Illinois Tool Works (ITW) 10-Q 2000 Q3 Quarterly report

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, 2000

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, $.01 par value, outstanding at October 31, 2000: 302,123,145.

Part I - Financial Information

Item 1

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

FINANCIAL STATEMENTS

The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the “Company”). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company’s Annual Report on Form 10-K. Certain reclassifications of prior year’s data have been made to conform with current year reporting.

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF INCOME

(UNAUDITED)

(In Thousands Except for
Per Share Amounts)

		Three Months Ended						Nine Months Ended
		September 30						September 30
		2000			1999			2000			1999
Operating Revenues		$	2,472,342		$	2,325,749		$	7,454,748		$	6,845,856
	Cost of revenues		1,597,669			1,511,405			4,821,874			4,441,421
	Selling, administrative, research and development expenses		416,949			412,995			1,327,021			1,268,969
	Amortization of goodwill and other intangible assets		23,461			19,263			66,784			54,790
Operating Income			434,263			382,086			1,239,069			1,080,676
	Interest expense		(18,567	)		(18,004	)		(52,375	)		(50,090	)
	Other income (expense)		(3,111	)		167			(4,708	)		11,227
Income Before Income Taxes			412,585			364,249			1,181,986			1,041,813
	Income taxes		148,500			131,327			425,500			380,743
Net Income		$	264,085		$	232,922		$	756,486		$	661,070
Per share of common stock:
	Basic Net Income	$	.87		$	.78		$	2.51		$	2.20
	Diluted Net Income	$	.87		$	.76		$	2.49		$	2.17
Cash dividends:
	Paid	$	.180		$	.148		$	.540		$	.440
	Declared	$	.200		$	.173		$	.560		$	.467
Shares of common stock outstanding during the period:
	Average		301,857			300,144			301,365			300,045
	Average assuming dilution		304,475			304,842			304,314			304,722

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

(In Thousands)

ASSETS				September 30, 2000			December 31, 1999
Current Assets:
Cash and equivalents				$	267,591		$	232,953
	Trade receivables				1,651,937			1,630,937
	Inventories				1,152,183			1,084,212
	Deferred income taxes				206,082			188,729
	Prepaids and other current assets				159,527			136,100
			Total current assets		3,437,320			3,272,931
Plant and Equipment:
	Land				112,315			114,048
	Buildings and improvements				932,467			926,306
	Machinery and equipment				2,724,178			2,633,212
	Equipment leased to others				116,090			118,164
	Construction in progress				148,959			120,568
					4,034,009			3,912,298
	Accumulated depreciation				(2,407,574	)		(2,278,367	)
		Net plant and equipment			1,626,435			1,633,931
Investments					1,171,393			1,188,120
Goodwill & Other Intangibles					2,319,660			2,029,959
Deferred Income Taxes					438,095			433,792
Other Assets					562,634			501,526
				$	9,555,537		$	9,060,259
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Short-term debt			$	482,348		$	553,655
	Accounts payable				430,764			470,200
	Accrued expenses				801,234			906,215
	Cash dividends payable				60,398			54,102
	Income taxes payable				61,075			61,189
		Total current liabilities			1,835,819			2,045,361
Non-current Liabilities:
	Long-term debt				1,581,787			1,360,746
	Other				848,210			838,729
		Total non-current liabilities			2,429,997			2,199,475
Stockholders' Equity:
	Preferred stock				--			--
	Common stock				3,022			3,008
	Additional Paid-in-Capital				546,794			517,210
	Income reinvested in the business				5,073,094			4,485,515
	Common stock held in treasury				(1,783	)		(1,783	)
	Cumulative translation adjustment				(331,406	)		(188,527	)
			Total stockholders' equity		5,289,721			4,815,423
				$	9,555,537		$	9,060,259

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

STATEMENT OF CASH FLOWS

(UNAUDITED)

(In Thousands)

				Nine Months Ended
				September 30
				2000			1999
Cash Provided by (Used for) Operating Activities:
	Net income			$	756,486		$	661,070
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			285,313			259,070
		Change in deferred income taxes			(6,639	)		876
		Provision for uncollectible accounts			12,385			9,327
		(Gain) loss on sale of plant and equipment			6,311			(1,345	)
		Income from investments			(108,326	)		(115,691	)
		Non-cash interest on nonrecourse debt			33,637			34,719
		Gain on sale of operations and affiliates			(1,619	)		(12	)
		Other non-cash items, net			(5,472	)		(9,088	)
			Cash provided by operating activities		972,076			838,926
Changes in assets and liabilities:
	(Increase) decrease in--
		Trade receivables			(18,611	)		(76,684	)
		Inventories			(18,162	)		1,267
		Prepaid expenses and other assets			(38,999	)		(46,246	)
	Increase (decrease) in--
		Accounts payable			(61,219	)		(10,221	)
		Accrued expenses			(57,505	)		(21,046	)
		Income taxes payable			(6,975	)		47,377
	Other, net				179			--
		Net cash provided by operating activities			770,784			733,373
Cash Provided by (Used for) Investing Activities:
	Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates				(533,578	)		(577,739	)
	Additions to plant and equipment				(235,525	)		(243,529	)
	Purchase of investments				(14,585	)		(35,734	)
	Proceeds from investments				62,580			66,368
	Proceeds from sale of plant and equipment				29,790			22,028
	Proceeds from sale of operations and affiliates				8,248			9,535
	Sales (purchases) of short-term investments				(4,630	)		(40,883	)
	Other, net				1,989			2,508
			Net cash used for investing activities		(685,711	)		(797,446	)
Cash Provided by (Used for) Financing Activities:
	Cash dividends paid				(162,612	)		(131,720	)
	Issuance of common stock				17,234			17,535
	Net borrowings (repayments)of short-term debt				387,812			(209,694	)
	Proceeds from long-term debt				1,059			507,057
	Repayments of long-term debt				(255,793	)		(29,125	)
	Repurchase of treasury stock				--			(44,995	)
	Other, net				(179	)		9,734
		Net cash provided by (used for) financing activities			(12,479	)		118,792
Effect of Exchange Rate Changes on Cash and Equivalents					(37,956	)		(10,748	)
Cash and Equivalents:
		Increase during the period			34,638			43,971
		Beginning of period			232,953			109,526
		End of period		$	267,591		$	153,497
Cash Paid During the Period for Interest				$	71,815		$	57,562
Cash Paid During the Period for Income Taxes				$	381,952		$	304,694
Liabilities Assumed from Acquisitions				$	180,295		$	173,569

ILLINOIS TOOL WORKS INC. and SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

(1)  INVENTORIES at September 30, 2000 and December 31, 1999 were as follows:

 (In Thousands)

	Sept 30,		Dec 31,
	2000		1999
Raw material	$	336,642	$	370,300
Work-in-process		144,177		126,783
Finished goods		671,364		587,129
	$	1,152,183	$	1,084,212

(2) COMPREHENSIVE INCOME:

The components of comprehensive income were as follows:

	Three Months Ended					Nine Months Ended
	September 30					September 30
	2000			1999		2000			1999
Net income	$	264,085		$	232,922	$	756,486		$	661,070
Foreign currency translation adjustments, net of tax		(51,774	)		10,006		(142,879	)		(51,593	)
Total comprehensive income	$	212,311		$	242,928	$	613,607		$	609,477

(3) SHORT-TERM DEBT:

In 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In 2000, the Company extended the termination date of the Line of Credit from June 28, 2000 to June 22, 2001.

As of September 30, 2000, commercial paper of $250,000,000 has been classified as long-term, as it is expected to remain outstanding beyond one year. The Company has the ability and intent to finance these commercial paper borrowings on a long-term basis. The remaining commercial paper balance of $328,000,000 has been classified as short-term.

(4) NEW ACCOUNTING PRONOUNCEMENTS:

The Financial Accounting Standards Board, Emerging Issues Task Force and Securities and Exchange Commission have issued numerous new accounting standards which the Company has not yet adopted. The adoption of these new standards is not expected to have a material effect on the Company's financial position or results of operations.

Item 2 - Management's Discussion and Analysis

ENGINEERED PRODUCTS - NORTH AMERICA

Businesses in this segment are located in North America and manufacture short lead-time components and fasteners, and specialty products such as adhesives, resealable packaging and electronic component packaging.

(Dollars in Thousands)

	Three months ended						Nine months ended
	September 30						September 30
	2000			1999			2000			1999
Operating revenues	$	785,152		$	745,617		$	2,432,117		$	2,198,442
Operating income		165,973			142,712			488,405			423,192
Margin %		21.1	%		19.1	%		20.1	%		19.2	%

Operating revenues in 2000 increased 5% in the third quarter and 11% year-to-date compared with the prior year. The base business revenue growth was 2% for the third quarter and 7% year-to-date, with the biggest contributors being the construction (including the Wilsonart laminate operation), automotive and industrial plastics businesses. Acquisitions also contributed 3% to the revenue increase for the third quarter and 4% for the year-to-date period. Operating income increased 16% for the third quarter and 15% year-to-date due to the revenue increases and operating efficiencies. Margins improved for both periods due to operating efficiencies and cost improvements at the base businesses.

ENGINEERED PRODUCTS - INTERNATIONAL

Businesses in this segment are located outside North America and manufacture short lead-time components and fasteners, and specialty products such as electronic component packaging and adhesives.

(Dollars in Thousands)

	Three months ended						Nine months ended
	September 30						September 30
	2000			1999			2000			1999
Operating revenues	$	390,759		$	324,122		$	1,100,998		$	937,772
Operating income		48,769			33,497			129,851			87,629
Margin %		12.5	%		10.3	%		11.8	%		9.3	%

In 2000, revenues increased 21% for the third quarter and 17% year-to-date mainly due to acquisitions, which contributed 31% and 23% to the increase for the respective periods. The base business revenue growth was 2% for the three-month period and 5% for the nine-month period, principally related to the industrial plastics and electronic packaging businesses for both periods, as well as the automotive and construction businesses for the year-to-date period. The revenue increases were partially offset by the effect of foreign currency fluctuations, which decreased revenues by 13% for the third quarter and 10% year-to-date. The operating income increase of 46% for the third quarter and 48% for the first nine months of 2000 was primarily due to the revenue growth and cost reductions in the base businesses. Operating income was reduced 15% for the three-month period and 14% for the nine-month period as a result of foreign currency fluctuations, primarily related to the Euro. Margins increased significantly for both periods due to cost reductions and higher 1999 nonrecurring costs.

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 food service and industrial spray coating.

(Dollars in Thousands)

	Three months ended						Nine months ended
	September 30						September 30
	2000			1999			2000			1999
Operating revenues	$	820,049		$	795,712		$	2,505,015		$	2,344,758
Operating income		148,000			134,372			430,063			385,568
Margin %		18.0	%		16.9	%		17.2	%		16.4	%

In 2000, revenues increased 3% and 7% for the three-month and nine-month periods, respectively. Base business revenue was flat for the third quarter and increased 4% for the year-to-date period, primarily as a result of contributions from the industrial packaging, food equipment and welding businesses. Acquisitions added 3% to the revenue growth for both periods. Operating income increased 10% for the third quarter and 12% for the first nine months of 2000 and margins improved in both periods due to the revenue growth and improved productivity in the food equipment and welding 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 food service and industrial spray coating.

(Dollars in Thousands)

	Three months ended						Nine months ended
	September 30						September 30
	2000			1999			2000			1999
Operating revenues	$	432,838		$	403,648		$	1,284,027		$	1,173,864
Operating income		50,197			46,900			137,593			105,347
Margin %		11.6	%		11.6	%		10.7	%		9.0	%

In 2000, operating revenues increased 7% for the third quarter and 9% year-to-date primarily due to acquisitions, which contributed 15% and 17%, respectively, to the increase. Base business revenue growth was 1% for both periods. Foreign currency fluctuations, primarily related to the Euro, reduced revenues 9% for the third quarter and 7% for the first nine months of 2000. Operating income increased 7% for the three-month period and 31% for the year-to-date period principally due to acquisitions and productivity enhancement programs in the industrial packaging, finishing and food equipment businesses. Foreign currency fluctuations reduced operating income 8% for the third quarter and 11% year-to-date. Margins were flat for the third quarter as cost improvements in the base businesses were offset by the lower margins for acquired companies. Margins increased in the year-to-date period due to the productivity improvements in the base businesses.

CONSUMER PRODUCTS

Businesses in this segment are located primarily in North America and manufacture household products which are used by consumers, including small electric appliances, physical fitness equipment and ceramic tile.

(Dollars in Thousands)

	Three months ended						Nine months ended
	September 30						September 30
	2000			1999			2000			1999
Operating revenues	$	114,302		$	116,268		$	341,268		$	349,943
Operating income		2,894			4,186			(3,322	)		15,802
Margin %		2.5	%		3.6	%		(1.0	)%		4.5	%

Operating revenues decreased 2% for both periods of 2000 as a result of lower sales for the small appliance and ceramic tile businesses, partially offset by higher sales of fitness equipment. Operating income and margins declined for both periods due to lower sales volume and nonrecurring costs.

LEASING AND INVESTMENTS

This segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of equipment, properties and property developments, and affordable housing.

(Dollars in Thousands)

	Three months ended				Nine months ended
	September 30				September 30
	2000		1999		2000		1999
Operating revenues	$	37,143	$	38,013	$	109,872	$	118,786
Operating income		18,430		20,419		56,479		63,138

For both periods of 2000, operating revenues and income decreased due to higher gains on the sales of assets in 1999.

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
		2000			1999			2000			1999
Engineered Products - North America		$	785,152		$	745,617		$	2,432,117		$	2,198,442
Engineered Products - International			390,759			324,122			1,100,998			937,772
Specialty Systems - North America			820,049			795,712			2,505,015			2,344,758
Specialty Systems - International			432,838			403,648			1,284,027			1,173,864
Consumer Products			114,302			116,268			341,268			349,943
Leasing and Investments			37,143			38,013			109,872			118,786
Total segment operating revenues			2,580,243			2,423,380			7,773,297			7,123,565
Intersegment revenues			(107,901	)		(97,631	)		(318,549	)		(277,709	)
	Total company operating revenues	$	2,472,342		$	2,325,749		$	7,454,748		$	6,845,856

OPERATING EXPENSES

Cost of revenues as a percentage of revenues decreased to 64.7% in the first nine months of 2000 versus 64.9% in the first nine months of 1999. Selling, administrative, and research and development expenses decreased to 17.8% of revenues in the first nine months of 2000 versus 18.5% in 1999, primarily due to expense reductions as a result of a Company-wide objective to reduce administrative costs.

INTEREST EXPENSE

Interest expense increased to $52.4 million in the first nine months of 2000 from $50.1 million in 1999, primarily due to higher average debt in the period and higher commercial paper borrowings.

OTHER INCOME (EXPENSE)

Other income (expense) was an expense of $4.7 million for the first nine months of 2000 versus income of $11.2 million in 1999. The decrease is primarily due to losses versus gains on the sale of fixed assets, higher minority interest expense on less-than-100%-owned subsidiaries, and higher losses on foreign currency translation in 2000.

NET INCOME

Net income of $756.5 million ($2.49 per diluted share) in the first nine months of 2000 was 14.4% higher than the 1999 net income of $661.1 million ($2.17 per diluted share).

FOREIGN CURRENCY

The strengthening of the U.S. dollar against foreign currencies in 2000 decreased operating revenues for the first nine months of 2000 by approximately $156 million and reduced earnings by approximately 5 cents per diluted share.

FINANCIAL POSITION

Net working capital at September 30, 2000 and December 31, 1999 is summarized as follows:

(Dollars in Thousands)

		Sept. 30,		Dec. 31,		Increase/
		2000		1999		(Decrease)
Current Assets:
	Cash and equivalents	$	267,591	$	232,953	$	34,638
	Trade receivables		1,651,937		1,630,937		21,000
	Inventories		1,152,183		1,084,212		67,971
	Other		365,609		324,829		40,780
			3,437,320		3,272,931		164,389
Current Liabilities:
	Short-term debt		482,348		553,655		(71,307	)
	Accounts payable		430,764		470,200		(39,436	)
	Accrued expenses		801,234		906,215		(104,981	)
	Other		121,473		115,291		6,182
			1,835,819		2,045,361		(209,542	)
Net Working Capital		$	1,601,501	$	1,227,570	$	373,931
Current Ratio			1.87		1.60

During the second quarter and third quarter of 2000, short-term borrowings increased to fund acquisitions. Commercial paper borrowings of $250 million have been classified as long-term.

Accrued expenses decreased primarily due to foreign currency translation and a decrease in accrued compensation and other items which have higher balances at year-end, such as rebates.

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 construction, food service, automotive, 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 lines, (4) an unfavorable environment for making acquisitions, domestic and foreign, including adverse accounting or regulatory requirements and market value of candidates.

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ILLINOIS TOOL WORKS INC.

Dated:   November 10, 2000                     By: /s/ Jon C. Kinney
                                                   Jon C. Kinney, Senior Vice President
                                                   and Chief Financial Officer
                                                   (Principal Accounting Officer)