UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 September 30, 1995 or [ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the transition period from [ ] to [ ] Commission file number 1-5224 I.R.S. Employer Identification Number 06-0548860 THE STANLEY WORKS (a Connecticut Corporation) 1000 Stanley Drive New Britain, Connecticut 06053 Telephone: (860) 225-5111 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 44,332,011 as of November 4, 1995. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Millions of Dollars) THIRD QUARTER NINE MONTHS 1995 1994 1995 1994 Net Sales $ 655.7 $ 632.6 $ 1,954.5 $ 1,847.1 Costs and Expenses Cost of sales 448.0 425.7 1,329.2 1,238.7 Selling, general and administrative 148.0 139.5 443.9 412.7 Interest - net 7.6 6.9 23.2 22.1 Other - net 3.7 9.1 12.7 26.9 Restructuring 41.5 - 41.5 - ------- ------- -------- -------- 648.8 581.2 1,850.5 1,700.4 ------- ------- -------- -------- Earnings Before Income Taxes 6.9 51.4 104.0 146.7 Income Taxes 8.6 19.2 45.5 55.2 ------- ------- -------- -------- Net Earnings (Loss) $ (1.7)$ 32.2 $ 58.5 $ 91.5 ======= ======= ======== ======== Net Earnings (Loss) Per Share of Common Stock $ (0.04)$ 0.72 $ 1.32 $ 2.04 ======= ======= ======== ======== Dividends per share $ 0.36 $ 0.35 $ 1.06 $ 1.03 Average shares outstanding 44,290 44,838 44,359 44,810 (in thousands) See notes to consolidated financial statements. -1- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Millions of Dollars) September 30 December 31 1995 1994 ASSETS Current Assets Cash and cash equivalents $ 48.5 $ 69.3 Accounts and notes receivable 453.4 410.3 Inventories 391.1 369.2 Other current assets 35.6 39.7 ------ ------ Total Current Assets 928.6 888.5 Property, Plant and Equipment 1,157.7 1,128.6 Less: accumulated depreciation (614.7) (568.8) ------- ------- 543.0 559.8 Goodwill and Other Intangibles 145.8 164.6 Other Assets 83.8 88.2 ------- ------- $ 1,701.2 $ 1,701.1 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 101.1 $ 82.8 Current maturities of long-term debt 11.5 10.9 Accounts payable 98.9 125.3 Accrued expenses 202.9 202.5 ------- ------- Total Current Liabilities 414.4 421.5 Long-Term Debt 396.3 387.1 Deferred Income Taxes 4.7 14.4 Other Liabilities 136.1 133.9 Shareholders' Equity Common Stock 115.4 115.4 Capital in excess of par value 69.2 70.1 Retained earnings 952.2 937.8 Foreign currency translation adjustment (65.7) (56.3) ESOP Debt (246.7) (253.7) ------- ------- 824.4 813.3 Less: cost of Common Stock in treasury 74.7 69.1 ------- ------- Total Shareholders' Equity 749.7 744.2 ------- ------- $ 1,701.2 $ 1,701.1 ======= ======= See notes to consolidated financial statements. -2- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars) THIRD QUARTER NINE MONTHS 1995 1994 1995 1994 Operating Activities Net Earnings (Loss) $ (1.7)$ 32.2 $ 58.5 $ 91.5 Depreciation and amortization 21.0 19.7 63.7 62.5 Restructuring charges 41.5 - 41.5 - Other non-cash items 0.5 7.0 13.6 23.5 Changes in operating assets and liabilities (10.8) (39.1) (101.5) (124.1) ------ ------ ------ ------ Net cash provided by operating activities 50.5 19.8 75.8 53.4 Investing Activities Capital expenditures (17.5) (17.5) (44.7) (48.6) Proceeds from sales of assets .3 1.0 .6 7.4 Business acquisitions (2.3) - (3.3) (5.1) Other (3.3) (1.9) (12.8) (4.9) ------ ------ ------ ------ Net cash used by investing activities (22.8) (18.4) (60.2) (51.2) Financing Activities Payments on long-term debt (81.9) (1.2) (83.5) (1.9) Proceeds from long-term borrowings 84.2 - 84.2 - Net short-term financing (24.2) 17.1 18.3 51.6 Proceeds from issuance of common stock 1.8 2.9 2.7 3.5 Purchase of common stock for treasury (2.3) (1.2) (12.5) (2.0) Cash dividends on common stock (0.7) (15.7) (46.3) (60.8) ------ ------ ------ ------ Net cash provided (used) by financing activities (23.1) 1.9 (37.1) (9.6) Effect of Exchange Rate Changes on Cash (0.9) 1.7 0.7 2.5 ------ ------ ------ ------ Increase (decrease) in Cash and Cash Equivalents 3.7 5.0 (20.8) (4.9) Cash and Cash Equivalents, Beginning of Period 44.8 33.8 69.3 43.7 ------ ------ ------ ------ Cash and Cash Equivalents, End of Third Quarter $ 48.5 $ 38.8 $ 48.5 $ 38.8 ====== ====== ====== ====== See notes to consolidated financial statements. -3- THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Millions of Dollars) NINE MONTHS 1995 1994 Balance at beginning of year $ 744.2 $ 680.9 Net earnings 58.5 91.5 Currency translation adjustment (9.4) 6.1 Cash dividends declared (46.6) (46.2) Net common stock activity (4.0) 3.7 ESOP debt 7.0 6.3 -------- ------- Balance at end of third quarter $ 749.7 $ 742.3 ======== ======= See notes to consolidated financial statements. -4- THE STANLEY WORKS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 NOTE A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q 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 (consisting of both normal recurring items and restructuring charges as referenced in Note E) 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 December 31, 1994. NOTE B - Computation of Earnings Per Share Earnings per share are based upon the weighted average number of common shares outstanding. The exercise of outstanding stock options would not result in a material dilution of earnings per share. (See Exhibit 11) NOTE C - Inventories The classification of inventories at the end of the third quarter of 1995 and at year-end 1994, in millions of dollars, is as follows: September 30 December 31 1995 1994 ------ ------ Finished products $ 253.4 $ 238.6 Work in process 73.4 68.4 Raw materials 60.9 59.4 Supplies 3.4 2.8 ------ ------ $ 391.1 $ 369.2 ====== ====== -5- NOTE D - Cash Flow Information Interest paid during the third quarter of 1995 and 1994 amounted to $10.8 million and $10.6 million, respectively. Interest paid for the nine months of 1995 and 1994 amounted to $24.7 million and $25.2 million, respectively. Income taxes paid during the third quarter of 1995 and 1994 were $20.0 million and $29.0 million, respectively. Income taxes paid for the nine months of 1995 and 1994 were $62.1 million and $71.2 million, respectively. NOTE E - Restructuring and Other Charges The company has announced strategic initiatives designed to improve long- term growth and profitability and to reach targeted sales of $4.0 billion by 1999. In order to fuel this growth, management intends to remove $150 million from the company's cost structure by the end of 1997, approximately half of which is intended to improve bottom line profitability. In addition, the company plans to improve working capital productivity and to eliminate individual products or groups of products that are a drain on performance in order to achieve a $250 million reduction in assets by 1997. The overall restructuring program encompasses numerous specific initiatives for each business unit in various stages of planning. During the third quarter 1995 restructuring charges and other related costs totaling $44.1 million were incurred in connection with the initial phase of the program. These charges reflected the decision to exit several small underperforming businesses, such as shoe repair and generic fasteners; to close manufacturing operations related to other non- performing product lines; and to close three distribution centers as part of a plan to consolidate order and distribution management and facilities for North American consumer products. Of the total restructuring charge of $41.5 million, $27.4 million related to the write-down of facilities and equipment, inventories and other assets and $3.0 million related to severance and other termination benefits for 450 employees. In addition, a strategic reassessment of the businesses affected by the initial phase of the program resulted in an $11.1 million goodwill write-off as the projected undiscounted cash flows were not sufficient to recover the carrying value of the recorded goodwill. Also included in operating expenses for the third quarter were $2.6 million of charges for consulting work for planning and implementation of restructuring activities. Restructuring related charges of $31.5 million, $6.1 million, and $.9 million were included in the Tools, Hardware, and Specialty Hardware segments, respectively. Future restructuring charges will result as the various initiatives currently under consideration are developed and specific operating plans are designed, approved, and implemented. Charges which can be classified as exit or restructuring costs will be taken as specific estimates are reliably determined and as management commits to a specific plan of action. Other costs related to the restructuring activities will be recognized when incurred. -6- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Third quarter operating profits together with charges related to the initial phase of recently announced restructuring plans resulted in a net loss for the quarter. These actions are expected to establish a more cost-effective base upon which to grow future sales and profits. Management believes that the company's ability to return superior value over the long run is dependent on taking these aggressive actions. The abrupt downturn in the U.S. consumer and construction markets experienced in the second quarter continued to dampen sales growth and profitability in the third quarter. Net sales of $656 million were 4% higher than the prior year's quarter. Volume growth contributed 2% as a result of strength in the European markets and the engineered tool category in the U.S., both of which offset the lackluster sales activity in U.S. consumer markets. Price increases added 2% to sales. Gross margins were 31.7% compared with 32.7% reported in the third quarter last year. Margins continued to be affected by costs associated with the closure and integration of manufacturing facilities at the company's Mechanics Tools division. In addition, efforts to control inventories resulted in the underabsorption of factory overheads. To a lesser extent, margins were also affected by the competitive pricing environment in U.S. markets. Operating expenses were 22.6% up from 22.1% last year. Approximately $2.6 million of charges for strategic consulting work related to the company's planning and implementation of restructuring activities were included in third quarter operating expenses. Other-net was $3.7 million compared with $9.1 million last year. The prior year included charges associated with divestiture activity in the quarter as well as higher foreign currency transaction losses and environmental expenses. Restructuring charges of $41.5 million, or $.71 per share, were also reported as part of third quarter operating results. Included in these charges were $30.4 million for the closure of four manufacturing plants and three distribution operations which will ultimately result in a workforce reduction of about 450 people. Approximately $11.1 million in charges to reduce the book value of assets associated with underperforming businesses were also included in the restructuring charge. The plant closings reflect the company's decision to exit small, underperforming businesses such as shoe repair equipment and a line of generic fastening products. The company is also closing a plant connected with its Home Decor division in France and one associated with its Hand Tools division in the U.S. These operations have contributed approximately $30 million in sales on an annual basis. The establishment in 1994 of the Stanley Customer Support Division to develop stronger and more efficient relationships with the company's North American consumer products customers has resulted in the planned consolidation of order and distribution management and facilities for the company's consumer businesses. The charges identified above reflect the -7- closing of three distribution centers in order to consolidate into a new and more efficient distribution center that will handle the shipment of Stanley consumer products. Customer service and credit and collection activity related to the consumer businesses are also being consolidated and are included in the charge. Not included in the third quarter charges are costs associated with a recently announced reduction of approximately 350 employees in the salaried workforce. A charge for the related severance will be included in the fourth quarter. The restructuring activities announced to date are expected to contribute a $20 million cost reduction in 1996, and a $35 million reduction in the company's asset base. Future restructuring charges will result as the various initiatives currently under consideration are further developed and approved and the estimated impact can be reliably determined. These restructuring charges are not quantifiable at this time; however, they are likely to be material to the company's results of operations. Management expects restructuring charges to continue at least into 1996. As the company progresses with its plans, the focus will move toward growth and expansion, rather than realignment and restructuring. In addition to restructuring charges the company will also experience transition costs in 1996 related to the implementation of the initiatives announced in the third quarter. These costs are not estimated to be material. Tax expense of $8.6 million reflected the non-deductibility of costs included in the restructuring charge. Excluding these items, the effective tax rate was approximately 38% compared with 37.5% in the prior year. As a result of the restructuring charges, a net loss for the quarter of $1.7 million, or $.04 per share, was reported compared with net earnings of $32.2 million, or $.72 per share, in the third quarter 1994. Net sales for the first nine months of 1995 were $2.0 billion, up 6% over prior year sales of $1.8 billion. Net earnings for the nine month period, including restructuring charges, were $58.5 million, or $1.32 per share, compared with $91.5 million, or $2.04 per share, in the prior year period. Net sales for the Tools segment in the third quarter were up 4% over the prior year. Volume and price contributed equally to the increase. Operating margins, excluding charges related to restructuring, were 10.8% in the current quarter, compared with margins of 11.5% reported in the prior year. For the nine months, net sales increased by 6% and operating margins, excluding restructuring charges, were 11.1%, compared with 11.7% in the prior year. Operating margins would have been similar to last year without the effects of Mechanics Tools manufacturing integration costs. Net sales in the Hardware segment increased by 2%, almost entirely the result of price increases. Operating margins declined from 9.7% to 6.4%, excluding the effects of restructuring, and reflected weakness in the Canadian and European home decor markets as well as continued weakness in the U.S. hardware market. Additionally, unrecovered cost increases experienced in certain raw materials, especially corrugated packaging, depressed margins. For the nine months, net sales increased by 5% and operating margins, excluding restructuring charges, were 8.6%, compared -8- with 11.6% in the prior year. Net sales in the Specialty Hardware segment increased 2%, with price and volume each adding 1%. Operating margins were 9.5%, without restructuring related charges, comparable to 9.2% reported in the prior year. For the nine months, net sales increased by 5% and operating margins, excluding restructuring charges, were 6.1%, compared with 6.7% in the prior year. Within the company's geographic regions, net sales in the U.S. increased by 4%. Volume contributed 3% and price added 1%. Excluding restructuring charges, operating margins declined to 10.7% from 11.9% in the prior year. European markets continued to be strong with net sales increasing 15%, with 7% from volume growth. Price increases added 2% to sales, currency added 5% and the net effect of recent acquisitions added 1%. European operating margins, excluding restructuring charges, were 10.1%, improved from prior year margins of 8.7%. Net sales in Other Areas declined 10%, entirely from volume, due to weakness in Canadian, Mexican and Australian markets. Operating margins, as a result, decreased to 6.2% from 8.6%. While the company would like to be encouraged by the recent rebound in U.S. housing starts and sales of existing homes, consumer activity at retail remains weak compared with last year. The company continues to see internal growth from its European businesses coupled with positive translation from stronger European currencies. However, significant weakness remains in its Canadian, Mexican and Australian markets with no appreciable improvement in sight. These trends may continue for the next three to six months. The company recognized these developments in the second quarter and has been taking the actions necessary to reduce costs and control inventories. Liquidity and Sources of Capital Cash flow from operations was $75.8 million for the first nine months, up from $53.4 million for the prior year. Prior year cash flows reflects the increased working capital levels necessary in the prior year to fund internal sales growth. In the third quarter 1995, the company borrowed $39.5 million under an agreement that bears interest at a variable rate (5.9% as of September 30, 1995) and has a final maturity of 2005. The company also issued $44.7 million of commercial paper classified as non-current. The proceeds from these borrowings were used to pay $81.3 million of Dutch guilder denominated debt due in 1996. Cash outlays of approximately $7.0 million associated with the company's third quarter restructuring activities are expected to be substantially complete by 1997 and funded with operating cash flows. The company anticipates that its operating cash flow and borrowing capacity will enable it to fund its growth and restructuring initiatives, capital expenditures, and dividends. As a result, the restructuring activities announced this quarter and expected to be announced in the future will not have a material affect on liquidity. Capital expenditures for the year are forecast at approximately $70 million. -9- THE STANLEY WORKS AND SUBSIDIARIES BUSINESS SEGMENT INFORMATION (Millions of Dollars) THIRD QUARTER NINE MONTHS 1995 1994 1995 1994 INDUSTRY SEGMENTS Net Sales Tools Consumer $ 181.9 $ 177.5 $ 538.7 $ 519.3 Industrial 131.4 129.4 415.5 389.4 Engineered 170.9 158.2 510.3 472.7 -------- -------- -------- -------- Total Tools 484.2 465.1 1,464.5 1,381.4 Hardware 81.1 79.3 247.5 235.6 Specialty Hardware 90.4 88.2 242.5 230.1 -------- -------- -------- -------- Consolidated $ 655.7 $ 632.6 $ 1,954.5 $ 1,847.1 ======== ======== ======== ======== Operating Profit Tools $ 20.7 $ 53.6 $ 131.6 $ 161.3 Hardware (0.9) 7.7 15.3 27.4 Specialty Hardware 7.7 8.1 13.8 15.4 -------- -------- -------- -------- Total 27.5 69.4 160.7 204.1 Net corporate expenses (11.8) (10.6) (29.7) (32.3) Interest expense (8.8) (7.4) (27.0) (25.1) -------- -------- -------- -------- Earnings before income taxes $ 6.9 $ 51.4 $ 104.0 $ 146.7 ======== ======== ======== ======== GEOGRAPHIC AREAS Net Sales United States $ 472.6 $ 452.9 $ 1,393.2 $ 1,330.4 Europe 100.3 87.4 312.6 261.8 Other Areas 82.8 92.3 248.7 254.9 -------- -------- -------- -------- Consolidated $ 655.7 $ 632.6 $ 1,954.5 $ 1,847.1 ======== ======== ======== ======== Operating Profit United States $ 19.1 $ 53.9 $ 116.3 $ 156.1 Europe 3.3 7.6 27.4 25.3 Other Areas 5.1 7.9 17.0 22.7 -------- -------- -------- -------- Total $ 27.5 $ 69.4 $ 160.7 $ 204.1 ======== ======== ======== ======== See notes to consolidated financial statements. -10- PART II - OTHER INFORMATION Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits (1) See Exhibit Index on page 12 (b) Reports on Form 8-K. (1) Registrant filed a Current Report on Form 8-K, dated July 19, 1995, in respect of the Registrant's press releases reporting on the following: (i) Second quarter sales and earnings (ii) Initiatives for profitable growth (2) Registrant filed a Current Report on Form 8-K, dated September 18, 1995, in respect of the Registrant's press release announcing the election of Paul W. Russo as Vice President Strategy and Development. Signatures 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: November 14, 1995 By: Richard Huck Richard Huck Vice President, Finance and Chief Financial Officer Date: November 14, 1995 By: Theresa F. Yerkes Theresa F. Yerkes Vice President and Controller (Chief Accounting Officer) -11- EXHIBIT INDEX (11) Statement re computation of earnings per share (12) Statement re computation of ratio of earnings to fixed charges (27) Financial Data Schedule -12-