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, 1996 ________________________________________________ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to _____________________ ________________________ Commission file number 1-4797 _____________________________ ILLINOIS TOOL WORKS INC. ________________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 36-1258310 _______________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3600 West Lake Avenue, Glenview, IL 60025-5811 _______________________________________________________________________________ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (847) 724-7500 __________________________ Former address: ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ___ ___ The number of shares of registrant's common stock, without par value, outstanding at July 31, 1996: 123,785,225.
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 comments on financial statements included in the Company's Annual Report on Form 10-K/A. 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 ---------------------- ---------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Operating Revenues $1,324,800 $1,095,658 $2,461,722 $2,034,203 Cost of revenues 871,156 707,104 1,626,695 1,325,772 Selling, administrative, and research and develop- ment expenses 229,429 204,819 440,500 390,140 Amortization of goodwill and other intangible assets 7,481 6,023 14,613 12,156 Amortization of retiree health care 1,742 1,742 3,484 3,484 ---------- ---------- ---------- ---------- Operating Income 214,992 175,970 376,430 302,651 Interest expense (8,075) (7,839) (14,876) (13,993) Other income 58 3,217 2,176 3,721 ---------- ---------- ---------- ---------- Income Before Income Taxes 206,975 171,348 363,730 292,379 Income taxes 76,600 65,100 134,600 111,100 ---------- ---------- ---------- ---------- Net Income $ 130,375 $ 106,248 $ 229,130 $ 181,279 ========== ========== ========== ========== Per Share of Common Stock: Net income $1.05 $ .91 $1.85 $1.55 ===== ===== ===== ===== Cash dividends: Paid $ .17 $ .15 $ .34 $ .30 ===== ===== ===== ===== Declared $ .17 $ .15 $ .34 $ .30 ===== ===== ===== ===== Average number of shares of common stock outstanding during the period 123,764 117,214 123,726 117,147 ======= ======= ======= =======
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF FINANCIAL POSITION (UNAUDITED) (In Thousands) ASSETS June 30, 1996 December 31, 1995 - ------ ------------- ----------------- Current Assets: Cash and equivalents $ 137,199 $ 116,600 Trade receivables 852,573 741,327 Inventories 548,360 518,964 Deferred income taxes 100,802 80,005 Prepaid expenses and other current assets 87,412 75,594 ---------- ---------- Total current assets 1,726,346 1,532,490 ---------- ---------- Plant and Equipment: Land 61,445 60,486 Buildings and improvements 403,105 375,352 Machinery and equipment 1,200,508 1,076,950 Equipment leased to others 90,768 75,175 Construction in progress 45,679 32,621 ---------- ---------- 1,801,505 1,620,584 Accumulated depreciation (1,053,407) (925,643) ---------- ---------- Net plant and equipment 748,098 694,941 ---------- ---------- Investments 486,639 504,820 Goodwill 556,090 518,747 Deferred Income Taxes 176,379 118,913 Other Assets 325,318 221,407 ---------- ---------- $4,018,870 $3,591,318 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Short-term debt $ 203,218 $ 176,188 Accounts payable 232,629 221,497 Accrued expenses 506,354 391,702 Cash dividends payable 21,043 20,100 Income taxes payable 28,376 41,445 ---------- ---------- Total current liabilities 991,620 850,932 ---------- ---------- Non-current Liabilities: Long-term debt 616,815 615,557 Other 242,440 200,592 ---------- ---------- Total non-current liabilities 859,255 816,149 ---------- ---------- Stockholders' Equity: Preferred stock -- -- Common stock 267,861 239,688 Income reinvested in the business 1,895,343 1,673,320 Common stock held in treasury (1,841) (1,866) Cumulative translation adjustment 6,632 13,095 ---------- ---------- Total stockholders' equity 2,167,995 1,924,237 ---------- ---------- $4,018,870 $3,591,318 ========== ==========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF CASH FLOWS (UNAUDITED) (In Thousands) Six Months Ended June 30 1996 1995 Cash Provided by (Used for) Operating Activities: Net income $229,130 $181,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 90,820 78,864 Change in deferred income taxes (23) (3,269) Provision for uncollectible accounts 3,444 3,596 (Gain)loss on sale of plant and equipment (1,171) (328) Income from investment properties (27,079) (10,988) Gain on sale of operations and affiliates (4,856) (502) Other non-cash items, net 552 12,717 -------- -------- Cash provided by operating activities 290,817 261,369 Changes in assets and liabilities: (Increase) decrease in-- Trade receivables (44,836) (51,055) Inventories 14,157 (36,885) Prepaid expenses and other assets (35,693) 1,035 Increase (decrease) in-- Accounts payable (25,312) (4,302) Accrued expenses 44,208 11,714 Income taxes payable (16,286) (27,369) Other, net (1,195) 8,551 -------- -------- Net cash provided by operating activities 225,860 163,058 -------- -------- Cash Provided by (Used for) Investing Activities: Acquisition of businesses(excluding cash and equivalents) and additional interest in affiliates (85,340) (131,902) Additions to plant and equipment (79,487) (73,025) Purchase of investments (4,647) (2,791) Proceeds from investments 39,283 13,074 Proceeds from sale of plant and equipment 17,242 6,033 Proceeds from sale of operations and affiliates 12,913 1,736 Other, net (8,536) (5,678) -------- -------- Net cash used for investing activities (108,572) (192,553) Cash Provided by (Used for) Financing Activities: Cash dividends paid (40,910) (34,211) Issuance of common stock 2,688 4,402 Net proceeds from short-term debt 18,803 57,983 Proceeds from long-term debt 8,875 85 Repayments of long-term debt (86,970) (1,690) Other, net 2,885 (5,039) -------- -------- Net cash (used for) provided by financing activities (94,629) 21,530 -------- -------- Effect of Exchange Rate Changes on Cash and Equivalents (2,060) 5,022 -------- -------- Cash and Equivalents: Increase (decrease)during the period 20,599 (2,943) Beginning of period 116,600 76,867 -------- -------- End of period $137,199 $ 73,924 ======== ======== Cash Paid During the Period for Interest $ 18,521 $ 13,968 ======== ======== Cash Paid During the Period for Income Taxes $139,526 $132,927 ======== ======== Liabilities Assumed from Acquisitions $203,459 $112,634 ======== ========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES COMMENTS ON FINANCIAL STATEMENTS (UNAUDITED) (1) INVENTORIES at June 30, 1996 and December 31, 1995 were as follows: (In Thousands) June 30, Dec. 31, 1996 1995 -------- -------- Raw material $155,531 $140,302 Work-in-process 82,429 84,981 Finished goods 310,400 293,681 -------- -------- $548,360 $518,964 ======== ======== (2) LONG-TERM DEBT In May 1996, the Company amended its existing revolving credit facility (RCF) to increase the maximum available borrowings to $350,000,000 and extend the commitment termination date to May 30, 2001. 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 this facility at June 30, 1996. The amended RCF contains financial covenants establishing a maximum total debt to capitalization percentage and a minimum consolidated net worth. The Company was in compliance with these covenants at June 30, 1996.
Item 2 - Management's Discussion and Analysis ENGINEERED COMPONENTS SEGMENT Businesses in this segment manufacture short lead-time plastic and metal components, fasteners and assemblies; industrial fluids and adhesives; fastening tools; and welding products. This segment primarily serves the construction, automotive and general industrial markets. (Dollars in Thousands) Three months ended Six months ended June 30 June 30 ------------------ ---------------------- Operating Revenues 1996 1995 1996 1995 - --------- -------- -------- ---------- ---------- Domestic $522,039 $364,074 $ 934,581 $ 692,990 International 234,535 197,412 446,959 368,225 -------- -------- ---------- ---------- Total $756,574 $561,486 $1,381,540 $1,061,215 ======== ======== ========== ========== Three months ended June 30 Six months ended June 30 ------------------------------- -------------------------------- Operating 1996 1995 1996 1995 Income Income Margin Income Margin Income Margin Income Margin -------- ------ ------- ------ -------- ------ -------- ------ Domestic $ 79,792 15.3% $59,274 16.3% $140,989 15.1% $112,299 16.2% International 34,447 14.7 29,899 15.1 57,999 13.0 46,863 12.7 -------- ------- -------- -------- Total $114,239 15.1 $89,173 15.9 $198,988 14.4 $159,162 15.0 ======== ======= ======== ======== Acquisitions largely contributed to domestic revenue growth, along with increased penetration in the automotive markets by the automotive businesses and new product introductions in the construction businesses for both the three month and six month periods. Operating income for the three month period increased primarily due to higher revenues without a corresponding increase in costs in the automotive and construction businesses, while acquisitions also contributed to the operating income growth for the six month period. Margins declined in both the three month and six month periods due to lower margins at acquired businesses (primarily Hobart Brothers and Medalist Industries), partially offset in the year-to-date period by margin increases in the automotive and construction businesses. For the three month and six month periods, international revenues and operating income increased primarily due to acquisitions in the European automotive businesses. For the three month period, margins were lower due to soft demand in the construction businesses and price decreases in the French automotive markets. A nonrecurring goodwill write-off of $3.7 million in the first quarter of 1995 contributed to the 1996 year-to-date operating income growth and margin increase.
INDUSTRIAL SYSTEMS AND CONSUMABLES SEGMENT Businesses in this segment manufacture longer lead-time systems and related consumables for consumer and industrial packaging; marking, labeling and identification systems; industrial spray coating equipment and systems; and quality assurance equipment and systems. The largest markets served by this segment are general industrial, food and beverage and industrial capital goods. (Dollars in Thousands) Three months ended Six months ended June 30 June 30 ------------------ ---------------------- Operating Revenues 1996 1995 1996 1995 - --------- -------- -------- --------- ---------- Domestic $332,844 $323,396 $ 633,243 $ 592,694 International 221,158 205,831 418,810 365,889 -------- -------- ---------- ---------- Total $554,002 $529,227 $1,052,053 $ 958,583 ======== ======== ========== ========== Three months ended June 30 Six months ended June 30 ------------------------------- ------------------------------- Operating 1996 1995 1996 1995 Income Income Margin Income Margin Income Margin Income Margin -------- ------ ------- ------ -------- ------ ------- ------ Domestic $68,637 20.6% $57,782 17.9% $123,622 19.5% $101,497 17.1% International 24,933 11.3 24,785 12.0 40,285 9.6 31,208 8.5 -------- ------- -------- -------- Total $93,570 16.9 $82,567 15.6 $163,907 15.6 $132,705 13.8 ======== ======= ======== ======== Domestic revenues increased for the three month period primarily due to higher sales in the quality measurement businesses. For the six month period, domestic revenues increased primarily due to acquisitions in the consumer packaging and finishing systems businesses as well as revenue growth in the Specialty Industrial Packaging and Quality Measurement Group. For both the three month and six month periods, operating income and margins increased due to new products and lower raw material costs in the Signode packaging businesses, increased revenues in the specialty industrial packaging businesses as a result of improved demand in the domestic packaging markets, and lower operating costs in the quality measurement businesses. International revenues and operating income in the three month and six month periods increased primarily due to acquisitions in the specialty industrial packaging businesses and to a lesser degree the Signode packaging operations. The European finishing systems businesses also contributed to the growth as they continued to introduce new products. For the second quarter of 1996, operating income was flat and margins declined as a result of restructuring costs and a continuing soft demand in the European steel, construction and appliance markets served by the European specialty industrial packaging businesses. The above margin declines were partially offset by improved margins for the Signode packaging, consumer packaging and finishing systems operations. For the six month period, the majority of the 1996 increase in operating income and margins was due to 1995 nonrecurring costs of $9.6 million, which primarily related to a write-off of goodwill.
LEASING AND INVESTMENTS SEGMENT The Company has historically had strong cash flows from its manufacturing operations. Although most of this cash has been reinvested in the manufacturing businesses, both through investments in capital equipment and through acquisitions, some of the excess cash has been used to make financial investments. These investments primarily include leveraged and direct financing leases of equipment, mortgage-related investments, investments in properties and property developments, and low-income housing investments. In 1996, due to the increased significance of these investments, the Company's leasing and investments business began reporting as a separate segment. Accordingly, certain reclassifications of amounts in the 1995 statement of income have been made. For the Leasing and Investments segment, operating revenues and operating income for the year ended December 31, 1995 were $25.9 million and $18.8 million, respectively, and identifiable assets at December 31, 1995 were $604.5 million. (Dollars in Thousands) Three months ended Six months ended June 30 June 30 ------------------ ------------------ 1996 1995 1996 1995 ------- ------ ------- ------- Operating revenues $14,224 $4,945 $28,129 $14,405 ======= ====== ======= ======= Operating income $ 7,183 $4,231 $13,535 $10,785 ======= ====== ======= ======= Margin 50.5% 85.6% 48.1% 74.9% For the three month and six month periods, revenues and operating income increased primarily due to the commercial mortgage transaction entered into at year-end 1995 (see Financial Position section for discussion). Year-to-date operating income in 1995 included a nonrecurring gain on the sale of equipment under leveraged lease of $4.0 million. Margins declined for both the second quarter and the first half of 1996 from the comparable periods in 1995 as a result of lower margins for the commercial mortgage transaction versus the transactions in the prior year. The 1996 year-to-date margins are more indicative of the segment's performance. OPERATING EXPENSES Cost of revenues as a percentage of revenues increased to 66.1% in the first half of 1996 versus 65.2% in the first six months of 1995, mainly due to lower gross margins for acquired companies. Selling, administrative and research and development expenses decreased to 17.9% of revenues in the first half of 1996 versus 19.2% in the first half of 1995, primarily due to higher 1995 nonrecurring costs of approximately $14.0 million. INTEREST EXPENSE Interest expense increased slightly to $14.9 million in the first half of 1996 from $14.0 million in the first half of 1995, primarily due to debt assumed in acquisitions and increased commercial paper borrowings.
OTHER INCOME Other income decreased to $2.2 million for the first half of 1996 from $3.7 million in 1995. This decrease is primarily due to debt prepayment costs related to acquired companies in 1996 and higher 1996 currency translation losses, partially offset by higher gains on the sale of operations and the sale of plant and equipment. NET INCOME Net income of $229.1 million ($1.85 per share) in the first half of 1996 was 26.4% higher than the 1995 first half net income of $181.3 million ($1.55 per share). Foreign currency fluctuations had no material impact on revenues or earnings in the first half of 1996 versus 1995. FINANCIAL POSITION Net working capital at June 30, 1996 and December 31, 1995 is summarized as follows: (Dollars in Thousands) June 30, Dec. 31, Increase/ 1996 1995 (Decrease) ---------- ---------- ---------- Current Assets: Cash and equivalents $ 137,199 $ 116,600 $ 20,599 Trade receivables 852,573 741,327 111,246 Inventories 548,360 518,964 29,396 Other 188,214 155,599 32,615 ---------- ---------- -------- $1,726,346 $1,532,490 $193,856 ---------- ---------- -------- Current Liabilities: Short-term debt $ 203,218 $ 176,188 $ 27,030 Accounts payable and accrued expenses 738,983 613,199 125,784 Other 49,419 61,545 (12,126) ---------- ---------- -------- $ 991,620 $ 850,932 $140,688 ---------- ---------- -------- Net Working Capital $ 734,726 $ 681,558 $ 53,168 ========== ========== ======== Current Ratio 1.74 1.80 ========== ========== The increase in trade receivables in the first half of 1996 was primarily due to 1996 acquisitions and higher revenues in the second quarter of 1996 versus the fourth quarter of 1995. Accounts payable and accrued expenses increased at June 30, 1996 versus year-end 1995 as a result of overall business growth and 1996 acquisitions. In the first half of 1996, long-term debt of $80.7 million assumed in acquisitions was repaid. 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 relate to commercial real estate located throughout the U.S. and include 26
subperforming, variable rate, balloon loans and five foreclosed properties. In conjunction with this transaction, the Company simultaneously entered into a ten-year swap agreement 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 $9,000,000 per year and a portion (estimated to be $197,000,000 at December 31, 1995) 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 note payable. In addition, in the event that the pool of mortgage-related assets does not generate income of $9,000,000 a year, the Company has a collateral right against the cash flow generated by a separate pool of mortgage-related assets (owned by a third party in which the Company has a minimal interest) which has a fair value of approximately $749,000,000 at June 30, 1996. The Company entered into the swap 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 and net swap receivable of $100,000,000 (net of the related nonrecourse note payable) through its expected net cash flow of $9,000,000 per year for ten years and its estimated share of the proceeds from disposition of the mortgage-related assets and principal repayments of $118,000,000. The Company believes that because the swap counter party is Aaa-rated and that significant collateral secures the net annual cash flow of $9,000,000, its risk of not recovering that portion of its $100,000,000 net investment has been significantly mitigated. The Company currently believes that 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.
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 3, 1996. Approval was granted for certain provisions of the Company's Executive Incentive Plan, by a vote of 101,201,491 shares in favor (with 5,439,267 votes against, 1,081,995 votes withheld, and 306,893 non-votes). In addition, approval was granted for the Company's 1996 Stock Incentive Plan by a vote of 102,036,538 shares in favor (with 5,226,863 votes against, 755,914 votes withheld, and 10,331 non-votes). The following members were elected to the Company's Board of Directors to hold office for the ensuing year: Nominees In favor Withheld - ----------------- ----------- -------- J. W. Becton, Jr. 107,904,759 124,887 S. Crown 107,922,067 107,579 H. R. Crowther 107,932,967 96,679 W. J. Farrell 107,929,821 99,825 L. R. Flury 107,929,707 99,939 R. M. Jones 107,907,824 121,822 G. D. Kennedy 107,904,215 125,431 R. H. Leet 107,910,947 118,699 R. C. McCormack 107,933,588 96,058 P. B. Rooney 107,933,230 96,416 H. B. Smith 107,933,345 96,301 O. J. Wade 107,931,425 98,221 C. A. H. Waller 107,924,534 105,112
Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit Index (1) Pursuant to Regulation S-K, Item 601(b)(4)(iii), the Company has not filed with Exhibit 4 any instrument with respect to the new amended revolving credit facility as the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of the amended instrument to the Securities and Exchange Commission upon request. (2) Exhibit No. Description 10(a) Illinois Tool Works Inc. Executive Incentive Plan 10(b) Illinois Tool Works Inc. 1996 Stock Incentive Plan 10(c) Amendment to the Illinois Tool Works Inc. 1985 Executive Contributory Retirement Income Plan 10(d) Amendment to the Illinois Tool Works Inc. 1993 Executive Contributory Retirement Income Plan 10(e) Illinois Tool Works Inc. Phantom Stock Plan for Non-Officer Directors 27 Financial Data Schedule (b) Reports on Form 8-K Form 8-K/A Current Report (Amendment No. 2) dated April 30, 1996 which included Item 5, Item 7 and amended selected pages of the 1995 Annual Report to Stockholders was filed during the period.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, 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 13, 1996 By: /s/ Michael W. Gregg _____________________________________________ Michael W. Gregg, Senior Vice President and Controller, Accounting (Principal Accounting Officer)