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 June 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 Identification No.)
incorporation or organization)
3600 West Lake Avenue, Glenview, IL 60025-5811
________________________________________ ______________________________________
(Address of principal executive offices) (Zip Code)
offices)
(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 July 31, 1998: 249,965,686.
<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)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Operating Revenues $1,420,461 $1,326,344 $2,761,452 $2,556,142
Cost of revenues 910,889 854,352 1,784,846 1,661,669
Selling, administrative,
and research and develop-
ment expenses 213,662 215,855 434,740 431,544
Amortization of goodwill
and other intangible
assets 10,397 8,492 20,174 17,024
Amortization of retiree
health care 1,826 1,826 3,653 3,653
---------- ---------- ---------- ----------
Operating Income 283,687 245,819 518,039 442,252
Interest expense (2,293) (5,617) (5,239) (11,578)
Other income (expense) (4,315) 3,092 (1,563) 6,675
---------- ---------- ---------- ----------
Income Before Income Taxes 277,079 243,294 511,237 437,349
Income taxes 101,100 88,900 186,600 159,700
---------- ---------- ---------- ----------
Net Income $ 175,979 $ 154,394 324,637 $ 277,649
========== ========== ========== ==========
Per share of common stock:
Basic Net Income $0.70 $0.62 $1.30 $1.11
===== ===== ===== =====
Diluted Net Income $0.70 $0.61 $1.29 $1.10
===== ===== ===== =====
Cash dividends:
Paid $0.12 $.095 $0.24 $.190
===== ===== ===== =====
Declared $0.12 $.120 $0.24 $.215
===== ===== ===== =====
Shares of common stock
outstanding during the
period:
Average 249,889 249,231 249,789 249,130
Average assuming dilution 252,678 251,704 252,526 251,556
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS June 30, 1998 December 31, 1997
- ------ ------------- -----------------
Current Assets:
Cash and equivalents $ 108,422 $ 185,856
Trade receivables 935,082 902,022
Inventories 532,229 522,996
Deferred income taxes 167,363 168,697
Prepaid expenses and other
current assets 73,772 79,071
---------- ----------
Total current assets 1,816,868 1,858,642
---------- ----------
Plant and Equipment:
Land 72,676 78,055
Buildings and improvements 499,844 485,845
Machinery and equipment 1,441,448 1,387,502
Equipment leased to others 103,860 107,345
Construction in progress 95,953 58,644
---------- ----------
2,213,781 2,117,391
Accumulated depreciation (1,326,703) (1,233,333)
---------- ----------
Net plant and equipment 887,078 884,058
---------- ----------
Investments 1,172,985 1,170,015
Goodwill 850,082 774,250
Deferred Income Taxes 381,633 379,738
Other Assets 460,376 328,053
---------- ----------
$5,569,022 $5,394,756
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Short-term debt $ 307,855 $ 298,278
Accounts payable 261,593 269,088
Accrued expenses 438,170 458,381
Cash dividends payable 29,992 29,952
Income taxes payable 81,099 102,181
---------- ----------
Total current liabilities 1,118,709 1,157,880
---------- ----------
Non-current Liabilities:
Long-term debt 841,767 854,328
Other 560,430 576,094
---------- ----------
Total non-current liabilities 1,402,197 1,430,422
---------- ----------
Stockholders' Equity:
Preferred stock -- --
Common stock 2,502 2,499
Additional Paid-in-Capital 291,849 287,153
Income reinvested in the business 2,857,086 2,592,416
Common stock held in treasury (1,783) (1,833)
Cumulative translation adjustment (101,538) (73,781)
---------- ----------
Total stockholders' equity 3,048,116 2,806,454
---------- ----------
$5,569,022 $5,394,756
========== ==========
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands) Six Months Ended
June 30
------------------
1998 1997
-------- --------
Cash Provided by (Used for) Operating Activities:
Net income 324,637 $277,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 107,371 97,337
Change in deferred income taxes 276 (2,962)
Provision for uncollectible accounts 2,141 2,225
Loss on sale of plant and equipment 3,765 5,461
Income from investments (62,306) (43,905)
Non-cash interest on nonrecourse debt 23,706 16,670
(Gain)loss on sale of operations and affiliates 3,293 (7,073)
Other non-cash items, net 718 2,657
-------- --------
Cash provided by operating activities 403,601 348,059
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (41,576) (78,289)
Inventories (9,804) (9,234)
Prepaid expenses and other assets (31,136) (31,791)
Increase (decrease) in--
Accounts payable (6,143) 7,112
Accrued expenses (26,799) 2,185
Income taxes payable (21,061) (7,508)
Other, net 7,194 3,926
-------- --------
Net cash provided by operating activities 274,276 234,460
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses(excluding cash and
equivalents) and additional interest in affiliates (229,509) (160,636)
Additions to plant and equipment (104,856) (81,462)
Purchase of investments (7,829) (5,753)
Proceeds from investments 22,165 18,138
Proceeds from sale of plant and equipment 2,228 6,873
Proceeds from sale of operations and affiliates 9,845 102,513
Other, net 6,075 (2,364)
-------- --------
Net cash used for investing activities (301,881) (122,691)
-------- --------
Cash Provided
by (Used for) Financing Activities:
Cash dividends paid (59,929) (47,205)
Issuance of common stock 4,748 4,902
Net borrowings (repayments)of short-term debt 7,807 (9,579)
Proceeds from long-term debt 45 679
Repayments of long-term debt (816) (31,662)
Other, net (31) 1,854
-------- --------
Net cash used for financing activities (48,176) (81,011)
-------- --------
Effect of Exchange Rate Changes on Cash and Equivalents (1,653) (10,951)
-------- --------
Cash and Equivalents:
Increase (decrease) during the period (77,434) 19,807
Beginning of period 185,856 137,699
-------- --------
End of period 108,422 $157,506
======== ========
Cash Paid During the Period for Interest $ 13,408 $ 16,960
======== ========
Cash Paid During the Period for Income Taxes $145,440 $138,228
======== ========
Liabilities Assumed from Acquisitions $ 20,995 $ 28,679
======== ========
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at June 30, 1998 and December 31, 1997 were as follows:
-----------
(In Thousands)
June 30, Dec. 31,
1998 1997
-------- --------
Raw material $165,144 $145,851
Work-in-process 64,197 67,956
Finished goods 302,888 309,189
-------- --------
$532,229 $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:
Three Months Ended Six Months Ended
June 30 June 30
-------- -------- -------- --------
1998 1997 1998 1997
-------- -------- -------- --------
Net income $175,979 $154,394 $324,637 $277,649
Foreign currency translation
adjustments, net of tax (9,081) (7,929) (27,756) (58,252)
-------- -------- -------- --------
Total comprehensive income $166,898 $146,465 $296,881 $219,397
======== ======== ======== ========
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 Six months ended
June 30 June 30
------------------ ----------------------
Operating
Revenues 1998 1997 1998 1997
- --------- -------- -------- ---------- ----------
North America $412,778 $391,559 $ 817,182 $ 755,823
International 225,132 212,921 424,653 405,464
-------- -------- ---------- ----------
Total $637,910 $604,480 $1,241,835 $1,161,287
======== ======== ========== ==========
Three months ended June 30 Six months ended June 30
------------------------------- --------------------------------
Operating 1998 1997 1998 1997
Income Income Margin Income Margin Income Margin Income Margin
- --------- -------------- --------------- --------------- ---------------
North America $ 90,444 21.9% $ 77,362 19.8% $171,933 21.0% $146,269 19.4%
International 33,416 14.8 35,229 16.5 56,779 13.4 57,264 14.1
-------- -------- -------- --------
Total $123,860 19.4 $112,591 18.6 $228,712 18.4 $203,533 17.5
======== ======== ======== ========
In North America, revenues and operating income increased in the second quarter
and first half of 1998 compared with last year largely due to acquisitions,
which contributed 4% to the revenue growth for both periods. The automotive,
general industrial and construction businesses were the primary contributors to
revenue growth for both the three-month and six-month periods in the base
businesses. Margins grew for the second quarter and first half of the year as a
result of higher revenues in the base businesses without a corresponding
increase in expenses.
Internationally, revenues increased in the current period and first half of 1998
compared with last year largely due to acquisitions, which contributed 8% to the
revenue growth for both periods. The automotive and general industrial
businesses were the primary contributors to the base businesses' revenue growth
for both the current and year-to-date periods. Currency translation moderated
revenue growth by 6% in the second quarter and 7% for the first half of 1998.
Operating income decreased in the second quarter of 1998 compared to the prior
year as a result of higher nonrecurring costs in 1998 and the unfavorable effect
of foreign currency translation. Operating income growth in the base businesses
was moderated as a result of pricing pressures in the Australasian construction
businesses. Operating income decreased in the first half of 1998 compared to
last year primarily as a result of the negative effects of foreign currency
translation. Margins were down due to restructuring expenses and price pressures
in the construction businesses and the effect of lower margins for acquired
companies.
<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 Six months ended
June 30 June 30
------------------ ----------------------
Operating
Revenues 1998 1997 1998 1997
- --------- -------- -------- ---------- ----------
North America $537,066 $539,612 $1,060,247 $1,030,062
International 283,955 230,642 539,402 447,630
-------- -------- ---------- ----------
Total $821,021 $770,254 $1,599,649 $1,477,692
======== ======== ========== ==========
Three months ended June 30 Six months ended June 30
-------------------------------- --------------------------------
Operating 1998 1997 1998 1997
Income Income Margin Income Margin Income Margin Income Margin
- --------- --------------- --------------- --------------- ---------------
North America $108,232 20.2% $ 91,737 17.0% $194,369 18.3% $165,689 16.1%
International 38,960 13.7 33,747 14.6 68,590 12.7 56,824 12.7
-------- -------- -------- --------
Total $147,192 17.9 $125,484 16.3 $262,959 16.4 $222,513 15.1
======== ======== ======== ========
Slower growth in the North American industrial markets resulted in slower growth
or revenue declines in the majority of the businesses in the second quarter of
1998. Despite the decline in revenues, operating income and margins increased in
the second quarter due to administrative and manufacturing cost reductions. For
the first half of the year, the welding, finishing and marking and decorating
operations largely contributed to the revenue and operating income increase.
Year-to-date margins increased due to higher revenues from the base businesses
and cost improvements.
Internationally, acquisitions added significantly to the revenue growth with a
22% contribution for the second quarter and the first half of 1998. For both
periods, international revenues and operating income also increased due to
increased sales in the stretch film equipment operations. The unfavorable effect
of foreign currency translation decreased revenues by 9% in the current period
and 10% for the first half of 1998. For both periods, margins increased in the
base operations but the lower margins of acquired businesses more than offset
the 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 Six months ended
June 30 June 30
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating
revenues $30,711 $23,446 $65,726 $55,283
======= ======= ======= =======
Operating
income $12,635 $ 7,744 $26,368 $16,206
======= ======= ======= =======
Revenues and operating income increased primarily due to the commercial mortgage
transaction entered into at year-end 1997.
OPERATING REVENUES
The reconciliation of segment operating revenues to total company operating
revenues is as follows:
Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- --------- ----------
Engineered components $ 637,910 $ 604,480 $1,241,835 $1,161,287
Industrial systems and consumables 821,021 770,254 1,599,649 1,477,692
Leasing and investments 30,711 23,446 65,726 55,283
---------- ---------- ---------- ----------
Total segment operating revenues 1,489,642 1,398,180 2,907,210 2,694,262
Intersegment revenues (69,181) (71,836) (145,758) (138,120)
---------- ---------- ---------- ----------
Total company operating revenues $1,420,461 $1,326,344 $2,761,452 $2,556,142
========== ========== ========== ==========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 64.6% in the first six
months of 1998 versus 65.0% in the first six months of 1997 due to increased
sales volume coupled with lower manufacturing costs. Selling, administrative,
and research and development expenses decreased to 15.7% of revenues in the
first six months of 1998 versus 16.9% in the first six 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 $5.2 million in the first six months of 1998 from
$11.6 million in the first six months of 1997, primarily due to decreased
commercial paper borrowings and higher interest expense in 1997 due to debt
related to acquisitions.
OTHER INCOME(EXPENSE)
Other expense was $1.6 million for the first six months of 1998 versus other
income of $6.7 million in 1997, primarily due to losses on the sale of
operations in 1998 versus gains on the sale of operations in 1997.
<PAGE>
NET INCOME
Net income of $324.6 million ($1.29 per diluted share) in the first six months
of 1998 was 16.9% higher than the 1997 first half net income of $277.6 million
($1.10 per diluted share).
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies in 1998
decreased operating revenues for the first six months of 1998 by approximately
$80.4 million and reduced earnings by approximately 3 cents per diluted share.
FINANCIAL POSITION
Net working capital at June 30, 1998 and December 31, 1997 is summarized as
follows:
(Dollars in Thousands)
June 30, Dec. 31, Increase/
1998 1997 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $ 108,422 $ 185,856 $(77,434)
Trade receivables 935,082 902,022 33,060
Inventories 532,229 522,996 9,233
Other 241,135 247,768 (6,633)
---------- ---------- --------
1,816,868 1,858,642 (41,774)
---------- ---------- --------
Current Liabilities:
Short-term debt 307,855 298,278 9,577
Accounts payable and
accrued expenses 699,763 727,469 (27,706)
Other 111,091 132,133 (21,042)
---------- ---------- --------
1,118,709 1,157,880 (39,171)
---------- ---------- --------
Net Working Capital $ 698,159 $ 700,762 $ (2,603)
========== ========== ========
Current Ratio 1.62 1.61
========== ==========
The increase in trade receivables in the first half of 1998 was primarily due to
higher revenues in the second quarter of 1998 versus the fourth quarter of 1997,
partially offset by the effect of foreign currency translation.
<PAGE>
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 8, 1998. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominees In Favor Withheld
- -------- -------- --------
M. J. Birck 217,387,794 273,091
M. D. Brailsford 217,386,639 274,246
S. Crown 217,363,605 297,280
H. R. Crowther 217,375,746 285,138
W. J. Farrell 217,348,374 312,510
L. R. Flurry 217,399,294 261,591
R. C. McCormack 217,401,259 259,625
P. B. Rooney 217,318,001 342,883
H. B. Smith 217,365,143 295,742
O. J. Wade 217,396,382 264,502
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 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: August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 108,422
<SECURITIES> 0
<RECEIVABLES> 935,082
<ALLOWANCES> 0
<INVENTORY> 532,229
<CURRENT-ASSETS> 1,816,868
<PP&E> 2,213,781
<DEPRECIATION> 1,326,703
<TOTAL-ASSETS> 5,569,022
<CURRENT-LIABILITIES> 1,118,709
<BONDS> 841,767
0
0
<COMMON> 2,502
<OTHER-SE> 3,148,935
<TOTAL-LIABILITY-AND-EQUITY> 5,569,022
<SALES> 2,761,452
<TOTAL-REVENUES> 2,761,452
<CGS> 1,784,846
<TOTAL-COSTS> 1,784,846
<OTHER-EXPENSES> 23,827
<LOSS-PROVISION> 2,141
<INTEREST-EXPENSE> 5,239
<INCOME-PRETAX> 511,237
<INCOME-TAX> 186,600
<INCOME-CONTINUING> 324,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,637
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
</TABLE>
