10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 1, 2000. 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 1-5224 The Stanley Works (Exact name of registrant as specified in its charter) CONNECTICUT 06-0548860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Stanley Drive New Britain, Connecticut 06053 (Address of principal executive offices) (Zip Code) (860) 225-5111 (Registrant's telephone number) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: shares of the company's Common Stock ($2.50 par value) were outstanding 86,252,918 as of August 11, 2000. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, Millions of Dollars Except Per Share Amounts)
Second Quarter Six Months 2000 1999 2000 1999 ------- ------- --------- --------- Net Sales $ 702.8 $ 685.5 $ 1,398.2 $ 1,369.2 Costs and Expenses Cost of sales 447.1 455.1 885.1 906.5 Selling, general and administrative 168.1 182.2 340.0 355.3 Interest - net 7.2 7.7 13.7 14.9 Other - net 3.7 2.4 9.7 7.0 ------- ------- --------- --------- 626.1 647.4 1,248.5 1,283.7 ------- ------- --------- --------- Earnings before income taxes 76.7 38.1 149.7 85.5 Income Taxes 26.1 12.8 50.9 29.9 ------- ------- --------- --------- Net Earnings $ 50.6 $ 25.3 $ 98.8 $ 55.6 ======= ======= ========= ========= Net Earnings Per Share of Common Stock Basic $ 0.58 $ 0.28 $ 1.12 $ 0.62 ======= ======= ========= ========= Diluted $ 0.58 $ 0.28 $ 1.12 $ 0.62 ======= ======= ========= ========= Dividends per share $ 0.22 $ 0.215 $ 0.44 $ 0.43 ======= ======= ========= ========= Average shares outstanding (in thousands) Basic 87,614 89,447 88,293 89,439 ======= ======= ========= ========= Diluted 87,827 89,831 88,526 89,751 ======= ======= ========= =========
See notes to consolidated financial statements. -1- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, Millions of Dollars)
July 1 January 1 2000 2000 -------- -------- ASSETS Current Assets Cash and cash equivalents $ 83.0 $ 88.0 Accounts and notes receivable 564.1 546.1 Inventories 399.9 381.2 Other current assets 71.7 75.7 -------- -------- Total Current Assets 1,118.7 1,091.0 Property, plant and equipment 1,228.7 1,208.0 Less: accumulated depreciation (716.9) (687.4) -------- -------- 511.8 520.6 Goodwill and other intangibles 178.8 185.2 Other assets 101.2 93.8 -------- -------- $ 1,910.5 $ 1,890.6 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Short-term borrowings $ 283.7 $ 145.3 Current maturities of long-term debt 5.6 11.7 Accounts payable 220.4 225.0 Accrued expenses 267.6 311.0 -------- -------- Total Current Liabilities 777.3 693.0 Long-Term Debt 252.9 290.0 Other Liabilities 175.9 172.2 Shareowners' Equity Common stock 230.9 230.9 Retained earnings 973.0 926.9 Accumulated other comprehensive loss (116.7) (99.2) ESOP debt (198.5) (202.2) -------- -------- 888.7 856.4 Less: cost of common stock in treasury 184.3 121.0 -------- -------- Total Shareowners' Equity 704.4 735.4 -------- -------- $ 1,910.5 $ 1,890.6 ======== ======== See notes to consolidated financial statements.
-2- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, Millions of Dollars)
Second Quarter Six Months 2000 1999 2000 1999 ------ ------ ------ ------ Operating Activities Net earnings $ 50.6 $ 25.3 $ 98.8 $ 55.6 Depreciation and amortization 20.4 21.2 44.1 45.3 Other non-cash items (0.1) 9.4 7.1 13.8 Changes in operating assets and liabilities (20.5) (0.2) (102.1) (54.5) ------ ------ ------ ------ Net cash provided by operating activities 50.4 55.7 47.9 60.2 Investing Activities Capital expenditures (12.0) (20.1) (27.4) (40.5) Capitalized software (0.8) (5.6) (1.4) (10.2) Proceeds from sales of assets 2.8 9.5 3.5 14.9 Other (7.9) (2.2) (11.4) (4.1) ------ ------ ------ ------ Net cash used by investing activities (17.9) (18.4) (36.7) (39.9) Financing Activities Payments on long-term borrowings (28.9) (2.3) (32.6) (156.0) Proceeds from long-term borrowings - - - 120.9 Net short-term borrowings 4.6 (7.5) 136.2 34.7 Proceeds from issuance of common stock 2.2 3.4 3.2 5.0 Purchase of common stock for treasury (34.4) (6.7) (79.4) (8.9) Cash dividends on common stock (19.2) (19.2) (38.7) (38.3) ------ ------ ------ ------ Net cash used by financing activities (75.7) (32.3) (11.3) (42.6) Effect of Exchange Rate Changes on Cash (2.7) (0.7) (4.9) (3.0) ------ ------ ------ ------ Increase (Decrease) in Cash and Cash Equivalents (45.9) 4.3 (5.0) (25.3) Cash and Cash Equivalents, Beginning of Period 128.9 80.5 88.0 110.1 ------ ------ ------ ------ Cash and Cash Equivalents, End of Second Quarter $ 83.0 $ 84.8 $ 83.0 $ 84.8 ====== ====== ====== ====== See notes to consolidated financial statements.
-3- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Unaudited, Millions of Dollars)
Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners' Stock Earnings (Loss) Debt Stock Equity --------------------------------------------------------- Balance Jan. 1, 2000 $230.9 $926.9 $(99.2) $(202.2) $(121.0) $735.4 Comprehensive income: Net earnings 98.8 Foreign currency translation (17.5) Total comprehensive income 81.3 Cash dividends declared (38.7) (38.7) Net common stock activity (14.7) (63.3) (78.0) Tax benefit related to stock options 0.1 0.1 ESOP debt 3.7 3.7 ESOP tax benefit 0.6 0.6 --------------------------------------------------------- Balance July 1, 2000 $230.9 $973.0 $(116.7) $(198.5) $(184.3) $704.4 ========================================================= Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners' Stock Earnings (Loss) Debt Stock Equity --------------------------------------------------------- Balance Jan. 2, 1999 $230.9 $867.2 $(84.6) $(213.2) $(130.9) $669.4 Comprehensive income: Net earnings 55.6 Foreign currency translation (12.7) Total comprehensive income 42.9 Cash dividends declared (38.3) (38.3) Net common stock activity (4.4) 4.0 (0.4) Tax benefit related to stock options 0.4 0.4 ESOP debt 5.5 5.5 ESOP tax benefit 1.4 1.4 --------------------------------------------------------- Balance July 3, 1999 $230.9 $881.9 $(97.3) $(207.7) $(126.9) $680.9 =========================================================
See notes to consolidated financial statements. -4- THE STANLEY WORKS AND SUBSIDIARIES BUSINESS SEGMENT INFORMATION (Unaudited, Millions of Dollars)
Second Quarter Six Months 2000 1999 2000 1999 ------- ------- --------- --------- INDUSTRY SEGMENTS Net Sales Tools $ 547.5 $ 533.2 $ 1,091.2 $ 1,058.6 Doors 155.3 152.3 307.0 310.6 ------- ------- --------- --------- Consolidated $ 702.8 $ 685.5 $ 1,398.2 $ 1,369.2 ======= ======= ========= ========= Operating Profit Tools $ 76.4 $ 74.1 $ 150.5 $ 140.6 Doors 11.2 8.8 22.6 21.7 ------- ------- --------- --------- 87.6 82.9 173.1 162.3 Restructuring-related transition and other non-recurring costs - (34.7) - (54.9) Interest-net (7.2) (7.7) (13.7) (14.9) Other-net (3.7) (2.4) (9.7) (7.0) ------- ------- --------- ---------- Earnings Before Income Taxes $ 76.7 $ 38.1 $ 149.7 $ 85.5 ======= ======= ========= ========== GEOGRAPHIC NET SALES United States $ 509.7 $ 485.3 $ 1,008.2 $ 970.1 Other Americas 53.2 52.7 103.1 99.2 Europe 113.9 124.5 237.0 253.7 Asia 26.0 23.0 49.9 46.2 ------- ------- --------- ---------- Consolidated $ 702.8 $ 685.5 $ 1,398.2 $ 1,369.2 ======= ======= ========= ==========
See notes to consolidated financial statements. -5- THE STANLEY WORKS AND SUBSIDIARIES NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 1, 2000 NOTE A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included. For further information, refer to the consolidated financial statements and footnotes included in the company's Annual Report on Form 10-K for the year ended January 1, 2000. NOTE B - Earnings Per Share Computation The following table reconciles the weighted average shares outstanding used to calculate basic and diluted earnings per share.
Second Quarter Six Months 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net earnings - basic and diluted $ 50.6 $ 25.3 $ 98.8 $ 55.6 ========== ========== ========== ========== Basic earnings per share - weighted average shares 87,613,634 89,446,907 88,292,523 89,439,257 Dilutive effect of employee stock options 213,273 383,664 233,508 311,322 ---------- ---------- ----------- ---------- Diluted earnings per share - weighted average shares 87,826,907 89,830,571 88,526,031 89,750,579 ========== ========== =========== ==========
NOTE C - Inventories The components of inventories at the end of the second quarter of 2000 and at year-end 1999, in millions of dollars, are as follows:
July 1 January 1 2000 2000 ------ ------ Finished products $ 285.0 $ 269.0 Work in process 56.1 48.3 Raw materials 58.8 63.9 ------ ------ $ 399.9 $ 381.2 ====== ======
-6- NOTE D - Cash Flow Information Interest paid during the second quarters of 2000 and 1999 amounted to $9.0 million and $8.7 million, respectively. Interest paid for the six months of 1999 and 1998 amounted to $21.3 million and $17.4 million, respectively. Income taxes paid during the second quarters of 2000 and 1999 were $32.7 million and $13.0 million, respectively. Income taxes paid for the six months of 2000 and 1999 were $44.7 million and $21.0 million, respectively. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales were $703 million, up 3% from $686 million in the same quarter last year. The increase was driven by an overall unit volume increase of 5% which was partially offset by a 1% reduction in sales from unfavorable pricing pressures and a 1% reduction from the effect of foreign currency translation. The company experienced strong sales volume growth in U.S. consumer hand tools, construction fastening products, and entry doors products. These increases were partially offset by the lingering effects of a major U.S. retail customer's 1999 bankruptcy on the Hardware business. The reduction in sales from foreign currency translation was primarily due to the weakening European currencies during the quarter. Net sales were $1,398 million for the first six months of 2000, a 2% increase over the same period last year. Sales growth for the six month period was comparable to growth in the second quarter with 4% unit volume growth being offset by a 1% decline from foreign currency translation and pricing. Financial results for the first six months of 1999 include transition expenses related to the company's restructuring initiatives. These costs are classified as period operating expenses within cost of sales or selling, general and administrative expense. They include the costs of moving production equipment, operating duplicate facilities while transferring production or distribution, consulting costs incurred in planning and implementing changes, and other types of costs that have been incurred to facilitate restructuring. Management judgment was used to determine which costs should be classified as transition costs based on whether the costs were unusual in nature, were incurred only because of restructuring initiatives and were expected to cease when the transition activities ended. In addition, the company incurred costs to remediate its computer and related systems so that these systems would function properly with regard to date issues related to Y2K. Because the presence of restructuring charges, restructuring-related transition costs and non-recurring Y2K remediation costs obscure the underlying trends within the company's business, the company also provides information on its results for the second quarter and first six months of 1999 excluding these identifiable costs. These pro forma or "core" results are the basis of business segment information. The narrative regarding results of operations has also been expanded to provide information as to the effects of these items on each financial statement category. Effective in the third quarter 1999, these costs were no longer disclosed separately as they were significantly lower than amounts previously incurred. The company reported gross profit of $256 million, or 36.4% of net sales in the second quarter. This represented an increase of 11% from $230 million, or 33.6% of net sales, reported in the second quarter of 1999. Included in the second quarter cost of sales in 1999 were $14 million of restructuring-related transition costs, primarily for plant rationalization activities. Core gross profits for 1999 were 35.7% of net sales. The company reported gross profit of $513 million, or 36.7% of net sales for the first six months of 2000 compared to 33.8% of net sales in 1999. Included in the cost of sales in 1999 for the six month period were $20 million of restructuring-related transition costs, primarily for plant rationalization activities. Core gross profits were 35.3% of net sales during that six month period. These significant improvements in gross profits are attributable to a combination of improved cost controls in operations, the benefits of the company's 1997 restructuring, higher unit volumes and continued progress on purchased material costs despite inflationary pressures. -8- Selling, general and administrative expenses were $168 million, or 23.9% of net sales, in the second quarter of 2000, as compared with $182 million, or 26.6% of net sales in the second quarter of 1999. Included in the second quarter expenses in 1999 were $21 million in restructuring-related transition and other non- recurring costs. The expenses resulted from spending on system conversions for the Y2K remediation project and certain consulting costs incurred for structural reorganization and administrative efficiency solutions. On a core basis, selling, general and administrative expenses were 23.6% of net sales in the second quarter of 1999. The increase of $7 million in 2000 from the core 1999 selling, general and administrative expenses is primarily the result of an increased number of sales representatives in the MacDirect program and increased sales and marketing expenses in certain channels. Selling, general and administrative expenses were $340 million, or 24.3% of net sales, in the six month period of 2000, as compared with $355 million, or 26.0% of net sales for the same period in 1999. Included in the second quarter expenses in 1999 were $35 million in restructuring-related transition and other non-recurring costs. On a core basis, selling, general and administrative expenses were $320 million in 1999. The $20 million increase in 2000 compared with core selling, general and administrative expenses in 1999 is primarily the result of an increased number of sales representatives in the MacDirect program and higher information management infrastructure costs. Net interest expense and other costs for the second quarter and first six months of 2000 were relatively flat to the comparable periods in 1999. The company's income tax rate was 34% in the second quarter and for the first six months of 2000. In the comparable 1999 periods, the company's income tax rate was 33.8% and 35%, respectively. The company's effective annual income tax rate was reduced to 35% from 36% during the second quarter of 1999, which resulted in a 33.8% effective tax rate in last year's second quarter. These income tax rate decreases reflect the continued benefit of structural changes implemented within the company's tax structure. Net earnings for the second quarter were $51 million, or $.58 per diluted share, compared with the prior year's net income of $25 million, or $.28 per diluted share. Net earnings on a core basis, would have been $48 million, or $.54 per diluted share in the second quarter of 1999. Net earnings for the first six months of 2000 were $99 million, or $1.12 per diluted share, compared with net income of $56 million, or $.62 per diluted share in the prior year. Net earnings on a core basis, would have been $91 million, or $1.02 per diluted share in the first six months of 1999. Business Segment Results The Tools segment includes carpenters, mechanics, pneumatic and hydraulic tools as well as tool sets. The Doors segment includes commercial and residential doors, both automatic and manual, as well as closet doors and systems, home decor and door and consumer hardware. The company assesses the performance of its business segments using core operating profit, which excludes restructuring charges, restructuring-related transition and other non-recurring costs for the first six months of 1999. Segment eliminations are also excluded. -9- As reflected in the table, "Business Segment Information", Tools sales in the second quarter of 2000 increased to $548 million, or 3% over the second quarter of 1999. This increase was driven by strong unit volume growth in U.S. consumer hand tools, fasteners and fastening tools, and industrial tools. Offsetting these volume increases were net sales reductions from unfavorable pricing pressures and from the effects of foreign currency translation. Tools sales for the six month period of 2000 also increased 3% compared to the same period of 1999. The Tools segment core operating profit was 14.0% of net sales for the second quarter and 13.8% for the first six months of 2000, compared with 13.9% and 13.3% of net sales, respectively, in the same periods last year. These improvements are attributable to improved cost controls in operations, the benefits of the company's restructuring initiatives, and higher unit volumes. Doors segment sales increased to $155 million, 2% above 1999's second quarter, due to unit volume growth in the U.S. entry doors and automated doors products. In addition, the prior year's quarter sales and profits were depressed due to difficulties associated with the implementation of a Year 2000 ("Y2K") compliant software. These increases were partially offset by the lingering effects of a major U.S. retail customer's 1999 bankruptcy on the hardware products. The Doors segment core operating profit increased to 7.2% of net sales in the second quarter and 7.4% for the first six months of 2000, compared with 5.8% and 7.0% of net sales, respectively, in the same periods last year. The improvements in operating margins are primarily due to higher volumes and productivity improvements, offset partially by a continuing shift in the mix of product to lower-margin retail channels. Restructuring Restructuring reserves as of the beginning of 2000 were $58 million. These reserves consisted of $42 million related to severance, $10 million related to asset write-downs, and $6 million related to other exit costs. In the first six months of 2000, severance of $12 million, asset write-downs of $6 million, and payments for other exit costs of $1 million reduced these reserves to $39 million. FINANCIAL CONDITION Liquidity and Sources of Capital In the second quarter of 2000, the company generated operating cash flow of $50 million which was essentially level with the prior year. Accounts receivable decreased $20 million during the second quarter of 2000, however, this was partially offset by an increase in inventories of $9 million due to increased inventory levels in the consumer hand tools and mechanic tools businesses. In the second quarter of 2000, the company utilized cash flow from operations to extinguish long term debt of approximately $26 million. Additionally, the company repurchased 1.2 million of its common shares, bringing the six month total to 3.3 million shares. -10- PART II OTHER INFORMATION Item 2. - Changes in Securities and Use of Proceeds (c) Recent Sales of Unregistered Securities (1) During the second fiscal quarter of 2000, options to purchase 50,060 shares of the Company's common stock at a purchase price of $23.90 per share were subscribed to by 280 employees under the Company's U.K. Savings Related Share Plan (the "Savings Plan"). In addition, 253 shares were issued to certain participants under the Savings Plan. Under the Savings Plan, shares are issued to employees who elect at the end of the five year savings period or upon termination of employment to receive the accumulated savings in the form of shares of the Company's stock rather than cash. (a) Participation in the Savings Plan is offered to all employees of the Company's subsidiaries in the United Kingdom. (b) The total dollar value of the shares issued during the quarter was $6,117.52. Under the Savings Plan: 236 shares were issued at $24.15 per share with an aggregate value of $5,699.40. 17 shares were issued at $24.60 per share with an aggregate value of $418.12. (c) Neither the options nor the underlying shares have been registered in reliance on an exemption from registration found in several no-action letters issued by the Division of Corporation Finance of the Securities and Exchange Commission. Registration is not required because the Company is a reporting company under the Securities Exchange Act of 1934, its shares are actively traded, the number of shares issuable under the Savings Plans is small relative to the number of shares outstanding, all eligible employees are entitled to participate, the shares are being issued in connection with the employees' compensation, not in lieu of it and there is no negotiation between the Company and the employee regarding the grant. (d) Under the Savings Plans, employees are given the right to buy a specified number of shares with the proceeds of a "Save-as-You-Earn" savings contract. Under the savings contract, the employee authorizes 60 monthly deductions from his or her paycheck At the end of the five year period, the employee may elect to (i) use all or a part of the accumulated savings to buy all or some of the shares under the employee's options, (ii) leave the accumulated savings with the financial institution that has custody of the funds for an additional two years or (iii) take a cash distribution of the accumulated savings. The option to purchase shares will lapse at the end of the five year period if not exercised at that time. -11- Item 4. - Submission of Matters to a Vote of Security-Holders The Company's Annual Meeting was held on April 19, 2000. (i) The following directors were elected: Shares Voted Shares For Withheld Non-Votes Eileen S. Kraus 64,203,536 2,341,950 0 John M. Trani 62,966,130 3,577,165 0 (ii) Ernst & Young LLP was approved as the Company's independent auditors by the following vote: FOR 65,226,197 AGAINST 919,149 ABSTAIN 400,140 NOT VOTED 0 Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits (1) See Exhibit Index on page 14. (b) Reports on Form 8-K. (1) Company filed a Current Report on Form 8-K, dated April 19, 2000, in respect of the Company's press release announcing first quarter results. (2) Company filed a Current Report on Form 8-K, dated May 26, 2000, which announced the election of William Y. O'Connor to the Board of Directors, a second quarter regular dividend of $.22 per share on the Company's common stock and the authorization to repurchase, from time to time, up to 10 million shares of the Company's common stock, in open market purchases, tender offers and privately negotiated transactions. (3) Company filed a Current Report on Form 8-K, dated June 23, 2000, announcing the execution of a new Employment Agreement between the Registrant and John M. Trani, the Company's chairman and chief executive officer and director, dated as of January 1, 2000. -12- Signature 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. THE STANLEY WORKS Date: August 15, 2000 By: James M. Loree James M. Loree Vice President, Finance and Chief Financial Officer By: Theresa F. Yerkes Theresa F. Yerkes Vice President and Controller (Chief Accounting Officer) -13- EXHIBIT INDEX EXHIBIT LIST (3)(i) By-laws (incorporated by reference to Exhibit 4.2 to Registration Statement No. 333-42346 filed July 27, 2000) (10)(i) Supplemental Retirement and Account Value Plan for Salaried Employees of The Stanley Works (incorporated by reference to Exhibit 99.1 to Registration Statement No. 333-42582 filed July 28, 2000) (10)(ii) 1997 Long Term Incentive Plan (incorporated by reference to Exhibit 99.2 to Registration Statement No. 333-42582 filed July 28, 2000) (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule -14-