ITW - 2014 investor day presentation FINAL...1 2014 ITW Investor Day New York, December 5, 2014 E....
Transcript of ITW - 2014 investor day presentation FINAL...1 2014 ITW Investor Day New York, December 5, 2014 E....
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2014 ITW Investor Day
New York, December 5, 2014
E. Scott Santi, President & CEO
David C. Parry, Vice Chairman
Michael M. Larsen, Senior Vice President & CFO
Forward Looking Statements
Safe Harbor StatementThis meeting contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the expected impact and timing of strategic initiatives and related benefits, future financial performance, operating performance, growth in free operating cash flow, organic and total revenue growth, operating margin growth, growth in diluted income per share from continuing operations, restructuring expenses and related benefits, tax rates, exchange rates, timing and amount of share repurchases, end market economic conditions, and the Company’s related 2014 guidance. These statements are subject to certain risks, uncertainties, and other factors which could cause actual results to differ materially from those anticipated. Important risks that could cause actual results to differ materially from the Company’s expectations include those that are detailed in ITW’s Form 10-Q for the second quarter of 2014.
Non-GAAP MeasuresThe Company uses certain non-GAAP measures in discussing the Company’s performance. The reconciliation of those measures to the most comparable GAAP measures are detailed in the appendix of this presentation.
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DAVID C. PARRY
Vice Chairman
20YEARS WITH ITW
NAMED VICE CHAIRMAN IN
2010
Presenters
E. SCOTT SANTI
President & Chief Executive Officer
32YEARS WITH ITW
NAMED PRESIDENT & CEO IN
2012
MICHAEL M. LARSEN
Senior Vice President & CFO
2YEARS WITH ITW
NAMED SVP & CFO IN
2013
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Agenda
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ITW’S ENTERPRISE STRATEGY
ITW’S DIFFERENTIATED BUSINESS MODEL
• The core concept• Updated long-term performance goals
• 80/20 business process• Customer-back innovation• Decentralized, entrepreneurial culture
REFOCUSING ITW (2013 – 2017)• Portfolio management• Business structure simplification• Strategic sourcing
GROWTH (2015 AND BEYOND)• Organic revenue growth strategy• Differentiated segments• The role of acquisitions
SUSTAINABLE FINANCIAL PERFORMANCE
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• 2014 outlook• 2015 guidance• 2017 and beyond performance goals
6 BREAK FOLLOWED BY Q&A
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ITW’s Enterprise Strategy
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Best-in-Class Operator
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The Core Concept
Refocus the entire company
to deliver on the compelling performance potential from
ITW’s unique and highly differentiated business model
Decentralized Entrepreneurial Culture
Customer-Back Innovation
80/20 Business Process
BUSINESS MODEL
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200 bps organic rev. growth above global GDP
20%+ROIC
~23%operating margin
Updated Long-Term Performance Targets
12-14%total shareholder
returns
BY THE END OF 2017
This Enterprise Strategy positions ITW to deliver sustainable, world-class financial performance
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BEYOND 2017
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ITW’s Differentiated Business Model
• Radically simplify and focus on high value items (the “80”)
• Apply to the whole business (not just manufacturing)
• Unique to ITW, deeply embedded in the culture and executed in multiple business contexts, extremely difficult to replicate
• Focus on solving “80” customer “pain points”
• Invent solutions for customers
• Higher velocity, lower risk, serial innovation
• One company/one team focused on executing ITW’s Enterprise Strategy
• Divisions have “flexibility within the ITW framework”
ITW’s Business Model is the Core Source of Value Creation
80/20 Business Process
Customer-Back Innovation
Decentralized Entrepreneurial Culture
World-class margins and returns andsolid organic revenue growth
High level of product differentiation with IP/patent protection
A culture of execution and performance
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80/20 Business Process
80/20 structures and focuses our businesses to uniquely satisfy the needs of our largest and most profitable customers (the “80”) allowing us to capture a disproportionate share of the available profits in the markets that we choose to serve …
Conversely …
… we handle less critical customers/products/ processes (the “20”) differently as we minimize both focus and overhead cost associated with managing this part of our businesses
Core 80/20 principle:
Complexity blurs focus and drives overhead costs
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80%
Customers, Products,Processes
20%
Customers, Products, Processes
the“80”
20%
Revenue & Profit
80%
Revenue & Profit
the“20”
Methodology used to manage all ITW businesses and deliver world-class performance
80/20 Business Process
• Simplify first to eliminate complexity, then improve
• Focus efforts and investment on high value items (the “80”) i.e. large customers, high volume products, mission critical business processes
• Aggressively reduce overhead costs associated with supporting low value items (the “20”) i.e. small customers, low volume products, non critical business processes
• Apply it to the whole business (not just manufacturing)
• Unique to ITW, deeply embedded in the culture and executed in multiple business contexts, extremely difficult to replicate
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OverheadCosts
80/20 Financial Impact
Revenue
Overhead Costs
Operating Income
Revenue
OverheadCosts
Operating Income
Revenue
OperatingIncome
80/20 is about driving total cost productivity … by focusing on customers, products, and processes that are best positioned for profitable, organic growth and mobilizing the organization to intensely focus on those opportunities
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1-2 years 3+ yearsBeginning
The Power of 80/20
Welding
Construction
WEIGHTEDPEER AVERAGE*
26% 14%
17% 10%
80/20 ADVANTAGE
+12 PTS.
Food Equipment 21% 16% +5 PTS.
Auto OEM 24% 8% +16 PTS.
+7 PTS.
Operating Margin Comparisons (3Q14 YTD)
14*See Appendix
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Customer-Back Innovation
2 3 4FROM THE
CUSTOMER BACK,
NOT FROM THE COMPANY OUT
LOWER RISK,
HIGHER VELOCITY“Serial” innovation … “singles and doubles”
PATENTSAND TRADE SECRETS
SUPPORT ITW’S COMPETITIVE EDGE
FOCUSED ON SOLVING
“80” CUSTOMER PAIN
POINTS
Inventing solutions for customers
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Key tenets of ITW’s approach to innovation
CUSTOMER PAIN POINT
Door panel sealsmust eliminaterattling
Need to improve workplace conditions and environment
Larger wind turbine blades require greater adhesive strength, more time to bond
Reduce energy and improve wash performance while maintaining ease of operation
Tougher industrystandards for more accurate tensile strength measurement
New engineered lumber and other materials require more power than traditional tools
ITW SOLUTION
2K DOOR FASTENER
MILLER CAPTURE 5
PLEXUS MA-560
GLOBAL FLIGHT WARE WASH
VIDEO MEASUREMENT
COMPACT FRAMER TOOL
No water, gas, dust intrusion or rattles
Captures weld cell fumes at the source; eliminates need for custom hood designs
Industry’s first “long open time” bonding agent lengthens the time it takes the adhesive to set
Reduces energy costs and improves wash performance, ease of operation
High-speed video-based solution effectively measures strain to meet regulatory requirements
Increased power, better cold weather performance with new fuel and management of gas venting
Examples of ITW’s Customer-Back Innovation
10PATENTS
53PATENTS
4PATENTS
135PATENTS
3PATENTS
82PATENTS
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WORLDWIDE PATENT RIGHTS
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1,370NEW PATENT
APPLICATIONS YTD 2014
ITW’s Patent Portfolio
Protecting our customer-back innovation with an active patent portfolio
10,460GRANTEDPATENTS
5,604PENDING PATENT
APPLICATIONS
1,254ITW
PATENT SOCIETY
MEMBERS
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ENTERPRISE
TEAM
Decentralized Entrepreneurial Culture: One Enterprise / One Team …
AT ITW, DECENTRALIZED AND ENTREPRENEURIAL MEANS: ● FLEXIBILITY within the ITW framework
● LEADERS exercise significant control and empowerment over the essential elements necessary to execute their individual business strategies, win with customers, and deliver results
● DECISIONS are made closer to customers, end markets
● SPEED and responsiveness
● We 80/20 everything … and minimize bureaucracy everywhere
An integrated and aligned organization focused on executing ITW’s Enterprise Strategy and
implementing ITW’s operating principles with excellence
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At ITW, Culture Drives Performance
● ITW’s culture is one of “GETTING THINGS DONE!”– Long track record of operational excellence
● ITW’s decentralized entrepreneurial culture is one of the 3 CORE COMPONENTS of our unique and highly differentiated business model
● Quality of Enterprise Strategy execution thus far attributable in large part to the UNIQUE ITW CULTURE
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Refocusing ITW (2013 – 2017)
Portfolio Management
Business Structure Simplification
Strategic Sourcing
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• ~30 divestitures (~$5B of sales) since 2011
• “Heavy lifting” is done … continue to monitor portfolio for risk of commoditization
• Now 7 highly differentiated segments with solid organic revenue growth potential
• Managed pace deliberately to minimize disruption and risk
• With 89 divisions, ITW is becoming a significantly simpler, “tighter” organization, but still decentralized
• Developed organizational structure and leadership team
• Segment-led approach
• Tools in place to deliver savings
Ongoing division level product line & customer simplification creates ~100 bps drag on organic revenue growth in 2015, less in 2016
Enterprise Initiatives Update
This image cannot currently be displayed.
This image cannot currently be displayed.
Portfolio Management
Business Structure Simplification
Strategic Sourcing
Continued progress in 2015 to further simplify the organization
On track to achieve goal of 1% savings per year on total spend
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Positioning the company to capitalize on the compelling performance potential from ITW’s unique and highly differentiated business model
Enterprise Initiatives Impact
Expect $600M to $800M of structural cost savings
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Annualized StructuralCost Savings
$600M to $800M
~23%OPERATING MARGIN
IN 2017
+700 bps OPERATING
MARGIN IMPROVEMENT
2012 to 2017
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Growth (2015 and Beyond)
Organic Growth
Acquisitions
200 bps of organic revenue growth above global GDP beyond 2017
ITW Organic Revenue Growth Framework
Organic Revenue Growth Rate and Path to Enterprise Target
Beyond 2017
3%
~50 bps
ITW Organic Revenue Growth
PortfolioQuality
ManagementFocus
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Global GDP*
2010-2014E Growth Rate
Assuming 3% Global GDP
~1%
~1%~3.5%~200 bps
*Source: IHS Global Insight
~5%TARGET
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ITW’s Enterprise Strategy Growth Agenda
Organic revenue growth is a key driver of financial performance.
Targeting ~5% organic growth in a ~3% global GDP environment.
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PORTFOLIO QUALITY … every one of our segments is differentiated by: Favorable market attributes
Focused strategic position
Sustainable competitive advantages
Meaningful growth drivers
MANAGEMENT FOCUS … from “acquisition first” to “organic first” Division leadership and above incentivized on organic revenue growth
Culture of “getting things done”
Business structure simplification better leverages 80/20 and customer-back innovation for growth
FAVORABLE MARKET ATTRIBUTESVery large, concentrated market where worldwide auto builds are expected to grow at 3% to 4% over the next five years*
STRATEGIC POSITION/COMPETITIVE ADVANTAGESThe only global, niche supplier to top tier OEMs, providing unique innovation to address pain points for sophisticated customers with complex problems
GROWTH DRIVERS Industry demand for improved fuel
economy, safety and drivability result in increasingly complex vehicles and require more sophisticated solutions across global platforms
Reduced engineering resources at OEMs necessitates greater reliance on ITW innovation
Clear plans to increase ITW content per vehicle globally
ITW Automotive OEM
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ITW has outperformed auto builds by
400-500 bps
for last 4 years
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FAVORABLE MARKET ATTRIBUTES$20B global market of which about $10B is differentiated; growing faster than global GDP due to infrastructure investment, emerging markets, and global investments in energy
STRATEGIC POSITION/COMPETITIVE ADVANTAGESBranded value-added equipment and specialty consumable manufacturer with on-trend innovation and leading technology
GROWTH DRIVERSRegulations drive innovation
in the welding environment
Demographics resulting in shortage of experienced welders; need for new, easier to use equipment
Improve weld quality and productivity for more sophisticated applications
Continue to focus on equipment opportunities that are differentiated by brand, technology and IP
ITW Welding
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9% organic revenue CAGR
1993-2014E
FAVORABLE MARKET ATTRIBUTES$16B addressable global market expected to grow at 3%+ through 2016*
STRATEGIC POSITION/COMPETITIVE ADVANTAGESHighly focused and branded industry-leading global positions differentiated by innovation and integrated service offerings
GROWTH DRIVERS Product portfolio helps
customers reduce total cost of ownership by managing food safety and reducing labor cost
Product innovation focused on energy efficiency and water usage
Growth of service offerings, which are unique to ITW
Well positioned in emerging markets (China and Latin America)
ITW Food Equipment
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+4% organic revenue growth in
2014E
*Source: Food Service Equipment Reports 2014 and select GDP forecasts and local market intelligence
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GROWTH DRIVERSTest and Measurement:
Higher global quality standards, particularly in emerging markets, require more sophisticated solutions
Heightened customer focus on safety/brand equity
Customers need to reduce time to market requires more dynamic testing systems
Electronics:
Innovation focused on improving our customers’ production quality, accuracy and throughput
FAVORABLE MARKET ATTRIBUTES•Significant opportunity in ~$5B addressable test and measurement space, largely for structural/mechanical quality assurance
•Electronics/MRO market expected to grow 3% to 4% over next 5 years*
STRATEGIC POSITION/COMPETITIVE ADVANTAGESSophisticated, branded and innovative test and measurement and electronic manufacturing and MRO solutions that improve efficiency and quality for customers in diverse end markets
ITW Test & Measurement and Electronics
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T&M platform revenue growth
20% CAGR
2005-2014E
*Source: Company estimates
FAVORABLE MARKET ATTRIBUTESTotal addressable market of $5B to $6B
STRATEGIC POSITION/COMPETITIVE ADVANTAGESBranded supplier of innovative engineered fastening systems/solutions
GROWTH DRIVERS Innovation focused on differentiated
technology and software to help solve customer pain points
Well positioned to capitalize on long-term positive end-market growth trends in U.S., U.K. and Australia/New Zealand
Product portfolio matches up with growth in off-site residential and pre-cast commercial
Continue to right-size Europe using 80/20 and product line simplification to position it for longer-term revenue and margin growth
ITW Construction Products
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op. margin +490 bps
since 2011
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FAVORABLE MARKET ATTRIBUTES$30B+ market growing in-line with global GDP over time
STRATEGIC POSITION/COMPETITIVE ADVANTAGESHighly branded segment targeting niche markets thatrequire value added differentiated products
GROWTH DRIVERS Significant positions in growth
areas like wind energy, OEM’s tire repair kits, and wiper blades
Strong brands like Rain-X and Permatex
Broad global reach (30+ countries) with strong presence in Asia Pacific and South America
Improve business through product line simplification
ITW Polymers & Fluids
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op. margin +250 bps
since 2011
FAVORABLE MARKET ATTRIBUTESDiverse set of highly differentiated end markets
STRATEGIC POSITION/COMPETITIVE ADVANTAGESFocused on niche market opportunities that deliver strong operating results with substantial patent protection
GROWTH DRIVERS Strong brands that deliver
customer-focused solutions
Segment serves as an “incubator” for developing larger platforms
ITW Specialty Products
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~22%op. margin in 2014E
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●All of ITW’s division leaders and above are INCENTIVIZED on organic revenue growth
●Shifting management focus from 30 to 40 acquisitions annually to ORGANIC REVENUE GROWTH
●BSS better leverages 80/20 and our unique CUSTOMER-BACK INNOVATION
– 80/20 focus on largest customers and products
– Full new product pipeline
– Product Line Simplification “drag” declines in 2016
– Culture of “GETTING THINGS DONE”
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Management Focus on Organic Revenue Growth
FROM “ACQUISITION
FIRST” TO
“ORGANIC FIRST”
200 bps of organic revenue growth above global GDP beyond 2017
ITW Organic Revenue Growth Framework
Organic Revenue Growth Rate and Path to Enterprise Target
Beyond 2017
3%
~50 bps
ITW Organic Revenue Growth
PortfolioQuality
ManagementFocus
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Global GDP*
2010-2014E Growth Rate
Assuming 3% Global GDP
~1%
~1%~3.5%~200 bps
*Source: IHS Global Insight
~5%TARGET
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The Role of Acquisitions
BOLT-ON acquisitions to support and accelerate organic revenue growth in a core segment
NEW PLATFORM development to expand the long-term growth and earnings potential of ITW
Current portfolio has everything we need to achieve our performance goals
But, HIGHLY TARGETED acquisitions have a role to play in supplementing
ITW’s GROWTH STRATEGY
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Segment Bolt-on Acquisitions
Support / accelerate
ORGANICrevenue
growth rate in a core segment
Significant margin
improvement potential from
80/20 business process
implementation
Accretive to ITW’s margin,
ROIC and organic revenue
growth rate targets within
5-7 YEARS
$50M to $250M
typical range;
2-3/year
• Mid-tier Western kitchen equipment manufacturer in China acquired in 2013
• Doubled ITW FEG presence in high growth market and accelerated organic revenue growth rate
• In year one, +300 bps margin expansion from 80/20 implementation*
• Accretive to ITW margins and ROIC by 2018
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Rigorous and disciplined acquisition process
*Excluding purchase accounting adjustments and amortization
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Current portfolio has all the potential we need to achieve our performance goals …
SO, WHY NEW PLATFORMS?• Extend the reach and growth potential of ITW by
entering and developing new platforms to expand long-term earnings potential
• ITW business model provides opportunities to enter new spaces successfully
The unique and differentiated business model is the core source of value creation for the company
PROVEN DEVELOPMENT PROCESS• Attractive end market fundamentals with sustainable
differentiation attributes
Potential / multiple paths to build $1B+ position over time
• A piece at a time, not all at once
Start from a single entrée acquisition at limited scale/risk profile: $100M to $250M
Significant margin improvement potential from 80/20
• Use actual industry experience to make scale-up decision
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New Platform Development
2005 2014E
Total Revenue
Proven Track Record of New Platform Development
• Acquired in 1993
• The beginning of ITW’s Welding segment
• Largely developed through organic revenue growth initiatives
• Acquired in 2005• Established the foundation
for the test and measurement platform
• Bolt-on acquisitions have extended reach into new end markets
381993 2014E
Total Revenue
$0.3BMiller
$1.8BWelding Segment
$0.2BInstron
$1.2BT&M Platform
9%CAGR
20%CAGR
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Sustainable Financial Performance
Financial Highlights
● STRONG 2014 RESULTS in year 2 of ITW’s 5-year Enterprise Strategy … PORTFOLIO WELL POSITIONED FOR ORGANIC REVENUE GROWTH
● Expect another strong 2015 … EPS $5.15 to $5.35, +12% to 16% OVER 2014E
● ON TRACK TO DELIVER ON UPDATED 2017 ENTERPRISE GOALS
● Strong, consistent cash flow … DISCIPLINED AND RETURNS-FOCUSED CAPITAL ALLOCATION … returning significant cash to shareholders
● Deliver LONG-TERM, SUSTAINABLE SHAREHOLDER VALUE … 12% to 14% TSR beyond 2017
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Reaffirming 2014 Outlook
• ~2.5% organic revenue growth after -1% drag from product line simplification
• ~20% operating margin … enterprise initiatives contribute ~120 basis points
• Strong cash flows with FCF* conversion >100% and enhanced capital structure
• ~$5B returned to shareholders• $4B+ share buyback ($3B related to divestiture)
• 15% dividend increase
Strong progress in year 2 of ITW’s 5-year Enterprise Strategy
Total Revenue
Operating Margin ~20%17.8%
$14.1B
~$14.5B
2014E2013
$3.63
$4.57 - $4.65
+200bps
Adjusted ROIC* ~18%-19%16.3%+200
bps
EPS
41*See Appendix
+27%
EPS
Progress on Refocusing ITW
Operating Margin
Operating Income
~20%15.9%
Adjusted ROIC* ~18%-19%14.5%
RECORD OPERATING
INCOMEAND MUCH BETTER
POSITIONED FOR ORGANIC
REVENUE GROWTH
Financial performance in 2014 illustrates the shift to focus on ITW’s most profitable, differentiated segments
~$2.9B$2.8B
2012 2014E
$17.9B~$14.5B
Total Revenue
+410bps
+350bps
42*See Appendix
Total Revenue
Operating IncomeOperating Income
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2015 Guidance: EPS $5.15 to $5.35, up 12% to 16%
Total Revenue
Operating Margin ~21%~20%
$14.5B2.5-3.5% organic
2015E2014E
$4.57 - $4.65 $5.15 - $5.35
+130bps
Adjusted ROIC* 19-20%~18-19%
EPS
*See Appendix
• 2.5% to 3.5% organic revenue growth, includes -1% drag from product line simplification
• Total revenue of 0.5% to 1.5%, includes -2% impact from foreign currency translation at the current rates
• ~21% operating margin … enterprise initiatives contribute ~100 basis points
• Expected EPS headwinds:
• Foreign currency, ~$0.15
• Pension, ~$0.05
• Strong cash flows with FCF* conversion >100%
+14%
EPS
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ITW Will Deliver on Updated 2017 Enterprise Goals with World-Class Performance
BY THE END OF 2017, ITW WILL HAVE …
• A high quality portfolio with solid organic revenue growth potential
• Organic revenue growth 200 bps > global GDP
• Supplemented by highly targeted acquisitions
• World-class operating margins and returns
• Positioned for strength through economic cycles
• Strong cash flows and enhanced capital structure
• FCF* Conversion > 100% … higher in economic downturns
• Disciplined capital allocation based on best risk-adjusted returns
Organic Revenue
Operating Margin ~23%15.9%
2.2%
~5%
2017E2012
+700bps
Adjusted ROIC* 20%+14.5% +550bps
~21%
2.5-3.5%
2015E
19-20%
44*See Appendix
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PRIORITIES• Investments that support organic revenue
growth and profitability … ~5% of sales• Cap Ex, customer-back innovation, restructuring
• Dividend grows in-line with earnings over time
• Acquisitions and/or share repurchases based on best risk-adjusted return • Bolt-on acquisitions and new platform
development
• Opportunistic share repurchases that add to EPS growth
Leverage strong balance sheet and continue to enhance capital structure
• Minimize global cash … invest overseas, tax efficient repatriation to U.S.
• Target leverage 2.25 x EBITDA* … maintain some flexibility and continue to reduce cost of capital
45*See Appendix
Disciplined Capital Allocation Aligned with Enterprise Strategy
• Expect to return ~$2B to shareholders
• ~$1.5B share buyback
• Dividend grows in-line with earnings over time
~25% Internal Investments
20-30% Dividend
~50% External Investments
2015 FRAMEWORK
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Enterprise Strategy will generate world-class financial performance and create sustainable, long-term shareholder value
Expect ITW Business Model to Deliver 12% to 14% TSR Beyond 2017
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Earnings Per Share
OperatingIncome
3% Global GDP
Total Shareholder
Returns+200 bps
~9-10% ~10-12% ~12-14%
+~2%
DIVIDENDYIELD
+1-2%
SHAREREPURCHASE/ACQUISITIONS
~35%
INCREMENTALMARGINS
Compelling and achievable long-term performance goals
~5%ORGANIC
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15-Minute Break
Question and Answer
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Appendix
ITW DefinitionsPeer GroupWeighted Average Peer Group Operating Margin • Peer group data (3Q14 YTD) is from S&P Capital IQ as of November 6, 2014, and includes Welding: Colfax
(Fabrication Technology segment), Lincoln; Food Equipment: Middleby, Dover (Refrigeration & Food Equipment segment); Manitowoc (Foodservice segment); Auto OEM: TRW, Magna Automotive Services, BorgWarner Inc., Autoliv, Inc.; Construction: USG Corp., Simpson Manufacturing. Weighted average based on revenue.
Adjusted Return on Invested CapitalThe 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. Adjusted average invested capital represents the net assets of the Company, excluding cash and equivalents and outstanding debt, as they do not represent capital investment in the Company's operations. Adjusted average invested capital also excludes the Company's net investment in the former Industrial Packaging segment and the equity investment in the Wilsonart business (formerly the Decorative Surfaces segment). Adjusted average invested capital is calculated using balances at the start of the period and at the end of each quarter.
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ITW Definitions
Free Operating 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.
Total Debt to Adjusted EBITDA
The Company uses the ratio of total debt to adjusted EBITDA to measure its ability to repay its outstanding debt obligations. The Company believes that total debt to adjusted 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. Adjusted EBITDA and the ratio of total debt to adjusted EBITDA are non-GAAP financial measures. The ratio of total debt to adjusted 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.
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ROIC ReconciliationDollars in millions
AdjustedDecember 31, 2012
AdjustedDecember 31, 2013
Operating income, as reported $ 2,475 $ 2,514
Adjustment for Decorative Surfaces (143) -
Adjusted operating income 2,332 2,514
Taxes (Tax rate: 29.2% 2012, 28.8% 2013) (681) (724)
Adjusted operating income after taxes $ 1,651 $ 1,790
Invested capital at end of period:
Trade receivables $ 2,742 $ 2,365
Inventories 1,585 1,247
Net plant and equipment 1,994 1,709
Goodwill and intangible assets 7,788 6,885
Accounts payable and accrued expenses (2,068) (1,906)
Net assets held for sale - 1,519
Other, net 798 616
Total invested capital $ 12,839 $ 12,435
Average invested capital $ 13,160 $ 12,605
Adjustment for Decorative Surfaces (274) (169)
Adjustment for Industrial Packaging (1,504) (1,477)
Adjusted average invested capital $ 11,382 $ 10,959
Adjusted return on average invested capital 14.5% 16.3%
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