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 March 31, 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
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 April 30, 1999: 250,467,238.
-1-
<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.
-2-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME
(UNAUDITED)
(In Thousands Except for
Per Share Amounts)
Three Months Ended
March 31
----------------------
1999 1998
---------- ----------
Operating Revenues $1,473,834 $1,340,991
Cost of revenues 942,142 873,957
Selling, administrative,
and research and develop-
ment expenses 253,261 221,078
Amortization of goodwill
and other intangible
assets 14,067 9,777
Amortization of retiree
health care 1,827 1,827
---------- ----------
Operating Income 262,537 234,352
Interest expense (8,385) (2,946)
Other income 4,694 2,752
---------- ----------
Income Before Income Taxes 258,846 234,158
Income taxes 94,500 85,500
---------- ----------
Net Income $ 164,346 $ 148,658
========== ==========
Per share of common stock:
Basic net income $ .66 $ .60
===== =====
Diluted net income $ .65 $ .59
===== =====
Cash dividends:
Paid $ .15 $ .12
===== =====
Declared $ .15 $ .12
===== =====
Shares of common stock
outstanding during the
period:
Average 250,222 249,693
======= =======
Average assuming dilution 252,788 252,370
======= =======
-3-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS March 31, 1999 December 31, 1998
-------------- -----------------
Current Assets:
Cash and equivalents $ 250,578 $ 93,485
Trade receivables 1,031,275 989,086
Inventories 598,173 581,755
Deferred income taxes 106,302 102,607
Prepaid expenses and other
current assets 82,095 67,540
---------- ----------
Total current assets 2,068,423 1,834,473
---------- ----------
Plant and Equipment:
Land 76,718 73,266
Buildings and improvements 574,357 554,383
Machinery and equipment 1,655,293 1,624,703
Equipment leased to others 112,562 107,186
Construction in progress 81,121 57,894
---------- ----------
2,500,051 2,417,432
Accumulated depreciation (1,467,629) (1,429,883)
---------- ----------
Net plant and equipment 1,032,422 987,549
---------- ----------
Investments 1,179,621 1,183,493
Goodwill 1,339,446 1,189,323
Deferred Income Taxes 414,210 417,361
Other Assets 427,548 505,963
---------- ----------
$6,461,670 $6,118,162
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 304,996 $ 406,707
Accounts payable 282,454 268,869
Accrued expenses 446,514 457,543
Cash dividends payable 37,546 37,519
Income taxes payable 127,555 51,371
---------- ----------
Total current liabilities 1,199,065 1,222,009
---------- ----------
Non-current Liabilities:
Long-term debt 1,230,818 947,008
Other 597,459 611,110
---------- ----------
Total non-current liabilities 1,828,277 1,558,118
---------- ----------
Stockholders' Equity:
Preferred stock -- --
Common stock 2,505 2,504
Additional paid-in-capital 305,212 302,684
Income reinvested in the business 3,257,016 3,130,213
Common stock held in treasury (1,783) (1,783)
Cumulative translation adjustment (128,622) (95,583)
---------- ----------
Total stockholders' equity 3,434,328 3,338,035
---------- ----------
$6,461,670 $6,118,162
========== ==========
-4-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands) Three Months Ended
March 31
------------------
1999 1998
-------- --------
Cash Provided by (Used for) Operating Activities:
Net income $164,346 $148,658
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60,257 53,534
Change in deferred income taxes 4,533 (2,854)
Provision for uncollectible accounts 1,404 1,371
(Gain) Loss on sale of plant and equipment (1) 504
Income from investments (39,536) (31,440)
Non-cash interest on nonrecourse debt 11,365 11,772
Gain on sale of operations and affiliates (2,828) (875)
Other non-cash items, net (1,859) 313
-------- --------
Cash provided by operating activities 197,681 180,983
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (26,497) (24,761)
Inventories (393) (13,477)
Prepaid expenses and other assets (22,940) (13,343)
Increase (decrease) in--
Accounts payable 533 5,502
Accrued expenses (23,291) (13,915)
Income taxes payable 67,055 34,093
Other, net 31 4,664
-------- --------
Net cash provided by operating activities 192,179 159,746
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses(excluding cash and
equivalents) and additional interest in affiliates (131,643) (75,690)
Additions to plant and equipment (49,307) (51,461)
Purchase of investments (5,551) (4,162)
Proceeds from investments 15,156 6,169
Proceeds from sale of plant and equipment 2,473 1,380
Proceeds from sale of operations and affiliates 9,589 1,488
Other, net 3,802 3,139
-------- --------
Net cash used for investing activities (155,481) (119,137)
-------- --------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (37,517) (29,952)
Issuance of common stock 2,529 2,454
Net borrowings (repayments) of short-term debt (338,870) 19,699
Proceeds from long-term debt 499,924 361
Repayments of long-term debt (2,529) (10,571)
Other, net 1,659 1,730
-------- --------
Net cash provided by (used for)
financing activities 125,196 (16,279)
-------- --------
Effect of Exchange Rate Changes on Cash and Equivalents (4,801) (3,642)
-------- --------
Cash and Equivalents:
Increase during the period 157,093 20,688
Beginning of period 93,485 185,856
-------- --------
End of period $250,578 $206,544
======== ========
Cash Paid During the Period for Interest $ 10,238 $ 4,096
======== ========
Cash Paid During the Period for Income Taxes $ 21,143 $ 48,733
======== ========
Liabilities Assumed from Acquisitions $106,268 $ 6,841
======== ========
-5-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at March 31, 1999 and December 31, 1998 were as follows:
(In Thousands)
March 31, Dec. 31,
1999 1998
-------- --------
Raw material $164,069 $163,868
Work-in-process 80,184 72,254
Finished goods 353,920 345,633
-------- --------
$598,173 $581,755
======== ========
(2) COMPREHENSIVE INCOME:
The only component of other comprehensive income that the Company has is
foreign currency translation adjustments.
(In Thousands)
March 31, March 31,
1999 1998
--------- ---------
Net income $164,346 $148,658
Foreign currency translation
adjustments, net of tax (33,039) (18,675)
-------- --------
Total comprehensive income $131,307 $129,983
======== ========
(3) SHORT-TERM DEBT:
In November 1998, the Company entered into a $350,000,000 Line of
Credit Agreement. In 1999, the Company extended the agreement from
March 31, 1999 to May 31,1999.
(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.
-6-
<PAGE>
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
March 31
------------------
1999 1998
-------- --------
Operating revenues $500,146 $423,747
Operating income 100,695 83,765
Margin % 20.1% 19.8%
Revenues increased 18% in the first quarter of 1999 versus 1998 due primarily to
acquisitions, which contributed 11% to the revenue growth. In addition, base
business revenue grew 7%, mainly in the construction and automotive businesses.
Operating income grew mainly due to the base business revenue increases,
improved operating efficiencies and acquisitions. The improved margins were the
result of operating efficiencies at the base businesses, partially 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
March 31
------------------
1999 1998
-------- --------
Operating revenues $258,797 $209,823
Operating income 27,537 26,599
Margin % 10.6% 12.7%
For the first quarter of 1999, acquisitions accounted for a 22% increase in
revenues. This revenue growth was offset by a 2% decline in base business
revenues, primarily in the construction and industrial components businesses.
Foreign currency fluctuations increased revenues by 3%.
The increased operating income from acquisitions was offset by lower operating
income for the base businesses. Margin declines are attributable both to the
base businesses and the lower margins of acquisitions.
-7-
<PAGE>
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
March 31
------------------
1999 1998
-------- --------
Operating revenues $507,097 $504,218
Operating income 97,003 84,332
Margin % 19.1% 16.7%
For the first three months of 1999, the 1% growth in revenues was made up of a
9% increase in acquisitions, offset by reduced base business revenues of 6% and
a revenue decline of 2% related to divestitures.
Despite the reduced revenues in the base businesses, operating income grew 15%
as a result of increased operating efficiencies. Lower margins for acquired
businesses partially offset the margin improvement in the base businesses.
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
March 31
------------------
1999 1998
-------- --------
Operating revenues $237,961 $241,992
Operating income 14,311 25,510
Margin % 6.0% 10.5%
Revenues decreased 2% in the first quarter of 1999 versus 1998 due to a revenue
decline of 13% for the base businesses, partially offset by increased revenues
of 8% for acquisitions and 3% related to favorable foreign currency
fluctuations.
Operating income and margins decreased primarily as a result of the base
business revenue declines and uncollectible receivables at one operation.
-8-
<PAGE>
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 investments.
(Dollars in Thousands)
Three months ended
March 31
------------------
1999 1998
-------- --------
Operating revenues $ 39,858 $ 35,015
Operating income 22,991 14,148
Both revenues and operating income increased in the first quarter of 1999 from
1998 due to gains on sales of certain investment assets. In addition, operating
income also increased due to higher commercial mortgage income.
OPERATING REVENUES
The reconciliation of segment operating revenues to total company operating
revenues is as follows:
Three months ended
March 31
------------------------
1999 1998
---------- ----------
Engineered Products - North America $ 500,146 $ 423,747
Engineered Products - International 258,797 209,823
Specialty Systems - North America 507,097 504,218
Specialty Systems - International 237,961 241,992
Leasing and Investments 39,858 35,015
---------- -----------
Total segment operating revenues 1,543,859 1,414,795
Intersegment revenues (70,025) (73,804)
---------- ----------
Total company operating revenues $1,473,834 $1,340,991
========== ==========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 63.9% in the first
three months of 1999 versus 65.2% in the first three months of 1998, due to
increased sales volume coupled with lower manufacturing costs. Selling,
administrative, and research and development expenses increased to 17.2% of
revenues in the first three months of 1999 versus 16.5% in the first three
months of 1998, primarily due to higher nonrecurring charges in 1999.
INTEREST EXPENSE
Interest expense increased to $8.4 million in the first three months of 1999
from $2.9 million in the first three months of 1998, primarily due to increased
borrowings.
-9-
<PAGE>
OTHER INCOME
Other income increased to $4.7 million for the first three months of 1999 from
$2.8 million in 1998. This increase is primarily due to higher gains on the
sale of operations in 1999.
NET INCOME
Net income of $164.3 million ($0.65 per diluted share) in the first three months
of 1999 was 10.6% higher than the 1998 first quarter net income of $148.7
million ($0.59 per diluted share).
FINANCIAL POSITION
Net working capital at March 31, 1999 and December 31, 1998 is summarized as
follows:
(Dollars in Thousands)
March 31, Dec. 31, Increase/
1999 1998 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $ 250,578 $ 93,485 $157,093
Trade receivables 1,031,275 989,086 42,189
Inventories 598,173 581,755 16,418
Other 188,397 170,147 18,250
---------- ---------- --------
2,068,423 1,834,473 233,950
---------- ---------- --------
Current Liabilities:
Short-term debt 304,996 406,707 (101,711)
Accounts payable and
accrued expenses 728,968 726,412 2,556
Other 165,101 88,890 76,211
---------- ---------- -------
1,199,065 1,222,009 (22,944)
---------- ---------- -------
Net Working Capital $ 869,358 $ 12,464 $256,894
========== ========== ========
Current Ratio 1.73 1.50
========== ==========
The increase in trade receivables in the first three months of 1999 was
primarily due to 1999 acquisitions.
In February 1999, the Company issued $500,000,000 of 5.75% notes due
March 1, 2009. The proceeds were primarily used to repay commercial paper. The
increase in other liabilities reflects an increase in income taxes payable.
Income taxes payable have increased as a result of the timing of tax payments.
-10-
<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.
Approximately 70% of the business units have completed testing of existing
systems and remediation activities as of March 31,1999, and it is expected that
substantially all businesses will have completed their projects by June 30,
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, 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 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 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.
The Company has begun to develop 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 $40 million for 1997 through 1999. Of this
amount, approximately 67% relates to capital expenditures and 33% to expensed
costs. Approximately 80% of the total cost has been incurred through March 31,
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.
-11-
<PAGE>
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding 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, without limitation, 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
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed during the period:
(1) Form 8-K, Current Report, dated January 28, 1999 which included
Item 5, Item 7 and the Form of a press release dated January 28, 1999.
(2) Form 8-K, Current Report, dated February 24, 1999 which
included Item 5, Item 7 and the Underwriting Agreement and the Form
of Note for the $500,000,000 5 3/4% Notes due 2009.
-12-
<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: May 17, 1999 By: /s/ Jon C. Kinney
______________________ ____________________________________
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
-13-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 250,578
<SECURITIES> 0
<RECEIVABLES> 1,058,396
<ALLOWANCES> 27,121
<INVENTORY> 598,173
<CURRENT-ASSETS> 2,068,423
<PP&E> 2,500,051
<DEPRECIATION> 1,467,629
<TOTAL-ASSETS> 6,461,670
<CURRENT-LIABILITIES> 1,199,065
<BONDS> 1,230,818
0
0
<COMMON> 2,505
<OTHER-SE> 3,562,228
<TOTAL-LIABILITY-AND-EQUITY> 6,461,670
<SALES> 1,473,834
<TOTAL-REVENUES> 1,473,834
<CGS> 942,142
<TOTAL-COSTS> 942,142
<OTHER-EXPENSES> 15,894
<LOSS-PROVISION> 1,404
<INTEREST-EXPENSE> 8,385
<INCOME-PRETAX> 258,846
<INCOME-TAX> 94,500
<INCOME-CONTINUING> 164,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,346
<EPS-PRIMARY> .66
<EPS-DILUTED> .65
</TABLE>
