The Company is involved in various legal proceedings relating to environmental issues, employment, product liability and workers' compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside counsel, as well as an actuary for risk insurance. Management believes that the ultimate disposition of these matters will not have a material adverse effect on operations or financial condition taken as a whole.
The Company's policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of March 29, 2003, the Company had reserves of $16.4 million, primarily for remediation activities associated with Company-owned properties as well as for Superfund sites.
In November 2002, Financial Accounting Standards Board (FASB) Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45) was issued. The disclosure provisions of this Interpretation were adopted beginning in fiscal 2002. FIN 45 requires that a liability for fair value of an obligation be recorded at the inception of a guarantee, for all guarantees issued or modified after December 31, 2002. As a result of the adoption of the remainder of FIN 45 as required in fiscal 2003, there was no material impact to the Company’s financial statements.
The Company’s financial guarantees, in millions of dollars, at March 29, 2003 are as follows:
The Company has sold various businesses and properties over many years and provided standard indemnification to the purchasers with respect to any unknown liabilities, such as environmental, which may arise in the future that are attributable to the time of Stanley's ownership. There are no material identified exposures associated with these general indemnifications.
The Company provides product and service warranties which vary across its businesses. The types of warranties offered generally range from one year to limited lifetime, while certain products carry no warranty. Further, the Company incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available.
The changes in the carrying amount of product and service warranties for the three months ended March 29, 2003 are as follows (in millions of dollars):
On April 30, 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. This Statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. The Company will adopt SFAS 149 on a prospective basis at its effective date in the fiscal third quarter. The Company is assessing the impact SFAS 149 may have on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $666 million in the first quarter of 2003 as compared to $617 million in the first quarter of 2002, representing an increase of 8%. Best Access and other acquisitions contributed a total of $71 million, or a 12% increase, in net sales. Organic sales declined 7% reflecting lower Mac Tools retail (Mac Direct) sales, the impact of adverse weather and several large customer inventory reductions. Favorable foreign currency translation increased sales by 3%.
The Company reported gross profit of $219 million, or 32.8% of net sales, in the first quarter of 2003 compared to $216 million, or 34.9% of net sales, in 2002. Excluding the favorable impact of acquisitions, gross profit declined $30 million as compared with the first quarter of 2002 due to reduced Mac Direct sales volume, higher inventory losses associated with announced plans to exit Mac Direct, certain consumer and industrial customer inventory reductions, continued price erosion, rising raw material costs and lower productivity, and the absence of retirement plan income.
Selling, general and administrative expenses (SG&A) were $172 million, or 25.9% of net sales, in the first quarter of 2003, compared to $135 million, or 21.9% of net sales, in the prior year. The increase was primarily attributed to $18 million of incremental costs due to Best Access, $10 million of higher receivables losses associated with announced plans to exit Mac Direct, the absence of retirement plan income, and a negative impact from foreign currency translation.
Interest expense totaled $9 million, an increase of $2 million over the first quarter of 2002, reflecting higher borrowings primarily for the Best Access acquisition.
Other-net represented $8 million expense, up $6 million over the first quarter of 2002 from increased intangible asset amortization expense associated with acquisitions and lower profitability from the Mac Advantage financing program.
The Company's income tax rate was 30% in the first quarter this year compared to 32% in the prior year. The decline in the tax rate relates to refunds of prior year tax assessments.
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, and associated services, as well as closet doors and systems, home decor, door locking systems, commercial and consumer hardware.
Tools segment sales of $467 million in the first quarter of 2003 represented a 2.3% decrease from $478 million in the first quarter of 2002, driven by lower Mac Tools sales and several large customer inventory reductions. Operating profit was $27 million, or 5.7% of net sales, for the first quarter of 2003 as compared to $62 million, or 12.9% of net sales, in 2002. The decline in operating profit is primarily attributable to $14 million in receivable and inventory losses as a result of the announced plans to exit Mac Direct, certain consumer and industrial customer inventory reductions, continued price erosion, rising raw material costs and lower productivity, and the absence of retirement plan income. The Company has announced restructuring plans to improve profits in this segment.
Doors segment sales were $199 million in the first quarter of 2003, an increase of 43.5% from $139 million in the first quarter of 2002. Operating profit of $19 million was up slightly, representing 9.7% of net sales in the first quarter of 2003 compared with 13.4% of net sales in the same period last year. Acquired companies contributed $68 million in sales. Sales and profit declines in the Doors business related to the loss of a major customer in three states, adverse weather and higher commodity costs eroded the gain from acquisitions.
Restructuring and Other Charges
The Company recorded $3.1 million of restructuring reserves in March 2003 for new initiatives, mainly in the Tools segment, pertaining to the further reduction of its cost structure, primarily for severance-related
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obligations. These actions will result in a net employment reduction of approximately 150 manufacturing, selling and administrative people. There were further employment reductions for Mac Direct retail distributors that did not involve severance obligations. The Company expended $2.6 million related to these charges in the quarter and anticipates the balance of payments will be made in the second quarter.
The Company announced restructuring plans on April 9, 2003 which include a workforce reduction of over 1,000 people, closures of four manufacturing plants and five warehouses, and exit from the Mac Tools retail channel. The Company expects that these measures will require severance payments and other exit costs, and will be accompanied by certain asset impairments. Excluding the Mac Direct exit, these actions are expected to require pre-tax charges of approximately $60 million during the year, of which $10-$15 million are expected to be non-cash.
In addition, the exit of Mac Direct will require liquidation of certain assets such as inventories, accounts receivable, trucks and other items. The aggregate net book value of these assets and certain lease obligations is approximately $85 million. Management is formulating plans to maximize the economic value associated with these items. In the first quarter of 2003, the Company recognized $10 million in receivable losses and $4 million in inventory losses associated with the Mac Direct exit. The Company believes that additional impairments and exit costs are possible, however the amounts cannot be determined at this time, as they depend on future events and actions which have not been finalized.
FINANCIAL CONDITION
Liquidity and Sources of Capital
Operating cash flow of $52 million in the first quarter of 2003 increased $31 million from the prior year’s first quarter principally as a result of lower restructuring, timing of income tax disbursements, and positive cash flows from acquisitions.
The Company acquired two businesses both within the Tools segment in the first quarter of 2003 at a cost of $16 million.
In April 2003 the Company announced plans to unwind the $213 million notional value Stanley common stock forward contracts (equity hedge). On April 14, 2003, $100 million of stock was purchased from the equity hedge counterparties which decreased shares then outstanding by 3.9 million. These transactions were completed using a combination of borrowings under existing lines of credit and available cash. No open market purchase of shares occurred. The remaining $113 million in forward contracts will be unwound later in 2003 pending finalization of new accounting rules that impact such structures. The Company expects to fund this $113 million repurchase of its shares over several years and that shares outstanding at the time of the repurchase will decrease by an additional 4.5 million in 2003 upon execution which is expected to occur mid-year. However, several alternative methods are being evaluated for completion of this second step and a final determination has not been made.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chairman and its Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chairman and its Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic Securities Exchange Commission filings. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
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PART 2 – OTHER INFORMATION
CAUTIONARY STATEMENT
This report on Form 10-Q contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws including, but not limited to (a) the Company’s plans to unwind its common stock forward contracts; and (b) the charges that will be incurred in connection with the Company’s recently announced restructuring plans. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for the future operating and financial performance of the Corporation, based on assumptions currently believed to be valid. Forward-looking statements may be identified by the use of words such as “believe,” “expect,” “plans,” “anticipate” and other words of similar meaning in connection with a discussion of future operating or financial performance.
These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances, including but not limited to (a) the success of the company’s efforts to decentralize its operations functions, primarily into its Tools and Access Solutions business groups; (b) the success of the company’s efforts to reduce its workforce and close certain facilities, including the resolution of any labor issues and the predictability of severance payments related to such activities, the need to respond to significant changes in product demand while any facility consolidation is in process and other unforeseen events; and (c) the success of the company’s efforts to restructure its Mac Tools organization in order to return it to profitability, including, without limitation, the company’s ability to liquidate certain Mac Tools assets at a satisfactory price. In addition, the timing of the decrease in shares outstanding associated with unwinding the common stock forward contracts is dependent on the content of the FASB’s “Limited Scope Final Statement On Liabilities and Equity” when issued. Actual results may also differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibits | | |
| | | |
| Exhibit No.: | | Description: |
| | | |
| 99 (i) | | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99 (ii) | | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| (b) | Reports on Form 8-K |
| | | |
| (1) | The Company filed a Current Report on Form 8-K dated January 24, 2003 with respect to the Company’s press release announcing fourth quarter 2002 results and providing earnings guidance for the first quarter of 2003 and the full year 2003 and commentary regarding operating margin expectations. |
| | | |
| (2) | The Company filed a Current Report on Form 8-K dated January 17, 2003 with respect to the Company’s press release providing earnings guidance for the fourth quarter 2002 and for the first quarter and full year 2003 and commentary regarding cash flow and operating margins. |
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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: May 6, 2003 | | By:/s/ James. M. Loree |
| | James M. Loree |
| | Executive Vice President, Finance
and Chief Financial Officer |
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CERTIFICATIONS
I, John M. Trani, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stanley Works and subsidiaries;
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 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.
| Date: May 6, 2003 | | /s/ John. M. Trani |
| | | John M. Trani |
| | | Chairman and Chief Executive Officer |
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CERTIFICATIONS
I, James M. Loree, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stanley Works and subsidiaries;
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 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.
| Date: May 6, 2003 | | /s/ James M. Loree |
| | James M. Loree |
| | Executive Vice President, Finance
and Chief Financial Officer |
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