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, 1998
-------------------------------------------------
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
incorporation or organization) Identification No.)
3600 West Lake Avenue, Glenview, IL 60025-5811
- ---------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (847) 724-7500
---------------------------
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, without par value,
outstanding at October 31, 1998: 250,063,656.
<PAGE>
Part I - Financial Information
Item 1
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
FINANCIAL STATEMENTS
The unaudited financial statements included herein have been prepared by
Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair statement of the results for interim
periods. It is suggested that these financial statements be read in conjunction
with the financial statements and notes to financial statements included in the
Company's Annual Report on Form 10-K. Certain reclassifications of prior years'
data have been made to conform with current year reporting.
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME
(UNAUDITED)
(In Thousands Except for
Per Share Amounts)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues $1,377,212 $1,315,388 $4,138,664 $3,871,530
Cost of revenues 888,741 857,495 2,673,587 2,519,164
Selling, administrative,
and research and develop-
ment expenses 211,027 210,654 645,767 642,198
Amortization of goodwill
and other intangible
assets 11,055 9,649 31,229 26,673
Amortization of retiree
health care 1,827 1,827 5,480 5,480
---------- ---------- ---------- ----------
Operating Income 264,562 235,763 782,601 678,015
Interest expense (3,652) (4,337) (8,891) (15,915)
Other income (expense) (2,840) 3,404 (4,403) 10,079
---------- ---------- ---------- ----------
Income Before Income Taxes 258,070 234,830 769,307 672,179
Income taxes 94,200 85,700 280,800 245,400
---------- ---------- ----------- ----------
Net Income $ 163,870 $ 149,130 $ 488,507 $ 426,779
========== ========== ========== ==========
Per share of common stock:
Basic Net Income $ .66 $ .60 $1.96 $1.71
===== ===== ===== =====
Diluted Net Income $ .65 $ .59 $1.94 $1.70
===== ===== ===== =====
Cash dividends:
Paid $ .12 $ .12 $ .36 $.310
===== ===== ===== =====
Declared $ .15 $ .12 $ .39 $.335
===== ===== ===== =====
Shares of common stock
outstanding during
the period:
Average 249,973 249,389 249,848 249,214
======= ======= ======= =======
Average assuming dilution 252,268 251,878 252,424 251,664
======= ======= ======= =======
</TABLE>
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
<TABLE>
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 108,138 $ 185,856
Trade receivables 997,328 902,022
Inventories 603,114 522,996
Deferred income taxes 172,086 168,697
Prepaid expenses and other
current assets 67,340 79,071
---------- ----------
Total current assets 1,948,006 1,858,642
---------- ----------
Plant and Equipment:
Land 70,485 78,055
Buildings and improvements 532,120 485,845
Machinery and equipment 1,521,278 1,387,502
Equipment leased to others 104,521 107,345
Construction in progress 93,217 58,644
---------- ----------
2,321,621 2,117,391
Accumulated depreciation (1,370,581) (1,233,333)
---------- ----------
Net plant and equipment 951,040 884,058
---------- ----------
Investments 1,172,956 1,170,015
Goodwill 1,118,460 774,250
Deferred Income Taxes 364,871 379,738
Other Assets 411,052 328,053
---------- ----------
$5,966,385 $5,394,756
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 401,911 $ 298,278
Accounts payable 286,296 269,088
Accrued expenses 493,528 458,381
Cash dividends payable 37,501 29,952
Income taxes payable 70,137 102,181
---------- ----------
Total current liabilities 1,289,373 1,157,880
---------- ----------
Non-current Liabilities:
Long-term debt 952,218 854,328
Other 564,717 576,094
---------- ----------
Total non-current liabilities 1,516,935 1,430,422
Stockholders' Equity:
Preferred stock -- --
Common stock 2,503 2,499
Additional Paid-in-Capital 292,401 287,153
Income reinvested in the business 2,983,456 2,592,416
Common stock held in treasury (1,783) (1,833)
Cumulative translation adjustment (116,500) (73,781)
---------- ----------
Total stockholders' equity 3,160,077 2,806,454
---------- ----------
$5,966,385 $5,394,756
========== ==========
</TABLE)
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
</TABLE>
<TABLE>
Nine Months Ended
September 30
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Provided by (Used for) Operating Activities:
Net income $ 488,507 $ 426,779
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 159,164 146,615
Change in deferred income taxes 20,183 12,291
Provision for uncollectible accounts 3,079 3,338
Loss on sale of plant and equipment 5,059 5,231
Income from investments (97,670) (68,996)
Non-cash interest on nonrecourse debt 36,125 26,730
(Gain) loss on sale of operations and affiliates 3,142 (7,153)
Other non-cash items, net 1,983 2,761
--------- ---------
Cash provided by operating activities 619,572 547,596
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (16,226) (70,500)
Inventories 9,917 (5,731)
Prepaid expenses and other assets (25,722) (26,430)
Increase (decrease) in--
Accounts payable (32,969) 9,228
Accrued expenses and other liabilities (25,315) 9,386
Income taxes payable (33,168) (26,173)
Other, net (160) (588)
--------- ---------
Net cash provided by operating activities 495,929 436,788
--------- ---------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses(excluding cash and
equivalents) and additional interest in affiliates (597,970) (183,500)
Additions to plant and equipment (149,967) (119,805)
Purchase of investments (9,238) (9,436)
Proceeds from investments 33,711 26,904
Proceeds from sale of plant and equipment 18,198 13,024
Proceeds from sale of operations and affiliates 10,251 104,932
Other, net 6,366 6,917
--------- ---------
Net cash used for investing activities (688,649) (160,964)
--------- ---------
Cash Provided by (Used for)Financing Activities:
Cash dividends paid (89,920) (77,124)
Issuance of common stock 5,301 5,406
Net proceeds (repayments)of short-term debt 190,623 (111,708)
Proceeds from long-term debt 17,162 785
Repayments of long-term debt (4,633) (32,595)
Other, net 2,286 3,210
--------- ---------
Net cash provided by (used for)
financing activities 120,819 (212,026)
--------- ---------
Effect of Exchange Rate Changes on Cash and Equivalents (5,817) (18,345)
--------- ---------
Cash and Equivalents:
Increase (decrease)during the period (77,718) 45,453
Beginning of period 185,856 137,699
--------- ---------
End of period $ 108,138 $ 183,152
========= =========
Cash Paid During the Period for Interest $ 20,223 $ 24,552
========= =========
Cash Paid During the Period for Income Taxes $ 226,461 $ 219,989
========= =========
Liabilities Assumed from Acquisitions $ 150,542 $ 60,324
========= =========
</TABLE>
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at September 30, 1998 and December 31, 1997 were as follows:
(In Thousands)
September 30, December 31,
1998 1997
------------- ------------
Raw material $173,918 $145,851
Work-in-process 90,837 67,956
Finished goods 338,359 309,189
-------- --------
$603,114 $522,996
======== ========
(2) NEW ACCOUNTING STANDARDS:
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, which
established standards for reporting and displaying comprehensive income and
its components in a separate financial statement. The only component of
other comprehensive income that the Company has is foreign currency
translation adjustments. The components of comprehensive income are as
follows:
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income $163,870 $149,130 $488,507 $426,779
Foreign currency translation
adjustments, net of tax (14,962) (34,529) (42,719) (92,781)
-------- -------- -------- --------
Total comprehensive income $148,908 $114,601 $445,788 $333,998
======== ======== ======== ========
Effective for fiscal years beginning after June 15, 1999, the Company is
required to adopt SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative will either be reported as gain
or loss in current earnings or as a component of comprehensive income. Upon
adoption of the new standard, the Company does not expect net income or
comprehensive income to be materially affected.
<PAGE>
Item 2 - Management's Discussion and Analysis
ENGINEERED COMPONENTS SEGMENT
Businesses in this segment manufacture short lead-time components and fasteners
primarily for automotive, construction and general industrial applications. They
also manufacture specialty products such as adhesives and static-control
equipment.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ----------------------
Operating
Revenues 1998 1997 1998 1997
- ------------- -------- -------- ---------- ----------
North America $428,956 $382,520 $1,246,138 $1,138,343
International 211,449 193,404 636,102 598,868
-------- -------- ---------- ----------
Total $640,405 $575,924 $1,882,240 $1,737,211
======== ======== ========== ==========
<TABLE>
Three months ended September 30 Nine months ended September 30
--------------------------------- ---------------------------------
Operating 1998 1997 1998 1997
Income Income Margin Income Margin Income Margin Income Margin
- ------------- -------- ------- -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $ 88,602 20.7% $ 77,051 20.1% $260,535 20.9% $223,320 19.6%
International 31,085 14.7 28,332 14.6 87,864 13.8 85,596 14.3
-------- -------- -------- --------
Total $119,687 18.7 $105,383 18.3 $348,399 18.5 $308,916 17.8
======== ======== ======== ========
</TABLE>
In North America, revenues increased in 1998 versus 1997 largely due to
acquisitions, which contributed 10% and 6% to the revenue growth for the
three-month and nine-month periods, respectively. For both the three-month and
year-to-date periods, the general industrial and construction businesses were
the primary contributors to revenue growth in the base businesses. Operating
income grew for both periods of 1998 due to acquisitions and cost reductions in
the base businesses. Margins improved in both periods due to cost improvements
in the base businesses, partially offset by lower margins for the acquired
businesses.
Internationally, revenues increased for both periods of 1998 compared with 1997
primarily due to acquisitions, which had contributions to revenue growth of 10%
for the third quarter and 9% for the year-to-date period. The automotive and
general industrial businesses were the primary contributors to the base
businesses' revenue growth for both periods. The effect of unfavorable currency
translation reduced revenues by 4% for the third quarter and 6% for the
year-to-date period. Operating income increased for both the three-month and
nine-month periods mainly due to cost reductions in the base businesses. Margins
were flat in the third quarter and lower in the year-to-date period as a result
of the lower margins of acquired companies offsetting the cost improvements in
the base businesses.
<PAGE>
INDUSTRIAL SYSTEMS AND CONSUMABLES SEGMENT
Businesses in this segment produce longer lead-time machinery and related
consumables primarily for the food and beverage, construction, automotive and
general industrial markets. They also manufacture specialty products for
applications such as industrial spray coating and quality measurement.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ----------------------
Operating
Revenues 1998 1997 1998 1997
- ------------- -------- -------- ---------- ----------
North America $508,243 $531,097 $1,568,490 $1,561,159
International 268,130 250,180 807,532 697,810
-------- -------- ---------- ----------
Total $776,373 $781,277 $2,376,022 $2,258,969
======== ======== ========== ==========
<TABLE>
Three months ended September 30 Nine months ended September 30
-------------------------------- ---------------------------------
Operating 1998 1997 1998 1997
Income Income Margin Income Margin Income Margin Income Margin
-------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $ 93,183 18.3% $ 89,456 16.8% $287,552 18.3% $255,145 16.3%
International 34,530 12.9 31,751 12.7 103,120 12.8 88,575 12.7
-------- -------- -------- --------
Total $127,713 16.4 $121,207 15.5 $390,672 16.4 $343,720 15.2
======== ======== ======== ========
</TABLE>
Slower growth in the North American industrial markets resulted in slower growth
or revenue declines for the majority of the businesses for both the three-month
and nine-month periods of 1998. Despite the decline in revenues, operating
income and margins increased for both periods due to administrative and
manufacturing cost reductions. Acquisitions also contributed to the higher
operating income for both periods.
Internationally, acquisitions added significantly to the 1998 revenue growth,
with a contribution of 16% for the third quarter and 20% for the year-to-date
period. Unfavorable foreign currency translation decreased revenues by 8% in the
three-month period and 9% in the year-to-date period. For the year-to-date
period, revenues and operating income also increased due to higher sales in the
stretch film equipment operations. For both periods, operating income and
margins increased in the base operation due to cost improvements, but the lower
margins of acquired businesses almost fully offset the margin increase.
<PAGE>
LEASING AND INVESTMENTS SEGMENT
This segment makes opportunistic investments that optimally utilize the
Company's cash flow. These investments primarily include mortgage-related
investments, leveraged and direct financing leases of equipment, investments in
properties and property developments, and affordable housing investments.
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1998 1997 1998 1997
-------- ------- -------- -------
Operating
revenues $36,159 $31,534 $101,885 $86,817
======= ======= ======== =======
Operating
income $17,162 $ 9,173 $ 43,530 $25,379
======= ======= ======== =======
For the third quarter and year-to-date periods, revenues and operating income
increased primarily due to the commercial mortgage transaction entered into at
year-end 1997 and increased property development activity. In addition,
operating income increased for both periods due to higher income related to
commercial mortgages as a result of better market conditions.
OPERATING REVENUES
The reconciliation of segment operating revenues to total company operating
revenues is as follows:
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Engineered components $ 640,405 $ 575,924 $1,882,240 $1,737,211
Industrial systems and consumables 776,373 781,277 2,376,022 2,258,969
Leasing and investments 36,159 31,534 101,885 86,817
---------- ---------- ---------- ----------
Total segment operating revenues 1,452,937 1,388,735 4,360,147 4,082,997
Intersegment revenues (75,725) (73,347) (221,483) (211,467)
---------- ---------- ---------- ----------
Total company operating revenues $1,377,212 $1,315,388 $4,138,664 $3,871,530
========== ========== ========== ==========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 64.6% in the first
nine months of 1998 versus 65.1% in the first nine months of 1997, due to
increased sales volume coupled with lower manufacturing costs. Selling,
administrative, and research and development expenses decreased to 15.6% of
revenues in the first nine months of 1998 versus 16.6% in the first nine months
of 1997, primarily due to expense reductions as a result of a Company-wide
objective to reduce administrative costs.
INTEREST EXPENSE
Interest expense decreased to $8.9 million in the first nine months of 1998 from
$15.9 million in the first nine months of 1997, primarily due to decreased
commercial paper borrowings and higher interest expense in 1997 due to debt
related from acquisitions.
OTHER INCOME (EXPENSE)
Other expense was $4.4 million for the first nine months of 1998 versus other
income of $10.1 million in 1997, primarily due to losses on the sale of
operations in 1998 versus gains on the sale of operations in 1997 and lower
interest income in 1998 versus 1997.
<PAGE>
NET INCOME
Net income of $488.5 million ($1.94 per diluted share) in the first nine
months of 1998 was 14.5% higher than 1997 nine-month net income of $426.8
million ($1.70 per diluted share).
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies in 1998
decreased operating revenues for the first nine months of 1998 by approximately
$106 million and reduced earnings by approximately 4 cents per diluted share.
FINANCIAL POSITION
Net working capital at September 30, 1997 and December 31, 1996 is summarized as
follows:
(Dollars in Thousands)
Sept. 30, Dec. 31, Increase/
1998 1997 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $ 108,138 $ 185,856 $(77,718)
Trade receivables 997,328 902,022 95,306
Inventories 603,114 522,996 80,118
Other 239,426 247,768 (8,342)
---------- ---------- --------
1,948,006 1,858,642 89,364
---------- ---------- --------
Current Liabilities:
Short-term debt 401,911 298,278 103,633
Accounts payable and
accrued expenses 779,824 727,469 52,355
Other 107,638 132,133 (24,495)
---------- ---------- --------
1,289,373 1,157,880 131,493
---------- ---------- --------
Net Working Capital $ 658,633 $ 700,762 $(42,129)
========== ========= ========
Current Ratio 1.51 1.61
========== =========
The increase in trade receivables for the first nine months of 1998 was due to
1998 acquisitions and higher operating revenues in the third quarter of 1998
versus the fourth quarter of 1997, partially offset by the effect of foreign
currency translation. The increase in inventories is due to acquisitions,
slightly offset by an overall reduction in inventory levels in the base
businesses and the effect of foreign currency translation.
The increase in short-term debt is due to increased borrowings in 1998 to fund
acquisitions. The increase in accounts payable and accrued expenses is due to
the acquisitions in 1998, partially offset by an overall reduction in accounts
payable and accrued expenses in the base businesses.
<PAGE>
YEAR 2000 ISSUE
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. Testing
of existing systems and remediation activities have begun and are expected to be
completed for critical systems by the end of the first quarter of 1999. It is
anticipated that the remaining non-critical year 2000 issues will be resolved 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, 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 organization, in which there are approximately 365 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 is reviewing this equipment as part
of its internal year 2000 compliance study. To date, because this equipment is
generally not highly automated, no significant year 2000 issues related to the
Company's equipment products have been identified.
In the event that critical systems or third parties are not year 2000 compliant
by the end of the first quarter of 1999, the Company will begin to develop
contingency plans for the affected operations.
Based on preliminary estimates, the total cost of the Company's year 2000
compliance program is approximately $30 million for 1997 through 1999. Of this
amount, approximately 75% relates to capital expenditures and 25% to expensed
costs. Approximately half of the total cost has been incurred through the third
quarter of 1998. 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.
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
----------- -----------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, 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 16, 1998 By: /s/ Jon C. Kinney
------------------- ---------------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income and the Statement of Financial Position and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 108,138
<SECURITIES> 0
<RECEIVABLES> 997,328
<ALLOWANCES> 0
<INVENTORY> 603,114
<CURRENT-ASSETS> 1,948,006
<PP&E> 2,321,621
<DEPRECIATION> 1,370,581
<TOTAL-ASSETS> 5,966,385
<CURRENT-LIABILITIES> 1,289,373
<BONDS> 952,218
0
0
<COMMON> 2,503
<OTHER-SE> 3,275,857
<TOTAL-LIABILITY-AND-EQUITY> 5,966,385
<SALES> 4,138,664
<TOTAL-REVENUES> 4,138,664
<CGS> 2,673,587
<TOTAL-COSTS> 2,673,587
<OTHER-EXPENSES> 36,709
<LOSS-PROVISION> 3,079
<INTEREST-EXPENSE> 8,891
<INCOME-PRETAX> 769,307
<INCOME-TAX> 280,800
<INCOME-CONTINUING> 488,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 488,507
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.94
</TABLE>
