ITEM 1. BUSINESS
GENERAL
Illinois Tool Works Inc. (the "Company") was founded in 1912 and incorporated in 1915. The Company manufactures and markets a variety of products and systems that provide specific, problem-solving solutions for a diverse customer base worldwide. The Company has more than 400 operations in 35 countries. The Company's business units are divided into five segments: Engineered Products-North America, Engineered Products-International, Specialty Systems-North America, Specialty Systems-International, and Leasing and Investments. Businesses in the Engineered Products-North America segment are located in North America and manufacture short lead-time components and fasteners, and specialty products such as adhesives, resealable packaging and electronic component packaging. Businesses in the Engineered Products-International segment are located outside North America and manufacture short lead-time components and fasteners, and specialty products such as electronic component packaging and adhesives. Businesses in the Specialty Systems-North America segment are located in North America and produce longer lead-time machinery and related consumables, and specialty equipment for applications such as industrial spray coating, quality measurement and static control. Businesses in the Specialty Systems-International segment are located outside North America and manufacture longer lead-time machinery and related consumables, and specialty equipment for industrial spray coating and other applications. The Leasing and Investment segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of equipment, properties and property developments, and affordable housing.
In early 1996, the Company acquired all of the voting stock of Hobart Brothers Company ("Hobart"), a manufacturer of welding products, in exchange for shares of ITW voting common stock. As a result, the Hobart acquisition has been accounted for as a pooling of interests in conformity with Generally Accepted Accounting Principles, specifically paragraphs 46 through 48 of Accounting Principles Board Opinion ("APB") No. 16. Accordingly, the results of operations for Hobart have been included in the Statement of Income as of the beginning of 1996. The impact of Hobart on consolidated operating revenues, net income and net income per share was not significant. Therefore, the 1995 financial statements have not been restated to reflect the acquisition of Hobart.
In late 1996, the Company acquired all of the outstanding common stock of Azon Limited ("Azon"), an Australian manufacturer of strapping and other industrial products. The acquisition has been accounted for as a purchase, and accordingly, the acquired net assets have been recorded at their estimated fair values at the date of acquisition. The results of operations have been included in the Statement of Income from the acquisition date, except for the Azon businesses which were expected to be sold, which were not consolidated at December 31, 1996. During 1997, the Company disposed of the majority of the Azon businesses which were expected to be sold. Based on the assumption that the Azon acquisition had occurred on January 1, 1996 or January 1, 1995, the Company's pro forma operating revenues, net income and net income per share would not have been significantly different.
During the five-year period ending December 31, 1998, the Company acquired and disposed of numerous other operations which did not materially impact consolidated results.
CURRENT YEAR DEVELOPMENTS
Refer to pages 16 through 21, Management's Discussion and Analysis, in the Company's 1998 Annual Report to Stockholders.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Segment and geographic data are included on pages 16 through 18 and 36 through 38 of the Company's 1998 Annual Report to Stockholders.
The principal markets served by the Company's four manufacturing segments are as follows:
Operating results of the segments are described on pages 16 through 18 and 36 through 38 of the Company's 1998 Annual Report to Stockholders.
Most of the Company's businesses distribute their products directly to industrial manufacturers and through independent distributors.
BACKLOG
Backlog generally is not considered a significant factor in the Company's businesses as relatively short delivery periods and rapid inventory turnover are characteristic of many of its products.
Backlog by manufacturing segment as of December 31, 1998 and 1997 is summarized as follows:
Backlog orders scheduled for shipment beyond calendar year 1999 were not material for any manufacturing segment as of December 31, 1998.
The information set forth below is equally applicable to all segments of the Company unless otherwise noted:
COMPETITION
The Company's global competitive environment is complex because of the wide diversity of products the Company manufactures and the markets it serves. Depending on the product or market, the Company may compete with a few other companies or with many others, some of which may be the Company's own licensees.
The Company is a leading producer of plastic and metal components, fasteners and assemblies; industrial fluids and adhesives; tooling for specialty applications; welding products; packaging machinery and related
consumables; industrial spray coating and static control equipment and systems; and quality measurement equipment and systems.
RAW MATERIALS
The Company uses raw materials of various types, primarily metals and plastics that are available from numerous commercial sources. The availability of materials and energy has not resulted in any business interruptions or other major problems, nor are any such problems anticipated.
RESEARCH AND DEVELOPMENT
The Company's growth has resulted from developing new and improved products, broadening the application of established products, continuing efforts to improve and develop new methods, processes and equipment, and from acquisitions. Many new products are designed to reduce customers' costs by eliminating steps in their manufacturing processes, reducing the number of parts in an assembly, or by improving the quality of customers' assembled products. Typically, the development of such products is accomplished by working closely with customers on specific applications. Identifiable research and development costs are set forth on page 25 of the Company's 1998 Annual Report to Stockholders. Research and development expenditures in 1998 in local currencies were consistent with 1997, however U.S. dollar expenditures decreased in 1998 as a result of the negative impact of foreign currencies against the U.S. dollar.
The Company owns approximately 1,975 unexpired United States patents covering articles, methods and machines. Many counterparts of these patents have also been obtained in various foreign countries. In addition, the Company has approximately 347 applications for patents pending in the United States Patent Office, but there is no assurance that any patent will be issued. The Company maintains an active patent department for the administration of patents and processing of patent applications.
The Company believes that many of its patents are valuable and important. Nevertheless, the Company credits its leadership in the markets it serves to engineering capability; manufacturing techniques, skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers.
TRADEMARKS
Many of the Company's products are sold under various trademarks owned or licensed by the Company. Among the most significant are: ITW, Apex, Buildex, Deltar, Devcon, DeVilbiss, Fastex, Hi-Cone, Hobart, Keps, Magnaflux, Miller, Minigrip, Newtec, Oxo, Paktron, Paslode, Powcon, Ramset, Ransburg, Red Head, Shakeproof, Signode, Teks, Tenax and Zip-Pak.
ENVIRONMENTAL
The Company believes that its plants and equipment are in substantial compliance with applicable environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company's capital expenditures, competitive position, financial position or results of operations.
Various legislative and administrative regulations concerning environmental issues have become effective or are under consideration in many parts of the world relating to manufacturing processes, and the sale or use of certain products. To date, such developments have not had a substantial adverse impact on the Company's sales or earnings. The Company has made considerable efforts to develop and sell environmentally compatible products resulting in new and expanding marketing opportunities.
EMPLOYEES
The Company employed approximately 29,200 persons as of December 31, 1998 and considers its employee relations to be excellent.
INTERNATIONAL
The Company's international operations include subsidiaries, joint ventures and licensees in 35 countries on six continents. These operations serve such markets as automotive, food and beverage, construction, general industrial, industrial capital goods, electronics, paper products and others on a worldwide basis. The Company's international subsidiaries contributed approximately 36% of operating revenues in both 1998 and 1997.
Refer to pages 16 through 19 and 36 through 38 in the Company's 1998 Annual Report to Stockholders for additional information on international activities. International operations are subject to certain risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates.
YEAR 2000
Refer to page 21 in the Company's 1998 Annual Report to Stockholders for discussion of the effect on the Company of the Year 2000 computer issue.
FORWARD-LOOKING STATEMENTS
Refer to page 21 of the Company's 1998 Annual Report to Stockholders for information on the risks associated with forward-looking statements within this document.
EXECUTIVE OFFICERS
Executive Officers of the Company as of March 25, 1999:
Except for Messrs. Hansen, Kinney, Martin, Speer, Sutherland, and Zentmeyer, each of the foregoing officers has been employed by the Company in various elected executive capacities for more than five years. The executive officers of the Company serve at the pleasure of the Board of Directors. Mr. Hansen joined the Company in 1980 and has held various management positions within the Company's automotive metal fasteners and components businesses. Mr. Kinney joined the Company in 1973 and has served as Senior Vice President and Controller, Operations, and Group Controller of several of the Company's businesses. Mr. Martin joined the Company in 1991 and has held several management positions in the welding businesses.
Mr. Speer joined the Company in 1978 and has held various sales, marketing and general management positions within the construction businesses. Mr. Sutherland joined the Company in 1993 after serving as a senior tax manager with Ernst & Young and has served the Company in various capacities, most recently as Vice President of Leasing and Investments. Mr. Zentmeyer joined Signode Corporation (which was acquired by the Company in 1986) in 1968 and has held various management positions in the industrial packaging businesses.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1998 the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:
The principal plants outside of the U.S. are in Australia, Belgium, Canada, France, Germany, Ireland, India, Italy, Japan, Malaysia, Spain, Sweden, Switzerland and the United Kingdom.
The Company's properties are primarily of steel, brick or concrete construction and are maintained in good operating condition. Productive capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds productive capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the businesses.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference to page 39 of the Company's 1998 Annual Report to Stockholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
This information is incorporated by reference to pages 40 and 41 of the Company's 1998 Annual Report to Stockholders.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information is incorporated by reference to pages 16 through 21 of the Company's 1998 Annual Report to Stockholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is incorporated by reference to page 20 and 21 of the Company's 1998 Annual Report to Stockholders.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and report thereon of Arthur Andersen LLP dated January 27, 1999, as found on pages 22 through 38 and supplementary data on page 39 of the Company's 1998 Annual Report to Stockholders, are incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding the Directors of the Company is incorporated by reference to the information under the caption "Election of Directors" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
Information regarding the Executive Officers of the Company can be found in Part I of this Annual Report on Form 10-K on pages 4 and 5.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the information under the caption "Executive Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the information under the caption "Ownership of ITW Stock" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Additional information is incorporated by reference to the information under the captions "Director Compensation" and "Executive Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The financial statements and report thereon of Arthur Andersen LLP dated January 27, 1999, as found on pages 22 through 39 of the Company's 1998 Annual Report to Stockholders, are incorporated by reference.
(2) Financial Statement Schedule
The following supplementary financial data should be read in conjunction with the financial statements and notes thereto as presented in the Company's 1998 Annual Report to Stockholders. Schedules not included with this supplementary financial data have been omitted because they are not applicable, immaterial or the required information is included in the financial statements or the related notes to financial statements.
(3) Exhibits
(i) See the Exhibit Index on page 11 of this Form 10-K.
(ii) Pursuant to Regulation S-K, Item 601(b)(4)(iii), the Company has not filed with Exhibit 4 any debt instruments for which the total amount of securities authorized thereunder are less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis as of December 31, 1998, with the exception of the agreement related to the 5 7/8% and 5 3/4% Notes, which are filed with Exhibit 4. The Company agrees to furnish a copy of the agreements related to the debt instruments which have not been filed with Exhibit 4 to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended December 31, 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Illinois Tool Works Inc.:
We have audited, in accordance with generally accepted auditing standards, the financial statements included in Illinois Tool Works Inc.'s 1998 Annual Report to Stockholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois, January 27, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 29th day of March, 1999.
ILLINOIS TOOL WORKS INC.
By /s/ W. JAMES FARRELL ------------------------------------ W. James Farrell Director, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this 29th day of March, 1999.
By /s/ W. JAMES FARRELL ----------------------------------- (W. James Farrell as Attorney-in-Fact)
Original powers of attorney authorizing W. James Farrell to sign this Annual Report on Form 10-K and amendments thereto on behalf of the above-named directors of the registrant have been filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K (Exhibit 24).
SCHEDULE II
ILLINOIS TOOL WORKS INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
- --------------- (1) Includes the effects of foreign currency translation and other reserve adjustments.
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K