Illinois Tool Works Inc. 2014 Annual Report
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ILLINOIS TOOL WORKS INC. 2014 ANNUAL REPORT Illinois Tool Works Inc. 155 Harlem Avenue Glenview, Illinois 60025 ILLINOIS TOOL WORKS INC. 2014 Annual Report 82141_Cover_a1.indd 1-3 3/4/15 11:43 AM Shareholder Information TRANSFER AGENT ANNUAL MEETING CONTACT INVESTOR AND REGISTRAR RELATIONS Friday, May 8, 2015, 9:00 a.m. Questions regarding stock ownership, Illinois Tool Works Inc. For additional assistance, including dividend payments, or change of 155 Harlem Avenue media inquiries: 224.661.7427 or address should be directed to the Glenview, Illinois 60025 [email protected] company’s transfer agent: Computershare Trust Company, N.A. TRADEMARKS VISIT US ON THE WEB P.O. Box 30170 Certain trademarks in this www.itw.com College Station, TX 77842-3170 publication are owned or www.computershare.com/investor licensed by Illinois Tool Works Inc. Phone Toll Free: 888.829.7424 COMMITTED TO or its wholly owned subsidiaries. International: +1.312.360.5155 SOCIAL RESPONSIBILITY Learn about our CSR activities and COMMON STOCK goals in our 2014 report: withpurpose.itw-csr.com ABOUT ITW New York Stock Exchange Symbol: ITW ITW is a global Fortune 200 diversified industrial manufacturer of value-added consumables and specialty equipment with related service businesses. The company focuses on solid growth, improving STOCK AND DIVIDEND ACTION profitability, and strong returns across its worldwide platforms and divisions. These divisions serve Effective with the October 7, 2014 payment, the quarterly cash dividend on ITW common stock was increased to customers and markets around the globe, with a significant presence in developed as well as emerging 48.5 cents per share. ITW’s annual dividend payment has increased for more than 50 consecutive years, except during markets. ITW’s revenues totaled $14.5 billion in 2014. a period of government controls in 1971. The ITW Common Stock Dividend Reinvestment Plan enables registered shareholders to reinvest the ITW dividends they receive in additional shares of common stock of the company at no additional cost. Participation in the plan is voluntary, and shareholders may join or withdraw at any time. The plan also allows for additional voluntary cash investments in any amount from $100 to $10,000 per month. For a brochure and full details of the program, please direct inquiries to the company’s transfer agent, Computershare Trust Company, N.A. CONTENTS 1 Letter to Shareholders 4 Capital Allocation Strategy and Total Shareholder Returns 5 Financial Highlights 6 ITW’s Industry-Leading Businesses 8 Corporate Executives and Board of Directors Inside Shareholder Information back cover 82141_Cover_a1.indd 4-6 3/4/15 11:43 AM To Our Fellow Shareholders E. Scott Santi PRESIDENT & CHIEF EXECUTIVE OFFICER Robert S. Morrison NON-EXECUTIVE CHAIRMAN OF THE BOARD In 2014, we continued to leverage the ITW Business Model to deliver strong financial performance. As a result of the excellent work of our business teams around the globe, ITW delivered record operating income of $2.9 billion and grew earnings per share by 29 percent. Operating margin of 19.9 percent was also an all-time high for the growth with best-in-class total cost productivity by concentrating company, and we improved our after-tax return on invested capital their efforts, investments, and resources on the key customers and by 260 basis points to 18.9 percent. Through the combination of products that are best positioned for profitable organic growth. the strong free cash flow generated by our business model and 2) Customer-back innovation has fueled decades of profitable divestiture proceeds, we were able to return a record $5 billion to growth at ITW. In every market in which we operate, our our shareholders and increased our dividend by 15 percent. businesses work hard to position themselves as the “go-to” The ITW Business Model problem solver for their key customers. Inventing solutions for our customers to help them address difficult technical challenges or Your company is built around a powerful and highly differentiated improve their business performance has been the central focus of business model that comprises three elements: ITW’s approach to innovation all the way back to the founding of 1) The ITW 80/20 business process is a proprietary operating our company over 100 years ago. This approach is very much alive system that we apply in every ITW company. Through the and well today, as evidenced by our portfolio of approximately application of our 80/20 business process, we structure and focus 16,000 active and pending patents and the more than 1,600 new our businesses to uniquely satisfy the needs of their largest and patent applications that we filed in 2014. most profitable customers and eliminate the costs, complexity, allows us to be and distractions associated with serving smaller, less profitable 3) Our decentralized, entrepreneurial culture fast, focused, and responsive. Our people are clear about what customers. As a result, our businesses consistently deliver solid is expected of them with regard to our business model, our Decentralized, The ITW 80/20 Customer-Back Entrepreneurial Business Process Innovation Business Culture Model ILLINOIS TOOL WORKS INC. 1 82141_Body.indd 1 2/27/15 5:22 PM strategy, and our values. Within the confines of this framework, In addition, we are implementing a strategic sourcing program to we empower our business teams to make decisions and customize better leverage our scale in sourcing raw materials throughout the their approach in order to maximize the relevance and impact company. Our target is to reduce global spend by an average of of the ITW Business Model for their specific customers and 1 percent per year for the five-year period from 2013-2017, and we end markets. Our people thrive in ITW’s “flexibility within the have exceeded our annual targets in each of the past two years. framework” culture; they think and act like entrepreneurs, they are 2017 Performance Goals accountable, and they deliver. As we have noted, through the execution of our strategy, our Our Strategy objective is to position the company to deliver solid growth with Our strategy is centered on our conviction that the ITW Business best-in-class margins and returns on capital. With this objective in Model is the core source of competitive advantage for the mind, we are committed to achieving the following performance company and value creation for our shareholders. Simply put, goals by the end of 2017: the focus of our strategy is to position the company to generate • Organic Growth: 200 basis points above global GDP maximum yield from the compelling performance potential that • Operating Margin: Approximately 23 percent resides within our business model. By doing so, we will generate • After-Tax ROIC: 20+ percent solid growth with best-in-class margins and returns on capital for • Free Operating Cash Flow: 100 percent of net income the company and sustainable long-term value for our shareholders. We have made significant progress toward these goals over In conjunction with our strategy, we are in the process of the past two years, increasing operating margin by over implementing a significant repositioning of our business portfolio, 300 basis points and after-tax return on invested capital by more which began with the divestiture of over 30 businesses that, than 400 basis points, but we have more work to do over the next while strong performers in their respective industries, operated in several years in order to fully realize our vision for the company. markets that did not have the attributes necessary to fully leverage the ITW Business Model. As a result, our business portfolio is now Our Growth Focus composed of seven industry-leading businesses, all of which have We believe that solid and consistent above-market organic growth strong and sustainable competitive advantages, solid end-market must be the core engine that drives our company forward. Our growth fundamentals, and significant customer-back innovation goal is to achieve enterprise-level organic growth of 200 basis potential to drive organic growth. All of these businesses have points or more above global GDP in 2017 and beyond. Our portfolio proven their ability to leverage the ITW Business Model to management and business structure simplification initiatives generate industry-leading operating margin and return on capital are significant and necessary preparatory steps to position the performance, with many of them exceeding average industry peer company to get there. In the year ahead, we will continue to performance by 500 basis points or more on these key metrics. execute on these initiatives while at the same time begin the The focus of our portfolio repositioning efforts has now shifted process of pivoting our efforts and attention more fully to the from divestitures to significant work going on inside our businesses organic growth component of our strategy. to exit slower-growth product lines so that they can concentrate The ITW management team is fully aligned with, and committed to, their efforts and resources on taking full advantage of their most our organic growth focus. In addition, the incentive compensation compelling organic growth opportunities. plans of all of our leaders from the division level and up now have We are also executing a major initiative to simplify our operating a significant component tied to the company’s organic growth structure to position our divisions to operate at the scale necessary objectives. While incentive system alignment is important, we to fully leverage 80/20, drive organic growth through innovation, are confident that ITW’s proven culture of execution will once and maximize their global competitiveness. Through this effort, again serve us very well as we shift our focus to driving profitable we are in the process of consolidating our operating structure organic growth.