. residential organic revenue growth was 8.2% primarily due to increased consumable sales associated with year-over-year growth in housing starts. U.S. renovation organic revenue growth was 7.3% primarily due to strong tool sales and

increased sales to big box retailers. U.S. commercial organic revenues declined 1.4% primarily due to weak overall demand. International organic revenues declined 1.6% in 2013 versus 2012, as European organic revenues declined 5.3% due to lower sales of consumable products driven by a slowdown in construction activity in European end markets. Organic revenues in Asia Pacific increased 2.4% in 2013 versus 2012 primarily due to growth in commercial and residential construction activity in Australia and New Zealand.

Operating Income

Operating income increased 21.3% in 2014 versus 2013 primarily due to lower operating expenses, higher organic revenues and lower restructuring expenses, partially offset by the unfavorable effect of currency translation. Total organic business margins increased 280 basis points due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues of 60 basis points. The changes in variable margins and overhead costs increased organic business margins by 220 basis points primarily driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, and favorable selling price versus material cost comparisons of 20 basis points. Lower restructuring expenses increased total operating margins by 30 basis points.

Operating income increased 19.4% in 2013 versus 2012 primarily due to lower operating expenses and higher organic revenues, partially offset by higher restructuring expenses and the unfavorable effect of currency translation. Total organic business margins increased 280 basis points primarily due to changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues. The changes in variable margins and overhead costs increased organic business margins by 260 basis points in 2013 versus 2012 due to lower overhead costs of 210 basis points, primarily driven by the benefits of business structure simplification activities and overhead cost management, and higher variable margins of 50 basis points. Restructuring expenses reduced total operating margins by 30 basis points due to increased cost reduction activities in Europe.

SPECIALTY PRODUCTS

Diversified businesses in this segment produce beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners.

In the Specialty Products segment, products include:

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

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

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

•	product coding and marking equipment and related consumables;

•	plastic and metal fasteners and components for appliances;

•	airport ground support equipment; and

•	components for medical devices.

In 2014, this segment primarily served the food and beverage (25%), consumer durables (14%), general industrial (13%), printing and publishing (10%) and industrial capital goods (6%) markets.

The results of operations for the Specialty Products segment for 2014, 2013 and 2012 were as follows:

Dollars in millions		2014				2013				2012
Operating revenues		$	2,055			$	2,007			$	1,871
Operating income		440				408				365
Margin %		21.4		%		20.3		%		19.5		%

In 2014 and 2013, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

		2014 Compared to 2013									2013 Compared to 2012
% Increase (Decrease)						% Point Increase (Decrease)			% Increase (Decrease)						% Point Increase (Decrease)
		Operating Revenues			Operating Income			Operating Margins			Operating Revenues			Operating Income			Operating Margins
Organic business:
Revenue change/Operating leverage		(0.3	)%		(0.7	)%		(0.1	)%		1.3	%		2.9	%		0.3	%
Changes in variable margins and overhead costs		—			7.4			1.5			—			6.5			1.3
		(0.3	)		6.7			1.4			1.3			9.4			1.6
Acquisitions and divestitures		2.7			0.7			(0.4	)		5.7			2.6			(0.6	)
Restructuring costs		—			0.5			0.1			—			(1.1	)		(0.2	)
Impairment of goodwill and intangibles		—			—			—			—			—			—
Translation		—			0.1			—			0.3			0.8			—
Total		2.4	%		8.0	%		1.1	%		7.3	%		11.7	%		0.8	%

Operating Revenues

Operating revenues increased 2.4% in 2014 versus 2013 due to an increase in acquisition revenues, partially offset by a decrease in organic revenues. Worldwide consumer packaging organic revenues decreased 1.0% driven by lower equipment revenues in North America. Worldwide ground support equipment organic revenues increased 5.3% primarily due to higher end market demand in North America. Worldwide appliance organic revenues increased 0.7% primarily due to penetration gains in the North American home appliance sector. Acquisition revenue was primarily due to the purchase of a European consumer packaging equipment business in the third quarter of 2013.

Operating revenues increased 7.3% in 2013 versus 2012 primarily due to an increase in acquisition and organic revenues, and the favorable effect of currency translation. Worldwide consumer packaging organic revenues increased 2.5% in 2013 versus 2012 primarily due to growth in multi-pack beverage systems. Worldwide appliance organic revenues declined 3.0% in 2013 versus 2012 primarily due to lower consumer demand in the European home appliance sector. Worldwide organic revenues of the ground support equipment business increased 1.1% in 2013 versus 2012. Acquisition revenue was primarily due to the third quarter 2013 purchase of a European consumer packaging equipment business and the fourth quarter 2012 purchase of a North American medical products manufacturer.

Operating Income

Operating income increased 8.0% in 2014 versus 2013 primarily due to the changes in variable margins and overhead costs, income from acquisitions and lower restructuring expenses, partially offset by lower organic revenues. Total organic business margins increased 140 basis points primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased organic business margins by 150 basis points driven by the benefits of the Company's enterprise initiatives, business structure simplification and strategic sourcing, partially offset by unfavorable selling price versus material cost comparisons of 30 basis points. Acquisitions diluted total operating margins by 40 basis points primarily due to lower operating margins and the impact of intangible asset amortization expense.

Operating income increased 11.7% in 2013 versus 2012 primarily due to lower operating expenses, an increase in organic revenues, and income from acquisitions. Total organic business margins increased 160 basis points in 2013 versus 2012 primarily due to the changes in variable margins and overhead costs and the positive operating leverage effect of the increase in organic revenues of 30 basis points. The changes in variable margins and overhead costs increased organic business margins by 130 basis points in 2013 versus 2012 driven by lower overhead expenses of 120 basis points, primarily resulting from the benefits of business structure simplification activities, and improvements in variable margins of 10 basis points. Acquisitions diluted total operating margins by 60 basis points in 2013 versus 2012 primarily due to amortization expense related to intangible assets.

DECORATIVE SURFACES

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

On August 15, 2012, the Company entered into a definitive agreement (the "Investment Agreement") to divest a 51% majority interest in its Decorative Surfaces segment to certain funds managed by Clayton, Dubilier & Rice, LLC ("CD&R"). Under the terms of the Investment Agreement, the Company contributed the assets and stock of the Decorative Surfaces segment to a newly formed entity, Wilsonart International Holdings LLC ("Wilsonart"). The transaction closed on October 31, 2012, reducing the Company's ownership of Wilsonart to 49% immediately following the close of the transaction. The Company ceased consolidating the results of the Decorative Surfaces segment as of October 31, 2012 and now reports its 49% ownership interest in Wilsonart using the equity method of accounting. Due to the Company's continuing involvement through its 49% interest in Wilsonart, the historical operating results of Decorative Surfaces are presented in continuing operations. Additionally, effective November 1, 2012, the operating results of Decorative Surfaces were no longer reviewed by senior management of the Company and therefore, effective the fourth quarter of 2012, Decorative Surfaces was no longer a reportable segment of the Company. See the Divestiture of Majority Interest in Former Decorative Surfaces Segment note in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

Historical operating results of Decorative Surfaces for 2012 were as follows:

Dollars in millions	For the Ten Months Ended October 31, 2012
Operating revenues	$	921
Operating income	143

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets decreased to $242 million in 2014 from $250 million in 2013 and $252 million in 2012, due to various intangible assets being fully amortized in both 2014 and 2013.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

The Company performed its annual impairment assessment of goodwill and indefinite-lived intangible assets in the third quarter of 2014, 2013 and 2012. In the third quarter of 2014, these assessments resulted in no goodwill impairment charges and total indefinite-lived intangible asset impairment charges of $3 million in the Polymers & Fluids and Test & Measurement and Electronics segments. In 2013, these assessments resulted in no goodwill impairment charges and an indefinite-lived intangible asset impairment charge of $2 million in the Test & Measurement and Electronics segment. In 2012, these assessments resulted in a goodwill impairment charge of $1 million in the Test & Measurement and Electronics segment and an indefinite-lived intangible asset impairment charge of $1 million in the Food Equipment segment. See the Goodwill and Intangible Assets note in Item 8. Financial Statements and Supplementary Data for further details of the impairment charges.

INTEREST EXPENSE

Interest expense increased to $250 million in 2014, which includes interest expense on the notes issued in February 2014 and the Euro notes issued in May 2014, versus $239 million in 2013. Interest expense increased in 2013, which included the full year impact of interest expense on the 3.9% notes issued in late August 2012, versus $213 million in 2012. See the Debt note in Item 8. Financial Statements and Supplementary Data for further details regarding the Company's debt obligations.

GAIN ON SALE OF INTEREST IN DECORATIVE SURFACES

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

OTHER INCOME (EXPENSE)

Other income (expense) was income of $61 million in 2014 versus $72 million in 2013. This decrease was primarily due to a pre-tax gain of $30 million recorded in 2013 related to the acquisition of the controlling interest in an existing equity investment, partially offset by higher interest income ($65 million in 2014 versus $50 million in 2013).

Other income (expense) was income of $72 million in 2013 versus $11 million in 2012. This increase was primarily due to a pre-tax gain of $30 million recorded in the first quarter of 2013 related to the acquisition of the controlling interest in an existing equity investment, higher interest income ($50 million in 2013 versus $38 million in 2012) and lower equity investment losses related to Wilsonart ($14 million in 2013 versus $30 million in 2012).

See the Other Income (Expense) note in Item 8. Financial Statements and Supplementary Data for further details.

INCOME TAXES

The effective tax rate was 30.0% in 2014, 30.6% in 2013, and 30.3% in 2012. The effective tax rate for 2013 was unfavorably impacted by a $40 million discrete tax charge in the third quarter of 2013 related to the tax treatment of intercompany financing transactions that impact the taxability of foreign earnings. The effective tax rate for 2012 was unfavorably impacted by discrete tax charges totaling $36 million in the fourth quarter of 2012, which included $35 million for the settlement of an IRS tax audit for the years 2008-2009.

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

FOREIGN CURRENCY

For the year ended 2014 versus 2013, the impact of foreign currencies against the U.S. Dollar decreased operating revenues by approximately $110 million in 2014 and decreased income from continuing operations by approximately $14 million. For the year ended 2013 versus 2012, the impact of foreign currency fluctuations against the U.S. Dollar did not have a significant impact on operating revenues or income from continuing operations.

INCOME FROM DISCONTINUED OPERATIONS

Income from discontinued operations was $1.1 billion in 2014, $49 million in 2013 and $637 million in 2012. Income from discontinued operations in 2014 included an after-tax gain of $1.1 billion on the disposal of the Industrial Packaging business in the second quarter of 2014. Income from discontinued operations in 2013 included after-tax losses on disposals of $72 million and goodwill impairment of $42 million related to various divested businesses. Income from discontinued operations in 2012 included an after-tax gain of $372 million related to the sale of the finishing group of businesses. See the Discontinued Operations note in Item 8. Financial Statements and Supplementary Data for discussion of the Company’s discontinued operations.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. The Company adopted this new guidance effective January 1, 2015. The new guidance applies prospectively to new disposals and new classifications of disposal groups held for sale after such date. As a result, this guidance did not have any impact on the Company's financial statements or related disclosures upon adoption.

In May 2014, the FASB issued authoritative guidance to change the criteria for revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, several new revenue recognition disclosures will be required. This guidance is effective for the Company beginning January 1, 2017. The Company is currently assessing the potential impact the guidance will have upon adoption.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are free operating cash flow and short-term credit facilities. In addition, the Company had $4.0 billion of cash on hand at December 31, 2014 and also maintains strong access to public debt markets. Management believes that these sources are sufficient to service debt and to finance the Company's capital allocation priorities, which include:

•	investment in existing businesses to fund internal growth;

•	payment of an attractive dividend to shareholders;

•	share repurchases; and

•	acquisitions.

In September 2013, the Company’s Board of Directors authorized a plan to commence a sale process for the Industrial Packaging business. The Company classified the Industrial Packaging segment as held for sale beginning in the third quarter of 2013 and no longer presented this segment as part of its continuing operations. As to the impact of this divestiture on the Company’s income per share from continuing operations and capital structure going forward, the Company also indicated that it intended to repurchase approximately 50 million shares through a program utilizing its existing share repurchase authorization to offset the full amount of divestiture-related dilution of income per share from continuing operations through a combination of sale proceeds, free operating cash flow and additional leverage. The Company completed this program in the second quarter of 2014. Under this program, the Company repurchased approximately 14.0 million shares of its common stock in the fourth quarter of 2013 and approximately 35.7 million shares of its common stock in the first half of 2014.

On February 6, 2014, the Company announced that it had signed a definitive agreement to sell the Industrial Packaging business to The Carlyle Group for $3.2 billion. The transaction was completed on May 1, 2014, resulting in a pre-tax gain of $1.7 billion ($1.1 billion after-tax) in the second quarter of 2014 which was included in Income from discontinued operations. A portion of the proceeds was used to fund share repurchases under the program noted above.

The Company believes that, based on its revenues, operating margins, current free operating cash flow, and credit ratings, it could readily obtain additional financing if necessary.

Cash Flow

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

Summarized cash flow information for the years ended December 31, 2014, 2013 and 2012 was as follows:

In millions		2014				2013				2012
Net cash provided by operating activities		$	1,616			$	2,528			$	2,072
Additions to plant and equipment		(361		)		(368		)		(382		)
Free operating cash flow		$	1,255			$	2,160			$	1,690
Cash dividends paid		$	(711	)		$	(528	)		$	(865	)
Repurchases of common stock		(4,346		)		(2,106		)		(2,020		)
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates		(45		)		(369		)		(723		)
Net proceeds from sale of discontinued operations		3,191				206				815
Proceeds from sale of operations and affiliates		18				2				1,028
Net proceeds from debt		1,339				1,264				1,015
Other		206				303				608
Effect of exchange rate changes on cash and equivalents		(535		)		(93		)		53
Net increase in cash and equivalents		$	372			$	839			$	1,601

The 2014 net cash provided by operating activities included $724 million of tax payments related to the disposition of the Industrial Packaging segment. Cash dividends paid during 2013 do not include the dividend payment of $174 million originally scheduled to be paid in January 2013, which was accelerated and paid in December 2012.

Stock Repurchase Programs

On May 6, 2011, the Company’s Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $4.0 billion of the Company’s common stock over an open-ended period of time (the "2011 Program"). Under the 2011 Program, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $43.20 per share during 2011, approximately 35.5 million shares of its common stock at an average price of $56.93 per share during 2012 and approximately 26.4 million shares of its common stock at an average price of $71.89 per share during 2013. As of December 31, 2013, there were no authorized repurchases remaining under the 2011 Program.

On August 2, 2013, the Company’s Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to an additional $6.0 billion of the Company’s common stock over an open-ended period of time (the "2013 Program"). Under the 2013 Program, the Company repurchased approximately 3.3 million shares of its common stock at an average price of $81.62 per share during 2013 and approximately 50.4 million shares of its common stock at an average price of $84.92 per share during 2014. As of December 31, 2014, there was approximately $1.4 billion of authorized repurchases remaining under the 2013 Program.

Adjusted Return on Average Invested Capital

The Company uses adjusted return on average invested capital ("adjusted ROIC") to measure the effectiveness of its operations’ use of invested capital to generate profits. Adjusted ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. To improve comparability of adjusted ROIC in the periods presented, after-tax operating income excludes the operating income of the former Decorative Surfaces segment. Adjusted average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, which are excluded as they do not represent capital investment in the Company's operations, as well as the Company's net investment in the former Decorative Surfaces and Industrial Packaging segments, and the equity investment in the Wilsonart business. Average invested capital is calculated using balances at the start of the period and at the end of each quarter.

Adjusted ROIC for the years ended December 31, 2014, 2013, and 2012 was as follows:

Dollars in millions		2014				2013				2012
Operating income		$	2,888			$	2,514			$	2,475
Adjustment for Decorative Surfaces		—				—				(143		)
Adjusted operating income		2,888				2,514				2,332
Tax rate (as adjusted in 2013 and 2012)		30.0		%		28.8		%		29.2		%
Income taxes		(866		)		(724		)		(681		)
Adjusted operating income after taxes		$	2,022			$	1,790			$	1,651
Invested capital:
Trade receivables		$	2,293			$	2,365			$	2,742
Inventories		1,180				1,247				1,585
Net assets held for sale		—				1,519				—
Net plant and equipment		1,686				1,709				1,994
Goodwill and intangible assets		6,466				6,885				7,788
Accounts payable and accrued expenses		(1,799		)		(1,906		)		(2,068		)
Other, net		465				616				798
Total invested capital		$	10,291			$	12,435			$	12,839
Average invested capital		$	11,249			$	12,605			$	13,160
Adjustment for Wilsonart (formerly the Decorative Surfaces segment)		(154		)		(169		)		(274		)
Adjustment for Industrial Packaging		(424		)		(1,477		)		(1,504		)
Adjusted average invested capital		$	10,671			$	10,959			$	11,382
Adjusted return on average invested capital		18.9		%		16.3		%		14.5		%

Adjusted ROIC increased 260 basis points in 2014 versus 2013 as a result of improvement in after-tax operating income of 13.0% and a decrease in adjusted average invested capital of 2.6%. Adjusted ROIC increased 180 basis points in 2013 versus 2012 as a result of improvement in after-tax operating income of 8.4% and a decrease in adjusted average invested capital of 3.7%.

The 2013 effective tax rate included a discrete tax charge of $40 million related to the tax treatment of intercompany financing transactions that impact the taxability of foreign earnings. The 2012 effective tax rate included a discrete tax charge of $36 million, which included $35 million for the settlement of an IRS tax audit for the years 2008-2009.

A reconciliation of the effective tax rate to the adjusted tax rate excluding the discrete tax items is as follows:

	For the Years Ended December 31
Dollars in millions	2013						2012
	Income Taxes			Tax Rate			Income Taxes			Tax Rate
As reported	$	717		30.6	%		$	973		30.3	%
Discrete tax charges	(40		)	(1.8	)		(36		)	(1.1	)
As adjusted	$	677		28.8	%		$	937		29.2	%

Working Capital

Management uses working capital as a measurement of the short-term liquidity of the Company. Net working capital at December 31, 2014 and 2013 is summarized as follows:

Dollars in millions		2014				2013				Increase (Decrease)
Current Assets:
Cash and equivalents		$	3,990			$	3,618			$	372
Trade receivables		2,293				2,365				(72		)
Inventories		1,180				1,247				(67		)
Other		613				750				(137		)
Assets held for sale		—				1,836				(1,836		)
		8,076				9,816				(1,740		)
Current Liabilities:
Short-term debt		1,476				3,551				(2,075		)
Accounts payable and accrued expenses		1,799				1,906				(107		)
Other		258				260				(2		)
Liabilities held for sale		—				317				(317		)
		3,533				6,034				(2,501		)
Net Working Capital		$	4,543			$	3,782			$	761

The increase in net working capital as of December 31, 2014 was primarily due to lower current maturities of long-term debt resulting from the repayment of $1.0 billion of 5.25% Euro notes in October 2014 and $800 million of 5.15% redeemable notes in April 2014, partially offset by a $1.5 billion decrease in net assets held for sale primarily related to the sale of the Industrial Packaging business.

Cash and equivalents totaled approximately $4.0 billion as of December 31, 2014 and $3.6 billion as of December 31, 2013, primarily all of which was held by international subsidiaries and may be subject to U.S. income taxes and foreign withholding taxes if repatriated to the U.S. Cash balances held internationally are typically used for international operating needs, reinvested to fund expansion of existing international businesses, used to fund new international acquisitions, or used to repay debt held internationally. In the U.S., the Company utilizes cash flows from domestic operations to fund domestic cash needs which primarily consist of dividend payments, share repurchases, acquisitions, servicing of domestic debt obligations and general corporate needs. The Company also uses its commercial paper program, which is backed by long-term credit facilities of $2.5 billion, for short-term liquidity needs. The Company believes cash generated domestically and liquidity provided by the Company's commercial paper program will continue to be sufficient to fund cash requirements in the U.S.

Debt

Total debt at December 31, 2014 and 2013 was as follows:

Dollars in millions		2014				2013				Increase (Decrease)
Short-term debt		$	1,476			$	3,551			$	(2,075	)
Long-term debt		5,981				2,793				3,188
Total debt		$	7,457			$	6,344			$	1,113

Short-term debt as of December 31, 2014 and December 31, 2013 included commercial paper of $1.4 billion and $1.7 billion, respectively. In addition, at December 31, 2013 the Company classified €750 million of 5.25% Euro notes due October 1, 2014 and $800 million of 5.15% redeemable notes due April 1, 2014 as short-term debt, which were repaid on the respective due dates.

In February 2014, the Company issued $650 million of 0.9% notes due February 25, 2017 at 99.861% of face value, $650 million of 1.95% notes due March 1, 2019 at 99.871% of face value, and $700 million of 3.5% notes due March 1, 2024 at 99.648% of face value. Net proceeds from the February 2014 debt issuance were used to repay commercial paper.

In May 2014, the Company issued €500 million of 1.75% Euro notes due May 20, 2022 at 99.16% of face value and €500 million of 3.0% Euro notes due May 19, 2034 at 98.089% of face value. The carrying values of the Euro notes were $600 million and $594 million, respectively, as of December 31, 2014. Net proceeds from the May 2014 debt issuances were used for general corporate purposes.

The Company may issue commercial paper to fund general corporate needs, share repurchases, and small and medium-sized acquisitions. The Company has committed lines of credit of $2.5 billion in the U.S. to support the potential issuances of commercial paper. Of this amount, $1.0 billion is provided under a line of credit agreement with a termination date of August 15, 2018 and $1.5 billion is provided under a line of credit agreement with a termination date of June 8, 2017. No amounts were outstanding under these two facilities at December 31, 2014. The maximum outstanding commercial paper balance during 2014 was $2.3 billion, while the average daily balance was $858 million. As of December 31, 2014, the Company's foreign operations had authorized credit facilities with unused capacity of $330 million.

Total Debt to EBITDA

The Company uses the ratio of total debt to EBITDA to measure its ability to repay its outstanding debt obligations. The Company believes that total debt to EBITDA is a meaningful metric to investors in evaluating the Company's long term financial liquidity and may be different than the method used by other companies to calculate total debt to EBITDA. EBITDA and the ratio of total debt to EBITDA are non-GAAP financial measures. The ratio of total debt to EBITDA represents total debt divided by income from continuing operations before interest expense, other income (expense), income taxes, depreciation, and amortization and impairment of goodwill and other intangible assets on a trailing twelve month basis.

Total debt to EBITDA for the years ended December 31, 2014 and 2013 was as follows:

Dollars in millions		2014				2013
Total debt		$	7,457			$	6,344
Income from continuing operations		$	1,890			$	1,630
Add:
Interest expense		250				239
Other income		(61		)		(72		)
Income taxes		809				717
Depreciation		262				270
Amortization and impairment of goodwill and other intangible assets		245				252
EBITDA		$	3,395			$	3,036
Total debt to EBITDA ratio		2.2				2.1

Stockholders’ Equity

The changes to stockholders’ equity during 2014 and 2013 were as follows:

In millions		2014				2013
Beginning balance		$	9,709			$	10,570
Net income		2,946				1,679
Cash dividends declared		(716		)		(709		)
Repurchases of common stock		(4,283		)		(2,170		)
Currency translation adjustments		(939		)		(193		)
Other		107				532
Ending balance		$	6,824			$	9,709

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company's significant contractual obligations as of December 31, 2014 were as follows:

In millions		2015				2016				2017				2018				2019				2020 and Future Years
Total long-term debt		$	1			$	—			$	650			$	—			$	1,350			$	4,014
Interest payments on notes		202				202				199				196				168				2,122
Minimum lease payments		105				78				52				35				26				41
		$	308			$	280			$	901			$	231			$	1,544			$	6,177

As of December 31, 2014, the Company had recorded noncurrent liabilities for unrecognized tax benefits of $157 million. The Company is not able to reasonably estimate the timing of payments related to the liabilities for unrecognized tax benefits.

The Company did not have any significant off-balance sheet commitments at December 31, 2014.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has six accounting policies that 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 in some cases on observable market information. Various assumptions are also used that are believed to be reasonable under the circumstances and 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.

The Company's 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 of usage		0	%
Slow-moving		Some usage in last 12 months, but quantity on hand exceeds prior 6 months of usage		50	%
Obsolete		No usage in the last 12 months		90	%

In addition, for approximately 22% of total inventories, 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 primarily compute depreciation on an accelerated basis, as follows:

Buildings and improvements	150% declining balance
Machinery and equipment	200% declining balance

The majority of the Company's international businesses compute depreciation on a straight-line basis.

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, the effect of the Company’s various tax planning strategies and uncertain tax positions. 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 are a significant portion of the Company’s total assets and affect the amount of amortization expense and impairment charges that the Company could 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 reporting units to the carrying value of each reporting unit to determine if a potential 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 or specific intangible assets, management relies on a number of factors, including 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.

As of December 31, 2014, the Company had total goodwill and intangible assets of $6.5 billion allocated to its reporting units. Although there can be no assurance that the Company will not incur additional impairment charges related to its goodwill and other intangible assets, the Company generally believes the risk of significant impairment charges is lessened by the number of diversified businesses and end markets represented by its reporting units that have goodwill and other intangible assets. In addition, the individual businesses in many of the reporting units have been acquired over a long period of time, and in many cases have been able to improve their performance, primarily as a result of the application of the Company’s 80/20 business process. The amount of goodwill and other intangible assets allocated to individual reporting units ranges from approximately $59 million to $1.6 billion, with the average amount equal to $461 million.

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 U.S. Pension and other postretirement benefit 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, life expectancy, and health care cost trend rates. Future changes in any of these assumptions could materially affect the amounts recorded related to the Company's pension and other postretirement benefit plans. 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.

During 2014, the Society of Actuaries released a new mortality table, referred to as RP-2014, which is believed to better reflect mortality improvements. The Company used the RP-2014 mortality table to measure its U.S. pension and other postretirement obligations as of December 31, 2014, resulting in an increase in pension obligations of $76 million and an increase in other postretirement obligations of $46 million as of December 31, 2014.

The Company determines the discount rate used to measure plan liabilities as of the year-end measurement date for the U.S. primary pension plan. 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 $37 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, a 25 basis point decrease in the expected return on plan assets would increase the annual pension expense by approximately $4 million. See the Pension and Other Postretirement

Benefits note in Item 8. Financial Statements and Supplementary Data for information on the Company's pension and other postretirement benefit plans and related assumptions.