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 September 30, 2007

 

 

 

OR

 

 

o

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated file (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o

No x

 

The number of shares of registrant’s common stock, $0.01 par value, outstanding at September 30, 2007: 543,955,000.

 

Part I – Financial Information

 

Item 1 – Financial Statements

 

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

 

FINANCIAL STATEMENTS

 

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company” or “ITW”). 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 Annual Report on Form 10-K/A. Certain reclassifications of prior year data have been made to conform with current year reporting.

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF INCOME

(UNAUDITED)

 

(In thousands except for per share amounts)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating Revenues

 

$

4,093,803

 

$

3,538,014

 

$

12,012,533

 

$

10,414,520

 

Cost of revenues

 

 

2,642,744

 

 

2,292,192

 

 

7,767,288

 

 

6,704,687

 

Selling, administrative, and research

 

 

 

 

 

 

 

 

 

 

 

 

 

and development expenses

 

 

715,662

 

 

593,719

 

 

2,162,565

 

 

1,797,361

 

Amortization and impairment of

 

 

 

 

 

 

 

 

 

 

 

 

 

goodwill and other intangible assets

 

 

39,102

 

 

25,237

 

 

119,060

 

 

85,874

 

Operating Income

 

 

696,295

 

 

626,866

 

 

1,963,620

 

 

1,826,598

 

Interest expense

 

 

(25,824

)

 

(20,804

)

 

(75,832

)

 

(58,710

)

Other income

 

 

19,017

 

 

35,830

 

 

89,741

 

 

71,688

 

Income Before Taxes

 

 

689,488

 

 

641,892

 

 

1,977,529

 

 

1,839,576

 

Income Taxes

 

 

198,400

 

 

195,800

 

 

578,400

 

 

561,100

 

Net Income

 

$

491,088

 

$

446,092

 

$

1,399,129

 

$

1,278,476

 

Net Income Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$0.89

 

 

$0.79

 

 

$2.52

 

 

$2.26

 

Diluted

 

 

$0.89

 

 

$0.78

 

 

$2.50

 

 

$2.24

 

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid

 

 

$0.21

 

 

$0.165

 

 

$0.63

 

 

$0.495

 

Declared

 

 

$0.28

 

 

$0.210

 

 

$0.70

 

 

$0.540

 

Shares of Common Stock Outstanding During the Period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

549,561

 

 

567,637

 

 

555,474

 

 

566,114

 

Average assuming dilution

 

 

554,255

 

 

570,929

 

 

559,949

 

 

569,857

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

(In thousands)

 

 

 

September 30, 2007

 

 

December 31, 2006

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and equivalents

 

$

602,104

 

$

590,207

 

Trade receivables

 

 

2,842,414

 

 

2,471,273

 

Inventories

 

 

1,607,759

 

 

1,482,508

 

Deferred income taxes

 

 

218,205

 

 

196,860

 

Prepaid expenses and other current assets

 

 

431,932

 

 

465,557

 

Total current assets

 

 

5,702,414

 

 

5,206,405

 

 

 

 

 

 

 

 

 

Plant and Equipment:

 

 

 

 

 

 

 

Land

 

 

216,715

 

 

193,328

 

Buildings and improvements

 

 

1,427,969

 

 

1,374,926

 

Machinery and equipment

 

 

3,757,437

 

 

3,594,057

 

Equipment leased to others

 

 

149,275

 

 

149,682

 

Construction in progress

 

 

103,396

 

 

96,853

 

 

 

 

5,654,792

 

 

5,408,846

 

Accumulated depreciation

 

 

(3,534,221

)

 

(3,355,389

)

Net plant and equipment

 

 

2,120,571

 

 

2,053,457

 

 

 

 

 

 

 

 

 

Investments

 

 

546,342

 

 

595,083

 

Goodwill

 

 

4,326,929

 

 

4,025,053

 

Intangible Assets

 

 

1,267,465

 

 

1,113,634

 

Deferred Income Taxes

 

 

116,904

 

 

116,245

 

Other Assets

 

 

801,561

 

 

770,562

 

 

 

$

14,882,186

 

$

13,880,439

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

101,467

 

$

462,721

 

Accounts payable

 

 

779,068

 

 

707,656

 

Accrued expenses

 

 

1,248,136

 

 

1,187,526

 

Cash dividends payable

 

 

152,307

 

 

117,337

 

Income taxes payable

 

 

125,038

 

 

161,344

 

Total current liabilities

 

 

2,406,016

 

 

2,636,584

 

Noncurrent Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

1,573,074

 

 

955,610

 

Deferred income taxes

 

 

324,332

 

 

259,159

 

Other

 

 

1,192,279

 

 

1,011,578

 

Total noncurrent liabilities

 

 

3,089,685

 

 

2,226,347

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

5,620

 

 

6,309

 

Additional paid-in-capital

 

 

142,920

 

 

1,378,587

 

Income reinvested in the business

 

 

9,556,758

 

 

10,406,511

 

Common stock held in treasury

 

 

(958,911

)

 

(3,220,538

)

Accumulated other comprehensive income

 

 

640,098

 

 

446,639

 

Total stockholders’ equity

 

 

9,386,485

 

 

9,017,508

 

 

 

$

14,882,186

 

$

13,880,439

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Nine Months Ended
September 30

 

 

 

 

2007

 

 

2006

 

Cash Provided by (Used for) Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,399,129

 

$

1,278,476

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

263,736

 

 

232,038

 

Amortization and impairment of goodwill and other intangible assets

 

 

119,060

 

 

85,874

 

Change in deferred income taxes

 

 

2,738

 

 

95,525

 

Provision for uncollectible accounts

 

 

5,970

 

 

8,590

 

Loss on sale of plant and equipment

 

 

1,247

 

 

433

 

Income from investments

 

 

(43,973

)

 

(64,756

)

(Gain) loss on sale of operations and affiliates

 

 

(36,475

)

 

3,363

 

Stock compensation expense

 

 

22,775

 

 

27,858

 

Other non-cash items, net

 

 

(6,556

)

 

(485

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in--

 

 

 

 

 

 

 

Trade receivables

 

 

(121,676

)

 

(75,713

)

Inventories

 

 

(55,409

)

 

(102,570

)

Prepaid expenses and other assets

 

 

(20,841

)

 

(40,852

)

Increase (decrease) in--

 

 

 

 

 

 

 

Accounts payable

 

 

(49,262

)

 

936

 

Accrued expenses and other liabilities

 

 

529

 

 

41,829

 

Income taxes receivable and payable

 

 

209,077

 

 

(169,061

)

Other, net

 

 

829

 

 

1,112

 

Net cash provided by operating activities

 

 

1,690,898

 

 

1,322,597

 

Cash Provided by (Used for) Investing Activities:

 

 

 

 

 

 

 

Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates

 

 

(619,509

)

 

(728,303

)

Additions to plant and equipment

 

 

(254,627

)

 

(222,790

)

Purchase of investments

 

 

(8,101

)

 

(5,868

)

Proceeds from investments

 

 

50,677

 

 

32,327

 

Proceeds from sale of plant and equipment

 

 

14,461

 

 

10,971

 

Proceeds from sale of operations and affiliates

 

 

160,348

 

 

13,234

 

Other, net

 

 

(6,859

)

 

1,803

 

Net cash used for investing activities

 

 

(663,610

)

 

(898,626

)

Cash Provided by (Used for) Financing Activities:

 

 

 

 

 

 

 

Cash dividends paid

 

 

(350,122

)

 

(279,847

)

Issuance of common stock

 

 

99,857

 

 

66,417

 

Repurchases of common stock

 

 

(958,911

)

 

(247,985

)

Net proceeds from short-term debt

 

 

196,912

 

 

275,268

 

Proceeds from long-term debt

 

 

108

 

 

139

 

Repayments of long-term debt

 

 

(11,267

)

 

(7,425

)

Excess tax benefits from share-based compensation

 

 

13,910

 

 

17,250

 

Repayment of preferred stock of subsidiary

 

 

(40,000

)

 

 

Net cash used for financing activities

 

 

(1,049,513

)

 

(176,183

)

Effect of Exchange Rate Changes on Cash and Equivalents

 

 

34,122

 

 

(293

)

Cash and Equivalents:

 

 

 

 

 

 

 

Increase during the period

 

 

11,897

 

 

247,495

 

Beginning of period

 

 

590,207

 

 

370,417

 

End of period

 

$

602,104

 

$

617,912

 

Cash Paid During the Period for Interest

 

$

115,728

 

$

57,521

 

Cash Paid During the Period for Income Taxes

 

$

349,814

 

$

630,991

 

Liabilities Assumed from Acquisitions

 

$

387,672

 

$

241,701

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)

COMPREHENSIVE INCOME

 

The Company’s components of comprehensive income in the periods presented are:

 

(In thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

491,088

 

$

446,092

 

$

1,399,129

 

$

1,278,476

 

Foreign currency translation adjustments

 

 

97,427

 

 

20,463

 

 

173,671

 

 

165,607

 

Amortization of unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

 

 

post retirement expense

 

 

4,840

 

 

 

 

19,788

 

 

 

Total comprehensive income

 

$

593,355

 

$

466,555

 

$

1,592,588

 

$

1,444,083

 

 

(2)

INVENTORIES

 

Inventories at September 30, 2007 and December 31, 2006 were as follows:

 

(In thousands)

 

 

September 30, 2007

 

December 31, 2006

 

Raw material

 

$

512,810

 

$

470,032

 

Work-in-process

 

 

188,083

 

 

166,946

 

Finished goods

 

 

906,866

 

 

845,530

 

 

 

$

1,607,759

 

$

1,482,508

 

 

(3)

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess cost over fair value of the net assets of purchased businesses. The Company does not amortize goodwill or intangible assets that have indefinite lives. In the first quarter of each year, the Company performs an annual impairment assessment of goodwill and intangible assets with indefinite lives based on the fair value of the related reporting unit or intangible asset.

 

As of January 1, 2007, the Company had assigned its recorded goodwill and intangible assets to approximately 440 of its 750 reporting units. When performing its annual impairment assessment, the Company compares the fair value of each reporting unit to its carrying value. Fair values are determined by discounting estimated future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows are based either on current operating cash flows or on a detailed cash flow forecast prepared by the relevant operating unit. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded for the difference between the implied fair value of the unit’s goodwill and the carrying value of the goodwill.

 

Amortization and impairment of goodwill and other intangible assets for the periods ended September 30, 2007 and 2006 were as follows:

 

(In thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Goodwill:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

$

 

$

 

$

988

 

$

9,200

 

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

39,102

 

 

25,237

 

 

116,906

 

 

73,689

 

Impairment

 

 

 

 

 

 

1,166

 

 

2,985

 

Total

 

$

39,102

 

$

25,237

 

$

119,060

 

$

85,874

 

 

In the first quarter of 2007, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in total impairment charges of $2,154,000. The first quarter 2007 goodwill impairment charges of $988,000 were primarily related to a French polymers business and an Asian construction business in the Engineered Products – International segment and resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2007, intangible asset impairments of $1,166,000 were recorded to reduce to the estimated fair value the carrying value of trademarks and customer-related intangible assets primarily related to a French polymers business in the Engineered Products – International segment and a U.S. contamination control business in the Engineered Products – North America segment.

 

In the first quarter of 2006, the Company recorded goodwill impairment charges of $9,200,000 which were primarily related to a U.S. construction joist business in the Engineered Products – North America segment, a U.S. thermal transfer ribbon business in the Specialty Systems – North America segment, and an Asian construction business in the Engineered Products – International segment, and resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2006, intangible asset impairments of $2,985,000 were recorded to reduce to the estimated fair value the carrying value of trademarks, patents and customer-related intangible assets primarily related to a U.S. welding components business in the Specialty Systems – North America segment and a U.S. contamination control business in the Engineered Products – North America segment.

 

(4)

RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

 

Pension and other postretirement benefit costs for the periods ended September 30, 2007 and 2006 were as follows:

 

(In thousands)

 

 

Three Months Ended

September 30

 

Nine Months Ended

September 30

 

 

 

Pension

 

Other Postretirement Benefits

 

Pension

 

Other Postretirement Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

28,833

 

$

27,040

 

$

3,697

 

$

4,187

 

$

86,198

 

$

80,444

 

$

11,261

 

$

12,560

 

Interest cost

 

 

26,737

 

 

24,388

 

 

8,008

 

 

8,225

 

 

79,699

 

 

72,549

 

 

24,124

 

 

24,674

 

Expected return on plan assets

 

 

(39,113

)

 

(34,609

)

 

(2,898

)

 

(1,995

)

 

(116,688

)

 

(103,154

)

 

(8,695

)

 

(5,987

)

Amortization of actuarial loss

 

 

5,041

 

 

6,377

 

 

489

 

 

1,292

 

 

15,024

 

 

18,970

 

 

1,500

 

 

23,573

 

Amortization of prior service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cost (income)

 

 

(605

)

 

(565

)

 

1,565

 

 

1,391

 

 

(1,779

)

 

(1,697

)

 

4,695

 

 

4,174

 

Amortization of net transition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amount

 

 

3

 

 

16

 

 

 

 

 

 

13

 

 

48

 

 

 

 

 

Curtailment/settlement loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(gain)

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

(1,562

)

 

 

Net periodic benefit cost

 

$

20,896

 

$

22,647

 

$

10,861

 

$

13,100

 

$

68,467

 

$

67,160

 

$

31,323

 

$

58,994

 

 

The Company expects to contribute $82,400,000 to its pension plans in 2007. As of September 30, 2007, contributions of $71,600,000 have been made.

 

(5)

SHORT-TERM DEBT

 

In June 2006, the Company entered into a $600,000,000 Line of Credit Agreement with a termination date of June 15, 2007. This line of credit was replaced on June 15, 2007, by a $1.0 billion Line of Credit Agreement with a termination date of June 13, 2008. No amounts were outstanding under this facility at September 30, 2007.

 

(6)

LONG-TERM DEBT

 

In June 2006, the Company entered into a $350,000,000 revolving credit facility (“RCF”) with a termination date of June 16, 2011. This RCF was replaced on June 15, 2007 by a $500,000,000 RCF with a termination date of June 15, 2012. No amounts were outstanding under this facility at September 30, 2007.

 

The Company had outstanding commercial paper of $616,139,883 at September 30, 2007 and $200,339,882 at December 31, 2006. All commercial paper outstanding at September 30, 2007 has been reclassified as long-term, since it was subsequently refinanced with long-term debt as discussed in Note 10. The commercial paper balance at December 31, 2006 was classified as short-term debt.

 

(7)

INCOME TAXES

 

On January 1, 2007, the Company adopted Financial Accounting Standard Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns, and provides guidance on derecognition, classification, and interest and penalties, related to uncertain tax positions. As a result of implementation of FIN 48, the Company did not recognize any change in its liability for unrecognized tax benefits.

 

As of the adoption date, the Company had $688,000,000 of unrecognized tax benefits. If these unrecognized tax benefits were recognized, approximately $593,000,000 would impact the Company's effective tax rate. There has been no significant change to the amount of unrecognized tax benefits during the nine months ended September 30, 2007. As of September 30, 2007, the Company does not expect any significant changes to the estimated amount of unrecognized tax benefits for any significant individual tax positions in the next twelve months.

 

The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state and foreign jurisdictions. The following table summarizes the open tax years for the Company’s major jurisdictions:

 

Jurisdiction

Open Tax Years

United States – Federal

2001-2006

United Kingdom

2000-2006

Germany

2001-2006

France

2000-2006

Australia

2002-2006

 

The Company recognizes interest and penalties related to income tax matters in income tax expense. There were no significant accruals for interest and penalties recorded as of January 1, 2007.

 

(8)

LEVERAGED LEASES

 

On January 1, 2007, the Company adopted FASB Staff Position No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (“FSP 13-2”). FSP 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease. Upon adoption of FSP 13-2, the Company recorded an after-tax charge to retained earnings of $22,600,000, resulting from changes in the timing of expected cash flows related to income tax benefits of the Company's leveraged lease transactions.

 

(9)       STOCKHOLDERS' EQUITY

 

Common Stock, Additional Paid-In-Capital, Income Reinvested in the Business and Common Stock Held in Treasury activity during the first nine months of 2007 are shown below:

 

(In thousands)

 

Common Stock

 

Additional Paid-In-Capital

 

Income Reinvested in the Business

 

Common Stock Held in Treasury

 

Balance, December 31, 2006

 

$

6,309

 

$

1,378,587

 

$

10,406,511

 

$

(3,220,538

)

During 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of treasury shares

 

 

(721

)

 

(1,378,587

)

 

(1,841,230

)

 

3,220,538

 

Shares issued for stock options and grants

 

 

32

 

 

99,933

 

 

 

 

 

Shares surrendered on exercise of stock options

 

 

 

 

(108

)

 

 

 

 

Stock compensation expense

 

 

 

 

22,775

 

 

 

 

 

Tax benefits related to stock options

 

 

 

 

20,320

 

 

 

 

 

Repurchases of common stock

 

 

 

 

 

 

 

 

(958,911

)

Net income

 

 

 

 

 

 

1,399,129

 

 

 

Cash dividends declared

 

 

 

 

 

 

(385,093

)

 

 

Cumulative effect of adopting FSP 13-2

 

 

 

 

 

 

(22,559

)

 

 

Balance, September 30, 2007

 

$

5,620

 

$

142,920

 

$

9,556,758

 

$

(958,911

)

 

On August 21, 2007, the Company’s Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to $3.0 billion of the Company’s common stock over an open-ended period of time. As of September 30, 2007, no shares have been repurchased under this program.

 

On February 9, 2007, the Company retired 72,151,184 shares of Common Stock Held in Treasury.

 

On August 4, 2006, the Company's Board of Directors authorized a stock repurchase program which provided for the buyback of up to 35,000,000 shares. In the first nine months of 2007, the Company repurchased 18,025,647 shares of its common stock under this program at an average price of $53.20 per share.

 

(10)

SUBSEQUENT EVENTS

 

On October 1, 2007, the Company, through its wholly-owned subsidiary ITW Finance Europe S.A., issued €750,000,000 of 5.25% notes due October 1, 2014, at 99.874% of face value. The effective interest rate of the notes is 5.27%. The net proceeds of the offering will be used to refinance commercial paper outstanding and for general corporate purposes.

 

(11)

SEGMENT INFORMATION

 

See Management’s Discussion and Analysis for information regarding operating revenues and operating income for the Company’s segments.

 

Item 2 - Management’s Discussion and Analysis

 

CONSOLIDATED RESULTS OF OPERATIONS

 

The Company’s consolidated results of operations for the third quarter and year-to-date periods of 2007 and 2006 were as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating revenues

 

 

$4,093,803

 

 

$3,538,014

 

 

$12,012,533

 

 

$10,414,520

 

Operating income

 

696,295

 

 

626,866

 

1,963,620

 

 

1,826,598

 

Margin %

 

17.0

%

 

17.7

%

16.3

%

 

17.5

%

 

In the third quarter and year-to-date periods of 2007, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

2.2

%

5.1

%

0.5

%

1.9

%

4.4

%

0.4

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

0.6

 

0.1

 

 

(0.5

)

(0.1

)

Total

 

2.2

 

5.7

 

0.6

 

1.9

 

3.9

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

11.7

 

2.7

 

(1.5

)

11.5

 

1.5

 

(1.6

)

Divestitures

 

(1.4

)

(1.1

)

 

(1.1

)

(0.7

)

 

Restructuring costs

 

 

0.4

 

0.1

 

 

(0.8

)

(0.1

)

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.6

 

0.1

 

Translation

 

3.8

 

3.4

 

 

3.4

 

3.0

 

 

Intercompany/Other

 

(0.6

)

 

0.1

 

(0.4

)

 

0.1

 

Total

 

15.7

%

11.1

%

(0.7

)%

15.3

%

7.5

%

(1.2

)%

 

In the third quarter and year-to-date period of 2007 revenues increased 15.7% and 15.3%, respectively, over 2006 primarily due to revenues from acquisitions and favorable currency translation. Base business revenues increased 2.2% and 1.9% in the third quarter and year-to-date periods, respectively, versus the 2006 period primarily related to a 5.1% and 7.2% increase in international base business revenues for the third quarter and year-to-date periods, respectively. These increases were offset for the year-to-date period by a 1.6% decline in North American base revenues. Base revenues for North America increased 0.2% for third quarter. European economic strength and market demand continued strong in 2007. North American base revenues remained weak due to sluggish industrial production and slow demand in many of the Company’s North American end markets, primarily construction and automotive.

 

Operating income in the third quarter and year-to-date periods improved over 2006 primarily due to leverage from the growth in base business revenues, favorable currency translation versus the prior year and the effect of acquisitions, partially offset by the effect of divestitures. In addition, for the year-to-date period, increased restructuring expenses decreased income. Operating margins were negatively affected by lower margins of acquired businesses, including amortization expense.

 

ENGINEERED PRODUCTS - NORTH AMERICA

 

Businesses in this segment are located in North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

 

In the plastic and metal components and fasteners category, products include:

metal fasteners and fastening tools for the commercial, residential and renovation construction industries;

metal plate connecting components, machines and software for the commercial and residential construction industries;

laminate products for the commercial, residential and renovation construction industries and furniture markets;

metal fasteners for automotive, appliance and general industrial applications;

metal components for automotive, appliance and general industrial applications;

plastic components for automotive, appliance, furniture, electronics and general industrial applications; and

plastic fasteners for automotive, appliance, electronics and general industrial applications.

 

In the specialty products category, products include:

reclosable packaging for consumer food and storage applications;

hand wipes and cleaners for use in industrial manufacturing locations;

chemical fluids which clean or add lubrication to machines and automobiles;

adhesives for industrial, construction and consumer purposes;

epoxy and resin-based coating products for industrial applications;

components for industrial machines;

automotive aftermarket maintenance and appearance products; and

swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries.

 

This segment primarily serves the construction, automotive and consumer durables markets.

 

The results of operations for the Engineered Products – North America segment for the third quarter and year-to-date periods of 2007 and 2006 were as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating revenues

 

 

$1,041,240

 

 

$1,017,265

 

 

$3,156,813

 

 

$3,139,276

 

Operating income

 

173,131

 

 

178,936

 

520,898

 

 

561,937

 

Margin %

 

16.6

%

 

17.6

%

16.5

%

 

17.9

%

 

 

In the third quarter and year-to-date periods of 2007, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

(1.7

)%

(4.0

)%

(0.4

)%

(3.8

)%

(8.7

)%

(0.9

)%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

(1.0

)

(0.2

)

 

0.6

 

0.1

 

Total

 

(1.7

)

(5.0

)

(0.6

)

(3.8

)

(8.1

)

(0.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

4.5

 

2.2

 

(0.4

)

4.9

 

1.4

 

(0.6

)

Divestitures

 

(0.8

)

(0.8

)

 

(0.6

)

(0.5

)

 

Restructuring costs

 

 

 

 

 

(1.2

)

(0.2

)

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.9

 

0.2

 

Translation/Other

 

0.4

 

0.4

 

 

0.1

 

0.2

 

 

Total

 

2.4

%

(3.2

)%

(1.0

)%

0.6

%

(7.3

)%

(1.4

)%

 

Revenues increased modestly in both the third quarter and year-to-date periods of 2007 versus 2006 primarily due to revenues from acquisitions, partially offset by a decline in base business revenues and the effect of divestitures. Acquisition revenue was primarily related to the acquisition of an electronic switches business, a specialty wipes business, and a die cut adhesives business. In the fourth quarter of 2006, a roofing components business was divested. In the third quarter and year-to-date periods, construction base revenues declined 4.6% and 6.8%, respectively, primarily due to declines in the residential construction market. Automotive base revenues increased 2.4% in the third quarter and declined 3.0% in the year-to-date period primarily due to a modest increase in automotive production at the Detroit 3 automotive manufacturers in the third quarter and a year-to-date decline in Detroit 3 automotive builds. Base revenues from the other industrial-based businesses in this segment declined 0.7% and 0.9% in the third quarter and year-to-date periods, respectively, mainly due to decreases in the strength films, industrial plastics and metals, and machined components and contamination control businesses, partially offset by revenue increases in the polymers and reclosable packaging businesses in both periods.

 

Operating income decreased in the third quarter of 2007 and year-to-date period primarily due to the decline in base business revenues described above. Variable margins increased 50 and 40 basis points for the third quarter and year-to-date periods, respectively, mainly due to expense management in the automotive, construction, and polymers businesses and the benefits of 2006 restructuring projects. Base overhead expenses increased 70 basis points in the third quarter due to increases in the laminate and construction business. Year-to-date overhead expenses increased 20 basis points as the expenses related to new product launches in the laminate businesses were partially offset by the positive 2007 effect of a first quarter 2006 charge of $9.8 million related to retiree healthcare and life insurance liabilities.

 

ENGINEERED PRODUCTS - INTERNATIONAL

 

Businesses in this segment are located outside North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

 

In the plastic and metal components and fasteners category, products include:

metal fasteners and fastening tools for the commercial, residential and renovation construction industries;

laminate products for the commercial, residential and renovation construction industries and furniture markets;

metal plate connecting components and software for the commercial and residential construction markets;

metal fasteners for automotive, appliance and general industrial applications;

metal components for automotive, appliance and general industrial applications;

plastic components for automotive, appliance, electronics and general industrial applications; and

plastic fasteners for automotive, appliance, electronics and general industrial applications.

 

In the specialty products category, products include:

reclosable packaging for consumer food applications;

electronic component packaging trays used for the storage, shipment and manufacturing insertion of electronic components

 

and microchips;

adhesives for industrial, construction and consumer purposes;

chemical fluids which clean or add lubrication to machines and automobiles;

epoxy and resin-based coating products for industrial applications;

automotive aftermarket maintenance and appearance products; and

swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries.

 

This segment primarily serves the construction, automotive and consumer durables markets.

 

The results of operations for the Engineered Products – International segment for the third quarter and year-to-date periods of 2007 and 2006 were as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating revenues

 

 

$954,571

 

 

$720,358

 

 

$2,764,400

 

 

$2,081,246

 

Operating income

 

140,595

 

 

109,588

 

386,174

 

 

295,886

 

Margin %

 

14.7

%

 

15.2

%

14.0

%

 

14.2

%

 

In the third quarter and year-to-date periods of 2007, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

6.7

%

17.2

%

1.5

%

7.3

%

20.4

%

1.7

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

(2.4

)

(0.3

)

 

(6.2

)

(0.8

)

Total

 

6.7

 

14.8

 

1.2

 

7.3

 

14.2

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

16.9

 

4.2

 

(1.7

)

16.7

 

6.3

 

(1.3

)

Divestitures

 

(0.2

)

(0.2

)

 

(0.3

)

0.1

 

0.1

 

Restructuring costs

 

 

(0.9

)

(0.1

)

 

(0.4

)

(0.1

)

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.1

 

 

Translation/Other

 

9.1

 

10.4

 

0.1

 

9.1

 

10.2

 

0.2

 

Total

 

32.5

%

28.3

%

(0.5

)%

32.8

%

30.5

%

(0.2

)%

 

 

Revenues increased in the third quarter and year-to-date periods of 2007 due to revenues from acquisitions, the favorable effect of currency translation and growth in base business revenues. Base business construction revenues increased 8.1% and 10.0% in the third quarter and year-to date periods, respectively, due to strong demand across the European and Asia-Pacific markets. Automotive base business revenues increased 8.5% and 4.9% in the third quarter and year-to-date periods, respectively, due to a 7.5% and 5.2% increase in European auto production, respectively. Base revenues from the other businesses in this segment increased 3.1% and 4.6% in the third quarter and year-to-date periods, respectively, as they benefited from strong demand in the broad array of industrial and commercial end markets they serve. Acquisition revenue was primarily related to the acquisitions of a European laminate business, one Korean and one European automotive business, two European performance polymers businesses, and a European construction business.

 

Operating income increased in the third quarter and year-to-date periods of 2007 versus 2006 primarily due to the positive leverage effect from the increase in base revenues described above, the favorable effect of currency translation and income from acquisitions, partially offset by higher restructuring expenses. Variable margins increased 20 basis points in the third quarter mainly due to price recovery of higher raw material costs. Variable margins declined 50 basis points for the year-to-date period mainly due to higher raw material costs in the first half of 2007. Operating margins were negatively affected by the lower margins of acquired businesses.

 

SPECIALTY SYSTEMS - NORTH AMERICA

 

Businesses in this segment are located in North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period of more than 30 days.

 

In the machinery and related consumables category, products include:

industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for

 

customers in numerous end markets;

welding equipment, metal consumables and related accessories for a variety of end market users;

equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

plastic stretch film and related packaging equipment for various industrial purposes;

paper and plastic products used to protect shipments of goods in transit;

marking tools and inks for various end users;

foil and film and related equipment used to decorate a variety of consumer products; and

solder materials, services and equipment for the electronic and microelectronic assembly industry.

 

In the specialty equipment and systems category, products include:

commercial food equipment such as dishwashers, refrigerators, cooking equipment and food machines for use by

 

restaurants, institutions and supermarkets and related service;

paint spray equipment for a variety of general industrial applications;

materials and structural testing machinery and software;

static control equipment for electronics and industrial applications;

airport ground power generators for commercial and military applications; and

supply chain management software for the industrial, aerospace and health care markets.

 

This segment primarily serves the general industrial, food institutional and service, maintenance, repair and operations (“MRO”)/metals, and food and beverage markets.

 

The results of operations for the Specialty Systems – North America segment for the third quarter and year-to-date periods of 2007 and 2006 were as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating revenues

 

 

$1,271,468

 

 

$1,150,193

 

 

$3,747,372

 

 

$3,408,736

 

Operating income

 

246,314

 

 

229,591

 

708,697

 

 

683,814

 

Margin %

 

19.4

%

 

20.0

%

18.9

%

 

20.1

%

 

 

In the third quarter and year-to-date periods of 2007, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

1.9

%

3.9

%

0.4

%

0.5

%

1.0

%

0.1

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

3.4

 

0.7

 

 

2.5

 

0.5

 

Total

 

1.9

 

7.3

 

1.1

 

0.5

 

3.5

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

9.8

 

0.2

 

(1.8

)

10.5

 

(0.3

)

(2.0

)

Divestitures

 

(1.5

)

(0.5

)

0.2

 

(1.1

)

(0.5

)

0.1

 

Restructuring costs

 

 

 

 

 

0.1

 

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.6

 

0.1

 

Translation/Other

 

0.3

 

0.3

 

(0.1

)

 

0.2

 

 

Total

 

10.5

%

7.3

%

(0.6

)%

9.9

%

3.6

%

(1.2

)%

 

Revenues increased in the third quarter and year-to-date periods of 2007 over 2006 primarily due to revenues from acquisitions. The acquired revenues were primarily related to the acquisition of two businesses supplying the electronic and microelectronic assembly industry, a supply chain management software business, two test and measurement businesses and two decorating businesses. A quality measurement business was divested during the second quarter of 2007. Base business revenues increased modestly in the third quarter and year-to-date periods of 2007 primarily due to slower growth in U.S. industrial production. Food equipment base revenues increased 8.6% in the third quarter and 6.2% year-to-date due to growth in the restaurant, service and institutional sectors. Welding base revenues increased 6.6% and 5.6% in the third quarter and year-to-date periods, respectively, due to higher demand in energy-related end markets. Total packaging base revenues declined 5.5% and 5.6% in the third quarter and year-to-date periods, respectively, primarily due to weakness in the metals and construction-related industrial packaging categories in North America. Base business revenues from the other businesses in this segment, including the decorating and finishing businesses, increased 0.7% for the third quarter, while decreasing 2.5% for the year-to-date period.

 

Operating income increased in the third quarter and year-to-date periods of 2007 versus 2006 primarily due to the leverage effect of the increase in base revenues, improved variable margins and decreased overhead costs, including the favorable first quarter 2007 impact of a $9.8 million charge related to retiree health care and life insurance liabilities incurred in the first quarter of 2006, offset by the effect of divestitures. Year-to-date operating income was also favorably affected by lower impairment charges. Acquisitions had minimal impact on income in the third quarter and a negative effect year-to-date.

 

SPECIALTY SYSTEMS - INTERNATIONAL

 

Businesses in this segment are located outside North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period of more than 30 days.

 

In the machinery and related consumables category, products include:

industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for

 

customers in numerous end markets;

welding equipment and metal consumables for a variety of end market users;

equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

plastic stretch film and related packaging equipment for various industrial purposes;

paper and plastic products used to protect shipments of goods in transit;

foil and film and related equipment used to decorate a variety of consumer products; and

solder materials, services and equipment for the electronic and microelectronic assembly industry.

 

In the specialty equipment category, products include:

commercial food equipment such as dishwashers, refrigerators and cooking equipment for use by restaurants, institutions and

 

supermarkets and related service;

materials and structural testing machinery and software;

paint spray equipment for a variety of general industrial applications;

static control equipment for electronics and industrial applications; and

airport ground power generators for commercial applications.

 

This segment primarily serves the general industrial, food institutional and retail, food and beverage, and MRO/metals markets.

 

The results of operations for the Specialty Systems – International segment for the third quarter and year-to-date periods of 2007 and 2006 were as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating revenues

 

 

$947,016

 

 

$750,003

 

 

$2,690,816

 

 

$2,085,343

 

Operating income

 

136,255

 

 

108,751

 

347,851

 

 

284,961

 

Margin %

 

14.4

%

 

14.5

%

12.9

%

 

13.7

%

 

In the third quarter and year-to-date periods of 2007, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

3.6

%

9.6

%

0.9

%

7.1

%

20.3

%

1.7

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

0.9

 

0.1

 

 

(2.7

)

(0.4

)

Total

 

3.6

 

10.5

 

1.0

 

7.1

 

17.6

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

18.0

 

7.3

 

(1.5

)

16.4

 

1.0

 

(1.9

)

Divestitures

 

(3.0

)

(3.5

)

(0.1

)

(2.3

)

(2.5

)

 

Restructuring costs

 

 

3.2

 

0.4

 

 

(2.2

)

(0.3

)

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.1

 

 

Translation/Other

 

7.7

 

7.8

 

0.1

 

7.8

 

8.1

 

0.1

 

Total

 

26.3

%

25.3

%

(0.1

)%

29.0

%

22.1

%

(0.8

)%

 

 

Revenues increased in the third quarter and year-to-date periods of 2007 versus 2006 primarily due to revenues from acquired companies, base business revenue growth and the favorable effect of currency translation, offset by the impact of divestitures. The revenue contribution from acquired businesses was primarily related to the acquisition of a European food equipment business, two businesses supplying the electronic and microelectronic assembly industry, two European test and measurement businesses and two decorating businesses. Food equipment base revenues increased 14.1% and 10.2% in the third quarter and year-to-date periods, respectively, due primarily to growth in European institutional demand. Total packaging base revenue increased 0.6% and 4.7% during the third quarter and year-to-date periods, respectively, led by growth in the industrial packaging systems businesses. Other base business revenues, including the welding and finishing businesses, increased 2.3% and 8.4% in the third quarter and year-to-date periods, led by higher welding equipment and consumable sales in Europe and Asia and strong demand for finishing products in Europe and Asia.

 

Operating income increased in the third quarter and year-to-date periods of 2007 versus 2006 primarily due to leverage from the base revenue increases described above, the favorable effect of currency translation and the effect of acquisitions. These increases were partially offset by the effect of the divestiture of the sleeve label business in the first quarter of 2007. Restructuring expenses were lower than the 2006 third quarter and higher for the year-to-date period. Variable margins were relatively flat in the third quarter and year-to-date periods as increased raw material costs were offset by efficiency gains. Operating margins were negatively effected by the lower margins of acquired businesses.

 

OPERATING REVENUES

 

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

 

(In thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Engineered Products – North America

 

$

1,041,240

 

$

1,017,265

 

$

3,156,813

 

$

3,139,276

 

Engineered Products – International

 

 

954,571

 

 

720,358

 

 

2,764,400

 

 

2,081,246

 

Specialty Systems – North America

 

 

1,271,468

 

 

1,150,193

 

 

3,747,372

 

 

3,408,736

 

Specialty Systems – International

 

 

947,016

 

 

750,003

 

 

2,690,816

 

 

2,085,343

 

Intersegment revenues

 

 

(120,492

)

 

(99,805

)

 

(346,868

)

 

(300,081

)

Total operating revenues

 

$

4,093,803

 

$

3,538,014

 

$

12,012,533

 

$

10,414,520

 

 

AMORTIZATION AND IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

 

The Company does not amortize goodwill and intangible assets that have indefinite lives. In the first quarter of each year, the Company performs an annual impairment assessment of goodwill and intangible assets with indefinite lives based on the fair value of the related reporting unit or intangible asset.

 

As of January 1, 2007, the Company had assigned its recorded goodwill and intangible assets to approximately 440 of its 750 reporting units. When performing its annual impairment assessment, the Company compares the fair value of each reporting unit to its carrying value. Fair values are determined by discounting estimated future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows are based either on current operating cash flows or on a detailed cash flow forecast prepared by the relevant operating unit. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded for the difference between the implied fair value of the unit’s goodwill and the carrying value of the goodwill.

 

Amortization and impairment of goodwill and other intangible assets for the periods ended September 30, 2007 and 2006 were as follows:

 

(In thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Goodwill:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

$

 

$

 

$

988

 

$

9,200

 

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

39,102

 

 

25,237

 

 

116,906

 

 

73,689

 

Impairment

 

 

 

 

 

 

1,166

 

 

2,985

 

Total

 

$

39,102

 

$

25,237

 

$

119,060

 

$

85,874

 

 

In the first quarter of 2007, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in total impairment charges of $2.2 million. The first quarter 2007 goodwill impairment charges of $1.0 million were primarily related to a French polymers business and an Asian construction business in the Engineered Products – International segment and resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2007, intangible asset impairments of $1.2 million were recorded to reduce to the estimated fair value the carrying value of trademarks and customer-related intangible assets primarily related to a French polymers business in the Engineered Products – International segment and a U.S. contamination control business in the Engineered Products – North America segment.

 

In the first quarter of 2006, the Company recorded goodwill impairment charges of $9.2 million which were primarily related to a U.S. construction joist business in the Engineered Products – North America segment, a U.S. thermal transfer ribbon business in the Specialty Systems – North America segment, and an Asian construction business in the Engineered Products – International segment, and resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2006, intangible asset impairments of $3.0 million were recorded to reduce to the estimated fair value the carrying value of trademarks, patents and customer-related intangible assets primarily related to a U.S. welding components business in the Specialty Systems – North America segment and a U.S. contamination control business in the Engineered Products – North America segment.

 

INTEREST EXPENSE

 

Interest expense increased to $75.8 million in the first nine months of 2007 from $58.7 million in 2006 primarily due to a higher amount of commercial paper outstanding in the first nine months of 2007.

 

OTHER INCOME

 

Other income increased to $89.7 million for the first nine months of 2007 versus income of $71.7 million in 2006, primarily due to gains on divestitures in 2007 versus losses in 2006. These amounts are partially offset by lower investment income in 2007, primarily due to the liquidation of the Company’s mortgage transactions in the fourth quarter of 2006.

 

INCOME TAXES

 

The effective tax rate for the first nine months of 2007 was 29.25%, 125 basis points lower than the effective rate for the first nine months of 2006. The reduction in the effective tax rate in 2007 resulted primarily from an increase in the domestic manufacturing deduction and a higher proportionate share of income in foreign jurisdictions with lower tax rates than the U.S.

 

NET INCOME

 

Net income of $1.4 billion ($2.50 per diluted share) in the first nine months of 2007 was 9.4% higher than the 2006 net income of $1.3 billion ($2.24 per diluted share).

 

FOREIGN CURRENCY

 

The weakening of the U.S. dollar against foreign currencies in 2007 increased operating revenues for the first nine months of 2007 by approximately $348.8 million and increased earnings by approximately 7 cents per diluted share. The strengthening of the U.S. dollar against foreign currencies in 2006 decreased operating revenues for the first nine months of 2006 by approximately $77.8 million and decreased earnings by approximately 1 cent per diluted share.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2007, the Company adopted Financial Accounting Standard Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns, and provides guidance on derecognition, classification, and interest and penalties, related to uncertain tax positions. As a result of implementation of FIN 48, the Company did not recognize any change in its liability for unrecognized tax benefits. See the income taxes note for additional information.

 

On January 1, 2007, the Company adopted FASB Staff Position No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (“FSP 13-2”). FSP 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease. Upon adoption of FSP 13-2, the Company recorded an after-tax charge to retained earnings of $22.6 million, resulting from a change in the timing of expected cash flows related to income tax benefits of the Company's leveraged lease transactions.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow

 

The Company’s primary source of liquidity is free operating cash flow. Management continues to believe that such internally generated cash flow will be adequate to service debt and to continue to pay dividends that meet its dividend payout guideline of 25% to 35% of the last two years’ average net income. In addition, free operating cash flow is expected to be adequate to finance internal growth, acquisitions and share repurchases.

 

The Company uses free operating cash flow to measure normal cash flow generated by its operations that is available for dividends, acquisitions, share repurchases and debt repayment. 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.

 

On October 1, 2007, the Company, through its wholly-owned subsidiary ITW Finance Europe S.A., issued €750,000,000 of 5.25% notes due October 1, 2014. The net proceeds of the offering will be used to refinance commercial paper outstanding and for general corporate purposes.

 

On August 21, 2007, the Company’s Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to $3.0 billion of the Company’s common stock over an open-ended period of time. As of September 30, 2007, no shares have been repurchased under this program.

 

On August 4, 2006, the Company’s Board of Directors authorized a stock repurchase program which provides for the buyback of up to 35.0 million shares. In the third quarter of 2007, the Company repurchased 8,561,228 shares of its common stock at an average price of $55.95 per share. Since inception of this program, the Company has repurchased 27,706,378 shares of its common stock for $1.4 billion at an average price of $50.74 per share. There are approximately 7,000,000 shares remaining under this program.

 

Summarized cash flow information for the third quarter and year-to-date periods of 2007 and 2006 was as follows:

 

(In thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

Net cash provided by operating activities

 

$

736,441

 

$

569,605

 

$

1,690,898

 

$

1,322,597

 

Additions to plant and equipment

 

 

(80,298

)

 

(77,796

)

 

(254,627

)

 

(222,790

)

Free operating cash flow

 

$

656,143

 

$

491,809

 

$

1,436,271

 

$

1,099,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

$

(195,089

)

$

(446,824

)

$

(619,509

)

$

(728,303

)

Proceeds from investments

 

 

25,805

 

 

13,778

 

 

50,677

 

 

32,327

 

Proceeds from sale of operations and affiliates

 

 

10,588

 

 

333

 

 

160,348

 

 

13,234

 

Cash dividends paid

 

 

(115,874

)

 

(93,664

)

 

(350,122

)

 

(279,847

)

Issuance of common stock

 

 

22,756

 

 

3,410

 

 

99,857

 

 

66,417

 

Repurchases of common stock

 

 

(479,038

)

 

(247,985

)

 

(958,911

)

 

(247,985

)

Net proceeds of debt

 

 

182,831

 

 

431,892

 

 

185,753

 

 

267,982

 

Repayment of preferred stock of subsidiary

 

 

 

 

 

 

(40,000

)

 

 

Other

 

 

12,474

 

 

5,977

 

 

47,533

 

 

23,863

 

Net increase in cash and equivalents

 

$

120,596

 

$

158,726

 

$

11,897

 

$

247,495

 

 

Return on Average Invested Capital

 

The Company uses return on average invested capital (“ROIC”) to measure the effectiveness of the operations’ use of invested capital to generate profits. ROIC for the third quarter and year-to-date periods of 2007 and 2006 was as follows:

 

(Dollars in thousands)

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income after taxes

 

$

495,971

 

$

435,672

 

$

1,389,261

 

$

1,269,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Invested Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

2,842,414

 

$

2,369,654

 

$

2,842,414

 

$

2,369,654

 

Inventories

 

 

1,607,759

 

 

1,444,560

 

 

1,607,759

 

 

1,444,560

 

Net plant and equipment

 

 

2,120,571

 

 

1,979,140

 

 

2,120,571

 

 

1,979,140

 

Investments

 

 

546,342

 

 

917,744

 

 

546,342

 

 

917,744

 

Goodwill and intangible assets

 

 

5,594,394

 

 

4,311,162

 

 

5,594,394

 

 

4,311,162

 

Accounts payable and accrued expenses

 

 

(2,027,204

)

 

(1,725,503

)

 

(2,027,204

)

 

(1,725,503

)

Other, net

 

 

(225,354

)

 

285,447

 

 

(225,354

)

 

285,447

 

Total invested capital

 

$

10,458,922

 

$

9,582,204

 

$

10,458,922

 

$

9,582,204

 

Average invested capital

 

$

10,425,272

 

$

9,384,397

 

$

10,202,949

 

$

8,989,482

 

Annualized return on average invested capital

 

 

19.0

%

 

18.6

%

 

18.2

%

 

18.8

%

 

The 40 basis point increase in ROIC in the third quarter of 2007 was due primarily to a 13.8% increase in after-tax operating income, mainly due to an increase in base business operating income, translation, acquisitions and a decrease in the effective tax rate. The positive impact was partially offset by an 11.1% increase in average invested capital, primarily due to acquisitions.

 

The 60 basis point decrease in ROIC for year-to-date 2007 was due primarily to a 13.5% increase in average invested capital, mainly from acquisitions. The negative impact of acquisitions was partially offset by a 9.4% increase in after-tax operating income primarily due to an increase in base business operating income, translation, and a decrease in the effective tax rate.

 

Working Capital

 

Net working capital at September 30, 2007 and December 31, 2006 is summarized as follows:

 

(Dollars in thousands)

 

 

September 30, 2007

 

December 31, 2006

 

Increase/(Decrease)

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

602,104

 

$

590,207

 

$

11,897

 

Trade receivables

 

 

2,842,414

 

 

2,471,273

 

 

371,141

 

Inventories

 

 

1,607,759

 

 

1,482,508

 

 

125,251

 

Other

 

 

650,137

 

 

662,417

 

 

(12,280

)

 

 

 

5,702,414

 

 

5,206,405

 

 

496,009

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

 

101,467

 

 

462,721

 

 

(361,254

)

Accounts payable and accrued expenses

 

 

2,027,204

 

 

1,895,182

 

 

132,022

 

Other

 

 

277,345

 

 

278,681

 

 

(1,336

)

 

 

 

2,406,016

 

 

2,636,584

 

 

(230,568

)

Net Working Capital

 

$

3,296,398

 

$

2,569,821

 

$

726,577

 

Current Ratio

 

 

2.37

 

 

1.97

 

 

 

 

 

Trade receivables and inventories increased due to acquisitions, increased sales and foreign currency translation. Short-term debt decreased primarily as a result of the reclassification of commercial paper to long-term debt, which was refinanced with long-term debt in October 2007. Accounts payable and accrued expenses increased primarily due to acquisitions.

 

Debt

 

Total debt at September 30, 2007 and December 31, 2006 was as follows:

 

(Dollars in thousands)

 

 

 

September 30, 2007

 

 

December 31, 2006

 

Short-term debt

 

$

101,467

 

$

462,721

 

Long-term debt

 

 

1,573,074

 

 

955,610

 

Total debt

 

$

1,674,541

 

$

1,418,331

 

 

 

 

 

 

 

 

 

Total debt to capitalization

 

 

15.1

%

 

13.6

%

 

The Company had outstanding commercial paper of $616.1 million at September 30, 2007 and $200.3 million at December 31, 2006. All commercial paper outstanding at September 30, 2007 has been reclassified as long-term, since it was subsequently refinanced with long-term debt. The commercial paper balance at December 31, 2006 was classified as short-term debt.

 

On October 1, 2007, the Company, through its wholly-owned subsidiary ITW Finance Europe S.A., issued €750,000,000 of 5.25% notes due October 1, 2014, at 99.874% of face value. The effective interest rate of the notes is 5.27%. The net proceeds of the offering will be used to refinance commercial paper outstanding and for general corporate purposes.

 

In June 2006, the Company entered into a $600,000,000 Line of Credit Agreement with a termination date of June 15, 2007. This line of credit was replaced on June 15, 2007, by a $1,000,000,000 Line of Credit Agreement with a termination date of June 13, 2008. No amounts were outstanding under this facility at September 30, 2007.

 

In June 2006, the Company entered into a $350,000,000 revolving credit facility (“RCF”) with a termination date of June 16, 2011. This RCF was replaced on June 15, 2007 by a $500,000,000 RCF with a termination date of June 15, 2012. No amounts were outstanding under this facility at September 30, 2007.

 

 

 

Stockholders’ Equity

 

The changes to stockholders’ equity during 2007 were as follows:

 

(In thousands)

 

Total stockholders’ equity, December 31, 2006

 

$

9,017,508

 

Net income

 

 

1,399,129

 

Cash dividends declared

 

 

(385,093

)

Repurchases of common stock

 

 

(958,911

)

Stock option activity

 

 

142,952

 

Amortization of unrecognized pension and postretirement expense

 

 

19,788

 

Currency translation adjustments

 

 

173,671

 

Cumulative effect of adopting FSP13-2

 

 

(22,559

)

Total stockholders’ equity, September 30, 2007

 

$

9,386,485

 

 

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding 2007 contributions to the Company's pension plans, the adequacy of internally generated funds, the meeting of dividend payout objectives, the impact of new accounting pronouncements and the estimated amount of unrecognized tax benefits. 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 may influence future results include (1) a downturn or further downturn in the construction, general industrial, automotive, or food institutional and service markets, (2) deterioration in international and domestic business and economic conditions, particularly in North America, Europe, Asia or Australia, (3) the unfavorable impact of foreign currency fluctuations and costs of raw materials, (4) an interruption in, or reduction in, introducing new products into the Company’s product lines, (5) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates, and (6) unfavorable tax law changes and tax authority rulings. The risks covered here are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 

ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW’s policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

 

Item 4 – Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of September 30, 2007. Based on such evaluation, the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, have concluded that, as of September 30, 2007, the Company’s disclosure controls and procedures were effective in timely alerting the Company’s management to all information required to be included in this Form 10-Q and other Exchange Act filings.

 

In connection with the evaluation by management, including the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended September 30, 2007 were identified that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 4, 2006, the Company’s Board of Directors authorized a stock repurchase program which provides for the buyback of up to 35,000,000 shares of common stock.

 

Share repurchase activity for the third quarter was as follows:

 

Period

 

Total Number of Shares Purchased

 

Average Price Paid Per Share

 

Total Number of Shares Purchased as part of Publicly Announced Program

 

Maximum Number that may yet be Purchased Under Program

August 2007

 

3,648,157

 

$54.82

 

3,648,157

 

12,206,693

September 2007

 

4,913,071

 

56.79

 

4,913,071

 

7,293,622

Total

 

8,561,228

 

55.95

 

8,561,228

 

 

 

On August 21, 2007, the Company’s Board of Directors authorized a new stock repurchase program, which provides for the buyback of up to $3.0 billion of the Company’s common stock over an open-ended period of time. As of September 30, 2007, no shares have been repurchased under this program.

 

Item 6 – Exhibits

 

Exhibit Index

 

Exhibit No.

 

Description

31

 

Rule 13a-14(a) Certification.

32

 

Section 1350 Certification.

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

ILLINOIS TOOL WORKS INC.

 

 

 

 

Dated: October 26, 2007

By: /s/ Ronald D. Kropp

 

Ronald D. Kropp

 

Senior Vice President & Chief Financial Officer

 

(Principal Accounting & Financial Officer)