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_____________________________________________________________________________
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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number: 1-4797
For the transition period from ________________ to ________________
ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1258310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 West Lake Avenue, Glenview, IL 60025-5811
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X . No _____.
The number of shares of registrant's common stock, $.01 par value, outstanding
at April 30, 2003: 307,561,230.
Part I - Financial Information
Item 1
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 years'
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
March 31
--------------------------
2003 2002
---------- ----------
Operating Revenues $2,313,790 $2,204,654
Cost of revenues 1,513,792 1,475,119
Selling, administrative, and research
and development expenses 469,688 414,764
Amortization and impairment of goodwill
and other intangible assets 9,310 4,872
---------- ----------
Operating Income 321,000 309,899
Interest expense (17,432) (17,503)
Other income 3,316 2,076
---------- ----------
Income from Continuing Operations
Before Income Taxes 306,884 294,472
Income Taxes 107,400 100,100
---------- ----------
Income from Continuing Operations 199,484 194,372
Income (Loss) from Discontinued Operations (4,107) 4,075
Cumulative Effect of Change in
Accounting Principle -- (221,890)
---------- ----------
Net Income (Loss) $ 195,377 $ (23,443)
========== ==========
Income Per Share from Continuing Operations:
Basic $0.65 $0.64
Diluted $0.65 $0.63
Income (Loss) Per Share from Discontinued
Operations:
Basic $(0.01) $0.01
Diluted $(0.01) $0.01
Cumulative Effect Per Share of Change in
Accounting Principle:
Basic $ - $(0.73)
Diluted $ - $(0.72)
Net Income (Loss) Per Share:
Basic $0.64 $(0.08)
Diluted $0.63 $(0.08)
Cash Dividends:
Paid $0.23 $0.22
Declared $0.23 $0.22
Shares of Common Stock Outstanding
During the Period:
Average 306,622 305,532
Average assuming dilution 307,772 307,985
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In thousands)
March 31, 2003 December 31, 2002
---------------- -----------------
ASSETS
Current Assets:
Cash and equivalents $1,125,550 $1,057,687
Trade receivables 1,562,330 1,500,031
Inventories 1,008,967 962,746
Deferred income taxes 219,681 217,738
Prepaid expenses and other current assets 134,878 136,563
---------- ----------
Total current assets 4,051,406 3,874,765
---------- ----------
Plant and Equipment:
Land 121,260 119,749
Buildings and improvements 1,074,580 1,041,680
Machinery and equipment 2,881,493 2,817,006
Equipment leased to others 138,860 135,508
Construction in progress 113,101 91,714
---------- ----------
4,329,294 4,205,657
Accumulated depreciation (2,671,832) (2,574,408)
---------- ----------
Net plant and equipment 1,657,462 1,631,249
---------- ----------
Investments 1,388,496 1,392,410
Goodwill 2,417,046 2,394,519
Intangible Assets 223,467 230,291
Deferred Income Taxes 558,625 541,625
Other Assets 501,901 506,552
Net Assets of Discontinued Operations 48,006 51,690
---------- ----------
$10,846,409 $10,623,101
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 100,998 $ 121,604
Accounts payable 425,791 416,958
Accrued expenses 709,926 833,689
Cash dividends payable 70,535 70,514
Income taxes payable 177,571 124,397
---------- ----------
Total current liabilities 1,484,821 1,567,162
---------- ----------
Noncurrent Liabilities:
Long-term debt 1,451,785 1,460,381
Other 990,721 946,487
---------- ----------
Total noncurrent liabilities 2,442,506 2,406,868
---------- ----------
Stockholders' Equity:
Common stock 3,077 3,068
Additional paid-in-capital 754,137 747,778
Income reinvested in the business 6,327,105 6,202,263
Common stock held in treasury (1,662) (1,662)
Accumulated other comprehensive income (163,575) (302,376)
---------- ----------
Total stockholders' equity 6,919,082 6,649,071
---------- ----------
$10,846,409 $10,623,101
========== ==========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31
---------------------
2003 2002
--------- ---------
Cash Provided by (Used for) Operating Activities:
Net income (loss) $ 195,377 $(23,443)
Adjustments to reconcile net income to net cash
provided by operating activities:
(Income) loss from discontinued operations 4,107 (4,075)
Cumulative effect of change in accounting principle -- 221,890
Depreciation 67,875 71,487
Amortization and impairment of goodwill
and intangible assets 9,310 4,872
Change in deferred income taxes (4,853) (11,870)
Provision for uncollectible accounts 1,880 5,922
Loss on sales of plant and equipment 1,203 488
Income from investments (28,888) (31,154)
Non-cash interest on nonrecourse notes payable 9,290 9,810
(Gain) loss on sales of operations and affiliates (205) 1,836
Other non-cash items, net 4,383 3,353
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables 2,003 (55,954)
Inventories (6,070) 24,768
Prepaid expenses and other assets 3,564 7,373
Net assets of discontinued operations 2,807 10,733
Increase (decrease) in--
Accounts payable (9,372) 26,708
Accrued expenses (101,344) (5,800)
Income taxes payable 66,068 25,926
Other, net 39 24
--------- ---------
Net cash provided by operating activities 217,174 282,894
--------- ---------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (14,814) (35,347)
Additions to plant and equipment (56,173) (64,051)
Purchase of investments (29,138) (115,049)
Proceeds from investments 15,665 11,827
Proceeds from sales of plant and equipment 2,772 2,605
Net settlement from sales of operations and affiliates (3,859) 1,792
Other, net 2,974 3,918
--------- ---------
Net cash used for investing activities (82,573) (194,305)
--------- ---------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (70,514) (67,084)
Issuance of common stock 2,597 30,997
Net repayments of short-term debt (29,596) (31,484)
Proceeds from long-term debt 888 237
Repayments of long-term debt (3,970) (9,626)
Other, net 458 (453)
--------- ---------
Net cash used for financing activities (100,137) (77,413)
--------- ---------
Effect of Exchange Rate Changes on Cash and Equivalents 33,399 (12,374)
--------- ---------
Cash and Equivalents:
Increase (decrease) during the period 67,863 (1,198)
Beginning of period 1,057,687 282,224
--------- ---------
End of period $1,125,550 $281,026
========= =========
Cash Paid During the Period for Interest $ 18,789 $ 22,494
========= =========
Cash Paid During the Period for Income Taxes $ 38,412 $ 80,411
========= =========
Liabilities Assumed from Acquisitions $ 7,531 $ 2,238
========= =========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES:
Inventories at March 31, 2003 and December 31, 2002 were as follows:
(In thousands)
March 31, Dec. 31,
2003 2002
---------- ----------
Raw material $ 289,973 $275,902
Work-in-process 94,260 98,678
Finished goods 624,734 588,166
---------- ----------
$1,008,967 $962,746
========== ==========
(2) COMPREHENSIVE INCOME:
The Company's only component of other comprehensive income in the periods
presented is foreign currency translation adjustments.
(In thousands)
Three months ended
March 31,
-----------------------
2003 2002
--------- ---------
Net income (loss) $195,377 $(23,443)
Foreign currency translation
adjustments, net of tax 138,801 (35,091)
--------- ---------
Total comprehensive income (loss) $334,178 $(58,534)
========= =========
(3) DISCONTINUED OPERATIONS:
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. The segment was comprised of the following
businesses: Precor specialty exercise equipment, West Bend appliances and
premium cookware, and Florida Tile ceramic tile. The consolidated financial
statements present these businesses as discontinued operations in accordance
with Accounting Principles Board Opinion No. 30. On October 31, 2002 the sales
of Precor and West Bend were completed, resulting in cash proceeds of
$211,193,000. The Company is actively marketing and intends to dispose of
Florida Tile through a sale transaction in 2003.
The Company's estimated net loss on disposal of the segment is as follows:
(In thousands)
Pretax Tax Provision
Gain (Loss) (Benefit) After-Tax
---------- ---------- ----------
Realized gains on 2002 sales of
Precor and West Bend $146,240 $51,604 $94,636
Estimated loss on 2003 sale of
Florida Tile recorded in 2002 (123,874) (31,636) (92,238)
--------- --------- ---------
Estimated net gain on disposal of
segment deferred at December 31, 2002 22,366 19,968 2,398
--------- --------- ---------
Gain adjustments related to 2002 sales
of Precor and West Bend recorded in 2003 (2,027) (754) (1,273)
Additional estimated loss on sale of
Florida Tile recorded in 2003 (8,264) (3,032) (5,232)
--------- --------- ---------
Estimated net loss on disposal of
segment at March 31, 2003 $ 12,075 $16,182 $(4,107)
========= ========= =========
Results of the discontinued operations were as follows:
(In thousands)
Three months ended
March 31
-----------------------
2003 2002
--------- ---------
Operating revenues $ 28,622 $101,054
========= =========
Operating income (loss) $ (1,925) $ 8,451
========= =========
Net income (loss) from discontinued operations $ (1,932) $ 4,075
Amount charged against reserve for operating losses 1,932 --
--------- ---------
Income from discontinued operations
(net of tax, $2,070 in 2002) -- 4,075
Loss on disposal of the segment
(net of tax, $16,182 in 2003) (4,107) --
--------- ---------
Income (loss) from discontinued operations $ (4,107) $ 4,075
========= =========
The net assets of the discontinued operations as of March 31, 2003 and December
31, 2002 were as follows:
(In thousands)
March 31, Dec. 31,
2003 2002
---------- ----------
Accounts receivable $ 12,598 $ 17,299
Inventory 45,873 44,286
Accounts payable (5,209) (4,919)
Deferred gain on divestitures -- (2,398)
Accrued liabilities (61,955) (58,491)
Net property, plant and equipment 38,991 41,497
Deferred income tax asset 28,284 32,083
Noncurrent liabilities (16,599) (26,196)
Other assets, net 6,023 8,529
-------- --------
Net assets of discontinued operations $ 48,006 $ 51,690
======== ========
(4) GOODWILL AND INTANGIBLE ASSETS:
Goodwill represents the excess cost over fair value of the net assets of
purchased businesses.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS
142, the Company no longer amortizes goodwill and intangibles that have
indefinite lives. SFAS 142 also requires that the Company assess goodwill and
intangibles with indefinite lives for impairment at least annually, based on the
fair value of the related reporting unit or intangible asset. The Company will
perform its annual impairment assessment in the first quarter of each year.
As the first step in the SFAS 142 implementation process, the Company assigned
its recorded goodwill and intangibles to approximately 300 of its 600 reporting
units based on the operating unit which includes the business acquired. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows at the
Company's estimated cost of capital of 10%. Estimated future cash flows were
based either on current operating cash flows or on a detailed cash flow forecast
prepared by the relevant operating unit. If the fair value of an operating unit
is less than its carrying value, an impairment loss is recorded for the
difference between the fair value of the unit's goodwill and intangible assets
and the carrying value of those assets.
Based on the Company's initial impairment testing, goodwill was reduced by
$254,582,000 and intangible assets were reduced by $8,234,000, and a net
after-tax impairment charge of $221,890,000 ($0.72 per diluted share) was
recognized as a cumulative effect of change in accounting principle in the first
quarter of 2002. The impairment charge was related to approximately 40
businesses and primarily resulted from evaluating impairment under SFAS 142
based on discounted cash flows, instead of using undiscounted cash flows as
required by the previous accounting standard.
In the first quarter of 2003, the Company performed its annual impairment
evaluation under SFAS 142, which resulted in goodwill impairment expense of
$702,000. This impairment charge was mainly related to a U.S. welding components
business.
Intangible expense was $8,608,000 for the first quarter of 2003 and $4,872,000
for the first quarter of 2002. Included in intangible expense in the first
quarter of 2003 are impairment charges of $3,761,000 for trademarks and brands
related to several U.S. welding components businesses and a U.S. business that
manufactures clean room mats.
(5) STOCK-BASED COMPENSATION:
Stock options have been issued to officers and other management employees under
ITW's 1996 Stock Incentive Plan and Premark's 1994 Incentive Plan. The stock
options generally vest over a four-year period.
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using
the intrinsic value method, which does not require that compensation cost be
recognized.
The Company's net income and earnings per share would have been reduced to the
amounts shown below if compensation cost had been determined based on fair value
at the grant dates in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123").
The pro forma net income effect of applying SFAS 123 was as follows:
(In thousands except per share amounts)
Three months ended
March 31
-------------------------
2003 2002
-------- --------
Net income (loss), as reported $195,377 $(23,443)
Add: Restricted stock recorded as
expense, net of tax 2,882 -
Deduct: Total stock-based employee compensation
expense, net of tax (8,635) (6,189)
-------- --------
Pro forma net income (loss) $189,624 $(29,632)
======== ========
Net income (loss) per share:
Basic - as reported $0.64 $(0.08)
Basic - pro forma $0.62 $(0.10)
Diluted - as reported $0.63 $(0.08)
Diluted - pro forma $0.62 $(0.10)
On January 2, 2003, the Company granted 792,158 shares of restricted stock to
domestic officers and other key management employees. This grant was made in
lieu of the normal 2002 stock option grant. Annual compensation expense of
$17,487,000 related to this grant will be recorded over the three-year vesting
period.
(6) NEW ACCOUNTING PRONOUNCEMENTS:
In 2003, the Financial Accounting Standards Board issued FASB Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51
("FIN 46"). The Company is required to adopt FIN 46 in the third quarter of
2003. FIN 46 requires consolidation of entities in which the Company does not
have a majority voting interest but is deemed to be the party which has the
majority of the benefits or risk of loss in the entity. The Company is in the
process of reviewing its investments to determine if any of them would be
impacted by the adoption of FIN 46. Although this FIN 46 analysis has not yet
been completed, the Company expects that the adoption of FIN 46 will result in
the deconsolidation of the Company's mortgage-related investments and the
consolidation of its property development partnership investments. The Company's
risk of loss related to these investments is generally limited to the carrying
value of these investments at December 31, 2002.
Item 2 - Management's Discussion and Analysis
CONSOLIDATED RESULTS OF OPERATIONS
The Company's consolidated results of operations for the first quarter of 2003
and 2002 were as follows:
(Dollars in thousands)
Three months ended
March 31
--------------------------------
2003 2002
---------- ----------
Operating revenues $2,313,790 $2,204,654
Operating income 321,000 309,899
Margin % 13.9% 14.1%
Operating revenues increased 5% in the 2003 first quarter versus the 2002
comparable period mainly due to a 5% increase from favorable currency
translation and a 2% increase from acquisitions. These increases were partially
offset by a 2% decline in base business revenues, which resulted from a 4%
decline in North America and 3% growth internationally. In North America,
industrial production remained at depressed levels and, as a result, capacity
utilization and capital spending remained weak. Consequently, many of the North
American end markets that the Company's businesses serve continued to be weak.
Internationally, economic conditions continued to be stronger than in North
America, particularly in the automotive and construction markets. However,
international capital spending was still fairly weak.
Operating income increased 4% in the first quarter of 2003. This increase
was the net effect of the following factors. First, favorable currency
translation increased income 4%. Second, the 2% decline in base business
revenues reduced income 5% due to operating leverage. Third, higher
corporate-related expenses associated with pensions, restricted shares, and
goodwill and intangible impairment reduced income by 6% (see below). Fourth,
operational cost savings increased income by 9%. Lastly, acquisitions net of
divestitures increased income 1%.
Pension expense increased $11.3 million primarily due to the lowering of the
asset return (from 11% to 8%) and discount rate (from 7.25% to 6.60%)
assumptions for the principal domestic plans. Compensation expense increased
$4.4 million due to the granting of restricted shares to domestic management
employees on January 2, 2003 in lieu of the normal annual stock option grant.
Intangible impairment charges of $4.5 million were the result of the Company's
annual impairment testing of its $2.6 billion of goodwill and intangibles. The
impaired assets reflect diminished expectations of future cash flows, and
primarily related to several U.S. welding components businesses.
Operational cost savings mainly resulted from the benefits of the last four
quarters of restructuring activity, which amounted to $55.1 million in expense
related to 70 different projects. In addition, a $5 million fixed asset
impairment charge was incurred in the first quarter of 2002, which was not
repeated in the current quarter.
Operating margins declined 20 basis points due to the above factors. Base
business revenue declines reduced margins by 50 basis points, operational cost
savings in excess of higher corporate-related expenses increased margins 40
basis points and acquisitions diluted margins 10 basis points.
ENGINEERED PRODUCTS - NORTH AMERICA
Businesses in this segment are located in North America and manufacture a
variety of short lead-time plastic and metal components and fasteners, as well
as specialty products for a diverse customer base. These commercially oriented,
value-added products become part of the customers' products and typically are
manufactured and delivered in a period of time of less than 30 days.
In the plastic and metal components and fasteners category, products include:
o metal fasteners and fastening tools for the commercial and residential
construction industries;
o laminate products for the commercial and residential construction industries
and furniture markets;
o metal fasteners for automotive, appliance and general industrial applications;
o metal components for automotive, appliance and general industrial applications;
o plastic components for automotive, appliance, furniture and electronics
and applications;
o plastic fasteners for automotive, appliance and electronics applications.
In the specialty products category, products include:
o reclosable packaging for consumer food applications;
o swabs, wipes and mats for clean room usage in the electronics and
pharmaceutical industries;
o hand wipes for industrial purposes;
o chemical fluids which clean or add lubrication to machines;
o adhesives for industrial, construction and household purposes;
o epoxy and resin-based coating products for industrial applications; and
o components for industrial machines.
This segment primarily serves the construction, automotive and general
industrial markets.
The results of operations for the Engineered Products - North America segment
for the first quarter of 2003 and 2002 were as follows:
(Dollars in thousands)
Three months ended
March 31
--------------------------------
2003 2002
---------- ----------
Operating revenues $748,785 $736,461
Operating income 111,146 124,778
Margin % 14.8% 16.9%
Operating revenues increased 2% in the first quarter of 2003 mainly due
to a 3% increase from acquisitions, partially offset by a base business revenue
decline of 2%. The base business revenue decline was a result of a 5% decline in
construction revenues resulting from continued weakness in commercial
construction and slowing residential construction activity. Although automotive
revenues grew 3% in the first quarter, this growth rate was slower than the past
quarters due to reduced automotive production. Revenues from the other
businesses in this segment declined 1% due to continued sluggishness in the
broad array of industrial and commercial markets that these businesses serve.
Operating income declined 11% in the first quarter of 2003, mainly due to
the following factors. First, higher restructuring costs reduced income 5%.
Second, the 2% decline in base business revenues reduced income 4% due to
operating leverage. Third, higher corporate-related expenses of $5.4 million
associated with pensions, restricted shares and intangible impairment charges
reduced income by 4%. Fourth, operational cost savings increased income by 2%
mainly due to the first quarter benefits from the last four quarters of
restructuring activity, which amounted to $6.4 million in expense for this
segment. Lastly, acquisitions increased income 1%.
Operating margins declined 210 basis points due to the above factors.
Higher restructuring costs reduced margins by 80 basis points, base business
revenue declines reduced margins 50 basis points, higher corporate-related
expenses net of operational cost savings lowered margins 40 basis points and
acquisitions diluted margins 40 basis points.
ENGINEERED PRODUCTS - INTERNATIONAL
Businesses in this segment are located outside North America and manufacture a
variety of short lead-time plastic and metal components and fasteners, as well
as specialty products for a diverse customer base. These commercially oriented,
value-added products become part of the customers' products and typically are
manufactured and delivered in a period of time of less than 30 days.
In the plastic and metal components and fastener category, products include:
o metal fasteners and fastening tools for the commercial and residential
construction industries;
o laminate products for the commercial and residential construction industries
and furniture markets;
o metal fasteners for automotive, appliance and general industrial applications;
o metal components for automotive, appliance and general industrial applications;
o plastic components for automotive, appliance and electronics applications; and
o plastic fasteners for automotive, appliance and electronics applications.
In the specialty products category, products include:
o electronic component packaging trays used for the storage, shipment and
manufacturing insertion of electronic components and microchips;
o swabs, wipes and mats for clean room usage in the electronics and
pharmaceutical industries;
o adhesives for industrial, construction and household purposes;
o chemical fluids which clean or add lubrication to machines; and
o epoxy and resin-based coating products for industrial applications.
This segment primarily serves the construction, automotive and general
industrial markets.
The results of operations for the Engineered Products - International segment
for the first quarter of 2003 and 2002 were as follows:
(Dollars in thousands)
Three months ended
March 31
-------------------------------
2003 2002
---------- ----------
Operating revenues $405,512 $332,033
Operating income 42,327 28,226
Margin % 10.4% 8.5%
Operating revenues increased 22% in the first quarter of 2003 versus the prior
year mainly due to a 15% increase from favorable currency translation, a 2%
increase from acquisitions and a base business revenue increase of 5%. The base
business revenue increase was a result of a 3% increase in construction
revenues, mainly resulting from higher commercial construction activity in the
Australasia region. Although automotive revenues grew 4% in the first quarter of
2003, this growth rate was slower than past quarters due to reduced European
automotive production. Other businesses in this segment serve a broad array of
industrial and commercial markets, and revenues from these businesses increased
9%.
Operating income increased 50% in the first quarter of 2003 mainly due to the
following factors. First, favorable currency translation increased income 21%.
Second, the 5% growth in base business revenues increased income 23% due to
operating leverage. Third, higher restructuring costs reduced income 5%. Fourth,
higher corporate-related expenses of $2.4 million related to higher pension and
restricted share expenses reduced income 9%. Fifth, operational cost savings
increased income 19%. These operational cost savings were mainly due to a $5
million fixed asset impairment reflected in last year's results and cost
reductions related to the last four quarters of restructuring activity, which
amounted to $2.4 million in expense for this segment. Lastly, acquisitions
increased income 1%.
Operating margins increased 190 basis points due to the above factors. Higher
base business revenues increased margins by 150 basis points, operational cost
savings net of higher corporate-related expenses increased margins 80 basis
points, currency translation increased margins 20 basis points, higher
restructuring expense reduced margins 40 basis points and acquisitions diluted
margins 10 basis points.
SPECIALTY SYSTEMS - NORTH AMERICA
Businesses in this segment are located in North America and design and
manufacture longer lead-time machinery and related consumables, as well as
specialty equipment for a diverse customer base. These commercially oriented,
value-added products become part of the customers' production process and
typically are manufactured and delivered in a period of time of more than 30
days.
In the machinery and related consumables category, products include:
o industrial packaging equipment and plastic and steel strapping for the
bundling and shipment of a variety of products for customers in numerous
end markets;
o welding equipment and metal consumables for a variety of end market users;
o equipment and plastic consumables that multi-pack cans and bottles for the
food and beverage industry;
o plastic bottle sleeves and related equipment for the food and beverage
industry;
o plastic stretch film and related packaging equipment for various industrial
purposes;
o paper and plastic products used to protect shipments of goods in transit;
o marking tools and inks for various end users; and
o foil and film and related equipment used to decorate a variety of consumer
products.
In the specialty equipment category, products include:
o commercial food equipment such as dishwashers, refrigerators, mixers,
ovens, food slicers and specialty scales for use by restaurants,
institutions and supermarkets;
o paint spray equipment for a variety of general industrial applications;
o static control equipment for electronics and industrial applications;
o wheel balancing and tire uniformity equipment used in the automotive industry; and
o airport ground power generators for commercial and military applications.
This segment primarily serves the food retail and service, general industrial,
construction, and food and beverage markets.
The results of operations for the Specialty Systems - North America segment for
the first quarter of 2003 and 2002 were as follows:
(Dollars in thousands)
Three months ended
March 31
-----------------------------
2003 2002
-------- --------
Operating revenues $785,716 $827,184
Operating income 111,340 111,127
Margin % 14.2% 13.4%
Operating revenues decreased 5% in the first quarter of 2003 over the
prior year, mainly due to a 6% decline in base business revenues partially
offset by a revenue increase of 1% from acquired companies. The 6% decline in
base business revenues was a result of continued low capacity utilization in the
various markets this segment serves, which has resulted in slow demand for
capital equipment, and continued low industrial production activity, which has
reduced demand for consumable products. This lower market demand was reflected
in declines in food equipment revenues of 12%, welding revenues of 5% and
marking and decorating revenues of 11%. Industrial packaging revenues were even
with the prior year.
Operating income in the first quarter of 2003 was even with the prior
year as a result of the following factors. First, lower restructuring costs in
2003 increased income 10%. Second, the 6% decline in base business revenues
reduced income 19% due to operating leverage. Third, higher corporate-related
expenses of $9.0 million associated with pensions, restricted shares and
impairments of goodwill and intangible assets reduced income by 8%. Fourth,
operational cost savings increased income 16% mainly due to cost savings related
to the last four quarters of restructuring activity, which amounted to $30.4
million in expense for this segment. Lastly, acquisitions increased income 2%.
Operating margins increased 80 basis points due to the above factors.
Lower restructuring costs increased margins by 140 basis points, base business
revenue declines reduced margins by 180 basis points, operational cost savings
in excess of higher corporate-related expenses increased margins 110 basis
points and acquisitions increased margins 10 basis points.
SPECIALTY SYSTEMS - INTERNATIONAL
Businesses in this segment are located outside North America and design and
manufacture longer lead-time machinery and related consumables, as well as
specialty equipment for a diverse customer base. These commercially oriented,
value-added products become part of the customers' production process and
typically are manufactured and delivered in a period of time of more than 30
days.
In the machinery and related consumables category, products include:
o industrial packaging equipment and plastic and steel strapping for the
bundling and shipment of a variety of products for customers in numerous
end markets;
o welding equipment and metal consumables for a variety of end market users;
o equipment and plastic consumables that multi-pack cans and bottles for the
food and beverage industry;
o plastic bottle sleeves and related equipment for the food and beverage
industry;
o plastic stretch film and related packaging equipment for various industrial
purposes;
o paper and plastic products used to protect shipments of goods in transit; and
o foil and film and related equipment used to decorate a variety of consumer
products.
In the specialty equipment category, products include:
o commercial food equipment such as dishwashers, refrigerators, mixers,
ovens, food slicers and specialty scales for use by restaurants,
institutions and supermarkets;
o paint spray equipment for a variety of general industrial applications;
o static control equipment for electronics and industrial applications; and
o airport ground power generators for commercial applications.
This segment primarily serves the general industrial, food retail and service,
and food and beverage markets.
The results of operations for the Specialty Systems - International segment for
the first quarter of 2003 and 2002 were as follows:
(Dollars in thousands)
Three months ended
March 31
-----------------------------
2003 2002
-------- --------
Operating revenues $425,394 $365,594
Operating income 38,759 28,976
Margin % 9.1% 7.9%
Operating revenues increased 16% in the first quarter of 2003 primarily due to a
16% increase from favorable currency translation. Base business revenues
increased by 1% primarily as a result of improved European industrial production
activity. However, low European capacity utilization continued to dampen
equipment demand. Industrial packaging revenues increased 6%, food equipment
revenues were flat and specialty equipment revenues declined 5%.
Operating income increased 34% in the first quarter of 2003, mainly due to the
following factors. First, currency translation increased income 22%. Second, the
1% increase in base business revenues increased income 2% due to operating
leverage. Third, higher restructuring expense reduced income 6%. Fourth, higher
corporate-related expenses of $2.8 million resulting from higher pension and
restricted share expenses reduced income 10%. Fourth, operational cost savings
of 23% offset the above increases. These operational cost savings were mainly
due to cost reductions related to the last four quarters of restructuring
activity, which amounted to $15.9 million in expense in this segment. Lastly,
acquisitions net of divestitures increased income 2%.
Operating margins increased 120 basis points due to the above factors. Higher
base business revenues increased margins by 10 basis points, operational cost
savings net of higher corporate-related expenses increased margins 110 basis
points, currency translation increased margins 30 basis points, higher
restructuring expense reduced margins 50 basis points and acquisitions enhanced
margins 20 basis points.
LEASING AND INVESTMENTS
Businesses in this segment make opportunistic investments in mortgage-related
assets, leveraged and direct financing leases of telecommunications, aircraft
and other equipment, properties and property developments, affordable housing,
and a venture capital fund. As a result of the Company's strong cash flow, the
Company has historically had excess funds to make opportunistic investments that
meet the Company's desired financial returns. In connection with some of these
investment transactions, the Company may be contractually required to make
future cash payments related to affordable housing contributions, venture fund
capital contributions or the redemption of preferred stock of subsidiaries. See
page 29 of the Company's 2002 Annual Report to Stockholders for further
information regarding these cash contractual obligations as of December 31,
2002.
The results of operations for the Leasing and Investments segment for the first
quarter of 2003 and 2002 were as follows:
(In thousands)
Three months ended
March 31
-----------------------------
2003 2002
-------- --------
Operating revenues $30,450 $32,096
Operating income 17,428 16,792
Operating income (loss) by investment for the first quarter of 2003 and 2002 was
as follows:
(In thousands)
Three months ended
March 31
-----------------------------
2003 2002
-------- --------
Mortgage investments $ 8,543 $14,742
Leases of equipment 5,055 1,410
Property developments 1,531 765
Properties held for sale (857) (543)
Venture capital limited partnership (357) (292)
Other 3,513 710
-------- --------
$17,428 $16,792
======== ========
Income from mortgage investments decreased primarily due to lower swap income as
a result of lower market interest rates. Income from leases increased due to
income from telecommunications leases which were entered into at the end of the
first quarter of 2002. Operating income from other investments increased
primarily due to lower interest expense related to affordable housing
investments.
OPERATING REVENUES
The reconciliation of segment operating revenues to total operating revenues is
as follows:
Three months ended
March 31
-------------------------
2003 2002
---------- ----------
Engineered Products - North America $ 748,785 $ 736,461
Engineered Products - International 405,512 332,033
Specialty Systems - North America 785,716 827,184
Specialty Systems - International 425,394 365,594
Leasing and Investments 30,450 32,096
---------- ----------
Total segment operating revenues 2,395,857 2,293,368
Intersegment revenues (82,067) (88,714)
---------- ----------
Total operating revenues $2,313,790 $2,204,654
========== ==========
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS
142, the Company no longer amortizes goodwill and intangibles that have
indefinite lives. SFAS 142 also requires that the Company assess goodwill and
intangibles with indefinite lives for impairment at least annually, based on the
fair value of the related reporting unit or intangible asset. The Company will
perform its annual impairment assessment in the first quarter of each year.
As the first step in the SFAS 142 implementation process, the Company assigned
its recorded goodwill and intangibles to approximately 300 of its 600 reporting
units based on the operating unit which includes the business acquired. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows at the
Company's estimated cost of capital of 10%. Estimated future cash flows were
based either on current operating cash flows or on a detailed cash flow forecast
prepared by the relevant operating unit. If the fair value of an operating unit
is less than its carrying value, an impairment loss is recorded for the
difference between the fair value of the unit's goodwill and intangible assets
and the carrying value of those assets.
Based on the Company's initial impairment testing, goodwill was reduced by
$254.6 million and intangible assets were reduced by $8.2 million, and a net
after-tax impairment charge of $221.9 million ($0.72 per diluted share) was
recognized as a cumulative effect of change in accounting principle in the first
quarter of 2002. The impairment charge was related to approximately 40
businesses and primarily resulted from evaluating impairment under SFAS 142
based on discounted cash flows, instead of using undiscounted cash flows as
required by the previous accounting standard.
In addition to the cumulative effect of change in accounting principle recorded
in 2002, goodwill and intangible expense for the quarter ended March 31, 2003
and 2002 was as follows:
(In thousands)
Three months ended
March 31
-------------------------
2003 2002
-------- --------
Goodwill:
Impairment $ 702 $ -
Intangibles:
Amortization 4,847 4,872
Impairment 3,761 -
------- -------
Total $9,310 $4,872
======= =======
In the first quarter of 2003, the Company performed its annual impairment
testing of its goodwill and intangible assets, which resulted in impairment
charges of $4.5 million. The 2003 goodwill impairment charge of $0.7 million was
related to a U.S. welding components business and primarily resulted from lower
estimated future cash flows than previously expected. Also in the first quarter
of 2003, intangible impairment charges of $3.8 million were recorded to reduce
to estimated fair value the carrying value of trademarks and brands related to
several U.S. welding components businesses and a U.S. business which
manufactures clean room mats.
INTEREST EXPENSE
Interest expense was essentially flat in the first three months of 2003 versus
the first three months of 2002 as higher interest expense from the 6.55%
preferred debt securities issued in the second quarter of 2002 was offset by
lower interest expense at international operations resulting from lower
international debt levels.
OTHER INCOME
Other income increased to $3.3 million for the first three months of 2003 from
$2.1 million in 2002. This increase is primarily due to gains in 2003 versus
losses in 2002 on the sale of operations and affiliates and higher interest
income in 2003, partially offset by translation losses in 2003 versus gains in
2002 on foreign currency transactions.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations of $199.5 million ($0.65 per diluted share) in
the first three months of 2003 was 2.6% higher than the 2002 first quarter
income from continuing operations of $194.4 million ($0.63 per diluted share).
DISCONTINUED OPERATIONS
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. These businesses were acquired by ITW in 1999 as
part of the Company's merger with Premark International Inc. ("Premark").
Subsequent to the Premark merger, the Company determined that the consumer
characteristics of the businesses in this segment were not a good long-term fit
with the Company's other industrially-focused businesses. Businesses in this
segment are located primarily in North America and manufacture household
products that are used by consumers, including Precor specialty exercise
equipment, West Bend small appliances and premium cookware, and Florida Tile
ceramic tile. On October 31, 2002 the sales of Precor and West Bend were
completed, resulting in net cash proceeds of $211.2 million. The Company is
actively marketing and intends to dispose of Florida Tile through a sale
transaction in 2003.
Results of the discontinued operations were as follows:
(In thousands)
Three months ended
March 31
-----------------------
2003 2002
------- --------
Operating revenues $28,622 $101,054
======== ========
Operating income (loss) $(1,925) $ 8,451
======== ========
Net income (loss) from discontinued operations $(1,932) $ 4,075
Amount charged against reserve for operating losses 1,932 -
-------- --------
Income from discontinued operations
(net of tax, $2,070 in 2002) - 4,075
Loss on disposal of the segment
(net of tax, $16,182 in 2003) (4,107) -
-------- --------
Income (loss) from discontinued operations $(4,107) $ 4,075
======== ========
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 existing debt and to continue to pay dividends that meet its
dividend payout objective of 25-30% of the last three years' average net income.
In addition, free operating cash flow is expected to be adequate to finance
internal growth, small-to-medium sized acquisitions and additional investments.
The Company uses free operating cash flow to measure normal cash flow generated
by its operations, which is available for dividends, acquisitions, debt
repayment and additional investments. 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 three months ended March 31, 2003 and
2002 was as follows:
(In thousands)
Three months ended
March 31
----------------------
2003 2002
--------- ---------
Net cash provided by operating activities $ 217,174 $ 282,894
Proceeds from investments 15,665 11,827
Additions to plant and equipment (56,173) (64,051)
--------- ---------
Free operating cash flow 176,666 230,670
--------- ---------
Acquisitions (14,814) (35,347)
Cash dividends paid (70,514) (67,084)
Purchase of investments (29,138) (115,049)
Net settlement from sales of operations and affiliates (3,859) 1,792
Net repayments of debt (32,678) (40,873)
Other 42,200 24,693
--------- ---------
Net increase (decrease) in cash and equivalents $ 67,863 $ (1,198)
========= =========
Return on Invested Capital
The Company uses return on average invested capital ("ROIC") to measure the
effectiveness of the operations' use of invested capital to generate profits.
ROIC for the three months ended March 31, 2003 and 2002 was as follows:
(Dollars in thousands)
Three months ended
March 31
--------------------------
2003 2002
---------- ----------
Operating income after taxes $ 208,650 $ 201,434
========== ==========
Total debt $1,552,783 $1,526,242
Less: Leasing and investment debt (812,128) (810,106)
Less: Cash (1,125,550) (281,026)
---------- ----------
Adjusted net debt (384,895) 435,110
Total stockholders' equity 6,919,082 5,945,936
---------- ----------
Invested capital $6,534,187 $6,381,046
========== ==========
Average invested capital $6,468,729 $6,506,623
========== ==========
Return on average invested capital 12.9% 12.4%
===== =====
Working Capital
Net working capital at March 31, 2003 and December 31, 2002 is summarized as
follows:
(Dollars in thousands)
March 31, Dec. 31, Increase/
2003 2002 (Decrease)
----------- ----------- -----------
Current Assets:
Cash and equivalents $1,125,550 $1,057,687 $ 67,863
Trade receivables 1,562,330 1,500,031 62,299
Inventories 1,008,967 962,746 46,221
Other 354,559 354,301 258
---------- ---------- ----------
4,051,406 3,874,765 176,641
---------- ---------- ----------
Current Liabilities:
Short-term debt 100,998 121,604 (20,606)
Accounts payable 425,791 416,958 8,833
Accrued expenses 709,926 833,689 (123,763)
Other 248,106 194,911 53,195
---------- ---------- ----------
1,484,821 1,567,162 (82,341)
---------- ---------- ----------
Net Working Capital $2,566,585 $2,307,603 $ 258,982
========== ========== ==========
Current Ratio 2.73 2.47
==== ====
Accrued liabilities decreased primarily as a result of the payments of accrued
bonuses, rebates and payroll in the first quarter of 2003.
Debt
Total debt at March 31, 2003 and December 31, 2002 was as follows:
(Dollars in thousands)
March 31, Dec. 31,
2003 2002
---------- ----------
Short-term debt $ 100,998 $ 121,604
Long-term debt 1,451,785 1,460,381
---------- ----------
Total debt $1,552,783 $1,581,985
========== ==========
Total debt to capitalization 18.3% 19.2%
Total debt to total capitalization
(excluding Leasing and Investment segment) 10.3% 11.4%
Stockholders' Equity
The changes to stockholders' equity during 2003 were as follows:
(In thousands)
Total stockholders' equity, December 31, 2002 $6,649,071
Income from continuing operations 199,484
Loss from discontinued operations (4,107)
Cash dividends declared (70,535)
Exercise of stock options 2,598
Shares issued for restricted stock grants 4,434
Escrow shares returned from prior acquisitions (664)
Currency translation adjustments 138,801
----------
Total stockholders' equity, March 31, 2003 $6,919,082
==========
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding the divestiture of the Florida Tile business in 2003, the
adequacy of internally generated funds and the impact of the adoption of FIN 46.
These statements are subject to certain risks, uncertainties, and other factors
which could cause actual results to differ materially from those anticipated,
including, without limitation, the risks described herein. Important factors
that may influence future results include (1) a downturn in the construction,
automotive, general industrial, food retail and service, commercial or real
estate markets, (2) deterioration in global and domestic business and economic
conditions, particularly in North America, the European Community or Australia,
(3) the unfavorable impact of foreign currency fluctuations, (4) an interruption
in, or reduction in, introducing new products into the Company's product line
and (5) a continuing unfavorable environment for making acquisitions or
dispositions, domestic and international, including adverse accounting or
regulatory requirements and market values of candidates.
Item 4 - Controls and Procedures
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Company's Chairman and Chief Executive Officer and
Senior Vice President and Chief Financial Officer believe the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) are effective in timely alerting the Company's management to material
information required to be included in this Form 10-Q and other Exchange Act
filings.
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation and there were no significant deficiencies or material
weaknesses which required corrective actions.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
10(a) Amendment to the Illinois Tool Works Inc. 1996 Stock Incentive
Plan effective May 9, 2003
99(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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.
ILLINOIS TOOL WORKS INC.
Dated: May 15, 2003 By: /s/ Jon C. Kinney
-------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Certification of Principal Executive Officer
I, W. James Farrell, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Illinois Tool
Works Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003 /s/ W. James Farrell
------------------------------------
W. James Farrell
Chairman and Chief Executive Officer
Certification of Principal Financial Officer
I, Jon C. Kinney, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Illinois Tool
Works Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003 /s/ Jon C. Kinney
------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
Exhibit 10(a)
AMENDMENT TO MERGE THE
PREMARK INTERNATIONAL, INC. 1994 INCENTIVE PLAN
INTO THE ILLINOIS TOOL WORKS INC. 1996 STOCK INCENTIVE PLAN
1. Section 1 of the Plan is amended to add the following:
"Effective May 9, 2003, the Premark International, Inc. 1994 Incentive Plan
(the "Premark Plan") is merged into the Plan. Section 15 of the Plan sets
forth the terms applicable to the merged Premark Plan and the Options
granted thereunder."
2. Section 4 of the Plan is amended to add the following:
"The 10,000,000 shares of Common Stock authorized for issuance pursuant to
the Plan increased to 20,000,000 shares pursuant to the stock split in
1997. Effective May 9, 2003, the number of shares of Common Stock
authorized for issuance shall be [30,930,193] shares, which number reflects
the merger of the Premark Plan into the Plan and an additional 3,000,000
shares."
3. A new Section 15 is added to the Plan as follows:
Section 15. Options Granted Under the Premark Plan.
Pursuant to the merger of the Premark Plan into the Plan effective May 9,
2003, each Option granted under the Premark Plan prior to such date shall
be assumed by the Plan and shall be subject to the requirements set forth
below.
(a) Administration by the Committee. The Committee shall have the full
power, discretion and authority to interpret and administer the
Options previously granted under the Premark Plan in a manner which is
consistent with the provisions of this Plan, the terms of the
applicable Option agreements, and the requirements of applicable law.
(b) Option Grants. Any grants of Options to individuals who had previously
been eligible for grants under the Premark Plan prior to the Company's
acquisition of Premark International, Inc. have been made under this
Plan subsequent to the acquisition and will continue to be granted
pursuant to the terms of this Plan.
(c) Option Agreements. Each Option granted under the Premark Plan is
evidenced by an Option agreement, the terms of which shall continue in
effect.
(d) Premark Plan Provisions. Except as set forth in this Section 15 or in
any outstanding Option agreement, the provisions of the Premark Plan
shall terminate and have no effect as of May 9, 2003.
EXHIBIT 99(a)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following statement is being made to the Securities and Exchange Commission
solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1349), which carries with it certain criminal penalties in the event of a
knowing or willful misrepresentation.
Each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q
for the period ended March 31, 2003 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the registrant.
Dated: May 15, 2003 /s/ W. James Farrell
------------------------------------
W. James Farrell
Chairman and Chief Executive Officer
Dated: May 15, 2003 /s/ Jon C. Kinney
------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer