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 4, 1998.
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 88,773,011
as of August 14, 1998.
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
1998 1997 1998 1997
------ ------ ------- -------
Net Sales $ 691.8 $ 673.6 $ 1,363.7 $ 1,320.2
Costs and Expenses
Cost of sales 448.9 446.1 883.9 877.5
Selling, general and
administrative 166.1 153.8 337.2 307.0
Interest - net 5.2 4.4 10.0 8.7
Other - net 4.1 13.6 6.9 17.2
Restructuring and
asset write-offs - 137.2 - 132.6
------ ------ ------- -------
624.3 755.1 1,238.0 1,343.0
------ ------ ------- -------
Earnings (Loss) before
income taxes 67.5 (81.5) 125.7 (22.8)
Income Taxes 25.3 (17.0) 47.1 5.0
------ ------ ------- -------
Net Earnings (Loss) $ 42.2 $ (64.5) $ 78.6 $ (27.8)
====== ====== ======= =======
Net Earnings (Loss) Per
Share of Common Stock
Basic $ 0.47 $ (.72) $ 0.88 $ (0.31)
====== ====== ======= =======
Diluted $ 0.47 $ (.72) $ 0.87 $ (0.31)
====== ====== ======= =======
Dividends per share $ 0.20 $ 0.185 $ 0.40 $ 0.37
====== ====== ======= =======
Average shares outstanding
(in thousands)
Basic 89,405 89,525 89,442 89,443
====== ====== ====== ======
Diluted 90,442 89,525 90,464 89,443
====== ====== ====== ======
See notes to consolidated financial statements.
-1-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
July 4 January 3
1998 1998
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 77.4 $ 152.2
Accounts and notes receivable 502.9 472.5
Inventories 372.0 301.2
Other current assets 87.4 79.4
-------- --------
Total Current Assets 1,039.7 1,005.3
Property, plant and equipment 1,161.6 1,166.1
Less: accumulated depreciation (674.0) (652.9)
-------- --------
487.6 513.2
Goodwill and other intangibles 104.1 104.1
Other assets 134.6 136.1
-------- --------
$ 1,766.0 $ 1,758.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 117.3 $ 80.8
Current maturities of long-term debt 15.5 50.0
Accounts payable 172.7 155.5
Accrued expenses 302.0 336.4
-------- --------
Total Current Liabilities 607.5 622.7
Long-term debt 272.0 283.7
Other liabilities 240.6 244.5
Shareholders' Equity
Common stock 230.9 230.9
Retained earnings 848.2 806.6
Accumulated other comprehensive income (85.3) (85.3)
ESOP debt (221.2) (223.8)
-------- --------
772.6 728.4
Less: cost of common stock in treasury 126.7 120.6
-------- --------
Total Shareholders' Equity 645.9 607.8
-------- --------
$ 1,766.0 $ 1,758.7
======== ========
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
1998 1997 1998 1997
------ ------ ------ ------
Operating Activities
Net earnings (loss) $ 42.2 $(64.5) $ 78.6 $(27.8)
Depreciation and amortization 18.3 18.9 38.1 37.4
Restructuring and asset write-offs - 137.2 - 132.6
Other non-cash items 10.0 (27.0) 10.6 (14.1)
Changes in operating assets
and liabilities (59.3) (16.4) (137.5) (76.8)
------ ------ ------ -------
Net cash provided (used) by
operating activities 11.2 48.2 (10.2) 51.3
Investing Activities
Capital expenditures (13.5) (19.3) (20.9) (36.5)
Capitalized software (1.4) (3.9) (1.8) (6.6)
Proceeds from sales of businesses - - 3.0 34.8
Investment in affiliated company - (22.2) - (22.2)
Other 6.1 2.5 5.7 3.3
------ ------ ------- -------
Net cash used by
investing activities (8.8) (42.9) (14.0) (27.2)
Financing Activities
Payments on long-term borrowings (1.6) (1.8) (38.1) (3.4)
Proceeds from long-term borrowings - 2.3 - 2.3
Net short-term borrowings 8.3 21.9 36.5 21.4
Proceeds from issuance of common stock 5.6 5.4 14.5 15.4
Purchase of common stock for treasury (13.4) - (29.6) (17.8)
Cash dividends on common stock (17.8) - (35.6) (16.5)
------ ------ ------- -------
Net cash provided (used) by
financing activities (18.9) 27.8 (52.3) 1.4
Effect of Exchange Rate Changes on Cash 0.7 (1.9) 1.7 (1.9)
------ ------ ------- -------
Increase (decrease) in Cash and
Cash Equivalents (15.8) 31.2 (74.8) 23.6
Cash and Cash Equivalents,
Beginning of Period 93.2 76.4 152.2 84.0
------ ------ ------- -------
Cash and Cash Equivalents,
End of Second Quarter $ 77.4 $107.6 $ 77.4 $107.6
====== ====== ======= =======
See notes to consolidated financial statements.
-3-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited, Millions of Dollars)
Accumulated
Other
Compre- Total
Common Retained hensive ESOP Treasury Shareholders'
Stock Earnings Income Debt Stock Equity
---------------------------------------------------------
Balance Jan 3, 1998 $ 230.9 $ 806.6 $(85.3) $(223.8) $(120.6) $ 607.8
Comprehensive income:
Net earnings 78.6
Foreign currency
translation -
Total comprehensive
income 78.6
Cash dividends
declared (35.6) (35.6)
Net common stock
activity (5.9) (6.1) (12.0)
Tax benefit related
to stock options 3.2 3.2
ESOP debt 2.6 2.6
ESOP tax benefit 1.3 1.3
---------------------------------------------------------
Balance July 4,1998 $ 230.9 $ 848.2 $(85.3) $(221.2) $(126.7) $645.9
=========================================================
Accumulated
Other
Compre- Total
Common Retained hensive ESOP Treasury Shareholders'
Stock Earnings Income Debt Stock Equity
---------------------------------------------------------
Balance Dec 28,1996 $230.9 $919.0 $(45.5) $(234.8) $(89.5) $780.1
Comprehensive loss:
Net loss (27.8)
Foreign currency
translation (11.7)
Total comprehensive
income (39.5)
Cash dividends
declared (33.0) (33.0)
Net common stock
activity (4.4) 4.0 (0.4)
Tax benefit related
to stock options 3.0 3.0
ESOP debt 5.0 5.0
ESOP tax benefit 1.5 1.5
---------------------------------------------------------
Balance June 28, 1997 $230.9 $858.3 $(57.2) $(229.8) $(85.5) $716.7
=========================================================
See notes to consolidated financial statements.
-4-
THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 4, 1998
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 3, 1998.
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
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net earnings (loss) -
basic and diluted $ 42.2 $(64.5) $ 78.6 $(27.8)
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 89,404,624 89,525,423 89,442,431 89,443,254
Dilutive effect of
employee stock options 1,037,239 - 1,021,113 -
---------- ---------- ========== ==========
Diluted earnings per share -
weighted average shares 90,441,863 89,525,423 90,463,544 89,443,254
========== ========== ========== ==========
Earnings per share:
Basic $ 0.47 $(0.72) $ 0.88 $ (0.31)
========== ========== ========== ==========
Diluted $ 0.47 $(0.72) $ 0.87 $ (0.31)
========== ========== ========== ==========
The effect of employee stock options for 1997 was 1,098,338 shares. These
are not included in the calculations since they are antidilutive.
-5-
NOTE C - Inventories
The components of inventories at the end of the second quarter of 1998
and at year-end 1997, in millions of dollars, are as follows:
July 4 January 3
1998 1998
------ ------
Finished products $ 257.5 $ 203.7
Work in process 63.0 51.9
Raw materials 48.9 43.8
Supplies 2.6 1.8
------ ------
$ 372.0 $ 301.2
====== ======
NOTE D - Cash Flow Information
Interest paid during the second quarters of 1998 and 1997 amounted to $7.5
million and $7.7 million, respectively. Interest paid for the six months of
1998 and 1997 amounted to $14.4 million and $12.8 million, respectively.
Income taxes paid during the second quarters of 1998 and 1997 were $37.2
million and $39.4 million, respectively. Income taxes paid for the six months
of 1998 and 1997 were $46.6 million and $56.7 million, respectively.
Note E - Subsequent Event
On August 5, 1998 the company acquired 90% of the outstanding common shares of
ZAG Industries Ltd., an innovator of plastic storage products, for
approximately $114 million. The acquisition will be accounted for by the
purchase method of accounting. This transaction is not expected to have a
material proforma effect on the company's financial position or results of
operations for the periods prior to the date of acquisition.
Note F - Comprehensive Income
In June of 1997, the Financial Accoun0ting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive
Income". The Statement, which the company adopted in the first quarter of
1998, establishes standards for reporting and displaying comprehensive income
and its components in financial statements. Where applicable, earlier
periods have been restated to conform to the standards set forth in FAS No.
130. The company's Comprehensive Income consists of net earnings and foreign
currency translation adjustments which are presented before tax. The company
does not provide for U.S. income taxes on foreign currency translation
adjustments because it does not provide for such taxes on undistributed
earnings of foreign subsidiaries. Accumulated other comprehensive income
consists of foreign currency translation adjustments. Comprehensive income
(loss) for the second quarters of 1998 and 1997 were $38.8 million and ($69.8)
million, respectively.
-6-
Note G - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Essentially, the new statement requires
all derivatives to recorded on the balance sheet at fair value and establishes
new accounting practices for hedge instruments. The statement is effective
for years beginning after June 15, 1999. The company is currently assessing
the impact this statement will have on its consolidated financial statements.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The attached table, "Price/Volume Information" provides detail of the changes
in net sales by business segment and geographic region. In addition, the
attached table, "Business Segment Information", provides clarification of
reported operating results for the second quarter and first six months of 1998
and 1997, reconciling them with pro-forma or "core" results. Core results
exclude restructuring charges, restructuring-related transition costs
associated with the company's restructuring plans and other costs.
Restructuring charges include the severance associated with employment
reductions, write-downs of assets either disposed of or impaired as a result
of the initiatives or other business factors, environmental costs of
remediating facilities to be closed or vacated and other similar exit costs.
The restructuring-related transition costs are additional costs resulting from
these major initiatives that are classified as period operating expenses
within cost of sales or selling, general and administrative expense
categories. These include the costs of moving production equipment, operating
duplicative 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 the changes encompassed by the
restructuring initiatives. Other costs excluded from core results are year-
2000 systems compliance costs and CEO recruitment costs. Management
judgmentally determines which costs should be classified as transition costs
based on the criteria of whether the costs are unusual in nature and are
expected to cease when the transition activities related to these initiatives
end. Because the presence of restructuring charges and transition costs makes
it difficult to see the underlying trends within the company's businesses, the
company also presents its results on a pro forma or core basis, which excludes
these as well as other non-recurring charges incurred in the period.
Net sales for the second quarter were $692 million, up 3% from net sales of
$674 million in the same quarter of last year. Core unit volume growth
generated substantially all of the increase. The most significant sales gains
were made in the Mac Tools r and U.S. consumer mechanics tools markets and in
the North American Fastening Systems business. U.S. markets continued to be
strong for Stanley products, however, European and Asian markets reflected
economic weakening. Revenue contributed by the late 1997 acquisition of Atro
Industriale, SpA offset the divested sales activity from the Access
Technologies European business to contribute a 1% increase in net sales.
Foreign currency translation, primarily Asia, decreased sales by 1%. Net
sales for the six month period increased by 3% to $1,364 million primarily
from unit volume growth.
Gross profit of $243 million increased 7% from $227 million reported in the
second quarter 1997. Gross profit as a percent of sales increased from 33.8%
to 35.1%. Included in the second quarter cost of sales for 1998 was $3
million of restructuring-related transition costs, primarily for plant
rationalization activities, as compared with $8 million recorded in 1997.
Excluding these transition costs related to the start up and moving of
production to new facilities, on a core basis, gross profit margin as a
percent of sales increased to 35.5% from 34.9%. Substantially all of the
margin improvement was contributed by the growth of the MacDirect (TM) program
which provides for higher gross margins as additional volume is generated from
-8-
a direct sales force rather than through independent distributors. These
higher margins are offset to some extent by increased selling expenses.
This program, along with higher production volume and savings from
productivity initiatives improved the year to date gross margins as a percent
of sales from 33.5% to 35.2%. On a core basis, gross profit as a percent of
sales for the six month period was 35.7%, up from 34.5% in the same period
last year.
Selling, general and administrative expenses increased to $166 million in the
second quarter 1998 from $154 million in 1997. As a percent of sales, these
expenses increased from 22.8% to 24.0%. This change included increased
spending on restructuring-related transition and other non-recurring costs
from $5 million in 1997 to $13 million in 1998. Although the focus of
restructuring initiatives has shifted this year from the consolidation of the
North American distribution centers to the functional reorganization, related
spending has not significantly changed year to year. The $8 million increase
in non-recurring costs compared to last year is attributable primarily to
systems conversions for the Year 2000 ("Y2k") remediation. To the greatest
extent possible, the Y2k systems solutions are being designed to provide a
common computer platform for the Company. This directly facilitates the
centralization of functions envisioned by the restructuring initiatives. On a
core basis selling, general and administration expenses increased $4 million
over the prior year quarter. Higher selling and administration costs
associated with the growth in the MacDirect (TM) program were partially offset
by savings generated from restructuring initiatives. In addition, as planned,
the early stages of the restructuring program to reallocate resources brings
about a positive effect on gross margins, but also increases marketing,
advertising and product development spending. Increased spending on growth
programs is being closely monitored and is being limited to the extent of
restructuring savings actually achieved.
Selling, general and administration expenses for the six month period were
$337 million, or 24.7% of sales, as compared with $307 million, or 23.3% of
sales, in the same period of 1997. Transition and other non-core spending
in the first six months of 1998 of $26 million represented an increase of $16
million over the same period last year. As in the second quarter the increase
was primarily attributable to Y2k remediation costs. Selling, general and
administration expenses excluding restructuring-related transition and other
non-recurring costs was $311 million, up $14 million from the prior year due
principally to the growth in the MacDirect (TM) program and reinvestment of
savings achieved from the operational restructuring savings into spending on
brand and new product development.
Net interest expense for the second quarter and for the six month period was
slightly higher than the comparable period of 1997 due to higher net
borrowings, which were used primarily to fund increased working capital.
Other, net expense of $4.1 million in the second quarter 1998 was
significantly lower than $13.6 million recorded in the prior year quarter. A
one-time, non-cash charge was included in the 1997 quarter and related to
stock options issued to the company's newly recruited chief executive officer
and represented substantially all of the variance. The 1997 second quarter
charge also represented the majority of the decrease in other, net expense for
the six month period.
Net earnings of $42 million, or $.47 per diluted share, were reported for the
second quarter 1998. In the second quarter of 1997, the company recorded a
significant restructuring and asset write-off charge of $137 million. The
-9-
charge related to restructuring initiatives providing for the reallocation of
resources freed from streamlining manufacturing, sales, distribution and
administrative operations in order to fund increased investment in brand and
new product development to stimulate long-term profitable growth.
Specifically, the company is reorganizing its operations into a product
management organizational structure and will centralize manufacturing,
engineering, sales and service, finance, human resource and information
technology. Overall these actions are expected to result in a decrease of
manufacturing and distribution facilities from 123 to 70 and change the
composition of the company's workforce with a resulting reduction in net
employment levels of 4,500. This charge contributed to a reported net loss
in the second quarter 1997 of $65 million, or $.72 per diluted share. Net
earnings on a pro-forma or "core" basis, which excludes restructuring-related
transition and other non-recurring charges, would have been $52 million, or
$.58 per diluted share, in the second quarter 1998 as compared with $49
million, or $.55 per diluted share, in 1997.
The company's restructuring initiatives are progressing substantially as
planned. While the anticipated results of the initiatives continue to be
as originally estimated, the timing of project completions may potentially
be delayed as it is dependent on the company's achievement of common
systems. Through July 1998, 24 facilities have been closed and 1500 employees
have been terminated (450 employees during 1998). During the first six months
of 1998, the company made payments of $12 million for severance and benefit
costs and payments of $4 million for other exit costs. At July 4, 1998,
the reserve balances related to the restructuring was $183 million.
For the first six months of 1998 net income of $79 million, or $.87 per
diluted share, was reported as compared with a net loss of $28 million, or
$.31 per diluted share, in the same period of 1997. The net restructuring
charge in 1997 of $133 million included a net restructuring gain reported in
the first quarter 1997 resulting from the divestiture of several businesses
offset by severance and other exit costs associated with the restructuring
program. Net earnings for the six months on a core basis would have been
$99 million, or $1.09 per diluted share, as compared with $89 million, or $.99
per diluted share, in 1997.
In the Tools segment overall, second quarter net sales increased 3% over the
prior year, primarily from unit volume growth. Both industrial and
engineered tools unit volume increased by 4% driven by the Mac Tools and
Fastening Systems businesses. Unit volume for consumer tools increased only
1% with strength in the consumer mechanics tools market offsetting declines in
carpenters tools. While pricing had no net effect on sales, increases in
consumer and industrial businesses offset the continuation of price erosion in
the markets for pneumatic tools and fasteners. As reflected in the attached
table, "Business Segment Information," second quarter 1998 core operating
profits for this segment, excluding restructuring charges, restructuring-
related transition costs and other non-recurring charges, were $87 million, up
from $83 million in the prior year second quarter. As a percent of sales,
operating profitability increased to 16.4% from 16.0% in the prior year. The
profitability of the MacDirect (TM) program as well as the benefits of
restructuring initiatives contributed to this improvement. For the six month
period core operating profits were $163 million, or 15.5% of sales, up from
$148 million, or 14.8% of sales in 1997.
The Hardware segment reported net sales of $86 million, essentially flat with
the second quarter last year. Unit volume increases of 2% were offset by
pricing and foreign currency translation. On a core basis, operating profit
decreased to 10.0% from 14.2% in the prior year, reflecting both mix and lower
than expected volumes in the Home Decor business. In the beginning of the
quarter Home Decor's largest customers initiated corrections to their
inventory levels, however, the necessary reductions in factory spending lagged
the lower level of sales. This also contributed to the decline in core
operating margins for the six month period declining from 14.7% of sales to
13.4% of sales.
-10-
Net sales in the Specialty Hardware segment were $73 million, up 2% from the
prior year. Very strong unit volume growth, driven primarily by the growth in
Access Technologies' national account business in the U.S., increased sales by
7%. The recent divestiture of the European business of Access Technologies
reduced sales by 6% and the net effects of pricing and foreign currency
translation provided a net 1% increase in revenue. Core operating profit as a
percent of sales increased to 8.2% from 5.6% in the second quarter due
primarily to increased volumes, productivity gains and lower wood prices in
the U.S. entry door business.
Core operating profits in the U.S. declined slightly to 15.8% of sales from an
unusually strong 16.1% in the prior year quarter. European profitability
declined to 11.1% of sales from 13.6% in 1997. The quarter reflected slowing
in the company's European markets and continued pricing pressures in the
fastening systems business. In Other Areas operating margins improved to
13.1% primarily due to the additional profitability of the company's Latin
American business.
Liquidity and Sources of Capital
Net cash flow from operations was $11 million for the second quarter 1998,
down substantially from $48 million generated in the same quarter of 1997.
The lower net cash flow is due primarily to an increase in inventory levels
reflecting the company's priority commitment to improving customer service.
The focus on improving customer service also incorporates a SKU reduction
program and an initiative to improve production planning. This short-term
inventory build is not expected to be a significant ongoing cash requirement
and is expected to be reversed as longer term improvements, including the SKU
reduction and improved production planning, are implemented.
Capital expenditures of $14 million in the second quarter and $21 million for
the six months were lower than spending in the comparable periods of the prior
year. A major component of the company's restructuring initiative is the
improvement of manufacturing efficiency through the establishment of the
Stanley Production System "SPS". Activities associated with the SPS program
have temporarily reduced the capital required to expand or improve capacity.
The total anticipated spending for capital has not yet been determined,
however, it is likely to be lower than the annual capital spending in prior
years.
Other Issues
The company is reviewing its products in light of the December 1, 1997 Federal
Trade Commission announcement of its enforcement policy with respect to "Made
in USA" labeling. In some cases, this review will result in the company's
increasing the domestic content of products or changing the labeling of
products. The impact of these changes on the company's results of operations
or financial position is not expected to be material.
On January 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing
currencies ("legacy currencies ") and one common currency - the euro. The euro
will then trade on currency exchanges and may be used in business
-11-
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
Company's operating subsidiaries affected by the euro conversion are
developing plans to address the systems and business issues raised by the euro
currency conversion. These issues include, among others, (1) the need to
adapt computer and other business systems and equipment to accommodate euro-
denominated transactions; and (2) the competitive impact of cross-border price
transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis. The
Company has not yet completed its estimate of the potential impact likely to
be caused by the euro conversion, however, it is not expected to have a
material adverse impact on its financial condition or results of operations.
Cautionary Statements Under the Private Securities Litigation Reform Act of
1995
The company's ability to achieve the growth expected from its restructuring
initiatives is dependent on several factors. These factors include the
ability to develop new products that will be successful in the marketplace; to
expand into "near neighbor" or related products; to position Stanley(R) as a
"Great Brand" in the marketplace; and to position the company as a low cost
producer.
These initiatives are in turn dependent on several factors. These include the
company's ability to generate the necessary cost savings to fund these
initiatives from a reallocation of resources, including the simplification of
the organization, the change in the composition of the workforce and the
standardization of the operating mechanisms.
The company's ability to achieve savings from the resource reallocation is
dependent upon the development and execution of comprehensive plans for the
facility consolidations so that among other things, the closures can be
executed without a disruption in customer service; the prompt resolution of
any labor issues arising from any employee terminations related to the closure
of facilities or to changes in the composition of the workforce; the
implementation of process improvements in the company's manufacturing
operations in order to meet customer requirements for on-time delivery,
quality and value; the ability of the organization to complete the transition
to a product management structure without losing focus on the business; the
ability to recruit, train and retain high level employees with the relevant
experience to execute the necessary changes; the availability of vendors to
perform non-core functions; the need to respond to significant changes in
product demand during the transition; the complexity and ultimate extent of
Y2k compliance efforts; and unforeseen events.
- -12-
THE STANLEY WORKS AND SUBSIDIARIES
PRICE/VOLUME INFORMATION
(Unaudited, Millions of Dollars)
NET SALES
Second Quarter
---------------------------------------------------
Unit ACQ/
1998 Price Volume DVT Currency 1997
---------------------------------------------------
INDUSTRY SEGMENTS
Tools
Consumer $ 183.7 1% 1% - (3)% $ 184.5
Industrial 151.1 - 4% - - 145.3
Engineered 197.9 (2)% 4% 5% (1)% 186.4
------ ------
Total Tools 532.7 - 3% 2% (2)% 516.2
Hardware 86.3 (1)% 2% - (1)% 86.2
Specialty Hardware 72.8 2% 7% (6)% (1)% 71.2
------ ------
Consolidated $ 691.8 - 3% 1% (1)% $ 673.6
====== ======
GEOGRAPHIC AREAS
United States $ 502.7 - 5% - - $ 479.7
Europe 109.6 - (1)% 6% (2)% 106.3
Other Areas 79.5 1% (2)% - (8)% 87.6
------ ------
Consolidated $ 691.8 - 3% 1% (1)% $ 673.6
====== ======
Year to Date
----------------------------------------------------
Unit ACQ/
1998 Price Volume DVT Currency 1997
----------------------------------------------------
INDUSTRY SEGMENTS
Tools
Consumer $ 356.7 1% 2% - (4)% $ 358.9
Industrial 302.2 - 7% - - 281.5
Engineered 386.3 (2)% 5% 6% (1)% 358.5
------- -------
Total Tools 1,045.2 - 5% 2% (2)% 998.9
Hardware 182.6 (2)% 5% - (1)% 179.3
Specialty Hardware 135.9 2% 4% (9)% (1)% 142.0
------- -------
Consolidated $ 1,363.7 - 5% - (2)% $ 1,320.2
======= =======
GEOGRAPHIC AREAS
United States $ 978.4 (1)% 7% (1)% - $ 935.5
Europe 229.5 1% 3% 7% (4)% 214.1
Other Areas 155.8 1% (1)% (1)% (8)% 170.6
------- -------
Consolidated $ 1,363.7 - 5% - (2)% $ 1,320.2
======= =======
-13-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
OPERATING PROFIT
Second Quarter 1998
-----------------------------------------------------
Related Core
Restrg Transition Profit
Reported Charges Costs Core Margin
-----------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 76.5 $ - $ 11.1 $ 87.6 16.4%
Hardware 6.4 - 2.2 8.6 10.0%
Specialty Hardware 3.0 - 3.0 6.0 8.2%
----- ----- ----- -----
Total 85.9 - 16.3 102.2 14.8%
Net corporate
expenses (11.8) - - (11.8)
Interest expense (6.6) - - (6.6)
----- ----- ----- -----
Earnings before
income taxes $ 67.5 $ - $ 16.3 $ 83.8
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 65.1 $ - $ 14.5 $ 79.6 15.8%
Europe 11.2 - 1.0 12.2 11.1%
Other Areas 9.6 - 0.8 10.4 13.1%
----- ----- ----- -----
Total $ 85.9 $ - $ 16.3 $ 102.2 14.8%
===== ===== ===== =====
Second Quarter 1997
-----------------------------------------------------
Related Core
Restrg Transition Profit
Reported Charges Costs* Core Margin
-----------------------------------------------------
INDUSTRY SEGMENTS
Tools $ (38.3) $ 110.7 $ 10.4 $ 82.8 16.0%
Hardware 2.6 7.5 2.1 12.2 14.2%
Specialty Hardware (9.8) 13.7 - 3.9 5.6%
----- ----- ----- -----
Total (45.5) 131.9 12.5 98.9 14.7%
Net corporate
expenses (29.6) 5.3 11.0 (13.3)
Interest expense (6.4) - - (6.4)
----- ----- ----- -----
Earnings (loss) before
income taxes $ (81.5) $ 137.2 $ 23.5 $ 79.2
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ (19.1) $ 87.6 $ 8.5 $ 77.0 16.1%
Europe (12.0) 24.1 2.4 14.5 13.6%
Other Areas (14.4) 20.2 1.6 7.4 8.4%
----- ----- ----- -----
Total $ (45.5) $ 131.9 $ 12.5 $ 98.9 14.7%
===== ===== ===== =====
* Includes stock option charge.
-14-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
OPERATING PROFIT
Year to Date 1998
------------------------------------------------------
Related Core
Restrg Transition Profit
Reported Charges Costs Core Margin
------------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 139.4 $ - $ 23.1 $ 162.5 15.5%
Hardware 20.1 - 4.3 24.4 13.4%
Specialty Hardware 2.9 - 5.2 8.1 6.0%
----- ----- ----- -----
Total 162.4 - 32.6 195.0 14.3%
Net corporate
expenses (23.3) - - (23.3)
Interest expense (13.4) - - (13.4)
----- ----- ----- -----
Earnings before
income taxes $ 125.7 $ - $ 32.6 $ 158.3
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 120.3 $ - $ 28.8 $ 149.1 15.2%
Europe 24.6 - 2.3 26.9 11.7%
Other Areas 17.5 - 1.5 19.0 12.2%
----- ----- ----- -----
Total $ 162.4 $ - $ 32.6 $ 195.0 14.3%
===== ===== ===== =====
Year to Date 1997
------------------------------------------------------
Related Core
Restrg Transition Profit
Reported Chgs Costs* Core Margin
------------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 17.7 $ 111.8 $ 18.0 $ 147.5 14.8%
Hardware 14.4 7.9 4.0 26.3 14.7%
Specialty Hardware (7.5) 14.3 0.2 7.0 4.9%
----- ----- ----- -----
Total 24.6 134.0 22.2 180.8 13.7%
Net corporate
expenses (35.4) (1.4) 11.1 (25.7)
Interest expense (12.0) - - (12.0)
----- ----- ----- -----
Earnings (loss) before
income taxes $ (22.8) $ 132.6 $ 33.3 $ 143.1
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 34.1 $ 88.8 $ 16.1 $ 139.0 14.9%
Europe (0.7) 24.5 3.5 27.3 12.8%
Other Areas (8.8) 20.7 2.6 14.5 8.5%
----- ----- ----- -----
Total $ 24.6 $ 134.0 $ 22.2 $ 180.8 13.7%
===== ===== ===== =====
* Includes stock option charge
-15-
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 1998, 1,183 shares were issued to
certain participants in the Company's U.K. Savings Related Share Plans (the
"Savings Plan").
(2) Participation in the Savings Plan is offered to all employees of the
Company's subsidiaries in the United Kingdom.
(3) The total dollar value of the shares issued during the quarter was
$22,119.69.
460 shares were issued at $18.15 per share with an aggregate value of
$8,349.00
368 shares were issued at $15.5334 per share with an aggregate value of
$5,716.29
166 shares were issued at $15.8834 per share with an aggregate value of
$2,636.64
94 shares were issued at $24.15 per share with an aggregate value of $2,270.10
95 shares were issued at $33.1333 per share with an aggregate value of
$3,147.66
(4) 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.
(5) 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. Employees who are terminated and whose options have
not lapsed have six months from the date of termination to elect to receive
shares with the savings accumulated as of the termination date.
-16-
Item 4. - Submission of Matters to a Vote of Security-Holders
(a) The company's annual meeting of shareholders was held on April 15, 1998.
(c)(i) The following directors were elected:
Shares Voted Shares
For Withheld Non-Votes
- - - - - - - - - - - - - - - -
James G. Kaiser 70,773,888 1,166,845 0
Hugo E. Uyterhoeven 70,843,918 1,096,815 0
Walter W. Williams 70,794,017 1,146,716 0
(ii) The material terms of performance goals were approved by the following
vote:
Shares Voted Shares Voted Shares Voted
For Against Abstaining Non-Votes
- - - - - - - - - - - - - - - - - - - - - - - -
67,940,612 3,226,359 773,761 0
(iii) The 1997 Long-Term Plan was approved by the following vote:
Shares Voted Shares Voted Shares Voted
For Against Abstaining Non-Votes
- - - - - - - - - - - - - - - - - - - - - - - -
51,740,755 19,333,871 866,106 0
(iv) Ernst & Young LLP was approved as the company's independent auditors by
the following vote:
Shares Voted Shares Voted Shares Voted
For Against Abstaining Non-Votes
- - - - - - - - - - - - - - - - - - - - - - - -
71,163,016 497,444 280,273 0
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) See Exhibit Index on page 19
(b) Reports on Form 8-K.
(1) Registrant filed a Current Report on Form 8-K, dated April 22,
1998, in respect of the Registrant's press release announcing
first quarter earnings.
(2) Registrant filed a Current Report on Form 8-K, dated April 23,
1998, in respect of the Registrant's press release announcing
that it had signed a definitive agreement to acquire 90% of the
outstanding shares of ZAG Industries, Ltd.
(3) Registrant filed a Current Report on Form 8-K, dated June 23,
1998, in respect of the Registrant's press release discussing
expected second quarter results and long-term business outlook.
-17-
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 18, 1998 By: Theresa F. Yerkes
Theresa F. Yerkes
Vice President and
Controller (Chief Financial
Officer, Chief Accounting
Officer and Authorized
Signatory of the Registrant)
-18-
EXHIBIT INDEX
EXHIBIT LIST
(3) (i) By-laws.
(10) (i) Note Purchase Agreement, dated as of June 30, 1998, between
Stanley Account Value Plan Trust, acting by and through
Citibank, N.A., as trustee under the trust agreement for
the Stanley Account Value Plan, for $41,050,763 6.07% Senior
ESOP Guaranteed Notes Due December 31, 2009.
(ii) New 1991 Loan Agreement dated June 30, 1998 between The
Stanley Works, as lender, and Citibank, N.A., as trustee under
the trust agreement for the Stanley Account Value Plan, to
refinance the 1991 Salaried ESOP Loan and the 1991 Hourly ESOP
Loan and their related promissory notes.
(iii) Management Incentive Compensation Plan effective January 4,
1998.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
-19-