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 October 2, 1999.
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 89,424,663
as of November 12, 1999.
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)
Third Quarter Nine Months
1999 1998 1999 1998
------- ------- --------- ---------
Net Sales $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
Costs and Expenses
Cost of sales 446.9 453.2 1,353.4 1,337.1
Selling, general and
administrative 166.9 172.7 522.2 509.9
Interest - net 7.0 7.4 21.9 17.4
Other - net (6.2) 2.7 0.8 9.6
------- ------- --------- ---------
614.6 636.0 1,898.3 1,874.0
------- ------- --------- ---------
Earnings before
income taxes 77.4 53.6 162.9 179.3
Income Taxes 27.1 20.2 57.0 67.3
------- ------- --------- ---------
Net Earnings $ 50.3 $ 33.4 $ 105.9 $ 112.0
======= ======= ========= =========
Net Earnings Per
Share of Common Stock
Basic $ 0.56 $ 0.37 $ 1.18 $ 1.25
======= ======= ========= =========
Diluted $ 0.56 $ 0.37 $ 1.18 $ 1.24
======= ======= ========= =========
Dividends per share $ 0.22 $ 0.215 $ 0.65 $ 0.615
======= ======= ========= =========
Average shares outstanding
(in thousands)
Basic 89,687 89,367 89,532 89,413
======= ======= ========= =========
Diluted 89,949 90,102 89,805 90,338
======= ======= ========= =========
See notes to consolidated financial statements.
-1-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
October 2 January 2
1999 1999
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 131.5 $ 110.1
Accounts and notes receivable 576.0 517.0
Inventories 367.1 380.9
Other current assets 74.8 78.4
-------- --------
Total Current Assets 1,149.4 1,086.4
Property, Plant and Equipment 1,186.9 1,198.5
Less: Accumulated Depreciation (691.0) (687.1)
-------- --------
495.9 511.4
Goodwill and Other Intangibles 187.6 196.9
Other Assets 129.0 138.2
-------- --------
$ 1,961.9 $ 1,932.9
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term borrowings $ 210.7 $ 207.8
Current maturities of long-term debt 12.2 14.2
Accounts payable 203.7 172.1
Accrued expenses 309.0 308.0
-------- --------
Total Current Liabilities 735.6 702.1
Long-Term Debt 299.2 344.8
Other Liabilities 213.5 216.6
Shareowners' Equity
Common stock 230.9 230.9
Retained earnings 892.4 867.2
Accumulated other comprehensive loss (97.6) (84.6)
ESOP debt (205.0) (213.2)
-------- --------
820.7 800.3
Less: cost of common stock in treasury 107.1 130.9
-------- --------
Total Shareowners' Equity 713.6 669.4
-------- --------
$ 1,961.9 $ 1,932.9
======== ========
See notes to consolidated financial statements.
-2-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Millions of Dollars)
Third Quarter Nine Months
1999 1998 1999 1998
------ ------ ------ ------
Operating Activities
Net earnings $ 50.3 $ 33.4 $ 105.9 $ 112.0
Depreciation and amortization 20.9 20.0 66.2 58.1
Other non-cash items (4.0) 1.1 9.8 11.7
Changes in operating assets
and liabilities 25.2 (58.5) (29.3) (196.0)
------ ------ ------ ------
Net cash provided (used) by
operating activities 92.4 (4.0) 152.6 (14.2)
Investing Activities
Capital expenditures (17.9) (14.4) (58.4) (35.3)
Capitalized software (13.2) (4.3) (23.4) (6.1)
Proceeds from sales of assets 22.1 3.4 37.0 12.2
Business acquisitions - (99.9) - (99.9)
Other 2.5 (5.4) (1.6) (5.5)
------ ------ ------ ------
Net cash used by
investing activities (6.5) (120.6) (46.4) (134.6)
Financing Activities
Payments on long-term borrowings - (1.9) (156.0) (40.0)
Proceeds from long-term borrowings 0.4 60.7 121.3 60.7
Net short-term borrowings (30.7) 76.6 4.0 113.1
Proceeds from issuance of common stock 2.3 5.0 7.3 19.5
Proceeds from swap termination 13.9 - 13.9 -
Purchase of common stock for treasury (4.8) (8.7) (13.7) (38.3)
Cash dividends on common stock (19.6) (19.1) (57.9) (54.7)
------ ------ ------ ------
Net cash provided (used) by
financing activities (38.5) 112.6 (81.1) 60.3
Effect of Exchange Rate Changes on Cash (0.7) (0.2) (3.7) 1.5
------ ------ ------ ------
Increase (Decrease) in Cash and
Cash Equivalents 46.7 (12.2) 21.4 (87.0)
Cash and Cash Equivalents,
Beginning of Period 84.8 77.4 110.1 152.2
------ ------ ------ ------
Cash and Cash Equivalents,
End of Third Quarter $ 131.5 $ 65.2 $ 131.5 $ 65.2
====== ====== ====== ======
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. 2, 1999 $230.9 $867.2 $(84.6) $(213.2) $(130.9) $669.4
Comprehensive income:
Net earnings 105.9
Foreign currency
translation (13.0)
Total comprehensive
income 92.9
Cash dividends
declared (57.8) (57.8)
Net common stock
activity (25.5) 23.8 (1.7)
Tax benefit related
to stock options 0.6 0.6
ESOP debt 8.2 8.2
ESOP tax benefit 2.0 2.0
---------------------------------------------------------
Balance Oct 2, 1999 $230.9 $892.4 $(97.6) $(205.0) $(107.1) $713.6
=========================================================
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareowners'
Stock Earnings (Loss) Debt Stock Equity
---------------------------------------------------------
Balance Jan. 3, 1998 $230.9 $806.6 $(85.3) $(223.8) $(120.6) $607.8
Comprehensive income:
Net earnings 112.0
Foreign currency
translation 0.1
Total comprehensive
income 112.1
Cash dividends
declared (54.7) (54.7)
Net common stock
activity (7.4) (11.2) (18.6)
Tax benefit related
to stock options 3.7 3.7
ESOP debt 5.4 5.4
ESOP tax benefit 2.1 2.1
---------------------------------------------------------
Balance Oct 3,1998 $230.9 $862.3 $(85.2) $(218.4) $(131.8) $657.8
=========================================================
See notes to consolidated financial statements.
-4-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
Third Quarter Nine Months
1999 1998 1999 1998
------- ------- --------- ---------
INDUSTRY SEGMENTS
Net Sales
Tools $ 525.5 $ 535.1 $ 1,584.1 $ 1,580.3
Doors 166.5 154.5 477.1 473.0
------- ------- --------- ---------
Consolidated $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
======= ======= ========= =========
Operating Profit
Tools $ 67.3 $ 72.0 $ 207.9 $ 218.3
Doors 10.9 17.2 32.6 46.1
------- ------- --------- ---------
78.2 89.2 240.5 264.4
Restructuring-related
transition and other
non-recurring costs - (25.5) (54.9) (58.1)
Interest-net (7.0) (7.4) (21.9) (17.4)
Other-net 6.2 (2.7) (0.8) (9.6)
------- ------- --------- ----------
Earnings Before
Income Taxes $ 77.4 $ 53.6 $ 162.9 $ 179.3
======= ======= ========= ==========
GEOGRAPHIC NET SALES
United States $ 496.4 $ 493.8 $ 1,466.5 $ 1,471.2
Other Americas 51.3 51.1 150.5 163.6
Europe 119.0 118.9 372.7 348.4
Asia 25.3 25.8 71.5 70.1
------- ------- --------- ----------
Consolidated $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
======= ======= ========= ==========
See notes to consolidated financial statements.
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THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1999
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 2, 1999.
NOTE B - Earnings Per Share Computation
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
Third Quarter Nine Months
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net earnings -
basic and diluted $ 50.3 $ 33.4 $ 105.9 $ 112.0
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 89,686,916 89,367,471 89,531,833 89,412,986
Dilutive effect of
employee stock options 262,205 734,349 273,108 925,461
---------- ---------- ----------- ----------
Diluted earnings per share -
weighted average shares 89,949,121 90,101,820 89,804,941 90,338,447
========== ========== =========== ==========
NOTE C - Inventories
The components of inventories at the end of the third quarter of 1999
and at year-end 1998, in millions of dollars, are as follows:
October 2 January 2
1999 1999
------ ------
Finished products $ 263.1 $ 273.3
Work in process 51.3 52.5
Raw materials 52.7 55.1
------ ------
$ 367.1 $ 380.9
====== ======
-6-
NOTE D - Cash Flow Information
Interest paid during the third quarters of 1999 and 1998 amounted to $7.1
million and $4.2 million, respectively. Interest paid for the nine months of
1999 and 1998 amounted to $24.5 million and $18.6 million, respectively.
Income taxes refunded net of payments made for the third quarter of 1999 were
$4.7 million. Income taxes paid during the third quarter of 1998 were $17.7
million. Income taxes paid (net of refund received in 1999) for the nine
months of 1999 and 1998 were $16.3 million and $64.3 million, respectively.
NOTE E - 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," which was originally to be effective in
fiscal year 2000. In May 1999, the Financial Accounting Standards Board
deferred the effective date for one year and the standard now will be
effective in fiscal year 2001. The adoption of this standard is not expected
to have a material impact on the company's balance sheet, operating results or
cash flows.
NOTE F - Long-Term Debt
In the first quarter 1999, the company issued $120 million of 5 year debt to
capitalize on the current rate environment and reduce its reliance on short-
term sources of funds.
Note G - Other-net
Other income in the third quarter of 1999 included non-recurring currency
related gains of $9.2 million, $.06 per share, comprised of a gain of $11.4
million realized upon the termination of a cross-currency financial instrument
partially offset by other currency related items of $2.2 million. In connection
with the termination, an additional $7.8 million was deferred from current
income and will be recognized as an interest yield adjustment over the remaining
life of the underlying debt.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company's goal is to become one of the world's Great Brands,
delivering sustained, profitable growth. To achieve this goal the company
undertook a major restructuring to consolidate manufacturing and
distribution operations, simplify the organizational structure and make
other changes to position itself as a low cost producer. The savings
associated with those changes were targeted for reinvestment in growth
initiatives such as new product and brand development. As of September
1999, most of the benefits originally anticipated from those initiatives
have been realized. The company believes it has made substantial
progress toward becoming a great brand and remains committed to its
objective of delivering sustained, profitable growth. The company is in
the process of developing new sales and marketing programs to stimulate
sales growth and developing new cost reduction and restructuring
initiatives to lower the company's cost structure, improve customer
service, and generate earnings growth.
Net sales were $692 million, a slight increase from $690 million in the
same quarter last year. ZAG Industries Ltd. ("ZAG"), which was acquired
in August 1998, contributed 2% to the sales growth. This growth was
offset by a 1% reduction in sales from the net effect of pricing and
foreign currency translation and a 1% decline due to unit volume
declines. Only a nominal volume decline was experienced despite
bankruptcy proceedings for a major U.S. retail customer and a work
stoppage, since resolved, in the French hand tools business. In addition,
the weaker Latin American market continued to negatively impact the
company's sales volume. These declines in sales volume were offset,
though not completely, by a double-digit volume increase in the U.S.
residential doors business and volume improvements in the U.S. industrial
mechanics tools and fastening systems businesses.
Net sales were $2,061 million for the first nine months of 1999, a slight
increase from the same period last year. ZAG contributed 3% to this
sales growth, which was partially offset by reduced sales volume from
ongoing businesses. Lingering effects of poor 1998 fill rates in hardware
and tools continue to depress sales even though many of those operational
problems have been corrected. European sales volume was negatively
affected earlier in 1999 by inefficiencies stemming from the closure of a
European distribution center and pricing competition in the European
fastening system business. Additionally, a weak economy in Latin America
and difficulties associated with the implementation of SAP software
during the second quarter of 1999 in a portion of the company's doors
business contributed to the lower sales volumes. These declines in sales
volume were offset by a double-digit volume increase in the U.S.
residential doors business and volume improvement in the U.S. fastening
systems businesses.
The company's restructuring initiatives have required expenditures which
affect the financial statements. Restructuring-related transition costs
are costs resulting from these initiatives that are classified as period
operating expenses within cost of sales or selling, general and
administrative expense. These 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
the changes encompassed by the restructuring initiatives. Management uses
its judgment to determine which costs should be classified as transition
-8-
costs based on whether the costs are unusual in nature, incurred only
because of restructuring initiatives and are expected to cease when the
transition activities end. In addition, the company is incurring costs to
remediate its computer and related systems so that these systems will
function properly with regard to date issues related to Year 2000
("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 excluding these identifiable costs.
These pro forma or "core" results are the basis of business segment
information. In addition, the narrative regarding results of operations
has 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 are no longer disclosed separately as they are
significantly lower than amounts previously incurred and are being phased
out completely. Prior period information continues to exclude these
costs for consistency with information previously disclosed.
The company reported gross profit of $245 million, or 35.4% of net sales
in the third quarter of 1999. This represented an increase from $236
million, or 34.3% of net sales, reported in the third quarter of 1998.
Core gross profits for the third quarter of 1998 excluding $5 million of
restructuring-related transition costs, primarily for plant
rationalization activities, were 35.0% of net sales. The improvement in
gross margins was principally due to improved cost management,
principally in Mechanics Tools and Hand Tools manufacturing operations.
The company reported gross profit of $708 million, or 34.3% of net sales
for the first nine months of 1999 compared to 34.9% of net sales in 1998.
Included in the cost of sales for 1999 was $20 million of restructuring-
related transition costs, primarily for plant rationalization activities,
as compared with $12 million recorded in the same period of 1998. Core
gross profits were 35.3% of net sales, compared with 35.5% for the first
nine months of 1998. During this period of 1999, the productivity savings
from restructuring and centralized procurement activities were almost
entirely offset by production and distribution inefficiencies.
Selling, general and administrative expenses were $167 million, or 24.1%
of net sales, in the third quarter of 1999, as compared with $173
million, or 25.0% of net sales in the third quarter of 1998. The decrease
in spending is attributed to lower spending on restructuring-related
transition and other non-recurring costs, which was $20 million in 1998.
Selling, general and administrative expenses on a core basis for the
third quarter last year were $152 million. The increase was the result
of Y2K costs, the Zag acquisition, higher selling and administrative
costs inherent in the Mac Direct program, implementation of new sales and
marketing initiatives designed to drive sales growth in retail channels,
increased information management infrastructure costs, and increased
reserves for uncollectible accounts receivable.
Selling, general and administrative expenses were $522 million, or 25.3%
of net sales, in the nine month period of 1999, as compared with $510
million, or 24.8% of net sales in 1998. Restructuring-related transition
and other non-recurring costs were $35 million in 1999 compared to $46
million in 1998. On a core basis, selling, general and administrative
expenses increased to $487 million in 1999 from $464 million in 1998.
This increase is primarily the result of the Zag acquisition and higher
selling and administrative costs inherent in the Mac Direct program.
-9-
Net interest expense was $7 million in the third quarter of 1999 and $22
million for the first nine months of 1999 compared to $7 million and $17
million, respectively, for the same periods in 1998. The increase in the
nine-month comparison is attributed to the increased level of debt
associated with the acquisition of ZAG and the funding of working capital
increases.
Other-net of $6 million income in the third quarter of 1999 and $1
million expense for the nine month period of 1999 compared to expense of
$3 million and $10 million, respectively, for the same periods in 1998.
This reduction in 1999 expense is primarily attributed to a gain
realized during the third quarter of 1999 upon the termination of a
cross-currency financial instrument.
The company's 1999 effective annual income tax rate was 35.0% for the
third quarter and first nine months versus 37.5% for the similar periods
last year. This reduction reflected the continued benefit of structural
changes implemented in late 1998, as well as an increase in the company's
ability to utilize foreign tax credits associated with a higher portion
of the company's taxable income being earned overseas.
Net earnings for the third quarter were $50 million, or $.56 per diluted
share, compared with the prior year's net income of $33 million, or $.37
per diluted share. Net earnings on a core basis for 1998, would have been
$49 million, or $.55 per diluted share.
Net earnings for the first nine months of 1999 were $106 million, or
$1.18 per diluted share, compared with the prior year's net income of
$112 million, or $1.24 per diluted share. Net earnings on a core basis,
would have been $142 million, or $1.58 per diluted share in the first
nine months of 1999 compared with $148 million, or $1.64 per diluted
share in 1998.
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. As discussed previously, effective this
quarter, these costs are no longer analyzed separately from reported
results. Prior period information continues to exclude these costs for
consistency with information previously disclosed. Segment eliminations
are also excluded.
As reflected in the table, "Business Segment Information", Tools sales
in the third quarter of 1999 were $526 million, down 2% from the third
quarter last year. Sales were positively impacted by the ZAG
acquisition, which generated a 2% increase and by volume improvements in
the U.S. industrial mechanics tools and fastening systems businesses.
These increases were offset by lower unit volume in hand tools businesses
in Europe and Latin America, fastening systems business in Europe, and
hydraulic tools. The Tools segment core operating profit was 12.8% of net
sales for the third quarter of 1999, compared with 13.5% of net sales in
the same period last year. This decline in operating profit reflects the
effect of higher selling, general and administrative costs, including new
sales and marketing initiatives designed to drive retail sales growth and
increased provisions for uncollectible accounts receivable. These cost
increases combined with effects of customer service related cost
-10-
inefficiencies contributed to the decline in core operating profits for
the nine month period which were $208 million, or 13.1% of net sales,
compared to $218 million, or 13.8% of net sales in 1998.
Doors segment sales increased to $166 million, approximately 8% above
1998's third quarter. This segment was led by double-digit unit volume
sales of U.S. residential entry doors and U.S. home decor products. The
Doors segment core operating profit decreased to 6.5% of net sales in the
third quarter of 1999, compared with 11.1% of net sales in the same
period last year. This decline was largely due to the Hardware business
being burdened with costs of relocating production to low-cost locations,
meeting customer service delivery requirements, and increased provisions
for uncollectible accounts receivable due to a customer bankruptcy. These
issues combined with difficulties associated with a SAP software
implementation in the Access Technologies business resulted in decreased
core operating profits for the nine month period of $33 million, or 6.8%
of net sales, compared to $46 million, or 9.7% of net sales in 1998.
Restructuring
At January 2, 1999, reserve balances related to the company's
restructuring initiatives were $154 million, of which $44 million related
to the write-down of impaired assets. The remaining $110 million included
$73 million related to severance, and $37 million to environmental
remediation and other exit costs. For the nine months ended October 2,
1999, asset write-downs of $12 million, severance of $31 million and
payments for other exit costs of $14 million reduced these reserves. The
reserve balances at the end of the third quarter were $97 million, of
which $32 million related to the write-down of impaired assets, $42
million related to severance, and $23 million to environmental
remediation and other exit costs.
The company is currently re-evaluating the scope of initiatives
encompassed by the remaining restructuring reserves. The objective of
the review is to determine which restructuring initiatives should be
completed and also to identify new initiatives to further lower the
company's cost structure. The outcome of this effort, which will be
completed prior to year-end 1999, will be a reversal of reserves for
actions the company will not complete, offset to some extent by a charge
for reserves related to new initiatives. Until the detailed planning has
been completed the full effect will not be known, however, based on the
current stage of planning, management anticipates that the net impact
will not result in a charge to operations.
FINANCIAL CONDITION
Liquidity and Sources of Capital
In the third quarter of 1999, the company generated $92 million in
operating cash flow compared to $4 million operating cash flow used in
the third quarter of 1998. This significant increase was driven by better
working capital management and the elimination of restructuring-related
transition costs. For the nine months of 1999, the company's receivables
have increased by $59 million, inventory has declined by $14 million, and
accounts payable has increased by $32 million. The receivables increase
is primarily attributable to the Zag, U.S. residential entry doors and
Mac Tools growth. The inventory decrease is primarily attributed to SKU
reductions combined with improved order fill rates that have approached
customer-required levels in a number of the company's business units. The
accounts payable increase is attributed to paying vendors based on
estimated date of receipt of goods or services versus invoice date, which
was the past practice.
-11-
Capital expenditures were $18 million for the third quarter of 1999
representing an increase over the $14 million in third quarter of last
year. Investment in capital during 1998 was lower than traditional levels
and lower than depreciation and amortization. Facility consolidations,
continued outsourcing and the Stanley Production System (which focuses on
continuous improvement) collectively reduced the requirement for
operating capital. The level of spending has returned to more
traditional levels during 1999.
Strategic changes were made in the company's debt portfolio during early
1999. In 1998, funding for working capital and the acquisition of ZAG was
provided by increased short-term borrowings. Short-term sources of funds
were used at that time with the intent of subsequently securing medium
term financing for the acquisition component of the requirement. In the
first quarter 1999, the company issued $120 million of 5 year debt to
capitalize on the current rate environment and reduce its reliance on
short-term sources of funds.
Year 2000 Update
Since many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, these business
systems may be unable to process accurately certain data before, during
or after the year 2000. As a result, business and governmental entities
are at risk for possible miscalculations or systems failures causing
disruptions in their business operations. This is commonly known as the
Year 2000 or Y2K issue. The Y2K issue can arise at any point in the
company's supply, manufacturing, distribution and financial chains.
To address the potential impact of the Y2K problem on the company a Y2K
project office, was established in September 1997, and is staffed with
internal managers who are responsible for oversight and implementation of
the principal portions of the Y2K project. In addition, approximately 60%
of the internal information technology resources were committed to Y2K
remediation efforts. The scope of the project includes: (1) ensuring the
compliance of all applications, operating systems and hardware on
mainframe, PC and LAN platforms; (2) addressing issues related to
software and non-IT embedded systems used in plant and distribution
facilities; and (3) addressing the compliance of key suppliers and
customers. Each component of the project has four phases: inventory and
assessment of systems and equipment affected by the Y2K issue; definition
of strategies to address affected systems and equipment; remediation or
replacement of affected systems and equipment; and testing that each is
Y2K compliant.
(1) Application of Software and Hardware
With respect to ensuring the compliance of all applications, operating
systems and hardware (other than PCs) on the company's various computer
platforms, the assessment and definition of strategies phases have been
completed. Remediation or replacement and testing phases have been
completed for approximately 85% of information systems. Businesses not
yet completed with remediation and testing include Mac Tools, Proto,
Stanley-Vidmar, and Air Tools product lines. All remediation and testing
associated with those product lines is on track or ahead of schedule for
completion before the end of the year. In addition to the application
software and mainframe hardware, we have completed an inventory of all
PC's and related equipment and all planned remediation and testing is now
completed.
(2) Plant and Distribution Systems
With respect to addressing issues related to software and non-IT embedded
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systems used in the company's manufacturing and distribution facilities,
the assessment and definition of strategies phases have been completed.
The remediation or replacement phase, as well as such testing, as is
judged appropriate, has been completed.
(3) Suppliers and Vendors
The company relies on numerous third party suppliers in the operation of
its business. Interruption in the operations of any supplier due to Y2K
issues would affect company operations. The company has initiated
efforts to evaluate the status of its most critical suppliers' progress
and this process is almost complete. In addition, interruptions in
customers' operations due to Y2K issues would result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While
these events are possible, the company's customer and supplier base is
broad enough to minimize the impact of the failure of any single
interface. The company continues to test its customer and vendor
interfaces and expects to be finished by year-end. The Company is in
compliance with all customer interfaces tested to date.
It is currently estimated that the aggregate cost of the company's Y2K
efforts, which include internal and incremental costs, will be
approximately $114 million. Approximately $106 million of
these costs have been spent to date. It is expected that no more than
25% of the total cost will be capitalized.
All of the company's major businesses have completed a general level of
contingency planning and those businesses whose remediation projects are
not yet completed are developing more detailed and comprehensive
contingency plans. These plans provide for process changes, alternative
methods of processing including manual, temporary inventory builds,
adjustments to staffing and other strategies to minimize disruption
caused by any potential Y2K failure.
Management expects that the company's Y2K project significantly reduces
the company's level of uncertainty about the Y2K problem, and reduces the
likelihood of risk of interruptions to routine business operations.
Additional discussion of the risks associated with potential Y2K failures
is provided in the last paragraph under Risk/Cautionary Statements.
Risk/Cautionary Statements
The statements contained in this Quarterly Report on Form 10-Q for the quarter
ended October 2, 1999 regarding the company's ability to achieve
operational excellence and deliver sustained, profitable growth (e.g., sales
growth at twice the industry rate, earnings growth in the low to mid teens and
dividend growth) are forward looking and inherently subject to risk and
uncertainty.
The Company's drive for operational excellence is focused on improving
manufacturing operations, implementing related control systems and
consolidating multiple manufacturing and distribution facilities. The success
of these initiatives is dependent on (1) the Company's ability to increase the
efficiency of its routine business processes, to implement process control
systems, and to develop and execute comprehensive plans for facility
consolidations, (2) the availability of vendors to perform outsourced
functions, (3) the successful recruitment and training of new employees,
(4) the resolution of any labor issues related to closing facilities, (5) the
need to respond to significant changes in product demand while any facility
consolidation is in process and (6) other unforeseen events.
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The Company's ability to generate sustained, profitable growth is dependent on
successfully freeing up resources to fund new product and brand development
and new ventures to broaden its markets, and to defend market share in the
face of price and other competition. Success at developing new products will
depend on the ability of the new product development process to foster
creativity and identify viable new product ideas as well as the Company's
ability to attract new product engineers and to design and implement
strategies to effectively commercialize the new product ideas. The
achievement of growth through new ventures will depend upon the ability to
successfully identify, negotiate, consummate and integrate into operations
acquisitions, joint ventures and/or strategic alliances.
The Company's ability to achieve the objectives discussed above will be
affected by the installation and implementation of critical business
transaction systems associated with its Y2K compliance program prior to year-
end and by external factors. These external factors include pricing pressure
and other changes within competitive markets, the continued consolidation of
customers in consumer channels, increasing competition, changes in trade,
monetary and fiscal policies and laws, inflation, currency exchange
fluctuations, the impact of dollar/foreign currency exchange rates on the
competitiveness of products and recessionary or expansive trends in the
economies of the world in which the company operates.
Many statements contained in the discussion of the state of the company's Y2K
readiness are forward looking and are inherently subject to risk and
uncertainty. The nature, scope and cost of the company's Y2K project are
based on management's best estimates. These estimates are based in part on
information obtained from third parties (including customers, suppliers and
consultants hired to assist in the Y2K compliance program) and in part on
numerous assumptions regarding future events (including the ability of
software vendors to implement new operating systems or deliver upgrades and
repairs as promised, the availability of new computer hardware and consultants
to meet the company's planned needs and the effectiveness of contingency
planning and execution). Due to the level of uncertainty inherent in Y2K
analysis and the complexity of the remediation activity, the company is unable
to determine conclusively whether the consequences of potential Y2K failures
by either the company or its customers and key suppliers will have a material
impact on the company's results of operations, liquidity or financial
condition. It is likely, however, that if the company is unable to complete
its Y2K project as planned or if completed project work is not effective, or
if the company's key suppliers and customers or a sizable number of its
smaller suppliers and customers fail to remediate their systems, this failure
and/or resulting litigation will have a material adverse impact on the
company's results of operations, liquidity and financial condition.
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PART II OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
(A) During the third fiscal quarter of 1999, 23,214 shares were issued to
certain participants under the Company's U.K. Savings Related Share Plan (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.
(B) Participation in the Savings Plan is offered to all employees of the
Company's subsidiaries in the United Kingdom.
(C) The total dollar value of the shares issued during the quarter was
$363,963.36.
Under the Savings Plan:
22,364 shares were issued at $15.5334 per share with an aggregate value
of $347,388.96.
574 shares were issued at $15.8834 per share with an aggregate value of
$9,117.07.
200 shares were issued at $24.15 per share with an aggregate value of
$4,830.00.
52 shares were issued at $33.1333 per share with an aggregate value of
$1,722.93.
24 shares were issued at $37.6833 per share with an aggregate value of
$904.40.
(D) 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 Plan 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.
(E) Under the Savings Plan, 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.
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Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) See Exhibit Index on page 18.
(b) Reports on Form 8-K.
(1) Registrant filed a Current Report on Form 8-K, dated July
15, 1999, in respect of the Registrant's press release
announcing second quarter sales and discussing profit outlook.
(2) Registrant filed a Current Report on Form 8-K, dated July
21, 1999, in respect of the Registrant's press release
announcing second quarter results.
(3) Registrant filed a Current Report on Form 8-K, dated July 23,
1999, in respect of cautionary statements relating to certain
forward looking statements made at a presentation to analysts.
(4) Registrant filed a Current Report on Form 8-K, dated September
30, 1999, announcing the appointment of Donald R. McIlnay as
President, Consumer Sales Americas.
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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: November 16, 1999 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)
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EXHIBIT INDEX
EXHIBIT LIST
(4)(i) Amended and Restated Credit Agreement, dated October 21, 1998,
as amended and restated as of October 20, 1999, among The Stanley
Works, each lender that is a signatory thereto and Citibank, N.A.
as Agent for the Lenders.
(10)(i) Engagement Letter, dated August 26, 1999, between The Stanley Works
and Donald R. McIlnay.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
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