UNITED STATES

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.

Yes x           No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x           No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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).

Yes [ ]       No x

 

The number of shares of registrant’s common stock, $0.01 par value, outstanding at July 31, 2009: 500,145,460.

 

Part I – Financial Information

 

Item 1 – Financial Statements

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF INCOME (UNAUDITED)

 

 

The Notes to Financial Statements are an integral part of these statements.

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION (UNAUDITED)

 

 

The Notes to Financial Statements are an integral part of these statements.

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS (UNAUDITED)

 

The Notes to Financial Statements are an integral part of these statements.

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

 

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). 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. Events that occurred after June 30, 2009 through the time that these financial statements have been filed on August 7, 2009 with the Securities and Exchange Commission were considered in the preparation of these financial statements. These financial statements should be read in conjunction with the financial statements and notes to financial statements included in the Company’s Annual Report on Form 10-K. Certain reclassifications of prior year data have been made to conform with current year reporting.

 

 

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

 

 

 

The Company periodically reviews its 895 operations for businesses which may no longer be aligned with its long-term objectives. In August 2008, the Company’s Board of Directors authorized the divestiture of the Click Commerce industrial software business which was previously reported in the All Other segment. In the second quarter of 2009, the Company completed the sale of the Click Commerce business.

 

In the fourth quarter of 2007, the Company classified an automotive components business and a consumer packaging business as held for sale. The consumer packaging business was sold in the second quarter of 2008. The Company has sold the automotive components business in the third quarter of 2009.

 

The consolidated statements of income and the notes to financial statements have been restated to present the operating results of the held for sale and divested businesses as discontinued operations.

 

In May 2009, the Company’s Board of Directors rescinded a resolution from August 2008 to divest the Decorative Surfaces segment. The consolidated financial statements and related notes for all periods have been restated to present the results related to the Decorative Surfaces segment as continuing operations.

 

Results of the discontinued operations for the second quarter of 2009 and 2008 were as follows:

 

 

In 2009, the Company recorded a pre-tax loss on the disposal of the Click Commerce business of $29,827,000. Loss before taxes in 2008 includes goodwill impairment charges of $97,152,000 related to the Click Commerce business.

 

As of June 30, 2009, the assets and liabilities of a certain automotive components business were included in assets and liabilities held for sale. As of December 31, 2008, the Company had recorded the assets and liabilities of the Click Commerce business and a certain automotive components business as held for sale. The total assets and liabilities held for sale were as follows:

 

 

 

In the first half of 2009, the Company incurred significant charges related to the impairment of goodwill and intangible assets of $89,997,000 that were mostly non-deductible, and discrete tax items of $43,540,000 to record reserves on net operating loss carryforwards no longer expected to be utilized and other tax adjustments. The components of the effective tax rate for the six month period ended June 30, 2009 were as follows:

 

 

In the U.S., the Internal Revenue Service (IRS) has completed its audits for the years 2001-2003 and has proposed several adjustments for which the Company is negotiating a settlement, the most significant of which are related to leveraged leases and mortgage-backed securities. The Company has recorded its best estimate for these exposures. Management believes it is reasonably possible that within the next twelve months the matters presently under consideration for 2001-2003 with the IRS will be resolved and that the amount of the Company’s unrecognized tax benefits may decrease by approximately $271 million.

 

 

Inventories at June 30, 2009 and December 31, 2008 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 and intangible assets that have indefinite lives. In the first quarter of each year, the Company performs an annual impairment assessment of goodwill and intangible assets with indefinite lives based on the fair value of the related reporting unit or intangible asset.

 

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). The Company adopted the provisions of SFAS 157 on January 1, 2009 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and provides guidance for measuring fair value and the necessary disclosures.

 

When performing its annual goodwill impairment assessment, the Company compares the estimated fair value of each of its 63 reporting units to the carrying value. Fair values are determined primarily by discounting estimated future cash flows based either on current operating cash flows or on a detailed cash flow forecast prepared by the relevant reporting unit. The Company also considers additional valuation techniques, such as market multiples from similar transactions and quoted market prices of relevant public companies. If the fair value of a reporting unit is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of the reporting unit’s goodwill.

 

The Company’s indefinite-lived intangibles consist of trademarks and brands. The fair values of these intangibles are determined based on a relief-of-royalty income approach derived from internally forecasted revenues of the related products. If the fair value of the trademark or brand is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible.

 

In the first quarter of 2009, the Company performed its annual impairment testing of its goodwill and intangible assets with indefinite lives in compliance with the newly adopted provisions of SFAS 157 which resulted in goodwill impairment charges of $60,000,000 related to the pressure sensitive adhesive reporting unit in the Polymers & Fluids segment and $18,000,000 related to the PC board fabrication reporting unit in the Power Systems & Electronics segment.

 

The goodwill impairments were related to new reporting units which were acquired over the last few years. These charges were driven by lower than expected forecasts compared to results expected when the reporting units were acquired. Also in the first quarter 2009, intangible asset impairments of $11,997,000 were recorded to reduce to the estimated fair value the carrying value of trademarks and brands with indefinite lives. Approximately $5,800,000 of this charge related to the PC board fabrication reporting unit and the remainder to various trademarks and brands of other reporting units.

 

A summary of goodwill and indefinite-lived intangible assets that were adjusted to fair value and the related impairment charges included in earnings for the first quarter of 2009 is as follows:

 

 

 

Pension and other postretirement benefit costs for the periods ended June 30, 2009 and 2008 were as follows:

 

 

 

The Company expects to contribute $218,400,000 to its pension plans and $38,100,000 to its other postretirement plans in 2009. As of June 30, 2009, contributions of $41,100,000 to pension plans and $17,300,000 to other postretirement plans have been made.

 

 

In June 2008, the Company entered into a $1,500,000,000 Line of Credit Agreement with a termination date of June 12, 2009. In October 2008, the Company amended the Line of Credit Agreement in order to increase the line of credit to $2,500,000,000. This line of credit was replaced on June 12, 2009 by a $2,000,000,000 Line of Credit Agreement with a termination date of June 11, 2010. No amounts were outstanding under this facilities at June 30, 2009.

 

The Company had outstanding commercial paper of $121,997,000 at June 30, 2009 and $1,820,423,000 at December 31, 2008.

 

In 1999, the Company issued $500,000,000 of 5.75% redeemable notes due March 1, 2009. The balance related to these notes was repaid at maturity.

 

 

On March 23, 2009, the Company issued $800,000,000 of 5.15% redeemable notes due April 1, 2014 at 99.92% of face value and $700,000,000 of 6.25% redeemable notes due April 1, 2019 at 99.984% of face value. The effective interest rates of the notes are 5.2% and 6.3%, respectively.

 

The approximate fair value based on rates for comparable instruments and related carrying value of the Company’s long-term debt, including current maturities was as follows:

 

(In thousands)

 

 

On January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements. Upon adoption the Company reclassified the December 31, 2008 balance of $11,616,000 from other noncurrent liabilities to noncontrolling interest in stockholders’ equity.

 

 

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

 

In 2007, the Company classified two consumer packaging businesses, an automotive machinery business and an automotive components business as discontinued operations. Additionally, in 2008, the Company’s Board of Directors authorized the divestiture of the Click Commerce industrial software business which was previously reported in the All Other segment. The consolidated statements of income, statements of financial position, the notes to financial statements and management’s discussion and analysis for all periods have been restated to present the results related to all of these businesses as discontinued operations. See the Discontinued Operations note for further information on the Company’s discontinued operations.

 

In May 2009, the Company’s Board of Directors rescinded a resolution from August 2008 to divest the Decorative Surfaces segment. The consolidated financial statements, the notes to financial statements and management’s discussion and analysis for all periods have been restated to present the results related to the Decorative Surfaces segment as continuing operations.

 

The Company’s consolidated results of operations for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 25.5% and 24.7% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to lower base revenues and the unfavorable effect of currency translation, mainly due to a weaker Euro versus the Dollar, partially offset by revenues from acquisitions. Total base revenues declined 22.2% and 22.5% in the second quarter and year-to-date periods, respectively. North American base revenue declined 26.8% and 26.5%, in the second quarter and year-to-date periods, respectively, while international base revenues declined 17.3% and 18.1% in the same periods. Both North American and international base revenues were adversely affected by on-going and significant declines in macroeconomic trends and related weak industrial production. The Company anticipates that the current global economic environment will continue through 2009 and as such, expects that key end markets will continue to be negatively impacted.

 

Operating Income

Operating income declined 55.8% and 69.0% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the decline in base revenues, the negative effect of currency translation and increased restructuring expenses. In addition, in the first quarter of 2009 the Company recorded impairment charges of $78 million and $12 million against the goodwill and intangible assets, respectively. The goodwill impairments were primarily driven by the combination of lower forecasts and lower market multiples being paid for similar businesses. The higher restructuring expenses reflect the Company’s efforts to reduce costs in response to current economic conditions. Improvements in base variable margins and lower overhead costs increased margins 3.1% and 2.2% in the second quarter and year-to-date periods, respectively, as the benefits of past restructuring projects began to be realized and price versus cost comparisons were favorable. Total margins declined by 6.7% and 9.3% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the declines in base revenues, restructuring charges and the first quarter goodwill and intangible impairment charges.

 

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

 

 

INDUSTRIAL PACKAGING

 

Businesses in this segment produce steel, plastic and paper products used for bundling, shipping and protecting goods in transit.

 

 

This segment primarily serves the primary metals, general industrial, construction, and food and beverage markets.

 

The results of operations for the Industrial Packaging segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 35.9% and 34.2% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to lower base revenues and the unfavorable impact of currency translation. Base revenues declined 43.1% and 40.6% for the North American strapping businesses in the second quarter and year-to-date periods, respectively, largely due to declines in consumable and equipment volume in key end markets such as primary metals, construction-related materials and manufacturing. The international strapping businesses declined 28.9% and 27.6%, respectively. Both were adversely affected by the continued global decline in industrial production and construction industries. The worldwide stretch packaging businesses experienced declines in base revenues of 22.9% and 21.2% in the second quarter and year-to-date periods, respectively, while the protective packaging business declined 6.8% and 11.4% for the same periods both due to continuing weakness in worldwide industrial-based end markets.

 

Operating Income

Operating income decreased 82.8% and 91.7% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the negative leverage effect of the decline in base revenues described above, the negative effect of currency translation and higher restructuring expenses. Improvements in base variable margins and overhead costs increased margins 3.4% and 1.7% in the second quarter and year-to-date periods, respectively, as price versus cost comparisons were favorable and benefits of past restructuring projects began to be realized. Total operating margins declined by 9.7% and 10.6% in the second quarter and year-to-date periods, respectively, mainly due to the declines in base revenues.

 

POWER SYSTEMS & ELECTRONICS

 

Businesses in this segment produce equipment and consumables associated with specialty power conversion, metallurgy and electronics.

 

 

 

This segment primarily serves the general industrial, electronics and construction markets.

 

The results of operations for the Power Systems & Electronics segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues declined 38.6% and 35.5% in the second quarter and year-to-date periods of 2009, respectively, over 2008 mainly due to declines in base revenues and the negative effect of currency translation. The revenue decrease was partially offset by 2008 acquisitions including a welding equipment business and a PC board fabrication business. Worldwide base welding revenues declined 37.0% in the second quarter and 34.2% year-to-date. North American welding businesses declined 41.3% and 38.7% while international base businesses declined 26.4% and 21.9%, in the respective periods. Revenues fell as end market demand continued to decline across the broad spectrum of industries that this segment serves. Base revenues for the electronics businesses fell 33.3% and 38.8% in the second quarter and year-to-date periods while base revenues in the PC board fabrication businesses fell 59.2% and 57.6% in the same periods both due to the decline in consumer demand for electronics. Revenues in the ground support businesses increased 4.0% and 9.4% in the second quarter and year-to-date period, respectively, due to commercial and military airport infrastructure projects.

 

Operating Income

Operating income decreased 57.0% and 67.6% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the declines in base revenues described above, first quarter 2009 impairment charges, higher restructuring expenses and the negative effect of currency translation. Goodwill and intangible asset impairment charges of $18.0 million and $6.7 million, respectively, were incurred in the PC board fabrication and welding accessories businesses in the first quarter of 2009. Total operating margins declined by 6.6% and 10.8% in the second quarter and year-to-date periods, respectively, primarily due to the declines in base revenues, higher impairment charges and higher restructuring expense. Improvements in variable margins and overhead costs, including favorable price versus cost comparison, increased operating margins by 4.5% and 3.8% in the same periods.

 

TRANSPORTATION

 

Businesses in this segment produce components, fasteners, fluids and polymers, as well as truck remanufacturing and related parts and service.

 

 

This segment primarily serves the automotive original equipment manufacturers and tiers and automotive aftermarket markets.

 

The results of operations for the Transportation segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues declined 20.3% and 23.5% in the second quarter and year-to-date periods, respectively, versus 2008 primarily due to declines in base revenues and the unfavorable effect of currency translation. Acquisition revenue partially mitigated the base revenue decrease and was primarily related to the purchase of a North American truck remanufacturing and parts business in the third quarter of 2008. Worldwide automotive base revenues declined 30.5% and 37.8% in the second quarter and year-to-date periods, respectively, as automotive production continued to be weak. Automotive aftermarket declined 12.7%, in the second quarter and 11.5% year-to-date as a result of a continued decline in discretionary consumer spending. North American base revenues declined 39.5% and 43.1% in the second quarter and year-to-date periods, respectively, on declines of 49% and 50% in North American auto builds in the same periods. International base revenues declined 22.5% and 32.8% for the second quarter and year-to-date, respectively, on declines in car builds of 23% and 28%.

 

Operating Income

Operating income decreased 75.6% and 95.9% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to the decline in base revenues described above, the unfavorable effect of currency translation and higher restructuring costs. The increase in restructuring expense is primarily due to continued efforts to reduce costs in response to current economic conditions and the decline in worldwide automotive production. Total operating margins declined by 11.0% and 14.8% in the second quarter and year-to-date periods, respectively, primarily due to the dramatic decline in revenues described above.

 

Due to the severe deterioration in the North American automotive market, there is significant uncertainty about the ability of certain U.S. auto manufacturers and their suppliers to continue as going concerns. On April 30, 2009, Chrysler LLC filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Shortly thereafter, Chrysler LLC suspended production at most of its facilities while the company went through the bankruptcy process. Additionally, General Motors (“GM”) filed for bankruptcy protection on June 1, 2009.

 

Both GM and Chrysler have subsequently emerged from bankruptcy reorganization and Chrysler has resumed production. Management continues to monitor conditions in the automotive industry, but currently believes these reorganizations will not have a significant long term impact on the Company.

 

FOOD EQUIPMENT

 

Businesses in this segment produce commercial food equipment and related service.

 

 

This segment primarily serves the food institutional/restaurant, service and food retail markets.

 

The results of operations for the Food Equipment segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 16.2% and 15.8% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 primarily due to the decline in base business and the unfavorable effect of currency translation slightly offset by revenues from acquisitions. The acquired revenues were attributable to the acquisition of a European food equipment business in 2008. North American base revenues declined 8.4% and 11.1%, respectively, for the second quarter and year-to-date periods while international base revenues declined 10.2% and 7.9% in the same periods. Base revenues for the North American institutional/restaurant businesses declined 13.2% and 15.6% in the second quarter and year-to-date periods, respectively, as customers delayed equipment purchases. North American service revenues declined a more modest 1.1% and 2.1% in the second quarter and year-to-date periods as customers continued to maintain existing equipment.

 

Operating Income

Operating income declined 20.7% and 28.6% in the second quarter and year-to-date periods, respectively, primarily due to the decrease in base revenues described above and the unfavorable effect of currency translation. Total operating margins declined by 0.8% and 2.0% in the second quarter and year-to-date, respectively, primarily due to the decline in base revenues partially offset by margin gains due to lower operating costs including lower fuel costs, favorable product mix, and reduced headcount.

 

CONSTRUCTION PRODUCTS

 

Businesses in this segment produce tools, fasteners and other products for construction applications.

 

 

This segment primarily serves the residential construction, renovation construction and commercial construction markets.

 

The results of operations for the Construction Products segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues declined 34.5% and 33.8% in the second quarter and year-to-date periods of 2009 versus 2008 primarily as a result of the decline in base revenue and the unfavorable effect of currency translation. Base revenues for the North American, European and Asia-Pacific regions decreased 34.0%, 30.2% and 2.5%, respectively during the second quarter while declining 32.6%, 29.7% and 3.5% year-to-date. These declines in base revenues were the result of ongoing weakness in the residential and commercial construction markets in North America and Europe. North American housing starts declined 48% on an annualized basis in the second quarter. In addition, commercial construction activity fell 50% year-to-date. The European and Asia-Pacific regions continued to show weakening demand, primarily in the commercial construction category.

 

Operating Income

Operating income decreased 72.8% and 91.3%, respectively, in the second quarter and year-to-date periods of 2009, primarily due to the revenue decline described above. In addition, the unfavorable effect of currency translation, higher restructuring expenses and lower income from acquisitions contributed to the lower income and margins. Total margins declined 8.2% and 10.9% as reduced operating expenses, including benefits from past restructuring projects, were more than offset by the effect of lower revenues.

 

POLYMERS & FLUIDS

 

Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, and hygiene products.

 

 

This segment primarily serves the general industrial, construction, maintenance, repair and operations and automotive aftermarket markets.

 

The results of operations for the Polymers & Fluids segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 6.9% and 5.0% in the second quarter and year-to-date periods of 2009 versus the same 2008 periods primarily due to lower base revenues and the unfavorable effect of currency translation mostly offset by revenues from acquisitions. Acquisition revenue was primarily the result of the purchase of a pressure sensitive adhesives business and two construction adhesives businesses. Total base revenues declined 15.1% and 15.9% in the second quarter and year-to-date periods, respectively, primarily due to continued weakness in worldwide industrial production and MRO market demand. Worldwide base revenue for the fluids and polymers businesses declined 16.9% and 17.7% in the second quarter and year-to-date, respectively.

 

Operating Income

Operating income decreased 46.1% in the second quarter and 124.2% to a year-to-date loss primarily due to a $60.0 million goodwill impairment charge against the pressure sensitive adhesive businesses in the first quarter of 2009 and declines in base revenues. Base operating margins declined 1.6% and 2.8% as savings from prior period restructuring projects and favorable price versus cost comparisons were offset by the lower revenues. The first quarter 2009 goodwill impairment charge further reduced year-to-date margins by 12.9%. Additionally, acquisitions diluted margins 3.1% and 0.8% in the second quarter and year-to-date periods.

 

DECORATIVE SURFACES

 

Businesses in this segment produce decorative surfacing materials for countertops, flooring, furniture and other applications.

 

 

This segment serves the commercial construction, renovation construction, residential construction and general industrial markets.

 

The results of operations for the Decorative Surfaces segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 23.4% and 23.3% in the second quarter and year-to-date periods of 2009 versus 2008 due to lower base revenues and the unfavorable effect of currency translation. North American laminate base revenues declined 20.0% and 19.4% in the second quarter and year-to-date periods, respectively, as a result of the continued downturn in commercial and residential construction. These declines were partially offset by increased product penetration in the premium high definition laminate product segment. International base revenues declined 11.6% and 12.3% in the same periods due to European volume declines.

 

Operating Income

Operating income decreased 27.2% and 23.5% in the second quarter and year-to-date periods primarily due to the decline in revenues described above, higher restructuring expenses and the negative effect of currency translation. Improvements in base variable margins and lower overhead costs increased margins 5.3% and 5.8% in the second quarter and year-to-date periods, respectively, largely due to higher prices on premium products, lower raw material costs and benefits from prior restructuring expense.

 

ALL OTHER

 

This segment contains all other operating segments.

 

 

This segment primarily serves the general industrial, consumer durables, food and beverage and electronics markets.

 

The results of operations for the All Other segment for the second quarter and year-to-date periods of 2009 and 2008 were as follows:

 

 

 

In the second quarter and year-to-date periods of 2009, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

Operating Revenues

Revenues decreased 18.2% and 16.8% in the second quarter and year-to-date periods of 2009, respectively, versus 2008 due to the decline in base business revenues and the unfavorable effect of currency translation, partially offset by an increase in revenues from acquired companies. The increase in acquisition revenue was primarily due to the purchase of two test and measurement businesses. Base revenues declined in the second quarter 26.9%, 38.7%, 12.9% and 15.3% for the industrial plastics and metals, finishing, consumer packaging and test and measurement businesses, respectively, due to the effect of weak capital expenditure spending and a fall-off in end market demand across the broad spectrum of industries this segment serves. Year-to-date these declines were 27.3%, 31.8%, 14.0% and 14.2%, respectively.

 

Operating Income

Operating income declined 46.0% and 46.8% in the second quarter and year-to-date periods of 2009, respectively, primarily due to the decline in base revenues described above, the unfavorable effect of currency translation and higher restructuring expenses. Total operating margins declined by 6.8% in both periods primarily due to the lower margins for both base and acquired businesses. Base margins declined by 3.0% and 3.8% in the second quarter and year-to-date, respectively, as favorable price versus cost comparisons and gains from tight cost controls were offset by the impact of lower revenues.

 

AMORTIZATION AND IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

 

Amortization expense increased to $102.5 million in the first six months of 2009 versus $82.4 million in the first six months of 2008, due to intangible amortization related to newly acquired businesses in the second half of 2008.

 

Total goodwill and intangible asset impairment charges by segment for the six months ended June 30, 2009 and 2008 were as follows:

 

 

See the Goodwill and Intangible Assets note for further details of the impairment charges.

 

INTEREST EXPENSE

 

Interest expense increased to $75.3 million in the first six months of 2009 from $74.1 million in the first six months of 2008 due to interest on the 5.15% and 6.25% notes issued on March 23, 2009, partially offset by the 6.875% notes and 5.75% bonds repaid at maturity on November 17, 2008 and March 2, 2009, respectively, and lower commercial paper rates and borrowings.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) was expense of $24.2 million for the first six months of 2009 versus income of $3.2 million in 2008, primarily due to investment and currency translation losses in 2009 versus gains in 2008 and lower interest income in 2009, partially offset by a charge for German taxes in 2008.

 

INCOME TAXES

 

The effective tax rate for the first six months of 2009 was 47.67% compared to 29.19% for the first six months of 2008. The increase in the effective tax rate resulted primarily from the impairment of non-deductible goodwill and discrete tax adjustments in 2009.

 

INCOME FROM CONTINUING OPERATIONS

 

Income from continuing operations of $170.9 million ($0.34 per diluted share) in the first six months of 2009 was 81.5% lower than the 2008 income from continuing operations of $924.0 million ($1.75 per diluted share).

 

FOREIGN CURRENCY

 

The strengthening of the U.S. dollar against foreign currencies in 2009 decreased operating revenues for the first six months of 2009 by approximately $565 million and decreased income from continuing operations by approximately 7 cents per diluted share.

 

DISCONTINUED OPERATIONS

 

Loss from discontinued operations was $33.7 million in the first six months of 2009 compared to $92.3 million in 2008 primarily due to 2008 impairment of goodwill of $97.2 million versus the 2009 loss on sale of the Click Commerce industrial software business of $29.8 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidity are free operating cash flows and short-term credit facilities. The Company’s targeted debt-to-capital ratio is 20% to 30%, excluding the impact of any larger acquisitions.

 

The primary uses of liquidity are:

 

The Company believes that based on its current free operating cash flow, debt-to-capitalization ratios and credit ratings, it could readily obtain additional financing if necessary.

 

Cash Flow

 

Free operating cash flow is used by management to measure normal cash flow generated by operations that is available for dividends, acquisitions, share repurchases and debt repayment. Free operating cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies.

 

Summarized cash flow information for the second quarter of 2009 and 2008 was as follows:

 

 

On August 20, 2007 the Company's Board of Directors authorized a 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. There are approximately $1.2 billion of authorized repurchases remaining under this program.

 

Return on Average Invested Capital

 

The Company uses return on average invested capital (“ROIC”) to measure the effectiveness of its operations’ use of invested capital to generate profits. We believe that ROIC is a meaningful metric to investors and may be different than the method used by other companies to calculate ROIC. ROIC for the second quarter of 2009 and 2008 was as follows:

 

 

The ROIC decrease of 10.2% in the second quarter of 2009 was the result of after-tax operating income decreasing 58.9%, resulting from the current economic downturn, while average invested capital decreased 10.6%.

 

The ROIC decrease of 10.5% for year-to-date 2009 was the result of after-tax operating income decreasing 63.9%, resulting from the current economic downturn, while average invested capital decreased 7.8%.

 

In the first quarter of 2009, the Company incurred significant charges for the impairment of goodwill and intangible assets of $90.0 million that was mostly non-deductible and discrete tax adjustments of $28.0 million. Since these charges were unusual, the ROIC calculation has been adjusted to exclude these items to improve comparability and better reflect the return on invested capital for the 2009 year-to-date period presented above. A reconciliation of year-to-date operating income and the tax rate as reported to operating income after taxes and tax rate used above is as follows:

 

 

 

Working Capital

 

Net working capital at June 30, 2009 and December 31, 2008 is summarized as follows:

 

 

Short-term debt decreased primarily due to the pay down of commercial paper resulting from the issuance of $1.5 billion of long-term notes, cash repatriation to the U.S. from Europe and excess cash flow. Inventories decreased primarily as a result of lower purchase activity. Trade receivables decreased primarily due to lower revenues.

 

Debt

 

Total debt at June 30, 2009 and December 31, 2008 was as follows:

 

 

The Company had outstanding commercial paper of $122.0 million at June 30, 2009 and $1.8 billion at December 31, 2008.

 

In 1999, the Company issued $500.0 million of 5.75% redeemable notes due March 1, 2009. The balance related to these notes outstanding at December 31, 2008 was repaid at maturity.

 

On March 23, 2009, the Company issued $800.0 million of 5.15% redeemable notes due April 1, 2014 at 99.92% of face value and $700.0 million of 6.25% redeemable notes due April 1, 2019 at 99.984% of face value. The net proceeds from the offering were used to pay down the Company’s commercial paper balance.

 

In June 2008, the Company entered into a $1.5 billion Line of Credit Agreement with a termination date of June 12, 2009. In October 2008, the Company amended the Line of Credit Agreement in order to increase the line of credit to $2.5 billion. This line of credit was replaced on June 12, 2009 by a $2.0 billion Line of Credit Agreement with a termination date of June 11, 2010. No amounts were outstanding under this facility at June 30, 2009.

 

Stockholders’ Equity

 

The changes to stockholders’ equity during 2009 were as follows:

 

(In thousands)

 

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that may be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “guidance,” and other similar words, including, without limitation, the impact of bankruptcies of particular customers in the transportation business, the adequacy of internally generated funds and credit facilities, the meeting of dividend payout objectives, the ability to fund debt service obligations and expected contributions to the Company’s pension and postretirement plans. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) a further downturn in the construction, general industrial, automotive or food institutional/restaurant and service markets, (2) changes or deterioration in international and domestic business and economic conditions, particularly in North America, Europe, Asia or Australia, (3) the unfavorable impact of foreign currency fluctuations and costs of raw materials, (4) decreases in credit availability, (5) an interruption in, or reduction in, introducing new products into the Company’s product lines, (6) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates, and (7) unfavorable tax law changes and tax authority rulings. The risks covered here are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. A more detailed description of these risks is set forth in the Company’s Form 10-K for 2008.

 

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

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

INTEREST RATE RISK

 

The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt.

 

On March 23, 2009, the Company issued $800.0 million of 5.15% redeemable notes due April 1, 2014 at 99.92% of face value and $700.0 million of 6.25% redeemable notes due April 1, 2019 at 99.984% of face value. The estimated fair value of the 5.15% and 6.25% notes exceeded the carrying value by approximately $41.2 million and $50.9 million, respectively, at June 30, 2009.

 

Item 4 – Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e)) as of June 30, 2009. Based on such evaluation, the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, have concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures were effective.

 

In connection with the evaluation by management, including the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended June 30, 2009 were identified that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 4 – Submission of Matters to a Vote of Security Holders

 

The Company’s Annual Meeting of Stockholders was held on May 8, 2009. The following members were elected to the Company’s Board of Directors to hold office for the ensuing year:

 

 

The stockholder proposal urging the Board of Directors to seek stockholder approval of any future extraordinary retirement benefits for senior executives was defeated with 120,168,204 votes in favor, 275,336,964 votes against, and 5,903,029 votes abstained. There were 46,779,063 broker non-votes with respect to this proposal.

 

The appointment of Deloitte & Touche LLP as the Company’s independent public accountants was ratified with 444,280,892 votes in favor, 3,137,209 votes against, and 769,028 votes abstained.

 

Item 6 – Exhibits

 

Exhibit Index

 

 

* As provided in Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections.

 

 

SIGNATURES

 

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