<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 1-4797
-------------------------------------------------------
ILLINOIS TOOL WORKS INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1258310
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 West Lake Avenue, Glenview, IL 60025-5811
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (847) 724-7500
-------------------------
Former address:
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
The number of shares of registrant's common stock, $.01 par value, outstanding
at October 31, 1999: 250,699,566.
<PAGE> 2
Part I - Financial Information
Item 1
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared by
Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair statement of the results for interim
periods. It is suggested that these financial statements be read in conjunction
with the financial statements and notes to financial statements included in the
Company's Annual Report on Form 10-K. Certain reclassifications of prior year's
data have been made to conform with current year reporting.
<PAGE> 3
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME
(UNAUDITED)
(In Thousands Except for
Per Share Amounts)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ---------- ---------
Operating Revenues $1,593,811 $1,377,212 $4,691,815 $4,138,664
Cost of revenues 1,012,132 888,741 2,977,931 2,673,587
Selling, administrative,
and research and
development expenses 254,618 212,854 769,936 651,247
Amortization of goodwill
and other intangible
assets 17,423 11,055 48,228 31,229
----------- ---------- ---------- ---------
Operating Income 309,638 264,562 895,720 782,601
Interest expense (11,956) (3,652) (31,898) (8,891)
Other income (expense) (2,858) (2,840) 4,586 (4,403)
----------- ---------- ---------- ---------
Income Before Income Taxes 294,824 258,070 868,408 769,307
Income taxes 107,600 94,200 317,000 280,800
---------- ---------- ---------- ----------
Net Income $ 187,224 $ 163,870 $ 551,408 $ 488,507
========== ========== ========== ==========
Per share of common stock:
Basic Net Income $0.75 $0.66 $2.20 $1.96
===== ===== ===== =====
Diluted Net Income $0.74 $0.65 $2.18 $1.94
===== ===== ===== =====
Cash dividends:
Paid $0.15 $0.12 $0.45 $0.36
===== ===== ===== =====
Declared $0.18 $0.15 $0.48 $0.39
===== ===== ===== =====
Shares of common stock
outstanding during the
period:
Average 250,617 249,973 250,435 249,848
Average assuming dilution 253,329 252,268 253,139 252,424
<PAGE> 4
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS September 30, 1999 December 31, 1998
- ------ ------------------ -----------------
Current Assets:
Cash and equivalents $ 151,493 $ 93,485
Trade receivables 1,096,907 989,086
Inventories 625,046 581,755
Deferred income taxes 115,979 102,607
Prepaid expenses and other
current assets 95,090 67,540
---------- ----------
Total current assets 2,084,515 1,834,473
---------- ----------
Plant and Equipment:
Land 78,240 73,266
Buildings and improvements 597,047 554,383
Machinery and equipment 1,718,773 1,624,703
Equipment leased to others 110,446 107,186
Construction in progress 111,417 57,894
---------- ----------
2,615,923 2,417,432
Accumulated depreciation (1,527,950) (1,429,883)
---------- ----------
Net plant and equipment 1,087,973 987,549
---------- ----------
Investments 1,185,202 1,183,493
Goodwill 1,577,653 1,189,323
Deferred Income Taxes 415,659 417,361
Other Assets 540,019 505,963
---------- ----------
$6,891,021 $6,118,162
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Short-term debt $ 424,894 $ 406,707
Accounts payable 289,402 268,869
Accrued expenses 474,694 457,543
Cash dividends payable 45,121 37,519
Income taxes payable 119,150 51,371
---------- ----------
Total current liabilities 1,353,261 1,222,009
---------- ----------
Non-current Liabilities:
Long-term debt 1,212,431 947,008
Other 583,774 611,110
---------- ----------
Total non-current liabilities 1,796,205 1,558,118
---------- ----------
Stockholders' Equity:
Preferred stock -- --
Common stock 2,509 2,504
Additional Paid-in-Capital 310,372 302,684
Income reinvested in the business 3,561,372 3,130,213
Common stock held in treasury (1,783) (1,783)
Cumulative translation adjustment (130,915) (95,583)
---------- ----------
Total stockholders' equity 3,741,555 3,338,035
---------- ----------
$6,891,021 $6,118,162
========== ==========
<PAGE> 5
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands) Nine Months Ended
September 30
------------------
1999 1998
-------- --------
Cash Provided by (Used for) Operating Activities:
Net income $551,408 $488,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 188,912 159,164
Change in deferred income taxes (3,540) 20,183
Provision for uncollectible accounts 8,829 3,079
(Gain) loss on sale of plant and equipment (1,418) 5,059
Income from investments (115,691) (97,670)
Non-cash interest on nonrecourse debt 34,719 36,125
(Gain)loss on sale of operations and affiliates (12) 3,142
Other non-cash items, net (4,665) 1,983
-------- --------
Cash provided by operating activities 658,542 619,572
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (70,486) (16,226)
Inventories (9,769) 9,917
Prepaid expenses and other assets (45,681) (25,722)
Increase (decrease) in--
Accounts payable (5,248) (32,969)
Accrued expenses (14,481) (25,315)
Income taxes payable 57,152 (33,168)
Other, net 258 (160)
-------- --------
Net cash provided by operating activities 570,287 495,929
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (569,234) (597,970)
Additions to plant and equipment (164,985) (149,967)
Purchase of investments (35,734) (9,238)
Proceeds from investments 66,368 33,711
Proceeds from sale of plant and equipment 18,762 18,198
Proceeds from sale of operations and affiliates 9,535 10,251
Other, net 7,293 6,366
-------- --------
Net cash used for investing activities (667,995) (688,649)
-------- --------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (112,647) (89,920)
Issuance of common stock 7,693 5,301
Net borrowings (repayments)of short-term debt (221,945) 195,542
Proceeds from long-term debt 507,057 17,162
Repayments of long-term debt (19,494) (9,552)
Other, net 1,641 2,286
-------- --------
Net cash provided by
financing activities 162,305 120,819
-------- --------
Effect of Exchange Rate Changes on Cash
and Equivalents (6,589) (5,817)
-------- --------
Cash and Equivalents:
Increase (decrease) during the period 58,008 (77,718)
Beginning of period 93,485 185,856
-------- --------
End of period $151,493 $108,138
======== ========
Cash Paid During the Period for Interest $ 39,583 $ 20,223
======== ========
Cash Paid During the Period for Income Taxes $237,740 $226,461
======== ========
Liabilities Assumed from Acquisitions $168,151 $150,542
======== ========
<PAGE> 6
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at September 30, 1999 and December 31, 1998 were as follows:
(In Thousands)
Sept 30, Dec. 31,
1999 1998
-------- --------
Raw material $186,571 $163,868
Work-in-process 76,531 72,254
Finished goods 361,944 345,633
-------- --------
$625,046 $581,755
======== ========
(2) COMPREHENSIVE INCOME:
The components of comprehensive income were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $187,224 $163,870 $551,408 $488,507
Foreign currency translation
adjustments, net of tax 7,022 (14,962) (35,332) (42,719)
-------- -------- -------- --------
Total comprehensive income $194,246 $148,908 $516,076 $445,788
======== ======== ======== ========
(3) SHORT-TERM DEBT:
In 1998, the Company entered into a $350,000,000 Line of Credit Agreement,
which was extended in 1999 from March 31,1999 to June 30, 1999. This line
of credit was replaced on June 30, 1999, by a $400,000,000 Credit Agreement
that expires on June 28, 2000.
(4) LONG-TERM DEBT:
In February 1999, the Company issued $500,000,000 of 5.75% notes due March
1, 2009, at 99.281% of face value.
(5) PREMARK ACQUISITION:
On September 9, 1999, the Company entered into an Agreement and Plan of
Merger with Premark International, Inc. ("Premark") pursuant to which,
subject to the terms and conditions contained in the Merger Agreement, CS
Merger Sub Inc., a wholly owned subsidiary of the Company, will be merged
(the "Merger") into Premark, with Premark surviving as a wholly owned
subsidiary of the Company. As a result of the Merger, each outstanding
share of Premark common stock, par value $1.00 per share (the "Premark
Common Stock") will be converted into the right to receive between .5776
and .9181 of a share of ITW common stock, par value of $.01 ("ITW Common
Stock"), depending on the average closing price of ITW Common Stock over
the 20 day trading period ending on the second business day prior to the
closing of the Merger.
<PAGE> 7
As a condition and inducement to the Company's willingness to enter into
the Merger Agreement, Premark has entered into a Stock Option Agreement
with the Company dated as of September 9, 1999 (the "Option Agreement").
Pursuant to the Option Agreement, the Company has an option (the "Option")
to purchase 12,203,694 shares of Premark's Common Stock at a price of
$34.06 (the "Option Price") per share of Premark Common Stock under certain
circumstances, subject to adjustment. The Option Agreement limits the
profit that the Company may receive pursuant to the Option to $30 million
in the aggregate.
<PAGE> 8
Item 2 - Management's Discussion and Analysis
ENGINEERED PRODUCTS - NORTH AMERICA
Businesses in this segment are located in North America and manufacture short
lead-time components and fasteners, and specialty products such as adhesives,
resealable packaging and electronic component packaging.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
Operating revenues $531,350 $453,571 $1,575,444 $1,317,152
Operating income 108,369 93,247 328,556 270,863
Margin % 20.4% 20.6% 20.9% 20.6%
In 1999, revenues increased 17% and 20% for the third quarter and year-to-date
periods, respectively. Base business revenue grew 10% for the third quarter and
9% year-to-date, mainly as a result of increases in the automotive, construction
and consumer packaging businesses. In addition, acquisitions contributed revenue
growth of 8% and 11% for the third quarter and year-to-date periods,
respectively.
For both periods, operating income grew due to the base business revenue
increases, improved operating efficiencies and acquisitions. Overall margins
were essentially flat for both periods as improved operating efficiencies at the
base businesses were offset by the lower margins of acquired businesses.
ENGINEERED PRODUCTS - INTERNATIONAL
Businesses in this segment are located outside North America and manufacture
short lead-time components and fasteners, and specialty products such as
electronic component packaging and adhesives.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $300,029 $221,068 $865,082 $666,146
Operating income 37,821 33,825 101,390 96,204
Margin % 12.6% 15.3% 11.7% 14.4%
<PAGE> 9
The 1999 revenue increases of 36% in the third quarter and 30% year-to-date were
largely due to acquisitions, which contributed growth of 36% and 31% in the
three-month and nine-month periods, respectively. For the three-month and
nine-month periods, the base business revenue growth was 3% and 1%,
respectively, mainly related to the automotive and polymers businesses for both
periods, as well as Australian construction businesses for the third quarter.
Foreign currency fluctuations negatively impacted revenues by 3% and 2% for the
three-month and nine-month periods, respectively.
For both periods, the increase in operating income was due to acquisitions,
partially offset by nonrecurring costs associated with various European
operations. The margin declines were attributable both to the base businesses,
mainly due to the European nonrecurring costs, and the initial lower margin
impact of acquisitions.
SPECIALTY SYSTEMS - NORTH AMERICA
Businesses in this segment are located in North America and produce longer
lead-time machinery and related consumables, and specialty equipment for
applications such as industrial spray coating, quality measurement, and static
control.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
Operating revenues $527,870 $480,472 $1,574,744 $1,498,365
Operating income 108,869 90,338 319,384 279,722
Margin % 20.6% 18.8% 20.3% 18.7%
In 1999, revenues increased 10% for the three-month period and 5% for the
year-to-date period. For the third quarter, acquisitions contributed 7% to the
revenue growth, while the base business revenue grew 2%. For the year-to-date
period, revenue growth of 8% from acquisitions was partially offset by reduced
base business revenues of 3%.
Operating income increased 21% in the third quarter and 14% year-to-date as a
result of improved operating efficiencies in the base businesses. For both
periods, the base business margin improvement was partially offset by lower
margins for acquired businesses.
<PAGE> 10
SPECIALTY SYSTEMS - INTERNATIONAL
Businesses in this segment are located outside North America and manufacture
longer lead-time machinery and related consumables, and specialty equipment for
industrial spray coating and other applications.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $275,579 $254,001 $780,895 $765,722
Operating income 35,029 30,685 80,755 91,822
Margin % 12.7% 12.1% 10.3% 12.0%
In 1999, revenues increased 8% in the third quarter and 2% in the year-to-date
period. For both periods, acquisitions contributed 8% to the revenue growth.
Base business revenues increased 1% for the three-month period and decreased 6%
year-to-date. Foreign currency translation did not have any significant impact
in either period.
In the third quarter, operating income and margins increased due to acquisitions
and improved performance in various packaging and finishing businesses. For the
year-to-date period, operating income and margins decreased due to the base
business revenue declines and the lower margins of acquired businesses.
LEASING AND INVESTMENTS
This segment makes opportunistic investments in mortgage-related assets,
leveraged and direct financing leases of equipment, properties and property
developments, and affordable housing.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $ 38,013 $ 36,159 $118,784 $101,885
Operating income 19,550 16,467 65,635 43,990
Both revenues and operating income increased for both periods of 1999 versus
1998 due to gains on the sales of assets and higher mortgage-related income.
<PAGE> 11
OPERATING REVENUES
The reconciliation of segment operating revenues to total company operating
revenues is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Engineered Products - North America $ 531,350 $ 453,571 $ 1,575,444 $ 1,317,152
Engineered Products - International 300,029 221,068 865,082 666,146
Specialty Systems - North America 527,870 480,472 1,574,744 1,498,365
Specialty Systems - International 275,579 254,001 780,895 765,722
Leasing and Investments 38,013 36,159 118,784 101,885
----------- ----------- ----------- -----------
Total segment operating revenues 1,672,841 1,445,271 4,914,949 4,349,270
Intersegment revenues (79,030) (68,059) (223,134) (210,606)
----------- ----------- ----------- -----------
Total company operating revenues $ 1,593,811 $ 1,377,212 $ 4,691,815 $ 4,138,664
=========== =========== =========== ===========
</TABLE>
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 63.5% in the first
nine months of 1999 versus 64.6% in the first nine months of 1998, due to
increased sales volume coupled with lower manufacturing costs. Selling,
administrative, and research and development expenses increased to 16.4% of
revenues in the first nine months of 1999 versus 15.7% in 1998, primarily due to
higher nonrecurring charges in 1999.
INTEREST EXPENSE
Interest expense increased to $31.9 million in the first nine months of 1999
from $8.9 million in 1998, primarily due to higher long-term debt and increased
commercial paper borrowings.
OTHER INCOME (EXPENSE)
Other income (expense) was income of $4.6 million for the first nine months of
1999 versus expense of $4.4 million in 1998. The increased income was primarily
due to gains on the sale of operations and plant and equipment in 1999, versus
losses in 1998.
NET INCOME
Net income of $551.4 million ($2.18 per diluted share) in the first nine months
of 1999 was 12.9% higher than the 1998 net income of $488.5 million ($1.94 per
diluted share).
<PAGE> 12
FINANCIAL POSITION
Net working capital at September 30, 1999 and December 31, 1998 is summarized as
follows:
(Dollars in Thousands)
Sept 30, Dec. 31,
1999 1998 Increase
---------- ---------- --------
Current Assets:
Cash and equivalents $ 151,493 $ 93,485 $ 58,008
Trade receivables 1,096,907 989,086 107,821
Inventories 625,046 581,755 43,291
Other 211,069 170,147 40,922
---------- ---------- --------
2,084,515 1,834,473 250,042
---------- ---------- --------
Current Liabilities:
Short-term debt 424,894 406,707 18,187
Accounts payable and
accrued expenses 764,096 726,412 37,684
Other 164,271 88,890 75,381
---------- ---------- --------
1,353,261 1,222,009 131,252
---------- ---------- --------
Net Working Capital $ 731,254 $ 612,464 $118,790
========== ========== ========
Current Ratio 1.54 1.50
==== ====
The increase in trade receivables for the first nine months of 1999 was due to
1999 acquisitions and higher operating revenues in the third quarter of 1999
versus the fourth quarter of 1998, partially offset by the effect of foreign
currency translation. The increase in inventories is due to acquisitions,
slightly offset by the effect of foreign currency translation.
YEAR 2000
The Company utilizes software and related technologies throughout its businesses
that will be affected by the date change in the year 2000.
To determine the extent of the year 2000 compliance issues related to its
computer systems, including equipment with embedded chip technology, the Company
began an extensive internal study at all of its business units in 1997.
Approximately 87% of the business units have completed testing of existing
systems and remediation activities as of September 30, 1999, and it is expected
that substantially all businesses will have completed their projects by the end
of 1999.
The Company also has initiated formal communications with its significant
suppliers, customers and other relevant third parties to determine the extent
and steps that they are taking to be year 2000 compliant. To date, no
significant issues have been identified. However, there is a risk that the
systems of these other companies could have a negative impact on the Company's
operations if they are not year 2000 compliant. To mitigate this risk, the
Company is monitoring the status of these companies' year 2000 compliance
programs. To the extent that critical suppliers are not compliant, in many
instances the Company may be able to obtain alternative sources of raw materials
or services.
The Company believes that the overall risk of year 2000 issues having a material
adverse effect on the Company's operations is mitigated by the Company's
decentralized
<PAGE> 13
organization, in which there are approximately 400 operating units and very few
individual computer systems which affect a significant number of operating
units. In addition, the Company's products are primarily components or
consumable goods that do not have embedded chip technology.
Approximately 20% of the Company's products are capital equipment goods that
could have embedded chip issues. The Company has been reviewing this equipment
as part of its internal year 2000 compliance study. Although a small number of
products which have display date functions may display an incorrect date, few
products will fail to operate and no products have been identified which can
cause property damage or bodily harm due to a year 2000 failure. To date, no
significant year 2000 issues related to the Company's equipment products have
been identified.
The Company has been developing contingency plans for the operations where case
critical systems or third parties are not year 2000 compliant.
Based on preliminary estimates, the total cost of the Company's year 2000
compliance program is approximately $41 million for 1997 through 1999. Of this
amount, approximately 67% relates to capital expenditures and 33% to expensed
costs. Approximately 88% of the total cost has been incurred through September
30, 1999. Estimates of year 2000 related costs are based upon numerous
assumptions and there is no certainty that actual costs could not be
significantly different from the estimates.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
year 2000 readiness. These statements are subject to certain risks,
uncertainties, and other factors which could cause actual results to differ
materially from those anticipated, including, the risks described herein.
Important factors that may influence future results include (1) a downturn in
the automotive, construction, general industrial or real estate markets, (2)
deterioration in global and domestic business and economic conditions,
particularly in North America, Europe and Australia, (3) an interruption in, or
reduction in, introducing new products into the Company's product line, (4) an
unfavorable environment for making acquisitions, domestic and foreign, including
adverse accounting or regulatory requirements and market value of candidates,
and (5) the failure of the Company's suppliers or customers to be year 2000
compliant or unexpected costs or difficulties in the Company becoming year 2000
compliant.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
- ----------- -------------------------------
27 Financial Data Schedule
10(a) Illinois Tool Works Inc. 1996 Stock Incentive Plan dated February
16, 1996, as amended on December 12, 1997 and October 29, 1999.
(b) Reports on Form 8-K
Form 8-K, Current Report, dated September 9, 1999 which included Item 5, a
description of the merger agreement between Illinois Tool Works Inc. and Premark
International, Inc., and Item 7, which included the Agreement and Plan of Merger
among Premark International, Inc., Illinois Tool Works Inc. and CS Merger Sub
Inc., the Stock Option Agreement between Premark International Inc. and Illinois
Tool Works Inc., and a press release dated September 9, 1999.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS TOOL WORKS INC.
Dated: November 15, 1999 By: /s/ Jon C. Kinney
----------------- -----------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 1
EXHIBIT 10(a)
ILLINOIS TOOL WORKS INC.
1996 STOCK INCENTIVE PLAN
Approved by the Board of Directors on February 16, 1996
and by the Stockholders on May 3, 1996
Amended by the Board of Directors on December 12, 1997 and on October 29, 1999
<PAGE> 2
TABLE OF CONTENTS
Section 1. Purpose...........................................................1
Section 2. Definitions.......................................................1
Section 3. Administration....................................................3
Section 4. Common Stock Subject to Plan......................................3
Section 5. Options...........................................................3
Section 6. Stock Awards......................................................4
Section 7. Performance Units.................................................5
Section 8. Stock Appreciation Rights.........................................5
Section 9. Termination of Employment.........................................6
Section 10. Adjustment Provisions.............................................7
Section 11. Term..............................................................7
Section 12. Corporate Change..................................................7
Section 13. General Provisions................................................7
Section 14. Amendment or Discontinuance of the Plan...........................9
-i-
<PAGE> 3
ILLINOIS TOOL WORKS INC.
1996 STOCK INCENTIVE PLAN
Section 1. PURPOSE.
The purpose of the Plan is to encourage Key Employees to have a greater
financial investment in the Company through ownership of its Common Stock. The
Plan is an amendment and restatement of the 1979 Stock Incentive Plan (the "1979
Plan"). The terms of the Plan will apply to all outstanding Incentives granted
under the 1979 Plan, including those pertaining to a Corporate Change and
termination of employment as described below. No additional Incentives will be
granted under the 1979 Plan.
Section 2. DEFINITIONS.
Board: The Board of Directors of the Company.
Code: The Internal Revenue Code of 1986, as amended.
Committee: The Compensation Committee of the Board or such other
committee as shall be appointed by the Board to administer the Plan pursuant to
Section 3.
Common Stock: The Common Stock, without par value, of the Company or
such other class of shares or other securities as may be applicable pursuant to
the provisions of Section 10.
Company: Illinois Tool Works Inc., a Delaware corporation, and any
successor thereto.
Corporate Change: Any of the following: (i) the dissolution of the
Company; (ii) the merger, consolidation, or reorganization of the Company with
any other corporation after which the holders of Common Stock immediately prior
to the effective date thereof hold less than 70% of the outstanding common stock
of the surviving or resulting entity; (iii) the sale of all or substantially all
of the assets of the Company to any person or entity other than a wholly owned
subsidiary; (iv) any person or group of persons acting in concert, other than
descendants of Byron L. Smith and trusts for the benefit of such descendants, or
entity becomes the beneficial owner, directly or indirectly, of more than 30% of
the outstanding Common Stock; or (v) the individuals who, as of the close of the
most recent annual meeting of the Company's stockholders, are members of the
Board (the "Existing Directors") cease for any reason to constitute more than
50% of the Board; provided, however, that if the election, or nomination for
election, by the Company's stockholders of any new director was approved by a
vote of at least 50% of the Existing Directors, such new director shall be
considered an Existing Director; provided further, however, that no individual
shall be considered an Existing Director if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 under the Securities Exchange Act of 1934) or other
actual or threatened solicitation of proxies by or on behalf of anyone other
than the Board (a "Proxy Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest.
<PAGE> 4
Covered Employee: A Key Employee who is or is expected to be a "covered
employee" within the meaning of Code Section 162(m) and the related regulations
for the year in which an Incentive is taxable to such employee and for whom the
Committee intends that such Incentive qualify as performance-based compensation
under Code Section 162(m).
Disability: Eligible for Social Security disability benefits or
disability benefits under the Company's long-term disability plan, based upon a
determination by the Committee that the condition arose prior to termination of
employment.
Fair Market Value: The average of the highest and lowest price at which
Common Stock was traded on the relevant date, as reported in the "NYSE-Composite
Transactions" section of the Midwest Edition of The Wall Street Journal, or, if
no sales of Common Stock were reported for that date, on the most recent
preceding date on which Common Stock was traded.
Incentive Stock Option: As defined in Code Section 422.
Incentives: Options (including Incentive Stock Options), Stock Awards,
Performance Units and Stock Appreciation Rights.
Key Employee: An employee of the Company approved by the Committee for
participation in the Plan on the basis of his or her ability to contribute
significantly to the growth and profitability of the Company.
Option: An option to purchase shares of Common Stock granted to a Key
Employee pursuant to Section 5.
Performance Unit: A unit representing a cash sum or one or more shares
of Common Stock that is granted to a Key Employee pursuant to Section 7.
Plan: The Illinois Tool Works Inc. 1996 Stock Incentive Plan, as
amended from time to time.
Restricted Shares: Shares of Common Stock issued subject to
restrictions pursuant to Section 6(b).
Retirement: Termination of employment while eligible for retirement as
defined by the Company's tax-qualified defined benefit retirement plan.
Stock Appreciation Right or Right: An award granted to a Key Employee
pursuant to Section 8.
Stock Award: An award of Common Stock granted to a Key Employee
pursuant to Section 6.
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<PAGE> 5
Stock Ownership Guidelines: The stock ownership guidelines adopted by
the Board, as amended from time to time.
Section 3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee. To the
extent required to comply with Rule 16b-3 under the Securities Exchange Act of
1934, each member of the Committee shall qualify as a "non-employee director" as
defined therein. To the extent required to comply with Code Section 162(m) and
the related regulations, each member of the Committee shall qualify as an
"outside director" as defined therein.
(b) Authority of the Committee. The Committee shall have the authority
to approve Key Employees for participation; to construe and interpret the Plan;
to establish, amend or waive rules and regulations for its administration; and
to accelerate the exercisability of any Incentive or the termination of any
restriction under any Incentive. Incentives may be subject to such provisions as
the Committee shall deem advisable, and may be amended by the Committee from
time to time; provided that no such amendment may adversely affect the rights of
the holder of an Incentive without such holder's consent, and no amendment, as
it applies to any Covered Employee, shall be made that would cause an Incentive
granted to such Covered Employee to fail to satisfy the performance-based
compensation exemption under Code Section 162(m) and the related regulations.
Section 4. COMMON STOCK SUBJECT TO PLAN.
Subject to Section 10, the aggregate shares of Common Stock that may be
issued under the Plan, including Common Stock authorized but not issued or
reserved for issuance under the 1979 Plan, shall not exceed 10,000,000. In the
event of a lapse, expiration, termination, forfeiture or cancellation of any
Incentive granted under the Plan or the 1979 Plan without the issuance of shares
or payment of cash, the Common Stock subject to or reserved for such Incentive
may be used again for a new Incentive hereunder; provided that in no event may
the number of shares of Common Stock issued hereunder exceed the total number of
shares reserved for issuance. Any shares of Common Stock withheld or surrendered
to pay withholding taxes pursuant to Section 13(e) or surrendered in full or
partial payment of the exercise price of an Option pursuant to Section 5(e)
shall be added to the aggregate of shares of Common Stock available for
issuance.
Section 5. OPTIONS.
(a) Price. The exercise price per share of an Option shall be not less
than the Fair Market Value on the grant date.
(b) Limitations. The exercise price of Incentive Stock Options
exercisable for the first time by a Key Employee during any calendar year shall
not exceed $100,000. Options for more than 500,000 shares of Common Stock may
not be granted in any calendar year to any Key Employee. No Incentive Stock
Options may be granted after April 30, 2006.
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<PAGE> 6
(c) Required Period of Employment. The Committee may condition the
exercisability of any Option on the completion of a minimum period of
employment.
(d) Duration. Each Option shall expire at such time as the Committee
may determine at the time of grant, provided that Incentive Stock Options must
expire not later than ten years from the grant date.
(e) Payment. The exercise price of an Option shall be paid in full at
the time of exercise in cash, or by the surrender of Common Stock previously
acquired from the Company that has been held by the Incentive holder for a
period of at least six months and that has a value equal to the exercise price,
or by a combination of the foregoing.
(f) Grant of Restorative Options. The Committee shall grant to any Key
Employee a restorative Option to purchase additional shares of Common Stock
equal to the number of shares delivered by the Key Employee in payment of the
exercise price of an Option. The terms of a restorative Option shall be
identical to the terms of the exercised Option, except that the exercise price
shall be not less than the Fair Market Value on the grant date of the
restorative Option.
Section 6. STOCK AWARDS.
(a) Grant of Stock Awards. Stock Awards may be made on terms and
conditions fixed by the Committee. Stock Awards may be in the form of Restricted
Shares authorized pursuant to Section 6(b). Officers who are covered by the
Stock Ownership Guidelines may elect to receive up to 50% of their Executive
Incentive Plan awards in shares of Common Stock. The recipient of Common Stock
pursuant to a Stock Award shall be a stockholder of the Company with respect
thereto, fully entitled to receive dividends, vote and exercise all other rights
of a stockholder except to the extent otherwise provided in the Stock Award.
Stock Awards (including Restricted Share awards) for more than 500,000 shares of
Common Stock may not be granted in any calendar year to any Key Employee.
(b) Restricted Shares. Restricted Shares may not be sold by the holder,
or subject to execution, attachment or similar process, until the lapse of the
applicable restriction period or satisfaction of other conditions specified by
the Committee. If the Committee intends the Restricted Shares granted to any
Covered Employee to satisfy the performance-based compensation exemption under
Code Section 162(m) ("Qualifying Restricted Shares"), the extent to which the
Qualifying Restricted Shares will vest shall be based on the attainment of
performance goals established in writing prior to commencement of the
performance period by the Committee from the list in Section 7(a). The level of
attainment of such performance goals and the corresponding number of vested
Qualifying Restricted Shares shall be certified by the Committee in writing
pursuant to Code Section 162(m) and the related regulations.
Section 7. PERFORMANCE UNITS.
(a) Value of Performance Units. Prior to the commencement of the
performance period, the Committee shall establish in writing an initial target
value or number of shares of
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<PAGE> 7
Common Stock for the Performance Units to be granted to a Key Employee, the
duration of the performance period, and the specific performance goals to be
attained, including performance levels at which various percentages of
Performance Units will be earned and, for Covered Employees, the minimum level
of attainment to be met to earn any portion of the Performance Units. If the
Committee intends the Performance Units granted to any Covered Employee to
satisfy the performance-based compensation exemption under Code Section 162(m)
("Qualifying Performance Units"), the performance goals shall be based on one or
more of the following objective criteria: generation of free cash, earnings per
share, revenues, market share, stock price, cash flow, retained earnings,
results of customer satisfaction surveys, aggregate product price and other
product price measures, safety record, acquisition activity, management
succession planning, improved asset management, improved gross margins,
increased inventory turns, product development and liability, research and
development integration, proprietary protections, legal effectiveness, handling
SEC or environmental issues, manufacturing efficiencies, system review and
improvement, service reliability and cost management, operating expense ratios,
total stockholder return, return on sales, return on equity, return on capital,
return on assets, return on investment, net income, operating income, and the
attainment of one or more performance goals relative to the performance of other
corporations.
(b) Payment of Performance Units. After the end of a performance
period, the Committee shall certify in writing the extent to which performance
goals have been met and shall compute the payout to be received by each Key
Employee. With respect to Qualifying Performance Units, for any calendar year,
the maximum amount payable in cash to any Covered Employee shall be $5,000,000,
and the aggregate shares of Common Stock that may be issued to any Covered
Employee is 500,000. The Committee may not adjust upward the amount payable to
any Covered Employee with respect to Qualifying Performance Units.
Section 8. STOCK APPRECIATION RIGHTS.
(a) Grant of Stock Appreciation Rights. Stock Appreciation Rights may
be granted in connection with an Option (at the time of the grant or at any time
thereafter) or may be granted independently. Stock Appreciation Rights for more
than 500,000 shares of Common Stock may not be granted to any Key Employee in
any calendar year.
(b) Value of Stock Appreciation Rights. The holder of a Stock
Appreciation Right granted in connection with an Option, upon surrender of that
Option, will receive cash or shares of Common Stock equal in value to the lesser
of (i) the excess of the Fair Market Value on the exercise date over the
Option's exercise price or (ii) the exercise price of the Option that is
surrendered, multiplied by the number of shares covered by such Option. The
holder of a Stock Appreciation Right granted independently of an Option, upon
exercise of that Right, will receive cash or shares of Common Stock equal in
value to the lesser of (i) the excess of the Fair Market Value on the exercise
date over the Fair Market Value on the grant date or (ii) the Fair Market Value
on the grant date, multiplied by the number of shares covered by such Right.
Section 9. TERMINATION OF EMPLOYMENT.
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<PAGE> 8
(a) Forfeiture of Incentives Upon Termination of Employment. Except as
may be determined otherwise by the Committee, all unvested Options, Rights and
Stock Awards and all unpaid Performance Units shall be forfeited upon
termination of employment for reasons other than Retirement, Disability or
death.
(b) Vesting Upon Retirement, Disability or Death. Subject to Section
13(g), upon termination of employment by reason of Retirement, Disability or
death, all unvested Options, Rights and Stock Awards shall become fully vested
and any Performance Units shall become payable to the extent provided in Section
9(c)(ii).
(c) Treatment of Incentives Following Termination.
(i) Options and Stock Appreciation Rights.
(A) Termination Due to Retirement, Disability or Death. Upon
termination of employment by reason of Retirement or Disability,
Options shall be exercisable not later than the earlier of five
years after the termination date or the expiration of the term of
the Options. Options held by a Key Employee who dies while employed
by the Company or after terminating by reason of Retirement or
Disability shall be exercisable by the Key Employee's beneficiary
not later than the earliest of two years after the date of death,
five years after the date of termination due to Retirement or
Disability, or the expiration of the term of the Options.
(B) Termination for Other Reasons. Upon termination of employment
for any reason other than Retirement, Disability or death, all
unvested Options shall be forfeited as provided in Section 9(a) and
any Options vested prior to such termination may be exercised by a
Key Employee during the three-month period commencing on the date
of termination, but not later than the expiration of the term of
the Options. If a Key Employee dies during such post-employment
period, such Key Employee's beneficiary may exercise the Options
(to the extent such Options were vested and exercisable at the date
of termination of employment), but not later than the earlier of
two years after the date of death or the expiration of the term of
the Options.
(C) Stock Appreciation Rights. Sections 9(c)(i)(A) and (B) shall
apply in the same manner to Stock Appreciation Rights.
(ii) Performance Units. If a Key Employee terminates employment by
reason of Retirement, Disability or death, the Key Employee or such
Key Employee's beneficiary in the event of death shall receive a
prorated payment of the Key Employee's Performance Units based on
the number of full months of service completed by the Key Employee
during the applicable performance period, adjusted based on the
achievement of performance goals during the performance
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<PAGE> 9
period. Payment shall be made at the time payments would have been
made had the Key Employee not terminated by reason of Retirement,
Disability or death.
Section 10. ADJUSTMENT PROVISIONS.
In the event of a stock split, stock dividend, recapitalization,
reclassification or combination of shares, merger, sale of assets or similar
event, the Committee shall adjust equitably (a) the number and class of shares
or other securities that are reserved for issuance under the Plan, (b) the
number and class of shares or other securities that have not been issued under
outstanding Incentives, and (c) the appropriate Fair Market Value and other
price determinations applicable to Incentives.
Section 11. TERM.
The Plan shall be deemed adopted and shall become effective on the date
it is approved by the stockholders of the Company and shall continue until
terminated by the Board or no Common Stock remains available for issuance under
Section 4, whichever occurs first.
Section 12. CORPORATE CHANGE.
In the event of a Corporate Change, all Incentives shall vest in each
Key Employee, and the maximum value of each Key Employee's Performance Units,
prorated for the number of full months of service completed by the Key Employee
during the applicable performance period, shall immediately be paid in cash to
the Key Employee.
Section 13. GENERAL PROVISIONS.
(a) Employment. Nothing in the Plan or in any related instrument shall
confer upon any employee any right to continue in the employ of the Company or
shall affect the right of the Company to terminate the employment of any
employee with or without cause.
(b) Legality of Issuance of Shares. No Common Stock shall be issued
pursuant to an Incentive unless and until all legal requirements applicable to
such issuance have been satisfied.
(c) Ownership of Common Stock Allocated to Plan. No employee
(individually or as a member of a group), and no beneficiary or other person
claiming under or through such employee, shall have any right, title or interest
in or to any Common Stock allocated or reserved for purposes of the Plan or
subject to any Incentive except as to shares of Common Stock, if any, as shall
have been issued to such employee.
(d) Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Illinois.
(e) Withholding of Taxes. The Company may withhold, or allow an
Incentive holder to remit to the Company, any Federal, state or local taxes
applicable to any grant, exercise,
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<PAGE> 10
vesting, distribution or other event giving rise to income tax liability with
respect to an Incentive. In order to satisfy all or a portion of the income tax
liability that arises with respect to any Incentive, the holder of the Incentive
may elect to surrender previously acquired Common Stock or to have the Company
withhold Common Stock that would otherwise have been issued pursuant to the
exercise of an Option or in connection with any other Incentive; provided that
any withheld Common Stock, or any surrendered Common Stock previously acquired
from the Company and held by the Incentive holder for less than six months, may
only be used to satisfy the minimum tax withholding required by law.
(f) Non-transferability; Exceptions. Except as provided in this Section
13(f), no Incentive may be assigned or subjected to any encumbrance, pledge or
charge of any nature. Under such rules and procedures as the Committee may
establish, the holder of an Incentive may transfer such Incentive to members of
the holder's immediate family (i.e., children, grandchildren and spouse) or to
one or more trusts for the benefit of such family members or to partnerships in
which such family members are the only partners, provided that (i) the
agreement, if any, with respect to such Incentives, expressly so permits or is
amended to so permit, (ii) the holder does not receive any consideration for
such transfer, and (iii) the holder provides such documentation or information
concerning any such transfer or transferee as the Committee may reasonably
request. Any Incentives held by any transferees shall be subject to the same
terms and conditions that applied immediately prior to their transfer. The
Committee may also amend the agreements applicable to any outstanding Incentives
to permit such transfers. Any Incentive not granted pursuant to any agreement
expressly permitting its transfer or amended expressly to permit its transfer
shall not be transferable. Such transfer rights shall in no event apply to any
Incentive Stock Option.
(g) Forfeiture of Incentives. Except for an Incentive that becomes
vested pursuant to Section 12, the Committee may immediately forfeit an
Incentive, whether vested or unvested, if the holder competes with the Company
or engages in conduct that, in the opinion of the Committee, adversely affects
the Company.
(h) Beneficiary Designation. Under such rules and procedures as the
Committee may establish, each Key Employee may designate a beneficiary or
beneficiaries to succeed to any rights which the Key Employee may have with
respect to Options, Stock Appreciation Rights, Stock Awards or Performance Units
at the time of his or her death. The designation may be changed or revoked by
the Key Employee at any time. No such designation, revocation or change shall be
effective unless made in writing on a form provided by the Company and delivered
to the Company prior to the Key Employee's death. If a Key Employee does not
designate a beneficiary or no designated beneficiary survives the Key Employee,
then his or her beneficiary shall be the Key Employee's estate.
Section 14. AMENDMENT OR DISCONTINUANCE OF THE PLAN.
(a) Amendment or Discontinuance. The Plan may be amended or
discontinued by the Board from time to time, provided that without the approval
of stockholders, no amendment shall be made which (i) amends Section 4 to
increase the aggregate Common Stock that may be issued
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<PAGE> 11
pursuant to Incentives, (ii) amends the provisions of Section 12, (iii) permits
any person who is not a Key Employee to be granted an Incentive, (iv) permits
Common Stock to be valued at, or permits the exercise price of Options at the
grant date, to be less than Fair Market Value, (v) amends the provisions of
Section 8 to change the method of establishing the amount the Company shall
distribute upon exercise of a Stock Appreciation Right, (vi) amends the
provisions of Section 7(b) to increase the value which may be specified for
Performance Units or amends any other provision of the Plan, the amendment of
which would require stockholder approval in order to continue to satisfy the
performance-based compensation exemption under Code Section 162(m) and the
related regulations with respect to any Incentive awarded to any Covered
Employee, (vii) changes the maximum number of shares of Common Stock that may be
awarded to any employee in any year pursuant to Options, Stock Awards or Stock
Appreciation Rights, or (viii) amends this Section 14.
(b) Effect of Amendment or Discontinuance on Incentives. No amendment
or discontinuance of the Plan by the Board or the stockholders of the Company
shall adversely affect any Incentive theretofore granted without the consent of
the holder.
-9-
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