FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934ILLINOIS TOOL WORKS INC.(Exact name of registrant as specified in its charter)Delaware 36-1258310 36-1258310(State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)3600 West Lake Avenue, Glenview, IL 60025-5811(Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (847) 724-7500Former address: (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . The number of shares of registrant's common stock, $.01 par value, outstanding at October 31, 2001: 304,678,211.Part I - Financial InformationItem 1ILLINOIS TOOL WORKS INC. and SUBSIDIARIESFINANCIAL STATEMENTSThe unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company's Annual Report on Form 10-K. Certain reclassifications of prior year's data have been made to conform with current year reporting.ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF INCOME(UNAUDITED)(In Thousands Except for Per Share Amounts) Three Months Ended Six Months Ended September 30 September 30 ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Operating Revenues $2,395,645 $2,472,342 $7,302,592 $7,454,748 Cost of revenues 1,597,149 1,597,669 4,874,594 4,821,874 Selling, administrative, research and development expenses 442,430 416,949 1,345,003 1,327,021 Amortization of goodwill and other intangible assets 28,450 23,461 79,092 66,784 ---------- ---------- ---------- ---------- Operating Income 327,616 434,263 1,003,903 1,239,069 Interest expense (18,308) (18,567) (54,878) (52,375) Other expense (3,153) (3,111) (3,536) (4,708) ---------- ---------- ---------- ---------- Income Before Income Taxes 306,155 412,585 945,489 1,181,986 Income taxes 107,100 148,500 330,900 425,500 ---------- ---------- ---------- ---------- Net Income $ 199,055 $ 264,085 $ 614,589 $ 756,486 =========== =========== =========== =========== Per share of common stock: Basic Net Income $.65 $.87 $2.02 $2.51 ====== ====== ======= ======= Diluted Net Income $.65 $.87 $2.01 $2.49 ====== ====== ======= ======= Cash dividends: Paid $.20 $.18 $.60 $.54 ====== ====== ======= ======= Declared $.22 $.20 $.62 $.56 ====== ====== ======= ======= Shares of common stock outstanding during the period: Average 304,522 301,857 303,908 301,365 Average assuming dilution 306,463 304,475 306,204 304,314ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF FINANCIAL POSITION(UNAUDITED)(In Thousands) ASSETS September 30, 2001 December 31, 2000 - ------ ------------------- ----------------- Current Assets: Cash and equivalents $ 229,313 $ 151,295 Trade receivables 1,629,559 1,654,632 Inventories 1,153,220 1,181,385 Deferred income taxes 195,702 183,823 Prepaids and other current assets 141,421 157,926 ----------- ----------- Total current assets 3,349,215 3,329,061 ----------- ----------- Plant and Equipment: Land 122,116 116,423 Buildings and improvements 1,017,175 1,000,807 Machinery and equipment 3,005,171 2,860,472 Equipment leased to others 122,652 118,589 Construction in progress 148,189 103,319 ----------- ----------- 4,415,303 4,199,610 Accumulated depreciation (2,678,904) (2,477,086) ----------- ----------- Net plant and equipment 1,736,399 1,722,524 ----------- ----------- Investments 1,294,550 1,170,392 Goodwill and Other Intangibles 2,812,254 2,483,882 Deferred Income Taxes 503,514 478,420 Other Assets 457,632 419,177 ----------- ----------- $10,153,564 $9,603,456 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term debt $ 584,130 $ 425,789 Accounts payable 405,145 455,417 Accrued expenses 790,893 826,107 Cash dividends payable 67,001 60,490 Income taxes payable 109,181 49,807 ----------- ----------- Total current liabilities 1,956,350 1,817,610 ----------- ----------- Non-current Liabilities: Long-term debt 1,380,371 1,549,038 Other 926,001 835,821 ----------- ----------- Total non-current liabilities 2,306,372 2,384,859 ----------- ----------- Stockholders' Equity: Preferred stock -- -- Common stock 3,048 3,027 Additional Paid-in-Capital 631,414 584,357 Income reinvested in the business 5,641,435 5,214,098 Common stock held in treasury (1,666) (1,783) Cumulative translation adjustment (383,389) (398,712) ----------- ----------- Total stockholders' equity 5,890,842 5,400,987 ----------- ----------- $10,153,564 $9,603,456 =========== ===========ILLINOIS TOOL WORKS INC. and SUBSIDIARIESSTATEMENT OF CASH FLOWS(UNAUDITED)(In Thousands) Nine Months Ended September 30 ------------------------- 2001 2000 ------------ ----------- Cash Provided by (Used for) Operating Activities: Net income $614,589 $756,486 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 308,301 285,313 Change in deferred income taxes (15,800) (6,639) Provision for uncollectible accounts 18,818 12,385 Loss on sale of plant and equipment 6,110 6,311 Income from investments (107,810) (108,326) Non-cash interest on nonrecourse debt 32,229 33,637 (Gain) loss on sale of operations and affiliates 4,302 (1,619) Other non-cash items, net (5,823) (5,472) ------- ------- Cash provided by operating activities 854,916 972,076 Changes in assets and liabilities: (Increase) decrease in-- Trade receivables 59,768 (18,611) Inventories 86,875 (18,162) Prepaid expenses and other assets 905 (38,999) Increase (decrease) in-- Accounts payable (85,300) (61,219) Accrued expenses (53,388) (57,505) Income taxes payable 62,854 (6,975) Other, net (278) 179 -------- -------- Net cash provided by operating activities 926,352 770,784 -------- -------- Cash Provided by (Used for) Investing Activities: Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates (535,334) (533,578) Additions to plant and equipment (200,667) (235,525) Purchase of investments (77,639) (14,585) Proceeds from investments 67,536 62,580 Proceeds from sale of plant and equipment 16,458 29,790 Proceeds from sale of operations and affiliates 9,800 8,248 Sales (purchases) of short-term investments 1,638 (4,630) Other, net 1,377 1,989 -------- -------- Net cash used for investing activities (716,831) (685,711) -------- -------- Cash Provided by (Used for) Financing Activities: Cash dividends paid (182,140) (162,612) Issuance of common stock 46,650 17,234 Net borrowings of short-term debt 6,039 387,812 Proceeds from long-term debt 4,182 1,059 Repayments of long-term debt (9,986) (255,793) Other, net 1,464 (179) -------- -------- Net cash used for financing activities (133,791) (12,479) -------- -------- Effect of Exchange Rate Changes on Cash and Equivalents 2,288 (37,956) -------- -------- Cash and Equivalents: Increase during the period 78,018 34,638 Beginning of period 151,295 232,953 -------- -------- End of period $229,313 $267,591 ========= ========= Cash Paid During the Period for Interest $ 64,194 $ 71,815 ========= ========= Cash Paid During the Period for Income Taxes $266,899 $381,952 ========= ========= Liabilities Assumed from Acquisitions $ 93,095 $180,295 ========= =========ILLINOIS TOOL WORKS INC. and SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS(UNAUDITED)(1) INVENTORIES at September 30, 2001 and December 31, 2000 were as follows: (In Thousands) September 30, December 31, 2001 2000 ------------ ------------ Raw material $330,395 $350,943 Work-in-process 120,152 134,044 Finished goods 702,673 696,398 ---------- ---------- $1,153,220 $1,181,385 ========== ========== (2) COMPREHENSIVE INCOME:The components of comprehensive income were as follows: (In Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income $199,055 $264,085 $614,589 $756,486 Foreign currency translation adjustments, net of tax 63,198 (51,774) 15,323 (142,879) --------- --------- --------- --------- Total comprehensive income $262,253 $212,311 $629,912 $613,607 ========= ========= ========= ========= (3) SHORT-TERM DEBT:In 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In 2001, the Company extended the termination date of the Line of Credit from June 22, 2001 to June 21, 2002. No amounts were outstanding under this facility at September 30, 2001. (4) NEW ACCOUNTING PRONOUNCEMENTS:In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The pooling-of-interests method will no longer be allowed. Under SFAS No. 142 beginning January 1, 2002, goodwill will no longer be amortized for book purposes. The Company will be required annually to evaluate goodwill for impairment based on fair value. The Company is currently evaluating the new statements to determine their effect on the Company's results of operations and financial position.(5) INVESTMENTS:During the third quarter of 2001, the Company entered into a leveraged lease of a Boeing 777 jet with a major airline. The components of the Company's cash investment of $28,295,000 were as follows: (In Thousands) Lease contracts receivable (net of principal and interest on nonrecourse financing) $10,773 Estimated residual value of leased asset 28,750 Unearned and deferred income (11,228) ------- Investment in leveraged lease $28,295 =======Item 2 - Management's Discussion and AnalysisENGINEERED PRODUCTS - NORTH AMERICABusinesses in this segment are located in North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $748,054 $785,152 $2,269,502 $2,432,117 Operating income 126,272 165,974 367,139 488,405 Margin % 16.9% 21.1% 16.2% 20.1% In 2001, operating revenues declined by 5% in the third quarter and 7% for the nine-month period mainly due to lower demand in the automotive, construction, electronic component packaging and consumer durable end markets. The base business revenue decline of 10% for both periods was partially offset by increases from acquisitions of 6% in the third quarter and 4% in the year-to-date period. Operating income declined 24% in the third quarter and 25% for the first nine months due to lower revenues and higher nonrecurring costs. Margins declined in both periods of 2001 due to reduced leverage of fixed costs as a result of lower sales and higher nonrecurring costs.ENGINEERED PRODUCTS - INTERNATIONALBusinesses in this segment are located outside North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $341,729 $374,649 $1,083,383 $1,066,660 Operating income 34,849 47,525 111,193 128,608 Margin % 10.2% 12.7% 10.3% 12.1% Operating revenues increased 2% for the first nine months of 2001 mainly due to acquisitions, which contributed 9%. Operating revenues decreased 9% for the third quarter of 2001 due primarily to the effect of translation, which reduced revenues by 8% for both the three-month and nine-month periods. Base business revenues were flat in the third quarter and increased 1% for the year-to-date period as higher sales for the construction and automotive businesses were offset by lower revenues for the electronic component packaging and industrial plastics businesses. Operating income declined 27% in the third quarter and 14% year-to-date, primarily related to the electronic component packaging and industrial plastics businesses. Margins declined 250 basis points for the third quarter and 180 basis points for the year-to-date period as a result of lower revenues related to certain base businesses, higher nonrecurring costs and the effect of currency translation, which reduced operating income by 7% for both periods.SPECIALTY SYSTEMS - NORTH AMERICABusinesses in this segment are located in North America and produce longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $863,615 $820,049 $2,578,307 $2,505,015 Operating income 110,086 148,000 335,877 430,063 Margin % 12.7% 18.0% 13.0% 17.2% In 2001, operating revenues increased 5% for the third quarter and 3% for the nine-month period, due primarily to acquisitions, which contributed 15% to the increase for the third quarter and 12% year-to-date. Base business revenues decreased 9% for both periods, as continued slow demand in most end markets negatively impacted the industrial packaging, food equipment, finishing and welding businesses. Operating income declined 26% in the third quarter and 22% year-to-date, and margins fell in both periods due to the revenue declines, nonrecurring costs and the impact of lower margins of acquired businesses.SPECIALTY SYSTEMS - INTERNATIONALBusinesses in this segment are located outside North America and manufacture longer lead-time machinery and related consumables, and specialty equipment for food service and industrial finishing. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $403,975 $439,747 $1,243,580 $1,290,399 Operating income 34,900 51,440 122,072 138,836 Margin % 8.6% 11.7% 9.8% 10.8% In 2001, operating revenues decreased 8% for the third quarter and 4% for the nine-month period primarily due to the effect of currency fluctuations, which reduced revenues by 8% for both periods. The acquisition-related revenue growth of 5% for the third quarter and 7% year-to-date was partially offset by base business revenue declines of 3% and 2%, respectively, primarily in the industrial packaging and food equipment operations. For the third quarter of 2001, operating income decreased 32% and margins declined 310 basis points due to weaknesses in the industrial packaging and consumer packaging markets. That weakness was partially offset by income improvements for the food equipment, finishing and welding operations. For the year-to-date period of 2001, operating income decreased 12% and margins declined 100 basis points due to lower demand in the industrial packaging and food equipment markets and the lower margins of acquired companies. Currency fluctuations reduced operating income by 8% for both periods.CONSUMER PRODUCTSBusinesses in this segment are located primarily in North America and manufacture specialty exercise equipment, small appliances, cookware and ceramic tile. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $96,462 $114,301 $294,530 $341,268 Operating income 2,967 2,894 3,109 (3,322) Margin % 3.1% 2.5% 1.1% (1.0%) In 2001, the decrease in operating revenues of 16% for the third quarter and 14% for the nine-month period was related to lower sales volume at the ceramic tile, small appliance and specialty exercise equipment businesses. Operating income and margins improved for both periods due to the effect of lower nonrecurring costs and improved operating performance for the ceramic tile operation.LEASING AND INVESTMENTSThis segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of equipment, properties and property developments, and affordable housing. (Dollars in Thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Operating revenues $35,104 $37,143 $116,384 $109,872 Operating income 18,542 18,430 64,513 56,479 Operating revenues and income were relatively flat in the third quarter of 2001. For the year-to-date period, revenues and income increased due to higher property development income and gains on real estate which was held for sale.OPERATING REVENUESThe reconciliation of segment operating revenues to total company operating revenues is as follows: Three Months Ended Six Months Ended September 30 September 30 -------------------- ----------------------- 2001 2000 2001 2000 ---------- --------- ---------- ---------- Engineered Products - North America $748,054 $785,152 $2,269,502 $2,432,117 Engineered Products - International 341,729 374,649 1,083,383 1,066,660 Specialty Systems - North America 863,615 820,049 2,578,307 2,505,015 Specialty Systems - International 403,975 439,747 1,243,580 1,290,399 Consumer Products 96,462 114,301 294,530 341,268 Leasing and Investments 35,104 37,143 116,384 109,872 --------- --------- --------- --------- Total segment operating revenues 2,488,939 2,571,041 7,585,686 7,745,331 Intersegment revenues (93,294) (98,699) (283,094) (290,583) --------- --------- --------- --------- Total company operating revenues $2,395,645 $2,472,342 $7,302,592 $7,454,748 ========== ========== ========== ==========OPERATING EXPENSESCost of revenues as a percentage of revenues increased to 66.8% in the first nine months of 2001 versus 64.7% in the first nine months of 2000 due to decreased sales volume in the North American base businesses and lower margins at acquired businesses. Selling, administrative, and research and development expenses increased to 18.4% of revenues in the first nine months of 2001 versus 17.8% in 2000 as a result of lower sales and higher non-recurring charges.INTEREST EXPENSEInterest expense increased to $54.9 million in the first nine months of 2001 from $52.4 million in 2001.OTHER EXPENSEOther expense was $3.5 million for the first nine months of 2001 versus $4.7 million in 2000. The decrease is primarily due to lower minority interest expense on less-than-100%-owned subsidiaries and lower losses on foreign currency translation in 2001, which was mostly offset by losses on the sales of operations in 2001 versus gains in 2000.NET INCOMENet income of $614.6 million ($2.01 per diluted share) in the first nine months of 2001 was 18.8% lower than the 2000 net income of $756.5 million ($2.49 per diluted share).FOREIGN CURRENCYThe strengthening of the U.S. dollar against foreign currencies in 2001 decreased operating revenues for the first nine months of 2001 by approximately $229 million and reduced earnings by approximately 5 cents per diluted share.FINANCIAL POSITIONNet working capital at September 30, 2001 and December 31, 2000 is summarized as follows: (Dollars in Thousands) September 30, December 31, Increase/ 2001 2000 (Decrease) -------------- ------------ ------------ Current Assets: Cash and equivalents $ 229,313 $ 151,295 $ 78,018 Trade receivables 1,629,559 1,654,632 (25,073) Inventories 1,153,220 1,181,385 (28,165) Other 337,123 341,749 (4,626) --------- --------- -------- 3,349,215 3,329,061 20,154 --------- --------- -------- Current Liabilities: Short-term debt 584,130 425,789 158,341 Accounts payable 405,145 455,417 (50,272) Accrued expenses 790,893 826,107 (35,214) Other 176,182 110,297 65,885 --------- --------- -------- 1,956,350 1,817,610 138,740 --------- --------- -------- Net Working Capital $1,392,865 $1,511,451 ($118,586) ========== ========== ========= Current Ratio 1.71 1.83 ==== ====Short-term borrowings increased as a result of the reclassification of debt from long-term to short-term. Other liabilities increased as a result of higher taxes payable due to the timing of tax payments. The Company's cash generation from operations continued to be strong in the quarter and reflected reduced working capital and capital expenditures as a result of the slower economy. The Company's invested capital declined $149 million, excluding the effect of acquisitions. Coupled with $615 million of net income, these two components resulted in free cash of $764 million. As a result, the Company has been able to fund a $535 million acquisition program and pay dividends of $182 million.FORWARD-LOOKING STATEMENTSThis document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks, uncertainties, and other factors which could cause actual results to differ materially from those anticipated, including, without limitation, the risks described herein. Important factors that may influence future results include (1) a further downturn in the construction, food retail and service, automotive, general industrial or real estate markets, (2) further deterioration in global and domestic business and economic conditions, such as interest rate and currency fluctuations, particularly in North America, Europe and Australia, (3) an interruption in, or reduction in, introducing new products into the Company's product lines, (4) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market value of candidates, and (5) uncertainties arising from the aftermath of the September 11th tragedy.Part II - Other InformationItem 6 - Exhibits and Reports on Form 8-K(a) Exhibit IndexExhibit No. Description3(b) By-laws of Illinois Tool Works Inc., as amended. 10(a) Illinois Tool Works Inc. Non-officer directors' restricted stock program, as amended. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed.SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILLINOIS TOOL WORKS INC. Dated: November 13, 2001 By: /s/ Jon C. KinneyJon C. Kinney, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)