MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
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The management of The Stanley Works is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
statements were prepared in accordance with generally accepted accounting
principles. Preparation of financial statements and related data involves our
best estimates and the use of judgment. Management also prepared the other
information in the Annual Report and is responsible for its accuracy and
consistency with the financial statements.
The company maintains a system of internal accounting controls which is
designed to provide reasonable assurance, at appropriate cost, as to the
reliability of financial records and the protection of assets. This system
includes monitoring by a staff of internal auditors. It is further
characterized by care in the selection of competent financial managers, by
organizational arrangements that provide for delegation of authority and
divisions of responsibility and by the dissemination of policies and procedures
throughout the company.
Management is also responsible for fostering a strong, ethical climate so
that the company's affairs are conducted according to the highest standards of
personal and business conduct. This responsibility is reflected in the
company's Business Conduct Guidelines which are publicized throughout the
organization. The company has a long-established reputation of integrity in
business conduct and maintains a systematic program to assess compliance with
these policies.
The adequacy of Stanley's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. Both the independent auditors and our
internal auditors have unrestricted access to the Audit Committee, and they
meet with it periodically, with and without management present.
/s/ John M. Trani /s/ Richard Huck
John M. Trani Richard Huck
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------
The Shareholders
The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley
Works and subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three fiscal years in the period ended December
28, 1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Stanley
Works and subsidiaries at December 28, 1996 and December 30, 1995, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended December 28, 1996, in conformity with
generally accepted accounting principles.
Hartford, Connecticut
January 23, 1997 /s/ Ernst & Young LLP
BUSINESS SEGMENT INFORMATION
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INDUSTRY SEGMENTS
- -----------------
The company operates worldwide in three reportable segments: Tools, Hardware
and Specialty Hardware. Additional detail is provided for the Consumer,
Industrial and Engineered tool categories within the Tools segment.
GEOGRAPHIC AREAS
- ----------------
The company has manufacturing and warehouse facilities and sales offices in the
United States, Europe and Other Areas. The company's operations in Europe are
principally located in the European Economic Community. Other Areas principally
include Canada, Australia, the Far East and Latin America.
GENERAL INFORMATION
- -------------------
Intercompany sales between geographic areas and between business segments were
not significant. Segment information includes insignificant allocations of
expenses and assets shared by the segments.
Operating profit represents net sales less operating expenses. In computing
operating profit, the following have been excluded: net corporate expenses,
interest expense and income taxes.
Identifiable assets are those assets used in the company's operations in
each segment or area.
INDUSTRY SEGMENTS
- -----------------
(MILLIONS OF DOLLARS) 1996 1995 1994
- --------------------------------------------------------------------
NET SALES
Tools
Consumer $ 734.3 $ 738.9 $ 716.0
Industrial 555.5 552.3 524.4
Engineered 686.4 678.3 643.5
- --------------------------------------------------------------------
Total Tools 1,976.2 1,969.5 1,883.9
Hardware 340.4 324.2 311.1
Specialty Hardware 354.2 330.6 315.9
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Consolidated $ 2,670.8 $ 2,624.3 $ 2,510.9
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OPERATING PROFIT
Tools $ 196.6 $ 154.9 $ 217.0
Hardware 42.4 13.4 33.3
Specialty Hardware 12.2 17.8 24.0
- --------------------------------------------------------------------
Total 251.2 186.1 274.3
Net corporate expenses (48.9) (37.6) (38.8)
Interest expense (28.1) (35.7) (33.7)
- --------------------------------------------------------------------
Earnings before
income taxes $ 174.2 $ 112.8 $ 201.8
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IDENTIFIABLE ASSETS
Tools $ 1,268.2 $ 1,287.5 $ 1,324.6
Hardware 178.3 174.9 186.4
Specialty Hardware 105.2 99.5 92.5
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1,551.7 1,561.9 1,603.5
General corporate assets 107.9 108.1 97.6
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Total $ 1,659.6 $ 1,670.0 $ 1,701.1
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CAPITAL EXPENDITURES
Tools $ 81.0 $ 65.4 $ 61.5
Hardware 11.8 9.9 7.7
Specialty Hardware 8.3 7.2 6.0
DEPRECIATION AND
AMORTIZATION
Tools 58.7 63.6 65.6
Hardware 9.6 10.9 10.9
Specialty Hardware 4.1 4.1 3.8
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GEOGRAPHIC AREAS
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(MILLIONS OF DOLLARS) 1996 1995 1994
- --------------------------------------------------------------------
NET SALES
United States $ 1,911.5 $ 1,884.9 $ 1,808.6
Europe 421.8 413.4 357.6
Other Areas 337.5 326.0 344.7
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Consolidated $ 2,670.8 $ 2,624.3 $ 2,510.9
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OPERATING PROFIT
United States $ 212.5 $ 146.9 $ 215.4
Europe 24.8 26.8 31.9
Other Areas 13.9 12.4 27.0
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Total $ 251.2 $ 186.1 $ 274.3
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IDENTIFIABLE ASSETS
United States $ 996.0 $ 1,028.5 $ 1,050.4
Europe 321.6 314.1 319.4
Other Areas 277.2 255.9 274.4
Eliminations (43.1) (36.6) (40.7)
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Total $ 1,551.7 $ 1,561.9 $ 1,603.5
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Note: In 1996, restructuring charges, asset write-offs and related transition
costs of $68.7 million, $4.4 million, and $2.6 million were included in the
Tools, Hardware, and Specialty Hardware segments, respectively, and $5.0
million was included in net corporate expenses. Restructuring charges, asset
write-offs and related transition costs of $43.4 million, $19.6 million and
$12.7 million were included in the United States, Europe and Other Areas,
respectively.
In 1995, restructuring charges, asset write-offs and related transition costs
of $70.0 million, $14.3 million, and $2.4 million were included in the Tools,
Hardware, and Specialty Hardware segments, respectively, and $8.3 million was
included in net corporate expenses. Restructuring charges, asset write-offs and
related transition costs of $62.0 million, $16.4 million and $8.3 million were
included in the United States, Europe and Other Areas, respectively.
The Operating Results: Comparative Analysis on page 23 of this report provides
further analysis of the restructuring charges, asset write-offs and related
transition costs.
SUMMARY OF SELECTED FINANCIAL INFORMATION
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(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1996(A) 1995(B) 1994 1993 1992
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CONTINUING OPERATIONS(C)
Net sales $ 2,671 $ 2,624 $ 2,511 $ 2,273 $ 2,196
Earnings 97 59 125 93 98
Earnings per share(D) $ 1.09 $ .67 $ 1.40 $ 1.03 $ 1.07
Percent of Net Sales:
Cost of sales 67.2% 68.2% 67.1% 68.3% 66.8%
Selling, general and administrative 22.8% 22.5% 22.3% 22.5% 24.0%
Interest-net .8% 1.2% 1.2% 1.1% 1.2%
Other-net .8% .5% 1.4% 1.6% .8%
Restructuring and asset write-offs 1.8% 3.3% - - -
Earnings before income taxes 6.5% 4.3% 8.0% 6.5% 7.2%
Earnings 3.6% 2.3% 5.0% 4.1% 4.5%
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OTHER KEY INFORMATION
Total assets $ 1,660 $ 1,670 $ 1,701 $ 1,577 $ 1,608
Long-term debt 343 391 387 377 438
Shareholders' equity $ 780 $ 735 $ 744 $ 681 $ 696
Ratios:
Current ratio 2.4 2.4 2.1 2.1 2.4
Total debt to total capital 31.7% 39.6% 39.2% 38.7% 40.1%
Income tax rate 44.4% 47.6% 37.9% 37.4% 37.9%
Return on average equity(C, D) 12.8% 8.0% 17.6% 13.5% 14.1%
Common Stock Data:
Dividends per share $ .73 $ .71 $ .69 $ .67 $ .64
Equity per share at year-end $ 8.79 $ 8.28 $ 8.37 $ 7.62 $ 7.66
Market price -high 32 13/16 26 11/16 22 7/16 23 15/16 24 1/16
-low 23 5/8 17 13/16 17 7/16 18 15/16 16 1/4
Average shares outstanding (in thousands) 88,824 88,719 89,550 89,871 91,405
Other Information:
Earnings from continuing operations $ 97 $ 59 $ 125 $ 93 $ 98
Earnings from discontinued operations - - - - -
Cumulative effect of accounting change - - - (9) -
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Net earnings $ 97 $ 59 $ 125 $ 84 $ 98
Net earnings per share(D) $ 1.09 $ .67 $ 1.40 $ .94 $ 1.07
Average number of employees 18,903 19,784 19,445 18,988 18,650
Shareholders of record at end of year 17,823 16,919 17,599 20,018 20,661
- -----------------------------------------------------------------------------------------------------------------------------------
(A) Includes charges for restructuring and asset write-offs of $47.8 million,
or $.43 per share, related transition costs of $32.9 million, or $.23 per
share, and a non-cash charge of $7.6 million, or $.08 per share, for
elements of the company's employment contract with its new chief executive
officer.
(B) Includes charges for restructuring and asset write-offs of $85.5 million,
or $.72 per share, and related transition costs of $9.5 million, or $.06
per share.
(C) Excluding the cumulative after-tax effect of accounting changes for
postemployment benefits of $8.5 million, or $.09 per share, in 1993;
postretirement benefits of $12.5 million, or $.14 per share, in 1991; and
income taxes of $13.1 million, or $.15 per share, in 1988.
(D) Earnings per share and return on average equity excluding restructuring
charges, asset write-offs, related transition costs and the 1996 chief
executive officer recruitment charge would have been $1.83 per share and
18.9% in 1996 and $1.45 per share and 16.6% in 1995.
On April 17, 1996, the Board of Directors declared a two-for-one common
stock split. All shares outstanding and per share amounts have been
restated to reflect the stock split.
1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------
$ 1,942 $ 1,956 $ 1,951 $ 1,888 $ 1,744 $ 1,355
97 106 117 102 96 78
$ 1.12 $ 1.26 $ 1.35 $ 1.18 $ 1.11 $ .92
66.0% 65.3% 64.8% 65.6% 64.7% 64.9%
23.8% 23.7% 23.0% 23.0% 23.4% 23.9%
1.3% 1.3% 1.3% 1.7% 1.7% 1.4%
.8% .9% 1.0% .6% .7% .1%
- - - - - -
8.1% 8.8% 9.9% 9.1% 9.5% 9.7%
5.0% 5.4% 6.0% 5.4% 5.5% 5.8%
- -----------------------------------------------------------------------------------------
$ 1,548 $ 1,494 $ 1,491 $ 1,405 $ 1,388 $ 1,208
397 398 416 339 354 363
$ 689 $ 679 $ 659 $ 684 $ 626 $ 555
2.4 2.6 2.6 2.6 2.4 2.9
37.6% 38.7% 39.6% 35.0% 40.9% 43.4%
38.0% 38.4% 39.6% 40.8% 41.7% 40.7%
14.1% 15.8% 17.3% 15.5% 14.7% 14.9%
$ .61 $ .57 $ .51 $ .46 $ .41 $ .36
$ 7.61 $ 8.25 $ 7.66 $ 7.99 $ 7.30 $ 6.52
22 19 7/8 19 5/8 15 5/8 18 5/16 15 7/16
13 13 5/16 13 3/4 12 3/16 10 5/8 10 1/4
86,532 84,384 86,756 86,217 86,714 84,558
$ 97 $ 106 $ 117 $ 102 $ 96 $ 78
- - - - (10) 1
(12) - - (13) - -
- -----------------------------------------------------------------------------------------
$ 85 $ 106 $ 117 $ 89 $ 86 $ 79
$ .98 $ 1.26 $ 1.35 $ 1.03 $ 1.00 $ .93
17,420 17,784 18,464 18,988 19,142 16,128
21,297 22,045 22,376 23,031 23,051 21,752
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
OVERVIEW
- --------
In 1996 the company reported sales of $2.7 billion and achieved a significant
increase in earnings. Net earnings of $97 million, or $1.09 per share, were 64%
higher than prior year net earnings of $59 million, or $.67 per share. The
major focus during the year was the achievement of the cost reduction
objectives of the company's restructuring program. Five underperforming
businesses were divested. Several plants and operations within plants were
closed or moved in connection with a worldwide manufacturing rationalization
plan. Certain distribution and sales activities were realigned. All of these
actions resulted in a net restructuring charge of $48 million, or $.43 per
share, in 1996 compared with $86 million, or $.72 per share, in 1995. Certain
costs and expenses associated with these restructuring initiatives were also
included in gross profit and operating expenses. These transition costs totaled
$33 million in 1996 and $9 million in 1995 and include duplicative facility
costs, the expenses associated with moving production to new facilities, and
strategic consulting.
In order to compare the company's profitability year to year it is helpful
to exclude unusual or infrequently occurring charges which would otherwise
obscure the underlying operating performance. Excluding restructuring charges
along with the related transitional costs and a non-cash charge incurred in
1996 for the recruitment of the company's new CEO, normalized "core" earnings
would have been $1.83 per share compared with $1.45 per share in 1995.
The company's 1996 results reflect profitability improvements attributable
to restructuring initiatives that began last year. All of these initiatives
contributed to improved margins and reduced operating expenses with the single
most significant cost savings generated by the cross-divisional procurement
teams.
CONSOLIDATED
- ------------
Net sales for 1996 were $2.7 billion, an increase of 2% over sales of $2.6
billion in 1995. As reflected in the chart below, ongoing businesses
experienced unit volume growth of 3% with particular strength in the Fastening
Systems and Door businesses. Business and product line divestitures, net of the
effects of acquisitions, decreased sales in 1996 by $38 million. Unit volume
gains were realized in all geographic areas. Net sales in 1995 reflected a 4%
increase over 1994, primarily attributable to unit volume gains of 3%.
Gross profit margins were 32.8% in 1996 compared with 31.8% in 1995 and
32.9% in 1994. The improvement in margins from the prior year primarily
reflects cost savings generated by procurement initiatives. Margins were also
improved due to manufacturing efficiencies on higher production volume and the
absence of integration costs associated with the closure of a Mechanics Tools
facility in 1995, which contributed to the margin decline between 1994 and
1995. Measured on a core basis, gross profit margins were 33.4% in 1996
compared with 32.0% in 1995 and 32.9% in 1994.
Operating expenses were 22.8% of sales in 1996 compared with 22.5% in 1995
and 22.3% in 1994. The increase in 1996 and 1995 as a percent of sales results
primarily from the transition costs associated with the restructuring
initiatives. On a core basis, the ratios would have been 22.1% in 1996, 22.4%
in 1995 and 22.3% in 1994. While there is some strategic consulting included in
these transition costs for both years, the 1996 costs
NET SALES ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------
1996 NET SALES CHANGES 1995 NET SALES CHANGES
UNIT AQUIS/ UNIT AQUIS/
1996 PRICE VOLUME DIVEST CURRENCY 1995 PRICE VOLUME DIVEST CURRENCY 1994
- -----------------------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENTS
Tools
Consumer $ 734.3 - 1% (1)% (1)% $ 738.9 3% 2% (2)% - $ 716.0
Industrial 555.5 3% (1)% (1)% - 552.3 2% 3% - - 524.4
Engineered 686.4 - 5% (4)% - 678.3 1% 4% - - 643.5
- -----------------------------------------------------------------------------------------------------------------------
Total Tools 1,976.2 1% 2% (2)% (1)% 1,969.5 2% 3% (1)% - 1,883.9
Hardware 340.4 1% 4% - - 324.2 2% 1% - 1% 311.1
Specialty Hardware 354.2 (2)% 8% 1% - 330.6 - 4% 1% - 315.9
- -----------------------------------------------------------------------------------------------------------------------
Consolidated $2,670.8 - 3% (1)% - $2,624.3 1% 3% (1)% 1% $2,510.9
- -----------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREAS
United States $1,911.5 - 3% (2)% - $1,884.9 1% 4% (1)% - $1,808.6
Europe 421.8 1% 2% 1% (2)% 413.4 2% 5% 1% 8% 357.6
Other Areas 337.5 1% 3% - - 326.0 4% (3)% (1)% (5)% 344.7
- -----------------------------------------------------------------------------------------------------------------------
Consolidated $2,670.8 - 3% (1)% - $2,624.3 1% 3% (1)% 1% $2,510.9
- -----------------------------------------------------------------------------------------------------------------------
primarily relate to the duplicative facility costs of consolidating North
American distribution and order management for the consumer market.
Interest-net expense of $23 million in 1996 was substantially lower than
the $30 million reported in 1995 and $29 million in 1994. The company reduced
its borrowing costs by using cash from operations to repay debt.
Other-net expense in 1996 was $22 million compared with $14 million in
1995. Included in 1996 was a non-cash charge for $7.6 million associated with
the recruitment of the company's new CEO. This charge primarily reflects the
market value of stock awarded under the terms of a three-year employment
contract. In 1994, other-net expense was $36 million and included higher
environmental charges as well as asset write-downs and other exit costs
associated with divestitures and plant closings, primarily the Mechanics Tools
facility closure.
The effective tax rate was 44.4% in 1996 compared with 47.6% in 1995 and
37.9% in 1994. The rate was influenced by non-deductible restructuring charges
in both 1996 and 1995 and by the non-deductibility of the 1996 charge for the
recruitment of the company's new CEO. Excluding those items, the effective tax
rate would have been 38% in 1996 and 1995.
BUSINESS SEGMENT RESULTS
- ------------------------
The consolidated 1996 segment operating profit margin, exclusive of
restructuring charges and restructuring-related transition costs, improved to
12.2% of sales from 10.4% in the prior year. The following table provides
clarification of reported results for 1996 and 1995, reconciling them with
normalized "core" results. Core results exclude restructuring charges,
restructuring-related transition costs and the non-cash charge associated with
the recruitment of the company's new CEO. The Tools, Hardware and Specialty
Hardware segment and the geographic area comments that follow are based on
these normalized "core" results.
Overall, net sales in the Tools segment in 1996 remained flat following a
4% increase in 1995. Unit volume growth was 2% with particular strength
experienced in the markets for fastening tools and fasteners. These gains were
offset by the lost sales from divested businesses and product lines.
Competitive pricing continues to influence most of the consumer channels. Core
operating profit margins improved to 13.4% in 1996 from 11.4% in 1995 and 11.5%
in 1994. Cost savings were realized from restructuring initiatives, primarily
cross-divisional procurement, along with manufacturing efficiencies in some
businesses that experienced higher production volume. Margins in 1995 were
depressed due to the integration costs associated with the closure and
relocation of a Mechanics Tools facility.
Net sales in the Hardware segment increased 5% in 1996, primarily from
volume increases, following a 4% increase in the prior year. Strong markets for
consumer hardware, especially in the U.S., contributed to the unit volume
gains. Core operating margins increased to 13.7% in 1996 from 8.5% in 1995 and
10.7% in 1994. This improvement results from increased volume, production
levels that favorably absorbed factory overhead costs and positive effects of
cross-divisional purchasing and other restructuring initiatives. Margins in
1995 were depressed due to operating inefficiencies in the Home Decor facility
located in France. These operating issues were successfully addressed in 1996.
Net sales in the Specialty Hardware segment increased 7% in 1996 following
a 5% increase in the prior year. The primary contributor to the volume growth
was gains realized in the U.S. markets for entry doors and
OPERATING RESULTS: COMPARATIVE ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995
Restructuring Related Core Related Core
& Other Transition Profit Restructuring Transition Profit
Reported Charges* Costs Core Margin Reported Charges Costs Core Margin
- -----------------------------------------------------------------------------------------------------------------------------------
Industry Segments
Tools $196.6 $44.6 $24.1 $265.3 13.4% $154.9 $64.2 $5.8 $224.9 11.4%
Hardware 42.4 - 4.4 46.8 13.7% 13.4 13.6 0.7 27.7 8.5%
Specialty Hardware 12.2 0.3 2.3 14.8 4.2% 17.8 2.0 0.4 20.2 6.1%
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Total 251.2 44.9 30.8 326.9 12.2% 186.1 79.8 6.9 272.8 10.4%
Net corporate expenses (48.9) 10.5 2.1 (36.3) (37.6) 5.7 2.6 (29.3)
Interest expense (28.1) - - (28.1) (35.7) - - (35.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $174.2 $55.4 $32.9 $262.5 $112.8 $85.5 $9.5 $207.8
- -----------------------------------------------------------------------------------------------------------------------------------
Geographic Areas
United States $212.5 $17.2 $26.2 $255.9 13.4% $146.9 $55.2 $6.8 $208.9 11.1%
Europe 24.8 17.1 2.5 44.4 10.5% 26.8 16.3 0.1 43.2 10.4%
Other Areas 13.9 10.6 2.1 26.6 7.9% 12.4 8.3 - 20.7 6.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated $251.2 $44.9 $30.8 $326.9 12.2% $186.1 $79.8 $6.9 $272.8 10.4%
- -----------------------------------------------------------------------------------------------------------------------------------
* Includes CEO recruitment charge.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
garage door openers. Competitive pricing continues to affect this segment, but
is especially severe in the U.S. commercial market for automated door products.
Operating profit margins have deteriorated in this segment and reflect the
company's strategic decision to defend its market share in an extremely
competitive pricing environment, incurring additional costs to do so. These
factors offset the profits realized from entry door products and improvements
from restructuring initiatives.
GEOGRAPHIC AREA RESULTS
- -----------------------
Net sales in the U.S. increased 1% from the prior year despite the lost sales
of divested businesses and product lines. Unit volume from continuing
operations increased 3% with the majority of the growth generated from the
Fastening Systems, Door Systems and Hardware divisions. Core operating profit
margins were significantly improved to 13.4% in 1996 from 11.1% in 1995 and
11.9% in 1994. Margins in 1995 were negatively affected by the integration
costs associated with moving a manufacturing facility. The improvement in 1996
also reflects the contributions from restructuring initiatives.
Net sales in Europe increased 2% in 1996, following a 16% increase in 1995.
Unit volume gains in the U.K. were offset by weak French and other European
markets as well as the negative effects of currency translation. Core operating
profit margins of 10.5% were relatively consistent with 1995 margins of 10.4%
and improved over margins of 8.9% in 1994, primarily due to higher volumes.
Net sales in Other Areas increased 4% in 1996 following a 5% decrease in
1995. During 1996 the Canadian markets for the company's products improved, as
did markets in the Pacific Rim. Australia and Latin America showed unit volume
declines for the year. Core operating profit margins improved to 7.9% in 1996
from 6.3% in 1995 and 7.8% in 1994. Margins were depressed in 1995, the result
of volume declines along with increased costs related to investments to expand
the company's presence in some of these markets.
FINANCIAL CONDITION
LIQUIDITY; SOURCES AND USES OF CAPITAL
- --------------------------------------
The company's success in achieving its planned growth depends upon its ability
to generate cash from operations and raise funds in either debt or equity
markets. The company's 1996 results reflect strengthening in both those areas,
as evidenced by a 46% increase in operating cash flow and a significantly lower
debt to total capital ratio.
Cash flow from operations in 1996 was $260 million, a significant increase
over prior year levels. Improved profitability along with more aggressive asset
and liability management were the primary contributors.
Capital expenditures, including the capitalization of internally-developed
software, were $104 million in 1996. This investment reflects increased
expenditures for consolidating distribution and order management as well as
additional strategic manufacturing investments to establish a more competitive
cost structure. Expenditures in 1997 are expected to be closer to depreciation
and amortization levels.
The company realized cash proceeds of $36 million from the sale of five
businesses.
In order to offset any dilutive impact of its employee benefit programs,
the company purchased $29 million of common stock for treasury. This amount
reflects the cost for the shares purchased net of the proceeds from shares of
stock issued during the year. Activity in 1996 reflects an increased level of
stock option exercises by employees. The company paid dividends of $68 million
in 1996 and increased the dividend payout rate by 3%. The total dollar amount
of dividends paid in 1996 was lower than in 1995 because there were five
dividend payments in 1995 compared with four in 1996.
As excess cash was used to reduce outstanding debt, the company's total
borrowing level decreased by $120 million. The company's total debt to capital
ratio was 31.7% compared with 39.6% in 1995. Excluding the company's guarantee
of its ESOP debt, the debt to capital ratio was 26.7% in 1996 compared with
34.1% in 1995.
The company manages its debt portfolio with the objectives of minimizing
interest expense and optimizing the leverage of foreign investments. In order
to achieve these objectives, the company utilizes selected derivative financial
instruments, primarily interest rate and interest rate/currency swaps.
Information regarding the company's use of derivative financial instruments is
provided in the footnotes to the financial statements. The company's overall
financing strategy does not expose it to significant market or credit risk.
The company has access to financial resources and borrowing capabilities
around the world. As of December 28, 1996, the company had approximately $374
million of unused lines of credit and $100 million of unissued debt securities
registered with the Securities and Exchange Commission. The company believes
that its strong financial position, operating cash flows and borrowing capacity
provide the financial flexibility necessary to continue its record of annual
dividend payments, to invest in the routine capital needs of its businesses, to
make strategic acquisitions and to undertake other initiatives associated with
the company's plans for growth.
RESTRUCTURING ACTIVITIES
- ------------------------
The company's multi-year restructuring plan resulted in a net charge of $48
million, or $.43 per share, in 1996. This charge reflects severance, asset
write-downs and other exit costs associated with a manufacturing
rationalization plan that encompasses both U.S. and international operations.
In addition, the company sold five under-performing businesses in 1996 and
included a $3 million charge for the net gains and losses associated with those
sales in the total restructuring charge.
On February 18, 1997, the company completed its sale of its garage related
products business which will result in a pretax gain to be recog-
nized in the first quarter of 1997 of approximately $10 million. The sale will
not have a significant effect on reported sales or earnings from core
operations in the future.
Restructuring charges in 1995 included $21 million related to the
write-down of impaired assets; $44 million related to the write-down of assets
from businesses or product lines to be exited; $4 million in cash payments,
primarily employee termination benefits; and $17 million related to reserves
established for closing facilities.
The company had approximately $27 million of reserves, primarily severance
related, at year-end 1996. Associated cash outlays are expected to be
substantially complete in 1997.
The company is aggressively pursuing its goal of lowering its cost
structure in the production and delivery of its products. While the initial
target of $400 million in cost and asset reductions will be reached in 1997,
several task forces have been appointed to examine areas for additional change.
The task forces have the objectives of reducing the number of manufacturing
locations, realigning the organization structure, reducing working capital,
increasing new product development and identifying opportunities for product
and market extensions. Plans currently in place and being developed will result
in additional restructuring charges and restructuring-related transition costs
in 1997 and possibly beyond. While the company is unable to estimate the amount
of these charges, it is anticipated that they will be significant.
OTHER MATTERS
At the end of 1996 the company recruited a new chief executive officer. A $7.6
million charge was recorded in 1996 to recognize the value of share units and
other immediately vested benefits provided under the terms of his employment
agreement. The employment agreement also granted options, subject to
shareholder approval, to purchase 1,000,000 shares of the company's common
stock at an exercise price of $27.562 per share. If approved by the
shareholders, this option grant will result in a non-cash accounting charge,
representing the difference between the exercise price and the fair market
value as of April 23, 1997, the date of the Shareholder Annual Meeting. This
charge will likely be material to the company's operating results in 1997.
LEGAL AND ENVIRONMENTAL
- -----------------------
In the normal course of business the company becomes involved in various
lawsuits and claims. The company has estimated the potential cost of these
activities and has established appropriate reserves.
The company incurs costs related to environmental issues as a result of
various laws and regulations governing current operations as well as the
remediation of previously contaminated sites. Future laws and regulations are
expected to be increasingly stringent and will likely increase the company's
expenditures related to environmental matters.
The company accrues for anticipated costs associated with investigatory and
remediation efforts in accordance with appropriate accounting guidelines which
address probability and the ability to reasonably estimate future costs. The
liabilities are reassessed whenever circumstances become better defined or
remediation efforts and their costs can be better estimated. Subject to the
imprecision in estimating future environmental costs, the company believes that
any sum it may pay in connection with environmental matters in excess of the
amounts recorded will not have a materially adverse effect on its financial
position, results of operations or liquidity.
ACCOUNTING CHANGE
- -----------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets", which modifies the criteria for recognizing transfers of
financial assets and establishes the accounting for servicing of those
transferred assets. The company will adopt the provisions of this new standard
effective the first quarter of 1997. The company has estimated that the
adoption of this pronouncement will not have a material impact on results of
operations or financial position.
CAUTIONARY STATEMENTS
- ---------------------
Certain risks and uncertainties are inherent in the company's abilities to
complete the competitive positioning of its cost structure through its
restructuring initiatives and to achieve sustained, profitable growth.
The company's ability to implement successfully all of its restructuring
initiatives, including the relocation and consolidation of multiple
manufacturing operations and the success of the Perfect Customer Service
Program, is dependent on such factors as the ability of its employees, with the
help of outside consultants, to develop and execute comprehensive plans to
provide for smooth transitions, the successful recruitment and training of new
employees, the resolution of any labor issues related to closing facilities,
the need to respond to significant changes in product demand during the
transition and unforeseen events. In addition, the company's ability to sustain
the profitability improvements that have been attributable to the restructuring
initiatives is dependent on the extent of pricing pressure within the company's
markets, the continued consolidation of customers in consumer channels,
increasing global competition, changes in trade, monetary and fiscal policies
and laws, inflation and currency exchange fluctuations, as well as recessionary
or expansive trends in the economies in which the company operates.
The company's ability to generate sustained, profitable growth is dependent
on its ability to competitively position its cost structure, to gain acceptance
of the company's products within new or developing markets and to continue the
development of successful new products. The achievement of externally-generated
growth will depend upon the ability to successfully identify, negotiate,
consummate and integrate into operations acquisitions, joint ventures and/or
strategic alliances.
The Stanley Works and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------
Fiscal years ended December 28, 1996, December 30, 1995, and December 31, 1994
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
- ------------------------------------------------------------------------------------------
NET SALES $ 2,670.8 $ 2,624.3 $ 2,510.9
COSTS AND EXPENSES
Cost of sales 1,795.5 1,789.7 1,684.0
Selling, general and administrative 608.5 591.7 560.4
Interest-net 22.5 30.3 29.0
Other-net 22.3 14.3 35.7
Restructuring and asset write-offs 47.8 85.5 -
- ------------------------------------------------------------------------------------------
2,496.6 2,511.5 2,309.1
- ------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 174.2 112.8 201.8
- ------------------------------------------------------------------------------------------
INCOME TAXES 77.3 53.7 76.5
- ------------------------------------------------------------------------------------------
NET EARNINGS $ 96.9 $ 59.1 $ 125.3
- ------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE OF COMMON STOCK $ 1.09 $ .67 $ 1.40
- ------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
The Stanley Works and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- ---------------------------
December 28, 1996 and December 30, 1995
(MILLIONS OF DOLLARS) 1996 1995
- -------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 84.0 $ 75.4
Accounts and notes receivable 446.3 438.7
Inventories 338.1 349.1
Other current assets 42.5 51.9
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 910.9 915.1
PROPERTY, PLANT AND EQUIPMENT 570.4 556.5
GOODWILL AND OTHER INTANGIBLES 98.9 131.8
OTHER ASSETS 79.4 66.6
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,659.6 $ 1,670.0
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 4.9 $ 77.2
Current maturities of long-term debt 15.1 14.1
Accounts payable 130.8 112.7
Accrued expenses 230.8 183.7
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 381.6 387.7
LONG-TERM DEBT 342.6 391.1
OTHER LIABILITIES 155.3 156.6
SHAREHOLDERS' EQUITY
Preferred Stock, without par value:
Authorized and unissued 10,000,000 shares
Common Stock, par value $2.50 per share:
Authorized 200,000,000 shares;
issued 92,343,410 shares in 1996 and 1995 230.9 115.4
Capital in excess of par value - 68.4
Retained earnings 919.0 937.6
Foreign currency translation adjustment (45.5) (70.6)
ESOP debt (234.8) (244.3)
- -------------------------------------------------------------------------------------------
869.6 806.5
Less: cost of common stock in treasury
(3,623,618 shares in 1996 and 3,584,580 shares in 1995) 89.5 71.9
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 780.1 734.6
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,659.6 $ 1,670.0
- -------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
The Stanley Works and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Fiscal years ended December 28, 1996, December 30, 1995, and December 31, 1994
(MILLIONS OF DOLLARS) 1996 1995 1994
- -------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings $ 96.9 $ 59.1 $ 125.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 74.7 81.2 81.8
Restructuring and asset write-offs 47.8 85.5 -
Other non-cash items 38.5 32.3 18.3
Changes in operating assets and liabilities:
Accounts and notes receivable (28.9) (23.3) (46.2)
Inventories (10.5) (4.5) (69.8)
Accounts payable and accrued expenses 9.5 (27.8) 34.9
Income taxes 24.3 (24.1) (11.9)
Other 7.6 (.3) (3.9)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 259.9 178.1 128.5
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (78.7) (66.5) (66.4)
Capitalized software (25.0) (20.2) (5.7)
Proceeds from sales of businesses 36.4 - 4.8
Other 5.5 1.4 (2.9)
- -------------------------------------------------------------------------------------------
Net cash used by investing activities (61.8) (85.3) (70.2)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt (26.0) (83.5) (2.9)
Proceeds from long-term borrowings 2.0 86.0 -
Net short-term financing (72.3) (5.1) 40.9
Proceeds from issuance of common stock 36.5 5.7 4.2
Purchase of common stock for treasury (65.7) (13.2) (16.3)
Cash dividends on common stock (67.6) (75.2) (61.5)
- -------------------------------------------------------------------------------------------
Net cash used by financing activities (193.1) (85.3) (35.6)
- -------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3.6 (1.4) 2.9
- -------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 8.6 6.1 25.6
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 75.4 69.3 43.7
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 84.0 $ 75.4 $ 69.3
- -------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
The Stanley Works and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------
Fiscal years ended December 28, 1996, December 30, 1995, and December 31, 1994
(MILLIONS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
Currency
Common Capital In Excess Retained Translation Treasury Shareholders'
Stock of Par Value Earnings Adjustment ESOP debt Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1994 $ 115.4 $ 73.1 $ 871.1 $ (56.7) $ (261.5) $ (60.5) $ 680.9
Net earnings 125.3 125.3
Currency translation adjustment .4 .4
Cash dividends declared--$.69 per share (61.9) (61.9)
Issuance of common stock (3.0) 13.3 10.3
Purchase of common stock (21.9) (21.9)
ESOP debt 7.8 7.8
ESOP tax benefit 3.3 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 115.4 70.1 937.8 (56.3) (253.7) (69.1) 744.2
Net earnings 59.1 59.1
Currency translation adjustment (14.3) (14.3)
Cash dividends declared--$.71 per share (62.6) (62.6)
Issuance of common stock (1.7) 13.9 12.2
Purchase of common stock (16.7) (16.7)
ESOP debt 9.4 9.4
ESOP tax benefit 3.3 3.3
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 30, 1995 115.4 68.4 937.6 (70.6) (244.3) (71.9) 734.6
Two-for-one stock split 115.5 (66.9) (48.6) -
Net earnings 96.9 96.9
Currency translation adjustment 25.1 25.1
Cash dividends declared--$.73 per share (65.2) (65.2)
Issuance of common stock (6.2) (5.1) 53.4 42.1
Purchase of common stock (71.0) (71.0)
Tax benefit related to stock options 4.7 .3 5.0
ESOP debt 9.5 9.5
ESOP tax benefit 3.1 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 28, 1996 $ 230.9 $ - $ 919.0 $ (45.5) $ (234.8) $ (89.5) $ 780.1
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
BASIS OF PRESENTATION
- ---------------------
The consolidated financial statements include the accounts of the company and
its majority-owned subsidiaries, after the elimination of intercompany accounts
and transactions. The company's fiscal year ends on the Saturday nearest to
December 31. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as certain financial statement disclosures.
While management believes that the estimates and assumptions used in the
preparation of the financial statements are appropriate, actual results could
differ from these estimates.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
For most foreign operations, asset and liability accounts are translated at
current exchange rates; income and expenses are translated using weighted
average exchange rates. Resulting translation adjustments, as well as gains and
losses from certain intercompany transactions, are reported in a separate
component of shareholders' equity. Translation adjustments for operations in
highly inflationary economies and exchange gains and losses on transactions are
included in earnings. These transactional gains and losses, together with the
translation adjustments related to foreign operations in highly inflationary
economies, amounted to net losses for 1996, 1995, and 1994 of $1.9 million, $.7
million and $5.5 million, respectively.
CASH EQUIVALENTS
- ----------------
Highly liquid investments with original maturities of three months or less are
considered cash equivalents.
INVENTORIES
- -----------
U.S. inventories are valued at the lower of last-in, first-out (LIFO) cost or
market. Other inventories are valued generally at the lower of first-in,
first-out (FIFO) cost or market.
LONG-LIVED ASSETS
- -----------------
Property, plant and equipment are stated on the basis of historical cost less
accumulated depreciation. Depreciation is provided using a combination of
accelerated and straight-line methods over the estimated useful lives of the
assets.
Goodwill is amortized on a straight-line basis over periods not exceeding
forty years. The company periodically evaluates the existence of goodwill
impairment on the basis of whether amounts recorded are recoverable from
projected undiscounted cash flows of related businesses. Impairment losses are
valued by comparing the carrying value of the goodwill to its fair value,
generally determined by the discounted cash flow method.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The company adopted and applied the
provisions of this new standard in 1995 to value the impairment of assets
affected by restructuring, plant closings and exit plans and of assets impaired
by changes in operating plans initiated in the latter half of the year. Asset
impairment losses were charged to operations in 1996 and 1995 and were included
in Restructuring and asset write-offs on the income statement.
FINANCIAL INSTRUMENTS
- ---------------------
To manage interest rate exposure, the company enters into interest rate swap
agreements. The net interest paid or received on the swaps is recognized as
interest expense. Gains resulting from the early termination of interest rate
swap agreements are deferred and amortized as adjustments to interest expense
over the remaining period originally covered by the terminated swap. The
company manages exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of forward exchange contracts or currency
options. The company enters into forward exchange contracts to hedge firm
commitments and intercompany loans and enters into purchased foreign currency
options to hedge anticipated transactions. Gains and losses on forward exchange
contracts are deferred and recognized as part of the underlying transactions.
Purchased currency option premiums are generally recognized as cost of sales
over the life of the contract. Gains and losses resulting from purchased
currency options are deferred and recognized in cost of sales in the same
period as the hedged transactions. Changes in the fair value of certain
options, representing a basket of foreign currencies purchased to hedge
anticipated intercompany cross-currency cash flows, are included in Other-net
expense. The company does not use financial instruments for trading or
speculative purposes.
INCOME TAXES
- ------------
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. In accordance with Financial Accounting Statement
No. 109, "Accounting for Income Taxes", these deferred taxes are measured by
applying enacted tax rates in effect in years in which the differences are
expected to reverse.
EARNINGS PER SHARE
- ------------------
Earnings per share are based on the weighted average number of shares of common
stock outstanding during each year (88,824,000 shares, 88,719,000 shares and
89,550,000 shares in 1996, 1995 and 1994, respectively). The issuance of
additional shares granted under employee stock compensation plans would not
result in a material dilution of earnings per share.
STOCK-BASED COMPENSATION
- ------------------------
Effective in fiscal year 1996, the company adopted Financial Accounting
Statement No. 123, "Accounting for Stock-Based Compensation." This statement
defines a fair value based method of accounting for employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans in accordance with Accounting Principle Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25,
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date over the amount the employee must pay to acquire the
stock. The company has elected to continue to account for its employee stock
compensation plans under APB No. 25. Pro forma disclosures of net earnings and
earnings per share, as if the fair value based method of accounting had been
applied, are presented in Note I.
RECLASSIFICATIONS
- -----------------
Certain prior years amounts have been reclassified to conform with the current
year presentation.
B ACCOUNTS AND NOTES RECEIVABLE
-----------------------------
Trade receivables are dispersed among a large number of retailers, distributors
and industrial accounts in many countries. Adequate provisions have been
established to cover anticipated credit losses. At December 28, 1996 and
December 30, 1995, allowances for doubtful receivables of $22.5 million and
$18.2 million, respectively, were applied as a reduction of current accounts
and notes receivable. The company believes it has no significant concentrations
of credit risk as of December 28, 1996.
The company sells, with recourse, certain domestic accounts receivable
under a revolving sales agreement. The proceeds from these sales were $73
million in 1996, $72 million in 1995 and $59 million in 1994. At December 28,
1996 and December 30, 1995, the balance of these receivables subject to
recourse was approximately $88 million and $81 million, respectively. Adequate
provisions have been made to cover anticipated losses.
C INVENTORIES
-----------
(MILLIONS OF DOLLARS) 1996 1995
- ----------------------------------------------
Finished products $ 223.2 $ 224.1
Work in process 61.7 63.1
Raw materials 50.9 59.4
Supplies 2.3 2.5
- ----------------------------------------------
$ 338.1 $ 349.1
- ----------------------------------------------
Inventories in the amount of $185.2 million at December 28, 1996 and $188.6
million at December 30, 1995 were valued at the lower of LIFO cost or market.
If LIFO inventories had been valued at FIFO costs, they would have been $120.3
million and $127.6 million higher than reported at December 28, 1996 and
December 30, 1995, respectively.
D PROPERTY, PLANT AND EQUIPMENT
-----------------------------
(MILLIONS OF DOLLARS) 1996 1995
- --------------------------------------------------
Land $ 39.2 $ 35.7
Buildings 245.1 241.5
Machinery and equipment 872.4 863.5
Computer software 67.7 45.5
- --------------------------------------------------
1,224.4 1,186.2
Less: accumulated depreciation
and amortization 654.0 629.7
- --------------------------------------------------
$ 570.4 $ 556.5
- --------------------------------------------------
The provisions for depreciation and amortization for 1996, 1995 and 1994 were
$65.9 million, $68.3 million and $68.4 million, respectively.
E GOODWILL AND OTHER INTANGIBLES
------------------------------
Goodwill and other intangibles at the end of each fiscal year, net of
accumulated amortization of $69.9 million and $74.3 million, were as follows:
(MILLIONS OF DOLLARS) 1996 1995
- ----------------------------------------------
Goodwill $ 78.0 $104.4
Other 20.9 27.4
- ----------------------------------------------
$ 98.9 $131.8
- ----------------------------------------------
F ACCRUED EXPENSES
----------------
(MILLIONS OF DOLLARS) 1996 1995
- ----------------------------------------------
Payroll and related taxes $ 68.2 $ 58.7
Insurance 28.7 28.6
Restructuring 26.9 16.6
Income taxes 21.4 -
Other 85.6 79.8
- ----------------------------------------------
$230.8 $183.7
- ----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
G LONG-TERM DEBT AND FINANCING ARRANGEMENTS
-----------------------------------------
(MILLIONS OF DOLLARS) 1996 1995
- -------------------------------------------------------------------
Notes payable in 2002 7.4% $100.0 $100.0
Commercial Paper 5.5% 89.3 107.0
Notes payable in 1998 9.0% 34.8 34.8
Notes payable due semiannually to 2005 6.1% 38.2 41.3
Industrial Revenue Bonds due in
varying amounts to 2010 5.8 - 6.8% 21.9 25.1
ESOP loan guarantees,
payable in varying
monthly installments
through 2001 7.7% 57.5 66.8
Other 16.0 30.2
- -------------------------------------------------------------------
357.7 405.2
Less: current maturities 15.1 14.1
- -------------------------------------------------------------------
$342.6 $391.1
- -------------------------------------------------------------------
Commercial paper outstanding at December 28, 1996 of $89.3 million is
classified as non-current pursuant to the company's intention and ability to
continue to finance this obligation on a long-term basis.
The company has on file with the Securities and Exchange Commission a shelf
registration statement covering the issuance of up to $200 million of debt
securities; as of December 28, 1996, $100 million remained unused. The company
has unused short and long-term credit arrangements with several banks to borrow
up to $300 million at the lower of prime or money market rates. Of this amount,
$150 million is long-term. Commitment fees range from .05% to .07%. In
addition, the company has short-term lines of credit with numerous foreign
banks aggregating $77.8 million of which $74.3 million was available at
December 28, 1996. Short-term arrangements are reviewed annually for renewal.
Of the long-term and short-term lines, $300 million is available to support the
company's commercial paper program. The weighted average interest rates on
short-term borrowings at December 28, 1996 and December 30, 1995 were 15.6% and
6.3%, respectively.
The company has guaranteed the long-term notes payable to banks of its
employee stock ownership plan (ESOP). The guarantee is reflected in the
consolidated balance sheets as long-term debt with a corresponding reduction in
shareholders' equity.
To manage interest costs and foreign exchange risk, the company maintains a
portfolio of interest rate swap agreements. In addition, the portfolio includes
currency swaps maturing in 1999 that convert $89.3 million of commercial paper
debt into Swiss Franc debt (5.4% weighted average rate). The company also has a
currency swap that converts $38.2 million of variable rate United States dollar
debt to variable rate Dutch Guilder debt (3.3% weighted average rate). See Note
H for more information regarding the company's interest rate and currency swap
agreements.
Aggregate annual maturities of long-term debt for the years 1998 to 2001
are $50.7 million, $17.0 million, $18.0 million and $104.7 million,
respectively. Interest paid during 1996, 1995 and 1994 amounted to $26.0
million, $33.9 million and $45.1 million, respectively.
Commercial paper, utilized to support working capital requirements,
classified as current was $1.1 million and $67.9 million, as of December 28,
1996 and December 30, 1995, respectively.
H FINANCIAL INSTRUMENTS
---------------------
The company's objectives in using debt related financial instruments are to
obtain the lowest cost source of funds within an acceptable range of variable
to fixed rate debt proportions (30% to 40%), and to minimize the foreign
exchange risk of obligations. To meet these objectives the company enters into
interest rate swap and currency swap agreements. A summary of instruments and
weighted average interest rates follows. The weighted average variable pay and
receive rates are based on rates in effect at the balance sheet dates. Variable
rates are generally based on LIBOR or commercial paper rates with no leverage
features.
(MILLIONS OF DOLLARS) 1996 1995
- ------------------------------------------------------
Interest rate swaps
Receive fixed-pay variable rates $ 50.0 $ 62.2
pay rate 5.5% 3.9%
receive rate 6.2% 5.5%
maturity dates 2002 1996
Receive variable-pay fixed rates $ 23.1 $130.0
pay rate 4.4% 7.8%
receive rate 5.5% 5.1%
maturity dates 1999 1996-99
Currency swaps $149.7 $301.6
pay rate 4.5% 6.3%
receive rate 5.8% 7.0%
maturity dates 1999-2005 1996-2005
- ------------------------------------------------------
The company uses purchased currency options to reduce exchange risks arising
from cross-border cash flows expected to occur over the next one year period.
In addition, the company enters into forward exchange contracts to hedge
intercompany loans and firm commitments. The objective of these practices is to
minimize the impact of foreign currency fluctuations on operating results. At
December 28, 1996 and December 30, 1995, the company had forward contracts
hedging intercompany loans and firm commitments totaling $14.5 million and
$70.7 million, respectively. In 1996, the company purchased a foreign currency
basket option that hedges a portion of 1997 anticipated net foreign currency
cash flow exposures. At December 28, 1996 and December 30, 1995, currency
basket options and purchased currency options hedging anticipated transactions
totaled $131.4 million and $47.1 million, respectively. The forward contracts
and options are primarily denominated in Canadian dollars, Australian dollars,
and major European currencies and generally mature within the next one year
period.
The counterparties to these interest rate and currency financial
instruments are major international financial institutions. The company is
exposed to credit risk for net exchanges under these agreements, but not for
the notional amounts. The company considers the risk of default to be remote.
A summary of the carrying values and fair values of the company's financial
instruments at December 28, 1996 and December 30, 1995 is as follows:
(Millions of Dollars) 1996 1995
- -----------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------
Long-term debt,
including current portion $350.4 $355.4 $381.3 $395.0
Currency and
interest rate swaps 7.3 8.3 23.9 33.1
- -----------------------------------------------------------------
$357.7 $363.7 $405.2 $428.1
- -----------------------------------------------------------------
Generally, the carrying value of the debt related financial instruments is
included in the balance sheet in long-term debt. The fair values of long-term
debt are estimated using discounted cash flow analysis, based on the company's
marginal borrowing rates. The fair values of foreign currency and interest rate
swap agreements are based on current settlement values. The carrying amount of
cash equivalents and short-term borrowings approximates fair value.
I CAPITAL STOCK
-------------
STOCK SPLIT
- -----------
On April 17, 1996, the shareholders approved an increase in the number of
authorized common shares from 110,000,000 to 200,000,000. On that date, the
Board of Directors declared a two-for-one common stock split to be effected by
the distribution of one additional share for each share outstanding. Such
distribution was made on June 3, 1996 to shareholders of record as of May 13,
1996. Accordingly, the stock split has been recognized by reclassifying $115.5
million, the par value of the additional shares resulting from the split, from
capital in excess of par value and retained earnings to common stock. All
shares outstanding and per share amounts have been restated to reflect the
stock split.
COMMON STOCK SHARE ACTIVITY
- ---------------------------
The activity in common shares for each year, net of treasury stock, was as
follows:
1996 1995 1994
- ------------------------------------------------------------------
Outstanding, beginning
of year 88,758,830 88,898,750 89,391,262
Issued for employee
stock plans 2,465,416 698,592 647,478
Purchased (2,504,454) (838,512) (1,139,990)
- ------------------------------------------------------------------
Outstanding, end of year 88,719,792 88,758,830 88,898,750
- ------------------------------------------------------------------
COMMON STOCK RESERVED
- ---------------------
At December 28, 1996 and December 30, 1995, the number of shares of common
stock reserved for future issuance under various employee and director stock
plans was as follows:
1996 1995
- --------------------------------------------------------
Employee Stock Purchase Plan 5,400,288 5,843,248
Stock Option Plans 9,039,112 11,012,342
Long-Term Stock Incentive Plan 2,895,066 2,909,318
- --------------------------------------------------------
17,334,466 19,764,908
- --------------------------------------------------------
PREFERRED STOCK PURCHASE RIGHTS
- -------------------------------
Each outstanding share of common stock has one half of a share purchase right.
Each purchase right may be exercised to purchase one two-hundredth of a share
of Series A Junior Participating Preferred Stock at an exercise price of
$220.00, subject to adjustment. The rights, which do not have voting rights,
expire on March 10, 2006, and may be redeemed by the company at a price of $.01
per right at any time prior to the 10th day following the public announcement
that a person has acquired beneficial ownership of 10% or more of the
outstanding shares of common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
In the event that the company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
(other than a holder who is a 10%-or-more shareholder) shall have the right to
receive, upon exercise thereof, that number of shares of common stock of the
surviving company having a market value equal to two times the exercise price
of the right. Similarly, if anyone becomes the beneficial owner of more than
10% of the then outstanding shares of common stock (except pursuant to an offer
for all outstanding shares of common stock which the independent directors have
deemed to be fair and in the best interest of the company), provision will be
made so that each holder of a right (other than a holder who is a 10%-or-more
shareholder) shall thereafter have the right to receive, upon exercise thereof,
common stock (or, in certain circumstances, cash, property or other securities
of the company) having a market value equal to two times the exercise price of
the right. At December 28, 1996, there were 44,359,896 outstanding rights.
There are 250,000 shares of Series A Junior Participating Preferred Stock
reserved for issuance in connection with the rights.
STOCK OPTIONS AND AWARDS
- ------------------------
The company has a stock option plan for officers and key employees that
provides for nonqualified and incentive stock option grants. The company also
has a stock option plan that provides for option grants to outside directors of
the company. Options are granted at the market price of the company's stock on
the date of grant and have a maximum term of 10 years.
In December 1996, the company recruited a new Chairman and Chief Executive
Officer pursuant to a three year employment agreement. Awarded, in addition to
a base salary, bonus and other annual benefits, were 200,000 common stock
equivalent share units, and an option grant to purchase 1,000,000 shares at
$27.562 (the market value on the date of issuance). Each share unit, which as
of the date of grant had a market value of $27.75, represents the right to
receive one share of common stock. The share units will be distributed in three
equal annual installments beginning in 2000. The fair market value of the share
units at their grant date was recognized in Other-net. The option, which is
subject to shareholder approval, has a ten year term and is exercisable after
June 1997. If approved by the shareholders, this option grant will result in a
charge to operations that will be recorded as of the shareholder approval date
(the effective grant date). The charge will represent the difference between
the $27.562 per share exercise price and the fair market value as of April
23,1997, the shareholder Annual Meeting date.
Information regarding the company's stock option plans is summarized below:
1996 1995 1994
- -----------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS PRICE Options Price Options Price
- -----------------------------------------------------------------------------
Outstanding
at beginning
of year 4,821,194 $18.34 4,261,602 $16.84 3,655,872 $15.64
Granted 973,450 27.95 1,098,600 23.00 1,067,494 20.19
Exercised (1,973,230) 16.61 (469,814) 15.88 (351,454) 15.06
Forfeited (36,676) 21.29 (69,194) 16.33 (110,310) 15.06
- -----------------------------------------------------------------------------
Outstanding
at end of year 3,784,738 $21.68 4,821,194 $18.34 4,261,602 $16.84
- -----------------------------------------------------------------------------
Options
exercisable
at end of year 2,811,288 $19.51 3,722,594 $16.96 3,194,108 $15.72
- -----------------------------------------------------------------------------
Exercise prices for options outstanding as of December 28, 1996 ranged from
$15.06 to $28.88. The weighted average remaining contractual life of these
options is 8 years.
EMPLOYEE STOCK PURCHASE PLAN
- ----------------------------
The Employee Stock Purchase Plan enables substantially all employees in the
United States and Canada to subscribe at any time to purchase shares of common
stock on a monthly basis at the lower of 85% of the fair market value of the
shares on the first day of the plan year ($23.69 per share for fiscal year 1997
purchases) or 85% of the fair market value of the shares on the last business
day of each month. A maximum of 6,000,000 shares are authorized for
subscription. During 1996, 1995, and 1994 shares totaling 442,960, 156,752 and
246,820, respectively, were issued under the plan at average prices of $19.61,
$17.29 and $17.15 per share, respectively.
LONG-TERM STOCK INCENTIVE PLAN
- ------------------------------
The Long-Term Stock Incentive Plan provides for the granting of awards to
senior management employees for achieving company performance measures over
five year cycles. The Plan is administered by the Compensation and Organization
Committee of the Board of Directors consisting of non-employee directors.
Awards are payable in cash, shares of common stock, or any combination thereof
at the discretion of the Committee. The amounts of $2.5 million, $.4 million
and $.3 million were charged to expense in 1996, 1995 and 1994, respectively.
Shares totaling 14,252, 47,734 and 16,534 were issued in 1996, 1995 and 1994,
respectively. The Compensation and Organization Committee determined in 1994
not to make any further awards under this plan. Accordingly, there will be no
further payments under this plan subsequent to the 1993-1997 and 1994-1998
award cycles.
STOCK COMPENSATION PLANS
- ------------------------
The company accounts for stock option grants under its two stock-based
compensation plans and stock purchases under the Employee Stock Purchase Plan
in accordance with APB No. 25. Accordingly, no compensation cost has been
recognized for stock option grants since the options have exercise prices equal
to the market value of the company's common stock at the date of grant. If
compensation cost for the company's stock-based compensation plans had been
determined based on the fair value at the grant dates for 1996 and 1995
consistent with the method prescribed by FAS No. 123, the company's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below:
1996 1995
- -----------------------------------------------------------
Pro forma Net Earnings (in millions) $ 90.4 $ 55.9
Pro forma Earnings Per Share $ 1.02 $ .63
- -----------------------------------------------------------
During the initial phase-in period, as required by FAS No. 123, the pro forma
amounts were determined based on the stock option grants and employee stock
purchases subsequent to January 1, 1995. Therefore, the pro forma amounts may
not be indicative of the effects of compensation cost on net earnings and
earnings per share in future years. Pro forma compensation cost relating to the
stock options is recognized over the six month vesting period, while Employee
Stock Purchase Plan compensation cost is recognized on the first day of the
plan year. The fair value of each stock option grant was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996 and 1995, respectively:
dividend yield of 2.6% and 3.1%; expected volatility of 25% for both years;
risk-free interest rates of 6.1% and 6.2%; and expected lives of 7 years. The
weighted average fair value of stock options granted in 1996 and 1995 was $8.02
and $6.18, respectively. The fair value of the employees' purchase rights under
the Employee Stock Purchase Plan was estimated using the following assumptions
for 1996 and 1995, respectively: dividend yield of 2.6% and 3.1%; expected
volatility of 25% for both years; risk-free interest rates of 5.6% and 5.8%;
and expected lives of 1.2 years. The weighted average fair value of those
purchase rights granted in 1996 and 1995 was $6.44 and $5.65, respectively.
J EMPLOYEE BENEFIT PLANS
----------------------
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
- ------------------------------------
The Savings Plan provides opportunities for tax-deferred savings, enabling
eligible U.S. employees to acquire a proprietary interest in the company. Such
employees may contribute from 1% to 15% of their salary to the Plan. The
company contributes an amount equal to one-half of the first 7% of employee
contributions. The amounts in 1996, 1995 and 1994 under this matching
arrangement were $8.4 million, $8.3 million and $8.3 million, respectively.
Shares of the company's common stock held by the ESOP were purchased with
the proceeds of external borrowings in 1989 and borrowings from the company in
1991. The external ESOP borrowings are guaranteed by the company and are
included in long-term debt. Shareholders' equity reflects both the internal and
the external borrowing arrangements.
Shares are released to participant accounts based on principal and interest
payments of the underlying debt. These shares along with allocated dividends
and shares purchased on the open market are assigned to fund share requirements
of the employee contributions, the associated employer match and the dividends
earned on participant account balances.
Net ESOP activity recognized is based on total debt service and share
purchase requirements less employee contributions and dividends on ESOP shares.
The company's net ESOP activity resulted in income of $8.6 million in 1996,
$2.6 million in 1995 and $2.3 million in 1994.
Dividends on ESOP shares, which are charged to shareholders' equity as
declared, were $15.1 million, $14.8 million and $14.5 million in 1996, 1995 and
1994, respectively. Interest costs incurred by the ESOP on external debt for
1996, 1995 and 1994 were $4.8 million, $5.5 million and $6.1 million,
respectively. ESOP shares not yet allocated to participants are treated as
outstanding for purposes of computing earnings per share. As of December 28,
1996, the number of ESOP shares allocated to participant accounts was 9,451,910
and the number of unallocated shares was 10,800,908.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
PENSION PLANS
- -------------
The retirement benefit for U.S. salaried and non-union hourly employees was
changed effective January 1, 1995. Previously, benefits were provided by both a
defined benefit plan and a defined contribution plan. The defined contribution
plan provided for benefits as a varying percentage of payroll and the defined
benefit plan provided a benefit based on salary and years of service. Upon
retirement, plan participants received the greater of the two benefits.
Effective January 1, 1995, the two plans were merged and restated as a defined
benefit plan. The assets of both plans were combined in order to fund the
plan's guaranteed benefit which is based on salary and years of service. If the
plans are terminated or merged with another plan within three years following a
change in control of the company, any excess plan assets are to be applied to
increase the benefits of all participants.
The company also sponsors defined benefit plans for its non-U.S. employees
and U.S. collective bargaining employees. Benefits generally are based on
salary and years of service for non-U.S. employees, while those for collective
bargaining employees are based on a stated amount for each year of service.
The company's funding policy is to contribute amounts determined annually
on an actuarial basis to provide for current and future benefits in accordance
with federal law and other regulations. Plan assets are invested in equity
securities, bonds, real estate and money market instruments.
Additionally, the company contributes to several union-sponsored
multi-employer plans which provide defined benefits.
Total pension expense includes the following components:
(MILLIONS OF DOLLARS) 1996 1995 1994
- -----------------------------------------------------------
Defined benefit plans:
Service cost $ 20.8 $ 16.7 $ 9.6
Interest cost 31.1 29.8 21.0
Actual return on plan assets (51.2) (39.5) 10.6
Net amortization and deferral 17.8 6.5 (35.1)
- -----------------------------------------------------------
Net pension expense 18.5 13.5 6.1
Defined contribution plan - - 8.1
Multi-employer plans .8 .8 .6
- -----------------------------------------------------------
Total pension expense $ 19.3 $ 14.3 $ 14.8
- -----------------------------------------------------------
The funded status of the company's defined benefit plans at the end of each
fiscal year was as follows:
(MILLIONS OF DOLLARS) 1996 1995
- -----------------------------------------------------------------------------
PLANS PLANS Plans Plans
WHERE WHERE Where Where
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS Exceed Benefits
ACCUMULATED EXCEED Accumulated Exceed
BENEFITS ASSETS Benefits Assets
- -----------------------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested $351.4 $ 13.3 $320.5 $ 11.5
Non-vested 6.0 2.7 3.7 2.0
- -----------------------------------------------------------------------------
Accumulated
benefit obligation 357.4 16.0 324.2 13.5
Additional amounts
related to projected
pay increases 69.6 6.8 68.2 4.1
- -----------------------------------------------------------------------------
Total projected benefit
obligation (PBO) 427.0 22.8 392.4 17.6
Plan assets at fair
value 463.1 7.1 425.2 6.5
- -----------------------------------------------------------------------------
Assets in excess of
(less than) PBO 36.1 (15.7) 32.8 (11.1)
Unrecognized net
(gain) or loss at
transition (6.5) .1 (8.1) .2
Unrecognized net
(gain) or loss (16.4) 4.2 (12.5) .9
Unrecognized prior
service cost 11.3 2.7 10.8 2.9
Adjustment required to
recognize minimum
liability - (2.5) - (2.8)
- -----------------------------------------------------------------------------
Prepaid (accrued)
pension expense $ 24.5 $(11.2) $ 23.0 $ (9.9)
- -----------------------------------------------------------------------------
Assumptions used for significant defined benefit plans were as follows:
1996 1995 1994
- ------------------------------------------------
Discount rate 7.0% 7.0% 8.25%
Average wage increase 4.5% 4.5% 5.0%
Long-term rate of return
on assets 9.0% 9.0% 9.0%
- ------------------------------------------------
POSTRETIREMENT BENEFITS
- -----------------------
The company provides medical and dental benefits for certain retired employees
in the United States. In addition, domestic employees who retire from active
service are eligible for life insurance benefits.
The status of the company's plans at the end of each fiscal year was as
follows:
(MILLIONS OF DOLLARS) 1996 1995
- ------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $13.3 $20.3
Fully eligible active plan participants 1.8 1.6
Other active plan participants 3.1 5.5
- ------------------------------------------------------------------
18.2 27.4
Unrecognized net loss (2.0) (10.7)
- ------------------------------------------------------------------
Accrued postretirement benefit expense $16.2 $16.7
- ------------------------------------------------------------------
Net periodic postretirement benefit expense was $2.0 million in 1996, $2.9
million in 1995 and $3.0 million in 1994.
The weighted average annual assumed rate of increase in the per-capita cost
of covered benefits (i.e. health care cost trend rate) is assumed to be 9% for
1997 reducing gradually to 6% by 2010 and remaining at that level thereafter. A
one percentage point increase in the assumed health care cost trend rate would
have increased the accumulated benefit obligation by $.8 million at December
28, 1996 and net periodic postretirement benefit expense for fiscal year 1996
by $.1 million. A weighted average discount rate of 7% was used in measuring
the accumulated benefit obligations in both 1996 and 1995.
K OTHER COSTS AND EXPENSES
------------------------
Interest-net for 1996, 1995 and 1994 included interest income of $5.5 million,
$5.3 million and $4.6 million, respectively.
Other-net in 1996 includes a charge of $7.6 million ($.08 per share) for
the issuance of 200,000 common stock equivalent share units and other
immediately vested benefits under the terms of the company's employment
contract with its new Chairman and Chief Executive Officer.
Advertising costs are expensed as incurred and amounted to $52.5 million in
1996, $54.3 million in 1995 and $53.4 million in 1994.
L RESTRUCTURING AND ASSET WRITE-OFFS
----------------------------------
In order to create a more competitive cost base and to fuel long-term growth,
the company initiated a multi-year restructuring program in 1995. The program
encompasses all Stanley businesses and focuses on the profitability potential
of each product category. Businesses or product lines that do not meet the
company's criteria for revenue growth and profitability have been divested.
Restructuring activities are directed at creating a more competitive cost
structure for the company's business units. Restructuring activities are also
being focused on enhancing the company's relationships with its customers in
order to create a strategic competitive advantage. This initiative involves the
consolidation of distribution and order management for North American key
customers.
In 1996, the company recorded restructuring charges of $35.4 million for
the write-down of assets, severance and other costs associated with the next
series of initiatives identified under the multi-year restructuring program.
Such costs were primarily related to transfers of production among existing
manufacturing facilities, plant closures and resulting workforce reductions.
These actions are expected to result in a reduction of 695 employees for which
$12.9 million of severance was recorded. The company also divested five
businesses during 1996 and recognized associated gains and losses on their
sales. A net loss of $3.0 million resulting from the divestitures was included
in restructuring charges.
In 1995, restructuring charges of $64.8 million included the write-down of
assets, severance and other costs totaling $53.4 million for exiting three
product categories, closing six manufacturing plants, three distribution
centers and two support facilities. These actions resulted in a workforce
reduction of 550 employees. Restructuring charges also included $5.3 million
for severance related to a workforce reduction of 350 employees and $6.1
million for a comprehensive SKU reduction program.
Charges were also recognized for losses on assets that were identified as
being impaired in conjunction with the company's restructuring initiatives and
strategy changes. The amounts of $9.4 million and $20.7 million were charged to
Restructuring and asset write-offs in 1996 and 1995, respectively.
Transition costs related to the restructuring initiatives were also
incurred and totaled $32.9 million in 1996 and $9.5 million in 1995 and are
included in Cost of sales and Selling, general and administrative expenses.
These costs include plant and equipment relocation, strategic consulting,
duplicate facility costs related to the implementation of the company's Perfect
Customer Service Program and start-up inefficiencies.
In 1996, the company made severance payments of $8.3 million to employees
separated under the restructuring plan and $9.6 million in payments for other
exit costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
M OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
--------------------------------------------------
Industry Segment and Geographic Area information included on page 19 of this
report is an integral part of the financial statements.
N INCOME TAXES
------------
Significant components of the company's deferred tax liabilities and assets as
of the end of each fiscal year were as follows:
(MILLIONS OF DOLLARS) 1996 1995 1994
- ------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation $ 78.6 $ 75.4 $ 74.1
Other 10.1 12.9 6.0
- ------------------------------------------------------------------
Total Deferred Tax Liabilities 88.7 88.3 80.1
- ------------------------------------------------------------------
Deferred Tax Assets:
Employee benefit plans 23.8 19.8 20.6
Doubtful accounts 6.7 5.1 5.8
Inventories 5.4 5.6 3.8
Amortization of intangibles 24.4 15.1 14.5
Accruals 18.6 18.0 24.4
Restructuring charges 15.1 19.2 -
Other 6.1 1.7 3.6
- ------------------------------------------------------------------
Total Deferred Tax Assets 100.1 84.5 72.7
- ------------------------------------------------------------------
Net Deferred Tax Assets (Liabilities) $ 11.4 $ (3.8) $ (7.4)
- ------------------------------------------------------------------
Income tax expense consisted of the following:
(MILLIONS OF DOLLARS) 1996 1995 1994
- -------------------------------------------------
Current:
Federal $49.4 $26.0 $59.3
Foreign 19.5 21.1 18.8
State 12.6 7.5 12.2
- -------------------------------------------------
Total Current 81.5 54.6 90.3
- -------------------------------------------------
Deferred:
Federal 2.0 1.2 (8.4)
Foreign (3.7) .3 (1.0)
State (2.5) (2.4) (4.4)
- -------------------------------------------------
Total Deferred (4.2) (0.9) (13.8)
- -------------------------------------------------
Total $77.3 $53.7 $76.5
- -------------------------------------------------
Income taxes paid during 1996, 1995 and 1994 were $64.4 million, $74.1 million
and $79.8 million, respectively.
The reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
1996 1995 1994
- ----------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefits 3.0 2.6 2.5
Difference between foreign
and federal income tax rates .3 1.3 (.3)
Non-deductible
restructuring charges 4.9 9.6 -
Other-net 1.2 (.9) .7
- ----------------------------------------------------------
Effective Tax Rate 44.4% 47.6% 37.9%
- ----------------------------------------------------------
The components of earnings before income taxes consisted of the following:
(MILLIONS OF DOLLARS) 1996 1995 1994
- ---------------------------------------------------
United States $156.6 $ 78.5 $159.4
Foreign 17.6 34.3 42.4
- ---------------------------------------------------
Total Pretax Earnings $174.2 $112.8 $201.8
- ---------------------------------------------------
Undistributed foreign earnings of approximately $158 million at December 28,
1996 are considered to be invested indefinitely or will be remitted
substantially free of additional tax. Accordingly, no provision has been made
for taxes that might be payable upon remittance of such earnings, nor is it
practicable to determine the amount of this liability.
O LEASES
------
The company leases certain facilities, vehicles, machinery and equipment under
long-term operating leases with varying terms and expiration dates.
Future minimum lease payments under noncancelable operating leases, in
millions of dollars, as of December 28, 1996 were $27.9 in 1997, $21.1 in 1998,
$16.6 in 1999, $12.1 in 2000, $7.9 in 2001 and $23.3 thereafter. Minimum
payments have not been reduced by minimum sublease rentals of $22.2 million due
in the future under noncancelable subleases. Rental expense for operating
leases amounted to $36.6 million in 1996, $40.3 million in 1995 and $38.1
million in 1994.
P 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 nine
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 December 28, 1996, the company
had reserves of $29 million, primarily for remediation activities associated
with company-owned properties as well as for 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.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) QUARTER YEAR
- ---------------------------------------------------------------------------------------------
1996 First Second Third Fourth
- ---------------------------------------------------------------------------------------------
Net Sales $635.3 $677.2 $672.9 $685.4 $2,670.8
Gross Profit 206.0 224.2 224.5 220.6 875.3
Selling, General and Administrative Expenses 149.0 153.1 151.7 154.7 608.5
Restructuring and Asset Write-offs - 3.8 3.1 40.9 47.8
Net Earnings (Loss) 29.6 32.6 37.7 (3.0) 96.9
Net Earnings (Loss) Per Share $ .33 $ .37 $ .42 $ (.03) $ 1.09
- ---------------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------------
Net Sales $643.3 $655.5 $655.7 $669.8 $2,624.3
Gross Profit 205.7 211.9 207.7 209.3 834.6
Selling, General and Administrative Expenses 147.3 148.6 148.0 147.8 591.7
Restructuring and Asset Write-offs - - 41.5 44.0 85.5
Net Earnings (Loss) 28.7 31.5 (1.7) .6 59.1
Net Earnings (Loss) Per Share $ .32 $ .36 $ (.02) $ .01 $ .67
- ---------------------------------------------------------------------------------------------
Note: The fourth quarter of 1996 includes a charge of $7.6 million, or $.08 per
share, for elements of the company's employment contract with its new
Chairman and Chief Executive Officer.
OFFICERS
- --------
BARBARA W. BENNETT
- ------------------
Vice President, Human Resources
(1984)
JENNIFER O. ESTABROOK
- ---------------------
Assistant General Counsel and Assistant Secretary
(1992)
JAMES B. GUSTAFSON
- ------------------
Vice President, Information Technology
(1977)
RICHARD HUCK
- ------------
Vice President, Finance and Chief Financial Officer
(1970)
R. ALAN HUNTER
- --------------
President and Chief Operating Officer
(1974)
THOMAS E. MAHONEY
- -----------------
Vice President, Marketing Development
President and General Manager,
Stanley Customer Support Division
(1965)
PAUL W. RUSSO
- -------------
Vice President, Strategy and Development
(1995)
JOHN M. TRANI
- -------------
Chairman and Chief Executive Officer
(1997)
STEPHEN S. WEDDLE
- -----------------
Vice President, General Counsel and Secretary
(1978)
THOMAS J. WILLIAMS
- ------------------
Associate General Counsel and Assistant Secretary
(1981)
THERESA F. YERKES
- -----------------
Vice President and Controller
(1989)
BOARD OF DIRECTORS
- ------------------
STILLMAN B. BROWN 1, 2, 4
- -----------------
Managing General Partner
Harcott Associates Investments
EDGAR R. FIEDLER 3, 4
- ----------------
Retired; former Vice President and Economic Counselor
The Conference Board
MANNIE L. JACKSON 2, 4
- -----------------
Chairman
Harlem Globetrotters International, a division of MJA, Inc.
JAMES G. KAISER 2, 5
- ---------------
Retired; former President and Chief Executive Officer
Quanterra Incorporated, a subsidiary of Corning Incorporated
and International Technology Inc.
EILEEN S. KRAUS 1, 2, 4
- ---------------
Chairman, Connecticut
Fleet National Bank
GEORGE A. LORCH 3, 5
- ---------------
Chairman and Chief Executive Officer
Armstrong World Industries, Inc.
WALTER J. MCNERNEY 2, 4
- ------------------
Professor of Health Policy
J.L. Kellogg Graduate School of Management,
Northwestern University
GERTRUDE G. MICHELSON 1, 3, 5
- ---------------------
Retired; former Senior Advisor and Director
R.H. Macy and Co., Inc.
JOHN S. SCOTT 1, 2, 5
- -------------
Retired; former Chairman and Chief Executive Officer
Richardson-Vicks Inc.,
a subsidiary of The Procter and Gamble Company
JOHN M. TRANI 1
- -------------
Chairman and Chief Executive Officer
The Stanley Works
HUGO E. UYTERHOEVEN 3, 4
- -------------------
Professor, Graduate School of Business Administration
Harvard University
WALTER W. WILLIAMS 3, 5
- ------------------
Retired; former Chairman and Chief Executive Officer
Rubbermaid, Incorporated
KATHRYN D. WRISTON 1, 3, 4
- ------------------
Director of various organizations
(JOINED STANLEY)
1 MEMBER OF THE EXECUTIVE COMMITTEE
2 MEMBER OF THE AUDIT COMMITTEE
3 MEMBER OF THE BOARD AFFAIRS AND PUBLIC POLICY COMMITTEE
4 MEMBER OF THE FINANCE AND PENSION COMMITTEE
5 MEMBER OF THE COMPENSATION AND ORGANIZATION COMMITTEE
INVESTOR AND SHAREHOLDER INFORMATION
- ------------------------------------
COMMON STOCK
- ------------
The Stanley Works common stock is listed on the New York and Pacific
Stock Exchanges under the abbreviated ticker symbol "SWK."
COMMON STOCK (DOLLARS PER SHARE)
- ------------------------------------------------------------------------------
PRICE DIVIDENDS
- ------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------
HIGH LOW High Low
First Quarter 28 5/8 24 1/16 20 13/16 17 13/16 $.18 $.175
Second Quarter 32 13/16 27 1/8 20 15/16 18 5/16 .18 .175
Third Quarter 30 3/4 23 5/8 23 5/16 18 5/8 .185 .18
Fourth Quarter 30 1/2 26 3/8 26 11/16 21 1/2 .185 .18
- -------------------------------------------------------------------------------
$.73 $.71
- -------------------------------------------------------------------------------
DIVIDENDS
- ---------
The Stanley Works has provided excellent long-term value for shareholders.
Without ever jeopardizing our strong balance sheet and without sacrificing
our ability to invest in new technologies and new growth opportunities for
our company, we have maintained an impressive and truly unique dividend
record over the long haul:
[ ] Our record of annual dividend payments is unmatched by any industrial
company listed on the New York Stock Exchange - 120 CONSECUTIVE YEARS.
[ ] Our quarterly dividend record is the longest of any industrial company
listed on the New York Stock Exchange - 407 CONSECUTIVE QUARTERS.
[ ] We have increased dividends in each of the past 29 YEARS, and in that
same period, an investment in Stanley stock grew at a compound annual
rate of 12.9%.
INCREASED DIVIDENDS EVERY YEAR SINCE 1968
- -----------------------------------------
[GRAPH SHOWING DIVIDENDS PAID BY THE COMPANY
EACH YEAR FROM 1976 TO 1996].
TRANSFER AGENT AND REGISTRAR
- ----------------------------
All shareholder inquiries, including tansfer-related matters, should be
directed to:
Boston EquiServe, Servicing Agent for
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
800-426-5523
CORPORATE OFFICES
- -----------------
The company's principal corporate offices are located at
1000 Stanley Drive,
New Britain, Connecticut 06053.
Telephone 860-225-5111.
ANNUAL MEETING
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The annual shareholders' meeting of The Stanley Works will be held at
9:30 a.m. on Wednesday, April 23, 1997, in New Britain, Connecticut at
the Stanley Center, 1255 Corbin Avenue. A formal notice of the meeting
together with a proxy statement has been mailed to shareholders with this
annual report.
INDEPENDENT AUDITORS
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Ernst & Young LLP, 225 Asylum Street, Hartford, Connecticut 06103
FINANCIAL & INVESTOR COMMUNICATIONS
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The Stanley Works investor relations department provides information to
shareholders and the financial community. We encourage inquiries and
will provide services which include:
[ ] fulfilling requests for annual reports, proxy statements, form 10-Q, form
10-K, copies of press releases and other company information.
[ ] meetings with securities analysts and fund managers.
Contact The Stanley Works investor relations at our corporate offices by
calling Gerard J. Gould, Director, Investor Relations and Communications at
(860) 827-3833.
We make quarterly news releases available on-line on the Internet on
the day that results are released to the news media. The Stanley Works
releases will be found at the following address on the World Wide Web:
http://www.prnewswire.com Click on "Company News On-Call".
The company's form 10-K, annual report and other recent information
are also available by accessing our Internet home page at:
http://www.StanleyWorks.com.
Stanley shareholders are also able to call toll-free 800-499-9202 to
request a copy of the most recent quarterly release.