In 2010, ITW was on the move—continuing to build a larger footprint in the world’s fastest growing regions, developing new business platforms, and bringing innovative products to our highly diverse end markets. ITW’s presence in both emerging and established markets, along with our proven operating principles, helped us take advantage of a modestly improving economy and generate total revenue growth of more than 14 percent in 2010, a number much higher than we originally anticipated.

Driving growth through new markets

You can meet expectations—or you can exceed them. In 2010, ITW achieved organic growth of 11 percent, far surpassing our original growth projection of seven percent. In addition, our operating margins improved significantly, and we reported another year of strong free operating cash flow.

While the economy is a long way from full recovery, there were encouraging signs of steady improvement in 2010. Both global gross domestic product (GDP) and industrial production activity steadily improved during the year. Although the economic recovery certainly played a role in our rebound, we achieved above market growth rates in a vast majority of our major business segments. Our growing strategic presence in new markets around the world also contributed to our strong performance this past year. In 2010, we further established our foundation in the emerging BRIC (Brazil, Russia, India and China) markets, which benefited from expanding consumer markets and growing government investment in infrastructure and commercial growth. Many of our core businesses experienced better than expected growth in these markets. In fact, for full year 2010, the percentage of our company revenues derived from the BRIC nations doubled when compared to 2006.

The role of acquisitions and innovation

While acquisitions have always been an important part of ITW’s growth, the acquisition environment was relatively muted in 2009 and in the first half of 2010. However, we began to see solid signs of improvement during the second half of 2010. As a result, ITW acquired 24 companies representing $530 million of annualized revenues in 2010—up from just under $300 million in annualized acquired revenues in 2009. While below our traditional levels due to higher than expected valuations and increasing competition from both strategic and private equity buyers, these acquisitions helped ITW accelerate growth in key end markets and geographies. We expect the acquisition market will continue to improve and provide us with even more opportunities in 2011.

Innovation, one of our core attributes for nearly 100 years, has been critical to our success in both emerging and established markets. We have solidified our place as one of the top 100 companies for new U.S. patents. We also increased our spending in research and product development by 11 percent over 2009, and we will continue to make innovation a top priority alongside our time tested 80/20 business improvement processes. Our focus on innovation is evident across all of our segments, including three relatively new scalable platforms that we continue to grow—automotive aftermarket, test and measurement, and electronics. ITW’s decentralized operating structure is also helping propel our presence in new markets by allowing our businesses the freedom to develop local, close-to-the-customer strategies.

In this year’s Annual Report, we are proud to showcase eight ITW businesses that represent how our characteristic innovation and growing presence in both emerging and established markets lay a foundation to meet the changing needs of our customers and their end users worldwide.

2010 financial highlights

Our full-year operating revenues totaled $15.9 billion, a 14.4 percent increase versus 2009. Much of that improvement was due to strong organic growth while the remainder came from the contribution of acquisitions and the benefits of currency translation. Just as impressive, operating margins totaled 14.8 percent in 2010, representing a 480 basis point improvement versus 2009.

We achieved higher than expected growth in certain worldwide end markets, such as transportation, where auto production was much higher than anticipated. Additionally, a number of end markets associated with industrial packaging increased at faster than expected rates, and we experienced double-digit growth in many of the related businesses. Our welding and electronics businesses also benefited from end market recovery and greater demand from industrial customers such as Caterpillar and Deere, as well as consumers seeking the latest products from the competitive electronics market. Our construction and food equipment businesses did not perform as well as we had expected. However, total construction revenues still increased 15 percent over 2009, even as U.S. housing starts remained lower than anticipated. Our food equipment businesses were hampered by low levels of capital expenditures during the year. As the economic recovery continues, we believe that these business platforms, and their associated end markets, also will show solid improvement.

Throughout the economic downturn of the past few years, ITW has remained committed to financial stability. In 2010, we maintained a strong balance sheet and solid credit ratings. Our 2010 free operating cash flow remained strong at $1.3 billion, enabling us to reinvest in current businesses, acquire new businesses, grow dividends and opportunistically utilize our share repurchase program. Moving forward, we will continue to use our strong balance sheet to support future growth.

Management developments

The extensive leadership experience and continuity of the ITW senior management team was a critical part of our recovery in late 2009 and our higher than expected growth in 2010. Strategic planning and guidance, in particular our growing presence in emerging markets, has helped us weather the economic storm and positioned us well for future opportunities. Our senior managers, whose average tenure is nearly 20 years, have partnered with leadership across our worldwide business platforms to help our company achieve long-term success—even during periods of economic fluctuations and change.

During 2010, we made key management moves to help drive strategic growth around the globe. The Board of Directors elected David Parry vice chairman, joining our other two vice chairmen, Tom Hansen and Scott Santi. David previously served as executive vice president with responsibility for ITW’s polymers and fluids businesses. The Board also elected Chris O’Herlihy executive vice president with responsibility for the global food equipment businesses and Sundaram Nagarajan executive vice president with responsibility for the global welding businesses.

In August 2010, Kevin M. Warren and Anré D. Williams were elected to the ITW Board of Directors. Kevin is president of the U.S. Solutions Group for Xerox Corporation and also serves as a vice president of the corporation. Anré is president of Global Commercial Card for American Express. Both Kevin and Anré are strong, experienced business leaders with highly regarded organizations, and we welcome their unique perspectives and contributions in the years ahead. We bid farewell to two directors who retired in 2010, William F. Aldinger, a board member since 1998, and Harold B. Smith, Jr. who served on ITW’s Board since 1968. We sincerely appreciate their valuable contributions to ITW and wish them the very best in their retirement!

Looking ahead

While the pace of the economic recovery is hard to predict, we are optimistic that our worldwide end markets will continue to modestly improve as we head into 2011. We plan to continue to develop new platforms; invest in the research and development that nurtures new innovations; and focus on significant growth opportunities in new and emerging markets to support the long-term stability and profitable growth of the Company.

We are supported by the talented women and men of ITW—operating managers and their teams, as well as the dedicated professionals in our financial, legal, engineering, marketing and human resource disciplines. Thank you for your continuing support as we continue creating a bright future for our customers, our shareholders and our people in
2011 and beyond.

 

Thomas J. Hansen, E. Scott Santi, David B. Speer and David C. Parry