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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ILLINOIS TOOL WORKS INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1258310 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)
(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, 2001: 304,678,211.
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 Six Months Ended
September 30 September 30
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Operating Revenues $2,395,645 $2,472,342 $7,302,592 $7,454,748
Cost of revenues 1,597,149 1,597,669 4,874,594 4,821,874
Selling, administrative,
research and
development expenses 442,430 416,949 1,345,003 1,327,021
Amortization of goodwill
and other intangible
assets 28,450 23,461 79,092 66,784
---------- ---------- ---------- ----------
Operating Income 327,616 434,263 1,003,903 1,239,069
Interest expense (18,308) (18,567) (54,878) (52,375)
Other expense (3,153) (3,111) (3,536) (4,708)
---------- ---------- ---------- ----------
Income Before Income Taxes 306,155 412,585 945,489 1,181,986
Income taxes 107,100 148,500 330,900 425,500
---------- ---------- ---------- ----------
Net Income $ 199,055 $ 264,085 $ 614,589 $ 756,486
=========== =========== =========== ===========
Per share of common stock:
Basic Net Income $.65 $.87 $2.02 $2.51
====== ====== ======= =======
Diluted Net Income $.65 $.87 $2.01 $2.49
====== ====== ======= =======
Cash dividends:
Paid $.20 $.18 $.60 $.54
====== ====== ======= =======
Declared $.22 $.20 $.62 $.56
====== ====== ======= =======
Shares of common stock
outstanding during the period:
Average 304,522 301,857 303,908 301,365
Average assuming dilution 306,463 304,475 306,204 304,314
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS September 30, 2001 December 31, 2000
- ------ ------------------- -----------------
Current Assets:
Cash and equivalents $ 229,313 $ 151,295
Trade receivables 1,629,559 1,654,632
Inventories 1,153,220 1,181,385
Deferred income taxes 195,702 183,823
Prepaids and other current assets 141,421 157,926
----------- -----------
Total current assets 3,349,215 3,329,061
----------- -----------
Plant and Equipment:
Land 122,116 116,423
Buildings and improvements 1,017,175 1,000,807
Machinery and equipment 3,005,171 2,860,472
Equipment leased to others 122,652 118,589
Construction in progress 148,189 103,319
----------- -----------
4,415,303 4,199,610
Accumulated depreciation (2,678,904) (2,477,086)
----------- -----------
Net plant and equipment 1,736,399 1,722,524
----------- -----------
Investments 1,294,550 1,170,392
Goodwill and Other Intangibles 2,812,254 2,483,882
Deferred Income Taxes 503,514 478,420
Other Assets 457,632 419,177
----------- -----------
$10,153,564 $9,603,456
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 584,130 $ 425,789
Accounts payable 405,145 455,417
Accrued expenses 790,893 826,107
Cash dividends payable 67,001 60,490
Income taxes payable 109,181 49,807
----------- -----------
Total current liabilities 1,956,350 1,817,610
----------- -----------
Non-current Liabilities:
Long-term debt 1,380,371 1,549,038
Other 926,001 835,821
----------- -----------
Total non-current liabilities 2,306,372 2,384,859
----------- -----------
Stockholders' Equity:
Preferred stock -- --
Common stock 3,048 3,027
Additional Paid-in-Capital 631,414 584,357
Income reinvested in the business 5,641,435 5,214,098
Common stock held in treasury (1,666) (1,783)
Cumulative translation adjustment (383,389) (398,712)
----------- -----------
Total stockholders' equity 5,890,842 5,400,987
----------- -----------
$10,153,564 $9,603,456
=========== ===========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Nine Months Ended
September 30
-------------------------
2001 2000
------------ -----------
Cash Provided by (Used for) Operating Activities:
Net income $614,589 $756,486
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 308,301 285,313
Change in deferred income taxes (15,800) (6,639)
Provision for uncollectible accounts 18,818 12,385
Loss on sale of plant and equipment 6,110 6,311
Income from investments (107,810) (108,326)
Non-cash interest on nonrecourse debt 32,229 33,637
(Gain) loss on sale of operations and affiliates 4,302 (1,619)
Other non-cash items, net (5,823) (5,472)
------- -------
Cash provided by operating activities 854,916 972,076
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables 59,768 (18,611)
Inventories 86,875 (18,162)
Prepaid expenses and other assets 905 (38,999)
Increase (decrease) in--
Accounts payable (85,300) (61,219)
Accrued expenses (53,388) (57,505)
Income taxes payable 62,854 (6,975)
Other, net (278) 179
-------- --------
Net cash provided by operating activities 926,352 770,784
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (535,334) (533,578)
Additions to plant and equipment (200,667) (235,525)
Purchase of investments (77,639) (14,585)
Proceeds from investments 67,536 62,580
Proceeds from sale of plant and equipment 16,458 29,790
Proceeds from sale of operations and affiliates 9,800 8,248
Sales (purchases) of short-term investments 1,638 (4,630)
Other, net 1,377 1,989
-------- --------
Net cash used for investing activities (716,831) (685,711)
-------- --------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (182,140) (162,612)
Issuance of common stock 46,650 17,234
Net borrowings of short-term debt 6,039 387,812
Proceeds from long-term debt 4,182 1,059
Repayments of long-term debt (9,986) (255,793)
Other, net 1,464 (179)
-------- --------
Net cash used for financing activities (133,791) (12,479)
-------- --------
Effect of Exchange Rate Changes on Cash and Equivalents 2,288 (37,956)
-------- --------
Cash and Equivalents:
Increase during the period 78,018 34,638
Beginning of period 151,295 232,953
-------- --------
End of period $229,313 $267,591
========= =========
Cash Paid During the Period for Interest $ 64,194 $ 71,815
========= =========
Cash Paid During the Period for Income Taxes $266,899 $381,952
========= =========
Liabilities Assumed from Acquisitions $ 93,095 $180,295
========= =========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES at September 30, 2001 and December 31, 2000 were as
follows:
(In Thousands)
September 30, December 31,
2001 2000
------------ ------------
Raw material $330,395 $350,943
Work-in-process 120,152 134,044
Finished goods 702,673 696,398
---------- ----------
$1,153,220 $1,181,385
========== ==========
(2) COMPREHENSIVE INCOME:
The components of comprehensive income were as follows:
(In Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income $199,055 $264,085 $614,589 $756,486
Foreign currency translation
adjustments, net of tax 63,198 (51,774) 15,323 (142,879)
--------- --------- --------- ---------
Total comprehensive income $262,253 $212,311 $629,912 $613,607
========= ========= ========= =========
(3) SHORT-TERM DEBT:
In 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In
2001, the Company extended the termination date of the Line of Credit from June
22, 2001 to June 21, 2002. No amounts were outstanding under this facility at
September 30, 2001.
(4) NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. The pooling-of-interests method will no longer be allowed.
Under SFAS No. 142 beginning January 1, 2002, goodwill will no longer be
amortized for book purposes. The Company will be required annually to evaluate
goodwill for impairment based on fair value. The Company is currently evaluating
the new statements to determine their effect on the Company's results of
operations and financial position.
(5) INVESTMENTS:
During the third quarter of 2001, the Company entered into a leveraged lease of
a Boeing 777 jet with a major airline. The components of the Company's cash
investment of $28,295,000 were as follows:
(In Thousands)
Lease contracts receivable
(net of principal and interest on
nonrecourse financing) $10,773
Estimated residual value of leased asset 28,750
Unearned and deferred income (11,228)
-------
Investment in leveraged lease $28,295
=======
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 plastic and metal components and fasteners, and specialty products
such as polymers, fluid products and resealable packaging.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $748,054 $785,152 $2,269,502 $2,432,117
Operating income 126,272 165,974 367,139 488,405
Margin % 16.9% 21.1% 16.2% 20.1%
In 2001, operating revenues declined by 5% in the third quarter and 7% for the
nine-month period mainly due to lower demand in the automotive, construction,
electronic component packaging and consumer durable end markets. The base
business revenue decline of 10% for both periods was partially offset by
increases from acquisitions of 6% in the third quarter and 4% in the
year-to-date period. Operating income declined 24% in the third quarter and 25%
for the first nine months due to lower revenues and higher nonrecurring costs.
Margins declined in both periods of 2001 due to reduced leverage of fixed costs
as a result of lower sales and higher nonrecurring costs.
ENGINEERED PRODUCTS - INTERNATIONAL
Businesses in this segment are located outside North America and manufacture
short lead-time plastic and metal components and fasteners, and specialty
products such as polymers, fluid products and resealable packaging.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $341,729 $374,649 $1,083,383 $1,066,660
Operating income 34,849 47,525 111,193 128,608
Margin % 10.2% 12.7% 10.3% 12.1%
Operating revenues increased 2% for the first nine months of 2001 mainly due to
acquisitions, which contributed 9%. Operating revenues decreased 9% for the
third quarter of 2001 due primarily to the effect of translation, which reduced
revenues by 8% for both the three-month and nine-month periods. Base business
revenues were flat in the third quarter and increased 1% for the year-to-date
period as higher sales for the construction and automotive businesses were
offset by lower revenues for the electronic component packaging and industrial
plastics businesses. Operating income declined 27% in the third quarter and 14%
year-to-date, primarily related to the electronic component packaging and
industrial plastics businesses. Margins declined 250 basis points for the third
quarter and 180 basis points for the year-to-date period as a result of lower
revenues related to certain base businesses, higher nonrecurring costs and the
effect of currency translation, which reduced operating income by 7% for both
periods.
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 finishing.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $863,615 $820,049 $2,578,307 $2,505,015
Operating income 110,086 148,000 335,877 430,063
Margin % 12.7% 18.0% 13.0% 17.2%
In 2001, operating revenues increased 5% for the third quarter and 3% for the
nine-month period, due primarily to acquisitions, which contributed 15% to the
increase for the third quarter and 12% year-to-date. Base business revenues
decreased 9% for both periods, as continued slow demand in most end markets
negatively impacted the industrial packaging, food equipment, finishing and
welding businesses. Operating income declined 26% in the third quarter and 22%
year-to-date, and margins fell in both periods due to the revenue declines,
nonrecurring costs and the impact of lower margins of 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
food service and industrial finishing.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $403,975 $439,747 $1,243,580 $1,290,399
Operating income 34,900 51,440 122,072 138,836
Margin % 8.6% 11.7% 9.8% 10.8%
In 2001, operating revenues decreased 8% for the third quarter and 4% for the
nine-month period primarily due to the effect of currency fluctuations, which
reduced revenues by 8% for both periods. The acquisition-related revenue growth
of 5% for the third quarter and 7% year-to-date was partially offset by base
business revenue declines of 3% and 2%, respectively, primarily in the
industrial packaging and food equipment operations. For the third quarter of
2001, operating income decreased 32% and margins declined 310 basis points due
to weaknesses in the industrial packaging and consumer packaging markets. That
weakness was partially offset by income improvements for the food equipment,
finishing and welding operations. For the year-to-date period of 2001, operating
income decreased 12% and margins declined 100 basis points due to lower demand
in the industrial packaging and food equipment markets and the lower margins of
acquired companies. Currency fluctuations reduced operating income by 8% for
both periods.
CONSUMER PRODUCTS
Businesses in this segment are located primarily in North America and
manufacture specialty exercise equipment, small appliances, cookware and ceramic
tile.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $96,462 $114,301 $294,530 $341,268
Operating income 2,967 2,894 3,109 (3,322)
Margin % 3.1% 2.5% 1.1% (1.0%)
In 2001, the decrease in operating revenues of 16% for the third quarter and 14%
for the nine-month period was related to lower sales volume at the ceramic tile,
small appliance and specialty exercise equipment businesses. Operating income
and margins improved for both periods due to the effect of lower nonrecurring
costs and improved operating performance for the ceramic tile operation.
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
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating revenues $35,104 $37,143 $116,384 $109,872
Operating income 18,542 18,430 64,513 56,479
Operating revenues and income were relatively flat in the third quarter of 2001.
For the year-to-date period, revenues and income increased due to higher
property development income and gains on real estate which was held for sale.
OPERATING REVENUES
The reconciliation of segment operating revenues to total company operating
revenues is as follows:
Three Months Ended Six Months Ended
September 30 September 30
-------------------- -----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
Engineered Products - North America $748,054 $785,152 $2,269,502 $2,432,117
Engineered Products - International 341,729 374,649 1,083,383 1,066,660
Specialty Systems - North America 863,615 820,049 2,578,307 2,505,015
Specialty Systems - International 403,975 439,747 1,243,580 1,290,399
Consumer Products 96,462 114,301 294,530 341,268
Leasing and Investments 35,104 37,143 116,384 109,872
--------- --------- --------- ---------
Total segment operating revenues 2,488,939 2,571,041 7,585,686 7,745,331
Intersegment revenues (93,294) (98,699) (283,094) (290,583)
--------- --------- --------- ---------
Total company operating revenues $2,395,645 $2,472,342 $7,302,592 $7,454,748
========== ========== ========== ==========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues increased to 66.8% in the first
nine months of 2001 versus 64.7% in the first nine months of 2000 due to
decreased sales volume in the North American base businesses and lower margins
at acquired businesses. Selling, administrative, and research and development
expenses increased to 18.4% of revenues in the first nine months of 2001 versus
17.8% in 2000 as a result of lower sales and higher non-recurring charges.
INTEREST EXPENSE
Interest expense increased to $54.9 million in the first nine months of 2001
from $52.4 million in 2001.
OTHER EXPENSE
Other expense was $3.5 million for the first nine months of 2001 versus $4.7
million in 2000. The decrease is primarily due to lower minority interest
expense on less-than-100%-owned subsidiaries and lower losses on foreign
currency translation in 2001, which was mostly offset by losses on the sales of
operations in 2001 versus gains in 2000.
NET INCOME
Net income of $614.6 million ($2.01 per diluted share) in the first nine months
of 2001 was 18.8% lower than the 2000 net income of $756.5 million ($2.49 per
diluted share).
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies in 2001
decreased operating revenues for the first nine months of 2001 by approximately
$229 million and reduced earnings by approximately 5 cents per diluted share.
FINANCIAL POSITION
Net working capital at September 30, 2001 and December 31, 2000 is summarized as
follows:
(Dollars in Thousands)
September 30, December 31, Increase/
2001 2000 (Decrease)
-------------- ------------ ------------
Current Assets:
Cash and equivalents $ 229,313 $ 151,295 $ 78,018
Trade receivables 1,629,559 1,654,632 (25,073)
Inventories 1,153,220 1,181,385 (28,165)
Other 337,123 341,749 (4,626)
--------- --------- --------
3,349,215 3,329,061 20,154
--------- --------- --------
Current Liabilities:
Short-term debt 584,130 425,789 158,341
Accounts payable 405,145 455,417 (50,272)
Accrued expenses 790,893 826,107 (35,214)
Other 176,182 110,297 65,885
--------- --------- --------
1,956,350 1,817,610 138,740
--------- --------- --------
Net Working Capital $1,392,865 $1,511,451 ($118,586)
========== ========== =========
Current Ratio 1.71 1.83
==== ====
Short-term borrowings increased as a result of the reclassification of debt from
long-term to short-term.
Other liabilities increased as a result of higher taxes payable due to the
timing of tax payments.
The Company's cash generation from operations continued to be strong in the
quarter and reflected reduced working capital and capital expenditures as a
result of the slower economy. The Company's invested capital declined $149
million, excluding the effect of acquisitions. Coupled with $615 million of net
income, these two components resulted in free cash of $764 million. As a result,
the Company has been able to fund a $535 million acquisition program and pay
dividends of $182 million.
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 further downturn in the construction, food retail
and service, automotive, general industrial or real estate markets, (2) further
deterioration in global and domestic business and economic conditions, such as
interest rate and currency fluctuations, 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 international, including adverse accounting or
regulatory requirements and market value of candidates, and (5) uncertainties
arising from the aftermath of the September 11th tragedy.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
3(b) By-laws of Illinois Tool Works Inc., as amended.
10(a) Illinois Tool Works Inc. Non-officer directors' restricted
stock program, as amended.
(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 13, 2001 By: /s/ Jon C. Kinney
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
