2004 Annual Report - Investor Relations | ITW

Transcription

ID_cvr
3/5/05
2:16 PM
Page 1
Illinois Tool Works Inc.
3600 West Lake Avenue
Glenview, Illinois 60026
ITW Annual Repor t 2004
ILLINOIS TOOL WORKS INC.
2004 ANNUAL REPORT
How do you grow a diversified manufacturer with some 650 companies worldwide?
Discipline
ID_cvr
3/5/05
2:16 PM
Page 2
Corporate Information
TRANSFER AGENT AND REGISTRAR
CORPORATE GOVERNANCE
Computershare Investor Ser vices, L.L.C.
2 Nor th LaSalle Street
Chicago, IL 60602
888.829.7424
On June 3, 2004, the Company’s Chairman and Chief Executive Officer
cer tified to the New York Stock Exchange (“NYSE”) that he is not
aware of any violation by the Company of the NYSE corporate governance
listing standards. The Company has provided cer tifications by the
Chairman and Chief Executive Officer and Senior Vice President and
Chief Financial Officer regarding the quality of the Company’s public
disclosure, as required by Section 302 of the Sarbanes-Oxley Act,
on Exhibit 31 in its Annual Repor t on Form 10-K.
AUDITORS
Deloitte & Touche LLP
180 N. Stetson Avenue
Chicago, IL 60601
TRADEMARKS
COMMON STOCK
ITW common stock is listed on the New York Stock Exchange
and Chicago Stock Exchange. Symbol—ITW
Cer tain trademarks in this publication are owned or licensed by Illinois
Tool Works Inc. or its wholly owned subsidiaries.
HI-CONE RECYCLING
ANNUAL MEETING
Friday, May 6, 2005, 3:00 p.m.
The Nor thern Trust Company
50 South LaSalle Street
Chicago, IL 60675
For more information, please contact:
STOCK AND DIVIDEND ACTION
ITW HI-CONE
Effective with the October 18, 2004 payment, the quar terly
cash dividend on ITW common stock was increased
17 percent to 28 cents a share. This represents an increase
of 16 cents per share annually. ITW’s annual dividend payment
has increased 41 consecutive years, except during a period
of government controls in 1971.
1140 West Br yn Mawr Avenue
Itasca, IL 60413
Telephone: 630.438.5300
Visit our Web site at www.ringleader.com
DIVIDEND REINVESTMENT PLAN
The ITW Common Stock Dividend Reinvestment Plan enables
registered shareholders to reinvest the ITW dividends they receive
in additional shares of common stock of the Company at no
additional cost. Par ticipation in the plan is voluntar y, and
shareholders may join or withdraw at any time. The plan also
allows for additional voluntar y cash investments in any amount
from $100 to $10,000 per month. For a brochure and full details
of the program, please direct inquiries to:
Computershare Trust Company
Dividend Reinvestment Ser vice
P.O. Box A3309
Chicago, IL 60690-3309
888.829.7424
SHAREHOLDERS INFORMATION
Questions regarding stock ownership, dividend payments or change
of address should be directed to the Company’s transfer agent,
Computershare Investor Ser vices. Computershare Shareholders
Ser vice Depar tment may be reached at 888.829.7424.
For additional assistance regarding stock holdings, please contact
Doris Dyer, shareholder relations, 847.657.4077.
On the Cover:
Stamping foil provided by ITW Foils.
ITW Hi-Cone, manufacturer of recyclable multipack ring carriers, offers
assistance to schools, offices and communities interested in establishing
carrier collection programs.
Shareholder Relations may be reached at:
Glenview, IL 60026
Telephone: 847.724.7500
Facsimile: 847.657.4261
Security analysts and investment professionals
should contact the Company’s Vice President of
Investor Relations,
John L. Brooklier, 847.657.4104
or [email protected]
Outside the United States, contact:
ITW HI-CONE (ITW LIMITED)
Greenock Road, Slough Trading Estate, Slough,
Berkshire, SL1 4QQ, United Kingdom
Telephone: 44.1753.479980
ITW HI-CONE (ITW AUSTRALIA)
Unit 6, 1-7 Friars Road, Moorabbin,
Victoria 3189, Australia
Telephone: 61.3.9556.6300
ITW HI-CONE (ITW SPAIN)
Polg. Ind. Congost P-5, Naves 7-8-9,
08530 La Garriga, Barcelona, Spain
Telephone: 34.93.860.5020
SIGNODE PLASTIC STRAP RECYCLING AND
PET BOTTLE COLLECTION PROGRAMS
Some of Signode’s plastic strapping is made from post-consumer
strapping and PET beverage bottles. The Company has collection
programs for both these materials.
For more information about post-consumer strapping recycling and
post-consumer PET bottles (large volume only), please contact:
ITW SIGNODE
7080 Industrial Road
Florence, KY 41042
Telephone: 859.342.6400
INTERNET HOME PAGE
www.itw.com
ID1-30
3/5/05
2:05 PM
Page 1
FINANCIAL HIGHLIGHTS
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2004
2003
2002
$ 11,731,425
$ 10,035,623
$ 9,467,740
2,056,613
1,633,458
1,505,771
Year Ended December 31
Operating Results
Operating revenues
Operating income
Operating income margin
17.5%
Income from continuing operations
$ 1,339,605
Return on operating revenues
16.3%
$ 1,040,214
15.9%
$
931,810
11.4%
10.4%
9.8%
Engineered Products—Nor th America
16.7%
16.0%
17.6%
Engineered Products—International
15.0
13.9
13.6
Specialty Systems—Nor th America
17.8
16.3
15.2
Specialty Systems—International
13.2
11.0
9.7
Leasing and Investments
88.4
76.6
47.1
$ 4.43
$ 3.39
$ 3.04
4.39
3.37
3.02
$ 1.00
$ 0.93
$ 0.89
Operating income margins by segment:
Per Share of Common Stock
Income from continuing operations:
Basic
Diluted
Cash dividends paid
Returns
Return on average invested capital
18.5%
16.1%
15.0%
Return on average stockholders’ equity
17.3
14.3
14.7
$ 1,334,883
$ 1,169,938
$ 1,095,112
Liquidity and Capital Resources
Free operating cash flow
Total debt to total capitalization
12.8%
11.0%
TABLE OF CONTENTS
ITW at a Glance 2
A Disciplined Approach 3
Management Team 26
Par t 1: Base Revenues 4
Letter to Shareholders 28
Par t 2: Acquisitions 14
Par t 3: Margin Improvement 20
Financial Table of Contents 30 Corporate Executives and Directors 80
1
19.2%
ID1-30
3/5/05
2:05 PM
Page 2
ITW AT A GLANCE
Illinois Tool Works Inc. (NYSE: ITW) designs and produces an array of highly engineered fasteners
and components, equipment and consumable systems, and specialty products and equipment
for customers around the world. A leading diversified manufacturing company with nearly
100 years of histor y, ITW’s some 650 decentralized business units in 45 countries employ
approximately 49,000 men and women who are focused on creating value-added products
and innovative customer solutions.
PRODUCT
CATEGORIES
MAJOR
BUSINESSES
PRIMARY
END MARKETS
ENGINEERED
PRODUCTS
NORTH AMERICA
Shor t lead-time plastic and
metal components and
fasteners, and specialty
products such as adhesives,
fluid products and
resealable packaging
Buildex, CIP, Deltar, Devcon,
Drawform, Fastex, Fibre Glass
Evercoat, ITW Brands,
Minigrip/Zip-Pak, Paslode,
Ramset/Red Head,
Shakeproof, TACC, Texwipe,
Truswal and Wilsonar t
Construction, automotive and
general industrial
ENGINEERED
PRODUCTS
INTERNATIONAL
Shor t lead-time plastic and
metal components and
fasteners, and specialty
products such as electronic
component packaging
Bailly Comte, Buildex, Deltar,
Fastex, Ispra, James Briggs,
Krafft, Meritex, Novadan,
Paslode, Pr yda, Ramset,
Resopal, Rocol, Shakeproof,
SPIT and Wilsonar t
Construction, automotive and
general industrial
SPECIALTY
SYSTEMS
NORTH AMERICA
Longer lead-time machiner y
and related consumables, and
specialty equipment for
applications such as food
service and industrial finishing
Acme Packaging, Angleboard,
DeVilbiss, Gerrard, Hi-Cone,
Hobar t, ITW Foils, Miller,
Ransburg, Signode, Valeron,
Unipac and Vulcan
Food institutional and retail,
general industrial, construction,
and food and beverage
SPECIALTY
SYSTEMS
INTERNATIONAL
Longer lead-time machiner y
and related consumables, and
specialty equipment for
applications such as food
service and industrial finishing
Auto-Sleeve, Decorative
Sleeves, DeVilbiss, Elga,
Foster, Gema, Gerrard,
Hi-Cone, Hobar t, ITW Foils,
Mima, Orgapack, Ransburg,
Signode, Simco, Strapex
and Tien Tai Electrode
General industrial, food
institutional and retail, and
food and beverage
LEASING AND
INVESTMENTS
This segment makes oppor tunistic investments in the following categories: mor tgage entities;
leases of telecommunications, aircraft, air traffic control and other equipment; properties; affordable
housing; and a venture capital fund.
2
ID1-30
3/5/05
2:05 PM
Page 3
A sound strategy.
A disciplined approach.
At ITW, we know what it takes. We’ve been growing this
business since 1912. How? By following a sound business
strategy that focuses on customers first.
By building a solid management team from the ground up.
By infusing innovation and an entrepreneurial spirit into
every level of our business. And by staying focused on our
operational and financial goals:
growing base revenues,
making profitable acquisitions, and
improving operating margins and returns.
It’s the way we do business.
And it’s what drives our growth over the long term.
3
ID1-30
3/5/05
2:05 PM
Page 4
ITW BASE REVENUE GROWTH
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
96
97
98
99
00
4
01
02
03
04
ID1-30
3/5/05
2:05 PM
Page 5
Base
Revenues
A diversified sales mix. A decentralized operating structure.
A sharp focus on core products, new product development and customers.
Our formula for growing base revenues works.
We have the track record to prove it.
5
ID1-30
3/5/05
2:05 PM
Page 6
ENGINEERED PRODUCTS
Construction
Wherever there is commercial, renovation or residential construction taking place in
the world, ITW products are on the job. From Paslode nail systems and staplers to
Buildex specialty fasteners and tools, our ITW construction products businesses manufacture
innovative products that set the standard in today’s construction industr y.
60 BUSINESSES IN 20 COUNTRIES
2004 REVENUE DIVERSIFICATION
45% NORTH AMERICA
30% EUROPE
6
25% ASIA PACIFIC
ID1-30
3/5/05
2:05 PM
Page 7
ID1-30
3/5/05
2:06 PM
Page 8
ID1-30
3/5/05
2:06 PM
Page 9
ENGINEERED PRODUCTS
Automotive
ITW plays the role of a specialty supplier to many of the world’s best-known
automotive companies. Leading manufacturers and suppliers rely on our ITW automotive business
units for the industr y-leading fasteners and components they need to ensure quality and
cost savings in the cars and light trucks they produce.
56% NORTH AMERICA
41% EUROPE
3% ASIA PACIFIC AND SOUTH AMERICA
9
ID1-30
3/5/05
2:07 PM
Page 10
SPECIALTY SYSTEMS
Food Institutional and Retail
From well-known casual dining restaurants and supermarkets to convention centers and
cruise ships, ITW outfits a diverse array of commercial kitchens around the globe.
Our own Hobar t business is the world’s premier commercial food equipment and ser vice provider
for both the food ser vice and food retail industries. And our other brands, including Traulsen,
Vulcan and Foster, are recognized and respected worldwide.
67% NORTH AMERICA
30% EUROPE
10
ID1-30
3/5/05
2:07 PM
Page 11
ID1-30
3/5/05
2:07 PM
Page 12
ID1-30
3/5/05
2:07 PM
Page 13
SPECIALTY SYSTEMS
Industrial Packaging
Through our Signode Packaging Systems businesses, we par tner with customers
around the world to help them create the most efficient, cost-effective ways to package,
handle and ship industrial products. As an industr y leader in packaging systems,
our strapping systems and consumables are used to secure ever ything from cotton bales
and newspapers to steel coils and corrugated car tons.
54% NORTH AMERICA
36% EUROPE
13
ID1-30
3/5/05
2:07 PM
Page 14
ITW ACQUISITION ACTIVITY
(in millions / annualized)
# of Deals
19
28
36
32
45
29
21
28
24
96
97
98
99
00
01
02
03
04
4000
3500
3000
2500
2000
1500
1000
500
0
14
ID1-30
3/5/05
2:07 PM
Page 15
Acquisitions
Strong products and brand names. Long-term growth potential.
Increased market penetration. Opportunities for margin improvement.
A well-schooled management team. These are the traits we look for
in our tried-and-true way of making profitable acquisitions.
A target company must add value for our customers to be the right fit for ITW.
15
ID1-30
3/5/05
2:07 PM
Page 16
Andy Schwitter
Key members of the ITW acquisition team:
Mary Ann Spiegel (legal), Steve Micatka (internal audit),
Maria Green (legal)
ID1-30
3/5/05
2:07 PM
Page 17
Truswal Systems
While our acquisition strategy almost always is driven by a bottom-up
After an extensive evaluation of the business, we determined that
approach that originates at the customer and individual business-
Truswal provided a significant opportunity to create a stronger foot-
unit levels, occasionally a great company finds us. Needless to say,
print in the residential and commercial construction markets, where
when the right oppor tunity knocks—we answer.
our Paslode, Buildex and Ramset/Red Head units are already well
Such was the case with the 2004 acquisition of Truswal Systems
known. What’s more, several of our companies regularly sold products
Corporation, a leading supplier of engineered products and software
to truss manufacturers, making Truswal a natural extension of our
for the building components industr y in Nor th America. In addition
core business.
®
This acquisition expands ITW’s activities in the construction-related
and TrusSpacer , Truswal also invests millions of dollars to develop
software business. While all of Truswal’s computer programs are deeply
state-of-the-art software programs for component design, engineering,
rooted in our base business, Truswal’s exper tise in developing
building layout and truss management. One of its newer programs,
sophisticated, technological solutions will serve as a strong foundation
to producing the well-known truss systems such as SpaceJoist TE
™
®
IntelliBuild , is revolutionizing the world of whole-house design,
for ITW as the construction industr y continues to evolve over time.
integrating all components of a structure—walls, openings, roofs
and floors—into a single application.
“Our competition in the marketplace
now understands that ITW is going to be
a serious player in this arena.”
Andy Schwitter President and CEO, Truswal Systems Corporation
17
ID1-30
3/5/05
2:07 PM
Page 18
Mauricio Lujambio
Key members of the ITW acquisition team:
Carmelle Giblin (group controller),
Jay Minich (internal audit)
Mike Underwood
ID1-30
3/5/05
2:07 PM
Page 19
Krafft
Our business unit managers are always on the lookout for
After carefully examining the business, Lujambio and Under wood
oppor tunities to grow ITW in ways that make the most sense
concluded that Krafft would complement the other companies in
for our customers. So when Mauricio Lujambio, General Manager of
our polymers business. Initially, the company wasn’t prepared to sell,
ITW Polymex, learned about the Krafft polymers business at a trade
but the owners expressed interest in leaving the door open for future
show a few years ago, he investigated the possibility of acquiring
discussions. We maintained a friendly rappor t with the company
the company. Excited by the potential oppor tunity, Lujambio shared
over the next three years until Februar y 2004, when Krafft decided
his discover y with Mike Under wood, Vice President and General
to join forces with ITW.
Manager of ITW Per formance Polymers Nor th America. In 2001 the
Now par t of ITW Per formance Polymers division, Krafft joins the
two made a special trip to Krafft headquar ters in Spain to find out
ranks of such industr y-leading companies as VersaChem, Devcon,
more about its operations.
Plexus and TACC. Through this acquisition, we are better positioned
During their visit, Lujambio and Under wood learned that Krafft is
to help customers simplify purchasing activities around the world
one of the leading players in the polymers market in Spain. This
through vendor consolidation. Moreover, Kraf ft opens up new
business produces a variety of adhesives, lubricants, sealants, and
geographic and channel oppor tunities for our polymers business in
other original equipment manufacturer (OEM) and maintenance,
Europe, while providing our customers with an expanded product
repair and operations (MRO) products for industry and the automotive
offering in markets worldwide.
aftermarket. While Spain accounts for the majority of its sales,
Krafft also distributes products in various markets across southern
Europe, as well as the United States, the Middle East and the Far East.
“We like to have a position in small niche
markets, where we can really get to know the
customers and help them grow and prosper.”
David Parry President, ITW Per formance Polymers
19
ID1-30
3/5/05
2:07 PM
Page 20
ITW OPERATING MARGINS
(operating income/revenues)
20%
15%
10%
5%
0%
96
97
98
99
00
20
01
02
03
04
ID1-30
3/5/05
2:07 PM
Page 21
Margin
Improvement
Innovating new products. Streamlining operations. Increasing productivity.
Reducing costs. Improving profitability and operating margins. It’s all part of our
strategic 80/20 business process—one that has delivered powerful results
since it was first developed nearly 20 years ago.
21
ID1-30
3/5/05
2:08 PM
Page 22
ID1-30
3/5/05
2:08 PM
Page 23
80/20:
The ITW Toolbox
A driving force behind much of our success at ITW is our 80/20
SEGMENTATION
business process, a practice that keeps us focused on our most
Working in tandem with product line simplification and outsourcing,
profitable products and customers. For nearly 20 years, we have
segmentation is our way of streamlining our large, multifaceted
been collecting and refining a comprehensive body of 80/20
businesses into smaller, more manageable business units. We
knowledge that touches ever y par t of our business. Known as the
focus on the small pieces of the markets we ser ve and then create
ITW Toolbox, this repositor y of proven strategies and techniques
ITW businesses to ser ve these niches. Segmentation allows us to
guides our business process and helps us find new ways to
provide greater focus on customers, products and end markets,
enhance customer satisfaction as well as drive margin growth and
and creates an ideal platform for integrating future acquisitions.
profitability. While a few of these strategies are outlined below, they
IN-LINING AND CELLULAR MANUFACTURING
are only a sampling of the power ful methodologies we bring to
We are constantly searching for better, more efficient ways to organize
ITW’s some 650 businesses around the world each and ever y day.
our shop-room floors. With in-lining and cellular manufacturing, we
PRODUCT LINE SIMPLIFICATION
take a hard look at our plants to evaluate everything from the
To achieve a streamlined product line, we regularly assess our
arrangement of workstations and equipment to employee training
products and technologies to ensure we’re appropriately focused
programs and inventor y control. By reducing the complexity in
on key customers. We literally separate out our high-volume products
our manufacturing processes, we increase the speed of deliver y,
and make them the focal point of our business. Then, we evaluate
productivity and, in the end, profitability.
our lower-volume products and pursue oppor tunities to consolidate,
MARKET RATE OF DEMAND
outsource or, in some cases, eliminate their production. It’s a
Market rate of demand is the only way we manufacture. We produce
power ful technique that helps us focus with laser-like precision on
our products to actual order rates rather than relying on some
the basics of the business.
marketing plan that can be hopelessly outdated in shor t order.
OUTSOURCING
Using this technique, we regularly review our sales activity, capacity
Once we’ve identified the lower-volume items in our product mix, we
and lead times to determine target inventor y levels for each and
then pursue outsourcing oppor tunities. To accomplish this, we align
every product. It’s a system that keeps us aligned with our customers’
ourselves with a select number of highly specialized suppliers, who
needs and ensures we only produce what we can sell.
are able to deliver ITW quality products at a more efficient rate.
It’s a process that enables our businesses to continue to ser ve
specialty customers. At the same time, our units benefit from
reduced costs and greatly increased productivity.
23
ID1-30
3/5/05
2:08 PM
Page 24
ID1-30
3/5/05
2:08 PM
Page 25
New Product Development:
A Way of Life at ITW
Fundamental to our 80/20 business process is our belief that new
MILLER ELECTRIC’S AXCESS™ WELDING SYSTEM
products are a way of life at ITW. As a regular member of the United
EMBODIES INNOVATION
States’ top 100 patent producers, ITW consistently conver ts ideas
Near the ver y top of ITW’s top patent producers, Miller Electric
into action—developing groundbreaking products, technologies and
is continuously searching for new and better ways to build value
ser vices that help our customers stay ahead in the marketplace.
for its welding customers. When the company learned that many
Each year, we commit significant resources to new product develop-
production plants were manufacturing at rates consistent with the
ment through our engineering teams at the business units. These
‘60s, ‘70s and ‘80s, Miller set out to develop more effective welding
engineering people work hand-in-hand with their sales, marketing
systems that would solve today’s more complex manufacturing
and manufacturing teams to ensure that new and improved products
problems, shor ten production times and improve overall return
make their way into the hands of customers around the world.
on investment.
We also have the ability to suppor t our businesses through our
After an extensive research and development process that involved
ITW Technology Center. Working on a request only basis from
a number of ITW customers, Miller introduced the revolutionary
our business units, the technology center develops cutting-edge
Axcess welding system. Widely praised throughout the industr y, the
materials, products and manufacturing processes that drive our
Axcess system features a number of patented technologies including
customers’ businesses. The technology center also manages the
Accu-pulse™, a process improvement that dramatically increases
ITW Technology Resource Web site, a password-protected Internet
the productivity of factor y welding workstations by an average of
site that allows information sharing among our business units
25 percent. Used in both robotic and manual welding applications by
worldwide. The site features valuable tools and information to
a wide variety of manufacturers, Axcess is the world’s first universal
support new product development, including online forums, research
welding system that can be integrated into production lines anywhere
on raw materials, vendor recommendations and a global director y of
regardless of primar y voltage levels, which often var y from one
ITW employees with expertise or experience in a wide range of areas.
countr y to the next. Best of all, the system is the easiest product
Whether it’s through our business units’ engineering teams or
on the market to install in our customers’ existing automation
our technology center’s talented group of exper ts, ITW product
processes, enabling them to achieve optimal per formance within
development focuses on solving the needs of our diverse customer
minutes—and at a minimal cost.
base. From the design of complex manufacturing facilities to the
development of new products, equipment and technologies, we
collaborate with customers to provide them with the innovations
they need to succeed.
25
ID1-30
3/5/05
2:08 PM
Page 26
Management Team
From left to right:
FRANK S. PTAK Vice Chairman; E. SCOTT SANTI Executive Vice President; JACK R. CAMPBELL Executive Vice President; HUGH J. ZENTMYER Executive Vice President;
W. JAMES FARRELL Chairman and Chief Executive Officer; JON C. KINNEY Chief Financial Officer
26
ID1-30
3/5/05
2:08 PM
Page 27
From left to right:
CRAIG A. HINDMAN Executive Vice President; THOMAS J. HANSEN Executive Vice President; DAVID B. SPEER President; RUSSELL M. FLAUM Executive Vice President;
DAVID T. FLOOD Executive Vice President; ALLAN C. SUTHERLAND Senior Vice President; PHILIP M. GRESH, JR. Executive Vice President
27
ID1-30
3/5/05
2:08 PM
Page 28
To Our Shareholders
At ITW, discipline makes the difference. From developing innovative
return on invested capital improved to 18.5 percent, up from
products to improving manufacturing efficiencies to targeting
16.1 percent the prior year.
profitable acquisitions, we keep our eye on what matters most. As
LEADERSHIP FOR THE FUTURE
noted elsewhere in this repor t, our 80/20 business process makes
Results like these are driven not just by the 80/20 process itself, but
sure that leaders at ever y level of our company focus on our most
by the ability of ITW managers to understand and apply it ever y day.
power ful and profitable oppor tunities. Putting these principles into
Because this management capital is our most impor tant asset,
practice and refining them for nearly two decades have made your
we take a ver y disciplined approach to our leadership development
company one of the premier manufacturers in the world. And one of
and succession.
the best investments anywhere.
By and large, we promote from within. ITW’s highly decentralized
2004 FINANCIAL RESULTS
structure and entrepreneurial culture create opportunities, as well as
Discipline keeps us accountable to our shareholders. Our focus on
challenges, for our managers. Combining that practical experience
financial per formance has produced the consistent, quality returns
with professional development programs produces a talented,
outlined in the char t below. And fiscal 2004 was a ver y strong year,
trained and tested corps of leaders within the company.
even by ITW standards.
Your senior management team, for example, averages 26 years of
Revenues reached a record $11.7 billion, a 17 percent increase
ser vice. Our Executive Vice Presidents are each responsible for
versus 2003. Notably, base revenues rose a robust 8 percent in
roughly 75 businesses generating more than $1 billion in revenue.
2004 while acquisitions and currency translation grew 5 percent
Together with their general managers and strong suppor t teams,
and 4 percent, respectively. For the full year, income from continuing
they provide tremendous executive bench strength and ensure a
operations grew 29 percent to $1.3 billion, while diluted income
continuum of leadership for the future.
per share from continuing operations of $4.39 was 30 percent
This past year was a critical one for management succession at
higher than the prior year.
ITW. Following my announced decision to retire in 2006, David
Despite raw material shor tages and the escalating price of steel
Speer was appointed president of ITW in August 2004. David is
in Nor th America, total company operating margins rose to 17.5
expected to become CEO in 2005. Formerly an Executive Vice
percent—a 120-basis-point gain year over year. The improvement
President for ITW Construction, Wilsonart and Finishing, David has held
came even though margins were diluted over the shor t term by the
progressively more responsible operating positions since first joining
acquisition of 24 companies during the year, representing nearly
the company in 1978. He currently has operating responsibility for
$624 million of annualized revenues. Free operating cash flow
all ITW businesses worldwide. Your board of directors believes
increased to $1.3 billion, up from $1.2 billion in 2003, while our
David will do an outstanding job leading ITW for ward.
25-YEAR TRACK RECORD
Revenue: 15% CAGR
EPS: 13% CAGR
ROIC: 15%
Shareholder Return: 20%
$ 12,000
Revenue (in millions)
$ 10,000
$
8,000
$
6,000
$
4,000
$
2,000
$
0
1980
1981
1982
1983
1984
1985
28
1986
1987
1988
1989
1990
1991
1992
3/5/05
2:08 PM
Page 29
In a related appointment, Craig Hindman was elected to the newly
The depth and breadth of management talent is one of your company’s
created position of Executive Vice President of Wilsonart, a business
greatest strengths. Cultivating homegrown leaders and taking a
line previously managed in tandem with ITW Construction. Craig
disciplined approach to succession planning help ensure continuity
has spent the last 29 years at ITW and ser ved most recently as
and a commitment to excellence going for ward.
president of our global finishing businesses.
A BRIGHT FUTURE
Two other key members of the management team plan to retire in
Disciplined attention to financial per formance, management
2005. A 29-year veteran of ITW, Vice Chairman Frank Ptak has
strength, product development and acquisition activity has made
relinquished his duties as head of our welding business units. He
your company stronger today than ever before. Staying disciplined
has been succeeded by newly elected Executive Vice President
and focusing on our operational goals—growing base revenues,
Scott Santi, who has spent his entire 22-year career at ITW—most
making value-adding acquisitions and improving operating margins—
recently as President of Welding Products Focus Markets Group.
will make it even stronger in the future.
Jon Kinney also will be retiring as Chief Financial Officer in the second
In 2004, as always, we owed our success to the ongoing suppor t
half of 2005 after 32 years of ser vice at ITW. Your company is
of our many long-term customers, suppliers and shareholders. We
currently assessing internal candidates to fill his position. Frank
also appreciate and thank our 49,000 employees around the world
and Jon will be with us for much of 2005, but we want to thank both
for their effor ts and exper tise. All of us at ITW remain dedicated
of them for their friendship and their significant contributions to the
to delivering superior results today and creating exciting growth
company over the years. We wish them the ver y best.
oppor tunities for tomorrow.
Lastly, we want to extend our thanks and best wishes to Jim
Ringler, who retired at the end of 2004 after more than 15 years
with the company. As Vice Chairman and head of our food equipment
business, Jim came to us with the 1999 Premark acquisition and
made significant contributions to ITW during his tenure. He has
FRANK S. PTAK
Vice Chairman
W. JAMES FARRELL
Chairman and
Chief Executive Officer
been succeeded by newly elected Executive Vice President Jack
Campbell. A 24-year veteran of ITW, Jack brings strong operational
exper tise to this position thanks to his wide range of experience
within the company, including his most recent assignment as head
FEBRUARY 11, 2005
of the marking and decorating businesses.
1993
1994
1995
1996
1997
1998
1999
2000
29
2001
2002
2003
2004
$
2,500
$
2,000
$
1,500
$
1,000
$
500
$
0
Operating Income (in thousands)
ID1-30
ID1-30
3/5/05
2:08 PM
Page 30
FINANCIAL TABLE OF CONTENTS
Management’s Discussion and Analysis
31
For ward-Looking Statements
49
Management Repor t on Internal Control Over Financial Repor ting
50
Repor t of Independent Registered Public Accounting Firm
51
Statement of Income
52
Statement of Income Reinvested in the Business
52
Statement of Comprehensive Income
52
Statement of Financial Position
53
Statement of Cash Flows
54
Notes to Financial Statements
55
Quar terly and Common Stock Data
77
Eleven-Year Financial Summar y
78
30
ID_Financials
3/5/05
1:55 PM
Page 31
Management’s Discussion and Analysis
INTRODUCTION
Illinois Tool Works Inc. (the “Company” or “ITW”) is a worldwide manufacturer of highly engineered products and specialty systems.
The Company has approximately 650 operations in 45 countries which are aggregated and organized for internal reporting purposes
into the following five segments: Engineered Products—Nor th America; Engineered Products—International; Specialty Systems—
Nor th America; Specialty Systems—International; and Leasing and Investments. These segments are described below.
Due to the large number of diverse businesses and the Company’s highly decentralized operating style, the Company does not
require its business units to provide detailed information on operating results. Instead, the Company’s corporate management collects
data on a few key measurements: operating revenues, operating income, operating margins, overhead costs, number of months on
hand in inventory, past due receivables, return on invested capital and cash flow. These key measures are monitored by management
and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with
operating unit management.
The results of each segment are analyzed by identifying the effects of changes in the results of the base businesses, newly
acquired companies, currency translation, restructuring costs, and goodwill and intangible impairment charges on the operating
revenues and operating income of each segment. Base businesses are those businesses that have been included in the Company’s
results of operations for more than a year. The changes to base business operating income include the estimated effects of both
operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the base
business revenue changes on operating income, assuming variable margins remain the same as the prior period. As manufacturing
and administrative overhead costs do not significantly change as a result of revenues increasing or decreasing, the percentage
change in operating income due to operating leverage is more than the percentage change in the base business revenues.
A key element of the Company’s business strategy is its continuous 80/20 business process. The basic concept of this 80/20
business process is to focus on what is most impor tant (the 20% of the items which account for 80% of the value) and to spend
less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company’s operations
use this 80/20 business process to simplify and focus on the key par ts of their business, and as a result, reduce complexity that
often disguises what is truly impor tant. Each of the Company’s 650 operations utilizes the 80/20 process in all aspects of their
business. Common applications of the 80/20 business process include:
• Simplifying manufactured product lines by reducing the number of products offered by combining the features of similar products,
outsourcing products or, as a last resor t, eliminating products.
• Simplifying the customer base by focusing on the 80/20 customers and finding different ways to ser ve the 20/80 customers.
• Simplifying the supplier base by par tnering with key 80/20 suppliers and reducing the number of 20/80 suppliers.
• Designing business processes and systems around the key 80/20 activities.
The result of the application of this 80/20 business process is that the Company improves its operating and financial performance.
These 80/20 effor ts often result in restructuring projects that reduce costs and improve margins. Corporate management works
closely with those business units that have operating results below expectations to help those units apply this 80/20
business process and improve their results.
CONSOLIDATED RESULTS OF OPERATIONS
The Company’s consolidated results of operations for 2004, 2003 and 2002 are summarized as follows:
DOLLARS IN THOUSANDS
2004
Operating revenues
Operating income
Margin %
2003
$ 11,731,425 $ 10,035,623
2,056,613
1,633,458
17.5%
16.3%
31
2002
$ 9,467,740
1,505,771
15.9%
ID_Financials
3/5/05
1:55 PM
Page 32
In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the
following factors:
2004 COMPARED TO 2003
% INCREASE (DECREASE)
OPERATING
REVENUES
Base manufacturing business:
Revenue change/Operating leverage
Changes in variable margins and
overhead costs
Total
Acquisitions and divestitures
Translation
Restructuring costs
Impairment of goodwill and intangibles
Other
8.1%
—
8.1
OPERATING
INCOME
20.3%
(3.2)
17.1
5.0
4.4
—
—
—
(0.6)
2.4
4.3
2.3
(1.1)
0.9
—
16.9%
25.9%
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
1.8%
OPERATING
REVENUES
(1.8)%
OPERATING
INCOME
(4.5)%
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
(0.4)%
(0.5)
—
3.9
0.7
1.3
(1.8)
(0.6)
0.3
(0.4)
(0.1)
0.4
(0.2)
0.1
0.1
2.9
5.5
—
—
(0.3)
(0.3)
1.7
4.9
0.2
0.2
2.1
—
(0.2)
(0.1)
—
—
0.4
—
1.2%
6.0%
8.5%
0.4%
Operating Revenues
The total company base business revenue increase in 2004 versus 2003 is primarily related to a 9% revenue increase in Nor th
American base business revenue. Industrial production levels in Nor th America improved over the prior year’s sluggish levels. This
improvement was evident in both the Nor th American Specialty Systems and Engineered Products segments. Internationally, base
business revenues increased 6% in 2004 over 2003 as a result of increased penetration in European industrial markets despite
an only slightly improved European economic environment.
The total company base business revenue decrease in 2003 versus 2002 is primarily related to a 2% and 1% decline in Nor th
American and international base business revenues, respectively. In Nor th America, industrial production activity showed modest
improvement over the prior year, most of which occurred in the fourth quarter of 2003. Despite this improvement, capacity utilization
and capital spending remained weak. Internationally, overall business conditions were flat, as indicated by low industrial production
in the major European economies.
Operating Income
Operating income in 2004 improved over 2003 primarily due to leverage from the growth in base business revenue, the favorable
effect of foreign currency translation, lower restructuring costs and income from acquired companies. These improvements were
partially offset by higher raw material costs, increased overhead costs and higher impairment charges.
Operating income in 2003 improved over 2002, primarily due to favorable currency translation, acquisition income and operational
cost savings as evidenced by a 50 basis point improvement in variable margin. Leasing and Investments income improved over the
prior year primarily due to a $32 million impairment charge related to aircraft leases in 2002. These increases were par tially offset
by the negative effect of leverage from the decline in base revenue described above.
ENGINEERED PRODUCTS—NORTH AMERICA SEGMENT
Businesses in this segment are located in Nor th America and manufacture a variety of shor t 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 par t 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 categor y, products include:
• metal fasteners, fastening tools, and metal plate connecting components for the commercial and
residential construction industries;
• laminate products for the commercial and residential 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 and electronics applications; and
• plastic fasteners for automotive, appliance and electronics applications.
32
ID_Financials
3/5/05
1:55 PM
Page 33
In the specialty products categor y, products include:
•
•
•
•
•
•
•
•
reclosable packaging for consumer food applications;
swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;
hand wipes for industrial purposes;
chemical fluids which clean or add lubrication to machines;
adhesives for industrial, construction and consumer purposes;
epoxy and resin-based coating products for industrial applications;
components for industrial machines; and
manual and power operated chucking equipment for industrial applications.
In 2004, this segment primarily ser ved the construction (47%), automotive (29%) and general industrial (9%) markets.
The results of operations for the Engineered Products—Nor th America segment for 2004, 2003 and 2002 were as follows:
2004
Operating revenues
Operating income
Margin %
$ 3,314,093
552,985
16.7%
2003
$ 3,053,961
489,416
16.0%
2002
$ 3,034,734
533,459
17.6%
following factors:
OPERATING
REVENUES
overhead costs
Total
Translation
Restructuring costs
Other
OPERATING
INCOME
7.0%
18.3%
—
(7.0)
7.0
11.3
1.3
0.2
—
—
—
0.8
0.2
2.0
(1.3)
—
8.5%
13.0%
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
1.7%
OPERATING
REVENUES
(2.5)%
OPERATING
INCOME
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
(5.9)%
(0.6)%
(0.4)
(1.0)
—
(2.2)
0.7
(2.5)
(8.1)
(1.0)
(0.1)
—
0.3
(0.2)
—
3.0
0.3
—
—
(0.2)
1.1
0.2
(1.4)
(0.1)
—
(0.3)
—
(0.2)
(0.1)
—
(8.3)%
(1.6)%
0.7%
0.6%
Operating Revenues
Revenues increased in 2004 over 2003 primarily due to higher base business revenues and revenues from acquisitions. The base
revenue increase was a result of stronger end market demand and price increases that par tially offset raw material cost increases.
Construction base business revenues increased 9% in 2004 as a result of growth in the residential remodeling/rehab and
commercial construction markets. As a result of increased penetration, automotive base revenues were flat in 2004 despite a 4%
decline in automotive production at the large domestic automotive manufacturers. Revenues from the other industrial base businesses
in this segment grew 11% in 2004 as they benefited from increased demand in a broad array of end markets.
Revenues increased in 2003 compared with 2002 due mainly to revenues from acquisitions, par tially offset by lower base business
revenues. In 2003, construction base business revenues decreased 2% versus 2002 as a result of a slow down in the commercial
and residential construction markets during the first half of the year. Automotive base business revenues declined 4% due to a 6%
decline in automotive production at the large domestic automotive manufacturers in 2003. Revenues from the other businesses in
this segment declined 2% in 2003 due to sluggishness in the various industrial and commercial markets that these businesses serve.
33
ID_Financials
3/5/05
1:55 PM
Page 34
Operating Income
Operating income increased in 2004 over 2003 primarily due to leverage from the growth in base business revenues described
above, lower restructuring costs and income from acquisitions. These increases were par tially offset by base business variable
margin declines of 40 basis points, primarily due to steel cost increases. In addition, income in 2004 was negatively impacted by
a $9 million charge associated with a warranty issue related to a discontinued product at the Wilsonar t business. Also partially
offsetting the base business increases were first quarter 2004 goodwill and impairment charges of $7 million, primarily related to the
goodwill of a U.S. electrical components business and the trademarks and brands of a U.S. manufacturer of clean room mats.
Operating income declined in 2003 over 2002 primarily due to the negative effect of leverage from the decline in 2003 base business
revenues described above, increased restructuring expense and higher corporate-related expenses primarily associated with
pensions, restricted stock and medical benefits. Par tially offsetting these declines was income from acquisitions.
ENGINEERED PRODUCTS — INTERNATIONAL SEGMENT
Businesses in this segment are located outside Nor th America and manufacture a variety of shor t 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 fastener categor y, products include:
• metal fasteners, fastening tools, and metal plate connecting components for the commercial and
residential construction industries;
• laminate products for the commercial and residential 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 and electronics applications; and
• plastic fasteners for automotive, appliance and electronics applications.
In the specialty products categor y, products include:
• electronic component packaging trays used for the storage, shipment and manufacturing inser tion of electronic components
and microchips;
• swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;
• adhesives for industrial, construction and consumer purposes;
• chemical fluids which clean or add lubrication to machines;
• epoxy and resin-based coating products for industrial applications; and
• manual and power operated chucking equipment for industrial applications.
In 2004, this segment primarily ser ved the construction (37%), automotive (30%), and general industrial (15%) markets.
The results of operations for the Engineered Products—International segment for 2004, 2003 and 2002 were as follows:
2004
Operating revenues
Operating income
Margin %
$ 2,465,941
369,188
15.0%
34
2003
$ 1,873,767
260,701
13.9%
2002
$ 1,566,387
212,824
13.6%
ID_Financials
3/5/05
1:55 PM
Page 35
following factors:
OPERATING
REVENUES
overhead costs
Total
Translation
Restructuring costs
7.3%
—
% POINT INCREASE
(DECREASE)
OPERATING
INCOME
21.0%
1.8%
OPERATING
REVENUES
2.3%
OPERATING
INCOME
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
6.7%
0.6%
—
—
(0.1)
—
20.8
1.8
2.3
6.6
0.6
12.5
11.8
—
—
8.8
13.9
1.4
(3.3)
(0.6)
0.1
0.2
(0.4)
1.5
15.8
—
—
1.3
17.9
(3.4)
0.1
—
0.2
(0.5)
—
31.6%
41.6%
19.6%
22.5%
7.3
(0.2)
OPERATING
MARGINS
1.1%
0.3%
Operating Revenues
Revenues increased in 2004 over 2003 due to contributions from acquisition, increased base business revenues and the favorable
effect of currency translation primarily as a result of the euro strengthening versus the U.S. dollar. The acquisition revenue is
primarily related to the acquisitions of an Australian construction business and a European polymer business in the first quar ter
of 2004 and two European fluid product businesses in the second quar ter of 2004. Base business construction revenues
increased 8% in 2004 due to a rise in commercial construction activity in Europe, as well as increased commercial and residential
demand in the Australasia region. Automotive base revenues grew 7% primarily due to increased product penetration at the
European automotive manufacturers. The other businesses in the segment serve a broad array of industrial and commercial markets,
and revenues from these businesses increased 6% in 2004.
Revenues increased in 2003 over 2002 mainly due to the favorable effect of currency translation, primarily the euro. Base business
construction revenues increased 2% in 2003 mainly due to an increase in commercial construction activity in Europe as well as
commercial and residential construction activity in the Australasia region. Automotive base revenues increased 2% and revenues
in the other base businesses grew 3% in 2003.
Operating Income
Operating income increased in 2004 over 2003 primarily due to leverage from the increase in base business revenues described
above, the favorable effect of currency translation, income from acquisitions and lower restructuring expense. Par tially offsetting
the above income increases was a goodwill impairment charge of $8.5 million incurred in the first quar ter of 2004. This impact
primarily was related to the diminished cash flow expectations of a European automotive components business.
Operating income increased in 2003 over 2002 primarily due to favorable currency translation, increased base business income
due to operating leverage and income from the acquisitions. These increases were par tially offset by higher restructuring expenses.
SPECIALTY SYSTEMS — NORTH AMERICA SEGMENT
Businesses in this segment are located in Nor th America and design and manufacture longer lead-time machiner y and related
consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products
become par t of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.
In the machiner y and related consumables categor y, 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 industr y;
• 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; and
• foil and film and related equipment used to decorate a variety of consumer products.
35
ID_Financials
3/5/05
1:55 PM
Page 36
In the specialty equipment categor y, products include:
• commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use
by restaurants, institutions and supermarkets;
• paint spray equipment for a variety of general industrial applications;
• static control equipment for electronics and industrial applications;
• wheel balancing and tire uniformity equipment used in the automotive industr y; and
• airpor t ground power generators for commercial and militar y applications.
In 2004, this segment primarily ser ved the food institutional and retail (25%), general industrial (23%), construction (13%), and
food and beverage (8%) markets.
The results of operations for the Specialty Systems—Nor th America segment for 2004, 2003 and 2002 were as follows:
2004
Operating revenues
Operating income
Margin %
$ 3,862,556
688,303
17.8%
2003
$ 3,365,219
549,038
16.3%
2002
$ 3,357,504
509,299
15.2%
following factors:
OPERATING
REVENUES
and overhead costs
Total
Translation
Restructuring costs
Other
OPERATING
INCOME
11.3%
29.2%
—
(5.3)
11.3
23.9
3.1
0.4
—
—
—
1.3
0.4
0.2
(0.4)
—
14.8%
25.4%
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
2.6%
OPERATING
REVENUES
(2.1)%
OPERATING
INCOME
(5.8)%
OPERATING
MARGINS
(0.6)%
(0.8)
—
1.8
(2.1)
1.2
0.5
(0.3)
—
0.1
(0.1)
—
2.0
0.5
—
—
(0.2)
1.3
0.6
5.4
(0.7)
—
(0.1)
—
0.8
(0.1)
—
1.5%
0.2%
7.0
% POINT INCREASE
(DECREASE)
7.8%
1.1
1.1%
Operating Revenues
Revenues increased in 2004 over 2003 due to increased base business revenues and revenues from acquisitions. The base revenue
increase was a result of stronger end market demand and price increases that par tially offset raw material cost increases. Base
business revenue growth in 2004 is primarily due to an increase in demand in most of the end markets that this segment ser ves.
Welding base revenues increased 27%, industrial packaging base revenues grew 11%, food equipment base revenues increased
2% and base revenues in the other businesses in this segment increased 9%.
Revenues increased slightly in 2003 versus 2002 as revenues from acquisitions were offset by lower base business revenues.
Base business revenues declined in 2003 as a result of low capacity utilization in the various markets this segment ser ves, which
resulted in slow demand for capital equipment. In addition, low industrial production activity reduced demand for consumable products.
The lower market demand for the year was reflected in declines in food equipment revenue of 8%, industrial packaging revenue of
1% and other base business revenue of 5%. These declines were par tially offset by an increase in welding revenues of 2%.
Operating Income
Operating income increased in 2004 over 2003 primarily due to leverage from the base business revenue increases described
above. Additionally, income from acquisitions increased income in 2004. However, variable margins declined 60 basis points
in 2004 primarily due to steel raw material cost increases. Additionally, income was adversely impacted in 2004 due to goodwill
and intangible asset impairment charges of $6 million incurred in the first quar ter of 2004. These charges were primarily related
to the diminished cash flow expectations at two welding businesses and an industrial packaging unit.
36
ID_Financials
3/5/05
1:55 PM
Page 37
Operating income increased in 2003 versus 2002 primarily due to lower base business costs and reduced restructuring expenses.
Variable margins increased 40 basis points in 2003 as a result of cost reductions related to prior years’ restructuring activity and
the continued benefits of the 80/20 business process. These improvements were offset by higher corporate-related expenses
primarily related to pensions, restricted stock, and employee health and welfare. Income was also negatively impacted by the effect
of leverage from the base business declines described above.
SPECIALTY SYSTEMS — INTERNATIONAL SEGMENT
Businesses in this segment are located outside Nor th America and design and manufacture longer lead-time machiner y and related
consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products
become par t of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.
In the machiner y and related consumables categor y, 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 industr y;
• plastic bottle sleeves and related equipment for the food and beverage industr y;
• plastic stretch film and related packaging equipment for various industrial purposes;
• paper and plastic products used to protect shipments of goods in transit; and
• foil and film and related equipment used to decorate a variety of consumer products.
In the specialty equipment categor y, products include:
• commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use by
restaurants, institutions and supermarkets;
• paint spray equipment for a variety of general industrial applications;
• static control equipment for electronics and industrial applications; and
• airpor t ground power generators for commercial applications.
In 2004, this segment primarily ser ved the general industrial (29%), food institutional and retail (21%), and food and beverage
(13%) markets.
The results of operations for the Specialty Systems—International segment for 2004, 2003 and 2002 were as follows:
2004
Operating revenues
Operating income
Margin %
$ 2,375,189
314,535
13.2%
2003
$ 1,967,630
217,366
11.0%
2002
$ 1,693,042
164,656
9.7%
following factors:
OPERATING
REVENUES
overhead costs
Total
Translation
Restructuring costs
Other
OPERATING
INCOME
4.2%
14.3%
—
3.8
4.2
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
1.1%
OPERATING
REVENUES
(3.4)%
0.4
—
OPERATING
INCOME
(12.8)%
21.5
% POINT INCREASE
(DECREASE)
OPERATING
MARGINS
(1.0)%
2.2
18.1
1.5
(3.4)
8.7
1.2
6.1
10.4
—
—
—
2.5
13.1
11.1
(0.1)
—
(0.5)
—
1.2
—
—
5.0
14.7
—
—
(0.1)
6.5
18.7
(6.4)
4.5
—
0.1
0.2
(0.6)
0.4
—
20.7%
44.7%
16.2%
32.0%
37
2.2%
1.3%
ID_Financials
3/5/05
1:55 PM
Page 38
Operating Revenues
Revenues increased in 2004 over 2003 mainly due to favorable currency translation, primarily as a result of the euro strengthening
versus the U.S. dollar. Revenues also grew due to acquisitions, including a second quarter 2003 acquisition of an Asian manufacturer
of welding consumables. Base business revenues increased as demand increased in most end markets that this segment ser ves.
Industrial packaging base revenues grew 5%, food equipment base business revenues grew 2%, and other base business revenues,
including welding and finishing, increased 3%.
Revenues increased in 2003 versus 2002 primarily due to acquisitions and favorable currency translation, which was tied to the
rise in the euro. Base business revenues declined primarily as a result of slow European industrial production. Industrial packaging
revenues decreased 4%, food equipment revenues decreased 1%, and other base business revenues in this segment declined 3%.
Operating Income
Operating income increased in 2004 versus 2003 primarily as a result of leverage from higher base business revenues, lower
restructuring expenses, the favorable effect of currency translation and income from acquisitions. In addition, variable margins
improved 60 basis points reflecting the benefits of past restructuring effor ts.
Operating income increased in 2003 versus 2002 mainly due to the favorable effect of currency translation and income from
acquired companies. In addition, operational cost savings related to prior years’ restructuring programs increased operating
income, reflected in a 110 basis point increase in variable margin. In addition, income was higher in 2003 due to a goodwill asset
impairment charge of approximately $7 million related to industrial packaging businesses in Australia and Asia which was incurred
in 2002. Par tially offsetting these increases in income was increased restructuring expense in 2003.
LEASING AND INVESTMENTS SEGMENT
Businesses in this segment make investments in mor tgage entities, leases of telecommunications, aircraft, air traffic control and
other equipment, proper ties, affordable housing and a venture capital fund. As a result of the Company’s strong cash flow, the
Company has historically had excess funds to make oppor tunistic investments that meet the Company’s desired returns. See the
Investments note for a detailed discussion of the accounting policies for the various investments in this segment.
The results of operations for the Leasing and Investments segment for 2004, 2003 and 2002 were as follows:
IN THOUSANDS
Operating revenues
Operating income
2004
2003
2002
$ 148,791
131,602
$ 152,585
116,937
$ 181,570
85,533
Operating income (loss) by investment for the years ended December 31, 2004, 2003 and 2002 was as follows:
IN THOUSANDS
2004
Mor tgage investments
Leases of equipment
Proper ty developments
Proper ties held for sale
Venture capital limited par tnership
Other
2003
2002
$ 72,270
23,294
7,440
4,177
18,211
6,210
$ 72,570
23,744
10,398
(3,044)
(924)
14,193
$ 83,357
(6,658)
6,583
5,532
(3,588)
307
$ 131,602
$ 116,937
$ 85,533
The net assets attributed to the Leasing and Investments segment at December 31, 2004 and 2003 are summarized by investment
type as follows:
IN THOUSANDS
2004
Leases of equipment
Affordable housing limited par tnerships
Other, net
38
2003
$ 376,194
(14,821)
24,831
21,602
7,110
49,344
$ 244,957
3,946
19,885
33,711
(5,821)
18,277
$ 464,260
$ 314,955
ID_Financials
3/5/05
1:55 PM
Page 39
The net assets attributed to the Leasing and Investments segment as of December 31, 2004 and 2003 were as follows:
IN THOUSANDS
2004
Investments
Deferred tax assets
Allocated general corporate debt
Deferred tax liabilities
Affordable housing capital obligations
Preferred stock of subsidiaries
Accrued dividends on preferred stock of subsidiaries
Other, net
2003
$ 912,483
201,954
(78,991)
(335,391)
(94,657)
(60,000)
(32,700)
(48,438)
$ 832,358
198,166
(198,945)
(295,150)
(117,838)
(60,000)
(28,580)
(15,056)
$ 464,260
$ 314,955
A por tion of the Company’s general corporate debt has been attributed to the various investments of the Leasing and Investments
segment based on the net cumulative after-tax cash investments in the applicable projects.
Mortgage Investments
In 1995, 1996 and 1997, the Company, through its investments in separate mor tgage entities, acquired pools of mor tgage-related
assets in exchange for aggregate nonrecourse notes payable of $739.7 million, preferred stock of subsidiaries of $60 million and
cash of $240 million. The mor tgage-related assets acquired in these transactions relate to office buildings, apar tment buildings
and shopping malls located throughout the United States and included four variable-rate balloon loans and 24 proper ties at
December 31, 2004. In conjunction with these transactions, the mor tgage entities simultaneously entered into ten-year swap
agreements and other related agreements whereby a third par ty receives the por tion of the interest and net operating cash flow
from the mortgage-related assets in excess of $26 million per year and a portion of the proceeds from the disposition of the mortgagerelated assets and principal repayments, in exchange for the third par ty making the contractual principal and interest payments on
the nonrecourse notes payable. In addition, in the event that the pools of mor tgage-related assets do not generate interest and
net operating cash flow of $26 million a year, the Company has the right to receive the shor tfall from the cash flow generated by
three separate pools of mor tgage-related assets (owned by third par ties in which the Company has minimal interests), which the
swap counter par ty has estimated to have a total fair value of approximately $1.1 billion at December 31, 2004.
The mor tgage entities entered into the swaps and other related agreements in order to reduce the Company’s real estate, credit
and interest rate risks relative to its net mor tgage investments. The swap counter par ty has assumed the majority of the real estate
and credit risk related to the commercial mor tgage loans and real estate, and has assumed all of the interest rate risk related to
the nonrecourse notes payable.
On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative
to its investments in mor tgage entities. See the Investments note for fur ther discussion of the change in accounting for these
investments.
Income (loss) from mor tgage investments consisted of the following components for the years ended December 31, 2004, 2003
and 2002:
IN THOUSANDS
2004
Equity income from mor tgage investments
Commercial mor tgage loans
Commercial real estate
Net swap receivables
Deferred mor tgage investment income
Interest expense on nonrecourse debt
Interest expense on allocated debt
Preferred stock dividend expense
Other
2003
2002
$ 81,030
—
—
—
—
—
(3,582)
(4,120)
(1,058)
$ 23,298
623
(11,852)
69,547
15,362
(18,696)
(1,027)
(4,120)
(565)
$
—
(7,584)
(11,498)
116,003
30,723
(39,629)
(1,465)
(4,120)
927
$ 72,270
$ 72,570
$ 83,357
In 2004, mortgage investment income was flat versus 2003 as gains on sales of properties in 2004 of $45.3 million were essentially
offset by the net income recorded in the first half of 2003 before the adoption of FIN 46, primarily related to a $39 million favorable
swap mark-to-market adjustment in the second quar ter of 2003.
39
ID_Financials
3/5/05
1:55 PM
Page 40
In 2003, mor tgage investment income declined primarily due to lower swap mark-to-market income versus 2002. In the second
quar ter of 2003, favorable swap mark-to-market adjustments of $39 million were recorded, primarily due to lower market interest
rates and lower estimated future cash flows from the related mortgage loans and real estate. As a result of the adoption of FIN 46
relative to the mor tgage investments, star ting in the third quar ter of 2003 and for future periods, income for the net mor tgage
investments was accounted for under the equity method, without any future mark-to-market adjustments. Accordingly, activity attributed
to commercial mor tgage loans, real estate, swap receivables, deferred mor tgage investment income and nonrecourse debt was
recorded only for the first six months of 2003.
The Company’s net assets related to mor tgage investments as of December 31, 2004 and 2003 were as follows:
IN THOUSANDS
2004
Net equity investments in mor tgage entities
Deferred tax assets
Other, net
2003
$ 380,465
106,722
(18,422)
(60,000)
(32,700)
129
$ 325,435
51,293
(43,437)
(60,000)
(28,580)
246
$ 376,194
$ 244,957
As shown below, the amount of future cash flows which is greater than the Company’s net equity investments in mor tgage entities
at December 31, 2004 will be recorded as income during the remaining terms of the transactions:
IN THOUSANDS
ITW’s estimated share of future cash flows:
Annual operating cash flows
Disposition proceeds
Net equity investments in mor tgage entities at December 31, 2004
Future income expected to be recorded
MORTGAGE
TRANSACTION
ENDING
DECEMBER 31,
2005
MORTGAGE
TRANSACTION
ENDING
DECEMBER 31,
2006
$
$
4,500
146,504
9,000
147,336
MORTGAGE
TRANSACTION
ENDING
FEBRUARY 28,
2008
$ 20,000
165,900
TOTAL
$ 33,500
459,740
151,004
156,336
185,900
493,240
120,854
118,456
141,155
380,465
$ 30,150
$ 37,880
$ 44,745
$ 112,775
The Company believes that because the swaps’ counter par ty is AAA-rated, there is minimal risk that the nonrecourse notes payable
of the mor tgage entities will not be repaid by the swap counter par ty. In addition, because significant assets back the total annual
cash flow, the Company believes its risk of not receiving the $33.5 million of cumulative annual operating cash flows is also minimal.
Under the terms of the servicing agreements, the swap counter party, upon sale of the mortgage loans and real estate by the mortgage
entities, is entitled to receive most of the disposition proceeds in excess of specified levels. Currently, the projected disposition
proceeds exceed the levels specified. Fur thermore, the disposition value of cer tain proper ties has been guaranteed by the swap
counter par ty to be at least equal to their original cost. As such, modest fluctuations in the market values of the mor tgage loans
and real estate held by the mor tgage entities are expected to largely impact the swap counter par ty rather than ITW.
To illustrate the extent to which the Company’s risk related to its share of the disposition proceeds has been mitigated, the effects
of decreases in the estimated disposition proceeds at December 31, 2004 are shown below:
DISPOSITION PROCEEDS
IN THOUSANDS
Current estimate
10% reduction in disposition proceeds
ITW’S
SHARE
SWAP COUNTER
PARTY’S SHARE
TOTAL
FUTURE ITW
INCOME TO BE
RECOGNIZED
$ 459,740
447,162
417,004
392,233
$ 522,684
437,019
368,935
295,463
$ 982,424
884,181
785,939
687,696
$ 112,775
100,197
70,039
45,268
If the swap counter party is unable to sell all of the commercial loans and real estate by the end of the tenth year for each transaction,
the Company will begin receiving all of the annual operating cash flow from the remaining assets. Accordingly, the Company believes
that it is unlikely that the assets will not be sold within the ten-year term of each transaction.
40
ID_Financials
3/5/05
1:55 PM
Page 41
Leases of Equipment
Income (loss) from leases of equipment consisted of the following components for the years ended December 31, 2004, 2003 and
2002:
IN THOUSANDS
Telecommunications equipment
Air traffic control equipment
Aircraft
Other
2004
2003
2002
$ 11,214
9,211
2,129
740
$ 17,393
2,419
3,488
444
$ 15,759
—
(22,968)
551
$ 23,294
$ 23,744
$ (6,658)
The Company’s net assets related to investments in leases of equipment at December 31, 2004 and 2003 were as follows:
IN THOUSANDS
2004
Investments in leases:
Telecommunications equipment
Air traffic control equipment
Aircraft
Manufacturing equipment
Railcars
Deferred tax liabilities
Other, net
2003
$ 193,306
61,757
44,020
3,404
—
(245,723)
(69,578)
(2,007)
$ 181,370
51,395
45,388
5,390
499
(151,414)
(126,597)
(2,085)
$ (14,821)
$
3,946
In the third quar ter of 2003, the Company entered into a leveraged lease transaction related to air traffic control equipment in
Australia with a cash investment of $48.8 million. In the first half of 2002, the Company entered into leveraged leasing transactions
related to mobile telecommunications equipment with two major European telecommunications companies with cash investments
of $144.7 million. Under the terms of the telecommunications and air traffic control lease transactions, the lessees have made
upfront payments to creditworthy third party financial institutions that are acting as payment undertakers. These payment undertakers
are obligated to make the required scheduled payments directly to the nonrecourse debt holders and to the lessors, including the
Company. In the event of default by the lessees, the Company can recover its net investment from the payment under takers. In
addition, the lessees are required to purchase residual value insurance from a creditwor thy third par ty at a date near the end of
the lease term. As a result of the payment under taker arrangements and the residual value insurance, the Company believes that
any credit and residual value risks related to the telecommunications and air traffic control leases have been significantly mitigated.
In 2004, lease income was essentially flat compared to 2003 as higher income from the new air traffic control lease was offset
by lower income from the telecommunications leases. In 2003, income from leases increased significantly from 2002 due to a
2002 impairment charge of $31.6 million related to aircraft leases, as well as the new air traffic control and telecommunications
leases. The impairment charge related to the Company’s investments in aircraft leased to United Airlines, which declared bankruptcy
in December 2002. Of this impairment charge, $28.6 million related to a direct financing lease of a Boeing 757 aircraft. This
charge was estimated based on the reduced lease payments that United Airlines agreed to pay in the future versus the Company’s
lease receivable under the existing lease agreement. Although some credit risk exists relating to the remaining investments in aircraft
due to financial difficulties and overcapacity in the airline industr y, the Company believes that its net remaining investments of
$44.0 million at December 31, 2004 will be realizable as sufficient collateral exists in the event of default by the lessees.
Other Investments
Income from proper ty developments was $7.4 million in 2004 compared to $10.4 million in 2003 and $6.6 million in 2002 as a
result of more residential home sales in 2003 than either 2004 or 2002.
Income from proper ties held for sale was higher in 2004 versus 2003 due to net gains of $8.2 million on the sale of eight former
manufacturing facilities in 2004 versus net gains of $1.2 million on the sale of four proper ties in 2003 and a 2003 asset writedown
of $1.2 million. Income related to proper ties held for sale was lower in 2003 compared with 2002 primarily due to a gain on the
sale of a Chicago-area proper ty of $7.4 million in 2002.
Operating income from the venture capital limited par tnership was $18.2 million in 2004 versus losses of $0.9 million in 2003
and $3.6 million in 2002 due to favorable mark-to-market gains in 2004. In addition, in 2002 a $2.5 million writedown related to
one of the par tnership’s investments was recorded.
41
ID_Financials
3/5/05
1:55 PM
Page 42
Operating income from other investments was lower in 2004 versus 2003 due primarily to lower amor tization of deferred investment
income. Operating income from other investments was higher in 2003 compared with 2002 due primarily to higher interest expense
related to affordable housing investments in 2002.
AMORTIZATION AND IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
Effective Januar y 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”). Under SFAS 142, the Company does not amortize goodwill and intangible assets that have indefinite
lives. SFAS 142 also requires that the Company assess goodwill and intangible assets with indefinite lives for impairment at least
annually, based on the fair value of the related repor ting unit or intangible asset. The Company per forms its annual impairment
assessment in the first quar ter of each year.
As the first step in the SFAS 142 implementation process, the Company assigned its recorded goodwill and intangible assets as
of Januar y 1, 2002 to approximately 300 of its 600 repor ting units based on the operating unit that includes the business acquired.
Then, the fair value of each reporting unit was compared to its carrying value. Fair values were determined by discounting estimated
future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows were 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 was less than its carrying value, an impairment loss was recorded for the difference between the fair value of the unit’s goodwill
and intangible assets and the carr ying value of those assets.
Based on the Company’s initial impairment testing, goodwill was reduced by $254.6 million and intangible assets were reduced by
$8.2 million, and a net after-tax impairment charge of $221.9 million ($0.72 per diluted share) was recognized as a cumulative effect
of change in accounting principle in the first quar ter of 2002. The impairment charge was related to approximately 40 businesses
and primarily resulted from evaluating impairment under SFAS 142 based on discounted cash flows, instead of using undiscounted
cash flows as required by the previous accounting standard.
Other than the cumulative effect of the change in accounting principle discussed above, amor tization and impairment of goodwill
and other intangible assets for the years ended December 31, 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
Goodwill:
Impairment
Intangible Assets:
Amor tization
Impairment
2003
2002
702
$ 7,877
37,409
10,220
19,813
3,761
20,056
—
$ 59,121
$ 24,276
$ 27,933
$ 11,492
$
Other than the cumulative effect of the change in accounting principle discussed above, total goodwill and intangible asset impairment
charges by segment for the years ended December 31, 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
2003
$ 7,007
8,492
276
5,937
$
762
—
3,701
—
$ 21,712
$ 4,463
2002
$
—
285
—
7,592
$ 7,877
INTEREST EXPENSE
Interest expense of $69.2 million in 2004 was essentially flat as compared to the interest expense of $70.7 million in 2003.
Interest expense increased to $70.7 million in 2003 versus $68.5 million in 2002 primarily as a result of a full year interest
expense on the $250.0 million preferred debt securities issued in April 2002, par tially offset by a benefit resulting from an interest
rate swap on the 5.75% notes and lower interest expense at international operations.
OTHER INCOME (EXPENSE)
Other income was $12.0 million in 2004 versus $13.3 million in 2003. The decline was primarily due to lower gain on sale of operating
affiliates and higher losses on currency translation, par tially offset by a gain on forgiveness of debt and lower losses on sale of
fixed assets. Other income (expense) was income of $13.3 million in 2003 versus an expense of $3.8 million primarily due to gains
in 2003 versus losses in 2002 on the sale of operations and affiliates and higher interest income in 2003.
42
ID_Financials
3/5/05
1:55 PM
Page 43
INCOME TAXES
The effective tax rate was 33.0% in 2004, 34.0% in 2003, and 35.0% in 2002. See the Income Taxes note for a reconciliation of
the U.S. federal statutor y rate to the effective tax rate. The Company has not recorded additional valuation allowances on the net
deferred income tax assets of $380.6 million at December 31, 2004 and $588.4 million at December 31, 2003 as it expects to
generate adequate taxable income in the applicable tax jurisdictions in future years.
In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted in the United States. The provisions of the AJCA
that are expected to have the most impact on the U.S. federal taxes paid by the Company in the future are as follows:
• A special one-time dividends-received deduction of 85% for the repatriation of foreign earnings during 2005 only. See the
Income Taxes note for fur ther information regarding the estimated effect of this provision.
• A deduction related to U.S. manufacturing income of 3% of eligible income in 2005 and 2006, 6% in 2007 through 2009 and 9%
in 2010 and thereafter. The Company believes that substantially all of the U.S. pretax income from its manufacturing segments
would qualify as eligible income under this provision. However, because the detailed guidelines for determining eligible manufacturing
income have not yet been finalized by the U.S. government, the amount of future tax benefit related to this provision cannot
yet be determined.
• A gradual repeal of the exclusion of certain extraterritorial income (“ETI”) related to export sales from the U.S. This provision
provides that the ETI benefit is reduced to 80% in 2005, 60% in 2006 and 0% in 2007 and thereafter. Because the Company
generally manufactures locally in the major foreign countries in which it sells products, the repeal of the ETI benefit will not
have a significant impact on the Company’s future U.S. tax payments. In 2004, the benefit of the ETI exclusion was approximately
$7.4 million.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations in 2004 of $1,339.6 million ($4.39 per diluted share) was 28.8% higher than 2003 income
of $1,040.2 million ($3.37 per diluted share). Income from continuing operations in 2003 was 11.6% higher than 2002 income of
$931.8 million ($3.02 per diluted share).
FOREIGN CURRENCY
The weakening of the U.S. dollar against foreign currencies increased operating revenues by approximately $430 million in 2004,
$520 million in 2003, and $90 million in 2002, and increased income from continuing operations by approximately 15 cents per
diluted share in 2004, 16 cents per diluted share in 2003, and 3 cents per diluted share in 2002.
NEW ACCOUNTING PRONOUNCEMENT
In 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (“SFAS 123R”). The Company is required to adopt SFAS 123R in the third quar ter of 2005. SFAS 123R
requires the Company to measure the cost of employee ser vices received in exchange for an equity award based on the grant date
fair value. The cost will be recognized as an expense in financial statements over the period during which an employee is required
to provide ser vice. If SFAS 123R had been in effect in 2004, the Company’s net income per diluted share would have been lower
by 12 cents. If the Company continues to issue the same type and amount of equity compensation, the Company anticipates the
future impact to be comparable.
2005 FORECAST
While the Company remains optimistic about its earning prospects, it is forecasting modest slowing in end markets in 2005. As a
result, the Company is forecasting full-year 2005 income from continuing operations to be in a range of $4.91 to $5.11 per diluted
share without consideration of the effect of adopting SFAS 123R. The following key assumptions were used for this forecast:
•
•
•
•
•
•
base business revenue growth in a range of 4.4% to 6.4%;
foreign exchange rates holding at year-end 2004 levels;
annualized revenues from acquired companies in a range of $600 million to $800 million;
restructuring costs of $30 million to $50 million;
income from the Leasing and Investments segment of $60 million to $70 million; and
an effective tax rate of 33%.
The Company updates its forecast and assumptions throughout the year via monthly press releases.
43
ID_Financials
3/5/05
1:55 PM
Page 44
DISCONTINUED OPERATIONS
In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. These businesses
were acquired by ITW in 1999 as par t of the Company’s merger with Premark International Inc. (“Premark”). Subsequent to the
Premark merger, the Company determined that the consumer characteristics of the businesses in the Consumer Products segment
were not a good long-term fit with the Company’s other industrially focused businesses. Businesses in this segment were located
primarily in Nor th America and manufacture household products that are used by consumers, including Precor specialty exercise
equipment, West Bend small appliances and premium cookware, and Florida Tile ceramic tile. On October 31, 2002 the sales of
Precor and West Bend were completed, resulting in cash proceeds of $211.2 million. On November 7, 2003 the sale of Florida Tile
was completed, resulting in cash proceeds of $11.5 million. The Company’s net loss on disposal of the segment was as follows:
PRETAX
GAIN (LOSS)
IN THOUSANDS
Realized gains on 2002 sales of Precor and West Bend
Estimated loss on 2003 sale of Florida Tile recorded in 2002
AFTER-TAX
GAIN (LOSS)
$ 146,240
(123,874)
$ 51,604
(31,636)
$ 94,636
(92,238)
22,366
(752)
(28,784)
19,968
(256)
(10,348)
2,398
(496)
(18,436)
Estimated net gain on disposal of the segment deferred at December 31, 2002
Gain adjustments related to 2002 sales of Precor and West Bend recorded in 2003
Additional loss on sale of Florida Tile recorded in 2003
Net loss on disposal of segment as of December 31, 2003
Adjustments to Florida Tile loss on sale recorded in 2004
TAX PROVISION
(BENEFIT)
$
(7,170)
263
9,364
1,174
(16,534)
(911)
(6,907)
$ 10,538
$ (17,445)
Results of the discontinued operations for the years ended December 31, 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
2003
2002
Operating revenues
$
—
$ 102,194
$ 344,419
Operating income (loss)
$
—
$
(4,003)
$ 10,804
Net income (loss) from discontinued operations
Amount charged against reser ve for Florida Tile operating losses
$
—
—
$
(4,027)
4,027
$
Income from discontinued operations (net of 2002 tax provision of $8,096)
Loss on disposal of the segment (net of 2004 and 2003 tax provisions of $1,174
and $9,364, respectively)
Income (loss) from discontinued operations
—
$
—
(911)
(16,534)
(911)
$ (16,534)
2,672
—
2,672
—
$
2,672
In 2003, operating revenues and income were significantly lower as 2003 only included Florida Tile while 2002 also included the
Precor and West Bend businesses until their sale.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company’s primar y source of liquidity is free operating cash flow. Management continues to believe that such internally
generated cash flow will be adequate to service existing debt and to continue to pay dividends that meet its dividend payout objective
of 25%–30% of the last three years’ average net income. In addition, free operating cash flow is expected to be adequate to finance
internal growth, small-to-medium sized acquisitions and additional investments.
The Company uses free operating cash flow to measure normal cash flow generated by its operations which is available for dividends,
acquisitions, debt repayment and additional investments. In addition, in 2004 free operating cash flow was used to repurchase
common stock. 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 April 19, 2004 the Company’s Board of Directors authorized a stock repurchase program, which provides for the buy back of
up to 31,000,000 shares. As of December 31, 2004, the Company had repurchased 18,915,473 shares of its common stock for
$1,729,806,000 at an average price of $91.45 per share.
44
ID_Financials
3/5/05
1:55 PM
Page 45
Summarized cash flow information for the three years ended December 31, 2004, 2003 and 2002 was as follows:
IN THOUSANDS
2004
2003
2002
Net cash provided by operating activities
Proceeds from investments
Additions to plant and equipment
$ 1,532,031
85,412
(282,560)
$ 1,368,741
59,509
(258,312)
$ 1,288,756
77,780
(271,424)
$ 1,334,883
$ 1,169,938
$ 1,095,112
Acquisitions
Cash dividends paid
Purchase of investments
Repurchases of common stock
Proceeds from sale of operations and affiliates
Issuance of common stock
Net proceeds (repayments) of debt
Other
$ (587,783)
(304,581)
(64,442)
(1,729,806)
6,495
79,108
127,487
121,546
$ (203,726)
(285,399)
(133,236)
—
21,421
40,357
(95,766)
113,207
$ (188,234)
(272,319)
(194,741)
—
211,075
44,381
(3,495)
83,684
Net increase (decrease) in cash and equivalents
$(1,017,093)
$
$
626,796
775,463
Return on 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 three years ended December 31, 2004, 2003 and 2002 was as follows:
2004
2003
Operating income after taxes of 33%, 34%, and 35%, respectively
$ 1,377,931
$ 1,078,082
$
Total debt
Less: Leasing and Investments debt
Less: Cash and equivalents
$ 1,124,621
(78,991)
(667,390)
$
976,454
(198,945)
(1,684,483)
$ 1,581,985
(770,099)
(1,057,687)
(906,974)
7,874,286
(245,801)
6,649,071
Adjusted net debt
Total stockholders’ equity
378,240
7,627,610
2002
978,751
Invested capital
$ 8,005,850
$ 6,967,312
$ 6,403,270
Average invested capital
$ 7,465,240
$ 6,685,291
$ 6,517,735
18.5%
16.1%
15.0%
The 240 basis point increase in ROIC in 2004 versus 2003 was due primarily to a 27.8% increase in after-tax operating income,
mainly as a result of increased base business operating income and a decrease in the effective tax rate to 33% in 2004 from 34%
in 2003.
The 110 basis point increase in ROIC in 2003 versus 2002 was due primarily to a 10.1% increase in after-tax operating income,
mainly as a result of favorable currency translation and a decrease in the effective tax rate to 34% in 2003 from 35% in 2002.
45
ID_Financials
3/5/05
1:55 PM
Page 46
Working Capital
Net working capital at December 31, 2004 and 2003 is summarized as follows:
Current Assets:
Cash and equivalents
Trade receivables
Inventories
Other
$
Current Liabilities:
Shor t-term debt
Accounts payable and accrued expenses
Other
Net Working Capital
2003
667,390
2,054,624
1,281,156
319,028
$ 1,684,483
1,721,186
991,979
385,554
$(1,017,093)
333,438
289,177
(66,526)
4,322,198
4,783,202
(461,004)
203,523
1,563,191
84,257
56,094
1,352,357
80,452
147,429
210,834
3,805
1,850,971
1,488,903
$ 2,471,227
$ 3,294,299
2.34
3.21
Current Ratio
INCREASE
(DECREASE)
2004
362,068
$ (823,072)
Cash decreased primarily due to the repurchase of common stock. Trade receivables and inventories increased primarily as a result
of increased sales, currency translation and acquisitions. Shor t-term debt increased primarily due to the issuance of commercial
paper. Accounts payable and accrued expenses increased primarily as a result of currency translation and acquisitions.
Debt
Total debt at December 31, 2004 and 2003 was as follows:
2004
INCREASE
(DECREASE)
2003
Shor t-term debt
Long-term debt
$
203,523
921,098
$
56,094
920,360
$
147,429
738
Total debt
$ 1,124,621
$
976,454
$
148,167
12.8%
11.0%
Shor t-term debt increased at December 31, 2004 due to commercial paper borrowings used primarily to fund 2004 acquisitions.
In 2004, the Company entered into a $400.0 million Line of Credit Agreement with a termination date of June 17, 2005. In 2003,
the Company entered into a $350.0 million revolving credit facility with a termination date of June 20, 2008. This debt capacity is
for use principally to suppor t any issuances of commercial paper and to fund larger acquisitions.
The Company has cash on hand and additional debt capacity to fund larger acquisitions. As of December 31, 2004, the Company
has unused capacity of $750.0 million under its current U.S. debt facilities. In addition, the Company believes that based on its
current free operating cash flow and debt-to-capitalization ratios, it could readily obtain additional financing if necessar y.
46
ID_Financials
3/5/05
1:55 PM
Page 47
Stockholders’ Equity
The changes to stockholders’ equity during 2004 and 2003 were as follows:
IN THOUSANDS
2004
2003
Beginning balance
Net income
Cash dividends declared
Stock option and restricted stock activity
Currency translation adjustments
Other
$ 7,874,286
1,338,694
(312,286)
(1,729,806)
151,490
306,653
(1,421)
$ 6,649,071
1,023,680
(288,833)
—
78,845
407,811
3,712
Ending balance
$ 7,627,610
$ 7,874,286
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Company’s contractual obligations as of December 31, 2004 were as follows:
IN THOUSANDS
2005
Total debt
$
Minimum lease payments
Maximum venture capital contribution
Accrued dividends on preferred
stock of subsidiaries
203,523
101,359
20,017
20,523
—
$
2006
2007
2008
2009
2010 AND
FUTURE YEARS
2,440
77,751
16,237
—
—
$ 1,316
59,160
13,703
—
—
$ 150,832
43,632
13,722
—
—
$ 499,988
32,774
14,092
—
—
$ 266,522
59,431
16,886
—
60,000
10,800
11,680
10,220
—
—
—
$ 356,222
$ 108,108
$ 84,399
$ 208,186
$ 546,854
$ 402,839
In 2001, the Company committed to two new affordable housing limited par tnership investments. In connection with the formation
and financing of these limited partnerships, the affordable housing limited partnerships borrowed the full amount of funds necessary
for their affordable housing projects from a third par ty financial institution. The excess cash of $126.8 million was distributed to
the Company in 2001 and will be repaid to the limited par tnerships via capital contributions as the limited par tnerships require the
funds for their affordable housing projects. The financing of these limited par tnerships was structured in this manner in order to
receive the affordable housing tax credits and deductions without any substantial initial cash outlay by the Company.
The Company entered into a private equity limited par tnership in 2001 that is investing in late stage venture capital and buy-out
oppor tunities. In connection with this par tnership investment, the Company has committed to total maximum capital contributions
of $100 million over a five-year period, with a maximum of $50 million in any one year.
The Company has provided guarantees related to the debt of cer tain unconsolidated affiliates of $32 million at December 31,
2004. In the event one of these affiliates defaults on its debt, the Company would be liable for the debt repayment. The Company
has recorded liabilities related to these guarantees of $16 million at December 31, 2004. At December 31, 2004, the Company
had open stand-by letters of credit of $97 million, substantially all of which expire in 2005. The Company had no other significant
off-balance sheet commitments at December 31, 2004.
47
ID_Financials
3/5/05
1:55 PM
Page 48
MARKET RISK
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt.
The Company has no cash flow exposure on its long-term obligations related to changes in market interest rates, other than
$100 million of debt which has been hedged by the interest rate swap discussed below. The Company primarily enters into longterm debt obligations for general corporate purposes, including the funding of capital expenditures and acquisitions. In December
2002, the Company entered into an interest rate swap with a notional value of $100 million to hedge a por tion of the fixed rate
debt. Under the terms of the interest rate swap, the Company receives interest at a fixed rate of 5.75% and pays interest at a variable
rate of LIBOR plus 1.96%. The maturity date of the interest rate swap is March 1, 2009. The carr ying value of the notes has been
adjusted to reflect the fair value of the interest rate swap.
The following table presents the Company’s financial instruments for which fair value is subject to changing market interest rates:
6.55%
5.75%
PREFERRED DEBT
6.875%
NOTES DUE
SECURITIES DUE
NOTES DUE
MARCH 1, 2009 DECEMBER 31, 2011 NOVEMBER 15, 2008
IN THOUSANDS
As of December 31, 2004:
Estimated cash outflow by year of principal maturity—
2005–2007
2008
2009
2010 and thereafter
Estimated fair value
Carr ying value
$
—
—
500,000
—
533,895
499,343
$
—
—
—
250,000
282,693
249,705
$
—
150,000
—
—
165,903
149,929
As of December 31, 2003:
Total estimated cash outflow
Estimated fair value
Carr ying value
$ 500,000
550,243
500,110
$ 250,000
285,918
249,672
$ 150,000
172,489
149,911
Foreign Currency Risk
The Company operates in the United States and 44 other countries. In general, the Company’s products are primarily manufactured
and sold in the same countr y. The initial funding for the foreign manufacturing operations was provided primarily through the
permanent investment of equity capital from the U.S. parent company. Therefore, the Company and its subsidiaries do not have
significant assets or liabilities denominated in currencies other than their functional currencies. As such, the Company does not
have any significant derivatives or other financial instruments that are subject to foreign currency risk at December 31, 2004 or 2003.
CRITICAL ACCOUNTING POLICIES
The Company has four accounting policies which it believes are important to the Company’s financial condition and results of operations,
and which require the Company to make estimates about matters that are inherently uncer tain.
These critical accounting policies are as follows:
Realizability of Inventories—Inventories are stated at the lower of cost or market. Generally, the Company’s operating units per form
an analysis of the historical sales usage of the individual inventor y items on hand and a reser ve is recorded to adjust inventor y
cost to market value based on the following usage criteria:
USAGE CLASSIFICATION
CRITERIA
RESERVE %
Active
Slow-moving
Obsolete
Quantity on hand is less than prior 6 months’ usage
Some usage in last 12 months, but quantity on hand exceeds prior 6 months’ usage
No usage in the last 12 months
0%
50%
90%
In addition, for the majority of U.S. operations, the Company has elected to use the last-in, first-out (“LIFO”) method of inventor y
costing. Generally, this method results in a lower inventory value than the first-in, first-out (“FIFO”) method due to the effects of inflation.
48
ID_Financials
3/5/05
1:55 PM
Page 49
Collectibility of Accounts Receivable—The Company estimates the allowance for uncollectible accounts based on the greater of
a specific reser ve for past due accounts or a reser ve calculated based on the historical write-off percentage over the last two years.
In addition, the allowance for uncollectible accounts includes reser ves for customer credits and cash discounts, which are also
estimated based on past experience.
Depreciation of Plant and Equipment—The Company’s U.S. businesses compute depreciation on an accelerated basis, as follows:
Buildings and improvements
Machiner y and equipment
150% declining balance
200% declining balance
The majority of the international businesses compute depreciation on a straight-line basis to conform to their local statutor y
accounting and tax regulations.
Income Taxes—The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of
differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s tax
balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax
expense recognized by the Company also reflects its best estimates and assumptions regarding, among other things, the level of future
taxable income and effect of the Company’s various tax planning strategies. Future tax authority rulings and changes in tax laws,
changes in projected levels of taxable income, and future tax planning strategies could affect the actual effective tax rate and tax
balances recorded by the Company.
The Company believes that the above critical policies have resulted in past actual results approximating the estimated amounts in
those areas.
FORWARD - LOOKING STATEMENTS
This annual repor t contains for ward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding the Company’s 2005 forecasts and assumptions, the adequacy of internally generated
funds, the recoverability of the Company’s investments in mor tgage entities, future cash flows and income from the Company’s
mor tgage investments, equipment leases, the meeting of dividend payout objectives, the impact of the adoption of SFAS 123R on
stock-based compensation, impact of the repeal of the ETI benefit on the Company’s future U.S. tax payments, the amount of U.S.
pre-tax manufacturing income that would qualify as eligible income, payments under guarantees, the Company’s por tion of future
benefit payments related to pension and postretirement benefits, and the availability of additional financing. These statements are
subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated.
Impor tant risks that may influence future results include (1) a downturn in the construction, automotive, general industrial, food
retail and ser vice, or real estate markets, (2) deterioration in global and domestic business and economic conditions, par ticularly
in Nor th America, the European Community and 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 regulator y 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 uncer tainties, investors should not place undue reliance on for ward-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 repor t issued
by any analyst irrespective of the content of the statement or repor t.
49
ID_Financials
3/5/05
1:55 PM
Page 50
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Illinois Tool Works Inc. (“ITW”) is responsible for establishing and maintaining adequate internal control over financial
repor ting. ITW’s internal control system was designed to provide reasonable assurance to the Company’s management and board
of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
ITW management assessed the effectiveness of the Company’s internal control over financial repor ting as of December 31, 2004.
In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, the Company’s
internal control over financial repor ting is effective based on those criteria.
ITW’s independent auditors have issued an audit report on our assessment of the Company’s internal control over financial reporting.
W. James Farrell
Chairman and Chief Executive Officer
March 1, 2005
Jon C. Kinney
Senior Vice President and Chief Financial Officer
March 1, 2005
50
ID_Financials
3/5/05
1:55 PM
Page 51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Illinois Tool Works Inc.:
We have audited the accompanying statements of financial position of Illinois Tool Works Inc. and Subsidiaries (the “Company”) as
of December 31, 2004 and 2003, and the related statements of income, income reinvested in the business, comprehensive
income and cash flows for each of the three years in the period ended December 31, 2004. We also have audited management’s
assessment, included in the accompanying Management Repor t on Internal Control Over Financial Repor ting, dated March 1,
2005, that the Company maintained effective internal control over financial repor ting as of December 31, 2004, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control
over financial repor ting, and for its assessment of the effectiveness of internal control over financial repor ting. Our responsibility
is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness
of the Company’s internal control over financial repor ting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and per form the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial repor ting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis, evidence suppor ting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial repor ting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and per forming such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial repor ting is a process designed by, or under the super vision of, a company’s principal
executive and principal financial officers, or persons per forming similar functions, and effected by a company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial repor ting includes those policies and procedures that (1) per tain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company; (2) provide reasonable
assurance that transactions are recorded as necessar y to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of a company are being made only in accordance with authorizations
of management and directors of a company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial repor ting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial repor ting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial
repor ting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Fur thermore, in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Chicago, Illinois
March 1, 2005
51
ID_Financials
3/5/05
1:55 PM
Page 52
Statement of Income
Illinois Tool Works Inc. and Subsidiaries
FOR THE YEARS ENDED DECEMBER 31
IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS
Operating Revenues
Cost of revenues
Selling, administrative, and research and development expenses
Amor tization and impairment of goodwill and other intangible assets
2004
2003
2002
$ 11,731,425
7,591,246
2,024,445
59,121
$ 10,035,623
6,527,692
1,850,197
24,276
$ 9,467,740
6,213,791
1,720,245
27,933
Operating Income
Interest expense
Other income (expense)
2,056,613
(69,234)
12,026
1,633,458
(70,672)
13,328
1,505,771
(68,455)
(3,756)
Income from Continuing Operations Before Income Taxes
Income taxes
1,999,405
659,800
1,576,114
535,900
1,433,560
501,750
Income from Continuing Operations
Income (Loss) from Discontinued Operations
Cumulative Effect of Change in Accounting Principle
1,339,605
(911)
—
1,040,214
(16,534)
—
Net Income
Income Per Share from Continuing Operations:
Basic
Diluted
Income (Loss) Per Share from Discontinued Operations:
Basic
Diluted
Cumulative Effect Per Share of Change in Accounting Principle:
Basic
Diluted
Net Income Per Share:
Basic
Diluted
931,810
2,672
(221,890)
$ 1,338,694
$ 1,023,680
$
712,592
$ 4.43
$ 3.39
$ 3.04
$ 4.39
$ 3.37
$ 3.02
$
—
$(0.05)
$ 0.01
$
—
$(0.05)
$ 0.01
$
—
$
—
$(0.72)
$
—
$
—
$(0.72)
$ 4.43
$ 3.33
$ 2.33
$ 4.39
$ 3.32
$ 2.31
Statement of Income Reinvested in the Business
IN THOUSANDS
2004
2003
2002
Beginning Balance
Net income
Cash dividends declared
$ 6,937,110 $ 6,202,263 $ 5,765,421
1,338,694
1,023,680
712,592
(312,286)
(288,833)
(275,750)
Ending Balance
$ 7,963,518
$ 6,937,110
$ 6,202,263
Statement of Comprehensive Income
IN THOUSANDS
2004
2003
Net Income
Other Comprehensive Income:
Foreign currency translation adjustments
Minimum pension liability adjustments
Income tax related to minimum pension liability adjustments
$ 1,338,694
$ 1,023,680
Comprehensive Income
$ 1,642,298
306,653
(5,009)
1,960
The Notes to Financial Statements are an integral par t of these statements.
52
2002
$
407,811
6,124
(1,748)
$ 1,435,867
712,592
135,144
(53,467)
17,872
$
812,141
ID_Financials
3/5/05
1:55 PM
Page 53
Statement of Financial Position
DECEMBER 31
IN THOUSANDS EXCEPT SHARES
2004
2003
667,390
2,054,624
1,281,156
147,416
171,612
$ 1,684,483
1,721,186
991,979
217,638
167,916
Assets
Current Assets:
Cash and equivalents
Trade receivables
Inventories
Deferred income taxes
Prepaid expenses and other current assets
$
4,322,198
4,783,202
Plant and Equipment:
Land
Equipment leased to others
Construction in progress
Total current assets
160,649
1,236,541
3,272,144
150,412
117,366
135,357
1,140,033
3,046,688
145,657
93,694
Accumulated depreciation
4,937,112
(3,060,237)
4,561,429
(2,832,791)
1,876,875
1,728,638
912,483
2,753,053
440,002
233,172
814,151
832,358
2,511,281
287,582
370,737
679,523
$ 11,351,934
$ 11,193,321
$
$
Net plant and equipment
Investments
Goodwill
Intangible Assets
Deferred Income Taxes
Other Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Shor t-term debt
Accounts payable
Accrued expenses
Cash dividends payable
Income taxes payable
Total current liabilities
Noncurrent Liabilities:
Long-term debt
Other
Total noncurrent liabilities
Stockholders’ Equity:
Common stock:
Issued—311,373,558 shares in 2004 and 308,877,225 shares in 2003
Additional paid-in-capital
Income reinvested in the business
Common stock held in treasur y
Accumulated other comprehensive income
Total stockholders’ equity
The Notes to Financial Statements are an integral par t of this statement.
53
203,523
603,811
959,380
81,653
2,604
56,094
481,407
870,950
73,948
6,504
1,850,971
1,488,903
921,098
952,255
920,360
909,772
1,873,353
1,830,132
3,114
978,941
7,963,518
(1,731,378)
413,415
3,089
825,924
6,937,110
(1,648)
109,811
7,627,610
7,874,286
$ 11,351,934
$ 11,193,321
ID_Financials
3/5/05
1:55 PM
Page 54
Statement of Cash Flows
IN THOUSANDS
Cash Provided by (Used for) Operating Activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
(Income) loss from discontinued operations
Cumulative effect of change in accounting principle
Depreciation
Change in deferred income taxes
Provision for uncollectible accounts
Loss on sale of plant and equipment
Income from investments
Non-cash interest on nonrecourse notes payable
(Gain) loss on sale of operations and affiliates
Amor tization of restricted stock
Other non-cash items, net
Change in assets and liabilities:
(Increase) decrease in—
Trade receivables
Inventories
Prepaid expenses and other assets
Net assets of discontinued operations
Increase (decrease) in—
Accounts payable
Accrued expenses and other liabilities
Income taxes payable
Other, net
2004
2003
$ 1,338,694
$ 1,023,680
911
—
294,162
59,121
143,214
391
4,710
(142,621)
—
(8)
32,514
9,740
16,534
—
282,277
24,276
203,958
8,875
6,883
(145,541)
18,696
(5,109)
17,777
17,951
(128,868)
(177,052)
(123,532)
—
(22,239)
108,180
(186,714)
30,736
31,947
35,056
153,457
195
Net cash provided by operating activities
Net cash used for financing activities
8,058
71,844
10,981
1,433
14,455
(9,649)
87,422
44
1,368,741
1,288,756
(188,234)
(271,424)
(194,741)
77,780
29,208
211,075
3,079
(811,327)
(483,861)
(333,257)
(304,581)
79,108
(1,729,806)
134,019
97
(6,629)
—
(285,399)
40,357
—
(68,159)
931
(28,538)
12
(272,319)
44,381
—
(231,214)
258,426
(30,707)
2,790
(1,827,792)
(340,796)
(228,643)
89,995
82,712
48,607
626,796
1,057,687
775,463
282,224
$ 1,684,483
$ 1,057,687
(1,017,093)
1,684,483
End of year
(2,672)
221,890
277,819
27,933
(60,471)
21,696
6,146
(147,024)
39,629
4,777
193
1,660
(203,726)
(258,312)
(133,236)
59,509
29,489
21,421
994
Effect of Exchange Rate Changes on Cash and Equivalents
Cash and Equivalents:
Increase (decrease) during the year
Beginning of year
712,592
(587,783)
(282,560)
(64,442)
85,412
23,378
6,495
8,173
Net cash used for investing activities
Cash Provided by (Used for) Financing Activities:
Cash dividends paid
Issuance of common stock
Net proceeds (repayments) of shor t-term debt
Proceeds from long-term debt
Repayments of long-term debt
Other, net
$
(10,104)
47,070
(68,497)
52
1,532,031
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and
additional interest in affiliates
Additions to plant and equipment
Purchase of investments
Proceeds from investments
Proceeds from sale of plant and equipment
Proceeds from sale of operations and affiliates
Other, net
2002
$
667,390
Cash Paid During the Year for Interest
$
73,393
$
73,250
$
73,284
Cash Paid During the Year for Income Taxes
$
339,334
$
351,156
$
474,954
Liabilities Assumed from Acquisitions
$
150,913
$
120,825
$
34,267
The Notes to Financial Statements are an integral par t of this statement. See the Investments note for information regarding non-cash transactions.
54
ID_Financials
3/5/05
1:55 PM
Page 55
Notes to Financial Statements
The Notes to Financial Statements furnish additional information on items in the financial statements. The notes have been
arranged in the same order as the related items appear in the statements.
Illinois Tool Works Inc. (the “Company” or “ITW”) is a worldwide manufacturer of highly engineered products and specialty systems.
The Company primarily ser ves the construction, automotive, food institutional and retail, and general industrial markets.
Significant accounting principles and policies of the Company are in italics. Cer tain reclassifications of prior years’ data have been
made to conform to current year repor ting.
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts repor ted in the financial statements and the notes to
financial statements. Actual results could differ from those estimates. The significant estimates included in the preparation of the
financial statements are related to inventories, trade receivables, plant and equipment, income taxes, product liability matters,
litigation, product warranties, pensions, other postretirement benefits, environmental matters and stock options.
Consolidation and Translation—The financial statements include the Company and substantially all of its majority-owned subsidiaries.
All significant intercompany transactions are eliminated from the financial statements. Substantially all of the Company’s foreign
subsidiaries outside Nor th America have November 30 fiscal year-ends to facilitate inclusion of their financial statements in the
December 31 consolidated financial statements.
Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are
translated at average rates for the period. Translation adjustments are reported as a component of accumulated other comprehensive
income in stockholders’ equity.
Acquisitions—Summarized information related to acquisitions during 2004, 2003 and 2002 is as follows:
IN THOUSANDS EXCEPT NUMBER OF ACQUISITIONS
Number of acquisitions
Net cash paid during the year
Premium recorded:
Goodwill
Intangible assets
2004
2003
2002
24
$ 587,783
28
$ 203,726
21
$ 188,234
$ 230,073
$ 197,182
$ 100,374
$ 55,280
$ 94,916
$ 40,023
The acquisitions in these years, individually and in the aggregate, did not materially affect the Company’s results of operations or
financial position.
Operating Revenues are recognized when the risks of ownership are transferred to the customer, which is generally at the time of
product shipment. Operating revenues for the Leasing and Investments segment include income from mortgage investments, leases
and other investments that is recognized based on the applicable accounting method for each type of investment. See the
Investments note for the detailed accounting policies related to the Company’s significant investments.
No single customer accounted for more than 5% of consolidated revenues in 2004, 2003 or 2002.
Research and Development Expenses are recorded as expense in the year incurred. These costs were $123,486,000 in 2004,
$106,777,000 in 2003 and $101,344,000 in 2002.
Rental Expense was $107,204,000 in 2004, $102,447,000 in 2003 and $94,395,000 in 2002. Future minimum lease payments
for the years ending December 31 are as follows:
IN THOUSANDS
2005
2006
2007
2008
2009
2010 and future years
$ 101,359
77,751
59,160
43,632
32,774
59,431
$ 374,107
Advertising Expenses are recorded as expense in the year incurred. These costs were $81,113,000 in 2004, $74,760,000 in
2003, and $73,894,000 in 2002.
55
ID_Financials
3/5/05
1:55 PM
Page 56
Interest Expense related to debt has been recorded in the statement of income as follows:
IN THOUSANDS
Cost of revenues
Interest expense
2004
2003
2002
4,202
69,234
—
$ 22,687
70,672
25
$ 43,333
68,455
1,578
$ 73,436
$ 93,384
$ 113,366
$
The interest expense recorded as cost of revenues relates to the Leasing and Investment segment and includes interest expense
related to both the direct debt of the segment and general corporate debt allocated to the segment based on the after-tax cash
flows of the investments. The allocation of interest expense from general corporate debt to the segment was $4,202,000,
$3,990,000 and $3,704,000 in 2004, 2003 and 2002, respectively.
Other Income (Expense) consisted of the following:
IN THOUSANDS
2004
Interest income
Gain (loss) on sale of operations and affiliates
Loss on sale of plant and equipment
Loss on foreign currency transactions
Other, net
2003
2002
$ 25,614
8
(4,710)
(9,810)
924
$ 26,171
5,109
(6,883)
(5,077)
(5,992)
$ 17,574
(4,777)
(6,146)
(9,070)
(1,337)
$ 12,026
$ 13,328
$ (3,756)
The interest income above relates to general corporate shor t-term investments. Interest income related to the investments of the
Leasing and Investments segment is included in the operating income of that segment.
Income Taxes—The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are
determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities
given the provisions of the enacted tax laws. The components of the provision for income taxes on continuing operations were as
shown below:
IN THOUSANDS
2004
U.S. federal income taxes:
Current
Deferred
Tax cost of expected dividend repatriation in 2005
Benefit of net operating loss carr yfor wards
Tax benefit related to stock recorded through equity
Foreign income taxes:
Current
Deferred
State income taxes:
Current
Deferred
Tax benefit related to stock recorded through equity
56
2003
2002
$ 250,887
92,526
25,000
(4,204)
36,322
$ 170,040
239,618
—
(33,816)
19,139
$ 334,329
35,064
—
(2,626)
25,366
400,531
394,981
392,133
226,699
51,129
(51,425)
201,136
(47,769)
(38,161)
153,949
(65,079)
(2,642)
226,403
115,206
86,228
43,297
(2,719)
(11,014)
3,302
33,116
20,407
(29,355)
1,545
35,518
(6,420)
(7,671)
1,962
32,866
25,713
23,389
$ 659,800
$ 535,900
$ 501,750
ID_Financials
3/5/05
1:55 PM
Page 57
Income from continuing operations before income taxes for domestic and foreign operations was as follows:
IN THOUSANDS
Domestic
Foreign
2004
2003
2002
$ 1,354,301
645,104
$ 1,066,575
509,539
$ 1,185,606
247,954
$ 1,999,405
$ 1,576,114
$ 1,433,560
The reconciliation between the U.S. federal statutor y tax rate and the effective tax rate was as follows:
2004
2003
2002
U.S. federal statutor y tax rate
State income taxes, net of U.S. federal tax benefit
Differences between U.S. federal statutor y and foreign tax rates
Nontaxable foreign interest income
Tax effect of foreign dividends
Other, net
35.0%
1.5
(0.6)
(1.6)
(1.1)
(0.2)
35.0%
1.1
(1.0)
(2.7)
1.0
0.6
35.0%
1.1
0.3
(1.4)
0.3
(0.3)
Ef fective tax rate
33.0%
34.0%
35.0%
In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted in the United States. One of the provisions of the
AJCA was to allow a special one-time dividends-received deduction of 85% on the repatriation of cer tain foreign earnings to U.S.
taxpayers, provided cer tain criteria regarding the sources and uses of the repatriated funds are met. In November 2004, the Tax
Technical Corrections Act of 2004 (“Technical Corrections Act”) was introduced in the U.S. House of Representatives which would
clarify cer tain computations related to the dividends-received deduction in the AJCA. The Company has not finalized its 2005
repatriation plans related to the AJCA and the possible enactment of the Technical Corrections Act. The range of possible total
repatriated amounts and the related tax effects are as follows:
UNDER AJCA ASSUMING
AMENDMENT BY PROPOSED
TECHNICAL CORRECTIONS ACT
UNDER AJCA AS
CURRENTLY ENACTED
IN THOUSANDS
MINIMUM
MAXIMUM
Estimated repatriation
$
273,500
$
745,500
$ 1,495,500
Estimated U.S. tax cost of repatriation
$
25,000
$
25,000
$
62,000
In 2004, the Company recorded a deferred tax liability of $25,000,000 to reflect the estimated tax cost of the minimum foreign
dividends expected to be repatriated under the AJCA in 2005. Deferred U.S. federal income taxes and foreign withholding taxes have
not been provided on undistributed earnings of certain international subsidiaries of $2,300,000,000 and $2,000,000,000 as of
December 31, 2004 and 2003, respectively, as these earnings are considered permanently invested. Upon repatriation of these
earnings to the United States in the form of dividends or other wise, the Company may be subject to U.S. income taxes and foreign
withholding taxes. The actual U.S. tax cost would depend on income tax laws and circumstances at the time of distribution.
Determination of the related tax liability is not practicable because of the complexities associated with the hypothetical calculation.
57
ID_Financials
3/5/05
1:55 PM
Page 58
The components of deferred income tax assets and liabilities at December 31, 2004 and 2003 were as follows:
2004
IN THOUSANDS
ASSET
Goodwill and intangible assets
Inventor y reser ves, capitalized tax cost and LIFO inventor y
Investments
Plant and equipment
Accrued expenses and reser ves
Employee benefit accruals
Foreign tax credit carr yfor wards
Net operating loss carr yfor wards
Capital loss carr yfor wards
Allowances for uncollectible accounts
Prepaid pension assets
Other
$
Gross deferred income tax assets (liabilities)
Valuation allowances
83,392
41,159
201,954
36,345
196,195
229,572
11,540
261,624
114,920
10,176
—
43,057
1,229,934
(150,766)
Total deferred income tax assets (liabilities)
$ 1,079,168
2003
LIABILITY
$ (117,471)
(15,327)
(335,391)
(98,585)
—
—
—
—
—
—
(87,654)
(44,152)
(698,580)
—
$ (698,580)
ASSET
$
84,563
32,811
198,166
14,269
240,117
209,466
20,954
230,427
82,074
13,491
—
92,205
1,218,543
(69,061)
$ 1,149,482
LIABILITY
$
(76,918)
(17,517)
(295,150)
(81,156)
—
—
—
—
—
—
(72,557)
(17,809)
(561,107)
—
$ (561,107)
The valuation allowances recorded at December 31, 2004 and 2003 relate primarily to net operating loss carr yfor wards and capital
loss carr yfor wards. No additional valuation allowances have been recorded on the net deferred income tax assets of
$380,588,000 and $588,375,000 at December 31, 2004 and 2003, respectively, as the Company expects to generate adequate
taxable income in the applicable tax jurisdictions in future years.
At December 31, 2004, the Company had net operating loss carryforwards available to offset future taxable income in the United States
and cer tain foreign jurisdictions, which expire as follows:
IN THOUSANDS
GROSS NET OPERATING LOSS CARRYFORWARDS
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Do not expire
$
983
4,821
2,467
33,052
4,460
3,090
4,368
5,078
7,181
2,638
2,199
1,370
4,713
29,517
1
13,002
7,503
1
24,119
94,629
619,948
$ 865,140
58
ID_Financials
3/5/05
1:55 PM
Page 59
Income from Continuing Operations Per Share is computed by dividing income from continuing operations by the weighted average
number of shares outstanding for the period. Income from continuing operations per diluted share is computed by dividing income
from continuing operations by the weighted average number of shares assuming dilution for stock options and restricted stock.
Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised
and the unvested restricted stock vested during the period. The computation of income from continuing operations per share was
as follows:
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2004
2003
$ 1,339,605
$ 1,040,214
Income from continuing operations per share—Basic:
Weighted average common shares
2002
$
931,810
302,376
307,069
306,157
Income from continuing operations per share—Basic
$ 4.43
$ 3.39
$ 3.04
Income from continuing operations per share—Diluted:
Weighted average common shares
Effect of dilutive stock options and restricted stock
302,376
2,475
307,069
1,681
306,157
1,888
Weighted average common shares assuming dilution
304,851
308,750
308,045
$ 4.39
$ 3.37
$ 3.02
Income from continuing operations per share—Diluted
Options that had exercise prices greater than the average market price of the common shares are considered antidilutive and were
not included in the computation of diluted income from continuing operations per share. The antidilutive options outstanding as of
December 31, 2004, 2003 and 2002 were as follows:
Weighted average shares issuable under antidilutive options
Weighted average exercise price per share
2004
2003
2002
191,975
$ 94.15
26,085
$ 79.35
915
$ 68.13
Discontinued Operations—In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer
Products segment. The segment was comprised of the following businesses: Precor specialty exercise equipment, West Bend small
appliances and premium cookware, and Florida Tile ceramic tile. The consolidated financial statements for all periods present these
businesses as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. On October 31, 2002, the
sales of Precor and West Bend were completed, resulting in cash proceeds of $211,193,000. On November 7, 2003, the sale of
Florida Tile was completed, resulting in cash proceeds of $11,450,000. The Company’s net loss on disposal of the segment was
as follows:
PRETAX GAIN
(LOSS)
IN THOUSANDS
Realized gains on 2002 sales of Precor and West Bend
Estimated loss on 2003 sale of Florida Tile recorded in 2002
AFTER-TAX
GAIN (LOSS)
$ 146,240
(123,874)
$ 51,604
(31,636)
$ 94,636
(92,238)
22,366
(752)
(28,784)
19,968
(256)
(10,348)
2,398
(496)
(18,436)
Estimated net gain on disposal of the segment deferred at December 31, 2002
Gain adjustments related to 2002 sales of Precor and West Bend recorded in 2003
Additional loss on sale of Florida Tile recorded in 2003
Adjustments to Florida Tile loss on sale recorded in 2004
TAX PROVISION
(BENEFIT)
$
(7,170)
263
9,364
1,174
(16,534)
(911)
(6,907)
$ 10,538
$ (17,445)
Results of the discontinued operations for the years ended December 31, 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
2003
2002
Operating revenues
$
—
$ 102,194
$ 344,419
Operating income (loss)
$
—
$
(4,003)
$ 10,804
Net income (loss) from discontinued operations
Amount charged against reser ve for Florida Tile operating losses
$
—
—
$
(4,027)
4,027
$
Income from discontinued operations (net of 2002 tax provision of $8,096)
Loss on disposal of the segment (net of 2004 and 2003 tax provisions of $1,174
and $9,364, respectively)
—
$
—
(911)
(16,534)
(911)
$ (16,534)
As of December 31, 2004 and 2003, there were no assets or liabilities remaining from the discontinued operations.
59
2,672
—
2,672
—
$
2,672
ID_Financials
3/5/05
1:55 PM
Page 60
Cash and Equivalents included interest-bearing instruments of $203,796,000 at December 31, 2004 and $1,281,492,000 at
December 31, 2003. Interest-bearing instruments have maturities of 90 days or less and are stated at cost, which approximates market.
Trade Receivables were net of allowances for uncollectible accounts. The changes in the allowances for uncollectible accounts during
2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
2003
2002
Beginning balance
Provision charged to expense
Write-offs, net of recoveries
Other
$ (62,364)
(391)
14,236
(4,285)
(3,401)
$ (66,158)
(8,875)
17,987
(2,851)
(2,467)
$ (61,065)
(21,696)
21,996
(3,437)
(1,956)
Ending balance
$ (56,205)
$ (62,364)
$ (66,158)
Inventories at December 31, 2004 and 2003 were as follows:
IN THOUSANDS
2004
Raw material
Work-in-process
Finished goods
$
2003
385,036
118,052
778,068
$
286,550
102,267
603,162
$ 1,281,156
$
991,979
Inventories are stated at the lower of cost or market and include material, labor and factor y overhead. The last-in, first-out (“LIFO”)
method is used to determine the cost of the inventories of a majority of the U.S. operations. Inventories priced at LIFO were 34% and
35% of total inventories as of December 31, 2004 and 2003, respectively. The first-in, first-out (“FIFO”) method, which approximates
current cost, is used for all other inventories. If the FIFO method was used for all inventories, total inventories would have been
approximately $126,774,000, and $93,511,000 higher than repor ted at December 31, 2004 and 2003, respectively.
Plant and Equipment are stated at cost less accumulated depreciation. Renewals and improvements that increase the useful life
of plant and equipment are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation was $294,162,000 in 2004, $282,277,000 in 2003 and $277,819,000 in 2002, and was reflected primarily in cost
of revenues. Depreciation of plant and equipment for financial repor ting purposes is computed principally on an accelerated basis.
The range of useful lives used to depreciate plant and equipment is as follows:
Equipment leased to others
10–50 years
3–20 years
Term of lease
Investments as of December 31, 2004 and 2003 consisted of the following:
IN THOUSANDS
Leases of equipment
Prepaid for ward contract
2004
2003
$ 380,465
302,487
93,200
75,333
22,868
27,040
11,090
$ 325,435
284,042
103,388
47,487
32,689
25,767
13,550
$ 912,483
$ 832,358
Mortgage Investments
In 1995, 1996 and 1997, the Company, through its investments in separate mor tgage entities, acquired pools of mor tgage-related
assets in exchange for aggregate nonrecourse notes payable of $739,705,000, preferred stock of subsidiaries of $60,000,000
and cash of $240,000,000. The mortgage-related assets acquired in these transactions relate to office buildings, apartment buildings
and shopping malls located throughout the United States. In conjunction with these transactions, the mortgage entities simultaneously
60
ID_Financials
3/5/05
1:55 PM
Page 61
entered into ten-year swap agreements and other related agreements whereby a third party receives the portion of the interest and
net operating cash flow from the mor tgage-related assets in excess of $26,000,000 per year and a por tion of the proceeds from
the disposition of the mor tgage-related assets and principal repayments, in exchange for the third par ty making the contractual
principal and interest payments on the nonrecourse notes payable. In addition, in the event that the pools of mor tgage-related
assets do not generate interest and net operating cash flow of $26,000,000 a year, the Company has the right to receive the shortfall
from the cash flow generated by three separate pools of mor tgage-related assets (owned by third par ties in which the Company
has minimal interests), which the swap counter party has estimated to have a total fair value of approximately $1,100,000,000 at
December 31, 2004. The mortgage entities entered into the swaps and other related agreements in order to reduce their real estate,
credit and interest rate risks relative to the mor tgage-related assets and related nonrecourse notes payable.
As of December 31, 2004 and December 31, 2003, the book value of the assets held by the mor tgage entities was as follows:
IN THOUSANDS
Cash on hand from dispositions
Real estate (24 and 37 proper ties, respectively)
Mor tgage loans (4 and 5 loans, respectively)
Other assets
2004
2003
$ 459,470
348,004
78,766
8,389
$ 89,703
646,269
79,820
8,343
$ 894,629
$ 824,135
Assuming all assets become wor thless and the swap counterpar ty defaults, the Company’s maximum exposure to loss related to
the mor tgage entities is limited to its investment of $380,465,000 at December 31, 2004.
On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative
to its investments in the mor tgage entities. FIN 46 requires consolidation of variable interest entities in which a company has a
controlling financial interest, even if it does not have a majority voting interest. A company is deemed to have a controlling financial
interest in a variable interest entity if it has either the majority of the risk of loss or the majority of the residual returns. Upon its
adoption of FIN 46 for the mor tgage investments as of July 1, 2003, the Company deconsolidated its investments in the mor tgage
entities as the Company neither bears the majority of the risk of loss nor enjoys the majority of any residual returns.
No gain or loss was recognized in connection with this change in accounting. The Company recorded its investments in the mor tgage
entities as of July 1, 2003 on a net carr yover basis, as follows:
IN THOUSANDS
Mor tgage-related assets
Current por tion of nonrecourse notes payable
Long-term por tion of nonrecourse notes payable
Accrued interest on nonrecourse notes payable
Current por tion of deferred mor tgage investment income
Noncurrent por tion of deferred mor tgage investment income
$ 978,755
(41,606)
(507,063)
(9,849)
(30,724)
(74,433)
Net book value of mor tgage investments as of July 1, 2003
$ 315,080
In 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (“FIN 46R”). The adoption of FIN 46R had no impact on the Company.
Star ting in the third quar ter of 2003 and for subsequent periods, the Company accounts for its net investments in the mor tgage
entities using the equity method of accounting as provided in Statement of Position 78-9, Accounting for Investments in Real Estate
Ventures. Under this method, the net mor tgage investments are adjusted through income for changes in the Company’s share of
the net assets of the mor tgage entities. The excess of the liquidation value of the investments in the mor tgage entities over their
net book value as of July 1, 2003 of $178,333,000 is being recognized as income over the remaining term of each of the investments.
The remaining amount of this excess liquidation value over book value at December 31, 2004 and December 31, 2003 was as follows:
IN THOUSANDS
Mor tgage transaction ending December 31, 2005
Mor tgage transaction ending December 31, 2006
Mor tgage transaction ending Februar y 28, 2008
61
2004
2003
$ 25,243
35,307
28,964
$ 59,998
56,079
40,293
$ 89,514
$ 156,370
ID_Financials
3/5/05
1:55 PM
Page 62
Prior to the adoption of FIN 46 for the mor tgage investments as of July 1, 2003, the principal mor tgage-related assets were
accounted for as follows:
Commercial mortgage loans—Interest income was recorded based on the effective yield determined at the inception
of the commercial mor tgage transactions. The Company evaluated whether the commercial mor tgage loans had been
impaired by reviewing the discounted estimated future cash flows of the loans versus the carr ying value of the loans.
If the carr ying value exceeded the discounted cash flows, an impairment loss was recorded through the operating
income of the Leasing and Investments segment. Interest income was recognized on impaired mor tgage loans based
on the original effective yield of the loans. Loans that were foreclosed were transferred to commercial real estate at
carr ying value.
Commercial real estate—Recorded at cost and depreciated on a straight-line basis over an estimated useful life of
39 years. At least annually, the real estate assets were evaluated for impairment by comparing estimated future
undiscounted cash flows to the carr ying values. If the undiscounted future cash flows were less than the carr ying
value, an impairment loss was recorded equal to the difference between the estimated fair value and the carr ying
value of the impaired asset. Gains and losses were recorded on the sale of the real estate assets through the
operating income of the Leasing and Investments segment based on the proceeds of the sale compared with the
carr ying value of the asset sold.
Net swap receivables—Recorded at fair value, based on the estimated future cash flows discounted at current market
interest rates. All estimated future cash flows were provided by the swap counter par ty, who also is the ser vicer of
the mor tgage loans and real estate. Market interest rates for the swap inflows were based on the current market yield
of a bond of the swap counter party. Discount rates for the swap outflows were based on an estimate of risk-adjusted
rates for real estate assets. Any adjustments to the carr ying value of the net swap receivables due to changes in
expected future cash flows, discount rates or interest rates were recorded through the operating income of the
Leasing and Investment segment.
Leases of Equipment
The components of the investment in leases of equipment at December 31, 2004 and 2003 were as shown below:
IN THOUSANDS
2004
Leveraged, direct financing and sale type leases:
Gross lease contracts receivable, net of nonrecourse debt ser vice
Estimated residual value of leased assets
Unearned income
Equipment under operating leases
2003
$ 166,646
255,119
(122,486)
$ 171,102
255,538
(145,734)
299,279
280,906
3,208
3,136
$ 302,487
$ 284,042
Deferred tax liabilities related to leveraged and direct financing leases were $245,723,000 and $151,414,000 at December 31,
2004 and 2003, respectively.
The investment in leases of equipment at December 31, 2004 and 2003 relates to the following types of equipment:
IN THOUSANDS
Telecommunications
Air traffic control
Aircraft
Manufacturing
Railcars
62
2004
2003
$ 193,306
61,757
44,020
3,404
—
$ 181,370
51,395
45,388
5,390
499
$ 302,487
$ 284,042
ID_Financials
3/5/05
1:55 PM
Page 63
In 2003, the Company entered into a leveraged lease transaction related to air traffic control equipment in Australia with a cash
investment of $48,763,000. In 2002, the Company entered into leveraged leasing transactions related to mobile telecommunications
equipment with two major European telecommunications companies with a cash investment of $144,676,000. Under the terms of
the telecommunications and air traffic control lease transactions, the lessees have made upfront payments to creditworthy third party
financial institutions that are acting as payment under takers. These payment under takers are obligated to make the required
scheduled payments directly to the nonrecourse debt holders and to the lessors, including the Company. In the event of default by
the lessees, the Company can recover its net investment from the payment under takers. In addition, the lessees are required to
purchase residual value insurance from a creditwor thy third par ty at a date near the end of the lease term.
The components of the income from leveraged, direct financing and sales-type leases for the years ended December 31, 2004,
2003 and 2002 were as shown below:
IN THOUSANDS
2004
Lease income before income taxes
Impairment charge on aircraft leases
Investment tax credits recognized
Income tax benefit (expense)
2003
2002
$ 24,326
—
296
(9,014)
$ 27,059
—
612
(10,077)
$ 26,731
(31,565)
(548)
2,258
$ 15,608
$ 17,594
$ (3,124)
Unearned income is recognized as lease income over the life of the lease based on the effective yield of the lease. The residual
values of leased assets are estimated at the inception of the lease based on market appraisals and reviewed for impairment at
least annually. In 2002, an impairment charge of $31,565,000 was recorded related to the Company’s investments in aircraft
leased to United Airlines, which declared bankruptcy in December 2002.
Other Investments
The Company has entered into several affordable housing limited par tnerships primarily to receive tax benefits in the form of tax
credits and tax deductions from operating losses. These affordable housing investments are accounted for using the effective yield
method, in which the investment is amor tized to income tax expense as the tax benefits are received. The tax credits are credited
to income tax expense as they are allocated to the Company.
The Company entered into a venture capital limited par tnership in 2001 that invests in late-stage venture capital oppor tunities.
The Company has committed to total capital contributions to this par tnership of $100,000,000 over a five-year period. The
Company has a 25% limited par tnership interest and accounts for this investment using the equity method, whereby the Company
recognizes its propor tionate share of the par tnership’s income or loss. The par tnership’s financial statements are prepared on a
mark-to-market basis.
Proper ties held for sale are former manufacturing or office facilities located primarily in the United States that are no longer used
by the Company’s operations and are currently held for sale. These proper ties are recorded at the lower of cost or market.
The Company’s investment in the prepaid for ward contract was initially recorded at cost. Interest income is being accrued for this
contract based on the effective yield of the contract.
The Company has invested in proper ty developments with a residential construction developer through par tnerships in which the
Company has a 50% interest. These par tnership investments are accounted for using the equity method, whereby the Company
recognizes its propor tionate share of the par tnerships’ income or loss.
The property development partnerships and affordable housing limited partnerships in which the Company has invested are considered
variable interest entities under FIN 46R. Because the Company neither bears the majority of the risk of loss nor enjoys the majority
of any residual returns relative to these variable interest entities, the Company was not required to consolidate the entities upon its
adoption of FIN 46R. The Company has continued to account for the proper ty development investments using the equity method
and the affordable housing investments using the effective yield method as described above. The Company’s maximum exposure
to loss related to these investments is $26,840,000 and $93,200,000, respectively, as of December 31, 2004.
63
ID_Financials
3/5/05
1:55 PM
Page 64
Cash Flows and Non-Cash Transactions
Cash flows related to investments during 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
Cash used to purchase investments:
Leveraged leases of equipment
Other
Cash proceeds from investments:
Venture capital
Leases of equipment
Other
2003
2002
$ (28,449)
(449)
(28,007)
(3,918)
(3,619)
$ (53,581)
(48,763)
(26,069)
(3,830)
(993)
$ (29,065)
(152,253)
(11,872)
(1,402)
(149)
$ (64,442)
$(133,236)
$(194,741)
$ 26,187
13,810
19,428
8,041
17,888
58
$ 26,000
19,584
—
9,767
3,929
229
$ 26,467
20,810
—
16,755
13,609
139
$ 85,412
$ 59,509
$ 77,780
There were no material non-cash transactions in 2004. The Company’s only material non-cash transactions during 2003 and 2002
relate to the debt service on the nonrecourse notes payable of the mortgage entities, which was paid by the mortgage swap counter
par ty, as follows:
IN THOUSANDS
2003
2002
Payments by mor tgage swap counter par ty—
Principal
Interest
$ 20,803
19,295
$ 31,066
40,201
$ 40,098
$ 71,267
Non-cash interest expense
$ 18,696
$ 39,629
The principal and interest amounts for 2003 above only reflect activity for the first half of 2003 as a result of the adoption of FIN
46 relative to the mor tgage investments as of July 1, 2003.
Goodwill and Intangible Assets—Goodwill represents the excess cost over fair value of the net assets of purchased businesses.
Effective Januar y 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”). Under SFAS 142, the Company does not amortize goodwill and intangible assets that have indefinite
lives. SFAS 142 also requires that the Company assess goodwill and intangible assets with indefinite lives for impairment at least
annually, based on the fair value of the related repor ting unit or intangible asset. The Company per forms its annual impairment
assessment in the first quar ter of each year.
As the first step in the SFAS 142 implementation process, the Company assigned its recorded goodwill and intangible assets as
of Januar y 1, 2002 to approximately 300 of its 600 repor ting units based on the operating unit that includes the business acquired.
Then, the fair value of each reporting unit was compared to its carrying value. Fair values were determined by discounting estimated
future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows were based either on current
operating cash flows or a detailed cash flow forecast prepared by the relevant operating unit. If the fair value of an operating unit
was less than its carr ying value, an impairment loss was recorded for the difference between the fair value of the unit’s goodwill
and intangible assets and the carr ying value of those assets.
Based on the Company’s initial impairment testing, goodwill was reduced by $254,582,000 and intangible assets were reduced
by $8,234,000, and a net after-tax impairment charge of $221,890,000 ($0.72 per diluted share) was recognized as a cumulative
effect of change in accounting principle in the first quar ter of 2002. The impairment charge was related to approximately
40 businesses and primarily resulted from evaluating impairment under SFAS 142 based on discounted cash flows, instead of
using undiscounted cash flows as required by the previous accounting standard.
64
ID_Financials
3/5/05
1:55 PM
Page 65
Other than the cumulative effect of change in accounting principle discussed above, amor tization and impairment of goodwill and
other intangible assets for the years ended December 31, 2004, 2003, and 2002 were as follows:
IN THOUSANDS
2004
Goodwill:
Impairment
Intangible Assets:
Amor tization
Impairment
2003
2002
702
$ 7,877
37,409
10,220
19,813
3,761
20,056
—
$ 59,121
$ 24,276
$ 27,933
$ 11,492
$
In the first quar ter of 2004, the Company per formed its annual impairment testing of its goodwill and intangible assets, which
resulted in impairment charges of $21,712,000. The first quar ter 2004 goodwill impairment charges of $11,492,000 were
primarily related to a European automotive components business and a U.S. electrical components business, and resulted from
lower estimated future cash flows than previously expected. Also in the first quar ter of 2004, intangible asset impairments of
$10,220,000 were recorded to reduce to estimated fair value the carr ying value of trademarks and brands related primarily to
several U.S. welding components businesses, a U.S. industrial packaging business in the Specialty Systems—North America segment
and a U.S. business that manufactures clean room mats in the Engineered Products—Nor th America segment.
In the first quar ter of 2003, the Company per formed its annual impairment testing of its goodwill and intangible assets, which
resulted in impairment charges of $4,463,000. The 2003 goodwill impairment charge of $702,000 was related to a U.S. welding
components business and primarily resulted from lower estimated future cash flows than previously expected. Also in the first quarter
of 2003, intangible asset impairment charges of $3,761,000 were recorded to reduce to estimated fair value the carr ying value
of trademarks and brands related to several U.S. welding components businesses in the Specialty Systems—North America segment
and a U.S. business that manufactures clean room mats in the Engineered Products—Nor th America segment.
In the four th quar ter of 2002, an impairment charge of $7,877,000 was recognized to reduce to estimated fair value the carr ying
value of goodwill related to five businesses. The impairment charge primarily related to the goodwill of industrial packaging businesses
in Australia and Asia, which was tested for impairment because actual results were lower than previously forecasted results.
The changes in the carr ying amount of goodwill by segment for the years ended December 31, 2004 and December 31, 2003 were
as follows:
IN THOUSANDS
Balance, December 31, 2002
2003 activity:
Acquisitions
Impairment write-offs
Foreign currency translation
Intersegment goodwill transfers
ENGINEERED
PRODUCTS
NORTH AMERICA
$
$
(14,386)
—
(44)
—
2004 activity:
Acquisitions
Impairment write-offs
Intersegment goodwill transfers
541,590
ENGINEERED
PRODUCTS
INTERNATIONAL
65
592,078
$
849,213
TOTAL
606,154
$ 2,394,519
664,254
17,348
—
137
(5,083)
$
SPECIALTY
SYSTEMS
INTERNATIONAL
32,975
—
22,734
2,391
836,811
93,762
(8,492)
15,998
7,754
$
805,299
34,480
(702)
125
(2,391)
483,056
103,300
(3,000)
468
(7,000)
620,928
$
13,934
—
27,646
—
527,160
$
441,476
SPECIALTY
SYSTEMS
NORTH AMERICA
20,842
—
1,409
4,329
$
690,834
67,003
(702)
50,461
—
2,511,281
235,252
(11,492)
18,012
—
$ 2,753,053
ID_Financials
3/5/05
1:55 PM
Page 66
Intangible assets as of December 31, 2004 and December 31, 2003 were as follows:
2004
IN THOUSANDS
COST
Amor tizable Intangible Assets:
Trademarks and brands
$
Customer lists and relationships
Patents and proprietar y technology
Noncompete agreements
Software
Other
Indefinite-lived Intangible Assets:
Trademarks and brands
Total Intangible Assets
68,353
112,315
117,285
80,562
51,123
97,686
81,387
$ 608,711
ACCUMULATED
AMORTIZATION
$
(8,489)
(14,015)
(55,021)
(47,115)
(5,472)
(38,597)
—
$(168,709)
2003
NET
COST
$ 59,864
98,300
62,264
33,447
45,651
59,089
$ 39,891
55,049
103,982
74,569
—
52,280
81,387
89,607
$ 440,002
$ 415,378
ACCUMULATED
AMORTIZATION
$
(3,982)
(6,293)
(46,620)
(36,980)
—
(33,921)
—
$(127,796)
NET
$ 35,909
48,756
57,362
37,589
—
18,359
89,607
$ 287,582
Intangible assets are being amor tized primarily on a straight-line basis over their estimated useful lives of three to 20 years.
The estimated amor tization expense of intangible assets for the future years ending December 31 is as follows:
IN THOUSANDS
2005
2006
2007
2008
2009
$ 47,168
44,992
41,385
35,571
26,995
Other Assets as of December 31, 2004 and 2003 consisted of the following:
IN THOUSANDS
Prepaid pension assets
Cash surrender value of life insurance policies
Investment in unconsolidated affiliates
Other
2004
2003
$ 402,045
266,581
21,720
123,805
$ 312,312
221,884
31,419
113,908
$ 814,151
$ 679,523
Retirement Plans and Postretirement Benefits—The Company has both funded and unfunded defined benefit pension plans. The
major domestic plan covers substantially all of its U.S. employees and provides benefits based on years of service and final average
salar y. The Company also has other postretirement benefit plans covering substantially all of its U.S. employees. The primary
postretirement health care plan is contributory with the participants’ contributions adjusted annually. The postretirement life insurance
plans are noncontributor y.
The Company has various defined benefit pension plans in foreign countries, predominantly the United Kingdom, Germany, Canada
and Australia.
The Company uses a September 30 measurement date for the majority of its plans.
Summarized information regarding the Company’s significant defined benefit pension and postretirement health care and life insurance
benefit plans is as follows:
PENSION
IN THOUSANDS
2004
Components of net periodic benefit cost:
Ser vice cost
$ 78,991
Interest cost
82,518
Expected return on plan assets
(118,024)
Amor tization of prior
ser vice cost (income)
(2,304)
Amor tization of actuarial loss
5,074
Amor tization of transition amount
(139)
Settlement/cur tailment (gain) loss
59
Net periodic benefit cost
$ 46,175
2003
2002
$ 70,168
77,606
(102,536)
$ 58,222
78,695
(104,945)
(2,345)
3,555
(893)
381
(4,030)
741
(899)
819
$ 45,936
66
$ 28,603
OTHER POSTRETIREMENT BENEFITS
2004
$ 13,471
34,666
(3,466)
2003
$ 12,613
31,302
(1,280)
6,736
5,595
—
—
6,601
926
—
—
$ 57,002
$ 50,162
2002
$ 15,902
29,868
—
6,675
536
—
(3,272)
$ 49,709
ID_Financials
3/5/05
1:55 PM
Page 67
PENSION
IN THOUSANDS
2004
Change in benefit obligation as of September 30:
Benefit obligation at beginning of period
Ser vice cost
Interest cost
Plan par ticipants’ contributions
Amendments
Medicare subsidy impact
Actuarial (gain) loss
Acquisitions/Divestitures
Benefits paid
Liabilities (to) from other plans
2003
2004
2003
$ 1,447,024
78,991
82,518
2,244
(15)
—
32,428
4,442
(97,053)
(777)
39,454
$ 1,237,348
70,168
77,606
1,949
435
—
114,834
—
(96,712)
78
41,318
$ 587,256
13,471
34,666
13,983
—
(30,465)
(33,238)
9,145
(48,706)
—
—
$ 485,741
12,613
31,302
12,414
(210)
—
79,376
11,568
(45,548)
—
—
$ 1,589,256
$ 1,447,024
$ 546,112
$ 587,256
$ 1,200,435
158,133
1,228
205,223
2,244
(97,053)
(4,456)
25,820
$
$ 36,192
2,360
—
61,375
13,983
(48,706)
—
—
$
Fair value of plan assets at end of period
$ 1,491,574
$ 1,200,435
$ 65,204
$ 36,192
Funded status
Unrecognized net actuarial loss
Unrecognized prior ser vice cost (income)
Unrecognized net transition amount
Contributions after measurement date
Other immaterial plans
$
(97,682)
352,439
(10,819)
2,220
8,171
(12,228)
$ (246,589)
354,190
(13,250)
(656)
88,240
(13,348)
$(480,908)
66,924
58,998
—
43,515
(2,028)
$(551,064)
136,543
65,734
—
36,148
—
Net amount recognized
$
242,101
$
$(313,499)
$(312,639)
$
$
Benefit obligation at end of period
Change in plan assets as of September 30:
Fair value of plan assets at beginning of period
Actual return on plan assets
Acquisitions
Company contributions
Plan par ticipants’ contributions
Benefits paid
Assets to other plans
992,709
181,257
—
98,103
1,949
(96,712)
(1,459)
24,588
168,587
The amounts recognized in the statement of financial position as of December 31 consisted of:
Prepaid benefit cost
$ 379,909
$ 288,323
Accrued benefit liability
(212,296)
(191,068)
Intangible asset for minimum pension liability
22,136
23,989
Accumulated other comprehensive loss for minimum
pension liability
52,352
47,343
Net amount recognized
$
Accumulated benefit obligation for all significant defined
benefit pension plans
242,101
$ 1,399,725
$
168,587
$ 1,295,647
Plans with accumulated benefit obligation in excess of plan assets as of September 30:
Projected benefit obligation
$ 288,393
$ 254,341
Accumulated benefit obligation
$
268,836
$
241,772
Fair value of plan assets
$
94,263
$
80,365
$
5,009
$
Increase (decrease) in minimum liability included in other
comprehensive income
67
(6,124)
—
(313,499)
—
—
$(313,499)
—
4,172
—
65,154
12,414
(45,548)
—
—
—
(312,639)
—
—
$(312,639)
ID_Financials
3/5/05
1:55 PM
Page 68
Assumptions
The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:
PENSION
Weighted-average assumptions
used to determine benefit
obligation at September 30:
Discount rate
Rate of compensation increases
Weighted-average assumptions used
to determine net cost for years
ended December 31:
Discount rate
Expected return on plan assets
Rate of compensation increases
2004
2003
2002
2004
2003
2002
5.67%
4.35%
5.90%
4.32%
6.44%
4.43%
5.75%
—
6.00%
—
6.60%
—
5.90%
7.99%
4.32%
6.44%
8.06%
4.43%
7.05%
7.97%
4.42%
6.00%
7.00%
—
6.60%
7.00%
—
7.25%
—
—
The expected long-term rate of return for pension plans was developed using historical returns while factoring in current market
conditions such as inflation, interest rates and equity per formance. The expected long-term rate of return for the postretirement
health care plans was developed from the major domestic pension plan rate less 100 basis points.
Assumed health care cost trend rates have an effect on the amounts repor ted for the postretirement health care benefit plans.
The assumed health care cost trend rates used to determine the postretirement benefit obligation at September 30 were as follows:
Health care cost trend rate assumed for the next year
Ultimate trend rate
Year that the rate reaches the ultimate trend rate
2004
2003
2002
10.00%
5.00%
2009
10.00%
5.00%
2008
11.00%
5.00%
2008
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGEPOINT INCREASE
IN THOUSANDS
Effect on total of ser vice and interest cost components for 2004
Effect on postretirement benefit obligation at September 30, 2004
$ 1,043
$ 15,819
1-PERCENTAGE
POINT DECREASE
$ (890)
$(13,595)
Plan Assets
The target asset allocation and weighted-average asset allocations for the Company’s significant pension plans at September 30,
2004 and 2003 were as follows:
PERCENTAGE OF PLAN ASSETS AT SEPTEMBER 30
ASSET CATEGORY
TARGET ALLOCATION
Equity securities
Debt securities
Real estate
Other
60% –75%
20% –35%
0% – 1%
0% –10%
2004
2003
67%
30%
1%
2%
100%
68%
29%
1%
2%
100%
The Company’s overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of growing
plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessar y risk, the
pension funds are diversified across several asset classes, securities and investment managers with a focus on total return. The
use of derivatives for the purpose of speculation, leverage, circumventing investment guidelines or taking risks that are inconsistent
with specified guidelines is prohibited.
The assets in the Company’s postretirement health care plans are invested in life insurance policies. The Company’s overall investment
strategy for the assets in the postretirement healthcare fund is to invest in assets that provide a reasonable rate of return while
preser ving capital and which are exempt from federal income taxes.
68
ID_Financials
3/5/05
1:55 PM
Page 69
Cash Flows
The Company generally funds its pension plans to the extent such contributions are tax deductible. The Company expects to contribute
$104,000,000 to its pension plans and $72,200,000 to its other postretirement benefit plans in 2005.
The Company’s por tion of the benefit payments that are expected to be paid during the years ending December 31 is as follows:
IN THOUSANDS
2005
2006
2007
2008
2009
Years 2010–2014
PENSION
BENEFITS
OTHER
POSTRETIREMENT
BENEFITS
$ 117,930
120,760
127,096
137,633
143,816
809,128
$ 38,111
40,472
42,803
45,016
47,147
264,858
In addition to the above pension benefits, the Company sponsors defined contribution retirement plans covering the majority of its
U.S. employees. The Company’s contributions to these plans were $27,220,000 in 2004, $24,745,000 in 2003 and $25,029,000
in 2002.
Short-Term Debt as of December 31, 2004 and 2003 consisted of the following:
IN THOUSANDS
Bank overdrafts
Commercial paper
Current maturities of long-term debt
Other borrowings by foreign subsidiaries
2004
2003
$ 33,937
134,982
4,149
30,455
$ 25,535
—
3,510
27,049
$ 203,523
$ 56,094
Commercial paper is issued at a discount and generally matures 30 to 90 days from the date of issuance. The weighted average
interest rate on commercial paper was 2.4% at December 31, 2004.
The weighted average interest rate on other borrowings by foreign subsidiaries was 2.0% at December 31, 2004 and 1.7% at
December 31, 2003.
In 2004, the Company entered into a $400,000,000 Line of Credit Agreement with a termination date of June 17, 2005. No
amounts were outstanding under this facility at December 31, 2004.
Accrued Expenses as of December 31, 2004 and 2003 consisted of accruals for:
IN THOUSANDS
Compensation and employee benefits
Rebates
Warranties
Current por tion of postretirement benefit obligation
Current por tion of affordable housing capital obligations
Other
2004
2003
$ 363,929
101,248
79,020
38,111
20,017
357,055
$ 337,991
74,431
69,415
38,111
14,765
336,237
$ 959,380
$ 870,950
2003
2002
The changes in accrued warranties during 2004, 2003 and 2002 were as follows:
IN THOUSANDS
2004
Beginning balance
Charges
Provision charged to expense
$ 69,415
(47,760)
57,365
$ 58,861
(49,423)
59,977
$ 55,493
(31,561)
34,929
Ending balance
$ 79,020
$ 69,415
$ 58,861
69
ID_Financials
3/5/05
1:55 PM
Page 70
Long-Term Debt at December 31, 2004 and 2003 consisted of the following:
IN THOUSANDS
6.875% notes due November 15, 2008
5.75% notes due March 1, 2009
6.55% preferred debt securities due December 31, 2011
Other borrowings
2004
2003
$ 149,929
499,343
249,705
26,270
$ 149,911
500,110
249,672
24,177
925,247
(4,149)
Current maturities
$ 921,098
923,870
(3,510)
$ 920,360
In 1998, the Company issued $150,000,000 of 6.875% notes at 99.228% of face value. The effective interest rate of the notes
is 6.9%. The quoted market price of the notes exceeded the carr ying value by approximately $15,974,000 at December 31, 2004
and $22,578,000 at December 31, 2003.
In 1999, the Company issued $500,000,000 of 5.75% redeemable notes at 99.281% of face value. The effective interest rate of
the notes is 5.8%. The quoted market price of the notes exceeded the carr ying value by approximately $34,552,000 at December
31, 2004 and $50,133,000 at December 31, 2003. In December 2002, the Company entered into an interest rate swap with a
notional value of $100,000,000 to hedge a por tion of the fixed-rate debt. Under the terms of the swap, the Company receives
interest at a fixed rate of 5.75% and pays interest at a variable rate of LIBOR plus 1.96%. The variable interest rate under the
swap was 4.36% at December 31, 2004 and 3.13% at December 31, 2003. The maturity date of the interest rate swap is March
1, 2009. The carr ying value of the 5.75% notes has been adjusted to reflect the fair value of the interest rate swap.
In 2002, a subsidiar y of the Company issued $250,000,000 of 6.55% preferred debt securities at 99.849% of face value. The
effective interest rate of the preferred debt securities is 6.7%. The estimated fair value of the securities exceeded the carr ying
value by approximately $32,988,000 at December 31, 2004 and $36,246,000 at December 31, 2003.
In 2003, the Company entered into a $350,000,000 revolving credit facility with a termination date of June 20, 2008. No amounts
were outstanding under this facility at December 31, 2004.
The Company’s debt agreements’ financial covenants limit total debt, including guarantees, to 50% of total capitalization. The
Company’s total debt, including guarantees, was 14% of total capitalization as of December 31, 2004, which was in compliance
with these covenants.
Other debt outstanding at December 31, 2004, bears interest at rates ranging from 2.2% to 12.0%, with maturities through the
year 2027.
Scheduled maturities of long-term debt for the years ending December 31 are as follows:
IN THOUSANDS
2006
2007
2008
2009
$
2,440
1,316
150,832
499,988
266,522
$ 921,098
In connection with forming joint ventures, the Company has provided debt guarantees of $32,000,000 and $31,000,000
at December 31, 2004 and 2003, respectively. As of December 31, 2004, the Company has recorded liabilities related to these
guarantees of $16,000,000.
At December 31, 2004, the Company had open stand-by letters of credit of $97,000,000, substantially all of which expire in 2005.
At December 31, 2003, the Company had open stand-by letters of credit of $66,000,000, substantially all of which expired in 2004.
70
ID_Financials
3/5/05
1:55 PM
Page 71
Other Noncurrent Liabilities at December 31, 2004 and 2003 consisted of the following:
IN THOUSANDS
Postretirement benefit obligation
Pension benefit obligation
Other
2004
2003
$ 275,388
212,296
74,640
60,000
32,700
297,231
$ 274,528
191,068
103,073
60,000
28,580
252,523
$ 952,255
$ 909,772
In connection with each of the three commercial mor tgage transactions, various subsidiaries of the Company issued $20,000,000
of preferred stock. Dividends on this preferred stock are cumulative and accrue at a rate of 6% on the first $20,000,000 issuance
and 7.3% on the second and third $20,000,000 issuances. The accrued dividends are recorded as an operating expense of the
Leasing and Investments segment. The redemption dates for the three issuances are Januar y 1, 2016, December 12, 2016 and
December 23, 2017, respectively.
In 2001, the Company committed to two new affordable housing limited par tnership investments. In connection with the formation
and financing of these limited partnerships, the affordable housing limited partnerships borrowed the full amount of funds necessary
for their affordable housing projects from a third par ty financial institution. The excess cash of $126,760,000 was distributed to
the Company in 2001 and will be repaid to the limited par tnerships via capital contributions as the limited par tnerships require the
funds for their affordable housing projects.
The noncurrent por tion of the Company’s capital contributions to the affordable housing limited par tnerships are expected to be
paid as follows:
IN THOUSANDS
2006
2007
2008
2009
$ 16,237
13,703
13,722
14,092
16,886
$ 74,640
Other than the capital contributions above, the Company has no future obligations, guarantees or commitments to the affordable
housing limited par tnerships.
Commitments and Contingencies—The Company is subject to various legal proceedings and claims that arise in the ordinar y
course of business, including those involving environmental, tax, product liability (including toxic tor t) and general liability claims.
The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably
estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters and its
experience in contesting, litigating and settling other similar matters. The Company believes resolution of these matters, individually
and in the aggregate, will not have a material adverse effect on the Company’s financial position, liquidity or future operations.
Among the toxic tor t cases in which the Company is a defendant, the Company as well as its subsidiaries Hobar t Brothers Company
and Miller Electric Mfg. Co., have been named, along with numerous other defendants, in lawsuits alleging injur y from exposure
to welding rod fumes. The plaintiffs in these suits claim unspecified damages for injuries resulting from the plaintiffs’ alleged
exposure to asbestos, manganese and/or toxic fumes in connection with the welding process. Based upon the Company’s experience
in litigating these claims, the Company believes that the resolution of these proceedings will not have a material adverse effect on
the Company’s financial position, liquidity or future operations. The Company has not recorded any significant reserves related to
these cases.
Wilsonar t International, Inc. (“Wilsonar t”), a wholly owned subsidiar y of ITW, is a defendant in a consolidated class action lawsuit
filed in 2000 in federal district cour t in White Plains, New York on behalf of purchasers of high-pressure laminate. The complaint
alleges that Wilsonar t par ticipated in a conspiracy with competitors to fix, raise, maintain or stabilize prices for high-pressure
laminate between 1994 and 2000 and seeks injunctive relief and treble damages. Indirect purchasers of high-pressure laminate
filed similar purpor ted class action cases under various state antitrust and consumer protection statutes in 13 states and the
District of Columbia, all of which cases have been stayed pending the outcome of the consolidated class action. These lawsuits
were brought following the commencement of a federal grand jury investigation into price-fixing in the high-pressure laminate industry,
71
ID_Financials
3/5/05
1:55 PM
Page 72
which investigation was subsequently closed by the Depar tment of Justice with no fur ther proceedings and with all documents being
returned to the par ties. Plaintiffs are seeking damages in the range of $439,000,000 to $475,000,000 before trebling. Without
admitting liability, two of Wilsonar t’s co-defendants, International Paper Company and Panolam International, Inc., have settled the
federal consolidated class action case for $31,000,000 and $9,500,000, respectively. The plaintiffs’ claims against Formica
Corporation, the remaining co-defendant in the case, were dismissed with prejudice as a result of its bankruptcy proceedings on
September 27, 2004. As a result, Wilsonar t is the sole remaining defendant in the consolidated class action lawsuit. While no
assurances can be given regarding the ultimate outcome or the timing of the resolution of these claims, the Company believes that
the plaintiffs’ claims are without merit and intends to continue to defend itself vigorously in this action and all related actions that
are now pending or that may be brought in the future. The Company has not recorded any reser ves related to this case.
Preferred Stock, without par value, of which 300,000 shares are authorized, is issuable in series. The Board of Directors is authorized
to fix by resolution the designation and characteristics of each series of preferred stock. The Company has no present commitment
to issue its preferred stock.
Common Stock, with a par value of $.01, Additional Paid-In-Capital and Common Stock Held in Treasury transactions during
2004, 2003 and 2002 are shown below:
COMMON STOCK
ADDITIONAL
PAID-IN-CAPITAL
AMOUNT
AMOUNT
305,169,742
During 2002—
Shares issued for stock options
1,687,489
Shares surrendered on exercise of stock options
(31,604)
Tax benefits related to stock options
—
Amor tization of restricted stock grants
—
Net shares issued for restricted stock grants
—
$ 3,052
$ 675,856
306,825,627
During 2003—
1,369,741
and vesting of restricted stock
(97,554)
Tax benefits related to stock options and
restricted stock
—
Escrow shares returned from prior acquisitions
(8,847)
788,258
Amor tization of restricted stock grants
—
3,068
308,877,225
During 2004—
2,146,718
and vesting of restricted stock
(201,639)
Tax benefits related to stock options and
restricted stock
—
Shares issued for acquisitions
19,257
531,997
Amor tization of restricted stock
—
—
3,089
825,924
(240,740)
(1,648)
22
97,607
(27,867)
(2,568)
(2)
(18,518)
27,867
2,568
—
—
5
—
—
39,624
1,628
162
32,514
—
—
—
11,019
—
(18,915,473)
—
—
76
—
(1,729,806)
$ 3,114
$ 978,941
(19,145,194)
$ (1,731,378)
IN THOUSANDS EXCEPT SHARES
SHARES
311,373,558
Authorized, December 31, 2004
350,000,000
16
—
—
—
—
46,594
(2,229)
27,328
193
36
COMMON STOCK HELD IN TREASURY
SHARES
(243,336)
AMOUNT
$
(1,666)
(2,380)
2,380
—
—
600
(162)
162
—
—
4
747,778
(242,736)
(1,662)
14
47,896
(8,911)
(644)
(1)
(7,552)
8,911
644
—
—
8
—
20,684
(664)
5
17,777
—
—
1,996
—
—
—
14
—
On April 19, 2004 the Company’s Board of Directors authorized a stock repurchase program, which provides for the buy back of
up to 31,000,000 shares. As of December 31, 2004, the Company had repurchased 18,915,473 shares of its common stock for
$1,729,806,000 at an average price of $91.45 per share.
72
ID_Financials
3/5/05
1:55 PM
Page 73
Cash Dividends declared were $1.04 per share in 2004, $.94 per share in 2003, and $.90 per share in 2002. Cash dividends
paid were $1.00 per share in 2004, $.93 per share in 2003 and $.89 per share in 2002.
Comprehensive Income is defined as the changes in equity during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and
distributions to owners. The Company’s components of other comprehensive income are shown below:
CUMULATIVE
TRANSLATION
ADJUSTMENTS
IN THOUSANDS
Balance, Januar y 1, 2002
Current period change
MINIMUM
PENSION
LIABILITY
$(401,925)
135,144
$
TOTAL
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
—
(35,595)
$(401,925)
99,549
(266,781)
407,811
(35,595)
4,376
(302,376)
412,187
141,030
306,653
(31,219)
(3,049)
109,811
303,604
$ 447,683
$ (34,268)
$ 413,415
Stock-Based Compensation—Stock options have been issued to officers and other management employees under ITW’s 1996
Stock Incentive Plan. The stock options generally vest over a four-year period and have a maturity of ten years from the issuance
date. At December 31, 2004, 18,429,691 shares of ITW common stock were reser ved for issuance under this plan. Option prices
are 100% of the common stock fair market value on the date of grant.
The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (“APB 25”), using the intrinsic value method, which does not require that compensation cost be
recognized for stock options. The Company’s net income and net income per share would have been reduced if compensation cost
related to stock options had been determined based on fair value at the grant dates in accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). The pro forma net income effect of applying
SFAS 123 was as follows:
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2004
2003
2002
Net income as repor ted
Add: Restricted stock recorded as expense, net of tax
Deduct: Total stock-based employee compensation expense, net of tax
$ 1,338,694
23,757
(61,282)
$ 1,023,680
11,789
(35,569)
$ 712,592
—
(25,199)
Pro forma net income
$ 1,301,169
$
999,900
$ 687,393
$ 3.33
3.26
3.32
3.24
$ 2.33
2.25
2.31
2.23
Net income per share:
Basic—as repor ted
Basic—pro forma
Diluted—as repor ted
Diluted—pro forma
$ 4.43
4.30
4.39
4.27
In 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (“SFAS 123R”). The Company is required to adopt SFAS 123R in the third quar ter of 2005. SFAS 123R
requires the Company to measure the cost of employee ser vices received in exchange for an equity award based on the grant date
fair value. The cost will be recognized as an expense in financial statements over the period during which an employee is required
to provide service. SFAS 123R supersedes SFAS 123 and APB 25. The Company anticipates that the future impact on diluted earnings
per share upon adoption of SFAS 123R will be comparable to the 2004 amount of 12 cents per share disclosed above.
On January 2, 2004 and 2003, the Company granted 553,981 and 792,158 shares of restricted stock, respectively, to domestic key
employees. The weighted-average grant-date fair value was $88.32 and $66.34 for 2004 and 2003, respectively. Compensation
expense related to these grants is being recorded over the three-year vesting period as follows:
IN THOUSANDS
JANUARY 2, 2004
JANUARY 2, 2003
TOTAL
2003
2004
2005
2006
$
—
15,223
15,223
15,222
$ 17,438
16,902
16,902
—
$ 17,438
32,125
32,125
15,222
Total
$ 45,668
$ 51,242
$ 96,910
73
ID_Financials
3/5/05
1:55 PM
Page 74
The restricted shares will vest only if the employee is actively employed by the Company on the vesting date, and unvested shares are
for feited upon retirement, death or disability, unless the Compensation Committee of the Board of Directors determines other wise.
The restricted shares carr y full voting and dividend rights until the stock is for feited or sold.
The estimated fair value of the options granted during 2004 was calculated using a binomial option pricing model. Previous grants
were valued using the Black-Scholes option-pricing model. The following summarizes the assumptions used in the models:
Risk-free interest rate
Expected stock volatility
Dividend yield
Expected years until exercise
2004
2003
2002
3.7%
24.6%
1.15%
5.5
4.2%
27.6%
1.09%
6.0
4.1%
28.4%
1.05%
5.7
Stock option activity during 2004, 2003 and 2002 is summarized as follows:
2004
NUMBER
OF SHARES
WEIGHTED AVERAGE
EXERCISE PRICE
WEIGHTED AVERAGE
EXERCISE PRICE
12,106,919
279,664
(1,378,652)
(44,663)
WEIGHTED AVERAGE
EXERCISE PRICE
10,963,268
2,395,832
(2,174,585)
(27,688)
Under option at end of year
11,156,827
65.79
10,963,268
55.65
12,106,919
52.74
7,778,285
7,272,864
56.90
8,405,885
9,943,499
53.45
7,995,212
8,169,706
48.75
$ 21.99
$ 52.74
81.21
35.22
58.47
2002
NUMBER
OF SHARES
Under option at beginning of year
Granted
Exercised
Canceled or expired
Exercisable at year-end
Available for grant at year-end
Weighted average fair value of
options granted during the year
$ 55.65
94.24
46.08
60.91
2003
NUMBER
OF SHARES
13,469,604
357,580
(1,689,869)
(30,396)
$ 25.65
$ 49.26
65.70
27.69
56.71
$ 20.47
The following table summarizes information on stock options outstanding as of December 31, 2004:
OPTIONS OUTSTANDING
RANGE OF
EXERCISE PRICES
$ 14.57–31.43
33.38–46.59
54.03–65.69
72.30–94.26
NUMBER
OUTSTANDING
2004
375,734
521,652
7,586,520
2,672,921
11,156,827
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL LIFE
OPTIONS EXERCISABLE
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER
EXERCISABLE
2004
WEIGHTED AVERAGE
EXERCISE PRICE
years
years
years
years
$ 28.01
41.28
59.80
92.88
375,734
521,652
6,804,002
76,897
$ 28.01
41.28
59.43
80.43
6.52 years
65.79
7,778,285
56.90
1.04
3.67
5.82
9.84
Segment Information—Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, requires that segment information be repor ted based on the way the segments are organized within the
Company for making operating decisions and assessing per formance.
The Company has approximately 650 operations in 45 countries, which are aggregated and organized for internal reporting purposes
into the following five segments:
Engineered Products—Nor th America : Businesses in this segment are located in Nor th America and manufacture a variety of
shor t 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 par t of the customers’ products and typically are manufactured and delivered
in a time period less than 30 days.
Engineered Products—International : Businesses in this segment are located outside Nor th America and manufacture a variety of
shor t 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 par t of the customers’ products and typically are manufactured and delivered
in a time period less than 30 days.
74
ID_Financials
3/5/05
1:55 PM
Page 75
Specialty Systems—Nor th America : Businesses in this segment are located in Nor th America and design and manufacture longer
lead-time machiner y and related consumables, as well as specialty equipment for a diverse customer base. These commercially
oriented value-added products become par t of the customers’ processes and typically are manufactured and delivered in a time
period more than 30 days.
Specialty Systems—International : Businesses in this segment are located outside Nor th 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 par t of the customers’ production process and typically are manufactured and delivered in
a time period more than 30 days.
Leasing and Investments : Businesses in this segment make opportunistic investments in mortgage entities, leases of telecommunications, aircraft, air traffic control and other equipment, proper ties, affordable housing and a venture capital fund.
Segment information for 2004, 2003 and 2002 was as follows:
IN THOUSANDS
2004
Operating revenues:
Intersegment revenues
2003
2002
$ 3,314,093 $ 3,053,961 $ 3,034,734
2,465,941
1,873,767
1,566,387
3,862,556
3,365,219
3,357,504
2,375,189
1,967,630
1,693,042
148,791
152,585
181,570
(435,145)
(377,539)
(365,497)
Operating income:
Depreciation and amor tization and impairment of goodwill and intangible assets:
Plant and equipment additions:
Identifiable assets:
Corporate
Net assets of discontinued operations
$ 11,731,425
$ 10,035,623
$ 9,467,740
$
$
$
552,985
369,188
688,303
314,535
131,602
489,416
260,701
549,038
217,366
116,937
533,459
212,824
509,299
164,656
85,533
$ 2,056,613
$ 1,633,458
$ 1,505,771
$
103,451
92,986
89,249
67,332
265
$
92,855
66,706
90,025
56,904
63
$
102,788
57,080
90,820
54,355
709
$
353,283
$
306,553
$
305,752
$
69,399
75,923
81,079
56,159
—
$
81,672
64,195
57,862
54,583
—
$
82,619
63,786
71,233
53,751
35
$
282,560
$
258,312
$
271,424
$ 2,050,126
2,217,941
2,336,951
2,134,383
778,381
1,834,152
—
$ 1,753,085
1,753,691
2,185,964
1,923,661
735,202
2,841,718
—
$ 1,787,984
1,471,043
2,171,129
1,647,230
1,536,067
1,957,958
51,690
$ 11,351,934
$ 11,193,321
$ 10,623,101
Identifiable assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash
and equivalents and other general corporate assets.
75
ID_Financials
3/5/05
1:55 PM
Page 76
Enterprise-wide information for 2004, 2003 and 2002 was as follows:
IN THOUSANDS
Operating Revenues by Product Line:
Engineered Products—Nor th America—
Fasteners and Components
Specialty Products
Engineered Products—International—
Fasteners and Components
Specialty Products
Specialty Systems—Nor th America—
Equipment and Consumables
Specialty Equipment
Specialty Systems—International—
Equipment and Consumables
Specialty Equipment
Operating Revenues by Geographic Region:
United States
Europe
Australia
Asia
Other
2004
2003
2002
$ 2,569,355
744,738
$ 2,379,599
674,362
$ 2,392,882
641,852
$ 3,314,093
$ 3,053,961
$ 3,034,734
$ 2,048,426
417,515
$ 1,649,131
224,636
$ 1,364,274
202,113
$ 2,465,941
$ 1,873,767
$ 1,566,387
$ 2,432,976
1,429,580
$ 2,009,506
1,355,713
$ 1,919,057
1,438,447
$ 3,862,556
$ 3,365,219
$ 3,357,504
$ 1,560,372
814,817
$ 1,258,658
708,972
$ 1,079,018
614,024
$ 2,375,189
$ 1,967,630
$ 1,693,042
$ 6,608,900
3,521,832
557,513
537,114
506,066
$ 5,915,456
2,844,333
425,831
397,757
452,246
$ 5,941,602
2,421,747
357,348
333,939
413,104
$ 11,731,425
$ 10,035,623
$ 9,467,740
Operating revenues by geographic region are based on the location of the business unit that recorded the revenues.
Total noncurrent assets excluding deferred tax assets and financial instruments were $5,918,000,000 and $5,253,000,000 at
December 31, 2004 and 2003, respectively. Of these amounts, approximately 54% and 55% was attributed to U.S. operations for
2004 and 2003, respectively. The remaining amounts were attributed to the Company’s foreign operations, with no single countr y
accounting for a significant por tion.
76
ID_Financials
3/5/05
1:55 PM
Page 77
Quarterly and Common Stock Data
Quarterly Financial Data (Unaudited)
THREE MONTHS ENDED
MARCH 31
IN THOUSANDS
EXCEPT PER SHARE AMOUNTS
2004
2003
JUNE 30
2004
2003
SEPTEMBER 30
2004
DECEMBER 31
2003
2004
2003
Operating revenues
$2,710,349 $2,313,790 $3,002,271 $2,563,990 $2,967,168 $2,531,885 $3,051,637 $2,625,958
Cost of revenues
1,750,343
1,513,792
1,929,803
1,659,400
1,934,831
1,634,056
1,976,269
1,720,444
Operating income
447,642
321,000
561,536
454,066
512,238
426,676
535,197
431,716
290,025
199,484
360,350
284,045
330,051
269,776
359,179
286,909
Income (loss) from
discontinued operations
171
(4,107)
—
(7,941)
—
(874)
(1,082)
(3,612)
Net income
290,196
195,377
360,350
276,104
330,051
268,902
358,097
283,297
Income per share from
continuing operations:
Basic
.94
.65
1.17
.93
1.10
.88
1.22
.93
Diluted
.93
.65
1.16
.92
1.09
.87
1.21
.93
Net income per share:
Basic
.94
.64
1.17
.90
1.10
.88
1.22
.92
Diluted
.93
.63
1.16
.90
1.09
.87
1.21
.91
Common Stock Price and Dividend Data—The common stock of Illinois Tool Works Inc. is listed on the New York Stock Exchange
and the Chicago Stock Exchange. Quar terly market price and dividend data for 2004 and 2003 were as shown below:
HIGH
LOW
DIVIDENDS
DECLARED
PER SHARE
2004
Four th quar ter
Third quar ter
Second quar ter
First quar ter
$ 96.62
96.68
96.70
85.00
$ 87.48
86.20
78.52
74.51
$ .28
.28
.24
.24
2003
Four th quar ter
Third quar ter
Second quar ter
First quar ter
$ 84.70
74.00
68.27
68.02
$ 65.88
64.11
57.05
54.56
$ .24
.24
.23
.23
MARKET PRICE PER SHARE
The approximate number of holders of record of common stock as of Februar y 1, 2005, was 12,428. This number does not include
beneficial owners of the Company’s securities held in the name of nominees.
$1.2
100
1.0
80
0.8
60
0.6
40
0.4
20
0.2
0
0.0
94 95 96 97 98 99 00 01 02 03 04
94 95 96 97 98 99 00 01 02 03 04
DIVIDENDS DECLARED
PER SHARE
IN DOLLARS
MARKET PRICE AT YEAR-END
IN DOLLARS
77
ID_Financials
3/5/05
1:55 PM
Page 78
Eleven-Year Financial Summary
DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2004
2003
2002
Income:
Operating revenues
Operating income
Income from continuing operations before income taxes
Income taxes
Income (loss) from discontinued operations (net of tax)
Cumulative effect of changes in accounting principles (net of tax)
Net income
Net income per common share—assuming dilution:
Cumulative effect of changes in accounting principle
Net income
$
$
$
$
$
$
$
$
11,731,425
2,056,613
1,999,405
659,800
1,339,605
(911)
—
1,338,694
10,035,623
1,633,458
1,576,114
535,900
1,040,214
(16,534)
—
1,023,680
9,467,740
1,505,771
1,433,560
501,750
931,810
2,672
(221,890)
712,592
3.37
(0.05)
—
3.32
3.02
0.01
(0.72)
2.31
$
$
$
$
4.39
—
—
4.39
$
$
$
$
$
$
$
2,471,227
1,876,875
11,351,934
921,098
1,124,621
8,005,850
7,627,610
3,294,299
1,728,638
11,193,321
920,360
976,454
6,967,312
7,874,286
2,276,401
1,631,249
10,623,101
1,460,381
1,581,985
6,403,270
6,649,071
$ 1,334,883
$
304,581
$
1.00
$
1.04
$
282,560
$
294,162
$
59,121
1,169,938
285,399
0.93
0.94
258,312
282,277
24,276
1,095,112
272,319
0.89
0.90
271,424
277,819
27,933
Financial Position:
Net working capital
Net plant and equipment
Total assets
Long-term debt
Total debt
Total invested capital
Stockholders’ equity
Cash Flow:
Cash dividends paid
Dividends paid per share (excluding Premark)
Dividends declared per share (excluding Premark)
Plant and equipment additions
Depreciation
Financial Ratios:
Operating income margin
Return on operating revenues
Return on average stockholders’ equity
Book value per share
%
%
%
%
$
%
17.5
11.4
17.3
18.5
26.10
12.8
16.3
10.4
14.3
16.1
25.51
11.0
15.9
9.8
14.7
15.0
21.69
19.2
$
92.68
292,228
302,376
123,486
49,000
83.91
308,636
307,069
106,777
47,500
64.86
306,583
306,157
101,344
48,700
Other Data:
Market price per share at year-end
Shares outstanding at December 31
Weighted average shares outstanding
Research and development expenses
Employees at December 31
20%
$
25 %
$5
15
4
20
3
15
2
10
1
5
10
5
0
0
0
94 95 96 97 98 99 00 01 02 03 04
94 95 96 97 98 99 00 01 02 03 04
94 95 96 97 98 99 00 01 02 03 04
OPERATING INCOME MARGIN
IN PERCENT
INCOME FROM CONTINUING
OPERATIONS PER DILUTED SHARE
IN DOLLARS
RETURN ON AVERAGE
STOCKHOLDER’S EQUITY
IN PERCENT
78
ID_Financials
3/5/05
1:55 PM
2001
Page 79
2000
1999
1998
1997
1996
1995
1994
9,292,791
1,306,103
1,230,849
428,400
802,449
3,210
—
805,659
9,511,647
1,577,453
1,496,002
526,551
969,451
(11,471)
—
957,980
8,840,454
1,390,038
1,340,940
505,045
835,895
5,217
—
841,112
7,898,285
1,294,749
1,268,179
466,284
801,895
7,852
—
809,747
7,148,588
1,082,525
1,079,779
401,352
678,427
13,162
—
691,589
6,811,503
929,805
851,491
328,068
523,423
82,699
—
606,122
5,959,104
764,092
722,606
270,713
451,893
174,169
—
626,062
5,141,222
580,760
538,925
202,598
336,327
167,966
—
504,293
2.62
0.01
—
2.63
3.18
(0.04)
—
3.15
2.74
0.02
—
2.76
2.63
0.03
—
2.66
2.23
0.04
—
2.27
1.74
0.27
—
2.01
1.57
0.60
—
2.17
1.20
0.60
—
1.80
1,587,332
1,633,690
9,822,349
1,267,141
1,580,588
6,632,199
6,040,738
1,511,451
1,629,883
9,514,847
1,549,038
1,974,827
6,415,719
5,400,987
1,227,570
1,529,455
8,978,329
1,360,746
1,914,401
5,584,900
4,815,423
1,176,163
1,386,455
8,133,424
1,208,046
1,636,065
4,812,698
4,243,372
1,232,862
1,156,306
7,087,775
966,628
1,279,606
3,535,214
3,615,221
1,076,167
1,067,022
6,391,995
934,847
1,328,772
3,380,186
3,171,924
958,158
975,860
5,495,474
737,257
1,046,445
3,314,225
2,832,175
915,600
903,176
4,378,541
394,887
487,189
2,803,927
2,412,105
1,305,133
249,141
0.82
0.84
256,562
281,723
104,585
893,719
223,009
0.74
0.76
305,954
272,660
118,905
782,450
183,587
0.63
0.66
317,069
250,119
71,540
622,117
150,934
0.51
0.54
296,530
226,868
47,646
602,673
128,396
0.43
0.46
240,334
197,178
39,062
673,219
142,281
0.35
0.36
224,647
195,937
34,009
374,702
129,783
0.31
0.32
214,905
176,385
29,114
440,402
104,462
0.27
0.28
185,260
157,530
29,816
14.1
8.6
14.0
13.0
19.81
20.7
16.6
10.2
19.0
17.1
17.86
26.8
15.7
9.5
18.5
17.4
16.02
28.4
16.4
10.2
20.4
20.2
14.14
27.8
15.1
9.5
20.0
20.3
12.07
26.1
13.7
7.7
17.4
18.1
10.63
29.5
12.8
7.6
17.2
16.2
9.91
27.0
11.3
6.5
15.4
14.5
8.63
16.8
67.72
304,926
304,112
102,288
52,000
59.56
302,449
301,573
106,118
55,300
67.56
300,569
300,158
104,882
52,800
58.00
300,092
299,912
89,148
48,500
60.13
299,541
299,663
88,673
42,900
39.94
298,461
297,706
87,855
40,700
29.50
285,844
285,604
84,175
38,600
21.88
279,557
278,202
77,512
36,100
25 %
30 %
$1500
20
1200
15
900
10
600
5
300
0
0
25
20
15
10
5
0
94 95 96 97 98 99 00 01 02 03 04
94 95 96 97 98 99 00 01 02 03 04
94 95 96 97 98 99 00 01 02 03 04
RETURN ON AVERAGE
INVESTED CAPITAL
IN PERCENT
FREE OPERATING CASH FLOW
IN MILLIONS OF DOLLARS
TOTAL DEBT TO
TOTAL CAPITALIZATION
IN PERCENT
79
ID_Financials
3/5/05
1:55 PM
Page 80
CORPORATE EXECUTIVES
DIRECTORS
W. JAMES FARRELL
WILLIAM F. ALDINGER
39 Years of Ser vice
HSBC Nor th America Holdings Inc.
Director since 1998
FRANK S. PTAK
Vice Chairman
MICHAEL J. BIRCK
Chairman
Tellabs, Inc.
Director since 1996
DAVID B. SPEER
President
MARVIN D. BRAILSFORD
Lt. General (Ret.)
U.S. Army
Director since 1996
JACK R. CAMPBELL
Executive Vice President
SUSAN CROWN
RUSSELL M. FLAUM
Vice President
Henr y Crown and Company
Director since 1994
DAVID T. FLOOD
DON H. DAVIS, JR.
Retired Chairman
Rockwell Automation Inc.
Director since 2000
PHILIP M. GRESH, JR.
W. JAMES FARRELL
Director since 1995
THOMAS J. HANSEN
ROBERT C. McCORMACK
Advisor y Director
Trident Capital, Inc.
Director since 1993, previously 1978–1987
E. SCOTT SANTI
ROBERT S. MORRISON
Retired Vice Chairman
PepsiCo, Inc.
Director since 2003
CRAIG A. HINDMAN
HUGH J. ZENTMYER
HAROLD B. SMITH
Director since 1968
ROBERT T. CALLAHAN
Senior Vice President, Human Resources
Alec Huff
STEWART S. HUDNUT
PHOTOGRAPHY
Senior Vice President, General Counsel and Secretar y
JON C. KINNEY
ALLAN C. SUTHERLAND
Senior Vice President, Leasing and Investments
80
DESIGN
Smith Design Co. (Evanston, IL)
Senior Vice President and Chief Financial Officer
ID_cvr
3/5/05
2:16 PM
Page 2
Corporate Information
TRANSFER AGENT AND REGISTRAR
CORPORATE GOVERNANCE
Computershare Investor Ser vices, L.L.C.
2 Nor th LaSalle Street
Chicago, IL 60602
888.829.7424
On June 3, 2004, the Company’s Chairman and Chief Executive Officer
cer tified to the New York Stock Exchange (“NYSE”) that he is not
aware of any violation by the Company of the NYSE corporate governance
listing standards. The Company has provided cer tifications by the
Chairman and Chief Executive Officer and Senior Vice President and
Chief Financial Officer regarding the quality of the Company’s public
disclosure, as required by Section 302 of the Sarbanes-Oxley Act,
on Exhibit 31 in its Annual Repor t on Form 10-K.
AUDITORS
180 N. Stetson Avenue
Chicago, IL 60601
TRADEMARKS
COMMON STOCK
ITW common stock is listed on the New York Stock Exchange
and Chicago Stock Exchange. Symbol—ITW
Cer tain trademarks in this publication are owned or licensed by Illinois
Tool Works Inc. or its wholly owned subsidiaries.
HI-CONE RECYCLING
ANNUAL MEETING
Friday, May 6, 2005, 3:00 p.m.
The Nor thern Trust Company
50 South LaSalle Street
Chicago, IL 60675
For more information, please contact:
STOCK AND DIVIDEND ACTION
ITW HI-CONE
Effective with the October 18, 2004 payment, the quar terly
cash dividend on ITW common stock was increased
17 percent to 28 cents a share. This represents an increase
of 16 cents per share annually. ITW’s annual dividend payment
has increased 41 consecutive years, except during a period
of government controls in 1971.
1140 West Br yn Mawr Avenue
Itasca, IL 60413
Telephone: 630.438.5300
Visit our Web site at www.ringleader.com
DIVIDEND REINVESTMENT PLAN
The ITW Common Stock Dividend Reinvestment Plan enables
registered shareholders to reinvest the ITW dividends they receive
in additional shares of common stock of the Company at no
additional cost. Par ticipation in the plan is voluntar y, and
shareholders may join or withdraw at any time. The plan also
allows for additional voluntar y cash investments in any amount
from $100 to $10,000 per month. For a brochure and full details
of the program, please direct inquiries to:
Computershare Trust Company
Dividend Reinvestment Ser vice
P.O. Box A3309
Chicago, IL 60690-3309
888.829.7424
SHAREHOLDERS INFORMATION
Questions regarding stock ownership, dividend payments or change
of address should be directed to the Company’s transfer agent,
Computershare Investor Ser vices. Computershare Shareholders
Ser vice Depar tment may be reached at 888.829.7424.
For additional assistance regarding stock holdings, please contact
Doris Dyer, shareholder relations, 847.657.4077.
On the Cover:
Stamping foil provided by ITW Foils.
ITW Hi-Cone, manufacturer of recyclable multipack ring carriers, offers
assistance to schools, offices and communities interested in establishing
carrier collection programs.
Shareholder Relations may be reached at:
Glenview, IL 60026
Telephone: 847.724.7500
Facsimile: 847.657.4261
Security analysts and investment professionals
should contact the Company’s Vice President of
Investor Relations,
John L. Brooklier, 847.657.4104
or [email protected]
Outside the United States, contact:
ITW HI-CONE (ITW LIMITED)
Greenock Road, Slough Trading Estate, Slough,
Berkshire, SL1 4QQ, United Kingdom
Telephone: 44.1753.479980
ITW HI-CONE (ITW AUSTRALIA)
Unit 6, 1-7 Friars Road, Moorabbin,
Victoria 3189, Australia
Telephone: 61.3.9556.6300
ITW HI-CONE (ITW SPAIN)
Polg. Ind. Congost P-5, Naves 7-8-9,
08530 La Garriga, Barcelona, Spain
Telephone: 34.93.860.5020
SIGNODE PLASTIC STRAP RECYCLING AND
PET BOTTLE COLLECTION PROGRAMS
Some of Signode’s plastic strapping is made from post-consumer
strapping and PET beverage bottles. The Company has collection
programs for both these materials.
For more information about post-consumer strapping recycling and
post-consumer PET bottles (large volume only), please contact:
ITW SIGNODE
7080 Industrial Road
Florence, KY 41042
Telephone: 859.342.6400
INTERNET HOME PAGE
www.itw.com
ID_cvr
3/5/05
2:16 PM
Page 1
Glenview, Illinois 60026
ITW Annual Repor t 2004
ILLINOIS TOOL WORKS INC.
2004 ANNUAL REPORT
How do you grow a diversified manufacturer with some 650 companies worldwide?
Discipline

2004 Annual Report - Investor Relations | ITW

Transcription

Similar documents

Food Equipment: A Growth Platform Presentation

Antoine-Louis Barye (1796 - French 1875)

Origin of our Participants

Holland Park - Yeronga by SA2

2010 TSC CAFR REVISED - Texas Southmost College

Yellow Pages Limited Investor Presentation – June 2015

2000 Annual Report - Investor Relations | ITW

ZGKB FS

ITW Formex® Brochure

- Greencore

100 YEARS STRONG - Investor Relations | ITW