Summary of Selected Financial Information
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1998(A) 1997(B) 1996(C) 1995(D)
- -------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS (E)
Net sales $ 2,729 $ 2,670 $ 2,671 $ 2,624
Earnings (loss) 138 (42) 97 59
Earnings (loss) per share
Basic $ 1.54 $ (.47) $ 1.09 $ .66
Diluted $ 1.53 $ (.47) $ 1.08 $ .66
Percent of Net Sales:
Cost of sales 65.7% 66.8% 67.2% 68.2%
Selling, general and administrative 25.1% 23.5% 22.8% 22.5%
Interest-net .8% .6% .8% 1.2%
Other-net .5% .8% .8% .5%
Earnings (loss) before income taxes 7.9% (.7%) 6.5% 4.3%
Earnings (loss) 5.1% (1.6%) 3.6% 2.3%
- -------------------------------------------------------------------------------------------------------------------
Other Key Information
Total assets $ 1,933 $ 1,759 $ 1,660 $ 1,670
Long-term debt 345 284 343 391
Shareowners' equity $ 669 $ 608 $ 780 $ 735
Ratios:
Current ratio 1.5 1.6 2.4 2.4
Total debt to total capital 45.8% 40.5% 31.7% 39.6%
Income tax rate 36.0% (125.4%) 44.4% 47.6%
Return on average equity (E),(F) 21.6% (6.0)% 12.8% 8.0%
Common Stock Data:
Dividends per share $ .83 $ .77 $ .73 $ .71
Equity per share at year-end $ 7.54 $ 6.85 $ 8.79 $ 8.28
Market price-high 57 1/4 47 3/8 32 13/16 26 11/16
-low 23 1/2 28 23 5/8 17 13/16
Average shares outstanding (in thousands)
Basic 89,408 89,470 89,152 89,043
Diluted 90,193 89,470 89,804 89,839
Other Information:
Earnings (loss) from continuing operations $ 138 $ (42) $ 97 $ 59
Cumulative effect of accounting change - - - -
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 138 $ (42) $ 97 $ 59
Net earnings (loss) per share (F)
Basic $ 1.54 $ (.47) $ 1.09 $ .66
Diluted $ 1.53 $ (.47) $ 1.08 $ .66
Average number of employees 18,319 18,377 18,903 19,784
Shareowners of record at end of year 17,963 18,503 17,823 16,919
===================================================================================================================
(A) Includes restructuring-related transition and other non-recurring costs of
$85.9 million, or $.61 per share.
(B) Includes charges for restructuring and asset write-offs of $238.5 million,
or $2.00 per share, related transition costs of $71.0 million, or $.49 per
share, and a non-cash charge of $10.6 million, or $.07 per share, for a
stock option grant as specified in the company's employment contract with
its chief executive officer.
(C) 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 chief executive
officer.
(D) 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.
(E) 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.
(F) Earnings per share and return on average equity excluding restructuring
charges, asset write-offs, related transition costs and other non-recurring
charges would have been $2.14 per share and 18.7% in 1998, $2.08 per share
and 19.9% in 1997, $1.83 per share and 18.9% in 1996 and $1.45 per share
and 16.6% in 1995.
1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------
$ 2,511 $ 2,273 $ 2,196 $ 1,942 $ 1,956 $ 1,951 $ 1,888
125 93 98 97 106 117 102
$ 1.40 $ 1.03 $ 1.07 $ 1.12 $ 1.26 $ 1.35 $ 1.18
$ 1.38 $ 1.01 $ 1.06 $ 1.11 $ 1.25 $ 1.34 $ 1.18
67.1% 68.3% 66.8% 66.0% 65.3% 64.8% 65.6%
22.3% 22.5% 24.0% 23.8% 23.7% 23.0% 23.0%
1.2% 1.1% 1.2% 1.3% 1.3% 1.3% 1.7%
1.4% 1.6% .8% .8%. .9% 1.0% .6%
8.0% 6.5% 7.2% 8.1% 8.8% 9.9% 9.1%
5.0% 4.1% 4.5% 5.0% 5.4% 6.0% 5.4%
- ---------------------------------------------------------------------------------------------------------------------
$ 1,701 $ 1,577 $ 1,608 $ 1,548 $ 1,494 $ 1,491 $ 1,405
387 377 438 397 398 416 339
$ 744 $ 681 $ 696 $ 689 $ 679 $ 659 $ 684
2.1 2.1 2.4 2.4 2.6 2.6 2.6
39.2% 38.7% 40.1% 37.6% 38.7% 39.6% 35.0%
37.9% 37.4% 37.9% 38.0% 38.4% 39.6% 40.8%
17.6% 13.5% 14.1% 14.1% 15.8% 17.3% 15.5%
$ .69 $ .67 $ .64 $ .61 $ .57 $ .51 $ .46
$ 8.37 $ 7.62 $ 7.66 $ 7.61 $ 8.25 $ 7.66 $ 7.99
22 7/16 23 15/16 24 1/16 22 19 7/8 19 5/8 15 5/8
17 7/16 18 15/16 16 1/4 13 13 5/16 13 3/4 12 3/16
89,550 89,871 91,405 86,532 84,384 86,756 86,217
90,656 91,296 92,842 87,552 84,770 87,194 86,662
$ 125 $ 93 $ 98 $ 97 $ 106 $ 117 $ 102
- (9) - (12) - - (13)
- ---------------------------------------------------------------------------------------------------------------------
$ 125 $ 84 $ 98 $ 85 $ 106 $ 117 $ 89
$ 1.40 $ .94 $ 1.07 $ .98 $ 1.26 $ 1.35 $ 1.03
$ 1.38 $ .92 $ 1.06 $ .97 $ 1.25 $ 1.34 $ 1.03
19,445 18,988 18,650 17,420 17,784 18,464 18,988
17,599 20,018 20,661 21,297 22,045 22,376 23,031
STANLEY 1998 ANNUAL REPORT
MANAGEMENT REPORT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
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 an internal audit function. 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.
January 28, 1999
/s/ John M. Trani
- ------------------------------------
John M. Trani
Chairman and Chief Executive Officer
/s/ Theresa F. Yerkes
- ------------------------------------
Theresa F. Yerkes
Vice President, Controller
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareowners
The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley
Works and subsidiaries as of January 2, 1999 and January 3, 1998, and the
related consolidated statements of operations, changes in shareowners' equity,
and cash flows for each of the three fiscal years in the period ended January 2,
1999. 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 January 2, 1999 and January 3, 1998, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
January 28, 1999, except for the second paragraph of Note H,
as to which the date is February 24, 1999.
STANLEY 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS
The company's goal is to become one of the world's Great Brands, delivering
sustained, profitable growth. The financial objectives to achieve that goal are
sales growth at two times the industry rate, earnings growth in the low- to
mid-teens, operating margin in the mid-teens, operating cash flow approximately
equal to earnings and return on capital in the low- to mid-twenties. The company
has undertaken a major restructuring to consolidate manufacturing and
distribution operations, simplify the organizational structure and make other
changes to position itself as a low cost producer. The savings associated with
those changes are targeted for reinvestment in growth initiatives such as new
product and brand development. During 1998, substantial progress was made;
however, more fundamental operating problems prevented the attainment of many of
the company's financial targets. Worldwide revenues increased 2% and the company
reported diluted earnings per share of $1.53 as compared with a loss, the result
of restructuring charges, of $.47 per share in 1997.
Net sales in 1998 were $2,729 million, an increase of 2% over 1997. The primary
contributors to the revenue gain were the MacDirect venture, growth in consumer
mechanics tools, fastening tools and fasteners and acquisitions (Zag and Atro).
However, these gains were partially offset by the negative effects of foreign
currency translation, primarily Asia and Canada.
Net sales declined between 1996 and 1997, primarily due to divestitures of lower
margin businesses. All of the company's core businesses achieved sales increases
in 1997; however, these were offset somewhat by the negative effects of currency
translation and pricing.
The company's restructuring initiatives are accompanied by costs which affect
the financial statements. Restructuring charges in 1997 included severance
associated with employment reductions, write-down of assets either disposed of
or impaired as a result of the initiatives, environmental costs of remediating
facilities to be closed and other similar exit costs. Restructuring-related
transition costs are additional costs resulting from these initiatives that are
classified as period operating expenses within cost of sales or selling, general
and administrative expense. These include the costs of moving production
equipment, operating duplicative facilities while transferring production or
distribution, consulting costs incurred in planning and implementing changes,
and other types of costs that have been incurred to facilitate the changes
encompassed by the restructuring initiatives. Management uses its judgment to
determine which costs should be classified as transition costs based on whether
the costs are unusual in nature, incurred only because of restructuring
initiatives and are expected to cease when the transition activities end. In
addition, the company is incurring costs to remediate its computer and related
systems so that these systems will function properly with regard to date issues
related to the year 2000. Because the presence of restructuring charges,
restructuring-related transition costs and non-recurring Year 2000 remediation
costs obscure the underlying trends within the company's businesses, the company
also provides information on its reported results excluding these identifiable
costs. These pro forma or "core" results are the basis of business segment
information. In addition, the narrative regarding results of operations has been
expanded to provide information as to the effects of these items on each
financial statement category.
The company reported gross profit of $936 million, or 34.3% of sales. This
represented an increase of $50 million, or 6%, over prior year gross profit of
$886 million, or 33.2% of sales. The improvement reflects productivity gains
from restructuring and centralized procurement activities, the MacDirect
venture, and lower spending on transition costs. The full impact of these
initiatives was diluted, however, by lower profitability in the fourth quarter
due to soft volume and the associated under-absorption in manufacturing
operations. Included in cost of sales were restructuring-related transition
costs, primarily for plant rationalization activities, of $17 million in 1998
and $31 million in 1997. The higher costs in 1997 related to demand flow
manufacturing implementation activities in several facilities. Core gross
profit, excluding transition costs, was $953 million, or 34.9% of sales, up from
$917 million or 34.4% of sales in the prior year. Contributing to the higher
margins were the growth of the MacDirect venture, increased volume and the
savings from restructuring and other productivity initiatives.
Gross profit also increased from 1996 to 1997, the result of manufacturing
efficiencies from higher volume and the savings realized from restructuring and
procurement initiatives. Excluding transition costs, core gross profit as a
percent of sales increased from 33.4% in 1996 to 34.4% in 1997.
Selling, general and administrative expenses were $685 million, or 25.1% of
sales, up $57 million from the prior year expenses of $628 million, or 23.5% of
sales. Approximately $30 million of the increase represented higher
restructuring-related and other non-recurring costs, which increased from $40
million in 1997 to $69 million in 1998. Incremental spending on systems
conversions for the Year 2000 ("Y2K") remediation of $39 million drove the
increase. To the greatest extent possible, the Y2K systems solutions are being
designed to provide a common computer platform to directly facilitate the
centralization of functions envisioned by the restructuring initiatives. The
restructuring-related transition costs in selling, general and administrative
expense represent consulting for structural reorganization, recruiting and
relocation of employees, the cost of transition employees involved in
reorganizing the functions and the cost of moving and maintaining duplicative
distribution facilities. Excluding transition and non-recurring Y2K costs,
selling, general and administrative expenses would have been $616 million, or
22.6% of sales, as compared with $588 million, or 22.0% of sales, in 1997. The
increase is primarily due to higher selling costs associated with the MacDirect
venture, which were partially offset by savings from restructuring and other
productivity initiatives. The MacDirect venture entails adding a direct sales
force in lieu of traditional third party distribution for the Mac(R) branded
product line. Higher gross margins more than offset these increased operating
expenses. The company has reinvested the benefits realized from the
restructuring and other productivity initiatives in engineering and brand
development.
Selling, general and administrative expenses increased $19 million from 1996 to
1997, primarily the result of increased transition costs. Excluding these costs,
core selling, general and administrative expenses would have been 22.0% of sales
as compared with 22.1% in 1996.
Net interest expense increased 39% to $23 million in 1998, primarily due to
additional debt for funding acquisitions and higher levels of working capital.
The decrease in interest expense from 1996 to 1997 reflected lower average
borrowings as well as lower effective interest rates.
Other net expense was $13 million in 1998 and $22 million in 1997 and 1996.
Included in 1997 and 1996 are non-cash charges related to the recruitment of the
company's chief executive officer. These include an $11 million charge taken in
1997 to reflect the value of stock options granted and $8 million in 1996
reflecting the value of stock rights awarded under the terms of a three-year
employment contract.
The company's effective tax rate was 36% in 1998. While prior years were
significantly affected by non-deductible restructuring charges, the pro forma
effective rate on core earnings for 1997 and 1996 was 37.5% and 38%,
respectively. Favorable fourth quarter 1998 tax settlements, which yielded cash
refunds, as well as tax restructuring initiatives finalized during the year
resulted in the decrease in overall rate.
FOURTH QUARTER
While unit volume growth was consistent throughout the first three quarters of
1998, in the fourth quarter unit volume sales declined 6%. About half the
decline resulted from the absence of a fourteenth week which had been present in
the prior fiscal year. Other major contributors to the decline were the fact
that large U.S. customers did not take advantage of year-end rebates to the
extent they had previously and the company experienced operational difficulties
in the European sales and distribution reorganization. Primarily as a result of
the sales decline, gross margins in the fourth quarter as a percent of sales
were 32.6% as compared with 32.9% in the prior year.
BUSINESS SEGMENT RESULTS
In 1998 the company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of a Business Enterprise and Related
Information". As a result, the company changed its depiction of operating
segments to Tools and Doors. Prior year amounts have been restated for
comparability. The Tools segment includes carpenters, mechanics, pneumatic and
hydraulic tools as well as tool sets. The Doors segment includes commercial and
residential doors, both automatic and manual, as well as closet doors and
systems, home decor and door and consumer hardware. The company assesses the
performance of its business segments using Core Operating Profit, which excludes
restructuring charges, restructuring-related transition and other non-recurring
costs; segment eliminations are also excluded.
Tools 1998 1997 1996
- ---------------------------------------------------------------
(Millions of Dollars)
Net Sales $2,108 $2,024 $ 1,976
Core Operating Profit $ 279 $ 277 $ 245
% of Net Sales 13.2% 13.7% 12.4%
===============================================================
Net sales increased 4% in 1998, due primarily to the growth of the MacDirect
venture and acquisitions. Growth in consumer mechanics tools and fastening tools
and fasteners also contributed to higher sales. Operating profit increased,
although as a percent of sales it was slightly lower than the prior year.
Productivity gains from procurement and restructuring initiatives were offset by
lower margins and absorption on lower fourth quarter sales and by operating
inefficiencies at the Mechanics Tools wrench and socket plants.
Net sales increased 2% in 1997 over 1996 with particular strength in fastening
tools and fasteners. All product lines experienced sales growth; however, the
gains were partially offset by price reductions, particularly in fastening
tools. Operating margins increased to 13.7% of sales from 12.4% due to
manufacturing efficiencies from higher volume and restructuring savings.
Doors 1998 1997 1996
- -------------------------------------------------------------
(Millions of Dollars)
Net Sales $ 621 $ 646 $ 695
Core Operating Profit $ 59 $ 52 $ 55
% of Net Sales 9.5% 8.1% 7.9%
=============================================================
Net sales decreased 4% in 1998 as compared to 1997, due to the divestiture in
1998 of the European automatic door business as well as the February 1997
divestiture of the US garage related products business. In addition, all
remaining product lines experienced a sales decline except for the automatic
door business in the US. Operating margin improved to 9.5%, primarily the result
of the divestitures, restructuring initiatives and reduction in material costs.
Net sales decreased 7% from 1996 to 1997. The divestiture of the US garage
related products business as well as start up difficulties in moving hardware
products to a new central distribution facility were the primary contributors.
Operating profit improved to 8.1% from 7.9% due to the divestiture and benefits
from restructuring initiatives.
RESTRUCTURING ACTIVITIES
The company made substantial progress on its restructuring initiatives in 1998.
The plan called for spending $340 million (approximately $240 million of
restructuring charges recorded in 1997 and $100 million of transition costs from
1997 to 1999) to generate annual savings of $145 million, all of which was to be
reinvested in growth initiatives. To date the company has closed 39 facilities
and reduced employment by approximately 3,000 people. Generally, the plans are
progressing as originally identified; however, there has been a shift toward
closing more distribution centers, which will result in lower severance costs
offset by additional asset write-offs. In addition, the Year 2000 systems
remediation activities have delayed several of the functional centralization
projects that are dependent on achieving common systems. Those initiatives may
not be completely implemented until the end of 2000; however, the delay in
timing is not expected to seriously affect the anticipated results of the
restructuring program. The company anticipates closing 20 additional facilities
as part of the initiatives. Reserves established for restructuring activities at
the beginning of 1998 were $167 million, of which $128 million related to
severance, $13 million related to environmental remediation, and $26 million to
other exit costs. Severance of $26 million was paid in 1998, and payments for
other exit costs of $7 million also reduced reserves. The reserve balances at
the end of 1998 were $110 million, of which $73 million related to severance,
and $37 million to environmental remediation and other exit costs. Reserves
classified as short term were $90 million. Total program transition costs are
still anticipated to be approximately $100 million, with $60 million having been
incurred to date. The funding for cash outlays associated with completing the
restructuring initiatives is expected to come from operating cash flow.
Annual savings of $65 million have been generated by the initiatives, all of
which have been reinvested into funding growth.
FINANCIAL CONDITION
LIQUIDITY, SOURCES AND USES OF CAPITAL
The company has historically generated strong cash flows from operations. During
1998 the company generated only $56 million in operating cash flow, down $185
million from the prior year. The reasons for the decline were twofold. Almost
half was attributable to increased levels of working capital, primarily
inventory. During 1998, the company experienced customer service and other
operational problems, and responded with higher inventory levels as a partial
solution. This phenomenon is expected to reverse, as evidenced by an $11 million
drop in inventories in the fourth quarter of 1998, as improved procedures in
distribution, customer service and production planning are implemented. In
addition to the temporary increase in working capital, the company made cash
payments of $33 million for its restructuring activities, primarily severance,
and incurred $86 million in restructuring-related transition and Y2K remediation
costs. Cash outflows relating to the restructuring and remediation activities
are expected to continue, although at a slightly reduced level, throughout 1999.
Funding for working capital and the 1998 acquisition of Zag Industries was
provided by increased short-term borrowing. Short-term sources of funds were
used for the acquisitions with the intent of ultimately securing medium term
financing. In February 1999, the company issued $120 million of 5 year debt to
capitalize on the current interest rate environment. Total borrowings increased
by $152 million to $567 million at the end of 1998. The company's debt to
capital ratio of 45.8% is inflated due to the recent restructuring charges. The
company's objective is to return to pre-restructuring levels of 30 to 40%.
Investment in capital of $57 million in 1998 was lower than traditional levels
and lower than depreciation and amortization. Facility consolidations, continued
outsourcing and the Stanley Production System (which focuses on continuous
improvement) collectively reduced the requirement for operating capital,
although the level of spending is anticipated to return to a more traditional
level.
Dividends increased 8% in 1998. The company's objective is to deliver dividend
growth equal to one-half the company's earnings growth rate, ultimately reaching
a dividend payout ratio of 25%.
The company's policy is to offset the dilutive impact of its employee benefit
programs (stock awards, options, etc.) through the purchase of shares in the
open market. The net activity related to the share repurchase program was to
reduce equity by $10 million in 1998.
MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The company is exposed to market
risk from changes in foreign currency exchange rates and interest rates.
Exposure to foreign currency risk results because the company, through its
global businesses, enters into transactions and makes investments denominated in
multiple currencies. The company's predominant exposures are in European,
Canadian and Asian currencies. All cross-currency trade flows arising from sales
and procurement activities are consolidated and netted prior to obtaining risk
protection, primarily purchased basket options. The company is thus able to
capitalize on its global positioning by taking advantage of naturally offsetting
exposures to reduce the cost of purchasing protection. From time to time, the
company also enters into forward exchange contracts to reduce the earnings and
cash flow impact of non-functional currency denominated receivables and
payables, predominately intercompany transactions. Gains and losses from these
hedging instruments offset the gains or losses on the underlying net exposures,
assets and liabilities being hedged. The company has also entered into several
cross-currency interest rate swaps, primarily to reduce overall borrowing costs,
but also to provide a partial hedge of the net investments in certain
subsidiaries. Sensitivity to foreign currency exposure risk from these financial
instruments at the end of 1998 would have been immaterial based on the potential
loss in fair value from a hypothetical 10% adverse movement in all currencies.
The company's exposure to interest rate risk results from its outstanding debt
obligations, short term investments and derivative financial instruments
employed in the management of its debt portfolio. The debt portfolio is managed
to achieve capital structure targets and reduce the overall cost of borrowing by
using a combination of fixed and floating rate debt as well as interest rate
swaps, caps and cross-currency interest rate swaps. The company's primary
exposure to interest risk comes from its floating rate debt in the US, Canada
and Europe and is fairly represented by changes in LIBOR rates. At January 2,
1999, the result of a hypothetical one percentage point increase in short term
LIBOR rates would not have resulted in a material impact on the pretax profit of
the company.
The company has access to financial resources and borrowing capabilities around
the world. As of year end 1998, the company had approximately $100 million of
unissued debt securities registered with the Securities and Exchange Commission,
which were subsequently issued in February 1999. 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 needs of its businesses, to make strategic
acquisitions and to fund the restructuring and other initiatives encompassed by
its growth strategy.
OTHER MATTERS
ENVIRONMENTAL
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 routine 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 circum-
stances 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.
YEAR 2000 SYSTEMS ISSUES
Since many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, these business systems may
be unable to process accurately certain data before, during or after the year
2000. As a result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K issue
can arise at any point in the company's supply, manufacturing, distribution and
financial chains.
A Y2K project office was established in September 1997 and is staffed with
internal managers who are responsible for oversight and implementation of the
comprehensive Y2K project. Approximately 60% of the internal information
technology resources were committed to Y2K remediation efforts in 1998. The
scope of the project includes: ensuring the compliance of all applications,
operating systems and hardware on mainframe, PC and LAN platforms; addressing
issues related to software and non-IT embedded systems used in plant and
distribution facilities; and addressing the compliance of key suppliers and
customers. The project has four phases: inventory and assessment of systems and
equipment affected by the Y2K issue; definition of strategies to address
affected systems and equipment; remediation or replacement of affected systems
and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating systems
and hardware (other than PCs) on the company's various computer platforms, the
assessment and definition of strategies phases have been completed. It is
estimated that 60% of the remediation or replacement and testing phases have
been completed with most of the major information systems expected to be
completed by mid 1999. The inventory of all PC's and related equipment is 95%
complete with assessment, remediation and testing 30% complete and expected to
be fully complete by October 1999.
With respect to addressing issues related to software and non-IT embedded
systems used in the company's manufacturing and distribution facilities, the
assessment and definition of strategies phases have been completed. The
remediation or replacement phase, as well as testing, are expected to be
completed by the end of the third quarter 1999.
The company will develop contingency plans for remediation projects where the
risk of non-completion is identified to be greater than remote. The company
anticipates the need to develop contingency plans for only one project, because
its expected completion date is in the second half of 1999.
It is currently estimated that the aggregate cost of the company's Y2K efforts
will be approximately $95 to $120 million, of which approximately $40 million of
incremental costs has been spent to date. It is expected that no more than 25%
of the total cost will be capitalized.
The company relies on numerous third party suppliers in the operation of its
business. Interruption in the operations of any material supplier due to Y2K
issues could affect company operations. The company has initiated efforts to
evaluate the status of its most critical suppliers' progress and this process is
expected to be complete by mid 1999.
In addition, interruptions in customers' operations due to Y2K issues could
result in reduced sales, increased inventory or receivable levels and cash flow
reductions. While these events are possible, the company's customer base is
broad enough to minimize the impact of the failure of any single customer
interface. The company is currently assessing its customer interfaces and
expects to begin testing by mid 1999.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency, the euro. The euro will trade on currency exchanges and
may be used in business transactions. Beginning in January 2002, new
euro-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. The company's operating subsidiaries affected by the
euro
conversion are developing plans to address the systems and business issues
raised by the euro currency conversion. These issues include, among others, (1)
the need to adapt computer and other business systems and equipment to
accommodate euro-denominated transactions; and (2) the competitive impact of
cross-border price transparency. The company has not yet completed its estimate
of the potential impact likely to be caused by the euro conversion; however, it
is not expected to have a material impact on its results of operations,
liquidity or financial condition.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective in fiscal year 2000. The adoption of this standard is not expected to
have a material impact on the company's results of operations, or financial
condition.
CAUTIONARY STATEMENTS
The statements contained in this Annual Report to Shareowners regarding the
company's ability to achieve operational excellence and deliver sustained,
profitable growth, (e.g., sales growth at twice the industry rate, earnings
growth in the low- to mid-teens and dividend growth), are forward looking and
inherently subject to risk and uncertainty.
The company's drive for operational excellence is focused on improving customer
service, consolidating multiple manufacturing and distribution facilities,
outsourcing non-core activities and converting to common systems. The ability to
implement the initiatives associated with these goals is dependent on the
company's ability to increase the effectiveness of its routine business
processes and to develop and execute comprehensive plans for facility
consolidations, the ability of the organization to complete the transition to a
product management structure without losing focus on the business, the
availability of vendors to perform non-core functions being outsourced, 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 other unforeseen events.
The company's ability to generate sustained, profitable growth is dependent on
successfully freeing up resources to fund new product and brand development and
new ventures to broaden its markets and to defend market share in the face of
price competition. Success at developing new products will depend on the ability
of the new product development process to foster creativity and identify viable
new product ideas as well as the company's ability to attract new product
engineers and to design and implement strategies to effectively commercialize
the new product ideas. The achievement of growth through new ventures will
depend upon the ability to successfully identify, negotiate, consummate and
integrate into operations acquisitions, joint ventures and/or strategic
alliances.
The company's ability to achieve and sustain the improvements resulting from
these initiatives will be dependent on the extent of pricing pressure and other
changes in its competitive markets, the continued consolidation of customers in
consumer channels, increasing global competition, changes in trade, monetary and
fiscal policies and laws, inflation, currency exchange fluctuations, the impact
of currency exchange rates on the competitiveness of products and recessionary
or expansive trends in the economies in which the company operates.
Many statements contained in the discussion of the state of the company's Y2K
readiness are also forward looking and inherently subject to risk and
uncertainty. The nature, scope and cost of the company's Y2K project is based on
management's best estimates. These estimates are based in part on information
obtained from third parties (including customers, suppliers and consultants
hired to assist in the Y2K compliance program) and in part on numerous
assumptions regarding future events (including the ability of software vendors
to implement new operating systems or deliver upgrades and repairs as promised,
and the availability of new computer hardware and consultants to meet the
company's planned needs). Due to the general level of uncertainty inherent in
Y2K analysis, the company is unable to determine conclusively whether the
consequences of potential Y2K failures by either the company or its customers
and key suppliers will have a material impact on the company's results of
operations, liquidity or financial condition. It is likely, however, that if the
company is unable to complete its Y2K project as planned or if the company's key
suppliers and customers or a sizable number of its smaller suppliers and
customers fail to remediate their systems, this will have a material adverse
impact on the company's results of operations, liquidity and financial
condition. The company's Y2K project is expected to significantly reduce the
company's level of uncertainty about the Y2K problem, and to reduce the
likelihood of risk of interruptions to routine business operations.
STANLEY 1998 ANNUAL REPORT
BUSINESS SEGMENT
INFORMATION
BUSINESS SEGMENTS
In 1998, the company adopted SFAS No. 131, "Disclosure about Segments of a
Business Enterprise and Related Information." Prior period amounts have been
restated for comparability.
The company operates worldwide in two reportable business segments: Tools and
Doors. The Tools segment includes carpenters, mechanics, pneumatic and hydraulic
tools as well as tool sets. The Doors segment includes commercial and
residential doors, both automatic and manual, as well as closet doors and
systems, home decor and door and consumer hardware.
BUSINESS SEGMENTS
(MILLIONS OF DOLLARS) 1998 1997 1996
=================================================================
NET SALES
Tools $ 2,107.8 $ 2,023.6 $ 1,976.2
Doors 621.3 645.9 694.6
- -----------------------------------------------------------------
Consolidated $ 2,729.1 $ 2,669.5 $ 2,670.8
=================================================================
OPERATING PROFIT
Tools $ 278.6 $ 276.8 $ 245.1
Doors 58.9 52.6 54.6
- -----------------------------------------------------------------
337.5 329.4 299.7
Restructuring, transition
and other costs (85.9) (320.1) (88.3)
Other-net (13.1) (11.3) (14.7)
Interest-net (23.1) (16.6) (22.5)
- -----------------------------------------------------------------
Earnings (loss) before
income taxes $ 215.4 $ (18.6) $ 174.2
=================================================================
SEGMENT ASSETS
Tools $ 1,462.9 $ 1,227.6 $ 1,256.9
Doors 279.6 291.5 318.0
- -----------------------------------------------------------------
1,742.5 1,519.1 1,574.9
Corporate assets 190.4 239.6 84.7
- -----------------------------------------------------------------
Consolidated $ 1,932.9 $ 1,758.7 $ 1,659.6
=================================================================
CAPITAL EXPENDITURES
Tools $ 53.1 $ 70.2 $ 81.1
Doors 11.6 13.9 20.9
DEPRECIATION AND
AMORTIZATION
Tools $ 57.2 $ 53.5 $ 52.7
Doors 14.2 11.7 13.2
- -----------------------------------------------------------------
GENERAL INFORMATION
The company assesses the performance of its reportable business segments using
operating profit, which follows the same accounting policies as those described
in Note A to the Financial Statements. Operating profit excludes interest-net,
other-net, and income tax expense. In addition, operating profit excludes
restructuring and asset write-offs, restructuring-related transition costs
associated with the company's restructuring plans and other non-recurring costs.
Corporate and shared expenses are allocated to each segment. Sales between
segments are not material. Segment assets primarily include accounts receivable,
inventory, other current assets, property, plant and equipment, intangible
assets and other miscellaneous assets. Corporate assets and unallocated assets
are cash, deferred income taxes and certain other assets. Geographic net sales
and long-lived assets are attributed to the geographic regions based on the
geographic location of the Stanley subsidiary.
Sales to one customer in both the Tools and Doors segments were approximately
14% and 12% of consolidated net sales in 1998 and 1997, respectively, and were
less than 10% in 1996.
GEOGRAPHIC AREAS
(MILLIONS OF DOLLARS) 1998 1997 1996
================================================================
NET SALES
United States $ 1,953.4 $ 1,900.6 $ 1,909.3
Other Americas 211.9 227.1 209.8
Europe 467.5 423.6 421.8
Asia 96.3 118.2 129.9
- ----------------------------------------------------------------
Consolidated $ 2,729.1 $ 2,669.5 $ 2,670.8
================================================================
LONG-LIVED ASSETS
United States $ 461.1 $ 479.7 $ 544.8
Other Americas 25.4 31.0 33.1
Europe 284.3 159.8 119.4
Asia 41.7 46.8 51.4
Other 34.0 36.1 -
- ----------------------------------------------------------------
Consolidated $ 846.5 $ 753.4 $ 748.7
================================================================
Consolidated Statements of Operations
FISCAL YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
=============================================================================================================
Net Sales $ 2,729.1 $ 2,669.5 $ 2,670.8
Costs and Expenses
Cost of sales 1,792.8 1,783.4 1,795.5
Selling, general and administrative 684.7 627.7 608.5
Interest-net 23.1 16.6 22.5
Other-net 13.1 21.9 22.3
Restructuring and asset write-offs - 238.5 47.8
- -------------------------------------------------------------------------------------------------------------
2,513.7 2,688.1 2,496.6
- -------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 215.4 (18.6) 174.2
- -------------------------------------------------------------------------------------------------------------
Income Taxes 77.6 23.3 77.3
- -------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ 137.8 $ (41.9) $ 96.9
- -------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Share of Common Stock
Basic $ 1.54 $ (.47) $ 1.09
Diluted $ 1.53 $ (.47) $ 1.08
- -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
Consolidated Balance Sheets
January 2, 1999 and January 3, 1998
(MILLIONS OF DOLLARS) 1998 1997
====================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 110.1 $ 152.2
Accounts and notes receivable 517.0 472.5
Inventories 380.9 301.2
Deferred taxes 43.6 51.1
Other current assets 34.8 28.3
- ------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,086.4 1,005.3
PROPERTY, PLANT AND EQUIPMENT 511.4 513.2
GOODWILL AND OTHER INTANGIBLES 196.9 104.1
OTHER ASSETS 138.2 136.1
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,932.9 $ 1,758.7
====================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 207.8 $ 80.8
Current maturities of long-term debt 14.2 50.0
Accounts payable 172.1 155.5
Accrued expenses 308.0 336.4
- ------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 702.1 622.7
LONG-TERM DEBT 344.8 283.7
RESTRUCTURING RESERVES 34.2 67.6
OTHER LIABILITIES 182.4 176.9
SHAREOWNERS' 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 1998 and 1997 230.9 230.9
Retained earnings 867.2 806.6
Accumulated other comprehensive loss (84.6) (85.3)
ESOP debt (213.2) (223.8)
- ------------------------------------------------------------------------------------
800.3 728.4
Less: cost of common stock in treasury
(3,571,482 shares in 1998 and 3,555,329 shares in 1997) 130.9 120.6
- ------------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY 669.4 607.8
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 1,932.9 $ 1,758.7
====================================================================================
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996
(MILLIONS OF DOLLARS) 1998 1997 1996
=======================================================================================
OPERATING ACTIVITIES:
Net earnings (loss) $ 137.8 $ (41.9) $ 96.9
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 79.7 72.4 74.7
Restructuring and asset write-offs -- 238.5 47.8
Other non-cash items 32.5 (17.9) 38.5
Changes in operating assets and liabilities:
Accounts and notes receivable (41.7) (38.7) (28.9)
Inventories (78.0) 8.6 (10.5)
Accounts payable and accrued expenses (61.8) (.7) 9.5
Income taxes (5.4) 21.8 24.3
Other (6.9) (.9) 7.6
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities 56.2 241.2 259.9
- ---------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (56.9) (73.3) (78.7)
Capitalized software (7.8) (10.8) (25.0)
Proceeds from sales of businesses 3.0 34.8 36.4
Business acquisitions (99.9) (58.4) (5.3)
Investment in affiliated company -- (23.1) --
Other 10.5 5.4 10.8
- ---------------------------------------------------------------------------------------
Net cash used by investing activities (151.1) (125.4) (61.8)
- ---------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt (40.0) (7.4) (26.0)
Proceeds from long-term borrowings 60.9 2.8 2.0
Net short-term financing 126.7 75.3 (72.3)
Proceeds from issuance of common stock 21.9 40.5 36.5
Purchase of common stock for treasury (42.0) (83.0) (65.7)
Cash dividends on common stock (73.9) (68.6) (67.6)
- ---------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 53.6 (40.4) (193.1)
- ---------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (.8) (7.2) 3.6
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (42.1) 68.2 8.6
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 152.2 84.0 75.4
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 110.1 $ 152.2 $ 84.0
=======================================================================================
See notes to consolidated financial statements.
Consolidated Statements of Changes In Shareowners's Equity
Fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996
ACCUMULATED
CAPITAL OTHER
(MILLIONS OF DOLLARS, EXCEPT COMMON IN EXCESS RETAINED COMPREHENSIVE TREASURY SHAREOWNERS'
PER SHARE AMOUNTS) STOCK OF PAR VALUE EARNINGS INCOME (LOSS) ESOP DEBT STOCK EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
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) -
Comprehensive income (loss):
Net earnings 96.9
Currency translation adjustment 25.1
Total comprehensive income (loss) 122.0
Cash dividends declared-$.73 per share (65.2) (65.2)
Issuance of common stock (6.2) (5.1) 53.4 42.1
Purchase of common stock (71.0) (71.0)
Tax benefit related to stock options 4.7 .3 5.0
ESOP debt 9.5 9.5
ESOP tax benefit 3.1 3.1
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1996 230.9 - 919.0 (45.5) (234.8) (89.5) 780.1
Comprehensive income (loss):
Net loss (41.9)
Currency translation adjustment (39.8)
Total comprehensive income (loss) (81.7)
Cash dividends declared-$.77 per share (68.6) (68.6)
Issuance of common stock (13.4) 61.1 47.7
Purchase of common stock (92.2) (92.2)
Tax benefit related to stock options 8.7 8.7
ESOP debt 11.0 11.0
ESOP tax benefit 2.8 2.8
- --------------------------------------------------------------------------------------------------------------------------------
Balance January 3, 1998 230.9 - 806.6 (85.3) (223.8) (120.6) 607.8
Comprehensive income (loss):
Net earnings 137.8
Currency translation adjustment 2.1
Minimum pension liability (1.4)
Total comprehensive income (loss) 138.5
Cash dividends declared-$.83 per share (73.9) (73.9)
Issuance of common stock (8.5) 33.8 25.3
Purchase of common stock (44.1) (44.1)
Tax benefit related to stock options 2.4 2.4
ESOP debt 10.6 10.6
ESOP tax benefit 2.8 2.8
- --------------------------------------------------------------------------------------------------------------------------------
Balance January 2, 1999 $ 230.9 $ - $ 867.2 $ (84.6) $ (213.2) $ (130.9) $ 669.4
================================================================================================================================
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 which require consolidation, after the
elimination of intercompany accounts and transactions. The company's fiscal year
ends on the Saturday nearest to December 31. There were 52 weeks in fiscal years
1998 and 1996 and 53 weeks in 1997.
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 shareowners' equity. Translation adjustments for operations in
highly inflationary economies and exchange gains and losses on transactions are
included in earnings.
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.
Impairment losses are 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.
Impairment losses were charged to operations in 1997 and 1996 and were included
in Restructuring and asset write-offs on the statement of operations.
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
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. Changes in the
fair value of options, representing a basket of foreign currencies purchased to
hedge anticipated cross-currency cash flows, are included in Other-net expense.
The company does not use financial instruments for trading or speculative
purposes.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting For Derivative
Instruments and Hedging Activities," which is effective in fiscal year 2000. The
adoption of this standard is not expected to have a material impact on the
company's balance sheet, operating results or cash flows.
INCOME TAXES
Income tax expense is based on reported earnings (loss) 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, and are measured by applying enacted tax rates in
effect in years in which the differences are expected to reverse.
EARNINGS PER SHARE
Basic earnings per share equals net earnings divided by weighted average shares
outstanding during the year. Diluted earnings per share includes the impact of
common stock equivalents using the treasury stock method when the effect is
dilutive.
STOCK-BASED COMPENSATION
The company accounts for its employee stock compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost is recognized for stock-based
compensation unless the quoted market price of the stock at the grant date is in
excess of the amount the employee must pay to acquire the stock. 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 J.
RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform with the current
year presentation.
B. ACQUISITIONS
In August 1998, the company acquired Zag Industries Ltd. (Zag), an innovator and
producer of plastic storage products, for $129.3 million. The purchase price
included a cash payment of $114.4 million, contingent payments based on Zag's
estimated earnings over a five year period and acquisition related costs. The
purchase price was allocated to the fair market value of the assets acquired and
liabilities assumed and resulted in goodwill of $94.3 million, which is being
amortized over a 40 year period.
In November 1997, the company acquired the assets of Atro Industriale, a
manufacturer and distributor of pneumatic fastening tools, collated nails, and
staples for $46.3 million.
The aforementioned acquisitions were accounted for as purchase transactions and,
accordingly, the operating results have been included in the company's
consolidated financial statements since the dates of acquisition. The
acquisitions did not have a material pro forma impact on operations.
C. 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 January 2, 1999 and January
3, 1998, allowances for doubtful receivables of $26.7 million and $19.8 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 January 2, 1999.
The company sells certain domestic accounts receivable under a revolving sales
agreement. The proceeds from these sales were $68.8 million in 1998, $61.9
million in 1997 and $73.1 million in 1996.
D. INVENTORIES
(MILLIONS OF DOLLARS) 1998 1997
================================================================
Finished products $ 273.3 $ 203.7
Work in process 52.5 51.9
Raw materials 55.1 45.6
- ----------------------------------------------------------------
$ 380.9 $ 301.2
================================================================
Inventories in the amount of $218.6 million at January 2, 1999 and $160.8
million at January 3, 1998 were valued at the lower of LIFO cost or market. If
LIFO inventories had been valued at FIFO costs, they would have been $113.9
million and $120.3 million higher than reported at January 2, 1999 and January
3, 1998, respectively.
E. PROPERTY, PLANT AND EQUIPMENT
(MILLIONS OF DOLLARS) 1998 1997
================================================================
Land $ 36.5 $ 34.7
Buildings 229.0 239.7
Machinery and equipment 873.3 833.4
Computer software 59.7 58.3
- ----------------------------------------------------------------
1,198.5 1,166.1
Less: accumulated depreciation
and amortization 687.1 652.9
- ----------------------------------------------------------------
$ 511.4 $ 513.2
================================================================
The provisions for depreciation and amortization for 1998, 1997 and 1996 were
$71.4 million, $65.2 million and $65.9 million, respectively.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles at the end of each fiscal year, net of
accumulated amortization of $80.2 million and $72.2 million, were as follows:
(MILLIONS OF DOLLARS) 1998 1997
================================================================
Goodwill $ 177.0 $ 79.0
Other 19.9 25.1
- ----------------------------------------------------------------
$ 196.9 $ 104.1
================================================================
G. ACCRUED EXPENSES
(MILLIONS OF DOLLARS) 1998 1997
================================================================
Payroll and related taxes $ 53.5 $ 66.3
Insurance 30.6 25.9
Restructuring 90.3 99.7
Income taxes 26.3 34.1
Other 107.3 110.4
- ----------------------------------------------------------------
$ 308.0 $ 336.4
================================================================
H. LONG-TERM DEBT
AND FINANCING ARRANGEMENTS
(MILLIONS OF DOLLARS) 1998 1997
===============================================================
Notes payable in 2002 7.4% $ 100.0 $ 100.0
Commercial Paper 5.2% 150.0 89.3
Notes payable in 1998 - 34.8
Notes payable due semiannually
to 2005 6.1% 31.3 34.3
Industrial Revenue Bonds due in
varying amounts to 2010 5.8-6.8% 19.6 19.6
ESOP loan guarantees,
payable in varying
monthly installments
through 2009 6.1% 39.6 46.5
Other 18.5 9.2
- ---------------------------------------------------------------
359.0 333.7
Less: current maturities 14.2 50.0
- ---------------------------------------------------------------
$ 344.8 $ 283.7
===============================================================
Commercial paper outstanding at January 2, 1999 of $150.0 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.
As of January 2, 1999, the company had on file with the Securities and Exchange
Commission a shelf registration statement covering the issuance of up to $200.0
million of debt securities, of which $100.0 million was unused. The remaining
debt securities were issued and used to refinance commercial paper on February
24, 1999. The company has unused short and long-term credit arrangements with
several banks to borrow up to $400.0 million at the lower of prime or money
market rates. Of this amount, $150.0 million is long-term. Commitment fees range
from .06% to .07%. In addition, the company has short-term lines of credit with
numerous foreign banks aggregating $113.4 million, of which $86.0 million was
available at January 2, 1999. Short-term arrangements are reviewed annually for
renewal. Of the long-term and short-term lines, $400.0 million is available to
support the company's commercial paper program. The weighted average interest
rates on short-term borrowings at January 2, 1999 and January 3, 1998 were 5.4%
and 6.4%, respectively.
The company has guaranteed the long-term notes payable to banks of its employee
stock ownership plan (ESOP). During 1998, the notes payable were refinanced,
thereby reducing the interest rate from 7.7% to 6.1% and extending the maturity
through 2009. The guarantee is reflected in the consolidated balance sheets as
long-term debt with a corresponding reduction in shareowners' equity.
To manage interest costs and foreign exchange risk, the company maintains a
portfolio of interest rate swap agreements. 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 $31.3 million of variable rate United States dollar debt to
variable rate Dutch Guilder debt (3.9% weighted average rate). See Note I for
more information regarding the company's interest rate and currency swap
agreements.
Aggregate annual maturities of long-term debt for the years 2000 to 2003 are
$12.1 million, $161.8 million, $125.7 million and $12.8 million, respectively.
Interest paid during 1998, 1997 and 1996 amounted to $31.2 million, $22.7
million and $26.0 million, respectively.
Commercial paper, utilized to support working capital requirements, classified
as current was $148.5 million and $26.9 million, as of January 2, 1999 and
January 3, 1998, respectively.
I. 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, 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) 1998 1997
===================================================================
Interest rate swaps
Receive fixed-pay variable rates $ - $ 50.0
pay rate - 5.7%
receive rate - 6.2%
maturity dates - 2002
Receive variable-pay fixed rates $ 167.8 $ 88.0
pay rate 5.1% 4.4%
receive rate 5.2% 5.8%
maturity dates 1999-2003 1999
Currency swaps $ 106.8 $ 105.5
pay rate 4.9% 4.2%
receive rate 5.7% 5.9%
maturity dates 1999-2005 1999-2005
===================================================================
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. The objective of these practices is to minimize the impact
of foreign currency fluctuations on operating results. At January 2, 1999 and
January 3, 1998, the company had forward contracts hedging intercompany loans
totaling $15.6 million. At January 2, 1999 and January 3, 1998, currency basket
options hedged anticipated transactions totaling $79.4 million and $166.0
million, respectively. The forward contracts and options are primarily
denominated in Canadian dollars, Japanese yen, Australian dollars, Taiwanese
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 January 2, 1999 and January 3, 1998 is as follows:
(MILLIONS OF DOLLARS) 1998 1997
=================================================================
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------
Long-term debt,
including current portion $ 356.2 $ 351.6 $ 334.3 $ 336.6
Currency and
interest rate swaps 2.8 2.9 (.6) (.8)
- -----------------------------------------------------------------
$ 359.0 $ 354.5 $ 333.7 $ 335.8
=================================================================
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.
J. CAPITAL STOCK
EARNINGS PER SHARE COMPUTATION
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
(MILLIONS OF DOLLARS, EXCEPT SHARE
AND PER SHARE AMOUNTS) 1998 1997 1996
========================================================================
Net earnings (loss)-
basic and diluted $ 137.8 $ (41.9) $ 96.9
========================================================================
Basic earnings per share-
weighted average shares 89,407,980 89,469,849 89,151,668
Dilutive effect of
employee stock options 785,342 - 652,349
- ------------------------------------------------------------------------
Diluted earnings per share-
weighted average shares 90,193,322 89,469,849 89,804,017
========================================================================
Earnings (loss) per share:
Basic $ 1.54 $ (.47) $ 1.09
Diluted $ 1.53 $ (.47) $ 1.08
========================================================================
The effect of employee stock options for 1997 was 1,002,456 shares. These shares
are not included in the calculations since they are antidilutive.
COMMON STOCK SHARE ACTIVITY
The activity in common shares for each year, net of treasury stock, was as
follows:
1998 1997 1996
==================================================================
Outstanding,
beginning of year 88,788,081 88,719,792 88,758,830
Issued for employee
stock plans 977,865 2,239,606 2,465,416
Purchased (994,018) (2,171,317) (2,504,454)
- ------------------------------------------------------------------
Outstanding, end of year 88,771,928 88,788,081 88,719,792
==================================================================
COMMON STOCK RESERVED
At January 2, 1999 and January 3, 1998, the number of shares of common stock
reserved for future issuance under various employee and director stock plans was
as follows:
1998 1997
==============================================================
Employee Stock Purchase Plan 4,298,753 4,666,251
Stock Option Plans 7,175,538 7,673,877
Long-term incentive plans 6,765,342 2,833,335
- --------------------------------------------------------------
18,239,633 15,173,463
==============================================================
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.
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 shareowner) 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
shareowner) 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 January 2, 1999, there were 44,385,964 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 and a Long-Term Incentive Plan (LTIP) for
key executives. Each provides for the grant of stock options. The LTIP also
provides for the grant of restricted stock and other awards. 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 and granted him 200,000
common stock equivalent share units and an option to purchase 1,000,000 shares
at $27.562 (the market value on the date of issuance). Each share unit had a
market value of $27.75 on the date of the grant and represents the right to
receive one share of common stock. The share units will be distributed in three
equal annual installments beginning in 2000. In fiscal year 1996, the fair
market value of the share units at their grant date was charged to operations
and included in Other-net expense in the Statement of Operations. The option
grant, which was approved by shareowners on April 23, 1997, has a ten year term.
Fiscal year 1997 includes a charge to operations representing the difference
between the exercise price and the fair market value as of the shareowner
approval date.
Information regarding the company's stock option plans is summarized below:
1998 1997 1996
===================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
===================================================================================================
Outstanding,
beginning
of year 4,244,013 $28.49 3,784,738 $ 21.68 4,821,194 $18.34
Granted 1,358,467 29.10 1,966,000 35.34 973,450 27.95
Exercised (498,339) 21.55 (1,365,235) 20.13 (1,973,230) 16.61
Forfeited (279,250) 43.20 (141,490) 22.21 (36,676) 21.29
- ---------------------------------------------------------------------------------------------------
Outstanding,
end of year 4,824,891 $29.56 4,244,013 $ 28.49 3,784,738 $21.68
===================================================================================================
Options
exercisable,
end of year 3,627,424 $29.02 3,285,513 $ 24.13 2,811,288 $19.51
===================================================================================================
Options outstanding as of January 2, 1999 had exercise prices as follows:
1,182,274 options ranging from $15.06 to $23.00, 2,583,417 options ranging from
$27.56 to $39.09 and 1,059,200 options ranging from $41.53 to $55.98. The
weighted average remaining contractual life of these options is 8.2 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 ($37.19 per share for fiscal year 1998
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 1998, 1997 and 1996 shares totaling 367,498, 734,037 and
442,960, respectively, were issued under the plan at average prices of $35.16,
$23.69 and $19.61 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 shares of common stock as directed by the Committee. The amounts of
$1.6 million, $3.5 million and $2.5 million were charged to expense in 1998,
1997 and 1996, respectively. Shares totaling 67,993, 61,731 and 14,252 were
issued in 1998, 1997 and 1996, 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
1994-1998 award cycle.
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 the majority of 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 consistent
with the method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the company's net earnings (loss) and earnings (loss) per share
would have been adjusted to the pro forma amounts indicated below:
1998 1997 1996
===========================================================================
Pro forma net earnings (loss)
(in millions) $ 128.9 $ (56.1) $ 90.4
Pro forma earnings (loss) per share:
Basic $ 1.44 $ (.63) $ 1.01
Diluted $ 1.43 $ (.63) $ 1.01
===========================================================================
During the initial phase-in period, as required by SFAS 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 (loss) and
earnings (loss) 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 1998, 1997 and 1996,
respectively: dividend yield of 3.1%, 1.8% and 2.6% expected volatility of 35%
for 1998 and 25% for 1997 and 1996; risk-free interest rates of 5.4%, 6.0% and
6.1%; and expected lives of 7 years. The weighted average fair value of stock
options granted in 1998, 1997 and 1996 was $10.90, $15.39 and $8.02,
respectively. The fair value of the employees' purchase rights under the
Employee Stock Purchase
Plan was estimated using the following assumptions for 1998, 1997 and 1996,
respectively: dividend yield of 3.1%, 1.8% and 2.6%; expected volatility of 35%
for 1998 and 25% for 1997 and 1996; risk-free interest rates of 4.8%, 6.0% and
5.6%; and expected lives of 1.2 years. The weighted average fair value of those
purchase rights granted in 1998, 1997 and 1996 was $7.21, $8.53 and $6.44,
respectively.
K. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Account Value Plan (formerly 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, all of which is invested in the company's
common stock. The amounts in 1998, 1997 and 1996 under this matching arrangement
were $7.9 million, $8.2 million and $8.4 million, respectively. In 1998, the
investment options for plan participant contributions were enhanced to include a
variety of investment funds in addition to the company's common stock.
In 1998, the ESOP was expanded to include an additional non-contributory benefit
for U.S. salaried and non-union hourly employees to replace the pre-existing
defined benefit plan. Under the new benefit arrangement, the company contributes
amounts ranging from 2% to 7% of employee compensation based on age, ($9.5
million in 1998). Assets of the new benefit are invested in equity securities
and bonds.
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,
both of which were refinanced in 1998. The external ESOP borrowings are
guaranteed by the company and are included in long-term debt. Shareowners'
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, employer contributions 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 $5.1 million in 1998, $15.2
million in 1997 and $8.6 million in 1996.
Dividends on ESOP shares, which are charged to shareowners' equity as declared,
were $15.2 million in 1998 and 1997 and $15.1 million in 1996. Interest costs
incurred by the ESOP on external debt for 1998, 1997 and 1996, were $2.9
million, $4.0 million and $4.8 million, respectively. ESOP shares not yet
allocated to participants are treated as outstanding for purposes of computing
earnings per share. As of January 2, 1999, the number of ESOP shares allocated
to participant accounts was 8,346,220 and the number of unallocated shares was
9,261,385.
PENSION AND OTHER BENEFIT PLANS
The company sponsors non-contributory pension plans covering substantially all
employees. Benefits for salaried and non-union hourly employees are generally
based on salary and years of service, while those for collective bargaining
employees are based on a stated amount for each year of service. Additionally,
the company contributes to several union-sponsored multi-employer plans which
provide defined benefits. In 1998, the company replaced the defined benefit plan
for U.S. salaried and non-union hourly employees with a defined contribution
plan, which was incorporated into the ESOP. The new plan was actuarially
designed to replace the benefits of the pre-existing defined benefit plan.
Additional service benefits under the pre-existing plan were frozen as of
January 31, 1998, resulting in a net $3.1 million curtailment loss.
Contributions under the new plan began in February 1998.
The company's funding policy for its defined benefit plans 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. 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 components of net periodic pension cost are as follows:
(MILLIONS OF DOLLARS) 1998 1997 1996
===================================================================
Service cost $ 11.1 $ 22.5 $ 20.8
Interest cost 31.6 31.2 31.1
Expected return on plan assets (43.4) (37.2) (35.2)
Amortization of transition
asset (1.2) (1.7) (1.7)
Amortization of prior service cost 1.4 1.5 1.5
Other 2.0 2.7 2.8
Curtailment loss 3.1 5.7 -
- -------------------------------------------------------------------
Net periodic pension cost $ 4.6 $ 24.7 $ 19.3
===================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $31.9 million, $22.0 million and $6.8
million as of January 2, 1999, and $25.7 million, $19.6 million and $7.1
million, respectively as of January 3, 1998.
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. Net periodic postretirement
benefit expense was $1.9 million in 1998 and 1997 and $2.0 million in 1996.
The funded status of the company's pension and other benefit plans at the end of
each fiscal year was as follows:
(MILLIONS OF DOLLARS) 1998 1997 1998 1997
========================================================================
Pension Benefits Other Benefits
========================================================================
Change in benefit obligation
Benefit obligation at end of
prior year $ 464.8 $ 448.7 $ 17.5 $ 18.2
Service cost 11.1 22.5 0.6 0.6
Interest cost 31.6 31.2 1.2 1.2
Actuarial (gains) losses 38.8 12.5 (4.1) (5.1)
Foreign currency exchange rates (0.8) (6.4) - -
Benefits paid (32.9) (43.7) 2.2 2.6
- ------------------------------------------------------------------------
Benefit obligation at end
of year 512.6 464.8 17.4 17.5
- ------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at end
of prior year 525.6 470.6 - -
Actual return on plan assets 35.1 85.9 - -
Foreign currency exchange rate
changes 1.3 (4.8) - -
Employer contribution 5.0 17.6 - -
Benefits paid (32.9) (43.7) - -
- ------------------------------------------------------------------------
Fair value of plan assets at end
of year 534.1 525.6 - -
- ------------------------------------------------------------------------
Funded status-assets in excess
(less than) benefit obligation 21.5 60.8 (17.4) (17.5)
Unrecognized prior service cost 9.7 14.0 - -
Unrecognized net actuarial
(gain) loss (15.5) (59.3) 2.2 1.9
Unrecognized net asset
at transition (3.5) (4.6) - -
- ------------------------------------------------------------------------
Net amount recognized $ 12.2 $ 10.9 $(15.2) $ (15.6)
- ------------------------------------------------------------------------
Amounts recognized in the
consolidated balance sheet
Prepaid benefit cost $ 31.4 $ 28.8 $ - $ -
Accrued benefit liability (21.8) (22.1) (15.2) (15.6)
Intangible asset 1.2 4.2 - -
Accumulated other
comprehensive income 1.4 - - -
- ------------------------------------------------------------------------
Net amount recognized $ 12.2 $ 10.9 $(15.2) $ (15.6)
========================================================================
Assumptions used for significant pension benefit plans were as follows:
1998 1997
- ---------------------------------------------------------------
Discount rate 6.5% 7.0%
Average wage increase 4.5% 4.5%
Expected return on plan assets 10.0% 9.0%
===============================================================
Reducing the discount rate used for measuring the benefit obligation resulted in
an actuarial loss of approximately $40 million, included in the change in
benefit obligation.
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 8.4% for
1998 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 $1.1 million at January 2,
1999 and net periodic postretirement benefit expense for fiscal year 1998 by $.1
million. A one percentage point decrease in the assumed health care cost trend
rate would have an immaterial effect on the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost for fiscal 1998. A
weighted average discount rate of 6.5% and 7% was used in measuring the
accumulated benefit obligations for 1998 and 1997, respectively.
L. OTHER COSTS AND EXPENSES
Interest-net for 1998, 1997 and 1996 included interest income of $7.9 million,
$8.1 million and $5.5 million, respectively.
Other-net in 1997 includes a non-cash charge of $10.6 million ($.07 per share),
representing the difference between the exercise price and the fair market value
of a 1,000,000 share option grant under terms of the company's employment
contract with its chief executive officer. This contract resulted in a 1996
charge of $7.6 million ($.08 per share) for the issuance of 200,000 common stock
equivalent share units and other immediately vested benefits.
Advertising costs are expensed as incurred and amounted to $46.2 million in
1998, $48.2 million in 1997 and $52.5 million in 1996. Marketing costs for 1998,
1997 and 1996 amounted to $61.4 million, $25.0 million and $23.9 million,
respectively.
M. RESTRUCTURING AND ASSET
WRITE-OFFS
In 1997, the company announced a restructuring initiative to streamline its
manufacturing, sales, distribution and administration operations, reducing its
overall cost structure. The company will close approximately 59 manufacturing
and distribution facilities. Many of
the closures will be effected by consolidating operations into other company
facilities, others by outsourcing work to vendors. In addition, the company
reorganized its operations into a product management structure, in which product
marketing groups will be focusing on customers and sales growth through
development of new products and expanding market shares. In support of this
structure, manufacturing, engineering, sales and service, finance, human
resource and information technology functions will be centralized. The
implementation of these restructuring initiatives results in additional
transition costs, which are expected to be incurred through mid-1999. In 1997,
restructuring and asset write-off charges of $238.5 million included the
write-down of assets ($73.6 million), severance for the termination of
approximately 8,900 employees ($139.3 million), other exit costs ($32.2 million)
offset by gains on the divestiture of two businesses ($6.6 million).
As of January 2, 1999, 39 manufacturing and distribution facilities have been
closed. In 1998 and 1997, approximately 2,100 and 900 employees have been
terminated as a result of restructuring initiatives, respectively. Severance
payments of $26.1 million and $9.2 million and other exit payments of $6.2
million and $5.0 million were made in 1998 and 1997, respectively. Since the
restructuring program was announced, certain modifications were made to
components of the plan, primarily a shift toward closing more distribution
facilities. This will result in lower severance costs, offset by additional
asset write-offs. The overall expected costs of the restructuring program have
not changed and there have been no material adjustments to the liability. The
company believes the existing reserves are sufficient to complete the
restructuring initiatives. At January 2, 1999 and January 3, 1998, reserve
balances related to the 1997 restructuring were $154.3 million and $208.0
million, of which $44.0 million and $40.9 million relate to the write-down of
impaired assets, respectively.
In 1996, the company recorded restructuring and asset write-off charges of $47.8
million for the write-down of assets, severance for approximately 695 employees
and other costs associated with a previous restructuring initiative announced in
fiscal 1995. Such costs and asset write-offs were primarily related to transfers
of production among existing manufacturing facilities, plant closures and
resulting workforce reductions ($35.4 million), and impairment of assets related
to restructuring initiatives and strategy changes ($9.4 million). The company
also divested five businesses during 1996 and recognized an associated net loss
of $3.0 million which was included in 1996 restructuring charges.
The 1996 and 1995 restructuring initiatives are complete. During 1998 and 1997,
payments of $.9 million and $13.7 million, respectively, were made for severance
and other exit costs.
N. BUSINESS SEGMENT AND
GEOGRAPHIC AREA
Business Segment and Geographic Area information included on page 36 of this
report is an integral part of the financial statements.
O. 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) 1998 1997
=================================================================
Deferred tax liabilities:
Depreciation $ 71.7 $ 74.3
Other 5.5 2.0
- -----------------------------------------------------------------
Total deferred tax liabilities 77.2 76.3
- -----------------------------------------------------------------
Deferred tax assets:
Employee benefit plans 36.6 36.5
Doubtful accounts 14.0 9.7
Inventories 7.6 5.0
Amortization of intangibles 17.1 22.8
Accruals 16.7 18.3
Restructuring charges 62.0 71.1
Other 9.9 8.8
- -----------------------------------------------------------------
163.9 172.2
Valuation allowance (9.1) (8.8)
- -----------------------------------------------------------------
Total deferred tax assets 154.8 163.4
- -----------------------------------------------------------------
Net deferred tax assets $ 77.6 $ 87.1
=================================================================
Valuation allowances reduce the deferred tax asset attributable to foreign and
state loss carryforwards to the amount that, based upon all available evidence,
is more likely than not to be realized. Reversal of the valuation allowance is
contingent upon the recognition of future taxable income and capital gains in
specific foreign countries and specific states, or changes in circumstances
which cause the recognition of the benefits to become more likely than not.
Income tax expense consisted of the following:
(MILLIONS OF DOLLARS) 1998 1997 1996
=================================================================
Current:
Federal $ 55.5 $ 48.5 $ 49.4
Foreign 13.9 28.7 19.5
State 7.6 8.8 12.6
- -----------------------------------------------------------------
Total current 77.0 86.0 81.5
- -----------------------------------------------------------------
Deferred (benefit):
Federal (.9) (36.9) 2.0
Foreign 1.4 (21.6) (3.7)
State .1 (4.2) (2.5)
- -----------------------------------------------------------------
Total deferred (benefit) .6 (62.7) (4.2)
- -----------------------------------------------------------------
Total $ 77.6 $ 23.3 $ 77.3
=================================================================
Income taxes paid during 1998, 1997 and 1996 were $71.0 million, $69.1 million
and $64.4 million, respectively.
The reconciliation of the federal income tax at the statutory federal rate to
the income tax at the effective rate was as follows:
(MILLIONS OF DOLLARS) 1998 1997 1996
================================================================
Tax at statutory rate $ 75.4 $ (6.5) $ 61.0
State income taxes,
net of federal benefits 5.0 3.8 6.9
Difference between foreign
and federal income tax (.4) 1.9 .7
Restructuring reserves - 24.3 7.1
Other-net (2.4) (.2) 1.6
- ----------------------------------------------------------------
Income taxes $ 77.6 $ 23.3 $ 77.3
================================================================
The components of earnings (loss) before income taxes consisted of the
following:
(MILLIONS OF DOLLARS) 1998 1997 1996
================================================================
United States $ 148.6 $ 11.1 $ 156.6
Foreign 66.8 (29.7) 17.6
- ----------------------------------------------------------------
Total pretax earnings (loss) $ 215.4 $ (18.6) $ 174.2
================================================================
Undistributed foreign earnings of $149.7 million at January 2, 1999 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.
P. 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 January 2, 1999 were $21.1 in 1999, $16.8 in 2000, $12.6 in
2001, $7.8 in 2002, $15.9 in 2003 and $22.8 thereafter. Minimum payments have
not been reduced by minimum sublease rentals of $11.6 million due in the future
under noncancelable subleases. Rental expense for operating leases amounted to
$45.1 million in 1998, $34.9 million in 1997 and $36.6 million in 1996.
Q. 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 13 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 January 2, 1999, the company had
reserves of $30.8 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
------------------------------------------------- ------
1998 First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 671.9 $ 691.8 $ 689.6 $ 675.8 $ 2,729.1
Gross profit 236.9 242.9 236.4 220.1 936.3
Selling, general and administrative expenses 171.1 166.1 172.7 174.8 684.7
Net earnings $ 36.4 $ 42.2 $ 33.4 $ 25.8 $ 137.8
Net earnings per share:
Basic $ .41 $ .47 $ .37 $ .29 $ 1.54
Diluted $ .40 $ .47 $ .37 $ .29 $ 1.53
- ------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 646.6 $ 673.6 $ 650.5 $ 698.8 $ 2,669.5
Gross profit 215.2 227.5 213.9 229.5 886.1
Selling, general and administrative expenses 153.2 153.8 148.2 172.5 627.7
Restructuring and asset write-offs (4.6) 137.2 105.9 - 238.5
Net earnings (loss) $ 36.7 $ (64.5) $ (40.6) $ 26.5 $ (41.9)
Net earnings (loss) per share:
Basic $ .41 $ (.72) $ (.46) $ .30 $ (.47)
Diluted $ .41 $ (.72) $ (.46) $ .29 $ (.47)
- ------------------------------------------------------------------------------------------------------------------------------
Note: The second quarter of 1997 includes a charge of $10.6 million, or $.07 per
share, for a stock option grant as specified in the company's employment
contract with its chief executive officer.
Corporate Information
BOARD OF DIRECTORS
JOHN M. TRANI (1)
Chairman and
Chief Executive Officer
The Stanley Works
STILLMAN B. BROWN (1), (4), (5)
Managing General Partner
Harcott Associates Investments
EDGAR R. FIEDLER (2), (4)
Retired; former Vice President
and Economic Counselor
The Conference Board
MANNIE L. JACKSON (4), (5)
Chairman
Harlem Globetrotters International,
a division of MJA, Inc.
JAMES G. KAISER (2), (3)
Chairman, Avenir Partners
automotive retailing; 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
HUGO E. UYTERHOEVEN (3), (5)
Professor emeritus, 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), (2), (3)
Director of various organizations
(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
CORPORATE OFFICERS
WILLIAM D. HILL
Vice President, Engineering and Technology
(1997)
STEF G.H. KRANENDIJK
President Europe
(1998)
KENNETH O. LEWIS
Vice President, Marketing and Brand Development
(1997)
MARK J. MATHIEU
Vice President, Human Resources
(1997)
PAUL W. RUSSO
Vice President, Strategy and Development
(1995)
JOHN M. TURNER
President, Consumer Sales Americas
(1998)
JOHN M. TRANI
Chairman and Chief Executive Officer
(1997)
STEPHEN S. WEDDLE
Vice President, General Counsel and Secretary
(1978)
THERESA F. YERKES
Vice President and Controller
(1989)
(Joined Stanley)
Investor and Shareowner Information
COMMON ST0CK
The Stanley Works common stock is listed on the New York and Pacific Stock
Exchanges under the abbreviated ticker symbol "SWK", and is a component of the
S&P 500 Composite Stock Price Index.
COMMON STOCK (DOLLARS PER SHARE)
- -----------------------------------------------------------------------------
Price Dividends
- -----------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------------
First Quarter 56 1/16 42 1/4 41 28 $.20 $.185
Second Quarter 57 1/4 40 1/2 44 3/8 35 1/2 .20 .185
Third Quarter 47 3/4 27 1/8 47 3/8 39 1/4 .215 .20
Fourth Quarter 32 9/16 23 1/2 47 3/16 39 15/16 .215 .20
- -----------------------------------------------------------------------------
$.83 $.77
- -----------------------------------------------------------------------------
DIVIDENDS
The Stanley Works has 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 -- 122 CONSECUTIVE YEARS.
Our quarterly dividend record is the longest of any industrial company
listed on the New York Stock Exchange -- 415 CONSECUTIVE QUARTERS.
We have increased dividends in each of the past 31 YEARS, and in that
same period, an investment in Stanley stock grew at a compound annual rate of
12.6%.
INCREASED DIVIDENDS EVERY YEAR SINCE 1968
DIVIDEND PER SHARE IN DOLLARS $.83 PER SHARE
- -----------------------------------------------------------------------------
(GRAPHIC OMITTED)
- -----------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR
All shareowner inquiries, including transfer-related matters, should be
directed to:
EquiServe, Servicing Agent for State Street Bank and Trust Company
P.O. Box 8200, Boston, MA 02266-8200 - (800) 543-6757
CORPORATE OFFICES
The company's principal corporate offices are located at:
1000 Stanley Drive, New Britain, CT 06053 - (860) 225-5111
ANNUAL MEETING
The annual shareowners' meeting of The Stanley Works will be held at 9:30 a.m.
on Wednesday, April 28, 1999, in Columbus, Ohio at the Crowne Plaza Hotel,
33 Nationwide Blvd. A formal notice of the meeting together with a proxy
statement has been mailed to shareowners with this annual report.
INDEPENDENT AUDITORS
Ernst & Young LLP, 225 Asylum Street, Hartford, Connecticut 06103
FINANCIAL & INVESTOR COMMUNICATIONS
The Stanley Works investor relations department provides information to
shareowners 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 department at our corporate
offices by calling Gerard J. Gould, Director, Investor Relations 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 and a variety of shareowner information can be found at the
following address on the World Wide Web: http://www.stanleyworks.com. Click on
"Investor Relations". Stanley shareowners are also able to call toll-free
(800) 499-9202 to request a copy of the most recent quarterly release.
DIVIDEND REINVESTMENT PLAN AND DIRECT STOCK PURCHASE
Shareowners may have dividends automatically reinvested in Stanley common stock
and/or make optional cash payments to increase their common stock investment.
Inquiries regarding this service should be directed to:
EquiServe, Servicing Agent for State Street Bank and Trust Company
P.O. Box 8200, Boston, MA 02266-8200 - (800) 543-6757