SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

Commission File Number: 1-4797

 

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)

 

 

(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.

 

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).

 

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

 

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)

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

(In thousands)

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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

 

(In thousands)

 

 

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

 

(In thousands)

 

 

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)

 

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.

 

 

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

 

(In thousands)

 

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.

 

 

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.

 

 

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.

 

 

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:

 

 

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.

 

 

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:

 

 

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.

 

 

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.

 

 

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)

 

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:

 

 

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.

 

 

 

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)

 

 

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:

 

 

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.

 

 

 

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)

 

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:

 

 

 

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.

 

 

 

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)

 

 

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:

 

 

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.

 

 

 

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)

 

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:

 

 

 

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)

 

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)

 

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)

 

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)

 

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)

 

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)

 

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)

 

 

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:

 

 

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

 

 

 

 

 

 

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.