1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ----------------------------------------------- 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 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, 1999: 250,699,566.
2 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 year's data have been made to conform with current year reporting.
3 ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF INCOME (UNAUDITED) (In Thousands Except for Per Share Amounts) Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 1999 1998 1999 1998 ----------- ---------- ---------- --------- Operating Revenues $1,593,811 $1,377,212 $4,691,815 $4,138,664 Cost of revenues 1,012,132 888,741 2,977,931 2,673,587 Selling, administrative, and research and development expenses 254,618 212,854 769,936 651,247 Amortization of goodwill and other intangible assets 17,423 11,055 48,228 31,229 ----------- ---------- ---------- --------- Operating Income 309,638 264,562 895,720 782,601 Interest expense (11,956) (3,652) (31,898) (8,891) Other income (expense) (2,858) (2,840) 4,586 (4,403) ----------- ---------- ---------- --------- Income Before Income Taxes 294,824 258,070 868,408 769,307 Income taxes 107,600 94,200 317,000 280,800 ---------- ---------- ---------- ---------- Net Income $ 187,224 $ 163,870 $ 551,408 $ 488,507 ========== ========== ========== ========== Per share of common stock: Basic Net Income $0.75 $0.66 $2.20 $1.96 ===== ===== ===== ===== Diluted Net Income $0.74 $0.65 $2.18 $1.94 ===== ===== ===== ===== Cash dividends: Paid $0.15 $0.12 $0.45 $0.36 ===== ===== ===== ===== Declared $0.18 $0.15 $0.48 $0.39 ===== ===== ===== ===== Shares of common stock outstanding during the period: Average 250,617 249,973 250,435 249,848 Average assuming dilution 253,329 252,268 253,139 252,424
4 ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF FINANCIAL POSITION (UNAUDITED) (In Thousands) ASSETS September 30, 1999 December 31, 1998 - ------ ------------------ ----------------- Current Assets: Cash and equivalents $ 151,493 $ 93,485 Trade receivables 1,096,907 989,086 Inventories 625,046 581,755 Deferred income taxes 115,979 102,607 Prepaid expenses and other current assets 95,090 67,540 ---------- ---------- Total current assets 2,084,515 1,834,473 ---------- ---------- Plant and Equipment: Land 78,240 73,266 Buildings and improvements 597,047 554,383 Machinery and equipment 1,718,773 1,624,703 Equipment leased to others 110,446 107,186 Construction in progress 111,417 57,894 ---------- ---------- 2,615,923 2,417,432 Accumulated depreciation (1,527,950) (1,429,883) ---------- ---------- Net plant and equipment 1,087,973 987,549 ---------- ---------- Investments 1,185,202 1,183,493 Goodwill 1,577,653 1,189,323 Deferred Income Taxes 415,659 417,361 Other Assets 540,019 505,963 ---------- ---------- $6,891,021 $6,118,162 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Short-term debt $ 424,894 $ 406,707 Accounts payable 289,402 268,869 Accrued expenses 474,694 457,543 Cash dividends payable 45,121 37,519 Income taxes payable 119,150 51,371 ---------- ---------- Total current liabilities 1,353,261 1,222,009 ---------- ---------- Non-current Liabilities: Long-term debt 1,212,431 947,008 Other 583,774 611,110 ---------- ---------- Total non-current liabilities 1,796,205 1,558,118 ---------- ---------- Stockholders' Equity: Preferred stock -- -- Common stock 2,509 2,504 Additional Paid-in-Capital 310,372 302,684 Income reinvested in the business 3,561,372 3,130,213 Common stock held in treasury (1,783) (1,783) Cumulative translation adjustment (130,915) (95,583) ---------- ---------- Total stockholders' equity 3,741,555 3,338,035 ---------- ---------- $6,891,021 $6,118,162 ========== ==========
5 ILLINOIS TOOL WORKS INC. and SUBSIDIARIES STATEMENT OF CASH FLOWS (UNAUDITED) (In Thousands) Nine Months Ended September 30 ------------------ 1999 1998 -------- -------- Cash Provided by (Used for) Operating Activities: Net income $551,408 $488,507 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 188,912 159,164 Change in deferred income taxes (3,540) 20,183 Provision for uncollectible accounts 8,829 3,079 (Gain) loss on sale of plant and equipment (1,418) 5,059 Income from investments (115,691) (97,670) Non-cash interest on nonrecourse debt 34,719 36,125 (Gain)loss on sale of operations and affiliates (12) 3,142 Other non-cash items, net (4,665) 1,983 -------- -------- Cash provided by operating activities 658,542 619,572 Changes in assets and liabilities: (Increase) decrease in-- Trade receivables (70,486) (16,226) Inventories (9,769) 9,917 Prepaid expenses and other assets (45,681) (25,722) Increase (decrease) in-- Accounts payable (5,248) (32,969) Accrued expenses (14,481) (25,315) Income taxes payable 57,152 (33,168) Other, net 258 (160) -------- -------- Net cash provided by operating activities 570,287 495,929 -------- -------- Cash Provided by (Used for) Investing Activities: Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates (569,234) (597,970) Additions to plant and equipment (164,985) (149,967) Purchase of investments (35,734) (9,238) Proceeds from investments 66,368 33,711 Proceeds from sale of plant and equipment 18,762 18,198 Proceeds from sale of operations and affiliates 9,535 10,251 Other, net 7,293 6,366 -------- -------- Net cash used for investing activities (667,995) (688,649) -------- -------- Cash Provided by (Used for) Financing Activities: Cash dividends paid (112,647) (89,920) Issuance of common stock 7,693 5,301 Net borrowings (repayments)of short-term debt (221,945) 195,542 Proceeds from long-term debt 507,057 17,162 Repayments of long-term debt (19,494) (9,552) Other, net 1,641 2,286 -------- -------- Net cash provided by financing activities 162,305 120,819 -------- -------- Effect of Exchange Rate Changes on Cash and Equivalents (6,589) (5,817) -------- -------- Cash and Equivalents: Increase (decrease) during the period 58,008 (77,718) Beginning of period 93,485 185,856 -------- -------- End of period $151,493 $108,138 ======== ======== Cash Paid During the Period for Interest $ 39,583 $ 20,223 ======== ======== Cash Paid During the Period for Income Taxes $237,740 $226,461 ======== ======== Liabilities Assumed from Acquisitions $168,151 $150,542 ======== ========
6 ILLINOIS TOOL WORKS INC. and SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) INVENTORIES at September 30, 1999 and December 31, 1998 were as follows: (In Thousands) Sept 30, Dec. 31, 1999 1998 -------- -------- Raw material $186,571 $163,868 Work-in-process 76,531 72,254 Finished goods 361,944 345,633 -------- -------- $625,046 $581,755 ======== ======== (2) COMPREHENSIVE INCOME: The components of comprehensive income were as follows: Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Net income $187,224 $163,870 $551,408 $488,507 Foreign currency translation adjustments, net of tax 7,022 (14,962) (35,332) (42,719) -------- -------- -------- -------- Total comprehensive income $194,246 $148,908 $516,076 $445,788 ======== ======== ======== ======== (3) SHORT-TERM DEBT: In 1998, the Company entered into a $350,000,000 Line of Credit Agreement, which was extended in 1999 from March 31,1999 to June 30, 1999. This line of credit was replaced on June 30, 1999, by a $400,000,000 Credit Agreement that expires on June 28, 2000. (4) LONG-TERM DEBT: In February 1999, the Company issued $500,000,000 of 5.75% notes due March 1, 2009, at 99.281% of face value. (5) PREMARK ACQUISITION: On September 9, 1999, the Company entered into an Agreement and Plan of Merger with Premark International, Inc. ("Premark") pursuant to which, subject to the terms and conditions contained in the Merger Agreement, CS Merger Sub Inc., a wholly owned subsidiary of the Company, will be merged (the "Merger") into Premark, with Premark surviving as a wholly owned subsidiary of the Company. As a result of the Merger, each outstanding share of Premark common stock, par value $1.00 per share (the "Premark Common Stock") will be converted into the right to receive between .5776 and .9181 of a share of ITW common stock, par value of $.01 ("ITW Common Stock"), depending on the average closing price of ITW Common Stock over the 20 day trading period ending on the second business day prior to the closing of the Merger.
7 As a condition and inducement to the Company's willingness to enter into the Merger Agreement, Premark has entered into a Stock Option Agreement with the Company dated as of September 9, 1999 (the "Option Agreement"). Pursuant to the Option Agreement, the Company has an option (the "Option") to purchase 12,203,694 shares of Premark's Common Stock at a price of $34.06 (the "Option Price") per share of Premark Common Stock under certain circumstances, subject to adjustment. The Option Agreement limits the profit that the Company may receive pursuant to the Option to $30 million in the aggregate.
8 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 components and fasteners, and specialty products such as adhesives, resealable packaging and electronic component packaging. (Dollars in Thousands) Three months ended Nine months ended September 30 September 30 ------------------ ---------------------- 1999 1998 1999 1998 -------- -------- ---------- ---------- Operating revenues $531,350 $453,571 $1,575,444 $1,317,152 Operating income 108,369 93,247 328,556 270,863 Margin % 20.4% 20.6% 20.9% 20.6% In 1999, revenues increased 17% and 20% for the third quarter and year-to-date periods, respectively. Base business revenue grew 10% for the third quarter and 9% year-to-date, mainly as a result of increases in the automotive, construction and consumer packaging businesses. In addition, acquisitions contributed revenue growth of 8% and 11% for the third quarter and year-to-date periods, respectively. For both periods, operating income grew due to the base business revenue increases, improved operating efficiencies and acquisitions. Overall margins were essentially flat for both periods as improved operating efficiencies at the base businesses were offset by the lower margins of acquired 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. (Dollars in Thousands) Three months ended Nine months ended September 30 September 30 ------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Operating revenues $300,029 $221,068 $865,082 $666,146 Operating income 37,821 33,825 101,390 96,204 Margin % 12.6% 15.3% 11.7% 14.4%
9 The 1999 revenue increases of 36% in the third quarter and 30% year-to-date were largely due to acquisitions, which contributed growth of 36% and 31% in the three-month and nine-month periods, respectively. For the three-month and nine-month periods, the base business revenue growth was 3% and 1%, respectively, mainly related to the automotive and polymers businesses for both periods, as well as Australian construction businesses for the third quarter. Foreign currency fluctuations negatively impacted revenues by 3% and 2% for the three-month and nine-month periods, respectively. For both periods, the increase in operating income was due to acquisitions, partially offset by nonrecurring costs associated with various European operations. The margin declines were attributable both to the base businesses, mainly due to the European nonrecurring costs, and the initial lower margin impact of acquisitions. 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. (Dollars in Thousands) Three months ended Nine months ended September 30 September 30 ------------------ ---------------------- 1999 1998 1999 1998 -------- -------- ---------- ---------- Operating revenues $527,870 $480,472 $1,574,744 $1,498,365 Operating income 108,869 90,338 319,384 279,722 Margin % 20.6% 18.8% 20.3% 18.7% In 1999, revenues increased 10% for the three-month period and 5% for the year-to-date period. For the third quarter, acquisitions contributed 7% to the revenue growth, while the base business revenue grew 2%. For the year-to-date period, revenue growth of 8% from acquisitions was partially offset by reduced base business revenues of 3%. Operating income increased 21% in the third quarter and 14% year-to-date as a result of improved operating efficiencies in the base businesses. For both periods, the base business margin improvement was partially offset by lower margins for acquired businesses.
10 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. (Dollars in Thousands) Three months ended Nine months ended September 30 September 30 ------------------ ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Operating revenues $275,579 $254,001 $780,895 $765,722 Operating income 35,029 30,685 80,755 91,822 Margin % 12.7% 12.1% 10.3% 12.0% In 1999, revenues increased 8% in the third quarter and 2% in the year-to-date period. For both periods, acquisitions contributed 8% to the revenue growth. Base business revenues increased 1% for the three-month period and decreased 6% year-to-date. Foreign currency translation did not have any significant impact in either period. In the third quarter, operating income and margins increased due to acquisitions and improved performance in various packaging and finishing businesses. For the year-to-date period, operating income and margins decreased due to the base business revenue declines and the lower margins of acquired businesses. 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) Three months ended Nine months ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Operating revenues $ 38,013 $ 36,159 $118,784 $101,885 Operating income 19,550 16,467 65,635 43,990 Both revenues and operating income increased for both periods of 1999 versus 1998 due to gains on the sales of assets and higher mortgage-related income.
11 OPERATING REVENUES The reconciliation of segment operating revenues to total company operating revenues is as follows: <TABLE> <CAPTION> Three months ended Nine months ended September 30 September 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Engineered Products - North America $ 531,350 $ 453,571 $ 1,575,444 $ 1,317,152 Engineered Products - International 300,029 221,068 865,082 666,146 Specialty Systems - North America 527,870 480,472 1,574,744 1,498,365 Specialty Systems - International 275,579 254,001 780,895 765,722 Leasing and Investments 38,013 36,159 118,784 101,885 ----------- ----------- ----------- ----------- Total segment operating revenues 1,672,841 1,445,271 4,914,949 4,349,270 Intersegment revenues (79,030) (68,059) (223,134) (210,606) ----------- ----------- ----------- ----------- Total company operating revenues $ 1,593,811 $ 1,377,212 $ 4,691,815 $ 4,138,664 =========== =========== =========== =========== </TABLE> OPERATING EXPENSES Cost of revenues as a percentage of revenues decreased to 63.5% in the first nine months of 1999 versus 64.6% in the first nine months of 1998, due to increased sales volume coupled with lower manufacturing costs. Selling, administrative, and research and development expenses increased to 16.4% of revenues in the first nine months of 1999 versus 15.7% in 1998, primarily due to higher nonrecurring charges in 1999. INTEREST EXPENSE Interest expense increased to $31.9 million in the first nine months of 1999 from $8.9 million in 1998, primarily due to higher long-term debt and increased commercial paper borrowings. OTHER INCOME (EXPENSE) Other income (expense) was income of $4.6 million for the first nine months of 1999 versus expense of $4.4 million in 1998. The increased income was primarily due to gains on the sale of operations and plant and equipment in 1999, versus losses in 1998. NET INCOME Net income of $551.4 million ($2.18 per diluted share) in the first nine months of 1999 was 12.9% higher than the 1998 net income of $488.5 million ($1.94 per diluted share).
12 FINANCIAL POSITION Net working capital at September 30, 1999 and December 31, 1998 is summarized as follows: (Dollars in Thousands) Sept 30, Dec. 31, 1999 1998 Increase ---------- ---------- -------- Current Assets: Cash and equivalents $ 151,493 $ 93,485 $ 58,008 Trade receivables 1,096,907 989,086 107,821 Inventories 625,046 581,755 43,291 Other 211,069 170,147 40,922 ---------- ---------- -------- 2,084,515 1,834,473 250,042 ---------- ---------- -------- Current Liabilities: Short-term debt 424,894 406,707 18,187 Accounts payable and accrued expenses 764,096 726,412 37,684 Other 164,271 88,890 75,381 ---------- ---------- -------- 1,353,261 1,222,009 131,252 ---------- ---------- -------- Net Working Capital $ 731,254 $ 612,464 $118,790 ========== ========== ======== Current Ratio 1.54 1.50 ==== ==== The increase in trade receivables for the first nine months of 1999 was due to 1999 acquisitions and higher operating revenues in the third quarter of 1999 versus the fourth quarter of 1998, partially offset by the effect of foreign currency translation. The increase in inventories is due to acquisitions, slightly offset by the effect of foreign currency translation. YEAR 2000 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 87% of the business units have completed testing of existing systems and remediation activities as of September 30, 1999, and it is expected that substantially all businesses will have completed their projects 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
13 organization, in which there are approximately 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 has been reviewing this equipment as part of its internal year 2000 compliance study. Although a small number of products which have display date functions may display an incorrect date, few products will fail to operate and no products have been identified which can cause property damage or bodily harm due to a year 2000 failure. To date, no significant year 2000 issues related to the Company's equipment products have been identified. The Company has been developing contingency plans for the operations where case critical systems or third parties are not year 2000 compliant. Based on preliminary estimates, the total cost of the Company's year 2000 compliance program is approximately $41 million for 1997 through 1999. Of this amount, approximately 67% relates to capital expenditures and 33% to expensed costs. Approximately 88% of the total cost has been incurred through September 30, 1999. 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 statements regarding 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, 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 value 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. Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit Index Exhibit No. Description - ----------- ------------------------------- 27 Financial Data Schedule 10(a) Illinois Tool Works Inc. 1996 Stock Incentive Plan dated February 16, 1996, as amended on December 12, 1997 and October 29, 1999. (b) Reports on Form 8-K Form 8-K, Current Report, dated September 9, 1999 which included Item 5, a description of the merger agreement between Illinois Tool Works Inc. and Premark International, Inc., and Item 7, which included the Agreement and Plan of Merger among Premark International, Inc., Illinois Tool Works Inc. and CS Merger Sub Inc., the Stock Option Agreement between Premark International Inc. and Illinois Tool Works Inc., and a press release dated September 9, 1999.
14 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: November 15, 1999 By: /s/ Jon C. Kinney ----------------- ----------------------------------- Jon C. Kinney, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)