1
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, 2002
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 March 31, 2002: 306,146,908.
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.
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF INCOME
(UNAUDITED)
(In Thousands Except for
Per Share Amounts)
Three Months Ended
March 31
------------------------- March 31
2002 2001
---------- ----------
Operating Revenues $2,204,654 $2,295,840
Cost of revenues 1,475,119 1,537,365
Selling, administrative,
and research and
development expenses 414,764 438,290
Amortization of goodwill
and other intangible assets 4,872 23,912
----------- -----------
Operating Income 309,899 296,273
Interest expense (17,503) (18,189)
Other income 2,076 2,293
----------- -----------
Income from Continuing Operations
Before Income Taxes 294,472 280,377
Income taxes 100,100 97,976
----------- -----------
Income from Continuing Operations 194,372 182,401
Income from Discontinued
Operations 4,075 357
Cumulative Effect of Change in
Accounting Principle (221,890) --
----------- -----------
Net Income(Loss) $ (23,443) $ 182,758
=========== ===========
Income Per Share from Continuing Operations:
Basic $ 0.64 $ 0.60
Diluted $ 0.63 $ 0.60
Income Per Share from Discontinued Operations:
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
Cumulative Effect Per Share of Change
In Accounting Principle:
Basic $ (0.73) --
Diluted $ (0.72) --
Net Income (Loss) Per Share:
Basic $ (0.08) $ 0.60
Diluted $ (0.08) $ 0.60
Pro Forma Excluding Goodwill Amortization:
Income from Continuing Operations $ 194,372 $ 198,960
Income per Diluted Share from
Continuing Operations $ 0.63 $ 0.65
Cash Dividends:
Paid $ 0.22 $ 0.20
Declared $ 0.22 $ 0.20
Shares of Common Stock
Outstanding During the Period:
Average 305,532 303,151
Average assuming dilution 307,985 305,731
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS March 31, 2002 December 31, 2001
- ------ -------------- -----------------
Current Assets:
Cash and equivalents $ 281,026 $ 282,224
Trade receivables 1,486,807 1,450,029
Inventories 964,958 994,156
Deferred income taxes 195,269 197,428
Prepaid expenses and other
current assets 133,419 139,226
Net current assets of
discontinued operations 95,754 100,181
----------- -----------
Total current assets 3,157,233 3,163,244
----------- -----------
Plant and Equipment:
Land 112,750 114,649
Buildings and improvements 949,990 960,232
Machinery and equipment 2,786,136 2,800,341
Equipment leased to others 123,703 123,422
Construction in progress 135,926 105,316
----------- -----------
4,108,505 4,103,960
Accumulated depreciation (2,503,325) (2,470,270)
----------- -----------
Net plant and equipment 1,605,180 1,633,690
----------- -----------
Investments 1,379,207 1,278,285
Goodwill 2,281,592 2,516,813
Intangible Assets 208,835 221,881
Deferred Income Taxes 492,785 439,278
Other Assets 450,070 459,429
Net Noncurrent Assets of
Discontinued Operations 107,844 109,729
----------- -----------
$ 9,682,746 $ 9,822,349
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 276,498 $ 313,447
Accounts payable 390,864 367,249
Accrued expenses 765,004 795,210
Cash dividends payable 67,352 67,084
Income taxes payable 56,305 32,922
----------- -----------
Total current liabilities 1,556,023 1,575,912
Noncurrent Liabilities: ----------- -----------
Long-term debt 1,249,744 1,267,141
Other 931,043 938,558
----------- -----------
Total noncurrent liabilities 2,180,787 2,205,699
Stockholders' Equity: ----------- -----------
Preferred stock
Common stock 3,063 3,052
Additional paid-in-capital 706,926 675,856
Income reinvested in the business 5,674,625 5,765,421
Common stock held in treasury (1,662) (1,666)
Cumulative translation adjustment (437,016) (401,925)
----------- -----------
Total stockholders' equity 5,945,936 6,040,738
----------- -----------
$ 9,682,746 $ 9,822,349
=========== ===========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Three Months Ended
March 31
-----------------------
2002 2001
---------- ----------
Cash Provided by (Used for) Operating Activities:
Net income $ (23,443) $ 182,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations (4,075) (357)
Non-cash goodwill impairment charge 221,890 --
Depreciation and amortization 76,359 97,442
Change in deferred income taxes (11,870) 580
Provision for uncollectible accounts 5,922 4,592
Loss on sale of plant and equipment 488 364
Income from investments (31,154) (36,898)
Non-cash interest on nonrecourse notes payable 9,810 10,611
(Gain) loss on sale of operations and affiliates 1,836 (899)
Other non-cash items, net 3,353 (956)
--------- ---------
Cash provided by operating activities 249,116 257,237
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (55,954) 1,089
Inventories 24,768 4,965
Prepaid expenses and other assets 7,373 8,417
Net assets of discontinued operations 10,733 9,636
Increase (decrease) in--
Accounts payable 26,708 (27,087)
Accrued expenses (5,800) (90,812)
Income taxes payable 25,926 71,528
Other, net 24 (10)
--------- ---------
Net cash provided by operating activities 282,894 234,963
--------- ---------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (35,347) (52,193)
Additions to plant and equipment (64,051) (69,532)
Purchase of investments (115,049) (9,518)
Proceeds from investments 11,827 22,050
Proceeds from sale of plant and equipment 2,605 3,503
Proceeds from sale of operations and affiliates 1,792 6,891
Sales of short-term investments 2,753 2,045
Other, net 1,165 666
--------- ---------
Net cash used for investing activities (194,305) (96,088)
--------- ---------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (67,084) (60,490)
Issuance of common stock 30,997 27,146
Net repayments of short-term debt (31,484) (108,761)
Proceeds from long-term debt 237 939
Repayments of long-term debt (9,626) (2,290)
Other, net (453) 116
--------- ---------
Net cash used for financing activities (77,413) (143,340)
--------- ---------
Effect of Exchange Rate Changes on Cash and Equivalents (12,374) 2,662
--------- ---------
Cash and Equivalents:
Decrease during the period (1,198) (1,803)
Beginning of period 282,224 151,295
--------- ---------
End of period $ 281,026 $ 149,492
========= =========
Cash Paid During the Period for Interest $ 22,494 $ 24,980
========= =========
Cash Paid During the Period for Income Taxes $ 80,411 $ 26,040
========= =========
Liabilities Assumed from Acquisitions $ 2,238 $ 4,165
========= =========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES:
Inventories at March 31, 2002 and December 31, 2001 were as follows:
(In Thousands)
March 31, Dec. 31,
2002 2001
-------- --------
Raw material $285,200 $287,067
Work-in-process 86,360 101,418
Finished goods 593,398 605,671
-------- --------
$964,958 $994,156
======== ========
(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,
2002 2001
-------- --------
Net income $(23,443) $182,758
Foreign currency translation
adjustments, net of tax (35,091) 31,930
-------- --------
Total comprehensive income (loss) $(58,534) $214,688
======== ========
(3) DISCONTINUED OPERATIONS:
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. The segment is comprised of the following
businesses: Precor specialty exercise equipment, West Bend appliances and
premium cookware, and Florida Tile ceramic tile. The consolidated financial
statements for all periods have been restated to present these businesses as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30. The Company intends to dispose of these businesses through sale
transactions in 2002, and does not expect to incur a loss on their disposal. As
of March 31, 2002, none of the businesses have been sold. Results of the
discontinued operations for the three months ended March 31, 2002 and 2001 were
as follows:
(In Thousands)
March 31, March 31,
2002 2001
-------- --------
Operating revenues $101,054 $100,993
======== ========
Pro forma operating income $ 8,451 $ 1,799
======== ========
Pro forma income before income taxes $ 6,145 $ 1,374
Income taxes 2,070 424
-------- --------
Pro forma income from discontinued
operations $ 4,075 $ 950
======== ========
The actual results for 2001 have been adjusted to reflect the pro forma effect
of the elimination of goodwill and indefinite-lived intangible amortization. The
Company has allocated general corporate interest expense to discontinued
operations based on proportional net assets excluding debt. Interest expense
allocated to discontinued operations was $495,000 in 2002 and $515,000 in 2001.
The net assets of the discontinued operations as of March 31, 2002 and December
31, 2001 were as follows:
(In Thousands)
March 31, Dec. 31,
2002 2001
--------- ---------
Accounts receivable $ 57,345 $ 64,897
Inventory 70,568 71,481
Accounts payable (13,464) (14,258)
Accrued liabilties (36,737) (40,686)
Other, net 18,042 18,747
Net current assets of discontinued --------- ---------
operations $ 95,754 $ 100,181
========= =========
Net plant and equipment $ 77,551 $ 79,730
Net goodwill and intangibles 68,183 68,200
Other, net (37,890) (38,201)
Net noncurrent assets of discontinued --------- ---------
operations $ 107,844 $ 109,729
========= =========
(4) INVESTMENTS:
In March 2002, the Company entered into two leveraged leasing transactions with
a major German telecommunications company related to certain German mobile
telecommunications equipment. The components of the Company's cash investment of
$100,001,000 were as follows:
(In Thousands)
Gross lease contracts receivable $ 692,723
Nonrecourse debt service (642,232)
Estimated residual value of leased assets 105,637
Unearned and deferred income (56,127)
---------
$ 100,001
=========
(5) GOODWILL AND INTANGIBLE ASSETS:
Goodwill represents the excess cost over fair value of the net assets of
purchased businesses. Effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142"). Under SFAS 142, the Company will no longer amortize goodwill and
intangibles which have indefinite lives. SFAS 142 also requires that the Company
assess goodwill and intangibles with indefinite lives for impairment at least
annually, based on the fair value of the related reporting unit. The Company has
not yet determined which quarter its annual impairment assessment will be
performed on an on-going basis.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to approximately 300 of its reporting units. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows.
Based on the Company's initial impairment testing, goodwill and intangible
assets were reduced by $262,816,000 and a net after-tax impairment charge of
$221,890,000 ($0.72 per diluted share) was recognized as a cumulative effect of
change in accounting principle in the first quarter of 2002. The impairment
charge was related to approximately 40 businesses and primarily resulted from
evaluating impairment based on discounted cash flows, as required by SFAS 142,
instead of using undiscounted cash flows per the previous accounting standard.
Although the Company has substantially completed its initial impairment testing,
the impairment charge recorded in the first quarter of 2002 is an estimate that
will be finalized later in 2002.
The changes in the carrying amount of goodwill by segment for the quarter ended
March 31, 2002 are as follows:
(In Thousands)
Engineered Engineered Specialty Specialty
Products - Products - Systems - Systems
North America International North America International Total
------------- ------------- ------------- ------------- -----
Balance,
Dec. 31, 2001 $579,462 $417,977 $853,557 $665,817 $2,516,813
Acquisitions 1,968 (39) 6,309 20,013 28,251
Impairment
write-offs (50,992) (18,744) (85,994) (98,858) (254,588)
Foreign currency
translation 32 (3,659) (1) (5,256) (8,884)
Balance, -------- -------- -------- -------- ----------
March 31, 2002 $530,470 $395,535 $773,871 $581,716 $2,281,592
======== ======== ======== ======== ==========
Intangible assets as of March 31, 2002 and December 31, 2001 were as follows:
(In Thousands)
As of March 31, 2002 As of December 31, 2001
------------------------- -------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
------- ------------ ---- ------ ------------ ----
Amortizable Intangibles:
Trademarks and brands $ 9,239 $ (1,791) $ 7,448 $ 9,339 $ (1,685) $ 7,654
Customer lists
and relationships 28,371 (3,620) 24,751 28,371 (2,848) 25,523
Patents 74,911 (35,878) 39,033 74,971 (34,775) 40,196
Noncompete agreements 60,252 (23,088) 37,164 63,203 (21,741) 41,462
Other 49,219 (26,914) 22,305 50,239 (25,648) 24,591
Indefinite-lived Intangibles:
Trademarks and brands 78,134 -- 78,134 82,455 -- 82,455
-------- -------- -------- -------- -------- --------
Total Intangible Assets $300,126 $(91,291)$208,835 $308,578 $(86,697)$221,881
======== ======== ======== ======== ======== ========
Amortization expense related to amortizable intangible assets was $4,872,000 for
the first quarter of 2002 and $4,679,000 for the first quarter of 2001. The
estimated amortization expense of intangible assets for the years ending
December 31 is as follows:
(In Thousands)
2002 $19,489
2003 17,099
2004 16,298
2005 15,319
2006 14,417
2007 12,228
A reconciliation of the previously reported 2001 statement of income information
to pro forma amounts that reflect the elimination of amortization of goodwill
and indefinite-lived intangible assets is presented below:
(In Thousands, except per share amounts)
Three months ended
March 31, 2001
---------------------------
Per Share
---------------
Amount Basic Diluted
-------- ------- -------
Income from continuing operations, as reported $182,401 $ 0.60 $ 0.60
Amortization of goodwill and indefinite-lived
intangible assets 16,559 0.05 0.05
--------
Pro forma income from continuing operations 198,960 0.66 0.65
--------
Income from discontinued operations, as reported 357 0.00 0.00
Amortization of goodwill and indefinite-lived
intangible assets 593 0.00 0.00
--------
Pro forma income from discontinued operations 950 0.00 0.00
--------
Pro forma net income $199,910 0.66 0.65
========
(6) SUBSEQUENT EVENT:
On April 26, 2002, a subsidiary of the Company issued $250,000,000 of 6.55%
preferred debt securities due December 31, 2011 at 99.849% of face value. The
effective interest rate of the preferred debt securities is 6.76%.
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
March 31
--------------------
2002 2001
-------- --------
Operating revenues $738,450 $744,595
Operating income 124,779 109,693
Margin % 16.9% 14.7%
For the first quarter of 2002, operating revenues decreased 1% as the base
business revenue decline of 4% was offset by a 3% revenue increase from
acquisitions. Base business revenues declined due to weakness in the industrial
plastics, construction, machined components, polymers and electronic component
packaging businesses, partially offset by increased demand in the automotive
businesses. Operating income increased 14% and margins were higher by 220 basis
points due to higher sales for the automotive businesses, reduced costs in the
construction and automotive businesses and higher 2001 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 electronic component packaging.
(Dollars in Thousands)
Three months ended
March 31
--------------------
2002 2001
-------- --------
Operating revenues $332,033 $361,193
Operating income 28,227 38,045
Margin % 8.5% 10.5%
Operating revenues decreased 8% in the first quarter of 2002 versus the prior
period. This revenue decline was primarily due to a 4% decrease attributed to
currency fluctuations and a base business revenue decline of 3%, primarily
related to weakness in the automotive, electronic component packaging and
industrial plastics businesses. Operating income declined 26% and margins
decreased 200 basis points due to the lower revenues and an asset writedown. In
addition, foreign currency fluctuations reduced operating income by 4%.
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
March 31
--------------------
2002 2001
-------- --------
Operating revenues $826,362 $847,006
Operating income 111,129 109,006
Margin % 13.4% 12.9%
In the first quarter of 2002, operating revenues decreased 2% as the revenue
increase from acquisitions of 5% was more than offset by revenue declines in the
base businesses of 8%. The base business revenue decreases in the industrial
packaging, food equipment and finishing businesses, offset higher revenues in
the welding businesses. Operating income increased 2% due mainly to
acquisitions, higher sales for the welding businesses and lower costs in the
food equipment businesses. These gains offset higher nonrecurring costs in 2002.
Margins improved 50 basis points due to lower costs in the food equipment,
industrial packaging and consumer packaging 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
applications such as food service and industrial finishing.
(Dollars in Thousands)
Three months ended
March 31
--------------------
2002 2001
-------- --------
Operating revenues $365,594 $401,756
Operating income 28,977 36,000
Margin % 7.9% 9.0%
Operating revenues decreased 9% in the first quarter of 2002 due to lower base
business revenues in the industrial packaging, food equipment and decorating
businesses. In addition, increased revenues from acquisitions of 4% were offset
by the effect of foreign currency fluctuations of 4%. Operating income decreased
20% and margins were lower by 110 basis points, primarily due to weakness in the
industrial packaging, decorating and finishing businesses. Also, currency
fluctuation reduced operating income by 4%.
LEASING AND INVESTMENTS
This segment makes opportunistic investments in mortgage-related assets,
leveraged and direct financing leases of telecommunications, aircraft and other
equipment, properties and property developments, affordable housing, and a
venture capital fund.
(In Thousands)
Three months ended
March 31
--------------------
2002 2001
-------- --------
Operating revenues $32,096 $40,323
Operating income 16,787 22,762
Operating revenues and income decreased in the first quarter of 2002 primarily
due to a gain on the sale of a property in the first quarter of 2001.
In March 2002, the Company entered into two leveraged leasing transactions with
a major German telecommunications company related to certain German mobile
telecommunications equipment. The Company's cash investment was $100,001,000.
OPERATING REVENUES
The reconciliation of segment operating revenues to total operating revenues is
as follows:
Three months ended
March 31
--------------------------
2002 2001
----------- -----------
Engineered Products - North America $ 738,450 $ 744,595
Engineered Products - International 332,033 361,193
Specialty Systems - North America 826,362 847,006
Specialty Systems - International 365,594 401,756
Leasing and Investments 32,096 40,323
----------- -----------
Total segment operating revenues 2,294,535 2,394,873
Intersegment revenues (89,881) (99,033)
----------- -----------
Total operating revenues $ 2,204,654 $ 2,295,840
=========== ===========
OPERATING INCOME
Segment operating income for 2001 was restated to exclude the amortization of
goodwill and indefinite-lived intangible assets. The reconciliation of segment
operating income to total operating income is as follows:
Three months ended
March 31
--------------------------
2002 2001
----------- -----------
Engineered Products - North America $ 124,779 $ 109,693
Engineered Products - International 28,227 38,045
Specialty Systems - North America 111,129 109,006
Specialty Systems - International 28,977 36,000
Leasing and Investments 16,787 22,762
--------- ---------
Total segment operating income 309,899 315,506
Amortization of goodwill and
indefinite-lived intangible assets -- (19,233)
--------- ---------
Total operating income $ 309,899 $ 296,273
========= =========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 66.9% in the first
three months of 2002 versus 67.0% in the first three months of 2001. Selling,
administrative, and research and development expenses decreased to 18.8% of
revenues in the first three months of 2002 versus 19.1% in the first three
months of 2001, primarily due to lower nonrecurring charges in 2002 and expense
reductions as a result of a Company-wide objective to reduce administrative
costs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS
142, the Company will no longer amortize goodwill and intangibles which have
indefinite lives. SFAS 142 also requires that the Company assess goodwill and
intangibles with indefinite lives for impairment at least annually, based on the
fair value of the related reporting unit. The Company has not yet determined
which quarter its annual impairment assessment will be performed on an on-going
basis.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to approximately 300 of its reporting units. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows.
Based on the Company's initial impairment testing, goodwill and intangible
assets were reduced by $262,816,000 and a net after-tax impairment charge of
$221,890,000 ($0.72 per diluted share) was recognized as a cumulative effect of
change in accounting principle in the first quarter of 2002. The impairment
charge was related to approximately 40 businesses and primarily resulted from
evaluating impairment based on discounted cash flows, as required by SFAS 142,
instead of using undiscounted cash flows per the previous accounting standard.
Although the Company has substantially completed its initial impairment testing,
the impairment charge recorded in the first quarter of 2002 is an estimate that
will be finalized later in 2002.
Amortization expense related to amortizable intangible assets was $4,872,000 for
the first quarter of 2002 and $4,679,000 for the first quarter of 2001.
INTEREST EXPENSE
Interest expense decreased to $17.5 million in the first three months of 2002
from $18.2 million in the first three months of 2001, primarily due to lower
commercial paper borrowings in 2002.
OTHER INCOME
Other income decreased to $2.1 million for the first three months of 2002 from
$2.3 million in 2001. This decrease is primarily due to losses versus gains on
the sale of operations and affiliates in 2002 partially offset by gains versus
losses on foreign currency translation.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations of $194.4 million ($0.63 per diluted share) in
the first three months of 2002 was 6.6% higher than the 2001 first quarter net
income of $182.4 million ($0.60 per diluted share).
On a pro forma basis, excluding goodwill and indefinite-lived intangible
amortization in 2001, net income from continuing operations of $194.4 million in
the first three months of 2002 was 2.3% lower than the 2001 pro forma income
from continuing operations of $199.0 million. Net income from continuing
operations per diluted share of $0.63 for the first three months of 2002 was
3.1% lower than the pro forma net income from continuing operations per diluted
share of $0.65 for the first three months of 2001.
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies in 2002
decreased operating revenues in the first three months of 2002 by approximately
$31 million and reduced income from continuing operations by approximately 1
cent per diluted share.
DISCONTINUED OPERATIONS
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. Businesses in this segment are located primarily
in North America and manufacture household products that are used by consumers,
including West Bend small electric appliances, Precor specialty exercise
equipment and Florida Tile ceramic tile. The Company intends to dispose of these
businesses through sale transactions in 2002, and does not expect to incur a net
loss on the disposal of the segment. As of March 31, 2002, none of the
businesses have been sold.
(Dollars in Thousands)
Three months ended
March 31
--------------------
2002 2001
-------- --------
Operating revenues $101,054 $100,993
Operating income 8,451 1,799
Margin % 8.4% 1.8%
Operating revenues increased slightly in 2002 versus 2001 due to higher sales of
specialty exercise equipment, offset by lower small appliance and ceramic tile
revenues. Operating income and margins increased significantly due to cost
improvements in the exercise equipment and appliance businesses.
LIQUIDITY AND CAPITAL RESOURCES
Summarized cash flow information for the three months ended March 31, 2002 and
2001 was as follows:
(In Thousands)
2002 2001
--------- ---------
Net cash provided by operating activities $ 282,894 $ 234,963
Net cash used for investing activities,
excluding acquisitions and purchase
of investments (43,909) (34,377)
--------- ---------
Free operating cash flow $ 238,985 $ 200,586
========= =========
Acquisitions $ (35,347) $ (52,193)
Purchase of investments (115,049) (9,518)
Cash dividends paid (67,084) (60,490)
Net payments of debt (40,873) (110,112)
Other, net 18,170 29,924
Net decrease in cash --------- ---------
and equivalents $ (1,198) $ (1,803)
========= =========
Return on average invested capital for the three months ended March 31, 2002 and
2001 was as follows:
(Dollars in Thousands)
2002 2001
----------- -----------
Pro forma operating income after taxes $ 204,533 $ 205,079
=========== ===========
Total debt $ 1,526,242 $ 1,860,012
Less: Leasing and investment debt (810,106) (796,115)
Less: Cash (281,026) (149,492)
----------- -----------
Adjusted net debt 435,110 914,405
Total stockholders' equity 5,945,936 5,583,917
----------- -----------
Invested capital $ 6,381,046 $ 6,498,322
=========== ===========
Average invested capital $ 6,506,623 $ 6,457,021
=========== ===========
Return on average invested capital 12.6% 12.7%
Net working capital at March 31, 2002 and December 31, 2001 is summarized as
follows:
(Dollars in Thousands)
March 31, Dec. 31, Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $ 281,026 $ 282,224 $ (1,198)
Trade receivables 1,486,807 1,450,029 36,778
Inventories 964,958 994,156 (29,198)
Other 328,688 336,654 (7,966)
Net current assets of
discontinued operations 95,754 100,181 (4,427)
---------- ---------- ----------
3,157,233 3,163,244 (6,011)
---------- ---------- ----------
Current Liabilities:
Short-term debt 276,498 313,447 (36,949)
Accounts payable 390,864 367,249 23,615
Accrued expenses 765,004 795,210 (30,206)
Other 123,657 100,006 23,651
---------- ---------- ----------
1,556,023 1,575,912 (19,889)
---------- ---------- ----------
Net Working Capital $1,601,210 $1,587,332 $ 13,878
========== ========== ==========
Current Ratio 2.03 2.01
==== ====
Accounts receivable increased as a result of higher sales at the end of the
first three months of 2002 and slower payments by customers. Inventories
decreased as a result of a Company-wide effort to reduce inventory levels.
Accounts payable has increased as a result of differences in the timing of
payments in the first quarter of 2002 and the fourth quarter of 2001. Accrued
liabilities decreased primarily as a result of a decrease in accrued bonuses and
payroll.
Total debt at March 31, 2002 and December 31, 2001 was as follows:
(Dollars in Thousands)
March 31, Dec. 31,
2002 2001
---------- ----------
Short-term debt $ 276,498 $ 313,447
Long-term debt 1,249,744 1,267,141
---------- ----------
Total debt $1,526,242 $1,580,588
========== ==========
Total debt to capitalization 20.4% 20.7%
Total debt to total capitalization
(excluding Leasing and Investment segment) 11.6% 13.1%
On April 26, 2002, a subsidiary of the Company issued $250,000,000 of 6.55%
preferred debt securities due December 31, 2011 at 99.849% of face value. The
proceeds will be used for general corporate purposes.
The changes to stockholders' equity during 2002 were as follows:
(In Thousands)
Total stockholders' equity, December 31, 2001 $ 6,040,738
Income from continuing operations 194,372
Income from discontinued operations 4,075
Cumulative effect of change in accounting principle (221,890)
Cash dividends declared (67,353)
Exercise of stock options, including tax benefits 31,085
Currency translation adjustments (35,091)
-----------
Total stockholders' equity, March 31, 2002 $ 5,945,936
===========
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 the profitable divestiture of the Consumer Products segment
in 2002 and the estimated residual value of leased assets. 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, automotive, general
industrial, food retail and service 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 and (4) an unfavorable
environment for making acquisitions or dispositions, domestic and international,
including adverse accounting or regulatory requirements and market values of
candidates.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
No exhibits.
(b) Reports on Form 8-K
Form 8-K, Current Report dated January 29, 2002 which included Items 5
and 7 and a press release dated January 29, 2002 setting forth the 2001
financial results of Illinois Tool Works Inc.
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 2, 2002 By: /s/ Jon C. Kinney
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
