1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Illinois Tool Works Inc. is a multinational manufacturer of highly engineered
products and specialty systems. The Company has 400 operations in 35 countries
which are aggregated and organized for internal reporting purposes into the
following five segments: Engineered Products--North America, Engineered
Products--International, Specialty Systems--North America, Specialty
Systems--International, and Leasing and Investments. These segments are
described below.
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. In 1998, this segment
primarily served the automotive (38%), construction (27%), and general
industrial (14%) markets.
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $1,790,221 $1,596,156 $1,480,214
Operating income 363,369 307,106 274,670
Margin % 20.3% 19.2% 18.6%
In 1998, revenues increased versus 1997 largely due to acquisitions, primarily
in the automotive and general industrial businesses, which contributed 8% to the
revenue growth. The primary contributors to the base business revenue growth of
5% were the construction, automotive and general industrial businesses.
Operating income grew 18% in 1998 due to cost reductions in the base businesses
and acquisitions. Margins improved in 1998 due to cost improvements in the base
businesses, partially offset by lower margins for acquired businesses.
Revenues and operating income increased in 1997 over 1996 mainly due to
acquisitions and growth in the base businesses, primarily in the automotive
businesses. The sale of a fastener distribution business in the first quarter of
1997 moderated revenue growth. New products and increased market penetration in
the adhesives and automotive businesses resulted in margin growth, partially
offset by flat operating income in the construction 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. In 1998, this segment primarily
served the automotive (37%), construction (33%), electronics (10%), and general
industrial (10%) markets.
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $ 937,243 $ 875,200 $ 877,088
Operating income 140,323 136,511 108,398
Margin % 15.0% 15.6% 12.4%
Revenues increased in 1998 compared with 1997 mainly due to acquisitions,
primarily in the construction businesses, which had a contribution of 9% to the
revenue growth. The general industrial, electronic component packaging and
automotive businesses were the primary contributors to the base business revenue
growth of 4%. Operating income was higher in 1998 due to cost reductions in the
base businesses and due to acquisitions. Margins were lower in 1998 as a result
of the lower margins of acquired companies, partially offset by the effect of
cost improvements in the base businesses. Foreign currency fluctuations in 1998
versus 1997 decreased revenues by 6% and operating income by 7%.
Revenues for the base businesses grew in 1997 over 1996 due to increased
market penetration by the European automotive businesses. The increase in
revenues was more than offset, however, by the negative effect of European
currencies against the U.S. dollar and flat revenues for the construction
businesses. A more profitable product mix and lower overall cost structure in
the construction businesses, however, combined with increased revenues in the
international automotive operations, resulted in strong operating income and
margin increases. Foreign currency fluctuations in 1997 versus 1996 decreased
revenues by 7% and operating income by 9%.
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ILLINOIS TOOL WORKS INC.
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. In 1998, this segment primarily served the general industrial (30%),
construction (15%), food and beverage (15%), and automotive (12%) markets.
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $2,000,308 $2,012,851 $1,930,503
Operating income 377,994 329,984 296,493
Margin % 18.9% 16.4% 15.4%
In 1998, revenues declined 2% in the base businesses as a result of slower
growth in the North American industrial markets, which affected the majority of
the businesses. The effect of divestitures also contributed 2% to the revenue
decrease. Acquisitions increased revenues by 4%, which almost offset the revenue
declines from the base businesses and divestitures. Despite the decrease in
revenues, operating income and margins increased due to administrative and
manufacturing cost reductions. Acquisitions also contributed to the higher
operating income in 1998.
Revenues and operating income increased in 1997 versus 1996 due primarily
to acquisitions and new products in the decorating businesses, along with new
product introductions in the welding and finishing systems businesses. Tempering
revenue growth was a decline in revenues in the quality measurement businesses
and a shift in product mix by the Signode operations from steel to plastic
strapping systems, which sell for a lower unit price and higher margins. Reduced
manufacturing costs at the Signode and the welding operations, increased
revenues from the finishing systems businesses and growth in the decorating
businesses contributed to operating income and margin increases.
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. In 1998, this segment primarily
served the general industrial (37%), food and beverage (15%), industrial capital
goods (10%), and paper products (10%) markets.
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $1,048,895 $ 919,063 $ 886,309
Operating income 125,617 113,509 95,715
Margin % 12.0% 12.4% 10.8%
Acquisitions, primarily in the Signode packaging and stretch film businesses,
contributed 19% to the revenue growth in 1998. The base business revenues grew
1%, as higher sales in the stretch film equipment operations were partially
offset by lower revenues in the businesses that serve the general industrial
markets. Operating income and margins increased in the base operations due to
cost improvements, but the lower margins of acquired businesses more than offset
the margin increase. Foreign currency translation reduced revenues by 5% and
operating income by 6% in 1998 versus 1997.
Revenues grew in 1997, due primarily to the acquisition of a stretch film
business in Europe and acquisitions in the Signode businesses. Currency
translation and the sale of the European palletizing operations in the first
quarter of 1997 partially offset the revenue growth. Operating income and
margins also improved as a result of cost reductions in Signode operations and
new product introductions in the finishing systems businesses. Foreign currency
translation reduced revenues by 7% and operating income by 8% in 1997 versus
1996.
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 1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $ 149,748 $ 101,110 $ 68,357
Operating income 71,983 40,113 25,310
Revenues and operating income increased in 1998 due primarily to the commercial
mortgage transaction entered into at year-end 1997. Increased property
development activity and sales of mortgage-related assets also contributed to
the higher revenues and operating income.
Revenues and operating income increased in 1997 primarily due to the
commercial mortgage transaction entered into at year-end 1996.
In December 1997, the Company acquired a pool of mortgage-related assets in
exchange for a nonrecourse note payable of $217.4 million, preferred stock of a
subsidiary of $20 million and cash of $80 million. In December 1996, the Company
acquired a pool of mortgage-related assets in exchange for a nonrecourse note
payable of $266.3 million, preferred stock of a subsidiary of $20 million and
cash of $80 million. In December 1995, the Company acquired a pool of
mortgage-related assets in exchange for a nonrecourse note payable of $256
million, preferred stock of a subsidiary of $20 million and cash of $80 million.
The mortgage-related assets for the three transactions are located throughout
the U.S. and include 24 subperforming, variable rate, balloon loans and 23
foreclosed properties at December 31, 1998. In conjunction with these
transactions, the Company simultaneously entered into ten-year swap agreements
and other related agreements whereby the Company will pay a third party the
portion of the interest and net operating cash flow from the mortgage-related
assets in excess of $26 million per year and a portion of the proceeds from the
disposition of the mortgage-related assets and principal repayments, in exchange
for the third party making payments to the Company equal to the
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MANAGEMENT'S DISCUSSION AND ANALYSIS
contractual principal and interest payments on the nonrecourse notes payable. In
addition, in the event that the pools of mortgage-related assets do not generate
income of $26 million a year, the Company has a collateral right against the
cash flow generated by three separate pools of mortgage-related assets (owned by
third parties in which the Company has minimal interests) which have a total
fair value of approximately $2.7 billion at December 31, 1998. The Company
entered into the swaps and other related agreements in order to reduce its
credit and interest rate risks relative to the mortgage-related assets.
The Company expects to recover its net investment in the mortgage-related
assets of $320.2 million at December 31, 1998 (net of the related nonrecourse
notes payable) through its expected net cash flow of $26 million per year for
the remainder of the ten-year periods and its estimated $415.4 million share of
the total proceeds from disposition of the mortgage-related assets and principal
repayments. The Company believes that because the swaps' counterparty is
Aaa-rated and that significant collateral secures the net annual cash flow of
$26 million, its risk of not recovering that portion of its net investment has
been significantly mitigated. The Company currently believes that its share of
the disposition proceeds will be sufficient to recover the remainder of its net
investment. However, there can be no assurances that all of the net investment
will be recovered.
The net assets attributed to the Leasing and Investments segment at
December 31, 1998 and 1997 are summarized as follows:
In thousands 1998 1997
- -----------------------------------------------------------------
Assets:
Investments--
Mortgage-related assets $1,018,698 $1,017,984
Leases 78,396 79,875
Properties and
affordable housing 50,837 57,549
Prepaid forward contract 20,247 --
Other 15,315 14,607
Deferred tax assets 345,127 360,262
Other assets 1,422 4,519
---------- ----------
1,530,042 1,534,796
========== ==========
Liabilities:
Debt--
Nonrecourse notes payable 698,462 720,125
Allocated general corporate debt 258,751 302,332
Deferred investment income 313,144 327,508
Preferred stock of subsidiaries 70,000 60,000
Other liabilities 24,291 16,720
---------- ----------
1,364,648 1,426,685
---------- ----------
Net assets $ 165,394 $ 108,111
========== ==========
OPERATING REVENUES
Total operating revenues increased 8.2% in 1998 versus 1997 and 4.5% in 1997
compared with 1996. Overall, the Company believes that the majority of the
increases in operating revenues is due to higher sales volume rather than
increased sales prices.
COST OF REVENUES
Cost of revenues as a percentage of revenues was 64.2% in 1998 compared with
64.7% in 1997 and 65.7% in 1996. The continued decline in this ratio was mainly
due to increased sales volume coupled with lower manufacturing costs.
SELLING, ADMINISTRATIVE AND R&D EXPENSES
Selling, administrative, and research and development expenses were 15.8% of
revenues in 1998 versus 16.7% in 1997 and 17.5% in 1996. This ratio continues to
decline because of increasing revenues and expense reductions as a result of a
Company-wide objective to reduce administrative costs.
INTEREST EXPENSE
Interest expense decreased to $14.2 million in 1998 versus $19.4 million in
1997, and $27.8 million in 1996, primarily due to higher interest expense in
1997 and 1996 because of debt assumed from acquisitions. Interest costs of $64.4
million in 1998, $49.3 million in 1997, and $24.8 million in 1996 attributed to
the Leasing and Investments segment have been classified in the segment's cost
of revenues.
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Illinois Tool Works Inc.
OTHER INCOME (EXPENSE)
Other income (expense) was an expense of $5.5 million in 1998 versus income of
$16.5 million in 1997, primarily due to losses on the sale of operations in 1998
versus gains on the sale of operations in 1997 and lower interest income in 1998
versus 1997. Other income was $16.5 million in 1997 versus expense of $2.4
million in 1996, primarily due to higher gains on the sale of operations,
foreign currency translation gains, and debt prepayment costs in 1996, partially
offset by higher losses on sale of fixed assets in 1997.
INCOME TAXES
The effective tax rate was 36.5% in 1998 and 1997 and 36.9% in 1996. See the
Income Taxes note for a reconciliation of the U.S. federal statutory rate to the
effective tax rate. The Company has not recorded a valuation allowance on the
net deferred income tax assets of $520.0 million at December 31, 1998, and
$548.4 million at December 31, 1997, as it expects to continue to generate
significant taxable income in future years.
NET INCOME
Net income in 1998 of $672.8 million ($2.69 per basic share and $2.67 per
diluted share) was 14.6% higher than 1997 net income of $587.0 million ($2.35
per basic share and $2.33 per diluted share). Net income in 1997 was 20.7%
higher than 1996 net income of $486.3 million ($1.96 per basic share and $1.95
per diluted share).
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies
in 1998 and 1997 resulted in decreased operating revenues of $114 million in
1998 and $142 million in 1997 and decreased net income by approximately 5 cents
per diluted share in 1998 and 1997. Foreign currency fluctuations had minimal
impact on revenues or earnings in 1996.
FINANCIAL POSITION
Net working capital at December 31, 1998 and 1997 is summarized as follows:
Increase
Dollars in thousands 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
Current Assets:
Cash and
equivalents $ 93,485 $ 185,856 $ (92,371)
Trade receivables 989,086 902,022 87,064
Inventories 581,755 522,996 58,759
Other 170,147 247,768 (77,621)
---------- ---------- -----------
1,834,473 1,858,642 (24,169)
========== ========== ===========
Current Liabilities:
Short-term debt 406,707 298,278 108,429
Accounts payable
and accrued
expenses 726,412 727,469 (1,057)
Other 88,890 132,133 (43,243)
1,222,009 1,157,880 64,129
--------- ---------- -----------
Net Working Capital $ 612,464 $ 700,762 $ (88,298)
========== ========== ==========
Current Ratio 1.50 1.61
========== ==========
The increase in trade receivables and inventories at December 31, 1998, was
primarily due to 1998 acquisitions.
Short-term debt increased at December 31, 1998, due to the higher
commercial paper borrowings used to fund 1998 acquisitions.
Long-term debt at December 31, 1998, consisted of $100 million of
commercial paper, $125 million of 5.875% notes, $698 million of nonrecourse
notes, and $57 million of capitalized lease obligations and other debt.
Long-term debt increased $93 million from December 31, 1997, principally as a
result of higher commercial paper borrowings. Excluding the effect of the
Leasing and Investments segment, the percentage of total debt to total
capitalization increased to 11.1% at December 31, 1998, from 4.6% at December
31, 1997. In February 1999, the Company issued $500 million of 5.75% notes due
March 1, 2009.
Stockholders' equity was $3.3 billion at December 31, 1998, compared with
$2.8 billion at December 31, 1997. Affecting equity were earnings of $673
million, dividends declared of $135 million, and unfavorable currency
translation adjustments of $22 million.
The Statement of Cash Flows for the years ended December 31, 1998 and 1997
is summarized below:
In thousands 1998 1997
- --------------------------------------------------------------------------------
Net income $ 672,784 $ 586,951
Depreciation and amortization 211,779 185,386
Income from investments,
net of non-cash interest on
nonrecourse debt (90,932) (58,014)
Acquisitions (751,981) (221,954)
Additions to plant and equipment (207,918) (178,702)
Cash dividends paid (127,421) (107,053)
Net proceeds (repayments) of debt 199,090 (241,880)
Purchase of investments (13,232) (89,729)
Proceeds from investments 45,455 43,772
Other, net (29,995) 129,380
--------- ---------
Net increase (decrease) in cash
and equivalents $ (92,371) $ 48,157
========= =========
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Net cash provided by operating activities of $721 million in 1998 was primarily
used for acquisitions, additions to plant and equipment, and cash dividends. Net
cash provided by operating activities of $660 million in 1997 was primarily used
for acquisitions, for additions to plant and equipment, for cash dividends, to
repay debt assumed from acquisitions and to make investments. Commercial paper
borrowings in 1998 were primarily used to fund acquisitions and to refinance
maturing long-term debt.
Dividends paid per share increased 19% to $.51 per share in 1998 from $.43
per share in 1997. The Company expects to continue to meet its dividend payout
objective of 25-30% of the average of the last three years' net income.
Management continues to believe that internally generated funds will be
adequate to service existing debt and maintain appropriate debt to total
capitalization and earnings to fixed charge ratios. Internally generated funds
are also expected to be adequate to finance internal growth, small-to-medium
sized acquisitions and additional investments.
The Company has additional debt capacity to fund larger acquisitions.
The Company had no material commitments for capital expenditures at
December 31, 1998 or 1997.
MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations and certain
mortgage-related investments.
The Company has no cash flow exposure on its long-term obligations related
to changes in market interest rates. The Company primarily enters into long-term
debt obligations for general corporate purposes, including the funding of
capital expenditures and acquisitions. The Company has not entered into any
material derivative financial instruments to hedge interest rate risk on these
general corporate borrowings.
The Company has also issued nonrecourse notes in connection with the three
commercial mortgage transactions. The holders of these notes only have recourse
against certain mortgage-related assets.
The mortgage-related assets acquired in the commercial mortgage
transactions include 24 and 38 subperforming, variable rate, balloon loans at
December 31, 1998 and 1997, respectively. The fair value of these commercial
mortgage loans fluctuates as market interest rates change. The Company has
entered into swap and other related agreements to reduce its credit and interest
rate risks relative to the commercial mortgage loans and other mortgage-related
assets. See the Leasing & Investments section for additional details regarding
the net swap receivables.
The table below presents the Company's financial instruments for which fair
value is subject to changing market interest rates:
Mortgage-related Investments
General Corporate Debt and Related Nonrecourse Debt
----------------------------------------- --------------------------------------------
7.5% notes due 5.875% notes Commercial 6.59% 7.00% 6.44%
December 1, due March 1, mortgage Net swap nonrecourse nonrecourse nonrecourse
In thousands 1998 2000 loans receivables note note note
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998:
estimated cash inflow (outflow)
by year of principal maturity--
1999 $ -- $ -- $ 60,875 $ 60,082 $ (16,000) $ (9,319) $ --
2000 -- (125,000) -- (41,168) (16,000) (9,319) --
2001 -- -- -- 65,157 (16,000) (31,286) --
2002 -- -- -- 33,170 (16,000) (13,979) (1,087)
2003 -- -- -- 43,071 (16,000) (23,431) (2,174)
2004 and thereafter -- -- 508,343 325,771 (137,500) (176,188) (214,179)
Total -- (125,000) 569,218 486,083 (217,500) (263,522) (217,440)
Estimated fair value -- (126,270) 510,795 371,000 (237,784) (290,414) (233,834)
Carrying value -- (125,000) 371,812 371,000 (217,500) (263,522) (217,440)
AS OF DECEMBER 31, 1997:
Total estimated cash
inflow (outflow) $ (125,000) $(125,000) $ 694,721 $ 616,861 $(236,500) $(266,185) $(217,440)
Estimated fair value (126,484) (124,707) 600,304 420,378 (246,963) (278,700) (217,440)
Carrying value (125,000) (125,000) 450,994 420,378 (236,500) (266,185) (217,440)
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Illinois Tool Works Inc.
Foreign Currency Risk
The Company operates in the United States and 34 other countries. In general,
the Company manufactures products that are sold in its significant foreign
markets in the particular local country. As the initial funding for these
foreign manufacturing operations is provided primarily through the permanent
investment of capital from the U.S. parent company, the Company and its
subsidiaries do not have significant assets or liabilities denominated in
currencies other than their functional currencies. As such, the Company does not
have any significant derivatives or other financial instruments which are
subject to foreign currency risk at December 31, 1998 or 1997.
YEAR 2000 ISSUE
The Company utilizes software and related technologies throughout its businesses
that will be affected by the date change in the year 2000.
To determine the extent of the year 2000 compliance issues related to its
computer systems, including equipment with embedded chip technology, the Company
began an extensive internal study at all of its business units in 1997.
Approximately 70% of the business units have completed testing of existing
systems and remediation activities as of the end of 1998, and it is expected
that substantially all businesses will have completed their projects by June 30,
1999. It is anticipated that the remaining non-critical year 2000 issues will be
resolved by the end of 1999.
The Company also has initiated formal communications with its significant
suppliers, customers and other relevant third parties to determine the extent
and steps that they are taking to be year 2000 compliant. To date, no
significant issues have been identified. However, there is a risk that the
systems of these other companies could have a negative impact on the Company's
operations if they are not year 2000 compliant. To mitigate this risk, the
Company is monitoring the status of these companies' year 2000 compliance
programs. To the extent that critical suppliers are not compliant, in many
instances the Company may be able to obtain alternative sources of raw materials
or services.
The Company believes that the overall risk of year 2000 issues having a
material adverse effect on the Company's operations is mitigated by the
Company's decentralized organization, in which there are 400 operating units and
very few individual computer systems which affect a significant number of
operating units. In addition, the Company's products are primarily components or
consumable goods that do not have embedded chip technology.
Approximately 20% of the Company's products are capital equipment goods
that could have embedded chip issues. The Company is reviewing this equipment as
part of its internal year 2000 compliance study. To date, because this equipment
is generally not highly automated, no significant year 2000 issues related to
the Company's equipment products have been identified.
In case critical systems of third parties are not year 2000 compliant by
the end of the first quarter of 1999, the Company has begun to develop
contingency plans for the affected operations.
Based on preliminary estimates, the total cost of the Company's year 2000
compliance program is approximately $34 million for 1997 through 1999. Of this
amount, approximately 67% relates to capital expenditures and 33% to expensed
costs. Approximately two-thirds of the total cost has been incurred through
December 31, 1998. 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.
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 adequacy of internally generated funds, the
recoverability of the Company's investment in mortgage-related assets, and 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 values 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.
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FINANCIAL STATEMENTS
STATEMENT OF INCOME
Illinois Tool Works Inc. and Subsidiaries
FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
IN thousands except for per share amounts 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating Revenues $5,647,889 $5,220,433 $4,996,681
Cost of revenues 3,626,123 3,378,794 3,281,530
Selling, administrative, and research and development expenses 890,581 870,268 875,386
Amortization of goodwill and other intangible assets 44,593 36,842 31,873
Amortization of retiree health care 7,306 7,306 7,306
---------- ---------- ----------
Operating Income 1,079,286 927,223 800,586
Interest expense (14,230) (19,383) (27,834)
Other income (expense) (5,472) 16,511 (2,437)
---------- ---------- ----------
Income Before Income Taxes 1,059,584 924,351 770,315
Income taxes 386,800 337,400 284,000
---------- ---------- ----------
Net Income $ 672,784 $ 586,951 $ 486,315
========== ========== ==========
Net Income Per Share:
Basic $2.69 $2.35 $1.96
===== ===== =====
Diluted $2.67 $2.33 $1.95
===== ===== =====
STATEMENT OF INCOME REINVESTED IN THE BUSINESS
ILLINOIS Tool Works Inc. and Subsidiaries
FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
IN thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year $2,592,416 $2,105,144 $1,673,320
Net income 672,784 586,951 486,315
Cash dividends declared (134,987) (113,467) (88,920)
Effect of pooling of interests acquisitions -- 13,788 34,429
---------- ---------- ----------
Balance, End of Year $3,130,213 $2,592,416 $2,105,144
========== ========== ==========
The Notes to Financial Statements are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Illinois Tool Works Inc.:
We have audited the accompanying statement of financial position of Illinois
Tool Works Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1998 and 1997, and the related statements of income, income reinvested in the
business, cash flows and comprehensive income for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Illinois Tool Works Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
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Illinois Tool Works Inc.
STATEMENT OF FINANCIAL POSITION
Illinois Tool Works Inc. and Subsidiaries
DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
In thousands except shares 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 93,485 $ 185,856
Trade receivables 989,086 902,022
Inventories 581,755 522,996
Deferred income taxes 102,607 168,697
Prepaid expenses and other current assets 67,540 79,071
----------- ------------
Total current assets 1,834,473 1,858,642
----------- ------------
Plant and Equipment:
Land 73,266 78,055
Buildings and improvements 554,383 485,845
Machinery and equipment 1,624,703 1,387,502
Equipment leased to others 107,186 107,345
Construction in progress 57,894 58,644
----------- ------------
2,417,432 2,117,391
Accumulated depreciation (1,429,883) (1,233,333)
----------- ------------
Net plant and equipment 987,549 884,058
----------- ------------
Investments 1,183,493 1,170,015
Goodwill 1,189,323 774,250
Deferred Income Taxes 417,361 379,738
Other Assets 505,963 328,053
----------- ------------
$ 6,118,162 $ 5,394,756
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 406,707 $ 298,278
Accounts payable 268,869 269,088
Accrued expenses 457,543 458,381
Cash dividends payable 37,519 29,952
Income taxes payable 51,371 102,181
----------- ------------
Total current liabilities 1,222,009 1,157,880
----------- ------------
Noncurrent Liabilities:
Long-term debt 947,008 854,328
Other 611,110 576,094
----------- ------------
Total noncurrent liabilities 1,558,118 1,430,422
----------- ------------
Stockholders' Equity:
Preferred stock -- --
Common stock:
Issued--250,388,969 shares in 1998 and
249,865,904 shares in 1997 2,504 2,499
Additional paid-in-capital 302,684 287,153
Income reinvested in the business 3,130,213 2,592,416
Common stock held in treasury (1,783) (1,833)
Cumulative translation adjustment (95,583) (73,781)
----------- ------------
Total stockholders' equity 3,338,035 2,806,454
----------- ------------
$ 6,118,162 $ 5,394,756
=========== ============
The Notes to Financial Statements are an integral part of this statement.
23
9
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
Illinois Tool Works Inc. and Subsidiaries
FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Operating Activities:
Net income $ 672,784 $ 586,951 $ 486,315
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 211,779 185,386 178,233
Change in deferred income taxes 59,943 (7,819) (12,627)
Provision for uncollectible accounts 5,008 6,268 4,451
Loss on sale of plant and equipment 6,887 7,683 536
Income from investments (139,310) (93,652) (53,623)
Non-cash interest on nonrecourse debt 48,378 35,638 16,413
(Gain) loss on sale of operations and affiliates 3,788 (6,824) 2,076
Other non-cash items, net 4,831 (1,206) (165)
--------- -------- --------
Cash provided by operating activities 874,088 712,425 621,609
========= ========= =========
Change in assets and liabilities:
(Increase) decrease in--
Trade receivables (410) (66,001) (11,461)
Inventories 18,547 6,173 58,935
Prepaid expenses and other assets (33,718) (46,519) (30,428)
Increase (decrease) in--
Accounts payable (56,703) 20,714 (22,396)
Accrued expenses & other liabilities (42,915) (3,472) 3,926
Income taxes payable (37,358) 35,836 8,863
Other, net (40) 1,102 379
--------- -------- --------
Net cash provided by operating activities 721,491 660,258 629,427
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents)
and additional interest in affiliates (751,981) (221,954) (343,595)
Additions to plant and equipment (207,918) (178,702) (168,657)
Purchase of investments (13,232) (89,729) (104,159)
Proceeds from investments 45,455 43,772 50,049
Proceeds from sale of plant and equipment 22,103 17,054 20,836
Proceeds from sale of operations and affiliates 10,203 168,383 24,660
Other, net 4,939 6,542 (521)
--------- -------- --------
Net cash used for investing activities (890,431) (254,634) (521,387)
========= ========= =========
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (127,421) (107,053) (85,481)
Issuance of common stock 7,381 7,763 5,514
Net proceeds (repayments) of short-term debt 317,154 (208,362) 74,362
Proceeds from long-term debt 17,938 3,341 9,776
Repayments of long-term debt (136,002) (36,859) (98,971)
Other, net 911 4,700 2,940
--------- -------- --------
Net cash provided by (used for) financing activities 79,961 (336,470) (91,860)
--------- -------- --------
Effect of Exchange Rate Changes on Cash and Equivalents (3,392) (20,997) 4,919
--------- -------- --------
Cash and Equivalents:
Increase (decrease) during the year (92,371) 48,157 21,099
Beginning of year 185,856 137,699 116,600
--------- -------- --------
End of year $ 93,485 $ 185,856 $ 137,699
--------- -------- --------
Cash Paid During the Year for Interest $ 30,887 $ 32,184 $ 45,394
--------- -------- --------
Cash Paid During the Year for Income Taxes $ 360,710 $ 291,721 $ 262,685
========= ========= =========
Liabilities Assumed from Acquisitions $ 151,428 $ 132,122 $ 306,677
========= ========= =========
See the Investments note for information regarding noncash transactions. The
Notes to Financial Statements are an integral part of this statement.
24
10
Illinois Tool Works Inc.
STATEMENT OF COMPREHENSIVE INCOME
Illinois Tool Works Inc. and Subsidiaries
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $672,784 $586,951 $486,315
Other comprehensive income:
Foreign currency translation adjustments (18,423) (94,632) 7,553
Income tax related to foreign currency translation adjustments (3,379) 1,993 (1,790)
-------- -------- --------
Comprehensive income $650,982 $494,312 $492,078
======== ======== ========
NOTES TO FINANCIAL STATEMENTS
THE NOTES TO FINANCIAL STATEMENTS furnish additional information on items in the
financial statements. The notes have been arranged in the same order as the
related items appear in the statements.
Illinois Tool Works Inc. (the "Company") is a multinational manufacturer of
highly engineered products and specialty systems. The Company primarily serves
the automotive, construction and general industrial markets.
Significant accounting principles and policies of the Company are
highlighted in italics. Certain reclassifications of prior years' data have been
made to conform with current year reporting.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the notes to financial statements. Actual results could differ from those
estimates.
CONSOLIDATION AND TRANSLATION--The financial statements include the Company
and its majority-owned subsidiaries. All significant intercompany transactions
are eliminated from the financial statements. Substantially all of the Company's
foreign subsidiaries have November 30 fiscal year-ends to facilitate inclusion
of their financial statements in the December 31 financial statements.
Foreign subsidiaries' assets and liabilities are translated to U.S. dollars
at end-of-period exchange rates. Revenues and expenses are translated at average
rates for the period. Translation adjustments are not included in income but are
reported as a separate component of stockholders' equity.
ACQUISITIONS AND DISPOSITIONS--In the fourth quarter of 1996, the Company
acquired all of the outstanding common stock of Azon Limited ("Azon"), an
Australian manufacturer of strapping and other industrial products. The
acquisition has been accounted for as a purchase, and accordingly, the acquired
net assets have been recorded at their estimated fair values at the date of
acquisition. The results of operations have been included in the Statement of
Income from the acquisition date, except for the Azon businesses which were
expected to be sold, which were not consolidated at December 31, 1996. During
1997, the Company disposed of the majority of the Azon businesses which were
expected to be sold.
Based on the assumption that the Azon acquisition had occurred on January
1, 1996, the Company's pro forma operating revenues, net income and net income
per share would not have been significantly different.
During 1998, 1997 and 1996, the Company acquired 36, 28 and 19 operations,
respectively, none of which materially affected consolidated results.
RESEARCH AND DEVELOPMENT EXPENSES are recorded as expense in the year incurred.
These costs were $50,678,000 in 1998, $52,021,000 in 1997 and $55,800,000
in 1996.
RENTAL EXPENSE was $42,669,000 in 1998, $41,809,000 in 1997 and $41,740,000 in
1996.
Future minimum lease payments for the years ended December 31 are as follows:
In thousands
- --------------------------------------------------------------------------------
1999 $ 35,234
2000 26,083
2001 19,985
2002 15,543
2003 10,790
2004 and future years 22,111
--------
$129,746
========
25
11
NOTES TO FINANCIAL STATEMENTS
OTHER INCOME (EXPENSE) consisted of the following:
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $ 9,743 $ 14,592 $ 9,732
Gain (loss) on sale of operations and affiliates (3,788) 6,824 (2,076)
Loss on sale of plant and equipment (6,887) (7,683) (536)
Gain (loss) on foreign currency translation (153) 3,628 (3,198)
Debt prepayment costs -- -- (2,721)
Other, net (4,387) (850) (3,638)
--------- -------- --------
$ (5,472) $ 16,511 $ (2,437)
========= ======== ========
INCOME TAXES--The Company utilizes the liability method of accounting for income
taxes. Deferred income taxes are determined based on the estimated future tax
effects of differences between the financial and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
The components of the provision for income taxes were as shown below:
In thousands 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
U.S. federal income taxes:
Current $ 209,186 $ 189,876 $ 162,454
Deferred 11,274 21,961 (9,526)
---------- --------- ----------
220,460 211,837 152,928
========== ========= ==========
Foreign income taxes:
Current 88,532 121,990 80,422
Deferred 33,902 (34,420) 16,850
---------- --------- ----------
122,434 87,570 97,272
========== ========= ==========
State income taxes:
Current 37,920 40,238 32,165
Deferred 5,986 (2,245) 1,635
---------- --------- ----------
43,906 37,993 33,800
---------- --------- ----------
$ 386,800 $ 337,400 $ 284,000
========== ========= =========
Income before income taxes for domestic and foreign operations was as follows:
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Domestic $ 775,047 $ 728,120 $ 522,770
Foreign 284,537 196,231 247,545
---------- --------- ----------
$1,059,584 $ 924,351 $ 770,315
========== ========= =========
The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of U.S. federal tax benefit 2.7 2.7 2.9
Amortization of nondeductible goodwill .8 .9 .9
Differences between U.S. federal statutory and foreign tax rates .6 .9 .6
Other, net (2.6) (3.0) (2.5)
Effective tax rate 36.5% 36.5% 36.9%
========== ========= =========
Deferred U.S. federal income taxes and foreign withholding taxes have not been
provided on approximately $265,000,000 and $201,000,000 of undistributed
earnings of international affiliates as of December 31, 1998 and 1997,
respectively. In the event these earnings were distributed to the Company, U.S.
federal income taxes payable would be reduced by foreign tax credits based on
income tax laws and circumstances at the time of distribution. If these
undistributed earnings were not considered permanently reinvested, additional
deferred taxes of approximately $43,000,000 and $34,000,000 would have been
provided at December 31, 1998 and 1997, respectively.
26
12
Illinois Tool Works Inc.
NOTES TO FINANCIAL STATEMENTS
The components of deferred income tax assets and liabilities at December 31,
1998 and 1997 were as follows:
1998 1997
-----------------------------------------------------------
In thousands Asset Liability Asset Liability
- ---------------------------------------------------------------------------------------------------------------------------
Acquisition asset basis differences $ 34,900 $ (25,121) $ 40,689 $ (20,505)
Inventory reserves, capitalized tax cost and LIFO inventory 24,279 (10,550) 22,134 (11,894)
Investments 384,632 (39,505) 400,280 (40,018)
Plant and equipment 12,451 (38,078) 10,736 (35,425)
Accrued expenses and reserves 72,111 -- 74,173 --
Employee benefit accruals 66,829 -- 60,694 --
Foreign tax credit carryforward 34,255 -- -- --
Net operating loss carryforwards 18,911 -- 41,414 --
Allowances for uncollectible accounts 6,287 -- 4,395 --
Prepaid pension assets -- (27,735) -- (23,027)
Other 39,647 (22,020) 44,422 (17,975)
---------- ---------- ---------- ---------
Gross deferred income tax assets (liabilities) 694,302 (163,009) 698,937 (148,844)
Valuation allowances (11,325) -- (1,658) --
---------- ---------- ---------- ---------
Total deferred income tax assets (liabilities) $ 682,977 $ (163,009) $ 697,279 $(148,844)
---------- ========== ---------- =========
Net deferred income tax assets $ 519,968 $ 548,435
========== ==========
No valuation allowance has been recorded on the net deferred income tax assets
at December 31, 1998 and 1997 as the Company expects to continue to generate
significant taxable income in future years.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $59,650,000 available to offset future taxable income in the U.S.
and certain foreign jurisdictions which expire as follows:
In thousands
- ---------------------------------------------------------------------------------------------------------------------------
2000 $ 263
2001 10,154
2002 --
2003 249
2004 1,664
2005 2,653
2006 1,244
2007 2,950
2008 135
2009 1,170
2010 630
2011 850
2012 2,360
2013 2,123
Do not expire 33,205
---------
$ 59,650
=========
27
13
NET INCOME PER SHARE--The Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS 128"), in the fourth quarter of
1997. Under SFAS 128, net income per basic share is computed by dividing net
income by the weighted average number of shares outstanding for the period. Net
income per diluted share is computed by dividing net income by the weighted
average number of shares assuming dilution. Dilutive shares reflect the
potential additional shares that would be outstanding if the dilutive stock
options outstanding were exercised during the period. The computation of net
income per share was as follows:
In thousands except per share data 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 672,784 $ 586,951 $486,315
========== ========= ========
Net income per share--Basic:
Weighted average common shares 249,906 249,284 247,556
--------- --------- --------
Net income per share--Basic $ 2.69 $ 2.35 $ 1.96
========== ========= ========
Net income per share--Diluted:
Weighted average common shares 249,906 249,284 247,556
Effect of dilutive stock options 2,537 2,476 2,014
---------- --------- --------
Weighted average common shares assuming dilution 252,443 251,760 249,570
--------- --------- --------
Net income per share--Diluted $ 2.67 $ 2.33 $ 1.95
========== ========= ========
Options to purchase 1,128,639 shares of common stock at an average price of
$54.61 per share were outstanding at December 31, 1997, but were not included in
the computation of diluted net income per share for the period because the
options' exercise price was greater than the average market price of the common
shares. These options will expire in 2007. There were no options outstanding at
December 31, 1998 that had an exercise price greater than the average market
price.
CASH AND EQUIVALENTS included interest-bearing deposits of $27,434,000 at
December 31, 1998 and $118,982,000 at December 31, 1997.
Interest-bearing deposits have maturities of 90 days or less and are stated
at cost, which approximates market.
TRADE RECEIVABLES as of December 31, 1998 and 1997 were net of allowances for
uncollectible accounts of $28,000,000 and $20,800,000, respectively.
INVENTORIES at December 31, 1998 and 1997 were as follows:
In thousands 1998 1997
- --------------------------------------------------------------------------------------
Raw material $163,868 $145,851
Work-in-process 72,254 67,956
Finished goods 345,633 309,189
-------- --------
$581,755 $522,996
======== ========
Inventories are stated at the lower of cost or market and include material,
labor and factory overhead. The last-in, first-out (LIFO) method is used to
determine the cost of the inventories of approximately half of the U.S.
operations. Inventories priced at LIFO were 34% and 39% of total inventories as
of December 31, 1998 and 1997, respectively. The first-in, first-out (FIFO)
method is used for all other inventories. Under the FIFO method, which
approximates current cost, total inventories would have been approximately
$49,100,000 and $58,500,000 higher than reported at December 31, 1998 and 1997,
respectively.
PLANT AND EQUIPMENT are stated at cost less accumulated depreciation. Renewals
and improvements that increase the useful life of plant and equipment are
capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation was $167,186,000 in 1998 compared with $148,544,000 in 1997
and $146,360,000 in 1996 and was reflected primarily in cost of revenues.
Depreciation of plant and equipment for financial reporting purposes is computed
principally on an accelerated basis.
The range of useful lives used to depreciate plant and equipment is as
follows:
Buildings and improvements 10-50 YEARS
Machinery and equipment 3-12 YEARS
Equipment leased to others TERM OF LEASE
28
14
Illinois Tool Works Inc.
INVESTMENTS as of December 31, 1998 and 1997 consisted of the following:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Commercial mortgage loans $ 371,812 $ 450,994
Commercial real estate 217,340 131,430
Net swap receivables 371,000 420,378
Receivable from mortgage servicer 58,546 15,182
Prepaid forward contract 20,247 --
Leveraged, direct financing and sales-type leases of equipment 78,396 79,875
Properties held for sale 23,035 22,583
Property developments 16,482 17,871
Affordable housing 11,320 17,095
Annuity contract 5,483 5,005
U.S. Treasury security 4,869 4,479
Other 4,963 5,123
------------- -----------
$ 1,183,493 $1,170,015
============= ===========
In December 1997, the Company acquired a pool of mortgage-related assets in
exchange for a nonrecourse note payable of $217,440,000, preferred stock of a
subsidiary of $20,000,000 and cash of $80,000,000. In December 1996, the Company
acquired a pool of mortgage-related assets in exchange for a nonrecourse note
payable of $266,265,000, preferred stock of a subsidiary of $20,000,000 and cash
of $80,000,000. In December 1995, the Company acquired a pool of
mortgage-related assets in exchange for a nonrecourse note payable of
$256,000,000, preferred stock of a subsidiary of $20,000,000 and cash of
$80,000,000. The mortgage-related assets for the three transactions are located
throughout the U.S. and include 24 and 38 subperforming, variable rate, balloon
loans and 23 and 13 foreclosed properties at December 31, 1998 and 1997,
respectively. In conjunction with these transactions, the Company simultaneously
entered into ten-year swap agreements and other related agreements whereby the
Company will pay a third party the portion of the interest and net operating
cash flow from the mortgage-related assets in excess of $26,000,000 per year and
a portion of the proceeds from the disposition of the mortgage-related assets
and principal repayments, in exchange for the third party making payments to the
Company equal to the contractual principal and interest payments on the
nonrecourse notes payable. In addition, in the event that the pools of
mortgage-related assets do not generate income of $26,000,000 a year, the
Company has a collateral right against the cash flow generated by three separate
pools of mortgage-related assets (owned by third parties in which the Company
has minimal interests) which have a total fair value of approximately
$2,660,000,000 at December 31, 1998. The Company entered into the swaps and
other related agreements in order to reduce its credit and interest rate risks
relative to the mortgage-related assets.
The Company expects to recover its net investment in the mortgage-related
assets of $320,236,000 at December 31, 1998 (net of the related nonrecourse
notes payable) through its expected net cash flow of $26,000,000 per year for
the remainder of the ten-year periods and its estimated $415,419,000 share of
the total proceeds from disposition of the mortgage-related assets and principal
repayments.
The Company evaluates whether the commercial mortgage loans have been
impaired by reviewing the discounted estimated future cash flows of the loans
versus the carrying value of the loans. If the carrying value exceeds the
discounted cash flows, an impairment loss is recorded through income. At
December 31, 1998 and 1997, the impairment loss allowance was $5,600,000 and
$12,000,000, respectively. The estimated fair value of the commercial mortgage
loans, based on discounted future cash flows, exceeds the carrying value at
December 31, 1998 and 1997 by $138,983,000 and $149,310,000, respectively. The
net swap receivables are recorded at fair value, based on the estimated future
cash flows discounted at the current market interest rate. Any adjustments to
the carrying value of the net swap receivables due to changes in expected future
cash flows or interest rates are recorded through income.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued in 1998.
SFAS 133 requires that an entity recognize certain derivatives in the Statement
of Financial Position and measure those instruments at fair value. The Company
is required to adopt SFAS 133 for annual and interim periods beginning after
June 15, 1999. The adoption of SFAS 133 is not expected to have a material
effect on the Company's financial position or results of operations.
29
15
NOTES TO FINANCIAL STATEMENTS
The Company's investment in leveraged and direct financing leases relates
to equipment used primarily in the transportation, mining and paper processing
industries. The components of the investment in leveraged, direct financing and
sales-type leases at December 31, 1998 and 1997 were as shown below:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Lease contracts receivable (net of principal and interest on nonrecourse financing) $ 81,400 $ 86,183
Estimated residual value of leased assets 25,428 25,596
Unearned and deferred income (28,432) (31,904)
----------- -----------
Investment in leveraged, direct financing and sales-type leases 78,396 79,875
Deferred income taxes related to leveraged and direct financing leases (34,281) (36,639)
----------- -----------
Net investment in leveraged, direct financing and sales-type leases $ 44,115 $ 43,236
=========== ===========
GOODWILL represents the excess cost over fair value of the net
assets of purchased businesses. Goodwill is being amortized on a straight-line
basis over 15 to 40 years. The Company assesses the recoverability of
unamortized goodwill and the other long-lived assets whenever events or changes
in circumstances indicate that such assets may be impaired by reviewing the
sufficiency of future undiscounted cash flows of the related entity to cover the
amortization or depreciation over the remaining useful life of the asset. For
any long-lived assets which are determined to be impaired, a loss would be
recognized for the difference between the carrying value and the fair value for
assets to be held or the net realizable value for assets to be disposed of.
Amortization expense was $32,526,000 in 1998, $25,666,000 in 1997, and
$21,727,000 in 1996. Accumulated goodwill amortization was $163,602,000 and
$133,137,000, at December 31, 1998 and 1997, respectively.
OTHER ASSETS as of December 31, 1998 and 1997 consisted of the following:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Other intangible assets $155,538 $132,974
Accumulated amortization of other intangible assets (34,755) (30,048)
Cash surrender value of life insurance policies 113,999 83,341
Prepaid pension assets 75,412 62,041
Investment in unconsolidated affiliates 135,659 28,526
Other 60,110 51,219
---------- --------
$505,963 $328,053
=========== =========
Other intangible assets represent patents, noncompete agreements and other
assets acquired with purchased businesses and are being amortized primarily on a
straight-line basis over five to 17 years. Amortization expense was $12,067,000
in 1998, $11,176,000 in 1997, and $10,146,000 in 1996.
30
16
Illinois Tool Works Inc.
RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS--Summarized
information regarding the Company's defined benefit pension and postretirement
health care benefits was as follows:
Pension Postretirement Health Care
- ---------------------------------------------------------------------------------------------------------------------------
In thousands 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 30,485 $ 29,830 $ 24,373 $ 2,647 $ 2,381 $ 2,253
Interest cost 43,334 41,688 35,641 9,264 9,246 9,182
Expected return on plan assets (56,004) (69,530) (50,726) -- -- --
Amortization of prior service cost 5,274 5,291 5,286 -- -- --
Amortization of actuarial
(gain)/loss (6,515) 13,319 (2,306) (766) (1,172) (1,239)
Amortization of transition amount (4,904) (4,793) (4,775) 7,306 7,306 7,306
--------- --------- --------- -------- ------- -------
Net periodic benefit cost $ 11,670 $ 15,805 $ 7,493 $ 18,451 $17,761 $17,502
========= ========== ========== ======== ======= ========
Pension Postretirement Health Care
- --------------------------------------------------------------------------------------------------------------------------
In thousands 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 613,343 $ 555,071 $129,328 $124,805
Service cost 30,485 29,830 2,647 2,381
Interest cost 43,334 41,688 9,264 9,246
Plan participant contributions 1,406 1,144 3,472 3,220
Amendments 3,261 284 -- --
Actuarial loss 83,325 26,791 11,305 3,755
Acquisitions and divestitures 9,118 -- -- --
Benefits paid (44,261) (37,572) (14,727) (14,079)
Liabilities from other plans 5,066 1,500 -- --
Foreign currency translation (3,318) (5,393) -- --
--------- --------- -------- --------
Benefit obligation at end of year $ 741,759 $ 613,343 $141,289 $129,328
========= ========= ========= ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 770,286 $ 622,174 $ -- $ --
Actual return on plan assets (17,954) 162,192 -- --
Acquisitions and divestitures 4,204 -- -- --
Company contributions 23,376 23,203 11,255 10,859
Plan participant contributions 1,406 1,144 3,472 3,220
Benefits paid (44,261) (37,572) (14,727) (14,079)
Assets from other plans -- 2,893 -- --
Foreign currency translation (5,453) (3,748) -- --
--------- --------- -------- --------
Fair value of plan assets at end of year $ 731,604 $ 770,286 $ -- $ --
========= ========= ========= ========
Funded status $ (10,155) $ 156,943 $(141,289) $(129,328)
Unrecognized net actuarial (gain)/loss 23,431 (142,095) (9,560) (21,631)
Unrecognized prior service cost 23,206 26,275 -- --
Unrecognized net transition amount (12,559) (17,127) 100,831 108,137
--------- --------- -------- --------
Net prepaid/(accrued) benefit cost $ 23,923 $ 23,996 $ (50,018) $ (42,822)
========= ========= ========== =========
Plans with accumulated benefit obligation in excess of plan assets:
Projected benefit obligation $ 64,396 $ 47,365
========= =========
Accumulated benefit obligation $ 62,580 $ 44,040
========= =========
Fair value of plan assets $ 2,249 $ 1,797
========= =========
31
17
NOTES TO FINANCIAL STATEMENTS
Pension Postretirement Health Care
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average assumptions
as of December 31:
Discount rate 6.63% 7.42% 7.86% 6.75% 7.50% 7.75%
Expected return on plan assets 10.38% 9.59% 9.70% -- -- --
Rate of compensation increases 4.32% 4.06% 4.53% -- -- --
Current and ultimate health care
cost trend rate -- -- -- 5.00% 5.00% 5.00%
Assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
In thousands Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 1,700 $ (1,360)
Effect on postretirement benefit obligation 17,944 (14,411)
In addition to the above defined benefit pension plans, the Company sponsors
defined contribution retirement plans covering the majority of domestic
employees. The Company's contributions to these plans were $13,400,000 in 1998,
$11,900,000 in 1997, and $12,200,000 in 1996.
SHORT-TERM DEBT as of December 31, 1998 and 1997 consisted of the following:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Bank overdrafts $ 64,008 $ 73,322
Commercial paper 226,813 --
Current maturities of long-term debt 33,782 151,409
Australian cash advance facility 51,007 56,842
Other borrowings by foreign subsidiaries 31,097 16,705
---------- ---------
$ 406,707 $ 298,278
========== =========
In August 1996, to fund the Azon acquisition, the Company entered into a 364-day
Australian cash advance facility with maximum available borrowings of Australian
$325,000,000. In September 1997, the Company amended this cash advance facility
to decrease the maximum available borrowings to Australian $175,000,000 and to
extend the term of the facility to August 1998. In October 1998, the Company
again amended this cash advance facility to decrease the maximum available
borrowings to Australian $95,000,000 and to extend the term of the facility to
August 1999. The facility had an interest rate of 5.2% at December 31, 1998 and
5.0% at December 31, 1997.
The weighted average interest rate on other foreign borrowings was 6.7% at
December 31, 1998 and 5.0% at December 31, 1997.
In November 1998, the Company entered into a $350,000,000 Line of Credit
Agreement. In December 1998, the maturity date of the agreement was extended
from January 30, 1999 to March 31, 1999. No amounts were outstanding under this
facility at December 31, 1998.
ACCRUED EXPENSES as of December 31, 1998 and 1997 consisted of accruals for:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits $181,988 $185,017
Deferred investment income 42,211 39,550
Other 233,344 233,814
-------- --------
$457,543 $458,381
======== ========
32
18
LONG-TERM DEBT at December 31, 1998 and 1997 consisted of the following:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
7.5% notes due December 1, 1998 $ -- $ 125,000
5.875% notes due March 1, 2000 125,000 125,000
6.59% nonrecourse note due semiannually through December 31, 2005 217,500 236,500
7.00% nonrecourse note due semiannually through November 30, 2006 263,522 266,185
6.44% nonrecourse note due semiannually from August 31, 2002 through February 29, 2008 217,440 217,440
Commercial paper 100,000 --
Other, including capitalized lease obligations 57,328 35,612
----------- ----------
980,790 1,005,737
Current maturities (33,782) (151,409)
----------- -----------
$ 947,008 $ 854,328
=========== ===========
In 1991, the Company issued $125,000,000 of 7.5% notes at 99.892% of face value.
The Company repaid the notes on December 1, 1998. The quoted market prices of
the notes exceeded the carrying value by $1,484,000 at December 31, 1997.
In 1993, the Company issued $125,000,000 of 5.875% notes due March 1, 2000,
at 99.744% of face value. The notes may not be redeemed by the Company prior to
maturity. The effective interest rate of the notes is 5.9%. The quoted market
price of the notes exceeded the carrying value by approximately $1,270,000 at
December 31, 1998, and was below the carrying value by approximately $293,000 at
December 31, 1997.
The Company issued a $256,000,000, 6.28% nonrecourse note at face value in
December 1995, a $266,265,000, 7.0% nonrecourse note at face value in December
1996 and a $217,440,000, 6.44% nonrecourse note at face value in December 1997.
In 1997, the Company refinanced the 6.28% nonrecourse note with a 6.59%
nonrecourse note with similar terms. The holders of these notes only have
recourse against the commercial mortgage loans, commercial real estate and net
swap receivables, which are included in investments. The estimated fair value of
the three nonrecourse notes, based on discounted cash flows, exceeded the
carrying value by $63,570,000 at December 31, 1998, and $22,978,000 at
December 31, 1997.
In 1992, the Company entered into a $300,000,000 revolving credit facility
(RCF). In 1994, the Company canceled $150,000,000 of the RCF. In 1996, the
Company amended the RCF to increase the maximum available borrowings to
$250,000,000 and extended the commitment termination date to May 30, 2001. In
September 1998, the Company amended the RCF to increase the maximum available
borrowings to $350,000,000 and extend the termination date to September 30,
2003. The amended RCF provides for borrowings under a number of options and may
be reduced or canceled at any time at the Company's option. There were no
amounts outstanding under these facilities as of December 31, 1998 or 1997.
The amended RCF contains financial covenants establishing a maximum total
debt to total capitalization percentage and a minimum consolidated tangible net
worth. The Company was in compliance with these covenants at December 31, 1998.
Commercial paper is issued at a discount and generally matures 30 to 90
days from the date of issue. The Company maintains unused commitments under the
RCF equal to any commercial paper borrowings. The weighted average interest rate
on commercial paper outstanding was 5.15% at December 31, 1998. No commercial
paper was outstanding at December 31, 1997.
In 1998, the commercial paper balance expected to remain outstanding beyond
one year has been classified as long-term, reflecting the Company's intent and
ability to finance the borrowings on a long-term basis. The remaining commercial
paper balance has been classified as short-term.
Other debt outstanding at December 31, 1998, bears interest at rates
ranging from 2.5% to 16.97%, with maturities through the year 2012.
Scheduled maturities of long-term debt for the years ended December 31 are
as follows:
In thousands
- ------------------------------------------------------------------------------------------------------------------
2000 $158,202
2001 53,081
2002 44,136
2003 146,992
2004 and future years 544,597
--------
$947,008
========
OTHER NONCURRENT LIABILITIES at December 31, 1998 and 1997 consisted of the
following:
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Deferred investment income $270,933 $287,958
Preferred stock of subsidiaries 70,000 60,000
Other 270,177 228,136
-------- --------
$611,110 $576,094
======== ========
33
19
NOTES TO FINANCIAL STATEMENTS
PREFERRED STOCK, without par value, of which 300,000 shares are authorized, is
issuable in series. The Board of Directors is authorized to fix by resolution
the designation and characteristics of each series of preferred stock. The
Company has no present commitments to issue its preferred stock.
COMMON STOCK, ADDITIONAL PAID-IN-CAPITAL and COMMON STOCK HELD IN TREASURY
transactions during 1998, 1997 and 1996 are shown below. On May 9, 1997, the
stockholders approved a) an amendment to the Restated Certificate of
Incorporation changing the number of authorized shares of common stock from
150,000,000 shares without par value to 350,000,000 shares with a par value of
$.01 and b) a two-for-one split of the Company's common stock, with a
distribution date of May 27, 1997, at a rate of one additional share for each
common share held by stockholders of record on May 20, 1997. All per share data
in this report has been restated to reflect the stock split.
Additional
Common Stock Paid-in-Capital
------------ ---------------
In thousands except shares Shares Amount Amount
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 118,369,029 $ 239,688 $ --
During 1996--
Stock options exercised 254,181 5,871 --
Shares surrendered on exercise
of stock options (11,791) (462) --
Tax benefits related to stock options exercised -- 3,176 --
Shares issued for acquisitions 5,408,704 25,510 --
Shares issued for stock incentive and
restricted stock grants -- 81 --
----------- ------------ -----------
Balance, December 31, 1996 124,020,123 273,864 --
=========== ============ ===========
During 1997--
Adjustment to reflect the May 1997 stock split 124,020,123 -- --
Adjustment to reflect change in par value -- (275,701) 275,701
Stock options exercised 673,132 4,018 4,452
Shares surrendered on exercise
of stock options (33,162) (10) (744)
Tax benefits related to stock options exercised -- -- 7,758
Shares issued for acquisitions 1,181,228 289 (14)
Shares issued for stock incentive and
restricted stock grants 4,460 39 --
----------- ------------ -----------
Balance, December 31, 1997 249,865,904 2,499 287,153
=========== ============ ===========
During 1998--
Stock options exercised 551,399 5 8,631
Shares surrendered on exercise
of stock options (28,334) -- (1,679)
Tax benefits related to stock options exercised -- -- 8,204
Shares issued for stock incentive and
restricted stock grants -- -- 375
----------- ------------ -----------
Balance, December 31, 1998 250,388,969 $ 2,504 $ 302,684
=========== ============ ===========
Authorized, December 31, 1998 350,000,000
===========
Common Stock
Held in Treasury
----------------
In thousands except shares Shares Amount
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (136,268) $ (1,866)
During 1996--
Stock options exercised 23,462 1,579
Shares surrendered on exercise
of stock options (23,462) (1,579)
Tax benefits related to stock options exercised -- --
Shares issued for acquisitions -- --
Shares issued for stock incentive and
restricted stock grants 1,800 25
----------- ------------
Balance, December 31, 1996 (134,468) (1,841)
=========== ============
During 1997--
Adjustment to reflect the May 1997 stock split (134,468) --
Adjustment to reflect change in par value -- --
Stock options exercised 14,862 796
Shares surrendered on exercise
of stock options (14,862) (796)
Tax benefits related to stock options exercised -- --
Shares issued for acquisitions -- --
Shares issued for stock incentive and
restricted stock grants 1,200 8
----------- ------------
Balance, December 31, 1997 (267,736) (1,833)
=========== ============
During 1998--
Stock options exercised 3,163 176
Shares surrendered on exercise
of stock options (3,163) (176)
Tax benefits related to stock options exercised -- --
Shares issued for stock incentive and
restricted stock grants 7,200 50
----------- ------------
Balance, December 31, 1998 (260,536) $ (1,783)
=========== ============
34
20
Illinois Tool Works Inc.
CASH DIVIDENDS declared were $.54 per share in 1998, $.46 per share in 1997 and
$.36 per share in 1996. Cash dividends paid were $.51 per share in 1998, $.43
per share in 1997 and $.35 per share in 1996.
COMPREHENSIVE INCOME--DURING 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which established
standards for reporting and displaying comprehensive income and its components
in a separate financial statement. Comprehensive Income is defined as the
changes in equity during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners. The Company's only component of other comprehensive income is foreign
currency translation adjustments.
STOCK OPTIONS have been issued to officers and other employees under the
Company's 1996 Stock Incentive Plan. At December 31, 1998, 18,482,078
shares were reserved for issuance under the plan. Option prices are 100% of the
common stock fair market value on the date of grant.
Effective in 1996, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), allows the recognition of
compensation cost related to employee stock options. The Company has elected to
continue to apply Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, which does not require that compensation cost be
recognized. The pro forma net income effect of applying SFAS 123 was as follows:
In thousands except per share data 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $672,784 $586,951 $486,315
Pro forma 664,638 582,909 482,767
Net income per basic share:
As reported $2.69 $2.35 $1.96
Pro forma 2.66 2.34 1.95
Net income per diluted share:
As reported $ 2.67 $ 2.33 $ 1.95
Pro forma 2.63 2.32 1.93
Stock option transactions during 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number Weighted Average Number Weighted Average
Number of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
- ------------------------------------------------------------------- -------------------------------------------------------------
Under option at beginning of year 5,384,685 $29.36 4,999,416 $21.56 5,154,158 $19.71
Granted 1,109,763 58.24 1,128,639 54.61 420,028 33.69
Exercised (554,562) 15.89 (687,994) 14.30 (556,020) 13.44
Canceled or expired (30,000) 47.72 (55,376) 27.17 (18,750) 23.29
----------- ------ ----------- -------- ------------ -------
Under option at end of year 5,909,886 35.96 5,384,685 29.36 4,999,416 21.56
=========== ====== =========== ======== ============ =======
Exercisable at year-end 3,422,878 3,145,946 3,037,064
Available for grant at year-end 12,572,192 13,620,685 14,650,384
Weighted average fair value of
option grant during the year $16.71 $15.82 $10.01
35
21
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information on stock options outstanding as of
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------
Weighted Average
Range of Number Outstanding Remaining Weighted Average Number Exercisable Weighted Average
Exercise Prices 1998 Contractual Life Exercise Price 1998 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$10.34-18.19 1,686,034 4.22 years $16.24 1,686,034 $16.24
20.06-30.13 1,589,622 6.80 years 28.92 1,279,445 28.62
33.38-40.22 417,078 7.36 years 33.64 168,078 33.69
51.06-58.25 2,217,152 9.45 years 56.43 289,321 54.60
---------
5,909,886 7.10 years 35.96 3,422,878 24.97
=========
The estimated fair value of each option granted is calculated using the
Black-Scholes option pricing model. The following summarizes the assumptions
used in the model:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Risk-free interest rate 4.8% 5.9% 6.4%
Expected stock volatility 24.5% 21.7% 22.2%
Dividend yield 1.20% 1.29% 1.36%
Expected years until exercise 5.5 5.5 5.5
SEGMENT INFORMATION--In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 131 requires that segment information be
reported based on the way the segments are organized within the Company for
making operating decisions and assessing performance.
The Company has approximately 400 operations in 35 countries which are
aggregated and organized for internal reporting purposes into the following five
segments:
Engineered Products--North America: Businesses that are located in North
America and that manufacture short lead-time components and fasteners, and
specialty products such as adhesives, resealable packaging and electronic
component packaging.
Engineered Products--International: Businesses that are located outside
North America and that manufacture short lead-time components and fasteners, and
specialty products such as electronic component packaging and adhesives.
Specialty Systems--North America: Businesses that are located in North
America and that produce longer lead-time machinery and related consumables, and
specialty equipment for applications such as industrial spray coating, quality
measurement and static control.
Specialty Systems--International: Businesses that are located outside North
America and that manufacture longer lead-time machinery and related consumables,
and specialty equipment for industrial spray coating and other applications.
Leasing & Investments: Businesses that make opportunistic investments in
mortgage-related assets, leveraged and direct financing leases of equipment,
properties and property developments and affordable housing investments.
Upon the adoption of SFAS 131, the Company's number of reportable segments
increased to five from the three segments that were reported under the previous
standard. Prior year amounts have been restated to conform with the new segments
reported under SFAS 131.
36
22
Illinois Tool Works Inc.
Segment information for 1998, 1997 and 1996 was as follows:
In thousands 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Operating Revenues:
Engineered Products--North America $ 1,790,221 $ 1,596,156 $ 1,480,214
Engineered Products--International 937,243 875,200 877,088
Specialty Systems--North America 2,000,308 2,012,851 1,930,503
Specialty Systems--International 1,048,895 919,063 886,309
Leasing & Investments 149,748 101,110 68,357
Intersegment revenues (278,526) (283,947) (245,790
------------ ------------ -----------
$ 5,647,889 $ 5,220,433 $ 4,996,681
============ ============ ===========
Operating Income:
Engineered Products--North America $ 363,369 $ 307,106 $ 274,670
Engineered Products--International 140,323 136,511 108,398
Specialty Systems--North America 377,994 329,984 296,493
Specialty Systems--International 125,617 113,509 95,715
Leasing & Investments 71,983 40,113 25,310
------------ ------------ -----------
$ 1,079,286 $ 927,223 $ 800,586
============ ============ ===========
Depreciation and Amortization:
Engineered Products--North America $ 67,915 $ 56,934 $ 52,533
Engineered Products--International 41,057 36,207 40,085
Specialty Systems--North America 64,494 57,135 56,936
Specialty Systems--International 37,334 34,541 27,991
Leasing & Investments 979 569 688
------------ ------------ -----------
$ 211,779 $ 185,386 $ 178,233
============ ============ ===========
Plant & Equipment Additions:
Engineered Products--North America $ 75,578 $ 55,146 $ 46,902
Engineered Products--International 40,346 35,698 44,490
Specialty Systems--North America 58,973 58,570 47,205
Specialty Systems--International 33,021 29,288 30,060
------------ ------------ -----------
$ 207,918 $ 178,702 $ 168,657
============ ============ ===========
Identifiable Assets:
Engineered Products--North America $ 1,101,077 $ 736,474 $ 677,727
Engineered Products--International 824,700 613,486 601,270
Specialty Systems--North America 1,273,430 1,057,480 1,019,835
Specialty Systems--International 963,182 1,011,383 996,895
Leasing & Investments 1,530,042 1,534,796 1,157,209
Corporate 425,731 441,137 353,226
------------ ------------ -----------
$ 6,118,162 $ 5,394,756 $ 4,806,162
============ ============ ===========
Identifiable assets by segment are those assets that are specifically used in
that segment. Corporate assets are principally cash and equivalents,
investments, and other general corporate assets.
37
23
NOTES TO FINANCIAL STATEMENTS
Enterprise-wide information for 1998, 1997 and 1996 was as follows:
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Operating Revenues by Product Line:
Engineered Products--North America--
Fasteners & Components $1,324,034 $1,178,425 $1,109,730
Specialty Products 466,187 417,731 370,484
------------ ---------- -----------
$1,790,221 $1,596,156 $1,480,214
============ ========== ===========
Engineered Products--International--
Fasteners & Components $ 847,500 $ 781,054 $ 796,023
Specialty Products 89,743 94,146 81,065
------------ ---------- -----------
$ 937,243 $ 875,200 $ 877,088
============ ========== ===========
Specialty Systems--North America--
Equipment & Consumables $1,640,263 $1,627,429 $1,554,688
Specialty Equipment 360,045 385,422 375,815
------------ ---------- -----------
$2,000,308 $2,012,851 $1,930,503
============ ========== ===========
Specialty Systems--International--
Equipment & Consumables $ 892,537 $ 760,057 $ 713,616
Specialty Equipment 156,358 159,006 172,693
------------ ---------- -----------
$1,048,895 $ 919,063 $ 886,309
============ ========== ===========
Operating Revenues by Geographic Region:
United States $3,617,727 $3,359,485 $3,188,978
Europe 1,482,092 1,339,419 1,369,827
Asia 192,783 171,742 164,569
Other 355,287 349,787 273,307
------------ ---------- -----------
$5,647,889 $5,220,433 $4,996,681
============ ========== ===========
No single customer accounted for more than 10% of consolidated revenues in
1998, 1997 or 1996. Export sales from U.S. operations to third parties were less
than 10% of total operating revenues during those years.
Total noncurrent assets excluding deferred tax assets and financial
instruments were $2,939,000,000 and $2,158,000,000 at December 31, 1998 and
1997, respectively. Of these amounts, approximately 61% and 58%, respectively,
were attributed to U.S. operations. The remaining amounts were attributed to the
Company's foreign operations, with no single country accounting for a
significant portion.
38
24
QUARTERLY AND COMMON STOCK DATA Illinois Tool Works Inc.
QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
- ---------------------------------------------------------------------------------------------------------------------------
In thousands except March 31 June 30 September 30 December 31
----------------------- ----------------------- ----------------------- ----------------------
per share amounts 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues $1,340,991 $1,229,798 $1,420,461 $1,326,344 $1,377,212 $1,315,388 $1,509,225 $1,348,903
Cost of revenues 873,957 807,317 910,889 854,352 888,741 857,495 952,536 859,630
Operating income 234,352 196,433 283,687 245,819 264,562 235,763 296,685 249,208
Net income 148,658 123,255 175,979 154,394 163,870 149,130 184,277 160,172
Net income per share:
Basic .60 .49 .70 .62 .66 .60 .74 .64
Diluted .59 .49 .70 .61 .65 .59 .73 .64
COMMON STOCK PRICE AND DIVIDEND DATA--The common stock of Illinois Tool Works
Inc. is listed on the New York Stock Exchange and the Chicago Stock Exchange.
Quarterly market price and dividend data for 1998 and 1997 were as shown below:
MARKET PRICE PER SHARE
----------------------
HIGH LOW DIVIDENDS PAID PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------
1998
Fourth quarter $67.69 $50.88 $ .150
Third quarter 68.75 45.19 .120
Second quarter 73.19 62.13 .120
First quarter 65.00 52.56 .120
1997
Fourth quarter $60.13 $46.88 $.120
Third quarter 55.31 45.56 .120
Second quarter 52.63 40.31 .095
First quarter 45.69 37.38 .095
The approximate number of holders of record of common stock as of February 5,
1999 was 5,764. This number does not include beneficial owners of the
Company's securities held in the name of nominees.
39
25
Illinois Tool Works Inc.
ELEVEN-YEAR FINANCIAL SUMMARY
Dollars and shares in thousands except per share amounts 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
INCOME:
Operating revenues $ 5,647,889 5,220,433 4,996,681
Cost of revenues $ 3,626,123 3,378,794 3,281,530
Selling, administrative and research and development expenses $ 890,581 870,268 875,386
Amortization of goodwill and other intangible assets $ 44,593 36,842 31,873
Amortization of retiree health care $ 7,306 7,306 7,306
Operating income $ 1,079,286 927,223 800,586
Interest expense $ (14,230) (19,383) (27,834)
Other income (expense) $ (5,472) 16,511 (2,437)
Income before income taxes $ 1,059,584 924,351 770,315
Income taxes $ 386,800 337,400 284,000
Net income $ 672,784 586,951 486,315
Basic per share $ 2.69 2.35 1.96
Diluted per share $ 2.67 2.33 1.95
FINANCIAL POSITION:
Net working capital $ 612,464 700,762 481,767
Net plant and equipment $ 987,549 884,058 808,340
Total assets $ 6,118,162 5,394,756 4,806,162
Long-term debt $ 947,008 854,328 818,947
Total debt $ 1,353,715 1,152,606 1,209,372
Stockholders' equity $ 3,338,035 2,806,454 2,396,025
OTHER DATA:
Operating income:
Return on operating revenues % 19.1 17.8 16.0
Net income:
Return on operating revenues % 11.9 11.2 9.7
Return on average stockholders' equity % 21.9 22.6 22.5
Cash dividends paid $ 127,421 107,053 85,481
Per share--paid $ .51 .43 .35
--declared $ .54 .46 .36
Book value per share $ 13.35 11.24 9.67
Common stock market price at year-end $ 58.00 60.13 39.94
Long-term debt to total capitalization 22.1 23.3 25.5
Total debt to total capitalization % 28.9 29.1 33.5
Total debt to total capitalization (excluding Leasing and Investments segment) % 11.1 4.6 15.9
Shares outstanding:
At December 31 250,128 249,598 247,771
Weighted average 249,906 249,284 247,556
Plant and equipment additions $ 207,918 178,702 168,657
Depreciation $ 167,186 148,544 146,360
Research and development expenses $ 50,678 52,021 55,800
Employees at December 31 29,200 25,700 24,400
Operating revenues per employee $ 193 203 205
Note: Certain reclassifications of prior years' data have been made to conform
with current year reporting.
40
26
Eleven-Year Financial Summary
Dollars and shares in thousands except per share amounts 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME:
Operating revenues 4,178,080 3,461,315 3,159,181 2,811,645
Cost of revenues 2,723,988 2,290,117 2,122,286 1,858,752
Selling, administrative and research and development expenses 776,112 666,576 638,560 589,423
Amortization of goodwill and other intangible assets 25,031 22,344 21,874 22,169
Amortization of retiree health care 6,968 6,968 6,968 --
Operating income 645,981 475,310 369,493 341,301
Interest expense (29,991) (26,943) (35,025) (42,852)
Other income (expense) 7,718 1,916 1,402 11,331
Income before income taxes 623,708 450,283 335,870 309,780
Income taxes 236,100 172,500 129,300 117,700
Net income 387,608 277,783 206,570 192,080
Basic per share 1.64 1.22 .91 .86
Diluted per share 1.63 1.22 .90 .85
FINANCIAL POSITION:
Net working capital 681,558 634,500 547,506 492,118
Net plant and equipment 694,941 641,235 583,765 524,116
Total assets 3,591,318 2,580,498 2,336,891 2,204,187
Long-term debt 615,557 272,987 375,641 251,979
Total debt 791,745 339,989 482,714 335,240
Stockholders' equity 1,924,237 1,541,521 1,258,669 1,339,673
OTHER DATA:
Operating income:
Return on operating revenues 15.5 13.7 11.7 12.1
Net income:
Return on operating revenues 9.3 8.0 6.5 6.8
Return on average stockholders' equity 22.4 19.8 15.9 15.1
Cash dividends paid 71,783 61,162 55,175 50,290
Per share--paid .31 .27 .25 .23
--declared .32 .28 .25 .23
Book value per share 8.14 6.76 5.56 5.98
Common stock market price at year-end 29.50 21.88 19.50 16.31
Long-term debt to total capitalization 24.2 15.0 23.0 15.8
Total debt to total capitalization 29.2 18.1 27.7 20.0
Total debt to total capitalization (excluding Leasing and Investments segment 16.2 18.1 27.7 20.0
Shares outstanding:
At December 31 236,466 227,916 226,300 224,027
Weighted average 235,978 226,775 225,958 223,492
Plant and equipment additions 150,176 131,055 119,931 115,313
Depreciation 126,900 109,805 109,852 100,462
Research and development expenses 52,700 48,700 47,200 42,500
Employees at December 31 21,200 19,500 19,000 17,800
Operating revenues per employee 197 178 166 158
Eleven-Year Financial Summary
Dollars and shares in thousands except per share amounts 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME:
Operating revenues 2,639,650 2,544,153 2,172,747 1,929,805
Cost of revenues 1,759,288 1,686,423 1,450,116 1,287,297
Selling, administrative and research and development expenses 551,865 512,685 417,520 377,003
Amortization of goodwill and other intangible assets 23,979 19,181 15,829 13,106
Amortization of retiree health care -- -- -- --
Operating income 304,518 325,864 289,282 252,399
Interest expense (44,342) (39,190) (30,995) (26,109)
Other income (expense) 27,583 13,209 10,735 6,522
Income before income taxes 287,759 299,883 269,022 232,812
Income taxes 107,200 117,500 105,200 92,800
Net income 180,559 182,383 163,822 140,012
Basic per share .81 .84 .77 .66
Diluted per share .81 .83 .76 .65
FINANCIAL POSITION:
Net working capital 442,041 615,055 440,406 392,283
Net plant and equipment 525,695 483,549 413,578 342,794
Total assets 2,257,139 2,150,307 1,687,985 1,380,237
Long-term debt 307,082 430,632 334,407 255,907
Total debt 489,189 495,952 370,507 257,597
Stockholders' equity 1,212,051 1,091,842 871,124 744,727
OTHER DATA:
Operating income:
Return on operating revenues 11.5 12.8 13.3 13.1
Net income:
Return on operating revenues 6.8 7.2 7.5 7.3
Return on average stockholders' equity 15.7 18.6 20.3 20.7
Cash dividends paid 44,108 35,861 28,747 23,027
Per share--paid .20 .17 .14 .11
--declared .21 .17 .14 .12
Book value per share 5.44 4.98 4.06 3.53
Common stock market price at year-end 15.94 12.07 11.22 8.63
Long-term debt to total capitalization 20.2 28.3 27.7 23.3
Total debt to total capitalization 28.8 31.2 29.8 25.7
Total debt to total capitalization (excluding Leasing and Investments segment 28.8 31.2 29.8 25.7
Shares outstanding:
At December 31 222,872 219,218 214,663 211,175
Weighted average 222,354 217,745 214,056 210,700
Plant and equipment additions 106,036 101,183 84,263 84,107
Depreciation 91,414 82,913 68,890 62,064
Research and development expenses 40,300 40,300 32,500 26,588
Employees at December 31 18,700 18,400 15,700 14,200
Operating revenues per employee 141 138 138 136
41
27
CORPORATE EXECUTIVES DIRECTORS
W. JAMES FARRELL W. JAMES FARRELL
Chairman and Chief Executive Officer, 33 Years of Service Chairman and Chief Executive Officer, Illinois Tool Works Inc.
Director since 1995
HAROLD B. SMITH
Chairman of the Executive Committee, 44 Years of Service HAROLD B. SMITH
Chairman of the Executive Committee, Illinois Tool Works Inc.
FRANK S. PTAK Director since 1968
Vice Chairman, 23 Years of Service
RUSSELL M. FLAUM WILLIAM F. ALDINGER III
Executive Vice President, 23 Years of Service Chairman and Chief Executive Officer, Household International, Inc.
(financial services), Director since 1998
THOMAS J. HANSEN MICHAEL J. BIRCK
Executive Vice President, 19 Years of Service President and Chief Executive Officer, Tellabs, Inc.
(telecommunications), Director since 1996
DENNIS J. MARTIN
Executive Vice President, 7 Years of Service MARVIN D. BRAILSFORD
Vice President, Kaiser-Hill Co LLC (construction
F. RONALD SEAGER and environmental services). Director since 1996
Executive Vice President, 18 Years of Service
SUSAN CROWN
DAVID B. SPEER Vice President, Henry Crown and Company
Executive Vice President, 21 Years of Service (diversified investments), Director since 1994
HUGH J. ZENTMYER H. RICHARD CROWTHER
Executive Vice President, 31 Years of Service Retired Vice Chairman, Illinois Tool Works Inc.
Director since 1995
STEWART S. HUDNUT ROBERT C. MCCORMACK
Senior Vice President, General Counsel and Secretary Partner, Trident Capital L.P. (venture capital). Director
7 Years of Service since 1993. Previously 1978-1987
JOHN KARPAN PHILLIP B. ROONEY
Senior Vice President, Human Resources, 9 Years of Service Vice Chairman, ServiceMaster Company (a network of quality
service companies), Director since 1990
JON C. KINNEY
Senior Vice President and Chief Financial Officer ORMAND J. WADE
26 Years of Service Former Vice Chairman, Ameritech Corporation
(telecommunications products and services), Director since 1985
ALLAN C. SUTHERLAND
Senior Vice President, Leasing and Investments EDWARD BYRON SMITH
6 Years of Service Honorary Director, Director 1938-93