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 June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-4797 ----------------------------- ILLINOIS TOOL WORKS INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 36-1258310 ------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3600 West Lake Avenue, Glenview, IL 60025-5811 ---------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (847) 724-7500 -------------- - ------------------------------------------------------------------- (Former 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 July 31, 2001: 304,514,850.Part I - Financial Information - ------------------------------ Item 1 - ------ ILLINOIS TOOL WORKS INC. and SUBSIDIARIES ----------------------------------------- FINANCIAL STATEMENTS -------------------- The unaudited financial statements included herein have been prepared by Illinois Tool Works Inc. and Subsidiaries (the "Company"). In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. It is suggested that these financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company's Annual Report on Form 10-K. Certain reclassifications of prior years' data have been made to conform with current year reporting.ILLINOIS TOOL WORKS INC. and SUBSIDIARIES ----------------------------------------- STATEMENT OF INCOME ------------------- (UNAUDITED) ----------- (In Thousands Except for Per Share Amounts) Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Operating Revenues $ 2,510,113 $ 2,577,446 $ 4,906,947 $ 4,982,406 Cost of revenues 1,664,403 1,652,275 3,277,445 3,224,205 Selling, administrative, and research and development expenses 440,799 455,901 902,573 910,072 Amortization of goodwill and other intangible assets 26,103 22,767 50,642 43,323 ---------- ---------- ---------- ---------- Operating Income 378,808 446,503 676,287 804,806 Interest expense (17,859) (17,725) (36,570) (33,808) Other expense (2,773) (1,806) (383) (1,597) ---------- ---------- ---------- ---------- Income Before Income Taxes 358,176 426,972 639,334 769,401 Income taxes 125,400 153,700 223,800 277,000 ---------- ---------- ---------- ---------- Net Income $ 232,776 $ 273,272 $ 415,534 $ 492,401 =========== =========== =========== =========== Per share of common stock: Basic Net Income $ .77 $ .91 $ 1.37 $ 1.64 ====== ====== ======= ======= Diluted Net Income $ .76 $ .90 $ 1.36 $ 1.62 ====== ====== ======= ======= Cash dividends: Paid $ .20 $ .18 $ .40 $ .36 ====== ====== ======= ======= Declared $ .20 $ .18 $ .40 $ .36 ====== ====== ======= ======= Shares of common stock outstanding during the period: Average 304,160 301,516 303,641 301,131 Average assuming dilution 306,477 304,484 306,101 304,248ILLINOIS TOOL WORKS INC. and SUBSIDIARIES ----------------------------------------- STATEMENT OF FINANCIAL POSITION ------------------------------- (UNAUDITED) ----------- (In Thousands) ASSETS June 30, 2001 December 31, 2000 - ------ ------------- ----------------- Current Assets: Cash and equivalents $ 176,931 $ 151,295 Trade receivables 1,635,693 1,654,632 Inventories 1,154,948 1,181,385 Deferred income taxes 191,473 183,823 Prepaid expenses and other current assets 136,689 157,926 ----------- ----------- Total current assets 3,295,734 3,329,061 ----------- ----------- Plant and Equipment: Land 119,869 116,423 Buildings and improvements 986,677 1,000,807 Machinery and equipment 2,931,076 2,860,472 Equipment leased to others 122,775 118,589 Construction in progress 152,006 103,319 ----------- ----------- 4,312,403 4,199,610 Accumulated depreciation (2,600,621) (2,477,086) ----------- ----------- Net plant and equipment 1,711,782 1,722,524 ----------- ----------- Investments 1,280,334 1,170,392 Goodwill and Other Intangibles 2,624,540 2,483,882 Deferred Income Taxes 503,586 478,420 Other Assets 455,290 419,177 ----------- ----------- $ 9,871,266 $ 9,603,456 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term debt $ 559,484 $ 425,789 Accounts payable 409,073 455,417 Accrued expenses 762,172 826,107 Cash dividends payable 60,898 60,490 Income taxes payable 58,182 49,807 ----------- ----------- Total current liabilities 1,849,809 1,817,610 ----------- ----------- Non-current Liabilities: Long-term debt 1,390,434 1,549,038 Other 936,927 835,821 ----------- ----------- Total non-current liabilities 2,327,361 2,384,859 ----------- ----------- Stockholders' Equity: Common stock 3,047 3,027 Additional Paid-in-Capital 629,921 584,357 Income reinvested in the business 5,509,381 5,214,098 Common stock held in treasury (1,666) (1,783) Cumulative translation adjustment (446,587) (398,712) ----------- ----------- Total stockholders' equity 5,694,096 5,400,987 ----------- ----------- $ 9,871,266 $ 9,603,456 =========== ===========ILLINOIS TOOL WORKS INC. and SUBSIDIARIES ----------------------------------------- STATEMENT OF CASH FLOWS ----------------------- (UNAUDITED) ---------- (In Thousands) Six Months Ended June 30 ------------------------- 2001 2000 ------------ ----------- Cash Provided by (Used for) Operating Activities: Net income $ 415,534 $ 492,401 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 206,561 188,167 Change in deferred income taxes (19,092) (9,467) Provision for uncollectible accounts 13,729 10,143 Loss on sale of plant and equipment 3,147 2,676 Income from investments (74,787) (73,052) Non-cash interest on nonrecourse debt 21,430 22,392 (Gain)loss on sale of operations and affiliates 3,633 (1,867) Other non-cash items, net (3,334) (3,722) ------- ------- Cash provided by operating activities 566,821 627,671 Changes in assets and liabilities: (Increase) decrease in-- Trade receivables (848) (39,249) Inventories 42,895 (6,310) Prepaid expenses and other assets 9,921 (24,728) Increase (decrease) in: Accounts payable (57,310) (34,024) Accrued expenses and other liabilities (51,430) (54,413) Income taxes payable 11,015 (3,119) Other, net 56 30 ------- ------- Net cash provided by operating activities 521,120 465,858 ------- ------- Cash Provided by (Used for) Investing Activities: Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates (308,488) (326,056) Additions to plant and equipment (140,399) (154,641) Purchase of investments (23,819) (11,102) Proceeds from investments 47,137 41,838 Proceeds from sale of plant and equipment 11,475 22,599 Proceeds from sale of operations and affiliates 10,040 4,220 Purchases of short-term investments 2,309 (4,126) Other, net 956 1,871 -------- -------- Net cash used for investing activities (400,789) (425,397) -------- -------- Cash Provided by (Used for) Financing Activities: Cash dividends paid (121,241) (108,306) Issuance of common stock 45,204 13,007 Net borrowings (repayments) of short-term debt (11,017) 209,301 Proceeds from long-term debt 2,999 1,611 Repayments of long-term debt (5,701) (142,630) Other, net 1,820 650 -------- -------- Net cash used for financing activities (87,936) (26,367) -------- -------- Effect of Exchange Rate Changes on Cash and Equivalents (6,759) (34,894) -------- -------- Cash and Equivalents: Increase (decrease) during the period 25,636 (20,800) Beginning of period 151,295 232,953 End of period $ 176,931 $ 212,153 ========= ========= Cash Paid During the Period for Interest $ 34,253 $ 38,823 ========= ========= Cash Paid During the Period for Income Taxes $ 221,034 $ 231,577 ========= ========= Liabilities Assumed from Acquisitions $ 59,606 $ 82,786 ========= =========ILLINOIS TOOL WORKS INC. and SUBSIDIARIES ----------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (UNAUDITED) ----------- (1) INVENTORIES at June 30, 2001 and December 31, 2000 were as follows: ----------- (In Thousands) June 30, Dec 31, 2001 2000 ----------- ------------ Raw material $ 346,869 $ 350,943 Work-in-process 115,450 134,044 Finished goods 692,629 696,398 ---------- ---------- $1,154,948 $1,181,385 ========== ========== (2) COMPREHENSIVE INCOME: --------------------- The components of comprehensive income were as follows: Three Months Ended Six Months Ended June 30 June 30 ---------------------- ----------------------- 2001 2000 2001 2000 ---------- --------- ---------- --------- Net income $ 232,776 $ 273,272 $ 415,534 $ 492,401 Foreign currency translation adjustments, net of tax (79,806) (57,913) (47,875) (91,105) --------- --------- --------- --------- Total comprehensive income $ 152,970 $ 215,359 $ 367,659 $ 401,296 ========= ========= ========= ========= (3) SHORT-TERM DEBT: ---------------- In June 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In 2001, the Company extended the termination date of the agreement from June 22, 2001 to June 21, 2002. (4) NEW ACCOUNTING STANDARDS: ------------------------- 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 to annually 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.Item 2 - Management's Discussion and Analysis - --------------------------------------------- ENGINEERED PRODUCTS - NORTH AMERICA - ----------------------------------- Businesses in this segment are located in North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $776,853 $841,238 $1,521,448 $1,646,965 Operating income 135,469 174,630 240,867 322,433 Margin % 17.4% 20.8% 15.8% 19.6% Operating revenues declined by 8% in both the second quarter and first half of 2001 mainly due to lower demand in the automotive and construction end markets. The base business revenue decline of 10% for both periods was partially offset by increases from acquisitions of 2% in the second and 3% in the year-to-date period. Operating income declined 22% in the second quarter and 25% for the first half of 2001 due to lower revenues and higher nonrecurring costs. Margins declined in both periods of 2001 due to reduced leverage of fixed costs as a result of lower sales and higher nonrecurring costs. ENGINEERED PRODUCTS - INTERNATIONAL - ----------------------------------- Businesses in this segment are located outside North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $380,460 $357,130 $741,653 $692,011 Operating income 42,830 49,046 76,344 81,082 Margin % 11.3% 13.7% 10.3% 11.7% Operating revenues increased 7% for both the three-month and six-month periods of 2001 due mainly to acquisitions, which contributed 12% and 14% for the respective periods. Base business revenue increased 1% for both periods as higher sales for automotive businesses were offset by lower revenues for the electronic component packaging and industrial plastics businesses. Operating income declined 13% in the second quarter and 6% year-to-date, primarily related to the electronic component packaging and industrial plastics businesses. Lower revenues related to certain end markets and the lower margins of acquired companies resulted in margin declines of 240 basis points for the second quarter and 140 basis points for the year-to-date period. Currency translation, primarily related to the euro, reduced revenues and operating income by 7% for both periods.SPECIALTY SYSTEMS -NORTH AMERICA - -------------------------------- Businesses in this segment are located in North America and produce longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $870,594 $855,903 $1,714,693 $1,684,966 Operating income 123,207 150,544 225,792 282,063 Margin % 14.2% 17.6% 13.2% 16.7% Operating revenues increased 2% for both the three-month and six-month periods of 2001, due primarily to acquisitions, which contributed 11% to the increase for both periods. Base business revenues decreased 9% for the second quarter and 8% for the first half of 2001, as slowing demand in most end markets negatively impacted the welding, industrial packaging, food equipment and finishing businesses. Operating income declined 18% in the second quarter and 20% year-to-date, primarily related to the welding and industrial packaging businesses. Margins declined in both periods due to the revenue declines, nonrecurring costs and lower margins of acquired businesses. SPECIALTY SYSTEMS - INTERNATIONAL - --------------------------------- Businesses in this segment are located outside North America and manufacture longer lead-time machinery and related consumables, and specialty equipment for food service and industrial finishing. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $437,849 $474,177 $839,605 $850,651 Operating income 55,157 59,635 87,171 87,397 Margin % 12.6% 12.6% 10.4% 10.3% In the second quarter of 2001, both operating revenues and operating income decreased 8% due to the unfavorable foreign currency impact of 8% on revenues and 9% on operating income. While revenues related to acquisitions grew 2%, the topline was decreased by the effect of divestitures. Base business revenues and operating income were flat. For the year-to-date period, revenues decreased 1% as the acquisition-related growth of 9% was offset by the unfavorable currency effect of 8% and a base business revenue decline of 1%. Operating income was flat and margins increased slightly as improvements related to acquisitions and higher 2000 nonrecurring costs were offset by negative translation effect of 9%.CONSUMER PRODUCTS - ----------------- Businesses in this segment are located primarily in North America and manufacture specialty exercise equipment, small electric appliances, cookware and ceramic tile. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $ 94,387 $ 107,309 $198,068 $ 226,967 Operating income (1,064) (8,036) 142 (6,217) Margin % -1.1% -7.5% 0.1% -2.7% In 2001, the decrease in operating revenues of 12% for the second quarter and 13% for the year-to-date period was primarily related to the ceramic tile and small appliance businesses. Operating income and margins improved for both periods due to the effect of 2000 nonrecurring costs. LEASING AND INVESTMENTS - ----------------------- This segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of equipment, properties and property developments, a private equity investment and affordable housing. (Dollars in Thousands) Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2001 2000 2001 2000 --------- --------- ----------- ---------- Operating revenues $40,957 $38,061 $81,280 $72,730 Operating income 23,209 20,684 45,971 38,048 Operating revenues and income increased in the second quarter of 2001 due to gains on the sales of mortgage-related investments and increased property development activity. For the year-to-date period, revenues and income increased due to higher property development income and gains on real estate which was held for sale. OPERATING REVENUES - ------------------ The reconciliation of segment operating revenues to total company operating revenues is as follows: Three Months Ended Six Months Ended June 30 June 30 -------------------- ----------------------- 2001 2000 2001 2000 --------- --------- ---------- ---------- Engineered Products-North America $ 776,853 $ 841,238 $1,521,448 $1,646,965 Engineered Products-International 380,460 357,130 741,653 692,011 Specialty Systems-North America 870,594 855,903 1,714,693 1,684,966 Specialty Systems-International 437,849 474,177 839,605 850,651 Consumer Products 94,387 107,309 198,068 226,967 Leasing and Investments 40,957 38,061 81,280 72,730 --------- --------- --------- --------- Total segment operating revenues 2,601,100 2,673,818 5,096,747 5,174,290 Intersegment revenues (90,987) (96,372) (189,800) (191,884) --------- --------- --------- --------- Total company operating revenue $2,510,113 $2,577,446 $4,906,947 $4,982,406 ========== ========== ========== ==========OPERATING EXPENSES - ------------------ Cost of revenues as a percentage of revenues increased to 66.8% in the first six months of 2001 versus 64.7% in the first six months of 2000 due to decreased sales volume in the North American base business and lower margins at acquired businesses. Selling, administrative, and research and development expenses as a percent of revenues in the first half of 2001 versus 2000 were flat. INTEREST EXPENSE - ---------------- Interest expense increased to $36.6 million in the first six months of 2001 from $33.8 million in 2000. OTHER EXPENSE - ------------- Other expense was $.4 million for the first half of 2001 versus $1.6 million in 2000. This reduced expense is primarily due to lower losses on foreign currency translation and higher interest income, mostly offset by losses versus gains on the divestiture of businesses. NET INCOME - ---------- Net income of $415.5 million ($1.36 per diluted share) in the first six months of 2001 was 15.6% lower than the 2000 net income of $492.4 million ($1.62 per diluted share). The Company is not expecting any material improvement in its various North American end markets in the second half of 2001. FOREIGN CURRENCY - ---------------- The strengthening of the U.S. dollar against foreign currencies in 2001 decreased operating revenues for the first half of 2001 by approximately $148 million and reduced earnings by approximately 3 cents per diluted share. FINANCIAL POSITION - ------------------ Net working capital at June 30, 2001 and December 31, 2000 is summarized as follows: (Dollars in Thousands) June 30, Dec. 31, Increase/ 2001 2000 (Decrease) ------------ ------------ ------------ Current Assets: Cash and equivalents $ 176,931 $ 151,295 $ 25,636 Trade receivables 1,635,693 1,654,632 (18,939) Inventories 1,154,948 1,181,385 (26,437) Other 328,162 341,749 (13,587) --------- --------- -------- 3,295,734 3,329,061 (33,327) --------- --------- -------- Current Liabilities: Short-term debt 559,484 425,789 133,695 Accounts payable 409,073 455,417 (46,344) Accrued expenses 762,172 826,107 (63,935) Other 119,080 110,297 8,783 --------- --------- -------- 1,849,809 1,817,610 32,199 --------- --------- --------- Net Working $1,445,925 $1,511,451 $ (65,526) ========== ========== ========= Current Ratio 1.78 1.83 ==== ==== Short-term borrowings increased as a result of the reclassification of debt from long-term to short-term. Accrued liabilities decreased primarily as a result of a decrease in accrued compensation and other miscellaneous accruals such as rebates. FORWARD-LOOKING STATEMENTS - -------------------------- This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks, uncertainties, and other factors which could cause actual results to differ materially from those anticipated, including, without limitation, the risks described herein. Important factors that may influence future results include (1) a 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 line, and (4) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates.Part II - Other Information - --------------------------- Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Company's Annual Meeting of Stockholders was held on May 12, 2000. The stockholders reapproved the performance factors and award limits under the 1996 Stock Incentive Plan and Executive Incentive Plan by a vote of 243,474,887 in favor (with 23,171,598 votes against and 2,817,347 votes withheld). The following members were elected to the Company's Board of Directors to hold office for the ensuing year: Nominees In Favor Withheld - ---------------------- ------------------- ------------------- W. F. Aldinger, III 267,004,072 2,459,759 M. J. Birck 267,030,684 2,433,147 M. D. Brailsford 267,057,498 2,406,333 S. Crown 267,052,409 2,411,422 H. R. Crowther 260,893,329 8,570,502 D. H. Davis, Jr. 267,006,370 2,457,461 W. J. Farrell 266,984,747 2,479,084 R. C. McCormack 267,038,248 2,425,583 P. B. Rooney 266,953,604 2,510,227 H. B. Smith 259,152,179 10,311,652 Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibit Index No exhibits. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed.SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILLINOIS TOOL WORKS INC. Dated: August 8, 2001 By: /s/ Jon C. Kinney -------------- ------------------------------------ Jon C. Kinney, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)