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ILLINOIS TOOL WORKS INC Annual Report, Year Ended Dec 31, 1997

Filing Date
Filed March 31, 1998
Period End
December 31, 1997
Security
ITW
In the record · 2016–202610-K1110-Q338-K86

ITW filed 11 annual reports (10-K), 33 quarterly reports (10-Q) and 86 current reports (8-K) between 2016 and 2026.

  1. FY2017 annual report10-K · Feb ’18Feb ’18
  2. Leadership change8-K · Feb ’21Feb ’21
  3. Leadership change8-K · Feb ’23Feb ’23
  4. Material agreement8-K · Feb ’25Feb ’25

01—Abstract

Summary

Summary of the 10-K filed March 31, 1998. Cited figures are marked; the original filing is the authoritative source.

Illinois Tool Works Inc. (ITW) reported a strong 1997 with operating revenues of $5.22 billiona, up 4.5% from $4.997 billion in 1996, and net income of $587.0 million ($2.33 per diluted share), up 20.7% from $486.3 million.

Operating income rose to $927.2 millionb from $800.6 million, and the operating margin improved to 17.8% from 16.0%. Management attributed the gains largely to higher volume, lower manufacturing costs, a leaner administrative structure (selling, administrative and R&D expenses fell to 16.7% of revenues from 17.5%), and acquisitions, partly offset by a roughly $142 million revenue headwind from a stronger U.S. dollar. The Engineered Components and Industrial Systems and Consumables segments drove the core results, while the Leasing and Investments segment has grown into a material, higher-risk balance-sheet business.

The balance sheet is notable for the expansion of the Leasing and Investments segment. Through three December mortgage-related transactions (1995-1997), ITW took on nonrecourse notes totaling roughly $720 millionc and assets of about $1.0 billion in mortgage-related investments, backed by ten-year swap arrangements with an Aaa-rated counterparty. Excluding this segment, total debt to total capitalization fell to 4.6% from 15.9%, underscoring the strength of the industrial core.

Stockholders' equity reached $2.8 billiond, and operating cash flow was $660 million. Dividends paid rose 23% to $0.43 per share, consistent with a 25-30% payout objective. For investors, the key questions are the quality of the core industrial earnings and the recoverability of the mortgage portfolio.

The filing indicates the Company expects to recover its roughly $298 million net investment in these assets, though it states no assurance can be given. Other items include the 1996 Azon acquisition, the sale of several businesses, and a Year 2000 program that management does not expect to be material in cost. Financial information is largely incorporated by reference to the 1997 Annual Report.

02—Key points

Key Highlights

  1. Net income rose 20.7% to $587.0 million ($2.33 diluted EPS) in 1997, versus $486.3 million ($1.95 diluted EPS) in 1996.
  2. Operating revenues grew 4.5% to $5.22 billion, with operating margin expanding to 17.8% from 16.0%.
  3. Selling, administrative and R&D expenses declined to 16.7% of revenues from 17.5%, reflecting a company-wide cost reduction focus.
  4. Excluding the Leasing and Investments segment, total debt to total capitalization fell to 4.6% from 15.9%, a conservative core balance sheet.
  5. The Leasing and Investments segment holds about $1.0 billion in mortgage-related assets funded by roughly $720 million of nonrecourse debt, a material risk area.
  6. Operating cash flow of $660 million and a 23% increase in dividends paid per share ($0.43 vs. $0.35) indicate strong cash generation and shareholder returns.
  7. A two-for-one stock split was approved in May 1997, and stockholders' equity reached $2.8 billion.

03—Questions

Frequently Asked Questions

  1. What drove the increase in ITW's 1997 earnings?

    Net income grew 20.7% to $587.0 million. The increase came from higher sales volume, lower manufacturing costs (cost of revenues fell to 64.7% of revenues from 65.7%), lower administrative expense ratios, and acquisitions. A stronger U.S. dollar reduced revenues by $142 million and net income by roughly 4 cents per share.

  2. How significant is the Leasing and Investments segment to ITW's risk profile?

    It is material and distinct from the industrial core. The segment's net assets were $108 million, against mortgage-related investments of about $1.0 billion funded by nonrecourse notes of $720 million. ITW entered into ten-year swaps to reduce credit and interest-rate risk, and the Company states it expects to recover its roughly $298 million net investment, but no assurance is given that the full amount will be recovered.

  3. Is ITW's debt level a concern for investors?

    Excluding the Leasing and Investments segment, debt is low, with total debt to total capitalization at 4.6% at year-end 1997, down from 15.9%. Consolidated long-term debt was $854 million, of which $720 million is nonrecourse debt tied to the mortgage investments and does not have recourse to ITW's general assets.

  4. What are the main markets and businesses behind ITW's revenue?

    The Engineered Components segment (42% of revenues) serves automotive (39% of its sales), construction and general industrial markets with components and fasteners. The Industrial Systems and Consumables segment (56%) serves food and beverage, construction, automotive and general industrial markets with machinery and consumables. Roughly 36% of operating revenues came from international subsidiaries.

  5. What should investors watch for going forward?

    Key items include the performance and recovery of the mortgage-related portfolio, the European currency headwind, continued margin expansion in the industrial segments, the Year 2000 remediation expected to be largely complete by end-1998, and the Azon disposition and related acquisitions. Dividend growth is guided to a 25-30% payout of the three-year average net income.

04—Continue

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