[Front Cover]
G R O W T H
[Close-up photo of hammer]
The Stanley Works
1994 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 a staff of internal auditors. It is further characterized by care in the
selection of competent financial managers, by organizational arrangements that
provide for delegation of authority and divisions of responsibility and by
disseminating policies and procedures throughout the company.
The Stanley Works also recognizes its responsibility for fostering a strong,
ethical climate so that the company's affairs are conducted according to the
highest standards of personal and business conduct. This responsibility is
reflected in the company's Business Conduct Guidelines which are publicized
throughout the organization. The company has a long-established reputation of
integrity in business conduct and maintains a systematic program to assess
compliance with these policies.
The adequacy of Stanley's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. Both the independent auditors and our
internal auditors have unrestricted access to the Audit Committee, and they meet
with it periodically, with and without management present.
/s/ Richard H. Ayers /s/ Richard Huck
Richard H. Ayers Richard Huck
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
Report of Ernst & Young LLP, Independent Auditors
The Shareholders
The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley
Works and subsidiaries as of December 31, 1994 and January 1, 1994, and the
related consolidated statements of earnings, changes in shareholders' equity and
cash flows for each of the three fiscal years in the period ended December 31,
1994. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Stanley Works
and subsidiaries at December 31, 1994 and January 1, 1994, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note K to the consolidated financial statements, the company
changed its method of accounting for postemployment benefits in 1993.
/s/ Ernst & Young LLP
Hartford, Connecticut
January 31, 1995
Business Segment Information
Industry Segments
The company operates worldwide in three reportable segments: Tools, Hardware and
Specialty Hardware. Additional detail is provided for the Consumer, Industrial
and Engineered tool categories within the Tools segment.
Geographic Areas
The company has manufacturing and warehouse facilities and sales offices in the
United States, Europe and Other Areas. The company's operations in Europe are
principally located in the European Economic Community. Other Areas principally
include Canada, Australia, the Far East and Latin America.
General Information
Intercompany sales between geographic areas and between business segments were
not significant. Segment information includes insignificant allocations of
expenses and assets shared by the segments.
Operating profit represents net sales less operating expenses. In computing
operating profit, the following have been excluded: net corporate expenses,
interest expense, income taxes and the cumulative effect of accounting changes.
Identifiable assets are those assets used in the company's operations in each
segment or area.
Industry Segments
(Millions of Dollars) 1994 1993 1992
Net Sales
Tools
Consumer $ 716.0 $ 676.8 $ 689.6
Industrial 524.4 460.3 411.1
Engineered 643.5 568.5 540.0
Total Tools 1,883.9 1,705.6 1,640.7
Hardware 311.1 299.4 297.2
Specialty Hardware 315.9 268.1 257.7
Consolidated $2,510.9 $2,273.1 $2,195.6
Operating Profit
Tools $ 217.0 $ 158.1 $ 171.7
Hardware 33.3 32.9 25.6
Specialty Hardware 24.0 13.2 18.3
Total 274.3 204.2 215.6
Net corporate expenses (38.8) (24.0) (24.5)
Interest expense (33.7) (32.2) (33.0)
Earnings before
income taxes $ 201.8 $ 148.0 $ 158.1
Identifiable Assets
Tools $1,324.6 $1,238.6 $1,199.3
Hardware 186.4 173.3 171.0
Specialty Hardware 92.5 83.9 91.3
1,603.5 1,495.8 1,461.6
General corporate assets 97.6 81.1 146.0
Total $1,701.1 $1,576.9 $1,607.6
Capital Expenditures
Tools $ 53.3 $ 53.6 $ 47.4
Hardware 7.4 8.2 10.7
Specialty Hardware 5.7 3.8 3.8
Depreciation and
Amortization
Tools 65.6 63.9 63.6
Hardware 10.9 10.6 10.7
Specialty Hardware 3.8 4.4 4.0
Geographic Areas
(Millions of Dollars) 1994 1993 1992
Net Sales
United States $1,808.6 $1,649.5 $1,534.4
Europe 357.6 317.3 354.0
Other Areas 344.7 306.3 307.2
Consolidated $2,510.9 $2,273.1 $2,195.6
Operating Profit
United States $ 215.4 $ 148.0 $ 143.7
Europe 31.9 27.4 38.5
Other Areas 27.0 29.2 32.4
Eliminations (.4) 1.0
Total $ 274.3 $ 204.2 $ 215.6
Identifiable Assets
United States $1,050.4 $1,004.8 $ 990.6
Europe 319.4 270.0 259.9
Other Areas 274.4 260.2 234.6
Eliminations (40.7) (39.2) (23.5)
Total $1,603.5 $1,495.8 $1,461.6
Note: In 1993, net corporate expenses include a gain of $29.0 million from the
sale of the company's investment in Max Co., Ltd.
In 1992, net corporate expenses include a gain of $25.8 million from the sale of
a portion of the company's investment in Max Co., Ltd., expenses of $14.1
million related to planned closings of certain company-owned stores and
reduction of the goodwill of the company's Taylor Rental operation.
Certain 1993 and 1992 amounts were reclassified to conform with the 1994
presentation.
Summary of Selected Financial Information
(Millions of Dollars, except per share amounts) 1994 1993 1992 1991 1990
Continuing Operations(A)
Net sales $ 2,511 $ 2,273 $ 2,196 $ 1,942 $ 1,956
Earnings 125 93 98 97 106
Earnings per share $ 2.80 $ 2.06 $ 2.15 $ 2.24 $ 2.51
Percent of Net Sales:
Cost of sales 67.1% 68.3% 66.8% 66.0% 65.3%
Selling, general and administrative 22.3% 22.5% 24.0% 23.8% 23.7%
Interest-net 1.2% 1.1% 1.2% 1.3% 1.3%
Other-net 1.4% 1.6% .8% .8% .9%
Earnings before income taxes 8.0% 6.5% 7.2% 8.1% 8.8%
Earnings 5.0% 4.1% 4.5% 5.0% 5.4%
Other Key Information
Total assets $ 1,701 $ 1,577 $ 1,608 $ 1,548 $ 1,494
Long-term debt 387 377 438 397 398
Shareholders' equity $ 744 $ 681 $ 696 $ 689 $ 679
Ratios:
Current ratio 2.1 2.1 2.4 2.4 2.6
Total debt to total capital 39.2% 38.7% 40.1% 37.6% 38.7%
Income tax rate 37.9% 37.4% 37.9% 38.0% 38.4%
Return on average equity(A) 17.6% 13.5% 14.1% 14.1% 15.8%
Common Stock Data:
Dividends per share $ 1.38 $ 1.34 $ 1.28 $ 1.22 $ 1.14
Equity per share at year-end $ 16.74 $ 15.23 $ 15.32 $ 15.22 $ 16.50
Market price--high 44-7/8 47-7/8 48-1/8 44 39-3/4
--low 34-7/8 37-7/8 32-1/2 26 26-5/8
Average shares outstanding (in thousands) 44,775 44,935 45,703 43,266 42,192
Other Information:
Earnings from continuing
operations $ 125 $ 93 $ 98 $ 97 $ 106
Earnings from discontinued
operations -- -- -- -- --
Cumulative effect of accounting change -- (9) -- (12) --
Net earnings $ 125 $ 84 $ 98 $ 85 $ 106
Net earnings per share $ 2.80 $ 1.87 $ 2.15 $ 1.95 $ 2.51
Average number of employees 19,445 18,988 18,650 17,420 17,784
Shareholders of record at end of year 17,599 20,018 20,661 21,297 22,045
(Millions of Dollars, except per share amounts) 1989 1988 1987 1986 1985 1984
Continuing Operations(A)
Net sales $ 1,951 $ 1,888 $ 1,744 $ 1,355 $ 922 $ 936
Earnings 117 102 96 78 70 64
Earnings per share $ 2.70 $ 2.37 $ 2.22 $ 1.84 $ 1.70 $ 1.54
Percent of Net Sales:
Cost of sales 64.8% 65.6% 64.7% 64.9% 63.2% 63.5%
Selling, general and
administrative 23.0% 23.0% 23.4% 23.9% 24.3% 24.1%
Interest-net 1.3% 1.7% 1.7% 1.4% .2% .1%
Other-net 1.0% .6% .7% .1% .1% .4%
Earnings before income taxes 9.9% 9.1% 9.5% 9.7% 12.2% 11.9%
Earnings 6.0% 5.4% 5.5% 5.8% 7.1% 6.8%
Other Key Information
Total assets $ 1,491 $ 1,405 $ 1,388 $ 1,208 $ 755 $ 697
Long-term debt 416 339 354 363 81 74
Shareholders' equity $ 659 $ 684 $ 626 $ 555 $ 503 $ 444
Ratios:
Current ratio 2.6 2.6 2.4 2.9 3.7 2.8
Total debt to total capital 39.6% 35.0% 40.9% 43.4% 15.7% 19.4%
Income tax rate 39.6% 40.8% 41.7% 40.7% 42.0% 42.5%
Return on average equity(A) 17.3% 15.5% 14.7% 14.9% 16.5% 16.5%
Common Stock Data:
Dividends per share $ 1.02 $ .92 $ .82 $ .73 $ .67 $ .60
Equity per share at year-end $ 15.32 $ 15.97 $ 14.59 $ 13.05 $ 12.03 $ 11.00
Market price--high 39-1/4 31-1/4 36-5/8 30-7/8 22-1/2 19-5/8
--low 27-1/2 24-3/8 21-1/4 20-1/2 16-3/8 13
Average shares outstanding
(in thousands) 43,378 43,109 43,357 42,279 41,243 41,816
Other Information:
Earnings from continuing
operations $ 117 $ 102 $ 96 $ 78 $ 70 $ 64
Earnings from discontinued
operations -- -- (10) 1 8 8
Cumulative effect of
accounting change -- (13) -- -- -- --
Net earnings $ 117 $ 89 $ 86 $ 79 $ 78 $ 72
Net earnings per share $ 2.70 $ 2.07 $ 2.00 $ 1.86 $ 1.90 $ 1.73
Average number of employees 18,464 18,988 19,142 16,128 13,069 12,788
Shareholders of record at end of year 22,376 23,031 23,051 21,752 22,870 23,238
A Excluding the cumulative after-tax effect of accounting changes for
postemployment benefits of $8.5 million, or $.19 per share, in 1993;
postretirement benefits of $12.5 million, or $.29 per share, in 1991; and
income taxes of $13.1 million, or $.30 per share, in 1988.
Management's Discussion and Analysis
Results Of Operations
Overview
Net earnings for 1994 of $125 million, or $2.80 per share, represented a 35%
increase over 1993 before the effect of a change in accounting principle, and a
23% increase after excluding the effects of fourth quarter legal settlements
from 1993 results. Net sales increased 10% to a record $2.5 billion. Return on
average shareholders' equity also established a new record of 17.6%. The
improvement in earnings was primarily the result of increased sales volume,
process improvements and cost-reduction efforts.
Net earnings for 1993 reflected an after-tax charge of $8.5 million, or $.19 per
share, for the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits". Earnings before the
cumulative effect of this accounting change were $93 million, or $2.06 per
share, which compares with $98 million, or $2.15 per share, reported in 1992.
Earnings in 1993 were reduced by a $15 million, or $.21 per share, charge
related to the settlement of lawsuits involving the company's Mac Tools, Inc.
subsidiary.
Consolidated Operations
Revenues
The strength of the company's markets, both in the U.S. and internationally,
along with the company's strategic initiatives provided the foundation for
achieving a 10% increase in sales, virtually all of which was generated by unit
volume growth. Internal growth was experienced across all product lines and
geographic areas, with the most significant increases in the U.S. Industrial
Tools, Engineered Tools and Specialty Hardware businesses. Price changes had a
slightly favorable impact on sales, while foreign currency translation and net
acquisition/ divestiture activity had a negligible decremental effect.
Sales in 1993 were 4% higher than 1992, primarily the result of U.S. internal
volume growth. Acquisitions and minor price increases were offset by the
negative effect of translating foreign revenues.
The following table provides the year-to-year components of net sales changes:
Net Sales Change Comparison
1994 1993 1992
with with with
1993 1992 1991
Unit Volume:
Existing Operations 9% 4% 2%
Acquisitions/Divestitures 2 10
Price 1 1 1%
Foreign Currency (3)
10% 4% 13%
Gross Profit
Gross profit margins improved to 32.9% of sales from 31.7% in 1993, primarily
the result of manufacturing efficiencies realized from increased volume, process
improvements and cost reduction efforts, especially in connection with the
successful transition of previously foreign-sourced fastening tools to U.S.
in-house manufacture. Much of the margin decline in 1993 from 1992 related to
costs associated with the fastening tools transition and to abnormally high wood
prices experienced in the company's Door Systems business and the associated
expenses of manufacturing process adjustments.
Operating and Other Expenses
Operating expenses were 22.3% of sales in 1994 compared with 22.5% in 1993 and
24.0% in 1992. Operating efficiencies achieved through higher sales volume in
1994 more than offset the costs of company initiatives for long-term growth,
resulting in a small improvement. The improvement in 1993 also reflected
increased sales volume and the absence of certain non-recurring expenses which
were included in 1992.
Interest-net expense of $29 million was slightly higher than $25 million and $27
million reported in 1993 and 1992, respectively, generally reflecting higher
interest rates on higher average borrowings and a lower amount of interest
income.
Other-net expense for 1994 of $36 million included reserves established for
plant consolidation, divestiture activities and environmental remediation.
Other-net expense in 1993 included a $15 million charge for distributor
litigation issues at the company's Mac Tools, Inc. subsidiary. Also included in
1993 was a gain on the sale of the company's investment in Max Co., Ltd of $29
million, which was offset by additional charges for contingency reserves.
Other-net expense in 1992 included charges of $14 million related to planned
closings of certain company-owned Taylor Rental stores along with a reduction of
the goodwill of the company's Taylor Rental business and $8 million for reserves
for litigation pending at the company's Mac Tools, Inc. subsidiary. Also
included in Other-net in 1992 was a $26 million gain from the sale of a portion
of the company's investment in Max Co., Ltd.
The effective income tax rates in 1994, 1993, and 1992 were 37.9%, 37.4% and
37.9%, respectively. A reconciliation of the effective tax rate for each year is
provided in the footnotes to the financial statements.
Business Segment Results
Sales increased in the Tools segment almost entirely due to 9% internal volume
growth. Continued strengthening in the U.S. industrial, construction and
automotive markets produced the most significant sales increases. This was
especially evident in the Industrial and Engineered tool categories. More modest
growth in the Consumer category was supplemented by successful efforts to expand
consumer mechanics tools sales. Increased sales resulting from recent
acquisitions in Europe and Japan were offset by the divestiture of Taylor Rental
and other small businesses. Price increases in all businesses aggregated to a 1%
increase in sales with the more substantial gains being realized in the
Industrial and Engineered tool categories. Operating profits increased 25% after
excluding the effects of a fourth quarter non-recurring charge from
1993 results, largely the result of increased sales volume, operating
efficiencies, and the successful transition of previously foreign-sourced
fastening products to in-house manufacture.
Sales in 1993 for the Tools segment were 4% higher than in 1992. Unit volume
gains were 4% while price increases and net acquisition/divestiture activity
were offset by unfavorable foreign currency translation. Operating profits were
depressed in 1993 by the inclusion of $15 million for the settlement of lawsuits
and $4 million for a plant closing at the company's Mac Tools, Inc. subsidiary.
Profits were also negatively affected by costs related to the transition to
in-house manufacture of certain fastening products.
Hardware segment sales for 1994 increased 4% over the prior year, reflecting
internal growth of 3% and price increases of 1%. Sales in the U.S. generally
reflected strong gains; however, these increases were dampened by a decision to
de-emphasize low margin products in the home decor product line. Canadian and
European sales of closet doors and organizers showed important gains as those
economies strengthened and new products were introduced in the marketplace.
Operating profit margins were reduced slightly from the prior year, especially
in the fourth quarter, due to operating inefficiencies in the Acmetrack facility
located in France. Business disruptions at this facility, which were compounded
by a sharp increase in demand, were caused as investments were undertaken to
modernize facilities, operations and information technology. When successfully
implemented, the company expects that these changes will increase its long-term
competitiveness in this business segment.
Hardware segment sales increased 1% in 1993 as negative currency effects
partially offset 3% unit volume growth. Operating margins improved from 1992,
primarily due to greater operating efficiencies and the integration of
acquisitions.
Specialty Hardware segment sales for 1994 increased 18%. Virtually all of the
increase came from U.S. internal growth while the impact of modest price
increases was largely offset by the negative effects of currency. Volume growth
was driven by increased penetration of entry doors in the national home center
channel and continued growing demand for power operated doors. Operating profits
were up 82% over last year and reflected efficiencies obtained from increased
volume and the successful implementation of process improvements at the
company's Door Systems business.
Specialty Hardware segment sales for 1993 were 4% higher than in 1992. Virtually
all of the increase was generated by internal growth, as the impact of modest
price increases was offset by the negative effect of foreign currency
translation. Operating profits were negatively affected by abnormally high raw
material costs and the expenses of related manufacturing process adjustments at
the company's Door Systems business.
Geographic Area Results
Strength in the U.S. economy along with the company's strategic growth
initiatives fueled unit volume gains and resulted in a 10% increase in sales in
1994. Volume increases were particularly strong in the Industrial and Engineered
Tools categories as well as the Specialty Hardware segment. Price increases
contributed 1% to sales but were offset by divestiture activity. Operating
profits increased 29%, after excluding non-recurring charges from 1993 results,
as a result of increased volume, process improvements and cost reduction
efforts.
In 1993 the company experienced strong internal growth, reflecting the
improvement in U.S. industrial and construction markets and the company's
efforts in introducing new products. Domestic unit volume growth was 6% for
1993. While the company's consumer businesses experienced only modest growth,
engineered and industrial businesses saw higher levels of sales increases. Many
of the company's businesses did not raise prices during 1993; consequently,
pricing had no net effect on U.S. sales. The incremental effect of acquisitions
contributed 2% to sales. Operating profits were negatively affected by legal and
plant closing expenses recorded in 1993 at the company's Mac Tools, Inc.
subsidiary.
Net sales in Europe for 1994 increased 13% over the prior year. This increase
included internal volume growth of 7% with the strongest year-to-year comparison
occurring in the fourth quarter. The incremental effect of acquisitions added 4%
to sales and the strengthening of European currencies provided a 2% increase.
Operating profits grew 16% despite the negative impact of operating
inefficiencies in the company's Acmetrack facility in France. Excluding that
business, operating profits grew 22%.
Sales in Europe for 1993 were 10% lower than the previous year as European
markets remained depressed, resulting in a 3% volume decline. European
currencies also weakened during 1993 resulting in an approximately $40 million,
or 11%, reduction in sales. A combination of small price increases and
acquisitions added 4% to sales.
Net sales in Other areas in 1994 increased 12% over the prior year, reflecting
internal growth of 8% realized generally across all regions. The incremental
effect of acquisitions added 3% to sales. Price increases, although
substantially offset by the negative effects of currency, increased sales by 1%.
Despite the strong sales performance, operating profits declined $2.2 million,
or 8%, for the year. Profitability increased in Canada and Australia due to
sales growth; however, these gains were offset by a slight decline in Latin
America and the Far East. Results in the Pacific Rim were depressed as 1994
included the full year results of a late 1993 acquisition in Japan along with
the cost of other investments made to expand our presence in Asia.
Other area net sales in 1993 decreased slightly from the previous year as a
result of foreign currency translation and weak sales in Canada. Sales increases
in the Far East and Latin America continued to exceed the growth rate
experienced by the company overall.
To protect against the reduction in value of forecasted foreign currency
cash flows resulting from cross-currency trade flows, the company uses
purchased currency options. The options are used to hedge a portion of the
next year's anticipated trade flows after giving consideration to natural
hedge positions. When the dollar strengthens significantly against the
foreign currencies, the decline in value of future foreign currency trade
flows is partially offset by the gains in the value of purchased currency
options. Conversely, when the dollar weakens, the increase in the value of
future foreign currency trade flows is reduced only by the premium paid to
acquire the options.
Financial Condition
Liquidity, Sources and Uses of Capital
The company continues to be in a strong financial position. Growth has been
funded primarily through cash generated by operations and, to a small extent,
short-term borrowings. Cash flow from operations in 1994, 1993 and 1992 was $129
million, $147 million and $185 million, respectively. Operating cash flow in
1994 was reduced as working capital was needed to fund increased sales as well
as some building of inventory in support of growth initiatives, especially for
new Mechanics' Tools programs. Operating cash flows in 1994 also reflected
higher than normal cash outlays for legal and tax settlements. Excluding those
items, cash flow from operations would have been approximately $170 million. The
reduced level of operating cash flow in 1993 also reflected the increased need
for working capital to fund volume growth in the company's businesses.
No significant changes to long-term debt occurred in 1994. The debt to capital
ratio in 1994 was 39.2% compared with 38.7% in 1993. Excluding the company's
guarantee on its ESOP debt, the debt to capital ratio was 33.1% in 1994 and
31.2% in 1993. The company manages its debt portfolio with the objectives of
minimizing interest expense and optimizing the leverage of foreign investments.
In order to achieve those objectives, the company utilizes selected derivative
financial instruments, primarily interest rate and interest rate/currency swaps.
Information regarding the company's use of derivative financial instruments is
provided in the footnotes to the financial statements. The company's overall
financing strategy does not expose it to significant market or credit risk.
The company has access to financial resources and borrowing capabilities around
the world. As of December 31, 1994, the company has approximately $260 million
of unused lines of credit. The company also has $100 million of unissued debt
securities registered with the Securities and Exchange Commission. The company
believes that its strong financial position, operating cash flows and borrowing
capacity will provide the financial flexibility necessary to continue its record
of annual dividend payments, to invest in the capital needs of its businesses
and to make appropriate acquisitions as those opportunities arise.
Capital Expenditures
The company invests in facilities, equipment and technology to position itself
for operational excellence in manufacturing, new product innovation and enhanced
customer service. Capital expenditures were $69 million in 1994 and 1993, and
$64 million in 1992. Capital expenditures in 1995 are expected to increase to
approximately $80 million. In support of key growth strategies the company
anticipates additional investments in technology and software of approximately
$20 million in 1995.
The company's productivity gains in 1994, as measured by net sales per employee
in constant 1994 dollars, reflects a 5.4% improvement. Net Sales per employee in
1994 was $122,700 compared with $116,400 in 1993.
Other Matters
The company has been advised by the U.S. Customs Service that it intends to
modify or revoke certain ruling letters it has issued relating to
country-of-origin markings on imported articles. In reliance on these existing
rulings, the company imports certain forgings which it substantially transforms
into mechanics tools for sale in the U.S. Despite the U.S. manufacturing
involved in this substantial transformation, there is some uncertainty as to
market acceptance for these tools if they are marked as being manufactured
outside the U.S.
On February 10, 1995 the company submitted comments in opposition to the
proposed withdrawal of these ruling letters, asserting that the proposed changes
constituted an impermissible attempt by Customs to change the substantive law
regarding country-of-origin markings in violation of Section 304 of the Tariff
Act of 1930 and the cases decided thereunder. If the Customs Service proceeds
and modifies its long-held position with respect to these rulings, the company
anticipates initiating litigation against the Customs Service, seeking
injunctive relief and seeking concurrence by the courts that the Customs
Service's proposed withdrawal is impermissible. Given the uncertainties
associated with the various possible outcomes, and actions that would be taken
in response, management is unable to quantify the potential impact on future
results.
The company incurs costs related to environmental protection as a result of
various laws and regulations governing current operations as well as its
internal waste-minimization initiatives. Costs are also incurred to remediate
previously contaminated sites. Future laws and regulations are expected to be
increasingly stringent and will likely increase the company's expenditures
related to environmental matters.
The company accrues for anticipated costs associated with investigatory and
remediation efforts in accordance with appropriate accounting guidelines which
address probability and the ability to reasonably estimate future costs. The
liabilities are reassessed whenever environmental circumstances become better
defined or remediation efforts and their costs can be better estimated. Subject
to the imprecision in estimating future environmental costs, the company does
not expect that any sum it may have to pay in connection with environmental
matters in excess of the amounts recorded will have a material adverse effect on
its financial position, results of operations or liquidity.
Consolidated Statements of Earnings
Fiscal years ended December 31, 1994,
January 1, 1994 and January 2, 1993
(Millions of Dollars, except per share amounts) 1994 1993 1992
Net Sales $2,510.9 $2,273.1 $2,195.6
Costs and Expenses
Cost of sales 1,684.0 1,553.0 1,466.0
Selling, general and administrative 560.4 512.3 526.7
Interest-net 29.0 25.2 26.5
Other-net 35.7 34.6 18.3
2,309.1 2,125.1 2,037.5
Earnings before Income Taxes and
Cumulative Effect of Accounting Change 201.8 148.0 158.1
Income Taxes
Currently payable 90.3 61.0 72.2
Deferred (13.8) (5.6) (12.2)
76.5 55.4 60.0
Earnings before Cumulative
Effect of Accounting Change 125.3 92.6 98.1
Cumulative effect of accounting change
for postemployment benefits (8.5)
Net Earnings $ 125.3 $ 84.1 $ 98.1
Earnings Per Share of Common Stock:
Before cumulative effect
of accounting change $ 2.80 $ 2.06 $ 2.15
Cumulative effect of accounting
change (.19)
Net Earnings Per Share of Common Stock $ 2.80 $ 1.87 $ 2.15
See notes to consolidated financial statements.
Consolidated Balance Sheets
December 31, 1994 and January 1, 1994
(Millions of Dollars) 1994 1993
Assets
Current Assets
Cash and cash equivalents $ 69.3 $ 43.7
Accounts and notes receivable 410.3 371.2
Inventories 369.2 308.1
Other current assets 39.7 35.6
Total Current Assets 888.5 758.6
Property, Plant and Equipment 559.8 566.5
Goodwill and Other Intangibles 164.6 171.5
Other Assets 88.2 80.3
Total Assets $1,701.1 $1,576.9
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings $ 82.8 $ 42.3
Current maturities of long-term debt 10.9 9.8
Accounts payable 125.3 103.3
Accrued expenses 195.1 197.6
Income taxes 7.4 4.1
Total Current Liabilities 421.5 357.1
Long-Term Debt 387.1 377.2
Deferred Income Taxes 14.4 36.0
Other Liabilities 133.9 125.7
Shareholders' Equity
Preferred Stock, without par value:
Authorized and unissued 10,000,000 shares
Common Stock, par value $2.50 per share:
Authorized 110,000,000 shares;
issued 46,171,705 shares in 1994 and 1993 115.4 115.4
Capital in excess of par value 70.1 73.1
Retained earnings 937.8 871.1
Foreign currency translation adjustment (56.3) (56.7)
ESOP debt (253.7) (261.5)
813.3 741.4
Less: cost of common stock in treasury
(1,722,330 shares in 1994 and
1,476,074 shares in 1993) 69.1 60.5
Total Shareholders' Equity 744.2 680.9
Total Liabilities and Shareholders' Equity $1,701.1 $1,576.9
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Fiscal years ended December 31, 1994,
January 1, 1994 and January 2, 1993
(Millions of Dollars) 1994 1993 1992
Operating Activities:
Net earnings $125.3 $ 84.1 $ 98.1
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 81.8 80.7 78.5
Gain on sale of non-operating asset (29.0) (25.8)
Provision for postemployment benefits 13.6
Other non-cash items 18.3 9.4 16.0
Changes in operating assets and
liabilities:
Accounts and notes receivable (46.2) (19.7) 13.1
Inventories (69.8) (15.5) (6.6)
Accounts payable and accrued expenses 34.9 16.0 17.2
Income taxes (11.9) 1.0 1.8
Other (3.9) 5.9 (7.3)
Net cash provided by operating activities 128.5 146.5 185.0
Investing Activities:
Capital expenditures (66.4) (69.7) (65.1)
Proceeds from sales of assets 11.0 6.6 8.2
Proceeds from sale of non-operating asset 38.9 35.2
Business acquisitions (5.1) (13.3) (105.8)
Other (9.7) (13.2) (10.6)
Net cash used by investing activities (70.2) (50.7) (138.1)
Financing Activities:
Payments on long-term debt (2.9) (133.8) (69.8)
Proceeds from long-term borrowings 78.5 120.2
Net short-term financing 40.9 22.3 5.1
Proceeds from issuance of common stock 4.2 4.6 3.6
Purchase of common stock for treasury (16.3) (42.3) (25.0)
Cash dividends on common stock (61.5) (60.5) (57.5)
Net cash used by financing activities (35.6) (131.2) (23.4)
Effect of exchange rate changes on cash 2.9 (2.0) (.7)
Increase (decrease) in cash and cash
equivalents 25.6 (37.4) 22.8
Cash and cash equivalents, beginning of year 43.7 81.1 58.3
Cash and cash equivalents, end of year $ 69.3 $ 43.7 $ 81.1
See notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Fiscal years ended December 31, 1994,
January 1, 1994 and January 2, 1993
(Millions of Dollars)
Common Capital In Excess Retained Translation Treasury Shareholders'
Stock of Par Value Earnings Adjustments ESOP debt Stock Equity
Balance December 28, 1991 $115.4 $77.3 $800.5 $ (8.1) $(276.1) $(10.7) $698.3
Net earnings 98.1 98.1
Currency translation adjustment (33.4) (33.4)
Cash dividends declared--
$1.28 per share (58.5) (58.5)
Issuance of common stock (1.5) 10.1 8.6
Purchase of common stock (27.7) (27.7)
ESOP debt 7.3 7.3
ESOP tax benefit 3.6 3.6
Balance January 2, 1993 115.4 75.8 843.7 (41.5) (268.8) (28.3) 696.3
Net earnings 84.1 84.1
Currency translation adjustment (15.2) (15.2)
Cash dividends declared--
$1.34 per share (60.1) (60.1)
Issuance of common stock (2.7) 15.7 13.0
Purchase of common stock (47.9) (47.9)
ESOP debt 7.3 7.3
ESOP tax benefit 3.4 3.4
Balance January 1, 1994 115.4 73.1 871.1 (56.7) (261.5) (60.5) 680.9
Net earnings 125.3 125.3
Currency translation adjustment .4 .4
Cash dividends declared--
$1.38 per share (61.9) (61.9)
Issuance of common stock (3.0) 13.3 10.3
Purchase of common stock (21.9) (21.9)
ESOP debt 7.8 7.8
ESOP tax benefit 3.3 3.3
Balance December 31, 1994 $115.4 $70.1 $937.8 $ (56.3) $(253.7) $(69.1) $744.2
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
A
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
its majority-owned subsidiaries, after the elimination of intercompany accounts
and transactions.
Fiscal Year-End
The company's fiscal year ends on the Saturday nearest to December 31. There
were 52 weeks in fiscal years 1994 and 1993 and 53 weeks in fiscal year 1992.
Foreign Currency Translation
For most foreign operations, asset and liability accounts are translated at the
year-end exchange rate; earnings statement items are translated at the average
exchange rate for the year. Resulting translation adjustments are made directly
to a separate component of shareholders' equity. Translation adjustments for
operations in highly inflationary countries and gains and losses on transactions
are included in earnings. These transactional gains and losses, together with
the translation adjustments related to foreign operations in highly-inflationary
economies, amounted to net losses for 1994, 1993 and 1992 of $5.5 million, $6.0
million, and $8.5 million respectively.
Cash Equivalents
Highly liquid investments with original maturities of three months or less are
considered cash equivalents.
Inventories
U.S. inventories are valued at the lower of last-in, first-out cost or market.
Other inventories are valued generally at the lower of first-in, first-out cost
or market.
Property, Plant and Equipment
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.
Intangibles
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.
Financial Instruments
To manage interest rate exposure, the company enters into interest rate swap
agreements. The difference to be paid or received is recognized as an adjustment
to interest expense. Gains on terminations of interest rate swap agreements are
deferred and amortized as adjustments to interest expense over the original
lives of the agreements. The company, at times, enters into forward exchange
contracts to hedge foreign currency exposures on firm commitments. In addition,
the company enters into purchased foreign currency options to hedge anticipated
transactions. Purchased currency option premiums are recognized as cost of sales
over the life of the contract. Gains and losses resulting from these foreign
currency instruments are deferred and recognized in cost of sales in the same
period as the hedged transactions.
Income Taxes
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred
tax expense represents the change in the deferred tax asset and liability
balances.
Earnings per Share
Earnings per share are based on the weighted average number of shares of common
stock outstanding during each year (44,775,000 shares, 44,935,000 shares, and
45,703,000 shares in 1994, 1993 and 1992, respectively). The issuance of
additional shares under employee stock plans would not result in a material
dilution of earnings per share.
B
Acquisitions and Divestitures
The company acquired businesses in 1993 for a total of $24.0 million. The most
significant of the businesses acquired were Friess & Co. KG, a German
manufacturer and marketer of paint rollers and brushes and Rikkoh-Sha Co. Ltd.,
a mechanics tools distributor in Japan.
The company acquired several businesses in 1992 for $90.4 million. The
acquisitions included: Goldblatt Tool Co., a manufacturer of masonry, tile and
drywall tools; Mail Media (Jensen Tools, Inc. and Direct Safety), known
principally as a marketer of precision tool kits through catalog sales; American
Brush Co., Inc., a U.S. manufacturer of paint brushes and decorator tools; and a
controlling interest in Tona a.s. Pecky, a major Czech manufacturer of mechanics
tools.
The 1993 and 1992 consolidated statements of earnings include the results of
these operations, which were accounted for as purchases, from the respective
dates of their acquisitions.
In connection with the aforementioned purchase transactions, the fair value of
assets acquired and liabilities assumed aggregated $34.5 million and $10.5
million, respectively, for 1993 and $115.8 million and $25.4 million,
respectively, for 1992. The acquisitions did not have a material pro forma
impact on operations.
On January 16, 1992, the company exchanged 642,940 shares of common stock for
all of the issued and outstanding common stock of LaBounty Manufacturing, Inc.,
a manufacturer of large hydraulic tools. This business combination was accounted
for as a pooling of interests.
On June 30, 1993, the company sold the franchise operations of its wholly owned
subsidiary, Taylor Rental Corporation, and on June 18, 1994 sold the related
company owned stores.
C
Accounts and Notes Receivable
Trade receivables are dispersed among a large number of retailers, distributors
and industrial accounts in many countries. No individual customer balance is
material. Adequate provisions have been established to cover anticipated credit
losses. At December 31, 1994 and January 1, 1994, allowances for doubtful
receivables of $20.9 million and $24.8 million, respectively, have been applied
as a reduction of current accounts and notes receivable. The company believes it
has no significant concentrations of credit risk as of December 31, 1994.
Throughout the year, the company sold, with recourse, certain domestic accounts
receivable under a revolving sales agreement. The proceeds from these sales were
$59 million in 1994, $39 million in 1993, and $64 million in 1992. At December
31, 1994 and January 1, 1994, the balance of these receivables subject to
recourse was approximately $69 million and $62 million, respectively. Provisions
have been made to cover anticipated losses.
D
Inventories
(Millions of Dollars) 1994 1993
Finished products $238.6 $195.7
Work in process 68.4 61.1
Raw materials 59.4 48.7
Supplies 2.8 2.6
$369.2 $308.1
Inventories in the amount of $203.6 million at December 31, 1994 and $158.9
million at January 1, 1994 were valued at the lower of last-in, first-out (LIFO)
cost or market. If LIFO inventories had been valued at FIFO costs, they would
have been $120.2 million and $118.5 million higher than reported at December 31,
1994 and January 1, 1994, respectively.
E
Property, Plant and Equipment
(Millions of Dollars) 1994 1993
Land $ 34.2 $ 32.4
Buildings 245.2 239.7
Machinery and equipment 849.2 846.9
1,128.6 1,119.0
Less: accumulated depreciation 568.8 552.5
$ 559.8 $ 566.5
The provisions for depreciation for 1994, 1993, and 1992 were $63.3 million,
$63.1 million, and $62.4 million, respectively.
F
Goodwill and Other Intangibles
Goodwill and other intangibles, net of accumulated amortization of $86.8 million
and $73.5 million, respectively, at the end of each fiscal year were as follows:
(Millions of Dollars) 1994 1993
Goodwill $128.7 $130.9
Other 35.9 40.6
$164.6 $171.5
G
Accrued Expenses
(Millions of Dollars) 1994 1993
Salaries and wages $ 40.2 $ 33.4
Insurance 30.3 39.1
Taxes, other than income taxes 19.2 16.9
Dividends payable 15.0 14.6
Litigation 11.6 24.0
Other 78.8 69.6
$195.1 $197.6
H
Long-Term Debt and Financing Arrangements
(Millions of Dollars) 1994 1993
Notes payable in 2002 7.4% $100.0 $100.0
Commercial Paper 5.9% 62.3 62.3
Dutch Guilder notes payable
in 1996 5.9% 75.0 66.9
Notes payable in 1998 9.0% 34.8 34.8
Industrial Revenue Bonds due
in varying amounts to 2011 5.8 - 8.4% 29.9 30.5
ESOP loan guarantees,
payable in varying
monthly installments
through 2001 7.7% 75.5 82.8
Other 20.5 9.7
398.0 387.0
Less: current maturities 10.9 9.8
$387.1 $377.2
Commercial paper outstanding at December 31, 1994 of $62.3 million is classified
as non-current pursuant to the company's intention and ability to continue to
refinance this obligation on a long-term basis. Commercial paper classified as
current as of December 31, 1994 and January 1, 1994 was $61.7 million and $36.5
million, respectively.
In 1992 the company filed a shelf registration statement with the Securities and
Exchange Commission covering the issuance of up to $200 million of debt
securities; as of December 31, 1994, $100 million remained unused. The company
has unused short and long-term credit arrangements with several banks to borrow
up to $205 million at the lower of prime or money market rates. Of this amount,
$137 million is long-term. Commitment fees range from .08% to .1%. In addition,
the company has short-term lines of credit with numerous foreign banks
aggregating $75.3 million of which $57.2 million was available at December 31,
1994. Short-term arrangements are reviewed annually for renewal. Of the
long-term and short-term lines, $200 million is available to support the
company's commercial paper program. The weighted average interest rates on
short-term borrowings at December 31, 1994 and January 1, 1994 were 6.4% and
4.6%, respectively.
The company has guaranteed the long-term notes payable to banks of its employee
stock ownership plan (ESOP). The guarantee is reflected in the consolidated
balance sheets as long-term debt with a corresponding reduction in shareholders'
equity.
Aggregate annual maturities of long-term debt for the years 1996 to 1999 are
$85.8 million, $11.5 million, $46.9 million and $12.9 million, respectively.
Interest paid during 1994, 1993 and 1992 amounted to $45.1 million, $34.0
million and $33.9 million, respectively.
I
Financial Instruments
The company's primary objective in using debt related financial instruments is
to obtain the lowest cost source of funds and minimize interest expense, within
an acceptable range of variable to fixed rate debt proportions (30% to 40%), as
well as to minimize the currency risk of obligations that are denominated in
currencies other than those of the leveraged assets. To meet this objective the
company enters into interest rate swaps, currency swaps and interest rate cap
agreements. A summary of instruments and weighted average interest rates as of
December 31, 1994 follows. The weighted average variable pay and receive rates
are based on rates in effect at December 31, 1994. Variable rates are generally
based on LIBOR with no leverage features.
Notional Maturity Pay Receive Capped
Amount Dates Rate Rate Rate
Pay fixed
and receive
variable swaps $174.1 1996 - 98 7.8% 6.0%
Pay variable
and receive
fixed swaps 157.6 1996 - 02 5.6% 6.5%
Currency swaps 125.4 1996 - 98 7.9% 8.3%
Interest rate caps 50.0 1996 7.5%
The company uses purchased currency options to hedge a portion of the currency
risk in cross border trade flows expected to occur over the next one year
period. In addition, the company enters into forward exchange contracts to hedge
certain firm commitments. These contracts and options generally mature within
the next one year period. The objective of these practices is to minimize the
impact of foreign currency fluctuations on operating results. At December 31,
1994 and January 1, 1994, the company had forward exchange contracts outstanding
of $2.7 million and $44 million, respectively, to exchange European currencies
for U.S. dollars. At December 31, 1994, purchased currency options which hedge
anticipated transactions totaled $32.6 million and were primarily denominated in
European currencies.
The counterparties to these interest rate and currency financial instruments are
major international financial institutions. The company is exposed to credit
risk for net coupon exchanges under these agreements, but not for the notional
amounts. The company considers the risk of default to be remote.
A summary of the carrying values and fair values of the company's financial
instruments at December 31, 1994 and January 1, 1994 is as follows:
1994 1993
Carrying Fair Carrying Fair
Value Value Value Value
Long-term debt,
including current portion $384.1 $377.9 $380.1 $392.7
Currency and
interest rate swaps 14.5 25.8 9.0 12.3
$398.6 $403.7 $389.1 $405.0
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
incremental 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
Common Stock Share Activity
The activity in common shares for each year, net of treasury stock, was as
follows:
1994 1993 1992
Outstanding, beginning
of year 44,695,631 45,438,854 45,240,591
Issued for:
Employee stock plans 323,739 387,196 263,805
Acquisitions 642,940
Purchased (569,995) (1,130,419) (708,482)
Outstanding, end of year 44,449,375 44,695,631 45,438,854
Common Stock Reserved
At December 31, 1994 and January 1, 1994, the number of shares of common stock
reserved for future issuance under various employee stock plans was as follows:
1994 1993
Employee Stock Purchase Plan 2,938,052 3,061,462
Stock Option Plans 5,741,078 2,316,805
Long-Term Stock Incentive Plan 1,478,526 1,507,945
10,157,656 6,886,212
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 final cycle of this plan is payable in 1998. The Plan is
administered by a committee of the Board of Directors consisting of non-employee
directors. Awards are payable 55% in cash and 45% in shares of common stock or
100% in shares of common stock. The amounts of $.3 million, $.5 million and $2.2
million were charged to expense in 1994, 1993 and 1992, respectively. Shares
totaling 8,267, 10,092 and 33,067 were issued in 1994, 1993 and 1992,
respectively.
Preferred Stock Purchase Rights
Each outstanding share of common stock has two-thirds of a share purchase right,
which, under certain conditions, may be exercised to purchase one two-hundredth
of a share of Series A Junior Participating Preferred Stock at an exercise price
of $125.00, subject to adjustment to prevent dilution. The rights, which do not
have voting rights, expire on March 10, 1996, and may be redeemed by the company
at a price of $.05 per right at any time prior to their expiration or within 30
days following the acquisition of 10 percent of the company's common stock. In
the event that the company were 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 10%-or-more shareholder) shall have the right to
receive, upon exercise thereof, that number of shares of common stock of the
surviving company having a market value equal to two times the exercise price of
the right. Similarly, if anyone becomes the beneficial owner of more than 10% of
the then outstanding shares of common stock, provision will be made so that each
holder of a right (other than a holder who is a 10%-or-more shareholder) shall
thereafter have the right to receive, upon exercise thereof, common stock (or,
in certain circumstances, cash, property or other securities of the company)
having a market value equal to two times the exercise price of the right. At
December 31, 1994, there were 44,449,375 outstanding rights. There are 175,000
shares of Series A Junior Participating Preferred Stock reserved for issuance in
connection with these rights.
Stock Options
The company has a stock option plan to provide nonqualified and incentive stock
options to officers and key employees. In 1994, the company amended the employee
stock option plan to provide for annual option grants, and also adopted a stock
option plan that provides for an automatic, biennial option grant to each
outside director of the company. The company reserved additional shares of
3,500,000 and 100,000 in 1994 for the employee and director stock option plans,
respectively. The company intends to seek shareholder approval of the amendment
to the key employee stock option plan and the adoption of the non-employee
director plan at the next shareholders' meeting. Options are generally for a ten
year term and are granted at the market price of the common stock on the date of
grant. Outstanding options granted prior to October, 1994 are subject to a two
year transfer restriction on at least half the shares issued upon exercise.
Options granted subsequent to October, 1994 are not subject to transfer
restrictions. In the event of a change of control in the company, all
outstanding stock options held by employees become immediately exercisable, all
transfer restrictions lapse and optionees have the right to sell options to the
company at market-related values.
Information relative to the stock option plans is summarized as follows:
1994 1993 1992
At end of year:
Options outstanding 2,130,801 1,827,936 2,006,305
Options exercisable 1,597,054 1,716,936 1,929,805
Shares available for grants 3,610,277 488,869 535,924
During the year:
Options granted 533,747 111,000 76,500
Options exercised 175,727 225,424 114,847
Options canceled 55,155 63,945 107,424
Average price per share:
Options outstanding $33.67 $31.27 $30.64
Options granted 40.37 40.25 37.13
Options exercised 30.13 30.47 30.15
K
Employee Benefit Plans
Employee Stock Purchase Plan
The Employee Stock Purchase Plan enables substantially all employees in the
United States and Canada to subscribe to shares of common stock on annual
offering dates at a purchase price of 85% of the fair market value of the shares
on the offering date or, if lower, 85% of the fair market value of the shares on
the exercise date. A maximum of 4,000,000 shares are authorized for subscription
over a ten year period. During 1994, 1993 and 1992, shares totaling 123,410,
139,010 and 106,738, respectively, were issued under the Plan at average prices
of $34.30, $33.07 and $33.31 per share, respectively. At December 31, 1994,
subscriptions were outstanding for 72,394 shares at $36.60 per share.
Employee Stock Ownership Plan (ESOP)
The Savings Plan provides opportunities for tax-deferred savings, enabling
eligible U.S. employees to acquire a proprietary interest in the company. Such
employees may contribute from 1% to 12% of their salary to the Plan. The company
contributes an amount equal to one-half of the first 7% of employee
contributions. The amounts in 1994, 1993 and 1992 under this matching
arrangement were $8.3 million, $7.8 million and $6.9 million, respectively.
Shares of the company's common stock held by the ESOP were purchased with the
proceeds of external borrowings in 1989 and borrowings from the company in 1991.
The external ESOP borrowings are guaranteed by the company and are included in
long-term debt. Shareholders' equity reflects both the internal and the external
borrowing arrangements.
Shares are released to participant accounts based on principal and interest
payments of the underlying debt. These shares along with allocated dividends and
shares purchased on the open market are assigned to fund share requirements of
the employee contribution, the associated employer match and the dividends
earned on participant account balances.
Net ESOP activity recognized is based on total debt service and share purchase
requirements less employee contributions and dividends on ESOP shares. The
company's net ESOP activity resulted in income of $2.3 million in 1994, $5.6
million in 1993 and $6.1 million in 1992.
Dividends on ESOP shares, which are charged to shareholders' equity as declared,
were $14.5 million, $14.2 million and $13.7 million in 1994, 1993 and 1992,
respectively. Interest costs incurred by the Plan on external debt for 1994,
1993 and 1992 were $6.1 million, $6.7 million and $7.2 million, respectively.
ESOP shares not yet allocated to participants are treated as outstanding for
purposes of computing earnings per share. As of December 31, 1994, the number of
ESOP shares allocated to participant accounts was 4,477,105 and the number of
unallocated shares was 6,200,196.
Pension Plans
The retirement benefit for U.S. salaried and non-union hourly employees was
changed effective January 1, 1995. Previously, benefits were provided by both a
defined benefit plan and a defined contribution plan. The defined contribution
plan provided for benefits as a varying percentage of payroll and the defined
benefit plan provided a benefit based on salary and years of service. Upon
retirement, plan participants received the greater of the two benefits.
Effective January 1, 1995, the two plans were merged and restated as a defined
benefit plan. The assets of both plans were combined in order to fund the plan's
guaranteed benefit which is based on salary and years of service. If the plans
are terminated or merged with another plan within three years following a change
in control of the company, any excess plan assets are to be applied to increase
the benefits of all participants.
The company also sponsors defined benefit plans for its non-U.S. employees and
U.S. collective bargaining employees. Benefits generally are based on salary and
years of service for non-U.S. employees, while those for collective bargaining
employees are based on a stated amount for each year of service.
The company's funding policy is to contribute amounts determined annually on an
actuarial basis that provide for current and future benefits in accordance with
federal law and other regulations. Plan assets are invested in equity
securities, bonds, real estate and money market instruments.
Additionally, the company contributes to several union-sponsored multiemployer
plans which provide defined benefits. Total pension expense includes the
following components:
(Millions of Dollars) 1994 1993 1992
Defined benefit plans:
Service cost $ 9.6 $ 9.0 $ 9.2
Interest cost 21.0 20.3 20.5
Actual return on plan assets 10.6 (25.3) (25.9)
Net amortization and deferral (35.1) 1.0 .6
Net pension expense 6.1 5.0 4.4
Defined contribution plan 8.1 8.0 7.8
Multi-employer plans .6 .5 .5
Total pension expense $ 14.8 $ 13.5 $ 12.7
The funded status of the company's defined benefit plans, adjusted for the
merger of the plans covering U.S. salaried and non-union hourly employees, at
the end of each fiscal year was as follows:
(Millions of Dollars) 1994 1993
Plans Plans Plans Plans
Where Where Where Where
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
Actuarial present
value of benefit
obligations:
Vested $296.8 $ 10.4 $203.7 $ 9.6
Non-vested 1.3 2.7 1.5 2.2
Accumulated
benefit obligation 298.1 13.1 205.2 11.8
Additional amounts
related to projected
pay increases 38.7 5.9 52.8 3.3
Total projected benefit
obligation (PBO) 336.8 19.0 258.0 15.1
Plan assets at fair
value 369.4 6.8 306.8 7.0
Assets in excess of
(less than) PBO 32.6 (12.2) 48.8 (8.1)
Unrecognized net
(gain) or loss at
transition (9.8) .3 (11.2) .4
Unrecognized net
(gain) or loss 2.3 (26.9) .1
Unrecognized prior
service cost 5.3 3.1 17.8 1.0
Adjustment required to
recognize minimum
liability (2.3) (1.8)
Prepaid (accrued)
pension expense
(long-term) $ 28.1 $ (8.8) $ 28.5 $(8.4)
Assumptions used for significant defined benefit plans were as follows:
1994 1993 1992
Discount rate 8.25% 7.5% 8.0%
Average wage increase 5.0% 5.0% 5.7%
Long-term rate of return
on assets 9.0% 9.0% 9.0%
Postretirement and Postemployment Benefits
The company provides medical and dental benefits for certain retired employees
in the United States. In addition, domestic employees who retire from active
service are eligible for life insurance benefits.
The status of the company's plans at the end of each fiscal year was as follows:
(Millions of Dollars) 1994 1993
Accumulated postretirement
benefit obligation:
Retirees $ 19.2 $ 19.9
Fully eligible active plan
participants 1.4 2.6
Active plan participants 3.7 4.7
Accumulated obligation 24.3 27.2
Unrecognized net loss (7.5) (10.7)
Accrued postretirement benefit expense $ 16.8 $ 16.5
Net periodic postretirement benefit expense was $3.0 million in 1994, $3.3
million in 1993 and $2.2 million in 1992.
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 10.5% for
1994 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 $1.5 million at December
31, 1994 and net periodic postretirement benefit expense for fiscal year 1994 by
$.2 million. Weighted average discount rates of 8.25% in 1994 and 7.5% in 1993
were used in determining the accumulated benefit obligations.
The company provides certain postemployment benefits to eligible employees and,
in some cases, their dependents. These benefits include severance, continuation
of medical coverage and other benefits when employees leave the company for
reasons other than retirement.
In 1993, the company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits." Prior to 1993,
postemployment benefits were recognized as expense when paid. The cumulative
effect of adopting this new standard was a one-time charge to 1993 earnings of
$8.5 million ($13.6 million less related deferred income taxes of $5.1 million)
or $.19 per share. The effect of this change on 1993 operating results was
immaterial.
L
Other Costs and Expenses
Interest-net for 1994, 1993 and 1992 included interest income of $4.6 million,
$6.8 million and $7.2 million, respectively.
Other-net in 1993 includes a gain of $29.0 million ($.39 per share) from the
sale of the company's investment in Max Co., Ltd. and a charge of $15.0 million
($.21 per share) related to the settlement of lawsuits involving a subsidiary,
Mac Tools, Inc. Also included in Other-net were additional charges for a fine
levied by U.S. District Court in Missouri for $5.0 million ($.07 per share) and
contingency reserves of $23.3 million ($.32 per share) related to product
liability litigation, restructuring activities and environmental remediation.
Other-net in 1992 includes a gain of $25.8 million ($.35 per share) from the
sale of a portion of the company's investment in Max Co., Ltd., expenses of
$14.1 million ($.21 per
share) related to planned closings of certain company-owned Taylor Rental stores
and reduction of the goodwill of the company's Taylor Rental operation, and
expense of $7.8 million ($.11 per share) for reserves for litigation pending at
the company's Mac Tools, Inc. subsidiary.
Research and development expenses amounted to $16.4 million in 1994, $14.6
million in 1993 and $15.2 million in 1992.
M
Operations by Industry Segment and Geographic Area
Industry Segment and Geographic Area information included on page 15 of this
report is an integral part of the financial statements.
N
Income Taxes
Significant components of the company's deferred tax liabilities and assets as
of the end of each fiscal year were as follows:
(Millions of Dollars) 1994 1993 1992
Depreciation $ 74.1 $ 73.1 $ 68.8
Other 6.0 12.9 16.0
Total deferred tax liabilities 80.1 86.0 84.8
Employee benefit plans (20.6) (20.4) (12.9)
Doubtful accounts (5.8) (6.9) (7.9)
Amortization of intangibles (14.5)
Accruals (24.4) (25.6) (13.5)
Other (7.4) (5.0) (9.1)
Total deferred tax assets (72.7) (57.9) (43.4)
Net deferred tax liabilities $ 7.4 $ 28.1 $ 41.4
Income tax expense consisted of the following:
(Millions of Dollars) 1994 1993 1992
Current:
Federal $ 59.3 $40.2 $ 47.1
Foreign 18.8 13.6 18.0
State 12.2 7.2 7.1
Total current 90.3 61.0 72.2
Deferred:
Federal (8.4) (4.8) (12.3)
Foreign (1.0) .6 1.2
State (4.4) (1.4) (1.1)
Total deferred (13.8) (5.6) (12.2)
Total $ 76.5 $55.4 $ 60.0
Income taxes paid during 1994, 1993 and 1992 were $79.8 million, $63.4 million
and $64.4 million, respectively.
The reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
1994 1993 1992
Statutory federal income
tax rate 35.0% 35.0% 34.0%
State income taxes,
net of federal benefit 2.5 2.7 2.9
Difference between foreign
and federal income tax rates (.3) .6
Other -- net .7 (.3) .4
Effective tax rate 37.9% 37.4% 37.9%
The components of earnings before income taxes consisted of the following:
(Millions of Dollars) 1994 1993 1992
United States $159.4 $110.5 $108.1
Foreign 42.4 37.5 50.0
Total pre-tax earnings $201.8 $148.0 $158.1
Undistributed foreign earnings of approximately $197 million as of December 31,
1994 are considered to be invested indefinitely or will be remitted
substantially free of additional tax. Accordingly, no provision has been made
for taxes that might be payable upon remittance of such earnings, nor is it
practicable to determine the amount of this liability.
O
Leases
The company leases certain facilities, vehicles, machinery and equipment under
long-term operating leases with varying terms and expiration dates.
Future minimum lease payments under noncancelable operating leases, in millions
of dollars, as of December 31, 1994 were $32.9 in 1995, $26.5 in 1996, $19.7 in
1997, $14.2 in 1998, $11.3 in 1999 and $22.8 thereafter. Minimum payments have
not been reduced by minimum sublease rentals of $32.1 million due in the future
under noncancelable subleases. Rental expense for operating leases amounted to
$38.1 million in 1994, $35.0 million in 1993 and $36.7 million in 1992.
P
Contingencies
In the normal course of business, the company is involved in various lawsuits
and claims. In addition, the company is a party to a number of proceedings
before federal and state regulatory agencies relating to environmental
remediation. Also, the company, along with many other companies, has been named
as a potentially responsible party (PRP) in a number of administrative
proceedings for the remediation of various waste sites, including eight
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 amounts 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
which becomes available. As of December 31, 1994, the company had reserves of
$24 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 which 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
1994 First Second Third Fourth
Net Sales $585.7 $628.8 $632.6 $663.8 $2,510.9
Gross Profit 191.3 210.2 206.9 218.5 826.9
Selling, General and
Administrative Expenses 133.8 139.4 139.5 147.7 560.4
Net Earnings 25.6 33.7 32.2 33.8 125.3
Net Earnings Per Share $ .57 $ .75 $ .72 $ .76 $ 2.80
1993
Net Sales $553.4 $565.2 $576.3 $578.2 $2,273.1
Gross Profit 178.7 181.7 179.5 180.2 720.1
Selling, General and
Administrative Expenses 130.1 128.5 126.1 127.6 512.3
Earnings Before Cumulative
Effect of Accounting Change 23.0 27.0 25.0 17.6 92.6
Net Earnings 14.5 27.0 25.0 17.6 84.1
Per Share:
Earnings Before Cumulative
Effect of Accounting Change $ .51 $ .60 $ .56 $ .39 $ 2.06
Net Earnings .32 .60 .56 .39 1.87
Note: The first quarter of 1993 includes a gain of $24.0 million ($.33 per
share) from the sale of a portion of the company's investment in Max Co., Ltd.,
and additional charges for a fine levied by U.S. District Court in Missouri for
$7.0 million ($.10 per share) and contingency reserves of $15.7 million ($.21
per share) related to product liability litigation, restructuring activities and
environmental remediation. The third quarter of 1993 includes a gain of $5.0
million ($.06 per share) from the sale of the company's investment in Max Co.,
Ltd., which was substantially offset by reserves established for the closing of
a manufacturing facility of the company's subsidiary, Mac Tools, Inc. The fourth
quarter of 1993 includes a charge of $15.0 million ($.21 per share) related to
the settlement of lawsuits involving a subsidiary, Mac Tools, Inc.
The following trademarks of The Stanley Works appear in this Annual Report:
Stanley(R) and the notched rectangle around the Stanley name, the slogan Helps
You Do Things Right(R); the design of the Powerlock(R) tape rule case; and the
names Bostitch(R), Direct Safety(TM), Goldblatt(R), Jensen(R), Leverlock (R),
Mac(R), Mac Tools(R), Magic-Access(TM), Monarch(TM), Mosley-Stone(TM), Nirva(R),
Powerlock(R), Proto(R), Sidchrome(R), Steel Plank(TM).
Investor Information
Reliable growth best defines our performance for shareholders. Stanley has
provided consistent, excellent value for generations of investors:
* Our Record of annual dividend payments is unmatched by any industrial company
listed on the New York Stock Exchange -- 128 consecutive years.
* Our quarterly dividend record is the second longest of any industrial company
listed on the New York Stock Exchange -- 399 consecutive quarters
* We have increased dividends in each of the past 28 years, and in that same
period, an investment in Stanley stock grew at a compound annual rate of 11.9%
Our company-wide strategies to grow profitably are working, and they are
enabling us to provide continued superior value for our shareholders.
Common Stock (Dollars per share)
Price Dividends
1994 1993 1994 1993
High Low High Low
First Quarter 44-7/8 38-5/8 45-7/8 39-1/8 $ .34 $ .33
Second Quarter 42-5/8 36-1/4 47-7/8 39-1/8 .34 .33
Third Quarter 43-7/8 38-1/2 43-1/2 37-7/8 .35 .34
Fourth Quarter 41-3/4 34-7/8 44-1/2 38-3/4 .35 .34
$1.38 $1.34
Annual Meeting
The annual shareholders' meeting of The Stanley Works will be held at 9:30 a.m.
on Wednesday, April 19, 1995, in New Britain, Connecticut at the Stanley Center,
1255 Corbin Avenue.
Stock Listing
The Stanley Works is listed in the New York and Pacific Stock Exchanges with the
symbol SWK.
Transfer Agent and Registrar
All shareholder inquiries, including transfer-related matters, should be
directed to Mellon Securities:
Mellon Securities Trust Company
85 Challenger Road, Overpeck Center
Ridgefield Park, NJ 07660
1-800-228-9541
1-800-231-5469 (TTY -- for the hearing impaired)
For More Information
If you would like a copy of Form 10-K filed with the Securities and Exchange
Commission, or additional information about Stanley, please write:
Patricia R. McLean, Mgr., Crop. Communications
The Stanley Works
1000 Stanley Drive
New Britain, CT 06053
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