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 September 28, 2002.
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: 88,266,284 shares of the
Company's Common Stock ($2.50 par value) were outstanding as of November 11,
2002.
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 Year to Date
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales $ 665.5 $ 671.4 $1,931.3 $ 1,964.6
Costs and expenses
Cost of sales 455.6 436.8 1,282.9 1,272.6
Selling, general and
administrative 133.4 147.4 403.4 442.4
Interest - expense 5.6 8.5 19.6 25.9
Interest - income (0.8) (1.8) (2.5) (5.1)
Other - net (0.5) 3.9 (19.4) (12.2)
Restructuring charge -- -- -- 18.3
------- -------- -------- ---------
593.3 594.8 1,684.0 1,741.9
------- -------- -------- ---------
Earnings before
income taxes 72.2 76.6 247.3 222.7
Income taxes 17.5 22.1 80.4 70.9
------- -------- -------- ---------
Net earnings $ 54.7 $ 54.5 $ 166.9 $ 151.8
======= ======== ======== =========
Net earnings per
share of common stock
Basic $ 0.63 $ 0.64 $ 1.94 $ 1.77
======= ======== ======== =========
Diluted $ 0.62 $ 0.62 $ 1.90 $ 1.74
======= ======== ======== =========
Dividends per share $ 0.26 $ 0.24 $ 0.74 $ 0.70
======= ======== ======== =========
Average shares outstanding
(in thousands)
Basic 86,582 85,439 85,991 85,744
======= ======== ======== =========
Diluted 88,041 87,419 87,985 87,346
======= ======== ======== =========
See notes to consolidated financial statements.
1
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, MILLIONS OF DOLLARS)
September 28 December 29
2002 2001
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 132.6 $ 115.2
Accounts and notes receivable 578.5 551.3
Inventories 404.6 410.1
Other current assets 75.2 64.8
-------- --------
Total current assets 1,190.9 1,141.4
Property, plant and equipment 1,249.2 1,229.7
Less: accumulated depreciation (760.8) (735.4)
-------- --------
488.4 494.3
Goodwill, net 233.2 216.2
Other intangible assets 32.3 19.9
Other assets 156.1 183.9
-------- --------
$2,100.9 $2,055.7
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term borrowings $ 116.4 $ 177.3
Current maturities of long-term debt 109.3 120.1
Accounts payable 259.8 247.7
Accrued expenses 265.1 280.4
-------- --------
Total current liabilities 750.6 825.5
Long-term debt 204.5 196.8
Other liabilities 171.3 201.1
Shareowners' equity
Common stock 230.9 230.9
Retained earnings 1,238.7 1,184.9
Accumulated other comprehensive loss (133.1) (138.9)
ESOP debt (182.6) (187.7)
-------- --------
1,153.9 1,089.2
Less: cost of common stock in treasury 179.4 256.9
-------- --------
Total shareowners' equity 974.5 832.3
-------- --------
$2,100.9 $2,055.7
======== ========
See notes to consolidated financial statements.
2
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, MILLIONS OF DOLLARS)
Third Quarter Year to Date
2002 2001 2002 2001
-------- -------- -------- --------
Operating activities
Net earnings $ 54.7 $ 54.5 $ 166.9 $ 151.8
Depreciation and amortization 15.8 18.6 48.5 60.8
Restructuring charge -- -- -- 18.3
Other non-cash items 10.1 (2.0) (7.6) (25.6)
Changes in working capital (31.8) (11.0) (24.9) (75.3)
Changes in other operating
assets and liabilities 55.1 9.0 25.5 (26.1)
------ ------ ------- -------
Net cash provided by operating activities 103.9 69.1 208.4 103.9
Investing activities
Capital expenditures (10.7) (20.0) (41.9) (56.0)
Proceeds from sales of assets 1.1 0.2 10.4 1.4
Business acquisitions (32.3) -- (32.3) (79.3)
Other -- 1.5 (5.3) (2.0)
------ ------ ------- -------
Net cash used in investing activities (41.9) (18.3) (69.1) (135.9)
Financing activities
Payments on long-term borrowings (10.0) (0.4) (10.9) (2.7)
Proceeds from long-term borrowings -- -- 0.5 --
Net short-term borrowings (36.3) (32.4) (62.3) 157.1
Proceeds from issuance of common stock 3.5 4.4 15.9 15.6
Purchase of common stock for treasury 0.1 (10.8) -- (11.0)
Cash dividends on common stock (21.9) (20.6) (62.8) (59.9)
------ ------ ------- -------
Net cash (used in) provided by financing activities (64.6) (59.8) (119.6) 99.1
Effect of exchange rate changes on cash (4.4) (1.0) (2.3) (8.5)
------ ------ ------- -------
Increase (Decrease) in cash
and cash equivalents (7.0) (10.0) 17.4 58.6
Cash and cash equivalents, beginning of period 139.6 162.2 115.2 93.6
------ ------ ------- -------
Cash and cash equivalents, end of third quarter $132.6 $152.2 $ 132.6 $ 152.2
====== ====== ======= =======
See notes to consolidated financial statements.
3
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(UNAUDITED, MILLIONS OF DOLLARS)
Third Quarter Year to Date
2002 2001 2002 2001
-------- -------- --------- ---------
INDUSTRY SEGMENTS
Net Sales
Tools $ 497.0 $ 510.8 $ 1,471.5 $ 1,520.0
Doors 168.5 160.6 459.8 444.6
-------- -------- --------- ---------
Consolidated $ 665.5 $ 671.4 $ 1,931.3 $ 1,964.6
======== ======== ========= =========
Operating Profit
Tools $ 51.5 $ 68.8 $ 178.9 $ 205.2
Doors 25.0 18.4 66.1 44.4
-------- -------- --------- ---------
Consolidated 76.5 87.2 245.0 249.6
======== ======== ========= =========
See notes to consolidated financial statements.
4
THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (hereafter referred to as "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
Stanley Works and Subsidiaries' (collectively, the "Company") Annual Report
incorporated by reference on Form 10-K for the year ended December 29, 2001.
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 Year to Date
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net earnings -
basic and diluted (in millions) $ 54.7 $ 54.5 $ 166.9 $ 151.8
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 86,582,123 85,438,722 85,990,692 85,743,628
Dilutive effect of
employee stock options 1,458,677 1,980,268 1,994,515 1,602,176
---------- ---------- ---------- ----------
Diluted earnings per share -
weighted average shares 88,040,800 87,418,990 87,985,207 87,345,804
========== ========== ========== ==========
NOTE C - COMPREHENSIVE INCOME
(in millions)
Third Quarter Year to Date
2002 2001 2002 2001
------- ------- -------- --------
Net earnings $ 54.7 $ 54.5 $ 166.9 $ 151.8
Other comprehensive income
(loss), net of tax (7.8) 0.8 5.8 (15.9)
------- ------- -------- --------
Comprehensive income $ 46.9 $ 55.3 $ 172.7 $ 135.9
======= ======= ======== ========
Other comprehensive income (loss) is primarily the impact of foreign currency
translation.
5
NOTE D - INVENTORIES
The components of inventories at the end of the third quarter of 2002 and at
year end 2001, in millions of dollars, are as follows:
September 28 December 29
2002 2001
------- -------
Finished products $ 310.0 $ 308.0
Work in process 48.9 49.1
Raw materials 45.7 53.0
------- -------
$ 404.6 $ 410.1
======= =======
NOTE E - GOODWILL AND OTHER INTANGIBLES
The components of goodwill and other intangibles at the end of the third quarter
of 2002 and at year end 2001, in millions of dollars, are as follows:
September 28 December 29
2002 2001
------ ------
Goodwill, net $233.2 $216.2
Other intangibles 59.5 54.4
Accumulated amortization (27.2) (34.5)
------ ------
$265.5 $236.1
====== ======
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", there is no amortization of goodwill
recorded in 2002. The Company records amortization expense for most of its other
intangibles, primarily patents, copyrights and trademarks. Third quarter pre-tax
amortization expense for these assets totaled $0.4 million in 2002 and $0.5
million in 2001. Year to date pre-tax amortization for these assets totaled $1.2
million in 2002 and $1.9 million in 2001.
The Company recorded $14 million in goodwill in the third quarter of 2002
related to preliminary purchase accounting for the Senior Technologies, Inc.
acquisition.
NOTE F - OTHER-NET
Other-net for the 2002 year to date period includes an $18.4 million pre-tax
gain related to the settlement of the Company's U.S. defined benefit pension
plan, or $0.06 per share, net of taxes. Other-net for the 2001 year to date
period includes a pension curtailment gain of $29.3 million, or $0.22 per share,
net of taxes. These gains were recorded in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination of Benefits". See Note I SFAS No. 142 for
further discussion related to Other-net.
NOTE G - RESTRUCTURING & OTHER CHARGES
In June 2002, $8.4 million in severance charges were recorded as the Company
continued to rationalize its headcount to provide further SG&A expense
reductions. For the 2002 year to date period, the Company expended $6.8 million
related to these charges. The Company anticipates the $1.6 million balance of
payments will be made by March 2003.
Restructuring reserves as of the beginning of 2002 were $38.5 million. These
reserves consisted of $26.1 million related to severance, $5.8 million related
to asset impairments and $6.6 million related to other exit costs. Of this
amount, $2 million was for certain run-off expenditures of initiatives announced
in 1997 and 1999 primarily related to non-cancelable leases. For the 2002 year
to date period, the Company charged $35.6 million against these reserves: $23.7
million for severance and $11.9 million for asset impairments and other exit
costs.
6
NOTE H - ACQUISITIONS
During the third quarter of 2002, the Company completed the acquisition of
Senior Technologies, Inc., a market leader of personal security systems for the
nursing home market for $32 million.
Results of operations of the acquired company have been included in the
Company's consolidated financial statements from the date of purchase and the
acquisition was accounted for using the purchase method of accounting. Pro
forma amounts are not presented because the impact on the Company's results is
not material.
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2002 the Company adopted Emerging Issues Task Force ("EITF") Issue
Number 00-25 "Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services". EITF No. 00-25 requires the
reclassification of certain customer promotional payments previously reported in
selling, general and administrative ("SG&A") expenses as a reduction of revenue,
and prior periods must be restated for comparability of results. Third quarter
and year to date 2002 net sales include $5.1 million and $15.8 million,
respectively, of co-operative advertising ("co-op") amounts that would have been
recorded in SG&A under the Company's previous accounting policy. In addition,
third quarter and year to date 2001 net sales and SG&A are $4.7 million and
$14.2 million, respectively, lower than previously published amounts, reflecting
reclassification of co-op expenses.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142 "Goodwill and Other Intangible Assets". This statement requires that
goodwill and intangible assets deemed to have an indefinite life not be
amortized. Instead of amortizing goodwill and intangible assets deemed to have
an indefinite life, SFAS No. 142 requires a test for impairment to be performed
annually, or immediately if conditions indicate such an impairment could exist.
The Company adopted the statement effective January 1, 2002. As a result of
adopting SFAS No. 142, the Company no longer records goodwill amortization.
Goodwill amortization included in other-net for the third quarter of 2001 was
$2.2 million, ($2.0 million, net of taxes) or $0.02 per share. Thus, third
quarter 2001 pro-forma net income and diluted earnings per share, excluding
goodwill amortization, are $56.5 million and $0.64, respectively. Year to date
goodwill amortization included in other-net in 2001 is $5.4 million ($4.6
million, net of taxes), or $0.05 per share. Thus, year to date 2001 pro-forma
net income and diluted earnings per share, excluding goodwill amortization, are
$156.4 million and $1.79, respectively. During the third quarter of 2002, the
Company performed its annual impairment test for each reporting unit. Fair value
for each unit was estimated based on the expected present value of future cash
flows. No impairment loss was recorded as a result of the tests performed.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible, long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred by capitalizing it as part of the carrying amount of the
long-lived assets. As required by SFAS No. 143, the Company will adopt this new
accounting standard beginning in fiscal 2003. The Company believes the adoption
of SFAS No. 143 will not have a material impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supercedes both SFAS No. 121 and the
accounting and reporting provisions of APB Opinion No. 30 for the disposal of a
segment of a business (as previously defined in APB 30). SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. SFAS No. 144 retains the basic provisions of APB
30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than a
segment of a business). Upon the Company's adoption of SFAS No. 144 on December
30, 2001, there was no material impact to the Company's financial statements.
7
In April 2002, SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. The adoption of this statement in June 2002 did not have a
material impact on the Company's consolidated financial position, results of
operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement requires costs associated with exit
or disposal activities to be recognized when they are incurred and applies
prospectively to such activities that are initiated after January 1, 2003.
Adoption of this standard is expected to impact the timing of recognition of
costs associated with future exit and disposal activities, but it is not
expected to impact the recognition of costs under the Company's existing
programs. The Company is assessing the impact of adopting this standard.
NOTE J - CONTINGENCIES
In the normal course of business, the Company is involved in various lawsuits
and claims. In addition, the Company is a party to a number of proceedings
before federal and state regulatory agencies relating to environmental
remediation. Also, the Company, along with many other companies, has been named
as a potentially responsible party (PRP) in a number of administrative
proceedings for the remediation of various waste sites, including ten active
Superfund sites. Current laws potentially impose joint and several liability
upon each PRP. In assessing its potential liability at these sites, the Company
has considered the following: the solvency of the other PRPs, whether
responsibility is being disputed, the terms of existing agreements, experience
at similar sites, and the fact that the Company's volumetric contribution at
these sites is relatively small.
The Company's policy is to accrue environmental investigatory and remediation
costs for identified sites when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal
information that becomes available. As of September 28, 2002 and December 29,
2001, the Company had reserves of $13.6 million and $14.6 million, respectively,
primarily for remediation activities associated with Company-owned properties as
well as Superfund sites.
The amount recorded for identified contingent liabilities is based on estimates.
Amounts recorded are reviewed periodically and adjusted to reflect additional
technical and legal information that becomes available. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating certain exposures. Subject to the imprecision in
estimating future contingent liability costs, the Company does not expect that
any sum it may have to pay in connection with these matters in excess of the
amounts recorded will have a materially adverse effect on its financial
position, results of operations or liquidity.
NOTE K - SUBSEQUENT EVENTS
In October 2002, the Company entered into a definitive agreement to purchase
Best Lock Corporation dba Best Access Systems ("Best") for $310 million. Best is
a global provider of security access control systems with $250 million in annual
sales. Closing is subject to certain governmental approvals, third-party
consents and customary conditions, and is expected to occur late in the fourth
quarter.
In November 2002, the Company completed an offering of $350 million in aggregate
principal amount of notes. The offering was comprised of $200 million of 4.90%
notes due in 2012 and $150 million of 3.50% notes due in 2007. The Company
expects to use a portion of the net proceeds from this offering to pay the
purchase price of the proposed acquisition of Best. Any amounts not used for the
Best acquisition and related debt offering costs will be used for general
corporate purposes.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $665.5 million for the third quarter of 2002, as compared to
$671.4 million for the third quarter of 2001, representing a decline of $5.9
million, or 0.9%. Sales were negatively impacted in the quarter by approximately
$14 million due to severe production problems in the Mechanics Tools business
associated with the consolidation of two domestic manufacturing plants and other
restructuring-related changes. Measures to restore Mechanics Tools operations to
normal shipment and profit levels have been taken, and production issues are
gradually subsiding. Year to date net sales were $1,931.3 million in 2002 as
compared to $1,964.6 for the same period in 2001. The year to date 1.7% decline
in sales is attributable to the Tools segment where continued weakness in the
industrial tools channels and inventory reductions at major retail customers
drove unit volume declines year over year, as well as the adverse impact from
the Mechanics Tools domestic production issues mentioned above.
Gross profit for the third quarter of 2002 of $209.9 million, or 31.5% of sales,
was $24.7 million lower than the $234.6 million, or 34.9% of sales reported in
the third quarter of 2001. It is estimated that approximately $16 million of
this decline is attributable to the sales decline and excess cost from the
flawed execution in consolidating two domestic manufacturing plants and other
related issues in Mechanics Tools. Year to date gross profit for 2002 amounted
to $648.4 million as compared with $692.0 million for the same period in 2001,
representing 33.6% and 35.2% of net sales, respectively. Included in year to
date gross profit for 2001 is $6.2 million in special charges related to
repositioning primarily at Mechanics Tools incurred in the first quarter of
2001. Excluding these special charges, year to date 2001 gross profit totaled
$698.2 million, or 35.5% of net sales. Year to date gross profit for 2002
declined by $49.8 million and gross profit as a percent of sales declined by 190
basis points when excluding the special charges. The drivers for the decline in
year to date gross profit in 2002 as compared to 2001 are consistent with the
explanations for the third quarter. In addition, the decline in gross profit as
a percentage of sales for the 2002 third quarter and year to date period as
compared to the same periods in 2001 reflected a mix shift from higher margin
industrial to lower margin retail sales.
Selling, general and administrative ("SG&A") expenses for the third quarter of
2002 are $133.4 million or 20.0% of net sales. SG&A expenses for the 2001 third
quarter were $147.4 million, or 22.0% of net sales. This reported amount
includes a $4.8 million one-time charge, primarily for severance, that was
incurred in the 2001 third quarter. Excluding this special charge, SG&A expenses
declined $9.2 million, or 120 basis points as a percentage of net sales in the
third quarter of 2002 as compared to the same period in 2001. 2002 year to date
SG&A expenses are $403.4 million, or 20.9% of net sales as compared with $442.4
million, or 22.5% of net sales, for the same period in 2001. Year to date SG&A
expenses in 2002 include $8.4 million in severance charges incurred in the
second quarter of 2002. In addition, year to date 2001 SG&A expenses include
$8.1 million in special charges from business repositioning that were incurred
in the first and third quarters. Excluding these items, year to date SG&A
expenses declined $39.3 million from $434.3 in 2001 to $395.0 million in 2002,
resulting in a 160 basis point decline in SG&A expenses as a percentage of net
sales from 22.1% in 2001 to 20.5% in 2002. The decline in 2002 SG&A expenses for
both the quarterly and year to date periods are primarily from headcount
reductions and the result of the Company's previous restructuring actions.
Interest expense for the 2002 third quarter declined by $2.9 million as compared
with the 2001 third quarter from $8.5 million to $5.6 million. 2002 year to date
interest expense declined by $6.3 million, from $25.9 million in 2001 to $19.6
million in 2002. These decreases are a result of declines in both the average
debt balance and the Company's borrowing rates.
Interest income for the 2002 third quarter declined by $1.0 million as compared
with the 2001 third quarter from $1.8 million to $0.8 million. 2002 year to date
interest income was $2.5 million, a decrease of $2.6 million from 2001 year to
date interest income of $5.1 million. The decreases are primarily a result of
declines in interest rates.
9
Other-net for the third quarter of 2002 represents income of $0.5 million versus
expense of $3.9 million in the third quarter of 2001. There is a $2.3 million
decrease in the amortization of goodwill and other intangible assets, primarily
due to the implementation of SFAS No. 142. An additional $3.0 million of the
fluctuation relates to improved performance in the Company's Mac Advantage
financing program. Year to date, other-net represents income of $19.4 million in
2002 as compared with income of $12.2 million in 2001. Year to date 2002
includes a gain of $18.4 million for the Company's settlement of its U.S.
defined benefit pension plan. Year to date 2001 other-net includes a gain on the
curtailment of that same pension plan of $29.3 million, offset by $1.7 million
of business repositioning one-time charges. Excluding these items, other-net for
the year to date period in 2002 represents income of $1.0 million and year to
date 2001 other-net represents expense of $15.4 million. The $16.4 million
improvement in other-net for the year to date period reflects a decrease in the
amortization of goodwill and other intangibles of $6.1 million, primarily as a
result of the implementation of SFAS No. 142, a $3.3 million gain from the sale
of a parcel of real estate, and a $7.1 million improvement in the performance of
the Mac Advantage financing program.
In June 2002, $8.4 million in severance charges were recorded as the Company
continued to rationalize its headcount to provide further SG&A expense
reductions. For the 2002 year to date period, the Company expended $6.8 million
related to these charges. The Company anticipates the $1.6 million balance of
payments will be made by March 2003.
Restructuring reserves as of the beginning of 2002 were $38.5 million. These
reserves consisted of $26.1 million related to severance, $5.8 million related
to asset impairments and $6.6 million related to other exit costs. Of this
amount, $2 million was for certain run-off expenditures of initiatives announced
in 1997 and 1999 primarily related to non-cancelable leases. For the 2002 year
to date period, the Company charged $35.6 million against these reserves: $23.7
million for severance and $11.9 million for asset impairments and other exit
costs.
The Company's effective tax rate for the third quarter of 2002 is 24.2% as
compared with 28.9% in the third quarter of 2001. The 2002 effective rate
includes the impact of a favorable foreign tax development that reduced income
taxes by $5.5 million. The 2001 effective tax rate includes the benefit of $3.1
million in nonrecurring tax adjustments recorded in the third quarter. Excluding
these items, the Company's effective tax rate for the third quarter of 2002 is
32% versus 33% in the third quarter 2001. On a year to date basis, the effective
tax rate in 2002 was 32.5% as compared with 31.8% in 2001. Excluding the special
charges and credits, which include business repositionings, restructuring
charges, a favorable foreign tax development and the pension curtailment, all
discussed previously, the 2002 year to date effective tax rate was 32.0% as
compared with 33.0% for the same period in 2001. The 1% decline in the effective
tax rate, excluding the special charges and credits, for both the third quarter
and year to date is a result of organizational and structural changes as well as
shifts in the geographic distribution of earnings.
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. Segment eliminations are excluded.
Tools sales declined in the third quarter from $510.8 million in 2001 to $497.0
million in 2002, a decrease of 2.7%. For the 2002 year to date period, net sales
are down by 3.2%, from $1,520.0 million in 2001 to $1,471.5 million in 2002. The
decrease in net sales for the Tools segment for both the quarter and year to
date is primarily the result of industrial sales unit volume declines as well as
the impact from the aforementioned Mechanics Tools production issues. Tools
operating profit declined $17.3 million from the third quarter of 2001 to $51.5
million. The third quarter 2001 Tools segment operating profit of $68.8 million
includes a $4.8 million one-time charge, primarily for severance. Excluding this
special charge, operating profit decreased $22.1 million, from $73.6 in third
quarter 2001 to $51.5 in third quarter 2002, primarily a result of the Mechanics
Tools domestic plant and production issues discussed above along with the
attendant volume and mix effects of weak industrial markets. Year to date
operating profit for the Tools segment is $178.9 million in 2002 as compared
with $205.2 million in 2001. Included in operating profit, however, was $7.8
million in severance incurred in the second quarter of 2002. In addition,
operating profit for the 2001 year to date period includes special charges for
business repositionings of $14.0 million that were incurred in the first and
third quarters of 2001. Excluding these items, year to date operating profit in
2002 for the Tools segment is down $32.5 million to $186.7 million, or 12.7% of
net sales and is $219.2 million, or 14.4% of net sales, for the same period in
2001. The drivers of this decrease are the Mechanics Tools third quarter
production issues and weak industrial markets.
10
Doors sales were $168.5 million in the third quarter of 2002 as compared to
$160.6 million in the third quarter of 2001 and $459.8 million for the 2002 year
to date period versus $444.6 million for year to date 2001. Performance
reflected solid sales growth in the Hardware and Access Technologies businesses.
Operating profit improved $6.6 million to $25.0 million as compared with $18.4
million in the third quarter of 2001. Year to date operating profit, excluding
$0.6 million in severance charges related to Doors in the second quarter of 2002
and $0.3 million of special charges related to business repositionings in 2001,
is $66.7 million in 2002 as compared with $44.7 million in 2001. Excluding
severance and special charges, operating profit for Doors totals 14.8% of net
sales in the third quarter of 2002 as compared to 11.5% for the third quarter of
2001 and is 14.5% of net sales for the 2002 year to date period as compared with
10.1% for the same period in 2001. The improvement in operating profit as a
percentage of sales for the Doors segment is attributable to improved
productivity from the movement of production within the segment to low cost
countries, the continued reduction of SG&A expenses, and volume leverage.
FINANCIAL CONDITION
LIQUIDITY AND SOURCES OF CAPITAL
For the quarter and year to date period ended September 28, 2002, operating cash
flows are $103.9 million and $208.4 million, respectively, as compared with
$69.1 million and $103.9 million for the 2001 third quarter and year to date
period, respectively. In the third quarter the Company received $69 million, net
of excise taxes paid, related to the final settlement from a terminated U.S.
defined benefit pension plan. Out of the $114.8 million gross pension settlement
proceeds, the Company contributed $28.7 million to a U.S. defined contribution
retirement plan that pre-funds future cash requirements. Excluding the $69
million pension settlement cash inflow, operating cash flow for the quarter was
$34.9 million as compared with $69.1 million in third quarter 2001, reflecting
higher outflows for restructuring and accrued taxes. On a year to date basis,
operating cash flow excluding the pension settlement was $139.4 million in 2002
versus $103.9 million in 2001, an increase primarily attributable to improved
working capital management.
The Company disbursed $32.3 million in the third quarter of 2002, and on a year
to date basis, related to business acquisitions as compared with the $79.3
million cash outflow year to date 2001 for the Contact East acquisition. The
Company repaid $46.3 million of borrowings in the third quarter of 2002 as
compared with $32.8 million paid in 2001. On a year to date basis, $72.7 million
in net debt payments were made as compared with $154.4 million of cash inflows
from borrowings in 2001.
In November 2002, the Company completed an offering of $350 million in aggregate
principal amount of notes, primarily to finance the anticipated acquisition of
Best. The offering was comprised of $200 million of 4.90% notes due in 2012 and
$150 million of 3.50% notes due in 2007. Any amounts not used for the Best
acquisition and related debt offering costs will be used for general corporate
purposes.
11
ITEM 4. - CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including the Company's Chief Executive
Officer and Chairman and its Chief Financial Officer, the Company has evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Company's Chief Executive Officer and Chairman and its
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in its periodic Securities Exchange Commission filings. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
their evaluation.
CAUTIONARY STATEMENT
This report on Form 10-Q contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" under the securities laws, including but not limited to a) the
anticipated improvement in the Company's Mechanics Tools operation and b) the
anticipated closing of the Best acquisition. From time to time, oral or written
forward-looking statements may also be included in other materials released to
the public. These forward-looking statements are intended to provide
management's current expectations or plans for the future operating and
financial performance of the Corporation, based on assumptions currently
believed to be valid. Forward-looking statements may be identified by the use of
words such as "believe," "expect," "plans," "anticipate" and other words of
similar meaning in connection with a discussion of future operating or financial
performance.
These statements are based on management's current expectations and are subject
to uncertainty and changes in circumstances, including but not limited to a) the
success of the Company's efforts to redress the operational problems in its
Mechanics Tools business and b) the fulfillment of certain closing requirements
and the receipt of certain approvals necessary to close the Best acquisition.
Actual results may also differ materially from these expectations due to changes
in global political, economic, business, competitive, market and regulatory
factors.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K.
(1) The Company filed a Current Report on Form 8-K, dated July 17, 2002,
in respect of the Company's press release announcing second quarter
results.
(2) The Company filed a Current Report on Form 8-K, dated August 1, 2002
announcing the withdrawal of the Company's proposal to re-incorporate
in Bermuda.
(3) The Company filed a Current Report on Form 8-K, dated August 13, 2002
announcing the affirmation by its Chairman and Chief Executive
Officer, John M. Trani and its Executive Vice President and Chief
Financial Officer, James M. Loree, by sworn statements to the U.S.
Securities and Exchange Commission of the accuracy of the Company's
Form 10-K report for 2001, Form 10-Q reports for the first and second
quarters of 2002, Form 8-K reports filed during 2002 and the Company's
2002 proxy statement to shareowners.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE STANLEY WORKS
Date: November 12, 2002 By: /s/ James M. Loree
------------------
James M. Loree
Executive Vice President, Finance
and Chief Financial Officer
13
CERTIFICATIONS
I, John M. Trani, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stanley Works and
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John M. Trani
-----------------
John M. Trani
Chairman and Chief Executive Officer
14
CERTIFICATIONS
I, James M. Loree, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stanley Works and
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ James M. Loree
------------------
James M. Loree
Executive Vice President, Finance
and Chief Financial Officer
15