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