Illinois Tool Works - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 1-4797

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code) 847-724-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

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

Part I – Financial Information

Item 1 – Financial Statements

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

FINANCIAL STATEMENTS

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company” or “ITW”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s Annual Report on Form 10-K/A. Certain reclassifications of prior year data have been made to conform with current year reporting.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF INCOME

(UNAUDITED)

(In thousands except for per share amounts)

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

(In thousands)

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS

(UNAUDITED)

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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

(In thousands)

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

(In thousands)

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

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

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

(In thousands)

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

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

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

(In thousands)

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

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

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

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

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

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

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

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

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

(9)       STOCKHOLDERS' EQUITY

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

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

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

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

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

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

Item 2 - Management’s Discussion and Analysis

CONSOLIDATED RESULTS OF OPERATIONS

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

(Dollars in thousands)

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

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

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

ENGINEERED PRODUCTS - NORTH AMERICA

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

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

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

(Dollars in thousands)

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

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

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

ENGINEERED PRODUCTS - INTERNATIONAL

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

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

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

(Dollars in thousands)

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

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

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

SPECIALTY SYSTEMS - NORTH AMERICA

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

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

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

(Dollars in thousands)

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

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

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

SPECIALTY SYSTEMS - INTERNATIONAL

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

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

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

(Dollars in thousands)

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