UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

_______________________________________________________

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2008

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from _______________ to _______________

 

 

Commission File Number: 1-4797

 

ILLINOIS TOOL WORKS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

36-1258310

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

 

3600 West Lake Avenue, Glenview, IL

60026-1215

(Address of principal executive offices)

(Zip Code)

 

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

 

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

Yes x  No [ ]

 

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.

 

Large accelerated filer X

Accelerated filer ___

 

Non-accelerated filer ___ (Do not check if a smaller reporting company)

Smaller reporting company ___

 

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 June 30, 2008: 519,368,398.

 

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”). 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. Certain reclassifications of prior year data have been made to conform with current year reporting.

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF INCOME (UNAUDITED)

 

(In thousands except for per share amounts)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating Revenues

 

$

4,570,472

 

$

4,136,836

 

$

8,709,886

 

$

7,853,477

 

Cost of revenues

 

 

2,946,725

 

 

2,657,405

 

 

5,644,691

 

 

5,070,415

 

Selling, administrative, and research

 

 

 

 

 

 

 

 

 

 

 

 

 

and development expenses

 

 

822,435

 

 

744,056

 

 

1,602,895

 

 

1,439,032

 

Amortization of intangible assets

 

 

44,600

 

 

39,779

 

 

87,037

 

 

77,803

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

other intangible assets

 

 

 

 

 

 

98,590

 

 

2,154

 

Operating Income

 

 

756,712

 

 

695,596

 

 

1,276,673

 

 

1,264,073

 

Interest expense

 

 

(36,575

)

 

(25,607

)

 

(74,063

)

 

(49,986

)

Other income

 

 

24,233

 

 

22,025

 

 

2,835

 

 

37,079

 

Income from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Before Income Taxes

 

 

744,370

 

 

692,014

 

 

1,205,445

 

 

1,251,166

 

Income Taxes

 

 

215,900

 

 

211,578

 

 

375,600

 

 

385,717

 

Income from Continuing Operations

 

 

528,470

 

 

480,436

 

 

829,845

 

 

865,449

 

Income (Loss) from Discontinued

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

(380

)

 

25,170

 

 

1,866

 

 

42,592

 

Net Income

 

$

528,090

 

$

505,606

 

$

831,711

 

$

908,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Per Share from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$1.01

 

 

$0.86

 

 

$1.58

 

 

$1.55

 

Diluted

 

 

$1.01

 

 

$0.86

 

 

$1.57

 

 

$1.54

 

Income Per Share from Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$0.00

 

 

$0.05

 

 

$0.00

 

 

$0.08

 

Diluted

 

 

$0.00

 

 

$0.04

 

 

$0.00

 

 

$0.08

 

Net Income Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$1.01

 

 

$0.91

 

 

$1.59

 

 

$1.63

 

Diluted

 

 

$1.01

 

 

$0.90

 

 

$1.58

 

 

$1.61

 

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid

 

 

$0.28

 

 

$0.21

 

 

$0.56

 

 

$0.42

 

Declared

 

 

$0.28

 

 

$0.21

 

 

$0.56

 

 

$0.42

 

Shares of Common Stock Outstanding During the Period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

521,488

 

 

556,793

 

 

523,894

 

 

558,022

 

Average assuming dilution

 

 

525,209

 

 

561,244

 

 

527,467

 

 

562,388

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION (UNAUDITED)

 

(In thousands)

 

 

June 30, 2008

 

 

December 31, 2007

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and equivalents

 

$

640,174

 

$

827,524

 

Trade receivables

 

 

3,302,285

 

 

2,915,546

 

Inventories

 

 

1,845,621

 

 

1,625,820

 

Deferred income taxes

 

 

209,103

 

 

189,093

 

Prepaid expenses and other current assets

 

 

553,059

 

 

607,672

 

Total current assets

 

 

6,550,242

 

 

6,165,655

 

 

 

 

 

 

 

 

 

Plant and Equipment:

 

 

 

 

 

 

 

Land

 

 

242,330

 

 

226,208

 

Buildings and improvements

 

 

1,545,834

 

 

1,476,673

 

Machinery and equipment

 

 

4,023,630

 

 

3,852,241

 

Equipment leased to others

 

 

164,707

 

 

154,111

 

Construction in progress

 

 

141,230

 

 

109,267

 

 

 

 

6,117,731

 

 

5,818,500

 

Accumulated depreciation

 

 

(3,832,682

)

 

(3,624,490

)

Net plant and equipment

 

 

2,285,049

 

 

2,194,010

 

 

 

 

 

 

 

 

 

Investments

 

 

506,407

 

 

507,567

 

Goodwill

 

 

4,753,450

 

 

4,387,165

 

Intangible Assets

 

 

1,526,430

 

 

1,296,176

 

Deferred Income Taxes

 

 

68,482

 

 

61,416

 

Other Assets

 

 

899,895

 

 

913,873

 

 

 

$

16,589,955

 

$

15,525,862

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

1,465,927

 

$

410,512

 

Accounts payable

 

 

921,223

 

 

854,148

 

Accrued expenses

 

 

1,448,273

 

 

1,341,817

 

Cash dividends payable

 

 

145,423

 

 

148,427

 

Income taxes payable

 

 

194,363

 

 

205,381

 

Total current liabilities

 

 

4,175,209

 

 

2,960,285

 

Noncurrent Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

1,462,435

 

 

1,888,839

 

Deferred income taxes

 

 

376,741

 

 

260,658

 

Other

 

 

1,076,411

 

 

1,064,755

 

Total noncurrent liabilities

 

 

2,915,587

 

 

3,214,252

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

5,311

 

 

5,625

 

Additional paid-in-capital

 

 

61,213

 

 

173,610

 

Income reinvested in the business

 

 

8,822,359

 

 

9,879,065

 

Common stock held in treasury

 

 

(585,574

)

 

(1,757,761

)

Accumulated other comprehensive income

 

 

1,195,850

 

 

1,050,786

 

Total stockholders’ equity

 

 

9,499,159

 

 

9,351,325

 

 

 

$

16,589,955

 

$

15,525,862

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

Six Months Ended
June 30

 

 

 

 

2008

 

 

2007

 

Cash Provided by (Used for) Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

831,711

 

$

908,041

 

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

 

 

 

 

 

 

 

Depreciation

 

 

189,775

 

 

174,798

 

Amortization and impairment of goodwill and other intangible assets

 

 

185,627

 

 

79,958

 

Change in deferred income taxes

 

 

(24,910

)

 

(28,723

)

Provision for uncollectible accounts

 

 

4,405

 

 

5,346

 

(Gain) loss on sale of plant and equipment

 

 

(484

)

 

1,019

 

Income from investments

 

 

(19,653

)

 

(28,223

)

Gain on sale of operations and affiliates

 

 

(97

)

 

(35,441

)

Stock compensation expense

 

 

21,834

 

 

15,045

 

Other non-cash items, net

 

 

(2,365

)

 

(7,777

)

Change in assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in--

 

 

 

 

 

 

 

Trade receivables

 

 

(213,253

)

 

(192,151

)

Inventories

 

 

(98,781

)

 

(72,766

)

Prepaid expenses and other assets

 

 

(15,773

)

 

(41,260

)

Increase (decrease) in--

 

 

 

 

 

 

 

Accounts payable

 

 

(7,835

)

 

(10,118

)

Accrued expenses and other liabilities

 

 

18,859

 

 

(38,475

)

Income taxes receivable and payable

 

 

72,795

 

 

223,385

 

Other, net

 

 

2,173

 

 

1,799

 

Net cash provided by operating activities

 

 

944,028

 

 

954,457

 

Cash Provided by (Used for) Investing Activities:

 

 

 

 

 

 

 

Acquisition of businesses (excluding cash and equivalents)

 

 

(678,194

)

 

(424,420

)

Additions to plant and equipment

 

 

(184,987

)

 

(174,329

)

Purchases of investments

 

 

(2,468

)

 

(7,538

)

Proceeds from investments

 

 

14,424

 

 

24,872

 

Proceeds from sale of plant and equipment

 

 

10,590

 

 

8,712

 

Proceeds from sale of operations and affiliates

 

 

1,006

 

 

149,760

 

Other, net

 

 

851

 

 

(68

)

Net cash used for investing activities

 

 

(838,778

)

 

(423,011

)

Cash Provided by (Used for) Financing Activities:

 

 

 

 

 

 

 

Cash dividends paid

 

 

(294,806

)

 

(234,248

)

Issuance of common stock

 

 

35,195

 

 

77,101

 

Repurchases of common stock

 

 

(585,574

)

 

(479,873

)

Net proceeds from short-term debt

 

 

539,314

 

 

12,628

 

Proceeds from long-term debt

 

 

432

 

 

22

 

Repayments of long-term debt

 

 

(4,170

)

 

(9,728

)

Excess tax benefits from share-based compensation

 

 

3,413

 

 

9,886

 

Repayment of preferred stock of subsidiary

 

 

 

 

(40,000

)

Net cash used for financing activities

 

 

(306,196

)

 

(664,212

)

Effect of Exchange Rate Changes on Cash and Equivalents

 

 

13,596

 

 

24,067

 

Cash and Equivalents:

 

 

 

 

 

 

 

Decrease during the period

 

 

(187,350

)

 

(108,699

)

Beginning of period

 

 

827,524

 

 

590,207

 

End of period

 

$

640,174

 

$

481,508

 

Cash Paid During the Period for Interest

 

$

40,905

 

$

81,579

 

Cash Paid During the Period for Income Taxes

 

$

308,190

 

$

170,413

 

Liabilities Assumed from Acquisitions

 

$

249,880

 

$

331,275

 

 

 

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

(1)

COMPREHENSIVE INCOME

 

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

 

(In thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income

 

$

528,090

 

$

505,606

 

$

831,711

 

$

908,041

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

39,400

 

 

99,114

 

 

141,939

 

 

76,244

 

Pension and other postretirement benefit adjustments, net of tax

 

 

(1,169

)

 

4,468

 

 

(448

)

 

14,948

 

Comprehensive income

 

$

566,321

 

$

609,188

 

$

973,202

 

$

999,233

 

 

(2)

DISCONTINUED OPERATIONS

 

In 2007, the Company completed the divestitures of a consumer packaging business and an automotive machinery business. As of June 30, 2008 and December 31, 2007, the Company also classified a separate consumer packaging business and an automotive components business as held for sale. The operating results of these businesses, along with the gains realized, net of tax, have been presented as discontinued operations. Assets of $144,700,000 and liabilities of $5,100,000 related to the two businesses held for sale as of June 30, 2008 have been classified as prepaids and other current assets and accrued expenses, respectively.

 

Results of the discontinued operations for the second quarter of 2008 and 2007 were as follows:

 

(In thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

23,173

 

$

22,853

 

$

45,246

 

$

65,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

2,765

 

 

2,050

 

 

6,230

 

 

2,082

 

Gain on sale of discontinued operations

 

 

 

 

23,142

 

 

 

 

34,793

 

Income tax (expense) benefit

 

 

(3,145

)

 

(22

)

 

(4,364

)

 

5,717

 

Income (loss) from discontinued operations

 

$

(380

)

$

25,170

 

$

1,866

 

$

42,592

 

 

(3)

INVENTORIES

 

Inventories at June 30, 2008 and December 31, 2007 were as follows:

 

(In thousands)

 

 

June 30, 2008

 

December 31, 2007

 

Raw material

 

$

603,436

 

$

516,914

 

Work-in-process

 

 

197,165

 

 

182,990

 

Finished goods

 

 

1,045,020

 

 

925,916

 

 

 

$

1,845,621

 

$

1,625,820

 

 

(4)

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess cost over fair value of the net assets of purchased businesses. The Company does not amortize goodwill 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 operating segment or intangible asset.

 

As of January 1, 2008, the Company had assigned its recorded goodwill and intangible assets to 59 of its 60 operating segments. When performing its annual impairment assessment, the Company compares the fair value of each operating segment to its carrying value. Fair values are determined primarily by discounting estimated future cash flows at an 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 segment. When the discounted cash flow method is not solely representative of fair value, the Company may also employ additional valuation techniques, such as market comparables. If the fair value of an operating segment is less than its carrying value, an impairment loss is recorded for the difference between the implied fair value of the operating segment’s goodwill and the carrying value of the goodwill.

 

In the first quarter of 2008, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in total impairment charges of $98,590,000. The first quarter 2008 goodwill impairment charge of $97,152,000 related to the Company’s worldwide software business in the All Other segment. The goodwill impairment was primarily driven by the combination of lower forecasts for this business and lower market driven multiples that were being paid for similar businesses.

 

(5)

RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

 

On January 1, 2008, the Company adopted the measurement date provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"), which required the Company to change its measurement date to correspond with the Company's fiscal year end. The Company previously used a September 30 measurement date. As allowed under SFAS 158, the Company elected to remeasure its plan assets and benefit obligations as of the beginning of the fiscal year. Upon adoption, the Company recorded an after-tax charge of $12,788,000 to beginning retained earnings and an after-tax gain to accumulated other comprehensive income of $3,573,000 related to the three months ended December 31, 2007.

 

Pension and other postretirement benefit costs for the periods ended June 30, 2008 and 2007 were as follows:

 

(In thousands)

 

Three Months Ended

June 30

 

Six Months Ended

June 30

 

 

 

Pension

 

Other Postretirement Benefits

 

Pension

 

Other Postretirement Benefits

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

28,060

 

$

28,698

 

$

3,585

 

$

3,782

 

$

56,009

 

$

57,365

 

$

7,170

 

$

7,564

 

Interest cost

 

 

30,223

 

 

26,548

 

 

8,217

 

 

8,058

 

 

60,319

 

 

52,962

 

 

16,433

 

 

16,116

 

Expected return on plan assets

 

 

(42,283

)

 

(38,856

)

 

(3,848

)

 

(2,899

)

 

(84,536

)

 

(77,575

)

 

(7,696

)

 

(5,797

)

Amortization of actuarial (gain)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loss

 

 

651

 

 

5,086

 

 

(252

)

 

506

 

 

1,289

 

 

9,983

 

 

(504

)

 

1,011

 

Amortization of prior service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(income) cost

 

 

(600

)

 

(586

)

 

1,565

 

 

1,565

 

 

(1,202

)

 

(1,174

)

 

3,130

 

 

3,130

 

Amortization of net transition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amount

 

 

24

 

 

4

 

 

 

 

 

 

45

 

 

10

 

 

 

 

 

Settlement (gain) loss

 

 

 

 

262

 

 

(1,929

)

 

(1,562

)

 

 

 

6,000

 

 

(1,929

)

 

(1,562

)

Net periodic benefit cost

 

$

16,075

 

$

21,156

 

$

7,338

 

$

9,450

 

$

31,924

 

$

47,571

 

$

16,604

 

$

20,462

 

 

The Company expects to contribute $44,400,000 to its pension plans and $60,100,000 to its other postretirement plans in 2008. As of June 30, 2008, contributions of $21,100,000 to pension plans and $33,100,000 to other postretirement plans have been made.

 

(6)

SHORT-TERM DEBT

 

In June 2007, the Company entered into a $1,000,000,000 Line of Credit Agreement with a termination date of June 13, 2008. This line of credit was replaced on June 13, 2008 by a $1,500,000,000 Line of Credit Agreement with a termination date of June 12, 2009. No amounts were outstanding under this facility at June 30, 2008.

 

The Company had outstanding commercial paper of $733,436,000 at June 30, 2008 and $200,977,000 at December 31, 2007.

 

In 1999, the Company issued $500,000,000 of 5.75% redeemable notes due March 1, 2009. The balance related to these notes outstanding at June 30, 2008 has been classified as short-term debt. The balance outstanding at December 31, 2007 was classified as long-term debt.

 

(7)       STOCKHOLDERS' EQUITY

 

Common Stock, Additional Paid-In-Capital, Income Reinvested in the Business and Common Stock Held in Treasury transactions during the first six months of 2008 are shown below:

 

(In thousands)

 

Common Stock

 

Additional Paid-In-Capital

 

Income Reinvested in the Business

 

Common Stock Held in Treasury

 

Balance, December 31, 2007

 

$

5,625

 

$

173,610

 

$

9,879,065

 

$

(1,757,761

)

During 2008 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of treasury shares

 

 

(324

)

 

(173,610

)

 

(1,583,827

)

 

1,757,761

 

Shares issued for stock options and grants

 

 

10

 

 

35,185

 

 

 

 

 

Stock compensation expense

 

 

 

 

21,834

 

 

 

 

 

Tax benefits related to stock options

 

 

 

 

4,194

 

 

 

 

 

Repurchases of common stock

 

 

 

 

 

 

 

 

(585,574

)

Net income

 

 

 

 

 

 

831,711

 

 

 

Cash dividends declared

 

 

 

 

 

 

(291,802

)

 

 

Adoption of SFAS 158, net of tax

 

 

 

 

 

 

(12,788

)

 

 

Balance, June 30, 2008

 

$

5,311

 

$

61,213

 

$

8,822,359

 

$

(585,574

)

 

On August 20, 2007, the Company's Board of Directors authorized a stock repurchase program, which provided for the buyback of up to $3,000,000,000 of the Company’s common stock over an open-ended period of time. In the first six months of 2008, the Company repurchased 11,780,202 shares of its common stock at an average price of $49.71 per share. In February 2008, the Company retired 32,425,297 shares of common stock held in treasury.

 

(8)

COMMITMENTS AND CONTINGENCIES

 

The Company has an estimated potential liability for European transfer taxes of up to approximately $57,000,000 related to legal entity reorganizations. The ultimate resolution of this liability will be dependent upon the determination of whether or not such transfers are deemed to have occurred and whether such taxes are applicable to transfers that occurred outside of Europe. A reserve of $32,000,000 has been recorded for this matter as of June 30, 2008.

 

(9)

INCOME TAXES

 

The Company and its subsidiaries file tax returns in the U.S. and in various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions and a number of these audits are currently ongoing.

 

As part of the Australia audit for 2003, the Australian Tax Office is reviewing an intercompany financing transaction between the U.S. and Australia. In the U.S., the Internal Revenue Service has completed its audits for the years 2001-2005 and has proposed several adjustments which the Company is protesting, the most significant of which is related to leveraged leases. The Company has recorded its best estimate of the exposure for these two audits; however, it is reasonably possible that the Company will resolve the Australian financing and leveraged lease issues within the next 12 months and that the amount of the Company’s unrecognized tax benefits may change by a range of approximately a $131 million decrease to a $90 million increase.

 

(10)

SEGMENT INFORMATION

 

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

 

Item 2 - Management’s Discussion and Analysis

 

CONSOLIDATED RESULTS OF OPERATIONS

 

The Company’s consolidated results of operations for the second quarter and year-to-date periods of 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

4,570,472

 

$

4,136,836

 

$

8,709,886

 

$

7,853,477

 

Operating income

 

756,712

 

 

695,596

 

1,276,673

 

 

1,264,073

 

Margin %

 

16.6

%

 

16.8

%

14.7

%

 

16.1

%

 

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

%

0.1

%

%

0.2

%

0.5

%

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

1.4

 

0.3

 

 

0.9

 

0.2

 

Total

 

 

1.5

 

0.3

 

0.2

 

1.4

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures

 

4.2

 

2.5

 

(0.3

)

5.2

 

1.6

 

(0.5

)

Restructuring costs

 

 

(1.3

)

(0.2

)

 

 

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

(7.6

)

(1.2

)

Translation

 

6.4

 

6.1

 

 

5.6

 

5.6

 

0.1

 

Other

 

(0.1

)

 

 

(0.1

)

 

 

Total

 

10.5

%

8.8

%

(0.2

)%

10.9

%

1.0

%

(1.4

)%

 

Operating Revenues

Revenues increased 10.5% and 10.9% in the second quarter and year-to-date periods of 2008, respectively, versus 2007 primarily due to the favorable effect of currency translation from the weakening dollar and revenues from acquisitions. Total base revenues were flat in the second quarter and increased 0.2% year-to-date. International base revenues increased 2.6% in the second quarter and 3.4% year-to-date periods, partially offset by a 1.8% and 2.3% decline, respectively, in North American base revenues. The Company’s Asia Pacific end markets continue to experience strong growth while Europe showed moderate growth. North American revenues continue to be negatively impacted by declines in the residential construction and automotive sectors as well as weak industrial production.

 

Operating Income

Operating income in the second quarter and year-to-date periods of 2008 increased 8.8% and 1.0%, respectively, versus the same periods of 2007 primarily due to the positive effect of currency translation and income from acquired businesses. Year-to-date income was negatively impacted by a first quarter 2008 impairment charge of $97.2 million related to the goodwill of a worldwide software business. Total operating margins decreased 0.2% and 1.4% for the second quarter and year-to-date periods, respectively, primarily due to the first quarter impairment charge and lower margins of acquired companies partially offset by lower overhead expense at base businesses due to tighter cost controls.

 

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

 

(In thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Industrial Packaging

 

$

711,447

 

$

620,660

 

$

1,334,739

 

$

1,175,298

 

Power Systems & Electronics

 

 

648,784

 

 

565,256

 

 

1,231,174

 

 

1,119,676

 

Transportation

 

 

630,650

 

 

583,743

 

 

1,224,911

 

 

1,113,038

 

Construction Products

 

 

566,172

 

 

541,227

 

 

1,050,206

 

 

1,015,763

 

Food Equipment

 

 

538,479

 

 

473,598

 

 

1,048,218

 

 

864,152

 

Decorative Surfaces

 

 

335,957

 

 

322,773

 

 

638,489

 

 

606,495

 

Polymers & Fluids

 

 

300,835

 

 

229,672

 

 

557,652

 

 

431,400

 

All Other

 

 

853,107

 

 

811,528

 

 

1,653,586

 

 

1,550,756

 

Intersegment revenues

 

 

(14,959

)

 

(11,621

)

 

(29,089

)

 

(23,101

)

Total operating revenues

 

$

4,570,472

 

$

4,136,836

 

$

8,709,886

 

$

7,853,477

 

 

INDUSTRIAL PACKAGING

 

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

 

In the Industrial Packaging segment, products include:

steel and plastic strapping and related tools and equipment;

plastic stretch film and related equipment;

paper and plastic products that protect goods in transit; and

metal jacketing and other insulation products.

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

711,447

 

$

620,660

 

$

1,334,739

 

$

1,175,298

 

Operating income

 

93,686

 

 

79,862

 

162,695

 

 

144,917

 

Margin %

 

13.2

%

 

12.9

%

12.2

%

 

12.3

%

 

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

0.7

%

2.0

%

0.2

%

0.7

%

2.3

%

0.2

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

5.1

 

0.7

 

 

(0.3

)

 

Total

 

0.7

 

7.1

 

0.9

 

0.7

 

2.0

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures

 

5.5

 

0.5

 

(0.7

)

5.3

 

1.0

 

(0.5

)

Restructuring costs

 

 

0.7

 

0.1

 

 

1.0

 

0.1

 

Translation

 

8.4

 

9.0

 

 

7.6

 

8.3

 

0.1

 

Other

 

 

 

 

 

 

 

Total

 

14.6

%

17.3

%

0.3

%

13.6

%

12.3

%

(0.1

)%

 

Operating Revenues

Revenues increased 14.6% and 13.6% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the favorable effect of currency translation and revenues from acquired companies. The increase in acquisition revenue was primarily related to the purchase of a European industrial packaging business and a European stretch packaging business. Total base revenues increased modestly for the current quarter and year-to-date periods as declines in the strapping and equipment businesses were offset with strong growth in the worldwide insulation businesses due to penetration in emerging markets.

 

Operating Income

Operating income increased 17.3% and 12.3% for the second quarter and year-to-date periods of 2008 versus 2007 primarily due to the favorable effect of currency translation, lower overhead costs and the positive leverage effect of the increase in base revenues. Operating margins in the second quarter were favorably impacted by lower overhead costs as a result of tighter cost controls and the benefits of prior year restructuring projects partially offset by raw material price increases.

 

POWER SYSTEMS & ELECTRONICS

 

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

 

In the Power Systems & Electronics segment, products include:

arc welding equipment;

metal arc welding consumables and related accessories;

metal solder materials for PC board fabrication;

equipment and services for microelectronics assembly;

electronic components and component packaging; and

airport ground support equipment.

 

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

648,784

 

$

565,256

 

$

1,231,174

 

$

1,119,676

 

Operating income

 

142,130

 

 

116,124

 

266,951

 

 

232,218

 

Margin %

 

21.9

%

 

20.5

%

21.7

%

 

20.7

%

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

7.7

%

14.4

%

1.3

%

4.3

%

7.9

%

0.7

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

3.9

 

0.8

 

 

4.0

 

0.8

 

Total

 

7.7

 

18.3

 

2.1

 

4.3

 

11.9

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures

 

3.7

 

1.0

 

(0.6

)

2.8

 

1.1

 

(0.4

)

Restructuring costs

 

 

0.3

 

0.1

 

 

 

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

(0.4

)

(0.1

)

Translation

 

3.4

 

2.8

 

(0.1

)

2.8

 

2.3

 

(0.1

)

Other

 

 

 

(0.1

)

0.1

 

0.1

 

0.1

 

Total

 

14.8

%

22.4

%

1.4

%

10.0

%

15.0

%

1.0

%

 

Operating Revenues

Revenues increased 14.8% and 10.0% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to an increase in base revenues, revenues from acquired companies and the positive effect of currency translation. Base revenues grew 7.7% and 4.3% for the second quarter and year-to-date periods primarily due to a 25.2% and 21.8% increase in the second quarter and year-to-date periods, respectively, in international welding businesses due to stronger demand in energy and shipping end markets. North American base revenues increased 3.3% and 0.8% during the same periods. Base revenues for the PC board fabrication businesses increased 6.9% and 1.2 % in the second quarter and year-to-date periods, respectively, primarily due to the ability to implement price increases. The growth in acquisition revenue was primarily due to the purchase of a PC board fabrication business and a welding accessories business.

 

Operating Income

Operating income increased 22.4% and 15.0% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the positive leverage effect from the increase in base revenues, reduced operating expenses, the favorable effect of currency translation, and income from acquired companies. Total operating margins increased 1.4% and 1.0% for the quarter and year-to-date periods, respectively, primarily due to leverage from the increase in revenue, improved margins at the PC board fabrication businesses resulting from prior year restructuring and improved variable margins.

 

TRANSPORTATION

 

Businesses in this segment produce components, fasteners, fluids and polymers for transportation-related applications.

 

In the Transportation segment, products include:

metal and plastic components and assemblies for automobiles and trucks;

metal and plastic fasteners for automobiles and trucks;

fluids and polymers for maintenance and appearance;

fillers and putties for auto body repair; and

polyester coatings and patch and repair products for the marine industry.

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

630,650

 

$

583,743

 

$

1,224,911

 

$

1,113,038

 

Operating income

 

99,743

 

 

107,175

 

191,394

 

 

191,460

 

Margin %

 

15.8

%

 

18.4

%

15.6

%

 

17.2

%

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

(4.7

)%

(10.1

)%

(1.0

)%

(2.0

)%

(4.4

)%

(0.4

)%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

(2.9

)

(0.6

)

 

(3.5

)

(0.6

)

Total

 

(4.7

)

(13.0

)

(1.6

)

(2.0

)

(7.9

)

(1.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

5.6

 

3.6

 

(0.2

)

5.7

 

2.5

 

(0.5

)

Restructuring costs

 

 

(5.5

)

(1.1

)

 

(1.8

)

(0.3

)

Translation

 

7.2

 

8.0

 

0.3

 

6.3

 

7.1

 

0.2

 

Other

 

(0.1

)

 

 

0.1

 

0.1

 

 

Total

 

8.0

%

(6.9

)%

(2.6

)%

10.1

%

%

(1.6

)%

 

Operating Revenues

Revenues increased 8.0% and 10.1% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the favorable effect of currency translation and acquisitions, partially offset by declines in base revenue. Acquisition revenue was primarily due to the purchases of a worldwide components business and an automotive aftermarket business. Base revenues for the North American automotive businesses declined 12.8% and 8.9% in the second quarter and year-to-date periods, respectively, due to a 21.4% and 17.4% decline in automotive production at the Detroit 3 automotive manufacturers in the second quarter and year-to-date periods, respectively. International automotive base revenues were flat in the second quarter and increased 2.6% year-to-date primarily due to increased European automotive production. Base revenues for the automotive aftermarket businesses increased 5.7% and 4.9% for the second quarter and year-to-date periods, respectively, primarily due to growth in sales to Asian end markets.

 

Operating Income

Operating income decreased 6.9% and was flat for the second quarter and year to-date periods, respectively, over the same periods of 2007 primarily due to the negative leverage effect of the decrease in base revenues described above, higher restructuring costs and increased operating expenses, partially offset by the favorable effect of currency translation and income from acquired businesses. Base margins declined in the second quarter and year-to-date periods due to the decline in revenue, higher raw material costs and price pressure, and unfavorable product mix issues in the automotive aftermarket businesses.

 

CONSTRUCTION PRODUCTS

 

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

 

In the Construction Products segment, products include:

fasteners and related fastening tools for wood applications;

anchors, fasteners and related tools for concrete applications;

metal plate truss components and related equipment and software; and

packaged hardware, fasteners, anchors and other products for retail.

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

566,172

 

$

541,227

 

$

1,050,206

 

$

1,015,763

 

Operating income

 

78,321

 

 

81,199

 

128,760

 

 

133,788

 

Margin %

 

13.8

%

 

15.0

%

12.3

%

 

13.2

%

 

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

(4.3

)%

(12.0

)%

(1.2

)%

(4.9

)%

(15.5

)%

(1.5

)%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

(1.7

)

(0.3

)

 

(2.6

)

(0.3

)

Total

 

(4.3

)

(13.7

)

(1.5

)

(4.9

)

(18.1

)

(1.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

0.6

 

(0.8

)

(0.2

)

0.6

 

(0.9

)

(0.2

)

Restructuring costs

 

 

1.5

 

0.2

 

 

5.5

 

0.8

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

0.3

 

 

Translation

 

8.2

 

9.4

 

0.3

 

7.7

 

9.4

 

0.3

 

Other

 

0.1

 

0.1

 

 

 

 

 

Total

 

4.6

%

(3.5

)%

(1.2

)%

3.4

%

(3.8

)%

(0.9

)%

 

 

Operating Revenues

Revenues increased 4.6% and 3.4% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the favorable effect of currency translation, partially offset by a decline in base revenues. Base revenues for the North American construction businesses decreased 12.4% and 15.0% in the second quarter and year-to-date periods, respectively, due to the ongoing weakness in the North American residential construction market. Notably, housing starts declined an annualized 30.4% and commercial construction fell 19.6% year-to-date. Internationally, base revenue increased 1.7% and 2.7% for the second quarter and year-to-date periods, respectively, primarily due to strong residential and commercial demand in the Australasian region, offset by weaker European demand.

 

Operating Income

Operating income decreased 3.5% and 3.8% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the negative leverage effect from the decline in base revenues described above in the second quarter and year-to-date periods, partially offset by the favorable effect of currency translation and lower restructuring expenses. Base margins declined in both periods primarily due to the revenue decreases and an increase in European selling expenses, partially offset by the benefit of prior year North American restructuring projects.

 

FOOD EQUIPMENT

 

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

 

In the Food Equipment segment, products include:

warewashing equipment;

cooking equipment, including ovens, ranges and broilers;

refrigeration equipment, including refrigerators, freezers and prep tables;

food processing equipment, including slicers, mixers and scales; and

kitchen exhaust, ventilation and pollution control systems.

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

538,479

 

$

473,598

 

$

1,048,218

 

$

864,152

 

Operating income

 

73,009

 

 

65,697

 

144,055

 

 

135,070

 

Margin %

 

13.6

%

 

13.9

%

13.7

%

 

15.6

%

 

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

2.3

%

6.9

%

0.6

%

4.0

%

11.0

%

1.0

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

(7.5

)

(1.0

)

 

(8.0

)

(1.2

)

Total

 

2.3

 

(0.6

)

(0.4

)

4.0

 

3.0

 

(0.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

5.1

 

13.7

 

1.2

 

11.9

 

3.9

 

(1.0

)

Restructuring costs

 

 

(7.2

)

(1.0

)

 

(4.8

)

(0.7

)

Translation

 

6.3

 

5.2

 

(0.1

)

5.4

 

4.6

 

 

Other

 

 

 

 

 

 

 

Total

 

13.7

%

11.1

%

(0.3

)%

21.3

%

6.7

%

(1.9

)%

 

Operating Revenues

Revenues increased 13.7% and 21.3% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 due to revenues from acquired companies, the favorable effect of currency translation and base revenue growth. The acquired revenues were primarily attributable to the acquisition of two worldwide food processing equipment businesses and a European food equipment business. International base revenues grew 3.8% and 7.1% for the second quarter and year-to-date periods, respectively, primarily due to strong European and Asian end market demand. North American base revenue increased 2.0% and 2.1% during the same periods primarily due to higher service revenues and increased demand in the institutional and restaurant sectors.

 

Operating Income

Operating income increased 11.1% and 6.7% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 as a result of the positive effect of leverage from the revenue increases described above, income from acquisitions and the favorable effect of currency translation, partially offset by increased operating expenses and higher restructuring costs. Base business margins declined due to competitive price pressure and higher warranty expenses in the food processing equipment businesses, and increased operating expenses in the service businesses.

 

DECORATIVE SURFACES

 

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

 

In the Decorative Surfaces segment, products include:

decorative high-pressure laminate for countertops;

solid surface materials for countertops;

high-pressure laminate flooring;

laminate for furniture applications; and

high-pressure laminate worktops.

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

335,957

 

$

322,773

 

$

638,489

 

$

606,495

 

Operating income

 

47,389

 

 

47,618

 

80,659

 

 

75,933

 

Margin %

 

14.1

%

 

14.8

%

12.6

%

 

12.5

%

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

(1.3

)%

(3.7

)%

(0.4

)%

0.3

%

1.1

%

0.1

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

0.3

 

 

 

2.1

 

0.3

 

Total

 

(1.3

)

(3.4

)

(0.4

)

0.3

 

3.2

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring costs

 

 

0.4

 

0.1

 

 

0.4

 

 

Translation

 

5.4

 

2.5

 

(0.4

)

4.9

 

2.7

 

(0.3

)

Other

 

 

 

 

0.1

 

(0.1

)

 

Total

 

4.1

%

(0.5

)%

(0.7

)%

5.3

%

6.2

%

0.1

%

 

Operating Revenues

Revenues increased 4.1% and 5.3% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to the favorable effect of currency translation. North American laminate base revenue increased 0.7% and 0.4% for the second quarter and year-to-date periods, respectively, primarily due to product penetration in the premium high definition laminate product line. These increases were offset by second quarter and year-to-date double digit base revenue declines in the flooring businesses primarily due to declines in the residential construction market. International base revenues grew 0.3% and 2.2% for the second quarter and year-to-date periods, respectively, primarily due to strong demand in the Asian end markets.

 

Operating Income

Operating income decreased 0.5% in the second quarter of 2008 and increased 6.2% for the year-to-date period over the same periods of 2007. For the second quarter, the decrease in income and operating margin is primarily due to the negative leverage effect from the decrease in revenues described above. For the year-to-date period, income increased primarily due to favorable currency translation, lower overhead expense and leverage from the increase in base revenues and lower overhead expense due to 2007 selling expenses related to a new product launch.

 

POLYMERS & FLUIDS

 

Businesses in this segment produce adhesives, sealants, lubrication and cutting fluids, and janitorial and sanitation supplies.

 

In the Polymers & Fluids segment, products include:

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;

hand wipes and cleaners for industrial applications; and

pressure sensitive adhesives and components for telecommunications, electronics, medical and transportation applications.

 

 

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 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

300,835

 

$

229,672

 

$

557,652

 

$

431,400

 

Operating income

 

55,166

 

 

40,701

 

92,484

 

 

71,082

 

Margin %

 

18.3

%

 

17.7

%

16.6

%

 

16.5

%

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

leverage

 

2.3

%

5.8

%

0.6

%

3.2

%

8.6

%

0.9

%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

13.5

 

2.3

 

 

7.7

 

1.2

 

Total

 

2.3

 

19.3

 

2.9

 

3.2

 

16.3

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

20.7

 

9.7

 

(2.1

)

19.0

 

6.4

 

(2.0

)

Restructuring costs

 

 

(0.9

)

(0.2

)

 

(0.6

)

(0.1

)

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

1.2

 

0.2

 

Translation

 

8.0

 

7.4

 

(0.1

)

7.0

 

6.8

 

 

Other

 

 

 

0.1

 

0.1

 

 

(0.1

)

Total

 

31.0

%

35.5

%

0.6

%

29.3

%

30.1

%

0.1

%

 

Operating Revenues

Revenues increased 31.0% and 29.3% for the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily due to acquisitions, the favorable effect of currency translation and base revenue growth. Growth in acquisition revenue was primarily the result of the purchase of an international fluid products business, two polymers and industrial adhesives businesses, an Australian polymers business, two North American construction adhesives businesses and a South American sealant business. Base revenues increased in the second quarter and year-to-date periods primarily due to growth in North American polymers businesses of 9.4% and 5.5% for the second quarter and year-to-date periods, respectively, mainly in specialty adhesives and epoxy products, partially offset by a decline in demand in the European fluids and construction polymers businesses.

 

Operating Income

Operating income increased 35.5% and 30.1% in the second quarter and year-to-date periods of 2008, respectively, over the same periods of 2007 primarily from reduced overhead expenses and the positive effect of leverage from the increase in base revenues, income from acquisitions and the favorable effect of currency translation. Total operating margins for both periods increased primarily due to tighter cost controls and benefits of prior year restructuring at base businesses, partially offset by lower margins of acquired businesses and increased raw material costs.

 

ALL OTHER

 

This segment contains all other operating segments.

 

In the All Other segment, products include:

plastic reclosable packaging for consumer food storage;

plastic reclosable bags for storage of clothes and home goods;

plastic consumables that multi-pack cans and bottles and related equipment;

plastic fasteners and components for appliances, furniture and industrial uses;

metal fasteners and components for appliances and industrial applications;

equipment and related software for testing of materials and structures;

software and related services for industrial and health care applications;

swabs, wipes and mats for clean room usage;

foil and film and related equipment used to decorate consumer products;

product coding and marking equipment and related consumables;

paint spray equipment; and

static and contamination control equipment.

 

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

 

The results of operations for the All Other segment for the second quarter and year-to-date periods of 2008 and 2007 were as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

853,107

 

$

811,528

 

$

1,653,586

 

$

1,550,756

 

Operating income

 

167,268

 

 

157,220

 

209,675

 

 

279,605

 

Margin %

 

19.6

%

 

19.4

%

12.7

%

 

18.0

%

 

 

In the second quarter and year-to-date periods of 2008, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

% Increase (Decrease)

 

% Point Increase
(Decrease)

 

 

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Operating Revenues

 

Operating Income

 

Operating Margins

 

Base manufacturing business:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue change/Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage

 

(0.9

)%

(2.2

)%

(0.3

)%

(1.2

)%

(3.2

)%

(0.4

)%

Changes in variable margins and

 

 

 

 

 

 

 

 

 

 

 

 

 

overhead costs

 

 

3.8

 

0.7

 

 

6.7

 

1.2

 

Total

 

(0.9

)

1.6

 

0.4

 

(1.2

)

3.5

 

0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures

 

1.1

 

(0.2

)

(0.3

)

3.5

 

1.1

 

(0.2

)

Restructuring costs

 

 

(0.2

)

 

 

0.2

 

 

Impairment of goodwill and

 

 

 

 

 

 

 

 

 

 

 

 

 

intangibles

 

 

 

 

 

(34.7

)

(6.3

)

Translation

 

4.8

 

5.3

 

0.1

 

4.3

 

4.9

 

0.3

 

Other

 

0.1

 

(0.1

)

 

 

 

0.1

 

Total

 

5.1

%

6.4

%

0.2

%

6.6

%

(25.0

)%

(5.3

)%

 

 

Operating Revenues

Revenues increased 5.1% and 6.6% in the second quarter and year-to-date periods of 2008, respectively, versus the same periods of 2007 primarily due to the favorable effect of currency translation and revenues from acquired companies. The increase in acquisition revenue was primarily due to the purchase of two test and measurement businesses, two decorating and graphics businesses, an industrial software business, and a label business. Total base revenues declined 0.9% in the second quarter, primarily due to a 4.6% and 1.5% decline in the industrial and appliance businesses and consumer packaging businesses, respectively, partially offset by an increase of 9.0% in the test and measurement businesses. The 1.2% decline in the year-to-date period was primarily due to a 9.2% increase in the test and measurement businesses, offset by a 6.4% and 1.3% decline in the industrial appliance finishing businesses and consumer packaging businesses, respectively. The test and measurement businesses benefited from a strong backlog at the end of 2007 and new product introductions.

 

Operating Income

Operating income increased 6.4% in the second quarter of 2008 primarily due to currency translation, partially offset by the negative effect of leverage from the decrease in base revenue discussed above. Operating income decreased 25.0% for the year-to-date period primarily due to the first quarter 2008 goodwill impairment charge related to a worldwide software business. In addition, lower operating expenses, as a result of tighter cost controls and the benefits of prior year restructuring projects, and the favorable effect of currency translation partially offset the declines.

 

AMORTIZATION AND IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

 

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

 

As of January 1, 2008, the Company had assigned its recorded goodwill and intangible assets to 59 of its 60 operating segments. When performing its annual impairment assessment, the Company compares the fair value of each operating segment to its carrying value. Fair values are determined primarily by discounting estimated future cash flows at an 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 segment. When the discounted cash flow method is not solely representative of fair value, the Company may also employ additional valuation techniques, such as market comparables. If the fair value of an operating segment is less than its carrying value, an impairment loss is recorded for the difference between the implied fair value of the operating segment’s goodwill and the carrying value of the goodwill.

 

In the first quarter of 2008, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in total impairment charges of $98.6 million. The first quarter 2008 goodwill impairment charge of $97.2 million related to the Company’s worldwide software business in the All Other segment. The goodwill impairment was primarily driven by the combination of lower forecasts for this business and lower market driven multiples that were being paid for similar businesses.

 

INTEREST EXPENSE

 

Interest expense increased to $74.1 million in the first six months of 2008 from $50.0 million in the first six months of 2007 primarily due to interest on the 5.25% Euro notes issued in October 2007.

 

OTHER INCOME

 

Other income decreased to $2.8 million for the first six months of 2008 versus income of $37.1 million in 2007, primarily due to a first quarter 2008 charge for European transfer taxes related to legal entity structuring transactions and lower investment income. These amounts were partially offset by higher interest income in 2008 earned on short-term investments, and lower currency translation losses in 2008 versus 2007.

 

INCOME TAXES

 

The effective tax rate for the first six months of 2008 was 31.16% compared to 30.83% for the first six months of 2007. The increase in the effective tax rate resulted primarily from the impairment of non-deductible goodwill in the first quarter of 2008. Excluding the impairment, the Company’s effective tax rate for the first six months was 29.01%. The reduction in the effective tax rate, excluding the impairment, resulted primarily from a higher proportionate share of income in foreign jurisdictions with lower tax rates.

 

INCOME FROM CONTINUING OPERATIONS

 

Income from continuing operations of $829.8 million ($1.57 per diluted share) in the first six months of 2008 was 4.1% lower than the 2007 income from continuing operations of $865.4 million ($1.54 per diluted share).

 

FOREIGN CURRENCY

 

The weakening of the U.S. dollar against foreign currencies in 2008 increased operating revenues for the first six months of 2008 by approximately $450 million and increased earnings by approximately 9 cents per diluted share. The weakening of the U.S. dollar against foreign currencies in 2007 increased operating revenues for the first six months of 2007 by approximately $228 million and increased earnings by approximately 5 cents per diluted share.

 

DISCONTINUED OPERATIONS

 

In the first six months of 2007, the Company completed the divestitures of a consumer packaging business and an automotive machinery business which resulted in an after-tax gain of $41.2 million. As of June 30, 2008 and December 31, 2007, the Company also classified a separate consumer packaging business and an automotive components business as held for sale. The operating results of these businesses, along with the gains realized, net of tax, have been presented as discontinued operations. Assets of $144.7 million and liabilities of $5.1 million related to the two businesses held for sale as of June 30, 2008, have been classified as prepaids and other current assets and accrued expenses, respectively.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2008, the Company adopted the measurement date provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"), which required the Company to change its measurement date to correspond with the Company's fiscal year end. The Company previously used a September 30 measurement date. As allowed under SFAS 158, the Company elected to remeasure its plan assets and benefit obligations as of the beginning of the fiscal year. Upon adoption, the Company recorded an after-tax charge of $12.8 million to beginning retained earnings and an after-tax gain to accumulated other comprehensive income of $3.6 million, related to the three months ended December 31, 2007.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow

 

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

 

Free operating cash flow is used 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 2008 and 2007 was as follows:

 

(In thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net cash provided by operating activities

 

$

450,104

 

$

531,638

 

$

944,028

 

$

954,457

 

Additions to plant and equipment

 

 

(95,982

)

 

(89,038

)

 

(184,987

)

 

(174,329

)

Free operating cash flow

 

$

354,122

 

$

442,600

 

$

759,041

 

$

780,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

$

(442,152

)

$

(155,338

)

$

(678,194

)

$

(424,420

)

Cash dividends paid

 

 

(146,379

)

 

(116,911

)

 

(294,806

)

 

(234,248

)

Proceeds from sale of operations and affiliates

 

 

4,733

 

 

58,021

 

 

1,006

 

 

149,760

 

Issuance of common stock

 

 

17,642

 

 

26,098

 

 

35,195

 

 

77,101

 

Repurchases of common stock

 

 

(200,000

)

 

(300,000

)

 

(585,574

)

 

(479,873

)

Net proceeds (repayments) of debt

 

 

110,421

 

 

(86,293

)

 

535,576

 

 

2,922

 

Repayment of preferred stock of subsidiary

 

 

 

 

 

 

 

 

(40,000

)

Other

 

 

14,346

 

 

38,756

 

 

40,406

 

 

59,931

 

Net decrease in cash and equivalents

 

$

(287,267

)

$

(93,067

)

$

(187,350

)

$

(108,699

)

 

 

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. In the first six months of 2008, the Company repurchased 11.8 million shares of its common stock at an average price of $49.71 per share. There are approximately $2.0 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. ROIC for the second quarter of 2008 and 2007 was as follows:

 

(Dollars in thousands)

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income after taxes

 

$

537,265

 

$

482,952

 

$

878,862

 

$

874,359

 

Invested capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade receivables

 

$

3,302,285

 

$

2,882,698

 

$

3,302,285

 

$

2,882,698

 

Inventories

 

 

1,845,621

 

 

1,612,380

 

 

1,845,621

 

 

1,612,380

 

Net plant and equipment

 

 

2,285,049

 

 

2,116,828

 

 

2,285,049

 

 

2,116,828

 

Investments

 

 

506,407

 

 

560,667

 

 

506,407

 

 

560,667

 

Goodwill and intangible assets

 

 

6,279,880

 

 

5,409,113

 

 

6,279,880

 

 

5,409,113

 

Accounts payable and accrued expenses

 

 

(2,369,496

)

 

(1,998,511

)

 

(2,369,496

)

 

(1,998,511

)

Other, net

 

 

(62,399

)

 

(191,553

)

 

(62,399

)

 

(191,553

)

Total invested capital

 

$

11,787,347

 

$

10,391,622

 

$

11,787,347

 

$

10,391,622

 

Average invested capital

 

$

11,441,668

 

$

10,253,622

 

$

11,235,496

 

$

10,117,625

 

Annualized return on average invested capital

 

 

18.8

%

 

18.8

%

 

15.6

%