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, 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)
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, 1999: 250,603,029.
<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 Six Months Ended
June 30 June 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating Revenues $1,624,170 $1,420,461 $3,098,004 $2,761,452
Cost of revenues 1,023,657 910,889 1,965,799 1,784,846
Selling, administrative,
and research and develop-
ment expenses 258,404 213,662 511,665 434,740
Amortization of goodwill
and other intangible
assets 16,738 10,397 30,805 20,174
Amortization of retiree
health care 1,826 1,826 3,653 3,653
---------- ---------- ---------- ----------
Operating Income 323,545 283,687 586,082 518,039
Interest expense (11,557) (2,293) (19,942) (5,239)
Other income (expense) 2,750 (4,315) 7,444 (1,563)
---------- ---------- ---------- ----------
Income Before Income Taxes 314,738 277,079 573,584 511,237
Income taxes 114,900 101,100 209,400 186,600
---------- ---------- ---------- ----------
Net Income $ 199,838 $ 175,979 $ 364,184 $ 324,637
========== ========== ========== ==========
Per share of common stock:
Basic Net Income $0.80 $0.70 $1.45 $1.30
===== ===== ===== =====
Diluted Net Income $0.79 $0.70 $1.44 $1.29
===== ===== ===== =====
Cash dividends:
Paid $0.15 $0.12 $0.30 $0.24
===== ===== ===== =====
Declared $0.15 $0.12 $0.30 $0.24
===== ===== ===== =====
Shares of common stock
outstanding during the
period:
Average 250,466 249,889 250,349 249,789
Average assuming dilution 253,247 252,678 253,035 252,526
-3-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS June 30, 1999 December 31, 1998
- ------ ------------- -----------------
Current Assets:
Cash and equivalents $ 119,542 $ 93,485
Trade receivables 1,087,783 989,086
Inventories 613,678 581,755
Deferred income taxes 110,811 102,607
Prepaid expenses and other
current assets 100,469 67,540
---------- ----------
Total current assets 2,032,283 1,834,473
---------- ----------
Plant and Equipment:
Land 77,630 73,266
Buildings and improvements 598,185 554,383
Machinery and equipment 1,701,370 1,624,703
Equipment leased to others 112,794 107,186
Construction in progress 96,497 57,894
---------- ----------
2,586,476 2,417,432
Accumulated depreciation (1,502,164) (1,429,883)
---------- ----------
Net plant and equipment 1,084,312 987,549
--------- -------
Investments 1,171,684 1,183,493
Goodwill 1,542,921 1,189,323
Deferred Income Taxes 413,424 417,361
Other Assets 494,269 505,963
---------- ----------
$6,738,893 $6,118,162
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 434,702 $ 406,707
Accounts payable 307,961 268,869
Accrued expenses 463,253 457,543
Cash dividends payable 37,584 37,519
Income taxes payable 88,406 51,371
---------- ----------
Total current liabilities 1,331,906 1,222,009
---------- ----------
Non-current Liabilities:
Long-term debt 1,223,942 947,008
Other 592,566 611,110
---------- ----------
Total non-current liabilities 1,816,508 1,558,118
---------- ----------
Stockholders' Equity:
Preferred stock -- --
Common stock 2,508 2,504
Additional Paid-in-Capital 308,421 302,684
Income reinvested in the business 3,419,270 3,130,213
Common stock held in treasury (1,783) (1,783)
Cumulative translation adjustment (137,937) (95,583)
---------- ----------
Total stockholders' equity 3,590,479 3,338,035
---------- ----------
$6,738,893 $6,118,162
========== ==========
-4-
<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands) Six Months Ended
June 30
------------------
1999 1998
-------- --------
Cash Provided by (Used for) Operating Activities:
Net income $364,184 $324,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 124,019 107,371
Change in deferred income taxes 1,399 276
Provision for uncollectible accounts 2,132 2,141
(Gain) loss on sale of plant and equipment (2,071) 3,765
Income from investments (79,297) (62,306)
Non-cash interest on nonrecourse debt 23,038 23,706
(Gain)loss on sale of operations and affiliates (386) 3,293
Other non-cash items, net (2,904) 718
-------- --------
Cash provided by operating activities 430,114 403,601
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (60,618) (41,576)
Inventories 4,064 (9,804)
Prepaid expenses and other assets (47,430) (31,136)
Increase (decrease) in--
Accounts payable 12,260 (6,143)
Accrued expenses (19,799) (26,799)
Income taxes payable 27,272 (21,061)
Other, net 187 7,194
-------- --------
Net cash provided by operating activities 346,050 274,276
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses(excluding cash and
equivalents) and additional interest in affiliates (485,631) (229,509)
Additions to plant and equipment (108,606) (104,856)
Purchase of investments (7,001) (7,829)
Proceeds from investments 43,705 22,165
Proceeds from sale of plant and equipment 16,932 2,228
Proceeds from sale of operations and affiliates 9,391 9,845
Other, net 6,822 6,075
-------- --------
Net cash used for investing activities (524,388) (301,881)
-------- --------
Cash Provided
by (Used for) Financing Activities:
Cash dividends paid (75,063) (59,929)
Issuance of common stock 5,742 4,748
Net borrowings (repayments)of short-term debt (213,605) 7,807
Proceeds from long-term debt 499,672 45
Repayments of long-term debt (7,091) (816)
Other, net 1,760 (31)
-------- --------
Net cash provided by (used for)
financing activities 211,415 (48,176)
-------- --------
Effect of Exchange Rate Changes on Cash and Equivalents (7,020) (1,653)
-------- --------
Cash and Equivalents:
Increase (decrease) during the period 26,057 (77,434)
Beginning of period 93,485 185,856
-------- --------
End of period $119,542 $108,422
======== ========
Cash Paid During the Period for Interest $ 12,967 $ 13,408
======== ========
Cash Paid During the Period for Income Taxes $171,108 $145,440
======== ========
Liabilities Assumed from Acquisitions $161,033 $ 20,995
======== ========
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<PAGE>
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at June 30, 1999 and December 31, 1998 were as follows:
(In Thousands)
June 30, Dec. 31,
1999 1998
-------- --------
Raw material $176,791 $163,868
Work-in-process 75,033 72,254
Finished goods 361,854 345,633
-------- --------
$613,678 $581,755
======== ========
(2) COMPREHENSIVE INCOME:
The components of comprehensive income were as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $199,838 $175,979 $364,184 $324,637
Foreign currency translation
adjustments, net of tax (9,315) (9,081) (42,354) (27,756)
-------- -------- -------- --------
Total comprehensive income $190,523 $166,898 $321,830 $296,881
======== ======== ======== ========
(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
which 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.
-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 Six months ended
June 30 June 30
------------------ --------------------
1999 1998 1999 1998
-------- -------- ---------- --------
Operating revenues $543,948 $439,834 $1,044,094 $863,581
Operating income 119,492 93,851 220,186 177,616
Margin % 22.0% 21.3% 21.1% 20.6%
The 1999 revenue increases of 24% in the second quarter and 21% year-to-date
were mainly due to acquisitions, which contributed revenue growth of 14% and 13%
for the second quarter and year-to-date periods, respectively. In addition, base
business revenue grew 10% in the second quarter and 8% year-to-date, mainly as a
result of increases in the construction, automotive and packaging 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 Six months ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $306,256 $235,255 $565,053 $445,079
Operating income 36,032 35,779 63,569 62,379
Margin % 11.8% 15.2% 11.3% 14.0%
The 1999 revenue increases of 30% in the second quarter and 27% year-to-date
were largely due to acquisitions, which contributed growth of 34% in the second
quarter and 29% year-to-date. The base business revenue growth was 2% in the
second quarter and was flat year-to-date. Higher revenues in the automotive
plastic, electronic component packaging and polymers operations were offset by
revenue declines for the other base businesses. Foreign currency
fluctuations decreased revenues by 6% and 2% for the three-month and six-month
periods, respectively.
-7-
<PAGE>
For both periods, the increase in operating income was largely due to
acquisitions, partially offset by nonrecurring costs associated with the
European construction operations. 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 Six months ended
June 30 June 30
------------------ ----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
Operating revenues $539,776 $513,676 $1,046,873 $1,017,893
Operating income 113,512 105,053 210,515 189,384
Margin % 21.0% 20.5% 20.1% 18.6%
In 1999, revenues increased 5% and 3% for the second quarter and year-to-date
periods, respectively. Acquisitions contributed 9% to the revenue growth for
both periods, partially offset by reduced base business revenues of 4% in the
second quarter and 5% in the year-to-date period.
Operating income grew 8% in the second quarter and 11% year-to-date as a result
of increased operating efficiencies in the base businesses. For both periods,
the margin improvement in the base businesses was partially offset by lower
margins for acquired 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 Six months ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $267,355 $269,729 $505,316 $511,721
Operating income 31,415 35,627 45,726 61,137
Margin % 11.8% 13.2% 9.0% 11.9%
Revenues decreased slightly in both periods of 1999 versus 1998 due to a base
business revenue decline of 7% for the second quarter and 10% for the
year-to-date period. The base business decrease was partially offset by
increased revenues of 8% for acquisitions for both periods. Foreign currency
translation decreased revenues 2% for the second quarter and had no year-to-date
impact.
For both periods, operating income and margins decreased primarily as a result
of the base business revenue declines, especially in certain packaging
operations.
-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 Six months ended
June 30 June 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $ 40,914 $ 30,711 $ 80,771 $ 65,726
Operating income 23,094 13,377 46,086 27,523
Both revenues and operating income increased for both periods of 1999 versus
1998 due to gains on the sales of certain non-mortgage investment assets. In
addition, operating income also increased for both periods 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 Six months ended
June 30 June 30
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Engineered Products - North America $ 543,948 $ 439,834 $1,044,094 $ 863,581
Engineered Products - International 306,256 235,255 565,053 445,079
Specialty Systems - North America 539,776 513,676 1,046,873 1,017,893
Specialty Systems - International 267,355 269,729 505,316 511,721
Leasing and Investments 40,914 30,711 80,771 65,726
---------- ---------- ---------- ----------
Total segment operating revenues 1,698,249 1,489,205 3,242,107 2,904,000
Intersegment revenues (74,079) (68,744) (144,103) (142,548)
---------- ---------- ---------- ----------
Total company operating revenues $1,624,170 $1,420,461 $3,098,004 $2,761,452
========== ========== ========== ==========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 63.5% in the first six
months of 1999 versus 64.6% in the first six months of 1998, due to increased
sales volume coupled with lower manufacturing costs. Selling, administrative,
and research and development expenses increased to 16.5% of revenues in the
first half of 1999 versus 15.7% in 1998, primarily due to higher nonrecurring
charges in 1999.
INTEREST EXPENSE
Interest expense increased to $19.9 million in the first six months of 1999 from
5.2 million in 1998, primarily due to higher long-term debt and increased
commercial paper borrowings.
OTHER INCOME (EXPENSE)
Other income (expense) was income of $7.4 million for the first half of 1999
versus expense $1.6 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.
-9-
<PAGE>
NET INCOME
Net income of $364.2 million ($1.44 per diluted share) in the first six months
of 1999 was 12.2% higher than the 1998 net income of $324.6 million ($1.29 per
diluted share).
FINANCIAL POSITION
Net working capital at June 30, 1999 and December 31, 1998 is summarized as
follows:
(Dollars in Thousands)
June 30, Dec. 31, Increase/
1999 1998 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $ 119,542 $ 93,485 $ 26,057
Trade receivables 1,087,783 989,086 98,697
Inventories 613,678 581,755 31,923
Other 211,280 170,147 41,133
---------- ---------- --------
2,032,283 1,834,473 197,810
---------- ---------- --------
Current Liabilities:
Short-term debt 434,702 406,707 27,995
Accounts payable and
accrued expenses 771,214 726,412 44,802
Other 125,990 88,890 37,100
---------- ---------- --------
1,331,906 1,222,009 109,897
---------- ---------- --------
Net Working Capital $ 700,377 $ 612,464 $ 87,913
========== ========== ========
Current Ratio 1.53 1.50
==== ====
The increase in trade receivables for the first six 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.
-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 80% of the business units have completed testing of existing
systems and remediation activities as of June 30,1999, and it is expected that
substantially all businesses will have completed their projects by September 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 has been 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 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 $40 million for 1997 through 1999. Of this
amount, approximately 67% relates to capital expenditures and 33% to expensed
costs. Approximately 84% of the total cost has been incurred through June 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.
-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.
-12-
<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 14, 1999. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominees In Favor Withheld
- --------------------------------------------------------------------------
W. F. Aldinger, III 224,606,095 592,382
M. J. Birck 224,659,928 538,549
M. D. Brailsford 224,686,034 512,443
S. Crown 224,700,237 498,240
H. R. Crowther 224,580,031 618,446
W. J. Farrell 224,703,326 495,151
R. C. McCormack 224,660,618 537,859
P. B. Rooney 224,628,321 570,156
H. B. Smith 224,698,555 499,922
O. J. Wade 224,657,775 540,702
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.
-13-
<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 11, 1999 By: /s/ Jon C. Kinney
--------------------------- --------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
-14-
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 119,542
<SECURITIES> 0
<RECEIVABLES> 1,114,899
<ALLOWANCES> 27,116
<INVENTORY> 613,678
<CURRENT-ASSETS> 2,032,283
<PP&E> 2,586,476
<DEPRECIATION> 1,502,164
<TOTAL-ASSETS> 6,738,893
<CURRENT-LIABILITIES> 1,331,906
<BONDS> 1,223,942
0
0
<COMMON> 2,508
<OTHER-SE> 3,727,691
<TOTAL-LIABILITY-AND-EQUITY> 6,738,893
<SALES> 3,098,004
<TOTAL-REVENUES> 3,098,004
<CGS> 1,965,799
<TOTAL-COSTS> 1,965,799
<OTHER-EXPENSES> 34,458
<LOSS-PROVISION> 2,132
<INTEREST-EXPENSE> 19,942
<INCOME-PRETAX> 573,584
<INCOME-TAX> 209,400
<INCOME-CONTINUING> 364,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 364,184
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.44
</TABLE>
