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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 September 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 September 30, 2002: 306,434,121.
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 Nine Months Ended
September 30 September 30
----------------------- ----------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Operating Revenues $2,401,038 $2,301,168 $7,040,317 $7,014,510
Cost of revenues 1,561,548 1,527,862 4,612,670 4,660,477
Selling, administrative,
and research and development
expenses 437,526 420,832 1,276,658 1,276,025
Amortization of goodwill
and other intangible assets 5,028 27,825 15,146 77,214
--------- --------- --------- ---------
Operating Income 396,936 324,649 1,135,843 1,000,794
Interest expense (14,652) (17,786) (50,576) (53,311)
Other expense (6,524) (2,915) (2,390) (2,480)
--------- --------- --------- ---------
Income from Continuing Operations
Before Income Taxes 375,760 303,948 1,082,877 945,003
Income taxes 131,500 106,067 379,000 330,263
--------- --------- --------- ---------
Income from Continuing Operations 244,260 197,881 703,877 614,740
Income (Loss) from Discontinued
Operations 1,276 1,174 7,617 (151)
Cumulative Effect of Change in
Accounting Principle -- -- (221,890) --
--------- --------- --------- ---------
Net Income $ 245,536 $ 199,055 $ 489,604 $ 614,589
========= ========= ========= =========
Income Per Share from
Continuing Operations:
Basic $0.80 $0.65 $2.30 $2.02
Diluted $0.79 $0.65 $2.28 $2.01
Income Per Share from
Discontinued Operations:
Basic $ -- $ -- $0.02 $ --
Diluted $ -- $ -- $0.02 $ --
Cumulative Effect Per Share of
Change in Accounting Principle:
Basic $ -- $ -- $(0.73) $ --
Diluted $ -- $ -- $(0.72) $ --
Net Income Per Share:
Basic $0.80 $0.65 $1.60 $2.02
Diluted $0.80 $0.65 $1.59 $2.01
Pro Forma Excluding Goodwill
Amortization:
Income from Continuing
Operations $ 244,260 $ 216,534 $ 703,877 $ 667,588
Income per Diluted Share from
Continuing Operations $0.79 $0.71 $2.28 $2.18
Cash dividends:
Paid $0.22 $0.20 $0.66 $0.60
Declared $0.23 $0.22 $0.67 $0.62
Shares of common stock
Outstanding during the period:
Average 306,408 304,522 306,045 303,908
Average assuming dilution 307,893 306,463 308,094 306,204
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In Thousands)
ASSETS September 30, 2002 December 31, 2001
Current Assets:
Cash and equivalents $720,421 $282,224
Trade receivables 1,574,888 1,450,029
Inventories 981,949 994,156
Deferred income taxes 196,847 197,428
Prepaids and other current assets 133,981 139,226
Net current assets of
discontinued operations 99,248 100,181
------------ ------------
Total current assets 3,707,334 3,163,244
------------ ------------
Plant and Equipment:
Land 118,116 114,649
Buildings and improvements 1,007,599 960,232
Machinery and equipment 2,879,136 2,800,341
Equipment leased to others 130,278 123,422
Construction in progress 150,365 105,316
------------ ------------
4,285,494 4,103,960
Accumulated depreciation (2,648,767) (2,470,270)
------------ ------------
Net plant and equipment 1,636,727 1,633,690
------------ ------------
Investments 1,412,901 1,278,285
Goodwill 2,374,807 2,516,813
Intangible Assets 220,171 221,881
Deferred Income Taxes 500,206 439,278
Other Assets 473,486 459,429
Net Noncurrent Assets of
Discontinued Operations 102,168 109,729
------------ ------------
$10,427,800 $9,822,349
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $132,804 $313,447
Accounts payable 416,043 367,249
Accrued expenses 847,831 795,210
Cash dividends payable 70,480 67,084
Income taxes payable 51,721 32,922
------------ ------------
Total current liabilities 1,518,879 1,575,912
------------ ------------
Non-current Liabilities:
Long-term debt 1,474,666 1,267,141
Other liabilities 936,015 938,558
------------ ------------
Total non-current liabilities 2,410,681 2,205,699
------------ ------------
Stockholders' Equity:
Common stock 3,067 3,052
Additional Paid-in-Capital 716,910 675,856
Income reinvested in the business 6,049,789 5,765,421
Common stock held in treasury (1,662) (1,666)
Cumulative translation adjustment (269,864) (401,925)
------------ ------------
Total stockholders' equity 6,498,240 6,040,738
------------ ------------
$10,427,800 $9,822,349
============ ============
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Nine Months Ended
September 30
---------------------
2002 2001
---------- --------
Cash Provided by (Used for) Operating Activities:
Net income $489,604 $614,589
Adjustments to reconcile net income to net cash
provided by operating activities:
(Income)loss from discontinued operations (7,617) 151
Non-cash goodwill impairment charge 221,890 --
Depreciation and amortization 228,098 294,774
Change in deferred income taxes (13,760) (16,212)
Provision for uncollectible accounts 19,737 12,051
Loss on sale of plant and equipment 2,012 5,136
Income from investments (105,722) (107,810)
Non-cash interest on nonrecourse debt 29,742 32,229
Loss on sale of operations and affiliates 3,233 4,302
Other non-cash items, net 2,135 (5,770)
--------- ---------
Cash provided by operating activities 869,352 833,440
Changes in assets and liabilities:
(Increase) decrease in--
Trade receivables (80,563) 53,685
Inventories 42,351 84,016
Prepaid expenses and other assets (1,898) 5
Net assets of discontinued operations 16,456 22,090
Increase (decrease) in:
Accounts payable 20,824 (80,272)
Accrued expenses and other liabilities 45,807 (54,214)
Income taxes payable 31,741 62,924
Other, net 74 (278)
--------- ---------
Net cash provided by operating activities 944,144 921,396
--------- ---------
Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and
equivalents) and additional interest in affiliates (105,715) (535,334)
Additions to plant and equipment (192,547) (193,420)
Purchase of investments (190,812) (77,639)
Proceeds from investments 49,329 67,536
Proceeds from sale of plant and equipment 19,757 14,148
Proceeds from sale of operations and affiliates 4,105 9,800
Sales of short-term investments 1,736 1,638
Other, net 2,658 1,377
--------- ---------
Net cash used for investing activities (411,489) (711,894)
--------- ---------
Cash Provided by (Used for) Financing Activities:
Cash dividends paid (201,839) (182,140)
Issuance of common stock 40,888 46,650
Net borrowings (repayments) of short-term debt (210,101) 6,039
Proceeds from long-term debt 254,230 4,182
Repayments of long-term debt (27,662) (9,986)
Other, net 1,434 1,464
--------- ---------
Net cash used for financing activities (143,050) (133,791)
--------- ---------
Effect of Exchange Rate Changes on Cash and Equivalents 48,592 2,307
--------- ---------
Cash and Equivalents:
Increase during the period 438,197 78,018
Beginning of period 282,224 151,295
--------- ---------
End of period $720,421 $229,313
========= =========
Cash Paid During the Period for Interest $53,697 $64,194
========= =========
Cash Paid During the Period for Income Taxes $300,889 $266,899
========= =========
Liabilities Assumed from Acquisitions $25,694 $93,095
========= =========
ILLINOIS TOOL WORKS INC. and SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) INVENTORIES:
Inventories at September 30, 2002 and December 31, 2001 were as follows:
(In Thousands)
September 30, December 31,
2002 2001
------------ ------------
Raw material $289,545 $287,067
Work-in-process 105,644 101,418
Finished goods 586,760 605,671
-------- --------
$981,949 $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 Nine Months Ended
September 30 September 30
------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $245,536 $199,055 $489,604 $614,589
Foreign currency translation
adjustments, net of tax 61,460 63,198 132,061 15,323
-------- -------- -------- --------
Total comprehensive income $306,996 $262,253 $621,665 $629,912
======== ======== ======== ========
(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. On October 31, 2002, the sales of Precor and West Bend
were completed. An agreement for the sale of Florida Tile is being negotiated
and is expected to be completed in the fourth quarter of 2002. The Company does
not expect to incur a net loss on the disposal of the segment. Results of the
discontinued operations were as follows:
(In Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues $91,831 $94,477 $286,901 $288,081
======== ======== ======== ========
Pro forma operating income $3,713 $3,560 $16,600 $4,887
======== ======== ======== ========
Pro forma income before
income taxes $3,206 $2,800 $13,286 $2,265
Income taxes 1,930 1,033 5,669 637
-------- -------- -------- --------
Pro forma income from
discontinued operations $1,276 $1,767 $7,617 $1,628
======== ======== ======== ========
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 $1,779,000, respectively, for the three months
and nine months ended September 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 $1,536,000 and
$1,544,000 for the nine months ended September 30, 2002 and 2001, respectively.
The net assets of the discontinued operations as of September 30, 2002 and
December 31, 2001 were as follows:
(In Thousands)
Sept. 30, Dec. 31,
2002 2001
---------- ----------
Accounts receivable $55,613 $64,897
Inventory 78,880 71,481
Accounts payable (12,230) (14,258)
Accrued liabilities (40,739) (40,686)
Other, net 17,724 18,747
--------- ---------
Net current assets of
discontinued operations $99,248 $100,181
========= =========
Net plant and equipment $72,875 $79,730
Net goodwill and intangibles 68,200 68,200
Other, net (38,907) (38,201)
--------- ---------
Net noncurrent assets of
discontinued operations $102,168 $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 the first step in the SFAS 142 implementation process, the Company assigned
its recorded 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 as required by the previous accounting standard.
The changes in the carrying amount of goodwill by segment for the nine months
ended September 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 (12,694) 9,938 40,622 34,245 72,111
Impairment
write-offs (51,002) (18,745) (85,977) (98,858) (254,582)
Foreign currency
translation (235) 17,350 -- 23,350 40,465
-------- -------- -------- -------- ----------
Balance,
Sept. 30, 2002 $511,031 $432,766 $808,202 $622,808 $2,374,807
======== ======== ======== ======== ==========
Intangible assets as of September 30, 2002 and December 31, 2001 were as
follows:
(In Thousands)
As of September 30, 2002 As of December 31, 2001
------------------------- ------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Amortizable Intangibles:
Trademarks and brands $9,902 $(2,261) $7,641 $9,339 $(1,685) $7,654
Customer lists and
Relationships 13,971 (4,531) 9,440 28,371 (2,848) 25,523
Patents 86,002 (38,667) 47,335 74,971 (34,762) 40,209
Noncompete agreements 66,954 (27,802) 39,152 63,203 (21,742) 41,461
Other 52,063 (28,828) 23,235 50,239 (25,648) 24,591
Indefinite-lived Intangibles:
Trademarks and brands 93,368 -- 93,368 82,443 -- 82,443
-------- --------- -------- -------- -------- -------
Total Intangible Assets $322,260 $(102,089) $220,171 $308,566 $(86,685)$221,881
======== ========= ======== ======== ======== ========
Amortization expense related to amortizable intangible assets was $5,028,000 and
$15,146,000, respectively, for the three months and nine months ended September
30, 2002, and $5,994,000 and $15,428,000, respectively, for the three months and
nine months ended September 30, 2001.
The estimated amortization expense of intangible assets for the years ending
December 31 is as follows:
(In Thousands)
2002 $20,078
2003 17,693
2004 16,978
2005 15,962
2006 14,518
2007 11,660
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 Nine months ended
September 30, 2001 September 30, 2001
---------------------- ------------------
Per Share Per Share
------------- -------------
Amount Basic Diluted Amount Basic Diluted
------ ----- ------- ------ ----- -------
Income from continuing
operations, as reported $197,881 $0.65 $0.65 $614,74 $2.02 $2.01
Amortization of goodwill
and indefinite-lived
intangible assets 18,653 0.06 0.06 52,848 0.17 0.17
------- -------
Pro forma income from continuing
operations 216,534 0.71 0.71 667,588 2.20 2.18
------- -------
Income (loss) from discontinued
operations,as reported 1,174 0.00 0.0 (151)(0.00) (0.00)
Amortization of goodwill
and indefinite-lived
intangible assets 593 0.00 0.00 1,779 0.01 0.01
------- -------
Pro forma income from
discontinued operations 1,767 0.01 0.01 1,628 0.01 0.01
------- -------
Pro forma net income $218,301 0.72 0.71 $669,216 2.20 2.19
======= =======
(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 Nine Months Ended
September 30 September 30
------------------------- ------------------------
2002 2001 2002 2001
---------- --------- ---------- ----------
Operating revenues $767,873 $748,054 $2,314,118 $2,269,502
Operating income 128,015 130,716 408,108 380,166
Margin % 16.7% 17.5% 17.6% 16.8%
Operating revenues increased 3% in the third quarter mainly as a result of base
business revenues increasing by 3%, with acquisitions having no impact. The base
business revenue increase was mainly due to strong demand in the automotive and
general industrial businesses, offset by lower demand in the commercial
construction end markets. Year-to-date operating revenues increased 2% due to
acquisitions. Base business revenue for the year-to-date period was flat, as
higher revenues from the automotive businesses were offset by weakness in the
polymers, construction, electronic packaging and machined components businesses.
Operating income in the third quarter declined by 2% and margins declined 80
basis points as contributions from the automotive and general industrial
businesses resulting from cost control measures were more than offset by
weakness in the commercial construction end market and increased warranty costs
in the laminate business. For the year-to-date period, operating income
increased 7% and margins increased by 80 basis points mainly due to increased
revenues and reduced costs, primarily in the automotive and general industrial
businesses.
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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $394,659 $341,729 $1,118,244 $1,083,383
Operating income 59,238 40,270 146,093 126,804
Margin % 15.0% 11.8% 13.1% 11.7%
For the third quarter 2002, operating revenue increased 15% due to a 4% increase
in base business, a 2% increase from acquisitions and a 9% contribution from
currency fluctuation. Base business revenues increased for the third quarter in
the construction, automotive, industrial plastics and electronic packaging
businesses. For the nine-month period, revenues increased 3% mainly due to a 2%
increase in both acquisitions and currency fluctuation offset by a 1% decrease
related to divestitures. Year-to-date base business revenue growth was flat as
increases in the construction businesses were offset by declines for the
automotive operations. Operating income increased 47% in the third quarter and
15% year-to-date, with corresponding margin gains of 320 and 140 basis points,
respectively. Income and margin improvements for both periods were primarily
related to the construction, industrial plastics and electronic packaging
businesses. The automotive business also contributed to the income and margin
increases for the third quarter. Currency translation positively impacted income
in the third quarter and year-to-date period by 12% and 3%, respectively.
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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $856,040 $867,243 $2,553,322 $2,588,720
Operating income 145,378 117,627 393,597 356,095
Margin % 17.0% 13.6% 15.4% 13.8%
In 2002, operating revenues declined by 1% for both the third quarter and
year-to-date period, largely due to a continued weakness in customers' capital
spending. Base business revenue declines of 3% and 5% for the three-month and
nine-month periods, respectively, were partially offset by acquisition revenue
increases of 2% and 4%, respectively. Both periods were impacted by base
business declines in the industrial packaging, food equipment, ground support
equipment, and marking and decorating businesses. Operating income increased 24%
in the third quarter and 11% year-to-date mainly due to cost reductions in the
food equipment, industrial packaging, finishing and welding businesses. Margins
increased 340 basis points and 160 basis points, respectively, due to lower
costs in most 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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
---------- --------- ---------- ----------
Operating revenues $440,959 $403,975 $1,231,976 $1,243,580
Operating income 45,821 39,325 128,231 135,002
Margin % 10.4% 9.7% 10.4% 10.9%
Operating revenues increased 9% for the third quarter of 2002 and decreased by
1% for the year-to-date period. The base businesses negatively impacted revenues
by 3% and 6%, respectively, primarily related to declines in the industrial
packaging, food equipment and decorating businesses. Acquisitions increased
revenues by 3% for both periods while divestitures reduced revenues by 1% in the
third quarter and had a neutral impact year-to-date. Translation positively
impacted revenues by 9% and 2% for the respective periods. Operating income
increased 17% for the third quarter of 2002 and decreased 5% year-to-date. For
the third quarter, operating income was favorably impacted by base business
income and margin increases in the food equipment, industrial packaging and
finishing businesses, as well as a 12% increase due to currency fluctuation.
Year-to-date base business income decreased by 6% as a result of income declines
in the industrial packaging, static control and decorating businesses, partially
offset by higher income in the food equipment operations and a 2% increase due
to currency translation. Margins correspondingly decreased by 50 basis points
for the year-to-date period.
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 Nine Months Ended
September 30 September 30
------------------------- ------------------------
2002 2001 2002 2001
---------- --------- ---------- ----------
Operating revenues $34,782 $35,104 $107,419 $116,384
Operating income 18,484 18,542 59,814 64,513
In the third quarter of 2002, operating revenues decreased 1% and income was
flat, due mainly to losses on the sales of commercial mortgage and equipment
leasing assets, offset by revenue and income from the new telecommunications
leveraged leases. For the year-to-date period, revenues decreased 8% and income
decreased 7%, as revenue and income from the telecommunications leases were more
than offset by losses on sales in the commercial mortgage and equipment leasing
portfolios, and a gain on the sale of a property in 2001.
OPERATING REVENUES
The reconciliation of segment operating revenues to total operating revenues is
as follows:
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Engineered Products - North America $767,873 $748,054 $2,314,118 $2,269,502
Engineered Products - International 394,659 341,729 1,118,244 1,083,383
Specialty Systems - North America 856,040 867,243 2,553,322 2,588,720
Specialty Systems - International 440,959 403,975 1,231,976 1,243,580
Leasing and Investments 34,782 35,104 107,419 116,384
--------- --------- --------- ---------
Total segment operating revenues 2,494,313 2,396,105 7,325,079 7,301,569
Intersegment revenues (93,275) (94,937) (284,762) (287,059)
--------- --------- --------- ---------
Total company operating revenues $2,401,038 $2,301,168 $7,040,317 $7,014,510
========= ========= ========= =========
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 Nine months ended
September 30 September 30
-------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Engineered Products - North America $128,015 $130,716 $408,108 $380,166
Engineered Products - International 59,238 40,270 146,093 126,804
Specialty Systems - North America 145,378 117,627 393,597 356,095
Specialty Systems - International 45,821 39,325 128,231 135,002
Leasing and Investments 18,484 18,542 59,814 64,513
------- ------- --------- ---------
Total segment operating income 396,936 346,480 1,135,843 1,062,580
Amortization of goodwill and
indefinite-lived intangible assets -- (21,831) -- (61,786)
------- ------- --------- ---------
Total operating income $396,936 $324,649 $1,135,843 $1,000,794
======= ======= ========= =========
OPERATING EXPENSES
Cost of revenues as a percentage of revenues decreased to 65.5% in the first
nine months of 2002 versus 66.4% in 2001 due to cost improvements in most
businesses. Selling, administrative, and research and development expenses as a
percent of revenues in the nine-month period declined slightly to 18.1% in 2002
versus 18.2% in 2001.
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 the first step in the SFAS 142 implementation process, the Company assigned
its recorded 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 as required by the previous accounting standard.
Amortization expense related to amortizable intangible assets was $5,028,000 and
$15,146,000 for the three months and nine months ended September 30, 2002,
respectively, and $5,994,000 and $15,428,000 for the three months and nine
months ended September 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 decreased to $50.6 million in the first nine months of 2002
from $53.3 million in 2001 primarily as a result of lower commercial paper
borrowings partially offset by interest expense on the $250 million preferred
debt securities issued in April 2002.
OTHER EXPENSE
Other expense was $2.4 million for the first nine months of 2002 versus $2.5
million in 2001, primarily as a result of higher losses on foreign currency in
2002 offset by lower losses on the sale of plant and equipment in 2002 versus
2001.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations of $703.9 million ($2.28 per diluted share) in
the first nine months of 2002 was 14.5% higher than 2001 income from continuing
operations of $614.7 million ($2.01 per diluted share).
Pro forma net income from continuing operations of $703.9 million in the first
nine months of 2002 was 5.4% higher than 2001 pro forma income from continuing
operations of $667.6 million. Net income from continuing operations per diluted
share of $2.28 for the first nine months of 2002 was 4.6% higher than pro forma
net income from continuing operations per diluted share of $2.18 for the first
nine months of 2001.
FOREIGN CURRENCY
The weakening of the U.S. dollar against foreign currencies in the first nine
months of 2002 increased operating revenues for the first nine months of 2002 by
approximately $35 million and increased 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. On October 31 2002,
the sales of Precor and West Bend were completed. An agreement for the sale of
Florida Tile is being negotiated and is expected to be completed in the fourth
quarter of 2002. The Company does not expect to incur a net loss on the disposal
of the segment.
Operating results for the discontinued operations were as follows:
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
2002 2001 2002 2001
---------- --------- ---------- ----------
Operating revenues $91,831 $94,477 $286,901 $288,081
Pro forma operating
income 3,713 3,560 16,600 4,887
Margin % 4.0% 3.8% 5.8% 1.7%
Operating revenues decreased in both periods of 2002 versus 2001 due to lower
small appliance revenues offset by higher sales of specialty exercise equipment.
Operating income and margins increased due to cost improvements in the exercise
equipment and Florida Tile businesses offset by lower income in the small
appliance businesses.
LIQUIDITY AND CAPITAL RESOURCES
Summarized cash flow information was as follows:
(In Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net cash provided by operating activities $379,958 $403,104 $944,144 $921,396
Plus: Proceeds from investments 21,159 20,399 49,329 67,536
Less: Additions to plant and equipment (59,840) (58,028) (192,547) (193,420)
-------- -------- -------- --------
Free operating cash flow $341,277 $365,475 $800,926 $795,512
======== ======== ======== ========
Acquisitions $(13,732)$(226,846)$(105,715)$(535,334)
Purchase of investments (15,378) (53,820) (190,812) (77,639)
Cash dividends paid (67,403) (60,899) (201,839) (182,140)
Net proceeds (repayments) of debt (58,830) 13,954 16,467 235
Other, net 49,148 14,531 119,170 77,384
-------- -------- -------- --------
Net increase in cash and equivalents $235,082 $52,395 $438,197 $78,018
======== ======== ======== ========
Return on average invested capital was as follows:
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Pro forma operating income
after taxes $258,008 $225,212 $738,298 $690,677
======== ======== ======== ========
Invested capital at end of period:
Total debt $1,607,470 $1,964,502 $1,607,470 $1,964,502
Less: Leasing and investment debt (795,529) (819,999) (795,529) (819,999)
Less: Cash (720,421) (229,313) (720,421) (229,313)
--------- --------- --------- ---------
Adjusted net debt 91,520 915,190 91,520 915,190
Total stockholders' equity 6,498,240 5,890,841 6,498,240 5,890,841
--------- --------- --------- ---------
Invested capital $6,589,760 $6,806,031 $6,589,760 $6,806,031
========== ========== ========== ==========
Average invested capital $6,604,859 $6,749,155 $6,610,980 $6,610,876
========== ========== ========== ==========
Return on average invested capital 15.6% 13.3% 14.9% 13.9%
===== ===== ===== =====
Net working capital at September 30, 2002 and December 31, 2001 is summarized as
follows:
(Dollars in Thousands)
Sept. 30, Dec. 31, Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Current Assets:
Cash and equivalents $720,421 $282,224 $438,197
Trade receivables 1,574,888 1,450,029 124,859
Inventories 981,949 994,156 (12,207)
Other 330,828 336,654 (5,826)
Net current assets of
discontinued operations 99,248 100,181 (933)
---------- ---------- ----------
3,707,334 3,163,244 544,090
---------- ---------- ----------
Current Liabilities:
Short-term debt 132,804 313,447 (180,643)
Accounts payable 416,043 367,249 48,794
Accrued expenses 847,831 795,210 52,621
Other 122,201 100,006 22,195
---------- ---------- ----------
1,518,879 1,575,912 (57,033)
---------- ---------- ----------
Net Working Capital $2,188,455 $1,587,332 $601,123
========== ========== ==========
Current Ratio 2.44 2.01
==== ====
Accounts receivable increased as a result of higher sales in the third quarter
of 2002 versus the fourth quarter of 2001.
Accounts payable has increased as a result of the timing of payments in the
third quarter of 2002 versus the fourth quarter of 2001 and the effect of
foreign currency translation. The increase in accrued liabilities is the result
of increases from foreign currency translation, increased warranty reserves and
various timing differences.
Total debt at September 30, 2002 and December 31, 2001 was as follows:
(Dollars in Thousands)
Sept. 30, Dec. 31,
2002 2001
---------- ----------
Short-term debt $132,804 $313,447
Long-term debt 1,474,666 1,267,141
---------- ----------
Total debt $1,607,470 $1,580,588
========== ==========
Total debt to capitalization 19.8% 20.7%
Total debt to capitalization
(excluding Leasing and Investment segment) 12.0% 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 have been 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 703,877
Income from discontinued operations 7,617
Cumulative effect of change in accounting principle (221,890)
Cash dividends declared (205,236)
Exercise of stock options 41,073
Currency translation adjustments 132,061
-----------
Total stockholders' equity, September 30, 2002 $6,498,240
===========
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 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) the unfavorable impact of
foreign currency fluctuations, (4) an interruption in, or reduction in,
introducing new products into the Company's product lines, and (5) an
unfavorable environment for making acquisitions or dispositions, domestic and
international, including adverse accounting or regulatory requirements and
market values of candidates.
Item 4 - Controls and Procedures
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Company's Chairman and Chief Executive Officer and
Senior Vice President and Chief Financial Officer believe the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) are effective in timely alerting the Company's management to material
information required to be included in this Form 10-Q and other Exchange Act
filings.
There were no significant changes in the company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation and there were no significant deficiencies or material
weaknesses which required corrective actions.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No. Description
10(a) ITW Nonqualified Pension Benefits Plan, as amended effective
January 1, 2002.
99(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(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: November 1, 2002 By:/s/ Jon C. Kinney
---------------- ------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer
CERTIFICATIONS
Certification of Principal Executive Officer
I, W. James Farrell, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Illinois Tool Works
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 1, 2002 /s/ W. James Farrell
---------------- ------------------------------------
W. James Farrell
Chairman and Chief Executive Officer
Certification of Principal Financial Officer
I, Jon C. Kinney, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Illinois Tool Works
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 1, 2002 /s/ Jon C. Kinney
---------------- ------------------------------------
Jon C. Kinney, Senior Vice President
and Chief Financial Officer