How did ITW's 1998 growth break down between acquisitions and the core business?

Acquisitions were the main driver. In Engineered Products-North America, acquisitions contributed 8 points of the 11% revenue increase while base growth was 5%. In Specialty Systems-International, acquisitions (mainly Signode packaging and stretch film) contributed 19 points versus 1% base growth. Specialty Systems-North America was the exception, with base revenues down 2% and acquisitions adding 4%. Overall, management attributed most of the revenue increase to higher volume rather than price.

What risks does the Leasing and Investments segment pose to investors?

The segment's $320.2 million net investment in mortgage-related assets (net of nonrecourse notes) depends on about $26 million of annual net cash flow and on ultimate disposition proceeds. ITW reduced its exposure with ten-year swaps with an Aaa-rated counterparty and collateral rights, and it believes its share of disposition proceeds will cover the remaining investment, but it explicitly states that recovery is not assured. The segment also carries $698 million of nonrecourse notes and $259 million of allocated corporate debt, so its results and balance sheet are sensitive to commercial real estate and interest rate conditions.

Is ITW's balance sheet still strong after the 1998 acquisitions?

Yes, by most measures. Stockholders' equity increased to $3.34 billion, the current ratio was 1.50, and interest expense fell to $14.2 million from $19.4 million. However, total debt rose to $1.35 billion from $1.15 billion, and short-term debt increased to $407 million because of commercial paper used for acquisitions. The company stated it had additional debt capacity to fund larger acquisitions, and it had a $350 million unused credit line.

What did ITW disclose about Year 2000 readiness and its costs?

ITW reported that about 70% of its business units had completed testing and remediation by the end of 1998, with substantially all expected to finish by June 30, 1999 and remaining non-critical issues by year-end 1999. Total estimated program costs were about $34 million for 1997 through 1999, roughly two-thirds of which had been incurred by December 31, 1998. The company noted that its decentralized structure and mostly non-embedded-chip products limit risk, but it is still monitoring critical suppliers and customers.

What does the 1998 cash flow picture look like for shareholders?

Operating cash flow was $721 million in 1998, compared with $660 million in 1997. Capital expenditures were $208 million and dividends paid were $127 million, leaving free cash flow of roughly $513 million before acquisitions. Most of the remaining cash went to acquisitions of $752 million, which was partly financed with net debt proceeds of $199 million. Cash and equivalents fell to $93 million from $186 million.

ITW 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

Illinois Tool Works (ITW) closed 1998 with record results: operating revenues rose 8.2% to $5.65 billion^a, operating income rose 16.4% to $1.08 billion, and net income climbed 14.6% to $672.8 million ($2.67 diluted EPS).

Growth was driven substantially by acquisitions, which added roughly 8 points to Engineered Products-North America revenue and 19 points to Specialty Systems-International, while base-business growth was modest and North American industrial markets slowed. Operating margin expanded to 19.1% of revenues, supported by cost reductions and a falling ratio of selling, administrative and R&D expenses to revenue (15.8% vs. 16.7%). The balance sheet grew substantially, with total assets of $6.12 billion^b and stockholders' equity of $3.34 billion, but the company spent heavily on acquisitions ($752 million in 1998) and funded them partly with commercial paper, lifting short-term debt to $407 million and total debt to $1.35 billion.

Excluding the Leasing and Investments segment, debt-to-capitalization rose to 11.1% from 4.6%. Free cash flow was healthy, with operating cash flow of $721 million^c against $208 million of capital expenditures, and dividends rose 19% to $0.51 per share paid. The Leasing and Investments segment is a notable risk area for investors.

It holds about $1.0 billion^d of commercial mortgage-related assets financed by nonrecourse notes, and its net assets are offset by a ten-year swap structure and a $26 million annual cash flow arrangement. ITW's management believes the swap counterparty's Aaa rating and collateral mitigate the risk, but recovery of the $320 million net investment is not assured. Year 2000 remediation was about 70% complete at year-end 1998, with a total estimated cost of roughly $34 million.

02—Key points

Key Highlights

Operating revenues increased 8.2% to $5.65 billion in 1998, with acquisitions contributing a significant share of growth while base-business growth was modest
Operating income rose 16.4% to $1.08 billion and operating margin improved to 19.1% from 17.8%, reflecting cost reductions and lower SG&A intensity
Net income of $672.8 million grew 14.6%; diluted EPS was $2.67 versus $2.33 in 1997, though foreign currency reduced diluted EPS by about 5 cents
Acquisitions totaled $752 million in 1998, funded largely by commercial paper, lifting total debt to $1.35 billion and debt-to-capitalization (ex-Leasing) to 11.1% from 4.6%
The Leasing and Investments segment carries roughly $1.5 billion in identifiable assets, including about $1.0 billion of mortgage-related assets with nonrecourse financing, a contingent risk area
Dividends paid rose 19% to $0.51 per share, with a stated payout objective of 25-30% of three-year average net income
Operations span over 400 units in 35 countries, with about 36% of operating revenues from international subsidiaries and 29,200 employees

03—Questions

Frequently Asked Questions

How did ITW's 1998 growth break down between acquisitions and the core business?
Acquisitions were the main driver. In Engineered Products-North America, acquisitions contributed 8 points of the 11% revenue increase while base growth was 5%. In Specialty Systems-International, acquisitions (mainly Signode packaging and stretch film) contributed 19 points versus 1% base growth. Specialty Systems-North America was the exception, with base revenues down 2% and acquisitions adding 4%. Overall, management attributed most of the revenue increase to higher volume rather than price.
What risks does the Leasing and Investments segment pose to investors?
The segment's $320.2 million net investment in mortgage-related assets (net of nonrecourse notes) depends on about $26 million of annual net cash flow and on ultimate disposition proceeds. ITW reduced its exposure with ten-year swaps with an Aaa-rated counterparty and collateral rights, and it believes its share of disposition proceeds will cover the remaining investment, but it explicitly states that recovery is not assured. The segment also carries $698 million of nonrecourse notes and $259 million of allocated corporate debt, so its results and balance sheet are sensitive to commercial real estate and interest rate conditions.
Is ITW's balance sheet still strong after the 1998 acquisitions?
Yes, by most measures. Stockholders' equity increased to $3.34 billion, the current ratio was 1.50, and interest expense fell to $14.2 million from $19.4 million. However, total debt rose to $1.35 billion from $1.15 billion, and short-term debt increased to $407 million because of commercial paper used for acquisitions. The company stated it had additional debt capacity to fund larger acquisitions, and it had a $350 million unused credit line.
What did ITW disclose about Year 2000 readiness and its costs?
ITW reported that about 70% of its business units had completed testing and remediation by the end of 1998, with substantially all expected to finish by June 30, 1999 and remaining non-critical issues by year-end 1999. Total estimated program costs were about $34 million for 1997 through 1999, roughly two-thirds of which had been incurred by December 31, 1998. The company noted that its decentralized structure and mostly non-embedded-chip products limit risk, but it is still monitoring critical suppliers and customers.
What does the 1998 cash flow picture look like for shareholders?
Operating cash flow was $721 million in 1998, compared with $660 million in 1997. Capital expenditures were $208 million and dividends paid were $127 million, leaving free cash flow of roughly $513 million before acquisitions. Most of the remaining cash went to acquisitions of $752 million, which was partly financed with net debt proceeds of $199 million. Cash and equivalents fell to $93 million from $186 million.

04—Continue

← View all 10-K filings