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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, 2002
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, $.01 par value, outstanding
at July 31, 2002: 306,393,120.
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
------------------------ -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating Revenues $2,434,625 $2,417,502 $4,639,279 $4,713,342
Cost of revenues 1,576,003 1,595,250 3,051,122 3,132,615
Selling, administrative,
and research and development
expenses 424,368 416,903 839,132 855,193
Amortization of goodwill
and other intangible assets 5,246 25,477 10,118 49,389
--------- --------- --------- ---------
Operating Income 429,008 379,872 738,907 676,145
Interest expense (18,421) (17,336) (35,924) (35,525)
Other income (expense) 2,058 (1,858) 4,134 435
--------- --------- --------- ---------
Income from Continuing Operations
Before Income Taxes 412,645 360,678 707,117 641,055
Income taxes 147,400 126,220 247,500 224,196
--------- --------- --------- ---------
Income from Continuing Operations 265,245 234,458 459,617 416,859
Income (Loss) from Discontinued
Operations 2,266 (1,682) 6,341 (1,325)
Cumulative Effect of Change in
Accounting Principle -- -- (221,890) --
--------- --------- --------- ---------
Net Income $ 267,511 $ 232,776 $ 244,068 $ 415,534
========= ========= ========= =========
Income Per Share from
Continuing Operations:
Basic $0.87 $0.77 $1.50 $1.37
Diluted $0.86 $0.77 $1.49 $1.36
Income (Loss) Per Share from
Discontinued Operations:
Basic $0.01 $(0.01) $0.02 $(0.00)
Diluted $0.01 $(0.01) $0.02 $(0.00)
Cumulative Effect Per Share of
Change in Accounting Principle:
Basic $ -- $ -- $(0.73) $ --
Diluted $ -- $ -- $(0.72) $ --
Net Income Per Share:
Basic $0.87 $0.77 $0.80 $1.37
Diluted $0.87 $0.76 $0.79 $1.36
Pro Forma Excluding Goodwill
Amortization:
Income from Continuing
Operations $265,245 $252,094 $459,617 $451,054
Income per Diluted Share from
Continuing Operations $0.86 $0.82 $1.49 $1.47
Cash dividends:
Paid $0.22 $0.20 $0.44 $0.40
Declared $0.22 $0.20 $0.44 $0.40
Shares of common stock
Outstanding during the period:
Average 306,303 304,160 305,885 303,641
Average assuming dilution 308,440 306,477 308,200 306,101
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS June 30, 2002 December 31, 2001
- ------ ------------- -----------------
Current Assets:
Cash and equivalents $ 485,339 $ 282,224
Trade receivables 1,584,827 1,450,029
Inventories 957,518 994,156
Deferred income taxes 197,238 197,428
Prepaids and other current assets 134,628 139,226
Net current assets of
discontinued operations 90,699 100,181
----------- ----------
Total current assets 3,450,249 3,163,244
----------- ----------
Plant and Equipment:
Land 116,513 114,649
Buildings and improvements 975,948 960,232
Machinery and equipment 2,846,342 2,800,341
Equipment leased to others 126,692 123,422
Construction in progress 161,947 105,316
----------- ----------
4,227,442 4,103,960
Accumulated depreciation (2,593,950) (2,470,270)
----------- ----------
Net plant and equipment 1,633,492 1,633,690
----------- ----------
Investments 1,428,717 1,278,285
Goodwill 2,315,470 2,516,813
Intangible Assets 224,894 221,881
Deferred Income Taxes 515,963 439,278
Other Assets 497,812 459,429
Net Noncurrent Assets of
Discontinued Operations 104,965 109,729
----------- ----------
$10,171,562 $9,822,349
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 171,338 $ 313,447
Accounts payable 400,412 367,249
Accrued expenses 813,688 795,210
Cash dividends payable 67,403 67,084
Income taxes payable 37,871 32,922
----------- ----------
Total current liabilities 1,490,712 1,575,912
----------- ----------
Non-current Liabilities:
Long-term debt 1,485,064 1,267,141
Other liabilities 935,523 938,558
----------- ----------
Total non-current liabilities 2,420,587 2,205,699
----------- ----------
Stockholders' Equity:
Common stock 3,066 3,052
Additional Paid-in-Capital 715,449 675,856
Income reinvested in the business 5,874,734 5,765,421
Common stock held in treasury (1,662) (1,666)
Cumulative translation adjustment (331,324) (401,925)
----------- ----------
Total stockholders' equity 6,260,263 6,040,738
----------- ----------
$10,171,562 $9,822,349
=========== ==========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Six Months Ended
June 30
-----------------------
2002 2001
---------- ---------
Cash Provided by (Used for) Operating Activities:
Net income $244,068 $415,534
Adjustments to reconcile net income to net cash
provided by operating activities:
(Income)loss from discontinued operations (6,341) 1,325
Non-cash goodwill impairment charge 221,890 --
Depreciation and amortization 151,068 197,549
Change in deferred income taxes (33,028) (19,029)
Provision for uncollectible accounts 13,776 7,959
(Gain) loss on sale of plant and equipment (160) 2,455
Income from investments (71,925) (74,787)
Non-cash interest on nonrecourse debt 19,803 21,430
Loss on sale of operations and affiliates 3,833 3,633
Other non-cash items, net 2,342 (3,299)
-------- --------
Cash provided by operating activities 545,326 552,770
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (118,140) (17,641)
Inventories 58,137 41,882
Prepaid expenses and other assets 7,440 12,148
Net assets of discontinued operations 20,933 19,574
Increase (decrease) in:
Accounts payable 19,577 (53,876)
Accrued expenses and other liabilities 16,757 (47,673)
Income taxes payable 12,726 11,050
Other, net 1,430 58
-------- --------
Net cash provided by operating activities 564,186 518,292
-------- --------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (91,983) (308,488)
Additions to plant and equipment (132,707) (135,392)
Purchase of investments (175,434) (23,819)
Proceeds from investments 28,170 47,137
Proceeds from sale of plant and equipment 11,263 9,217
Proceeds from sale of operations and affiliates 1,920 10,040
Sales (Purchases) of short-term investments (338) 2,309
Other, net 1,567 955
-------- --------
Net cash used for investing activities (357,542) (398,041)
-------- --------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (134,436) (121,241)
Issuance of common stock 39,475 45,204
Net repayments of short-term debt (154,105) (11,017)
Proceeds from long-term debt 253,430 2,999
Repayments of long-term debt (24,028) (5,701)
Other, net 141 1,820
-------- --------
Net cash used for financing activities (19,523) (87,936)
-------- --------
Effect of Exchange Rate Changes on Cash and Equivalents 15,994 (6,692)
-------- --------
Cash and Equivalents:
Increase during the period 203,115 25,623
Beginning of period 282,224 151,295
-------- --------
End of period $485,339 $176,918
======== ========
Cash Paid During the Period for Interest $ 35,800 $ 34,253
======== ========
Cash Paid During the Period for Income Taxes $274,489 $221,034
======== ========
Liabilities Assumed from Acquisitions $ 11,117 $ 59,606
======== ========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES:
Inventories at June 30, 2002 and December 31, 2001 were as follows:
(In Thousands)
June 30, Dec 31,
2002 2001
--------- ---------
Raw material $279,797 $287,067
Work-in-process 101,670 101,418
Finished goods 576,051 605,671
--------- ---------
$957,518 $994,156
========= =========
(2) COMPREHENSIVE INCOME:
The only component of other comprehensive income that the Company has is foreign
currency translation adjustments.
(In Thousands)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $267,511 $232,776 $244,068 $415,534
Foreign currency translation
adjustments, net of tax 105,692 (79,806) 70,601 (47,875)
-------- -------- -------- --------
Total comprehensive income $373,203 $152,970 $314,669 $367,659
======== ======== ======== ========
(3) DISCONTINUED OPERATIONS:
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. This segment is comprised of the following
businesses: Precor specialty exercise equipment, West Bend appliances and
premium cookware, and Florida Tile ceramic tile. The Company's consolidated
financial statements for all periods have been restated to present these
businesses as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30. The Company intends to dispose of these businesses through
sale transactions by the end of 2002, and does not expect to incur a loss on
their disposal. As of June 30, 2002, none of the businesses had been
sold. Results of the discontinued operations were as follows:
(In Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- --------
Operating revenues $94,016 $92,611 $195,070 $193,604
======= ======= ======== ========
Pro forma operating income/(loss) $ 4,436 $ (472) $ 12,887 $ 1,327
======= ======= ======== ========
Pro forma income/(loss) before
income taxes $ 3,935 $(1,909) $ 10,080 $ (535)
Income taxes 1,669 (820) 3,739 (396)
------- ------- -------- --------
Pro forma income from
discontinued operations $ 2,266 $(1,089) $ 6,341 $ (139)
======= ======= ======== ========
The actual results for 2001 have been adjusted to reflect the pro forma effect
of the elimination of the amortization of goodwill and indefinite-lived
intangible assets of $593,000 and $1,186,000, respectively, for the three months
and six months ended June 30, 2001. The Company has allocated general corporate
interest expense to discontinued operations based on proportional net assets
excluding general corporate debt. Interest expense allocated to discontinued
operations was $1,016,000 and $1,029,000 for the six months ended June 30, 2002
and 2001, respectively.
The net assets of the discontinued operations as of June 30, 2002 and December
31, 2001 were as follows:
(In Thousands)
June 30, Dec 31,
2002 2001
-------- --------
Accounts receivable $ 53,494 $ 64,897
Inventory 73,674 71,481
Accounts payable (12,789) (14,258)
Accrued liabilities (41,626) (40,686)
Other, net 17,946 18,747
Net current assets of -------- --------
discontinued operations $ 90,699 $100,181
======== ========
Net plant and equipment $ 75,080 $ 79,730
Net goodwill and intangibles 68,200 68,200
Other, net (38,315) (38,201)
Net noncurrent assets of -------- --------
discontinued operations $104,965 $109,729
======== ========
(4) INVESTMENTS:
In 2002, the Company entered into leveraged leasing transactions related to
mobile telecommunications equipment with two major European telecommunications
companies. The components of the Company's total cash investment for these
transactions of $144,676,000 were as follows:
(In Thousands)
Gross lease contracts receivable $991,426
Non-recourse debt service (914,724)
Estimated residual value of leased assets 151,908
Unearned and deferred income (83,934)
--------
$144,676
========
(5) GOODWILL AND INTANGIBLE ASSETS:
Goodwill represents the excess cost over fair value of the net assets of
purchased businesses.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS
142, the Company will no longer amortize goodwill and intangibles which have
indefinite lives. SFAS 142 also requires that the Company assess goodwill and
intangibles with indefinite lives for impairment at least annually, based on the
fair value of the related reporting unit or intangible asset. On an on-going
basis, the Company expects to perform its annual impairment assessment in the
first quarter of each year.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to approximately 300 of its reporting units. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows.
Based on the Company's initial impairment testing, goodwill and intangible
assets were reduced by $262,816,000 and a net after-tax impairment charge of
$221,890,000 ($0.72 per diluted share) was recognized as a cumulative effect of
change in accounting principle in the first quarter of 2002. The impairment
charge was related to approximately 40 businesses and primarily resulted from
evaluating impairment under SFAS 142 based on discounted cash flows, instead of
using undiscounted cash flows per the previous accounting standard.
The changes in the carrying amount of goodwill by segment for the six months
ended June 30, 2002 were as follows:
(In Thousands)
Engineered Engineered Specialty Specialty
Products - Products - Systems - Systems
North America International North America International Total
------------- ------------- ------------- ------------- -------
Balance,
Dec. 31, 2001 $574,962 $424,223 $853,557 $664,071 $2,516,813
Acquisitions (6,061) 3,107 6,536 24,188 27,770
Impairment
write-offs (50,992) (18,744) (85,994) (98,858) (254,588)
Foreign currency
translation (171) 12,233 23 13,390 25,475
Balance, -------- -------- -------- -------- ----------
June 30, 2002 $517,738 $420,819 $774,122 $602,791 $2,315,470
======== ======== ======== ======== ==========
Intangible assets as of June 30, 2002 and December 31, 2001 were as follows:
(In Thousands)
As of June 30, 2002 As of December 31, 2001
----------------------- -----------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ----
Amortizable Intangibles:
Trademarks and brands $ 10,125 $ (2,102) $ 8,023 $ 9,339 $(1,685) $ 7,654
Customer lists and
Relationships 13,971 (4,287) 9,684 28,371 (2,848) 25,523
Patents 85,976 (36,692) 49,284 74,971 (34,775) 40,196
Noncompete agreements 65,402 (25,537) 39,865 63,203 (21,741) 41,462
Other 52,135 (27,818) 24,317 50,239 (25,648) 24,591
Indefinite-lived Intangibles:
Trademarks and brands 93,721 -- 93,721 82,455 -- 82,455
-------- -------- -------- -------- -------- --------
Total Intangible Asset $321,330 $(96,436)$224,894 $308,578 $(86,697) $221,881
======== ======== ======== ======== ======== ========
Amortization expense related to amortizable intangible assets was $5,246,000 and
$10,118,000, respectively, for the three months and six months ended June 30,
2002, and $4,755,000 and $9,434,000, respectively, for the three months and six
months ended June 30, 2001.
The estimated amortization expense of intangible assets for the years ending
December 31 is as follows:
(In Thousands)
2002 $20,175
2003 18,621
2004 17,893
2005 16,848
2006 15,387
2007 12,554
A reconciliation of the previously reported 2001 statement of income information
to pro forma amounts that reflect the elimination of amortization of goodwill
and indefinite-lived intangible assets is presented below:
(In Thousands, except per share amounts)
Three months ended Six months ended
June 30,2001 June 30, 2001
---------------------- ---------------------
Per Share Per Share
-------------- --------------
Amount Basic Diluted Amount Basic Diluted
------ ----- ------- ------ ----- -------
Income from continuing operations,
as reported $234,458 $0.77 $0.77 $416,859 $1.37 $1.36
Amortization of goodwill and
indefinite-lived intangible
assets 17,636 0.06 0.06 34,195 0.11 0.11
Pro forma income from -------- --------
continuing operations 252,094 0.83 0.82 451,054 1.49 1.47
Loss from discontinued
operations, as reported (1,682)(0.01) (0.01) (1,325)(0.00) (0.00)
Amortization of goodwill and
indefinite-lived intangible assets 593 0.00 0.00 1,186 0.00 0.00
Pro forma loss from discontinued -------- --------
operations (1,089)(0.00) (0.00) (139)(0.00) (0.00)
-------- --------
Pro forma net income $251,005 0.83 0.82 $450,915 1.49 1.47
======== ========
(6) SHORT-TERM DEBT:
In June 2002, the Company entered into a $400,000,000 Line of Credit Agreement
with a termination date of June 20, 2003.
(7) LONG-TERM DEBT:
In April 2002, a subsidiary of the Company issued $250,000,000 of 6.55%
preferred debt securities due December 31, 2011 at 99.849% of face value. The
effective interest rate of the preferred debt securities is 6.74%.
(8) SEGMENT INFORMATION:
See Management's Discussion and Analysis for information regarding operating
revenues and operating income for the Company's segments.
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
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $ 807,795 $ 776,853 $1,546,245 $1,521,448
Operating income 155,313 139,757 280,092 249,450
Margin % 19.2% 18.0% 18.1% 16.4%
Operating revenues increased 4% in the second quarter and 2% for the
year-to-date period as a result of base business revenues increasing by 1% in
the second quarter and decreasing by 1% on a year-to-date basis. Acquisitions
increased revenues by 3% for both periods. Base business revenues increased for
the second quarter of 2002 mainly due to strong demand in the automotive end
markets. For the year-to-date period, higher base business revenues from the
automotive businesses were offset by weakness in the industrial plastics,
machined components, construction, polymers and electronics packaging
businesses. Operating income increased 11% and 12% for the respective periods
primarily due to lower nonrecurring costs and cost control measures in the
automotive and construction businesses. Margins increased 120 and 170 basis
points, respectively, due to increased revenues and reduced 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 electronic component packaging.
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $391,551 $380,460 $723,584 $741,653
Operating income 58,628 48,489 86,855 86,534
Margin % 15.0% 12.7% 12.0% 11.7%
For the second quarter of 2002, operating revenue increased 3% primarily due to
a 2% increase from acquisitions, a 1% base business increase and a 1% increase
related to currency fluctuation. Base business revenue increases in the
construction, industrial plastics and electronics packaging businesses were
offset by lower sales in the automotive operations. For the six-month period,
revenues decreased 2% mainly due to a base business revenue decrease of 1%, a
decrease related to currency translation of 2%, and lower revenues related to
divestitures of 1%, partially offset by increased acquisition revenues of 2%.
Operating income increased 21% the second quarter and remained flat for the
first half of 2002, with corresponding margin gains of 230 and 30 basis points.
Income and margin improvements in the second quarter were primarily related to
the construction, industrial plastics and electronics packaging units. Currency
translation had no impact on operating income in the second quarter and a
negative 1% impact on year-to-date operating income.
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
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $ 870,921 $ 874,472 $1,697,283 $1,721,478
Operating income 137,091 129,463 248,220 238,469
Margin % 15.7% 14.8% 14.6% 13.9%
In 2002, operating revenues were essentially flat for the second quarter and
decreased 1% for the year-to-date period. Base business revenue declines of 5%
and 6% for the three-month and six-month periods, respectively, were offset by
acquisition revenue increases of 4% and 5%, respectively. For both periods, base
business revenue decreases in the industrial packaging, food equipment and
finishing businesses were offset by increases in the welding businesses.
Operating income increased 6% in the second quarter and 4% year-to-date due
mainly to acquisitions and cost containment strategies. Margins increased 90
basis points and 70 basis points, respectively, due to lower costs in the food
equipment and industrial packaging 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
applications such as food service and industrial finishing.
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $425,423 $437,850 $791,017 $839,606
Operating income 53,432 59,676 82,409 95,676
Margin % 12.6% 13.6% 10.4% 11.4%
Operating revenues decreased 3% for the second quarter of 2002 and 6% for the
year-to-date period due mainly to lower base business revenues of 6% and 8%,
respectively, primarily related to the industrial packaging, food equipment and
decorating businesses. Acquisitions increased revenues by 3% and 4% for the
respective periods. The translation impact was neutral for the quarter and
reduced revenues by 2% for the year-to-date period. Operating income decreased
by 10% and 14% for the respective periods and margins decreased 100 basis points
in both periods mainly due to lower revenues and higher nonrecurring costs in
2002.
LEASING AND INVESTMENTS
This segment makes opportunistic investments in mortgage-related assets,
leveraged and direct financing leases of telecommunications, aircraft and other
equipment, properties and property developments, affordable housing, and a
venture capital fund.
(In Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
-------- ------- ------- --------
Operating revenues $40,541 $40,957 $72,637 $81,280
Operating income 24,544 23,209 41,331 45,971
Operating revenues decreased 1% in the second quarter due mainly to declines in
customer finance revenue offset by revenues from the new telecommunications
leveraged leases. Income increased 6% in the second quarter due to income from
the telecommunications leveraged leases. Year-to-date revenues decreased 11% and
operating income decreased 10% primarily due to a gain on the sale of a property
in the first quarter of 2001.
OPERATING REVENUES
The reconciliation of segment operating revenues to total operating revenues is
as follows:
Three months ended Six months ended
June 30 June 30
--------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- -----------
Engineered Products - North America $ 807,795 $ 776,853 $1,546,245 $ 1,521,448
Engineered Products - International 391,551 380,460 723,584 741,653
Specialty Systems - North America 870,921 874,472 1,697,283 1,721,478
Specialty Systems - International 425,423 437,850 791,017 839,606
Leasing and Investments 40,541 40,957 72,637 81,280
---------- ---------- ---------- ----------
Total segment operating revenues 2,536,231 2,510,592 4,830,766 4,905,465
Intersegment revenues (101,606) (93,090) (191,487) (192,123)
---------- ---------- ---------- ----------
Total company operating revenues $2,434,625 $2,417,502 $4,639,279 $4,713,342
========== ========== ========== ==========
OPERATING INCOME
Segment operating income for 2001 was restated to exclude the amortization of
goodwill and indefinite-lived intangible assets. The reconciliation of segment
operating income to total operating income is as follows:
Three months ended Six months ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Engineered Products - North America $155,313 $139,757 $280,092 $249,450
Engineered Products - International 58,628 48,489 86,855 86,534
Specialty Systems - North America 137,091 129,463 248,220 238,469
Specialty Systems - International 53,432 59,676 82,409 95,676
Leasing and Investments 24,544 23,209 41,331 45,971
-------- -------- -------- --------
Total segment operating income 429,008 400,594 738,907 716,100
Amortization of goodwill and
indefinite-lived intangible assets -- (20,722) -- (39,955)
-------- -------- -------- --------
Total operating income $429,008 $379,872 $738,907 $676,145
======== ======== ======== ========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 65.8% in the first six
months of 2002 versus 66.5% in 2001 due to cost improvements. Selling,
administrative, and research and development expenses as a percent of revenues
in the first half of 2002 versus 2001 were flat.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS
142, the Company will no longer amortize goodwill and intangibles which have
indefinite lives. SFAS 142 also requires that the Company assess goodwill and
intangibles with indefinite lives for impairment at least annually, based on the
fair value of the related reporting unit or intangible asset. On an on-going
basis, the Company expects to perform its annual impairment assessment in the
first quarter of each year.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to approximately 300 of its reporting units. Then,
the fair value of each reporting unit was compared to its carrying value. Fair
values were determined by discounting estimated future cash flows.
Based on the Company's initial impairment testing, goodwill and intangible
assets were reduced by $262,816,000 and a net after-tax impairment charge of
$221,890,000 ($0.72 per diluted share) was recognized as a cumulative effect of
change in accounting principle in the first quarter of 2002. The impairment
charge was related to approximately 40 businesses and primarily resulted from
evaluating impairment under SFAS 142 based on discounted cash flows, instead of
using undiscounted cash flows per the previous accounting standard.
Amortization expense related to amortizable intangible assets was $5,246,000 and
$10,118,000 for the three months and six months ended June 30, 2002,
respectively, and $4,755,000 and $9,434,000 for the three months and six months
ended June 30, 2001, respectively.
All pro forma data presented in this report reflect the elimination of the
amortization of goodwill and indefinite-lived intangibles in prior years.
INTEREST EXPENSE
Interest expense increased to $35.9 million in the first six months of 2002 from
$35.5 million in 2001.
OTHER INCOME
Other income was $4.1 million for the first half of 2002 versus $0.4 million in
2001, primarily due to losses on the sale of plant and equipment in 2001 and
higher interest income in 2002.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations of $459.6 million ($1.49 per diluted share) in
the first six months of 2002 was 10.3% higher than 2001 income from continuing
operations of $416.9 million ($1.36 per diluted share).
Pro forma net income from continuing operations of $459.6 million in the first
six months of 2002 was 1.9% higher than 2001 pro forma income from continuing
operations of $451.1 million. Net income from continuing operations per diluted
share of $1.49 for the first six months of 2002 was 1.4% higher than pro forma
net income from continuing operations per diluted share of $1.47 for the first
six months of 2001.
FOREIGN CURRENCY
The strengthening of the U.S. dollar against foreign currencies in the first six
months of 2002 decreased operating revenues for the first half of 2002 by
approximately $30 million and reduced earnings by approximately 1 cent per
diluted share.
DISCONTINUED OPERATIONS
In December 2001, the Company's Board of Directors authorized the divestiture of
the Consumer Products segment. Businesses in this segment are located primarily
in North America and manufacture household products that are used by consumers,
including West Bend small electric appliances and premium cookware, Precor
specialty exercise equipment and Florida Tile ceramic tile. The Company intends
to dispose of these businesses through sale transactions by the end of 2002, and
does not expect to incur a net loss on the disposal of the segment. As of June
30, 2002, none of the businesses had been sold.
Operating results for the discontinued operations were as follows:
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------- --------------------
2002 2001 2002 2001
-------- ------- -------- --------
Operating revenues $94,016 $92,611 $195,070 $193,604
Pro forma operating
income/(loss) 4,436 (472) 12,887 1,327
Margin % 4.7% (.5%) 6.6% .7%
Operating revenues increased slightly in both periods of 2002 versus 2001 due to
higher sales of specialty exercise equipment offset by lower small appliance
revenues. Operating income and margins increased significantly due to cost
improvements in the exercise equipment business.
LIQUIDITY AND CAPITAL RESOURCES
Summarized cash flow information was as follows:
(In Thousands)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
-------- --------- -------- --------
Net cash provided by operating
activities $281,292 $ 283,329 $564,186 $ 518,292
Plus: Proceeds from investments 16,343 25,087 28,170 47,137
Less: Additions to plant and
equipment (68,656) (65,860) (132,707) (135,392)
-------- --------- -------- ---------
Free operating cash flow $228,979 $ 242,556 $459,649 $ 430,037
======== ========= ======== =========
Acquisitions $(56,636) $(256,295) $(91,983) $(308,488)
Purchase of investments (60,385) (14,301) (175,434) (23,819)
Cash dividends paid (67,352) (60,751) (134,436) (121,241)
Net proceeds (repayments) of debt 116,170 96,393 75,297 (13,719)
Other, net 43,537 19,824 70,022 62,853
Net increase in cash and -------- -------- -------- ---------
equivalents $204,313 $ 27,426 $203,115 $ 25,623
======== ======== ======== =========
Return on average invested capital was as follows:
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Pro forma operating income after
taxes $ 275,757 $ 260,386 $ 480,290 $ 465,465
========== ========== ========== ==========
Invested capital at end of period:
Total debt $1,656,402 $1,949,918 $1,656,402 $1,949,918
Less: Leasing and investment debt (811,368) (774,817) (811,368) (774,817)
Less: Cash (485,339) (176,918) (485,339) (176,918)
---------- ---------- ---------- ----------
Adjusted net debt 359,695 998,183 359,695 998,183
Total stockholders' equity 6,260,263 5,694,096 6,260,263 5,694,096
---------- ---------- ---------- ----------
Invested capital $6,619,958 $6,692,279 $6,619,958 $6,692,279
========== ========== ========== ==========
Average invested capital $6,500,502 $6,595,301 $6,626,079 $6,554,000
========== ========== ========== ==========
Return on average invested capital 17.0% 15.8% 14.5% 14.2%
===== ===== ===== =====
Net working capital at June 30, 2002 and December 31, 2001 is summarized as
follows:
(Dollars in Thousands)
June 30, Dec. 31, Increase/
2002 2001 (Decrease)
----------- ---------- ----------
Current Assets:
Cash and equivalents $ 485,339 $ 282,224 $203,115
Trade receivables 1,584,827 1,450,029 134,798
Inventories 957,518 994,156 (36,638)
Other 331,866 336,654 (4,788)
Net current assets of
discontinued operations 90,699 100,181 (9,482)
---------- ---------- --------
3,450,249 3,163,244 287,005
Current Liabilities: ---------- ---------- --------
Short-term debt 171,338 313,447 (142,109)
Accounts payable 400,412 367,249 33,163
Accrued expenses 813,688 795,210 18,478
Other 105,274 100,006 5,268
---------- ---------- --------
1,490,712 1,575,912 (85,200)
---------- ---------- --------
Net Working Capital $1,959,537 $1,587,332 $372,205
========== ========== ========
Current Ratio 2.31 2.01
==== ====
Accounts receivable increased as a result of higher sales in the second quarter
of 2002 versus the fourth quarter of 2001. Inventories decreased as a result of
a Company-wide effort to reduce inventory levels.
Total debt at June 30, 2002 and December 31, 2001 was as follows:
(Dollars in Thousands)
June 30, Dec. 31,
2002 2001
---------- ----------
Short-term debt $ 171,338 $ 313,447
Long-term debt 1,485,064 1,267,141
---------- ----------
Total debt $1,656,402 $1,580,588
========== ==========
Total debt to capitalization 20.9% 20.7%
Total debt to total capitalization
(excluding Leasing and Investment segment) 12.8% 13.1%
In April 2002, a subsidiary of the Company issued $250,000,000 of 6.55%
preferred debt securities due December 31, 2011 at 99.849% of face value. The
proceeds will be used for general corporate purposes.
The changes to stockholders' equity during 2002 were as follows:
(In Thousands)
Total stockholders' equity, December 31, 2001 $6,040,738
Income from continuing operations 459,617
Income from discontinued operations 6,341
Cumulative effect of change in accounting principle (221,890)
Cash dividends declared (134,755)
Exercise of stock options, including tax benefits 39,611
Currency translation adjustments 70,601
----------
Total stockholders' equity, June 30, 2002 $6,260,263
==========
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including without limitation,
statements regarding the profitable divestiture of the Consumer Products segment
in 2002 and the estimated residual value of leased assets. These statements are
subject to certain risks, uncertainties, and other factors which could cause
actual results to differ materially from those anticipated, including, without
limitation, the risks described herein. Important factors that may influence
future results include (1) a downturn in the construction, automotive, general
industrial, food retail and service, or real estate markets, (2) deterioration
in global and domestic business and economic conditions, particularly in North
America, European Community, and Australia, (3) an interruption in, or reduction
in, introducing new products into the Company's product lines, and (4) an
unfavorable environment for making acquisitions or dispositions, domestic and
international, including adverse accounting or regulatory requirements and
market values of candidates.
Part II - Other Information
Item 1 - Legal Proceedings
One of the Company's business units has entered into a consent order with the
United States Environmental Protection Agency. In this order the business unit
agreed to a penalty being assessed against it for alleged violations of
hazardous waste regulations issued under the Resource Conservation and Recovery
Act of 1976. The penalty principally relates to activities at a facility in
Kansas City that took place prior to the Company's acquisition of the business
in July 1998. The Company never operated at the Kansas City facility. Pursuant
to an indemnification agreement with the former owners of the business, the
Company has been reimbursed for all but $50,000 of the $371,000 penalty.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 10, 2002. 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 269,858,904 2,935,703
M. J. Birck 269,864,293 2,930,314
M. D. Brailsford 269,873,157 2,921,450
J. R. Cantalupo 271,234,522 1,560,085
S. Crown 269,897,720 2,896,888
D. H. Davis, Jr. 269,738,810 3,055,797
W. J. Farrell 271,249,211 1,545,396
R. C. McCormack 271,185,938 1,608,669
P. B. Rooney 270,865,485 1,929,123
H. B. Smith 271,284,441 1,510,166
Item 5 - Other Information
On August 12, 2002, in accordance with Order No. 4-460 and pursuant to Section
21(a)(1) of the Securities Exchange Act of 1934, sworn statements by the
principal executive and financial officers of Illinois Tool Works Inc. were
filed with the Securities and Exchange Commission. Copies of each sworn
statement are furnished as Exhibits 99.1 and 99.2 to this report.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
3(b) By-laws of Illinois Tool Works Inc., as amended.
99.1 Statement under Oath of Principal Executive Officer
Regarding Facts and Circumstances Related to Exchange Act
Filings
99.2 Statement under Oath of Principal Financial Officer
Regarding Facts and Circumstances Related to Exchange Act
Filings
(b) Reports on Form 8-K
On May 10, 2002, the Company filed a Current Report on Form 8-K reporting the
dismissal of Arthur Andersen LLP as the Company's independent auditors and the
engagement of Deloitte and Touche LLP as its new independent auditors.
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 12, 2002 By: /s/ Jon C. Kinney
- ---------------------- ------------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
CERTIFICATION
The following statement is being made to the Securities and Exchange Commission
solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1349), which carries with it certain criminal penalties in the event of a
knowing or willful misrepresentation.
Each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q
for the period ended June 30, 2002 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the registrant.
Dated: August 12, 2002 By: /s/ W. James Farrell
- ---------------------- ------------------------------------------
W. James Farrell, Chairman
and Chief Executive Officer
Dated: August 12, 2002 By: /s/ Jon C. Kinney
- ---------------------- ------------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer