XNYS:ITW Illinois Tool Works Inc Quarterly Report 10-Q Filing - 8/3/2012

Effective Date 8/3/2012

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

FORM 10-Q

(Mark One)
 
    [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2012
   
 
                                                                 OR
   
    [  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from _______________ to _______________
 

Commission File Number: 1-4797

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

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

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

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

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

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

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

The number of shares of registrant’s common stock, $0.01 par value, outstanding at June 30, 2012: 468,817,680.
 
 

Part I – Financial Information

Item 1 – Financial Statements

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME (UNAUDITED)

(In millions except per share amounts)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Operating Revenues
  $ 4,655     $ 4,615     $ 9,202     $ 8,887  
Cost of revenues
    2,964       2,996       5,875       5,758  
Selling, administrative, and research
                               
and development expenses
    846       845       1,705       1,641  
Amortization of intangible assets
    75       63       147       118  
Operating Income
    770       711       1,475       1,370  
Interest expense
    (50 )     (45 )     (100 )     (89 )
Other income (expense)
    23       15       31       21  
Income from Continuing Operations
                               
Before Income Taxes
    743       681       1,406       1,302  
Income Taxes
    216       197       408       212  
Income from Continuing Operations
    527       484       998       1,090  
Income from Discontinued Operations
    354       15       369       32  
Net Income
  $ 881     $ 499     $ 1,367     $ 1,122  
                                 
Income Per Share from Continuing
                               
Operations:
                               
Basic
  $ 1.12     $ 0.97     $ 2.09     $ 2.19  
Diluted
  $ 1.11     $ 0.96     $ 2.08     $ 2.17  
Income Per Share from Discontinued
                               
Operations:
                               
Basic
  $ 0.75     $ 0.03     $ 0.77     $ 0.06  
Diluted
  $ 0.74     $ 0.03     $ 0.77     $ 0.06  
Net Income Per Share:
                               
Basic
  $ 1.86     $ 1.00     $ 2.86     $ 2.25  
Diluted
  $ 1.85     $ 0.99     $ 2.84     $ 2.23  
Cash Dividends Per Share:
                               
    Paid
  $ 0.36     $ 0.34     $ 0.72     $ 0.68  
    Declared
  $ 0.36     $ 0.34     $ 0.72     $ 0.68  
Shares of Common Stock Outstanding
                               
During the Period:
                               
Average
    472.9       497.8       477.4       498.2  
Average assuming dilution
    476.1       501.9       480.9       502.3  

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

 
 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


(In millions)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 881     $ 499     $ 1,367     $ 1,122  
Other comprehensive income:
                               
Foreign currency translation adjustments
    (291 )     194       (115 )     426  
Pension and other postretirement benefit adjustments, net of tax
    16       8       26       17  
Comprehensive income
  $ 606     $ 701     $ 1,278     $ 1,565  

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

 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION (UNAUDITED)

(In millions)
 
 
June 30,
2012
   
December 31,
2011
 
ASSETS
           
Current Assets:
           
Cash and equivalents
  $ 1,692     $ 1,178  
Trade receivables
    3,164       2,819  
Inventories
    1,796       1,716  
Deferred income taxes
    373       366  
Prepaid expenses and other current assets
    449       384  
Assets held for sale
    77       386  
Total current assets
    7,551       6,849  
Net Plant and Equipment
    2,067       2,025  
Investments
    271       409  
Goodwill
    5,456       5,198  
Intangible Assets
    2,368       2,233  
Deferred Income Taxes
    514       634  
Other Assets
    694       636  
    $ 18,921     $ 17,984  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Short-term debt
  $ 1,438     $ 502  
Accounts payable
    785       697  
Accrued expenses
    1,479       1,435  
Cash dividends payable
    169       174  
Income taxes payable
    54       57  
Deferred income taxes
    5       5  
Liabilities held for sale
    6       107  
Total current liabilities
    3,936       2,977  
Noncurrent Liabilities:
               
Long-term debt
    3,468       3,488  
Deferred income taxes
    118       117  
Other liabilities
    1,298       1,368  
Total noncurrent liabilities
    4,884       4,973  
Stockholders’ Equity:
               
Common stock
    5       5  
Additional paid-in-capital
    825       686  
Income reinvested in the business
    12,821       11,794  
Common stock held in treasury
    (3,702 )     (2,692 )
Accumulated other comprehensive income
    135       224  
Noncontrolling interest
    17       17  
Total stockholders’ equity
    10,101       10,034  
    $ 18,921     $ 17,984  

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

 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS (UNAUDITED)
(In millions)
 
Six Months Ended
June 30,
 
   
2012
   
2011
 
Cash Provided by (Used for) Operating Activities:
           
Net income
  $ 1,367     $ 1,122  
Adjustments to reconcile net income to cash provided by operating activities:
               
(Gain)/Loss on disposal of discontinued operations
    (454 )      
Depreciation
    162       167  
Amortization and impairment of goodwill and other intangible assets
    147       120  
Change in deferred income taxes
    (12 )     (52 )
Provision for uncollectible accounts
    10       5  
(Gain)/Loss on sale of plant and equipment
    (1 )      
Income from investments
    (9 )     (14 )
Gain on sale of operations and affiliates
    (1 )     (2 )
Stock compensation expense
    24       28  
Other non-cash items, net
    (3 )     (3 )
Change in assets and liabilities:
               
(Increase) decrease in--
               
Trade receivables
    (339 )     (526 )
Inventories
    (46 )     (194 )
Prepaid expenses and other assets
    (42 )     (20 )
Increase (decrease) in--
               
Accounts payable
    73       91  
Accrued expenses and other liabilities
    (34 )     69  
Income taxes
    3       (336 )
Other, net
    (13 )     2  
Net cash provided by operating activities
    832       457  
Cash Provided by (Used for) Investing Activities:
               
Acquisition of businesses (excluding cash and equivalents)
    (587 )     (748 )
Additions to plant and equipment
    (184 )     (176 )
Purchase of investments
    (1 )      
Proceeds from investments
    146       12  
Proceeds from sale of plant and equipment
    10       5  
Net proceeds from sale of discontinued operations
    626        
Proceeds from sale of operations and affiliates
    3       1  
Other, net
    (2 )     9  
Net cash provided by (used for) investing activities
    11       (897 )
Cash Provided by (Used for) Financing Activities:
               
Cash dividends paid
    (346 )     (339 )
Issuance of common stock
    113       131  
Repurchases of common stock
    (1,000 )     (550 )
Net proceeds of debt with original maturities of three months or less
    1,186       1,115  
Repayments of debt with original maturities of more than three months
    (260 )     (2 )
Excess tax benefits from share-based compensation
    2       7  
Net cash provided by (used for) financing activities
    (305 )     362  
Effect of Exchange Rate Changes on Cash and Equivalents
    (24 )     123  
Cash and Equivalents:
               
Increase (decrease) during the period
    514       45  
Beginning of period
    1,178       1,186  
End of period
  $ 1,692     $ 1,231  
Cash Paid During the Period for Interest
  $ 86     $ 59  
Cash Paid During the Period for Income Taxes
  $ 478     $ 566  
Liabilities Assumed from Acquisitions
  $ 160     $ 90  

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

 
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

(1)           FINANCIAL STATEMENTS

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s 2011 Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

On January 1, 2012, the Company adopted new accounting guidance that requires the presentation of net income and comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  The Company is reporting comprehensive income in a separate consecutive financial statement for interim and annual reporting periods.

On January 1, 2012, the Company adopted new accounting guidance which provides an entity the option to first assess qualitative factors in determining whether it is necessary to perform the two-step test for goodwill impairment.  Under the new guidance, further testing using the two-step test would only be required when, based on the qualitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.  The Company performs its annual goodwill impairment test in the third quarter and does not expect the adoption of the new accounting guidance to have a material impact on its consolidated financial statements.

(2)           DISCONTINUED OPERATIONS

In April 2011, the Company entered into a definitive agreement to sell its finishing group of businesses included within the All Other segment to Graco Inc. in a $650 million cash transaction. The sale of the finishing business to Graco was completed on April 2, 2012, resulting in a pre-tax gain of $454 million which was included in income before taxes from discontinued operations in the second quarter of 2012.

In the second quarter of 2011, the Company’s Board of Directors approved plans to divest a consumer packaging business in the All Other segment and an electronic components business in the Power Systems & Electronics segment. The consumer packaging and electronics components businesses have been classified as held for sale beginning in the second quarter of 2011. The electronic components business was sold in the fourth quarter of 2011. The Company entered into a definitive agreement in June 2012 to sell the consumer packaging business and expects to complete the sale in the third quarter of 2012. The Company also exited a flooring business in the Decorative Surfaces segment in early 2011.

The consolidated statement of income and the notes to financial statements for all periods have been restated to present the operating results of the held for sale and previously divested or exited businesses discussed above as discontinued operations.

Results of the discontinued operations for the second quarter and year-to-date periods ended June 30, 2012 and 2011 were as follows:

(In millions)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Operating revenues
  $ 17     $ 122     $ 132     $ 238  
                                 
Income before income taxes
  $ 442     $ 23     $ 465     $ 46  
Income taxes
    (88 )     (8 )     (96 )     (14 )
Income from discontinued operations
  $ 354     $ 15     $ 369     $ 32  
                                 

 
 
 

 
The assets and liabilities of the held for sale businesses discussed above were presented as assets and liabilities held for sale in the statement of financial position.  At June 30, 2012 assets and liabilities held for sale included the consumer packaging business discussed above.  Assets and liabilities held for sale at December 31, 2011 included both the consumer packaging and finishing businesses discussed above.  The following table summarizes the classes of assets and liabilities held for sale at June 30, 2012 and December 31, 2011:

(In millions)
 
 
June 30,
2012
   
December 31,
2011
 
Trade receivables
  $ 11     $ 72  
Inventories
    7       56  
Net plant and equipment
    2       44  
Goodwill and intangible assets
    55       201  
Other
    2       13  
  Total assets held for sale
  $ 77     $ 386  
                 
Accounts payable
  $ 2     $ 22  
Accrued expenses
    3       55  
Other
    1       30  
  Total liabilities held for sale
  $ 6     $ 107  

(3)           INCOME TAXES

The components of the effective tax rate for the six month periods ended June 30, 2012 and 2011 were as follows:

   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Estimated annual effective tax rate
    29.0 %     29.0 %
Discrete tax adjustments
          (12.7 )
Effective tax rate
    29.0 %     16.3 %

The Company litigated a dispute with the Australian Tax Office over the tax treatment of an intercompany financing transaction between the U.S. and Australia. The case was heard before the Federal Court of Australia, Victoria, in September 2010. The proceedings resulted from the Company’s appeal of a decision by the Australian Tax Commissioner to disallow income tax deductions for the income tax years 2002 through 2005 and the assessment of withholding taxes for income tax year 2003. The Company also contested the Commissioner’s similar determination for income tax years 2006 and 2007; however, the parties agreed to follow the Court’s decision made on the earlier years. On February 4, 2011, the Federal Court of Australia, Victoria, decided in the Company’s favor with respect to a significant portion of the income tax deductions. The Court issued the final orders on February 18, 2011. Based on this decision, the Company decreased its unrecognized tax benefits related to this matter by approximately $197 million and recorded a favorable discrete non-cash tax benefit to reduce tax expense by $166 million in the first quarter of 2011. Subsequent to the 2011 ruling, the Australian Tax Office appealed the timing of certain of the deductions. In March 2012, the Court ruled in favor of the Australian Tax Office regarding the timing of the deductions, which did not have a material impact to the Company.

During the first quarter of 2011, the Company resolved an issue with the Internal Revenue Service in the United States related to a deduction for foreign exchange losses on an intercompany loan that resulted in a decrease in unrecognized tax benefits of approximately $179 million.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions and a number of these audits are currently ongoing.

The Company believes it is reasonably possible that within the next twelve months the amount of the Company’s unrecognized tax benefits may be reduced by a range of approximately $70 million to $220 million related predominantly to cross-border loss utilization tax claims and global legal structure reorganization tax audits. The Company has recorded its best estimate of the potential exposure for these issues.
 

(4)           INVENTORIES

Inventories at June 30, 2012 and December 31, 2011 were as follows:
 

(In millions)
 
 
June 30,
2012
   
December 31,
2011
 
Raw material
  $ 626     $ 596  
Work-in-process
    170       156  
Finished goods
    1,000       964  
    $ 1,796     $ 1,716  
 
(5)          RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

Pension and other postretirement benefit costs related to both continuing and discontinued operations for the second quarter and year-to-date periods ended June 30, 2012 and 2011, were as follows:
 

(In millions)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
Pension
   
Other Postretirement Benefits
   
Pension
   
Other Postretirement Benefits
 
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Components of net periodic
benefit cost:
                                               
Service cost
  $ 24     $ 23     $ 4     $ 4     $ 49     $ 48     $ 7     $ 7  
Interest cost
    27       29       7       8       55       60       14       15  
Expected return on plan assets
    (39 )     (39 )     (5 )     (5 )     (79 )     (81     (10     (10
Amortization of actuarial loss
    13       10                   26       20              
Amortization of prior service
  cost
                      1                   1       3  
Net periodic benefit cost
  $ 25     $ 23     $ 6     $ 8     $ 51     $ 47     $ 12     $ 15  
Amounts were included in the statement of income as follows:
                                                               
 Income from continuing
  operations
   25      22      6      8      50      46        12        15  
Income from discontinued
  operations
          1                   1       1              
Total 
   25      23      6      8     51      47      12      15  
 
The Company expects to contribute approximately $165 million to its pension plans and $39 million to its other postretirement plans in 2012. As of June 30, 2012, contributions of $144 million to pension plans and $16 million to other postretirement plans have been made.

(6)           SHORT-TERM DEBT

The Company had outstanding commercial paper of $1.3 billion at June 30, 2012 and $192 million at December 31, 2011. Commercial paper is stated at cost, which approximates fair value.
 

(7)           LONG-TERM DEBT

Based on rates for comparable instruments, which are classified as Level 2 inputs, the approximate fair value and related carrying value of the Company’s long-term debt, including current maturities, were as follows:

(In millions)
 
 
June 30,
2012
   
December 31,
2011
 
Fair value
  $ 3,954     $ 4,234  
Carrying value
    3,475       3,751  
 
In June 2007, the Company entered into a $500 million line of credit agreement with a termination date of June 15, 2012.  In June 2010, the Company entered into an additional $1.0 billion line of credit agreement with a termination date of June 11, 2013.  These two lines of credit were terminated and replaced on June 8, 2012 by a $1.5 billion line of credit agreement with a termination date of June 8, 2017.   No amounts were outstanding under this facility at June 30, 2012.

(8)           COMMITMENTS AND CONTINGENCIES

Among the toxic tort cases in which the Company is a defendant, the Company as well as its subsidiaries Hobart Brothers Company and Miller Electric Mfg. Co., have been named, along with numerous other defendants, in lawsuits alleging injury from exposure to welding consumables. The plaintiffs in these suits claim unspecified damages for injuries resulting from the plaintiffs’ alleged exposure to asbestos, manganese and/or toxic fumes in connection with the welding process. In the first quarter of 2012, the Company entered into an agreement resolving substantially all of the manganese-related claims for an immaterial amount. The Company believes that the remaining claims will not have a material adverse effect on the Company’s operating results, financial position or cash flows.  

(9)           SEGMENT INFORMATION

The Company periodically makes changes to its management reporting structure to better align its businesses with Company objectives and operating strategies.  In the first quarter of 2012, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments.  These changes primarily related to the industrial fasteners reporting unit, formerly in the All Other segment, moving to the Transportation segment; certain businesses in a Latin American reporting unit, formerly in the Polymers & Fluids segment, moving to the Transportation segment; and a worldwide insulation reporting unit, formerly in the Industrial Packaging segment, moving to the Power Systems & Electronics segment. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2012. The prior period segment results have been restated to conform to the current year reporting of these businesses. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for information regarding operating revenues and operating income for the Company’s segments.

 
 
 

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

INTRODUCTION

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

The Company periodically reviews its operations for businesses that may no longer be aligned with its long-term objectives. For businesses reported as discontinued operations in the statement of income, all related prior period income statement information has been restated to conform to the current year reporting of these businesses. Refer to the Discontinued Operations note in Item 1 - Financial Statements for discussion of the Company’s discontinued operations.

The Company periodically makes changes to its management reporting structure to better align its businesses with Company objectives and operating strategies. In the first quarter of 2012, the Company made certain changes in its management reporting structure that resulted in changes in some of the reportable segments. These changes primarily related to the industrial fasteners reporting unit, formerly in the All Other segment, moving to the Transportation segment; certain businesses in a Latin American reporting unit, formerly in the Polymers & Fluids segment, moving to the Transportation segment; and a worldwide insulation reporting unit, formerly in the Industrial Packaging segment, moving to the Power Systems & Electronics segment. The changes in the reportable segments and underlying reporting units did not result in any goodwill impairment charges in the first quarter of 2012. The prior period segment results have been restated to conform to the current year reporting of these businesses.

The following discussion of operating results should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

CONSOLIDATED RESULTS OF OPERATIONS

The Company’s consolidated results of operations for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 4,655     $ 4,615     $ 9,202     $ 8,887  
Operating income
    770       711       1,475       1,370  
Margin %
    16.5 %     15.4 %     16.0 %     15.4 %

 
 
 

 
In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    2.3 %     6.0 %     0.6 %     2.7 %     7.2 %     0.7 %
Changes in variable margins & overhead costs
    -       6.4       0.9       -       4.5       0.6  
Total
    2.3       12.4       1.5       2.7       11.7       1.3  
                                                 
Acquisitions and divestitures
    3.0       0.7       (0.4 )     3.7       0.9       (0.4 )
Restructuring costs
    -       (0.1 )     -       -       (1.9 )     (0.3 )
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (4.5 )     (4.7 )     -       (3.0 )     (3.0 )     -  
Other
    0.1       -       -       0.1       -       -  
Total
    0.9 %     8.3 %     1.1 %     3.5 %     7.7 %     0.6 %

Operating Revenues
Revenues increased 0.9% and 3.5% for the second quarter and year-to-date periods of 2012, respectively, versus 2011. Worldwide base revenues increased 2.3% and 2.7% for the second quarter and year-to-date periods, respectively, as economic conditions in North America remained strong while the European economic environment remained modestly negative, and Asia continued to experience slower growth. North American base revenues increased 5.4% and 5.8% for the second quarter and year-to-date periods, respectively, while international base revenues declined 0.8% and 0.3%, respectively, as Europe decreased 1.7% and 0.8%, respectively, and Asia Pacific base business growth was 1.8% and 1.4%, respectively. Acquisitions (net of divestitures) contributed 3.0% and 3.7% to revenues in the second quarter and year-to-date periods, respectively. Significant acquisitions included a North American automotive aftermarket business purchased in the first quarter of 2011, a thermal processing and environmental equipment manufacturer purchased in the third quarter of 2011 and a manufacturer of specialty devices used to measure the flow of gases and fluids purchased in the first quarter of 2012. Currency translation resulted in a 4.5% and 3.0% decline in revenues in the second quarter and year-to-date periods, respectively, primarily due to a weaker Euro versus the year ago period. 

Operating Income
Operating income increased 8.3% and 7.7% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to the positive operating leverage effects of the base revenue increase noted above and the improved variable margins further discussed below. Currency translation resulted in a 4.7% and 3.0% decline in operating income in the second quarter and year-to-date periods, respectively, primarily due to a weaker Euro versus the year ago period.  Higher restructuring expenses due to increased cost reduction activities negatively impacted operating income by 0.1% and 1.9% in the second quarter and year-to-date periods, respectively. Base margins increased 150 and 130 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive operating leverage effect of the increase in base revenues of 60 and 70 basis points, respectively, and improvements in variable margins and overhead costs.  The 90 and 60 basis point improvements in variable margins and overhead costs in the second quarter and year-to-date periods, respectively, were primarily due to the favorable effect of selling price versus material cost comparisons of 60 and 50 basis points, respectively. The increase in base margins was partially offset by a 30 basis point operating margin decline in the year-to-date period due to the higher restructuring expenses noted above. Acquisitions and divestitures diluted operating margins by 40 basis points in both the second quarter and year-to-date periods primarily due to amortization expense related to intangible assets from acquisitions made within the past year.
 
 
 

 
RESULTS OF OPERATIONS BY SEGMENT

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

(In millions)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Transportation
  $ 896     $ 895     $ 1,819     $ 1,734  
Power Systems & Electronics
    810       752       1,601       1,464  
Industrial Packaging
    627       661       1,239       1,253  
Food Equipment
    476       492       949       965  
Construction Products
    489       520       958       984  
Polymers & Fluids
    334       337       637       624  
Decorative Surfaces
    286       285       561       553  
All Other
    755       694       1,471       1,352  
Intersegment revenues
    (18 )     (21 )     (33 )     (42 )
Total operating revenues
  $ 4,655     $ 4,615     $ 9,202     $ 8,887  

TRANSPORTATION

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

In the Transportation segment, products and services include:
      plastic and metal components, fasteners and assemblies for automobiles, light trucks, and other industrial uses;
      fluids, polymers and other supplies for auto aftermarket maintenance and appearance;
      fillers and putties for auto body repair;
      polyester coatings and patch and repair products for the marine industry; and
      truck remanufacturing and related parts and service.

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

The results of operations for the Transportation segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 896     $ 895     $ 1,819     $ 1,734  
Operating income
    143       137       294       274  
Margin %
    16.0 %     15.3 %     16.2 %     15.8 %
 
 
 
 

 
In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    3.4 %     7.9 %     0.7 %     4.2 %     9.6 %     0.8 %
Changes in variable margins & overhead costs
    -       2.3       0.3       -       0.3       0.1  
Total
    3.4       10.2       1.0       4.2       9.9       0.9  
                                                 
Acquisitions and divestitures
    1.1       0.7       (0.1 )     3.7       2.9       (0.1 )
Restructuring costs
    -       (1.5 )     (0.2 )     -       (1.8 )     (0.3 )
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (4.4 )     (5.0 )     -       (3.0 )     (3.7 )     (0.1 )
Other
    -       -       -       -       -       -  
Total
    0.1 %     4.4 %     0.7 %     4.9 %     7.3 %     0.4 %
 
Operating Revenues
Revenues increased 0.1% and 4.9% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 due to an increase in base revenues and revenues from acquisitions, partially offset by the unfavorable effect of currency translation. The increase in acquisition revenue for the second quarter and year-to-date periods was primarily due to the purchase of a North American automotive aftermarket business in the first quarter of 2011 and a European automotive aftermarket business in the third quarter of 2011. North American automotive base revenues increased 8.0% and 7.4% in the second quarter and year-to-date periods, respectively, primarily due to increases in the major US automakers’ auto builds of approximately 7.0% and 9.0% for the respective periods. International automotive base revenues increased 4.2% and 5.8% in the second quarter and year-to-date periods, respectively, primarily due to Asia Pacific base revenue growth of 24.2% and 21.3%, respectively, driven by the Company’s growing product penetration with Chinese automotive original equipment manufacturers and increased auto builds. European base revenues grew 0.9% and 3.7% in the second quarter and year-to-date periods, respectively, due to favorable customer mix and product penetration gains, as European car builds decreased approximately 7% and 5% for the respective periods. The automotive aftermarket base business declined 1.8% for the second quarter and 1.2% for the year-to-date period due to decreased demand for car care products as discretionary consumer spending continued to be soft in North America and Europe. Base revenues for the truck remanufacturing and related parts and service business increased 4.1% and 5.7% for the second quarter and year-to-date periods, respectively, primarily due to strong energy development activity that increased demand in North America.

Operating Income
Operating income increased 4.4% and 7.3% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to the increase in base revenues and income from acquisitions, partially offset by the unfavorable effect of currency translation and higher restructuring expenses due to increased cost reduction activities. Base margins increased 100 and 90 basis points for the second quarter and year-to-date periods, respectively, primarily as a result of positive leverage from the increase in base revenues and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins primarily due to the positive impact of selling price versus material cost comparisons of 30 and 10 basis points in the second quarter and year-to-date periods, respectively. The increase in total base margins was partially offset by a 20 and 30 basis point operating margin decline in the second quarter and year-to-date periods, respectively, due to the higher restructuring expenses noted above. Acquisitions and divestitures diluted operating margins by 10 basis points for each respective period primarily due to the impact of intangible asset amortization from acquisitions made within the past year.
 

POWER SYSTEMS & ELECTRONICS

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

In the Power Systems & Electronics segment, products include:
•      arc welding equipment;
•      metal arc welding consumables and related accessories;
•      metal solder materials for PC board fabrication;
•      equipment and services for microelectronics assembly;
      electronic components and component packaging;
      static and contamination control equipment;
      airport ground support equipment;
      pressue sensitive adhesives and components for telecommunications, electronics, medical and transportation applications; and
      metal jacketing and other insulation products.

This segment primarily serves the general industrial, electronics, construction and automotive original equipment manufacturers markets.

The results of operations for the Power Systems & Electronics segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 810     $ 752     $ 1,601     $ 1,464  
Operating income
    172       155       341       305  
Margin %
    21.2 %     20.6 %     21.3 %     20.8 %

In the second quarter and year-to-date periods of 2012, the changes in operating revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    5.2 %     10.2 %     1.1 %     6.1 %     11.7 %     1.1 %
Changes in variable margins & overhead costs
    -       3.3       0.5       -       3.4       0.7  
Total
    5.2       13.5       1.6       6.1       15.1       1.8  
                                                 
Acquisitions
    4.8       (0.6 )     (1.1 )     4.8       (1.3 )     (1.2 )
Restructuring costs
    -       0.6       0.1       -       (0.3 )     (0.1 )
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (2.3 )     (2.5 )     -       (1.5 )     (1.7 )     -  
Other
    -       -       -       -       -       -  
Total
    7.7 %     11.0 %     0.6 %     9.4 %     11.8 %     0.5 %
 
 

Operating Revenues
Revenues increased 7.7% and 9.4% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to growth in base business and revenues from acquisitions, partially offset by the unfavorable effect of currency translation. The acquisition revenue was primarily due to the purchase of a thermal processing and environmental equipment manufacturer in the third quarter of 2011. Worldwide welding base business revenues increased 8.8% and 13.6% for the second quarter and year-to-date periods, respectively, with North American revenues increasing 11.4% and 16.9%, respectively, driven by demand for heavy equipment in the oil and gas, agriculture and transportation end markets. Base business revenues for the international welding businesses increased 2.1% and 4.7% in the second quarter and year-to-date periods, respectively, primarily due to growth in European oil and gas end markets. Base revenues for the electronics businesses increased 1.9% for the second quarter, after a decrease of 10.5% in the first quarter, and decreased 4.2% for the year-to-date period.  Base revenues in the electronics assembly business improved in the second quarter with growth of 14.2% due to strong order rates from key electronics customers.  Base revenues for the other electronics businesses decreased 5.1% and 5.6% for the second quarter and year-to-date periods, respectively, as consumer demand for basic cell phones and computers was weaker.  

Operating Income
Operating income increased 11.0% and 11.8% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to the increase in base revenues and improved variable margins, partially offset by the unfavorable effect of currency translation and the impact of acquisitions. Base margins increased 160 and 180 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive leverage effect of the growth in base business revenues and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 50 and 70 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive impact of selling price versus material cost comparisons of 80 and 90 basis points in each respective period, partially offset by additional operating expenses, including overhead investments in emerging markets related to the oil and gas businesses. Acquisitions and divestitures diluted total operating margins by 110 and 120 basis points in the second quarter and year-to-date periods, respectively, primarily due to lower operating margins and the impact of intangible asset amortization from acquisitions made within the past year.

INDUSTRIAL PACKAGING

Businesses in this segment produce steel, plastic and paper products and equipment used for bundling, shipping and protecting goods in transit.

In the Industrial Packaging segment, products include:
      steel and plastic strapping and related tools and equipment;
      plastic stretch film and related equipment; and
      paper and plastic products that protect goods in transit.

This segment primarily serves the general industrial, primary metals, food and beverage, and construction markets.

The results of operations for the Industrial Packaging segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 627     $ 661     $ 1,239     $ 1,253  
Operating income
    76       70       144       131  
Margin %
    12.1 %     10.6 %     11.6 %     10.5 %
 
 

In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    0.2 %     0.9 %     - %     1.0 %     3.8 %     0.3 %
Changes in variable margins & overhead costs
    -       16.2       1.8       -       12.4       1.3  
Total
    0.2       17.1       1.8       1.0       16.2       1.6  
                                                 
Acquisitions
    0.6       -       (0.1 )     2.0       1.5       -  
Restructuring costs
    -       -       -       -       (2.3 )     (0.2 )
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (5.9 )     (8.5 )     (0.2 )     (4.1 )     (5.5 )     (0.3 )
Other
    -       -       -       -       -       -  
Total
    (5.1 )%     8.6 %     1.5 %     (1.1 )%     9.9 %     1.1 %

Operating Revenues
Operating revenues decreased 5.1% and 1.1% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 due to the unfavorable effect of currency translation which more than offset the increase in base revenues and revenues from acquisitions. The increase in acquisition revenue for the second quarter and year-to-date periods was primarily due to the purchase of a North American protective packaging business in the second quarter of 2011and a European protective packaging business in the fourth quarter of 2011. Worldwide strapping and equipment base revenues decreased 1.2% and 0.9% for the second quarter and year-to-date periods, respectively. Base revenues increased 3.3% and 4.0% in the second quarter and year-to-date periods, respectively, for the North American strapping and equipment businesses primarily due to increased sales of steel and plastic strapping.  Base revenues for the international strapping and equipment businesses decreased 3.9% and 3.7% in the second quarter and year-to-date periods, respectively, primarily due to a slowdown in consumable and equipment sales in Europe. Worldwide protective packaging base revenues increased 0.1% and 4.1% in the second quarter and year-to-date periods, respectively, while worldwide stretch packaging base revenues increased 2.7% and 4.2% in the same periods.

Operating Income
Operating income increased 8.6% and 9.9% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to lower operating expenses, partially offset by the unfavorable effect of currency translation. Within the year-to-date period, acquisitions contributed 1.5% of the increase, while higher restructuring expenses had a negative impact of 2.3%.  Base operating margins increased 180 and 160 basis points for the second quarter and year-to-date periods, respectively, primarily due to changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 180 and 130 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive impact of selling price versus material cost comparisons of 100 and 70 basis points, respectively, and the benefits of prior restructuring projects. Restructuring expenses diluted total operating margins by 20 basis points in the year-to-date period due to increased cost reduction activities in the first quarter of 2012, and currency translation diluted operating margins by 20 basis points in the second quarter and 30 basis points in the year-to-date period.

FOOD EQUIPMENT

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

In the Food Equipment segment, products and services include:
      warewashing equipment;
      cooking equipment, including ovens, ranges and broilers;
      refrigeration equipment, including refrigerators, freezers and prep tables;
      food processing equipment, including slicers, mixers and scales;
      kitchen exhaust, ventilation and pollution control systems; and
      food equipment service, maintenance and repair.

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

The results of operations for the Food Equipment segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 476     $ 492     $ 949     $ 965  
Operating income
    75       67       151       134  
Margin %
    15.8 %     13.6 %     15.9 %     13.9 %

 
In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    1.3 %     4.1 %     0.4 %     1.4 %     4.5 %     0.4 %
Changes in variable margins & overhead costs
    -       13.8       1.8       -       11.2       1.5  
Total
    1.3       17.9       2.2       1.4       15.7       1.9  
                                                 
Acquisitions
    -       -       -       -       -       -  
Restructuring costs
    -       -       -       -       0.7       0.1  
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (4.6 )     (6.0 )     -       (3.1 )     (3.7 )     -  
Other
    -       -       -       -       -       -  
Total
    (3.3 )%     11.9 %     2.2 %     (1.7 )%     12.7 %     2.0 %

Operating Revenues
Revenues decreased 3.3% and 1.7% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 due to the unfavorable effect of currency translation more than offsetting the growth in base business. North American base revenues increased 2.8% and 4.7% in the second quarter and year-to-date periods, respectively, as equipment revenues increased 3.2% and 5.0%, respectively, driven by private sector spending, including casual dining restaurants and supermarkets, that offset continued weakness in the institutional sector where government budgets were constrained. North American service base revenues increased 2.1% and 4.3% for the second quarter and year-to-date periods, respectively. International base revenues were relatively flat in the second quarter and decreased 2.0% in the year-to-date period, as equipment revenues were relatively flat in the second quarter, after decreasing 5.6% in the first quarter, and decreased 2.9% in the year-to-date period, and service revenues remained flat for each respective period. International equipment sales were negatively impacted by lower equipment sales to the institutional sector in Europe, partially offset by stronger sales in Asia.

Operating Income
Operating income increased 11.9% and 12.7% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to operating efficiencies and the positive operating leverage from the increase in base revenues, partially offset by the unfavorable effect of currency translation. Base operating margins increased 220 and 190 basis points in the second quarter and year-to-date periods, respectively, primarily due to the positive leverage effect of the increase in base revenues and changes in variable margins and overhead costs. The changes in variable margins and overhead costs increased base margins by 180 and 150 basis points in the second quarter and year-to-date periods, respectively, primarily due to operating efficiencies in North America and Europe and the positive impact of selling price versus material cost comparisons of 60 and 40 basis points in each respective period.
 

CONSTRUCTION PRODUCTS

Businesses in this segment produce tools, fasteners and other products for construction applications.

In the Construction Products segment, products include:
      fasteners and related fastening tools for wood and metal applications;
      anchors, fasteners and related tools for concrete applications;
      metal plate truss components and related equipment and software; and
      packaged hardware, fasteners, anchors and other products for retail.

This segment primarily serves the residential construction, renovation construction and commercial construction markets.
 
The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 489     $ 520     $ 958     $ 984  
Operating income
    59       64       95       109  
Margin %
    12.1 %     12.3 %     9.9 %     11.1 %

In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    (0.5 )%     (1.7 )%     - %     - %     (0.1 )%     - %
Changes in variable margins & overhead costs
    -       (1.4 )     (0.3 )     -       (2.6 )     (0.3 )
Total
    (0.5 )     (3.1 )     (0.3 )     -       (2.7 )     (0.3 )
                                                 
Acquisitions and divestitures
    0.3       1.6       0.1       0.5       2.7       0.2  
Restructuring costs
    -       -       -       -       (10.0 )     (1.1 )
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (5.8 )     (6.3 )     -       (3.1 )     (2.8 )     -  
Other
    -       -       -       -       -       -  
Total
    (6.0 )%     (7.8 )%     (0.2 )%     (2.6 )%     (12.8 )%     (1.2 )%
 
Operating Revenues
Revenues decreased 6.0% and 2.6% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to the negative impact of currency translation and flat to slightly lower base revenues. International base revenues declined 4.0% and 3.3% for the second quarter and year-to-date periods, respectively, as European base revenues declined 6.4% and 4.1% for the second quarter and year-to-date periods, respectively, due to a slowdown in commercial construction activity. Base revenues in Asia Pacific declined 0.8% and 2.3% for the second quarter and year-to-date periods, respectively, due to a weak economic and construction environment in Australia and New Zealand.  North American base revenues increased 7.9% and 8.2% for the second quarter and year-to-date periods, respectively, primarily due to positive housing starts and improved commercial and renovation activity. For the second quarter and year-to-date periods, North American renovation base revenue growth was 5.3% and 8.6%, respectively, residential base revenue growth was 12.7% and 10.2%, respectively, and commercial construction base revenue growth was 4.6% and 5.9%, respectively.
 

Operating Income
Operating income decreased 7.8% in the second quarter of 2012 versus 2011 primarily due to the negative impact of currency translation and the decline in base revenues, partially offset by income from acquisitions. The year-to-date period decreased 12.8% primarily due to higher restructuring expenses in the first quarter of 2012 and the negative impact of currency translation. Total base margins declined 30 basis points in both the second quarter and year-to-date periods due to changes in variable margins and overhead costs, as higher operating expenses in Europe and unfavorable product mix more than offset the benefits of prior restructuring projects and favorable selling price versus material cost comparisons of 10 and 20 basis points, respectively. Restructuring expenses reduced total operating margins by 110 basis points in the year-to-date period due to increased cost reduction activities in the first quarter of 2012.

POLYMERS & FLUIDS

Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, and hygiene products.

In the Polymers & Fluids segment, products include:
      adhesives for industrial, construction and consumer purposes;
      chemical fluids which clean or add lubrication to machines;
      epoxy and resin-based coating products for industrial applications; and
      hand wipes and cleaners for industrial applications.

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

The results of operations for the Polymers & Fluids segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 334     $ 337     $ 637     $ 624  
Operating income
    57       56       103       97  
Margin %
    17.1 %     16.6 %     16.2 %     15.5 %
 
In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income
   
Operating Margins
   
Operating Revenues
   
Operating Income
   
Operating Margins
 
Base business:
                                   
Revenue change/Operating leverage
    (0.4 )%     (1.1 )%     (0.2 )%     0.6 %     1.7 %     0.2 %
Changes in variable margins & overhead costs
    -       8.2       1.4       -       7.6       1.1  
Total
    (0.4 )     7.1       1.2       0.6       9.3       1.3  
                                                 
Acquisitions
    6.2       1.8       (0.7 )     5.9       1.0       (0.7 )
Restructuring costs
    -       -       -       -       1.0       0.2  
Impairment of goodwill & intangibles
    -       -       -       -       -       -  
Translation
    (6.7 )     (7.1 )     -       (4.4 )     (5.1 )     (0.1 )
Other
    -       -       -       -       -       -  
Total
    (0.9 )%     1.8 %     0.5 %     2.1 %     6.2 %     0.7 %
 
 

Operating Revenues
Revenues decreased 0.9% in the second quarter of 2012 versus 2011 due to the negative effect of currency translation and a decrease in base revenues, partially offset by revenues from acquisitions. For the year-to-date period of 2012 versus 2011, revenues increased 2.1% due to revenues from acquisitions and an increase in base revenues, partially offset by the unfavorable effect of currency translation. Acquisition revenue in the second quarter and year-to-date periods is primarily due to the purchase of a European specialty chemical business in the first quarter of 2012 and a manufacturer of advanced technology silicone materials in the second quarter of 2012. The purchase of a Latin American solvent business acquired at the beginning of the second quarter of 2011 also contributed to the year-to-date acquisition revenue. Worldwide base revenues for the polymers and hygiene businesses decreased 0.4% for the second quarter and increased 1.3% for the year-to-date period, as the slowing end markets in Europe and Brazil in the second quarter offset the base growth from the China transportation and appliance markets, and the North American military, industrial grouting and MRO markets. Worldwide base revenues for the fluids businesses decreased 0.6% and 1.0% for the second quarter and year-to-date periods, respectively, as second quarter declines in Europe were offset by growth in North America, Russia and India.

Operating Income
Operating income increased 1.8% and 6.2% in the second quarter and year-to-date periods of 2012, respectively, versus 2011 primarily due to improvements in variable margins and overhead costs, partially offset by the unfavorable effect of currency translation.  Total base margins increased 120 and 130 basis points for the second quarter and year-to-date periods, respectively, primarily due to changes in variable margins and overhead costs of 140 and 110 basis points, respectively. The positive impact from changes in variable margins and overhead costs is primarily due to the favorable impact of selling price versus material cost comparisons of 60 basis points in both the second quarter and year-to-date periods and benefits of prior restructuring projects. Acquisitions diluted total operating margins by 70 basis points in both the second quarter and year-to-date periods primarily due to the impact of intangible asset amortization from acquisitions made within the past year.

DECORATIVE SURFACES

Businesses in this segment produce decorative surfacing materials for furniture, office and retail space, countertops, and other applications.

In the Decorative Surfaces segment, products include:
      decorative high-pressure laminate for furniture, office and retail space and countertops; and
      high-pressure laminate worktops.
 
This segment serves the commercial construction, renovation construction and residential construction markets.

The results of operations for the Decorative Surfaces segment for the second quarter and year-to-date periods of 2012 and 2011 were as follows:

(Dollars in millions)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Operating revenues
  $ 286     $ 285     $ 561     $ 553  
Operating income
    41       35       77       69  
Margin %
    14.3 %     12.3 %     13.7 %     12.5 %
 
 

In the second quarter and year-to-date periods of 2012, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
   
% Increase (Decrease)
   
% Increase (Decrease)
   
% Point Increase (Decrease)
 
   
Operating Revenues
   
Operating Income