UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 29, 2001. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from [ ] to [ ] Commission file number 1-5224 THE STANLEY WORKS (Exact name of registrant as specified in its charter) CONNECTICUT 06-0548860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Stanley Drive New Britain, Connecticut 06053 (Address of principal executive offices) (Zip Code) (860) 225-5111 (Registrant's telephone number) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: shares of the company's Common Stock ($2.50 par value) were outstanding 85.353,211 as of November 5, 2001.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Third Quarter Nine Months 2001 2000 2001 2000 ------- ------- --------- --------- Net sales $ 676.1 $ 684.4 $ 1,978.8 $ 2,082.6 Costs and expenses Cost of sales 436.8 439.4 1,272.6 1,324.5 Selling, general and administrative 152.1 162.2 456.6 502.2 Interest - net 6.7 7.2 20.8 20.9 Other - net 3.9 1.8 (12.2) 11.5 Restructuring charge - - 18.3 - ------- ------- --------- --------- 599.5 610.6 1,756.1 1,859.1 ------- ------- --------- --------- Earnings before income taxes 76.6 73.8 222.7 223.5 Income taxes 22.1 25.1 70.9 76.0 ------- ------- --------- --------- Net earnings $ 54.5 $ 48.7 $ 151.8 $ 147.5 ======= ======= ========= ========= Net earnings per share of common stock Basic $ 0.64 $ 0.56 $ 1.77 $ 1.68 ======= ======= ========= ========= Diluted $ 0.62 $ 0.56 $ 1.74 $ 1.68 ======= ======= ========= ========= Dividends per share $ 0.24 $ 0.23 $ 0.70 $ 0.67 ======= ======= ========= ========= Average shares outstanding (in thousands) Basic 85,439 86,532 85,744 87,721 ======= ======= ========= ========= Diluted 87,419 86,677 87,346 87,927 ======= ======= ========= ========= See notes to consolidated financial statements. -1-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, Millions of Dollars) September 29 December 30 2001 2000 -------- -------- ASSETS Current assets Cash and cash equivalents $ 152.2 $ 93.6 Accounts and notes receivable 559.9 531.9 Inventories 432.2 398.1 Other current assets 96.5 70.7 -------- -------- Total current assets 1,240.8 1,094.3 Property, plant and equipment 1,263.6 1,232.2 Less: accumulated depreciation (756.9) (728.5) -------- -------- 506.7 503.7 Goodwill and other intangibles 234.3 175.9 Other assets 157.0 110.9 -------- -------- $ 2,138.8 $ 1,884.8 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Short-term borrowings $ 364.2 $ 207.6 Current maturities of long-term debt 16.2 6.1 Accounts payable 237.8 239.8 Accrued expenses 271.9 253.8 -------- -------- Total current liabilities 890.1 707.3 Long-term debt 231.5 248.7 Other liabilities 187.1 192.3 Shareowners' equity Common stock 230.9 230.9 Retained earnings 1,147.5 1,039.6 Accumulated other comprehensive loss (140.4) (124.5) ESOP debt (189.5) (194.8) -------- -------- 1,048.5 951.2 Less: cost of common stock in treasury 218.4 214.7 -------- -------- Total shareowners' equity 830.1 736.5 -------- -------- $ 2,138.8 $ 1,884.8 ======== ======== See notes to consolidated financial statements. -2-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, MILLIONS OF DOLLARS) Third Quarter Nine Months 2001 2000 2001 2000 ------ ------ ------ ------ Operating activities Net earnings $ 54.5 $ 48.7 $151.8 $147.5 Depreciation and amortization 18.6 20.3 60.8 64.4 Restructuring charge and other non-cash items (2.0) 2.8 (7.3) 9.9 Changes in other operating assets and liabilities (2.0) 0.8 (101.4) (101.3) ------ ------ ------ ------ Net cash provided by operating activities 69.1 72.6 103.9 120.5 Investing activities Capital and software expenditures (20.0) (19.3) (56.0) (48.1) Business acquisitions/dispositions 0.2 6.5 (77.9) 10.0 Other 1.5 (3.9) (2.0) (15.3) ------ ------ ------ ------ Net cash used by investing activities (18.3) (16.7) (135.9) (53.4) Financing activities Net borrowings (32.8) 4.3 154.4 107.9 Proceeds from issuance of common stock 4.4 1.4 15.6 4.6 Purchase of common stock for treasury (10.8) (32.3) (11.0) (111.7) Cash dividends on common stock (20.6) (19.8) (59.9) (58.5) ------ ------ ------ ------ Net cash used by financing activities (59.8) (46.4) 99.1 (57.7) Effect of exchange rate changes on cash (1.0) 0.8 (8.5) (4.1) ------ ------ ------ ------ Increase in cash and cash equivalents (10.0) 10.3 58.6 5.3 Cash and cash equivalents, beginning of period 162.2 83.0 93.6 88.0 ------ ------ ------ ------ Cash and cash equivalents, end of third quarter $152.2 $ 93.3 $152.2 $93.3 ====== ====== ====== ====== See notes to consolidated financial statements. -3-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED, MILLIONS OF DOLLARS) <TABLE> <CAPTION> Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners- Stock Earnings (Loss) Debt Stock Equity ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance Dec 30, 2000 $230.9 $1,039.6 $(124.5) $(194.8) $(214.7) $736.5 Comprehensive income: Net earnings 151.8 Foreign currency translation (15.9) Total comprehensive income 135.9 Cash dividends declared (59.9) (59.9) Net common stock activity 12.3 (3.7) 8.6 Tax benefit related to stock options 1.8 1.8 ESOP debt 5.3 5.3 ESOP tax benefit 1.9 1.9 --------------------------------------------------------- Balance Sept 29, 2001 $230.9 $1,147.5 $(140.4) $(189.5) $(218.4) $830.1 ========================================================= </TABLE> <TABLE> <CAPTION> Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners- Stock Earnings (Loss) Debt Stock Equity -------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance Jan 1, 2000 $230.9 $926.9 $(99.2) $(202.2) $(121.0) $735.4 Comprehensive income: Net earnings 147.5 Foreign currency translation (24.0) Total comprehensive income 123.5 Cash dividends declared (58.5) (58.5) Net common stock activity (33.4) (71.8) (105.2) Tax benefit related to stock options 0.3 0.3 ESOP debt 3.3 3.3 ESOP tax benefit 2.0 2.0 --------------------------------------------------------- Balance Sep 30, 2000 $230.9 $984.8 $(123.2) $(198.9) $(192.8) $700.8 ========================================================= </TABLE> See notes to consolidated financial statements. -4-
THE STANLEY WORKS AND SUBSIDIARIES BUSINESS SEGMENT INFORMATION (UNAUDITED, MILLIONS OF DOLLARS) Third Quarter Nine Months 2001 2000 2001 2000 ------- ------- --------- --------- INDUSTRY SEGMENTS Net sales Tools $ 514.4 $ 530.6 $ 1,530.7 $ 1,621.8 Doors 161.7 153.8 448.1 460.8 ------- ------- --------- --------- Consolidated $ 676.1 $ 684.4 $ 1,978.8 $ 2,082.6 ======= ======= ========= ========= Operating profit Tools $ 68.8 $ 68.7 $ 205.2 $ 219.2 Doors 18.4 14.1 44.4 36.7 ------- ------- --------- --------- 87.2 82.8 249.6 255.9 Interest-net (6.7) (7.2) (20.8) (20.9) Other-net (3.9) (1.8) 12.2 (11.5) Restructuring charges - - (18.3) - ------- ------- --------- ---------- Earnings before income taxes $ 76.6 $ 73.8 $ 222.7 $ 223.5 ======= ======= ========= ========== See notes to consolidated financial statements. -5-
THE STANLEY WORKS AND SUBSIDIARIES NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 2001 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 30, 2000. NOTE B - EARNINGS PER SHARE COMPUTATION The following table reconciles the weighted average shares outstanding used to calculate basic and diluted earnings per share. Third Quarter Nine Months 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net earnings - basic and diluted $ 54.5 $ 48.7 $151.8 $147.5 ========== ========== ========== ========== Basic earnings per share - weighted average shares 85,438,722 86,531,911 85,743,628 87,721,165 Dilutive effect of employee stock options 1,980,268 145,386 1,602,176 205,838 ---------- ---------- ----------- ---------- Diluted earnings per share - weighted average shares 87,418,990 86,677,297 87,345,804 87,927,003 ========== ========== =========== ========== NOTE C - INVENTORIES The components of inventories at the end of the third quarter of 2001 and at year-end 2000, in millions of dollars, are as follows: September 29 December 30 2001 2000 ------ ------ Finished products $ 317.1 $ 281.4 Work in process 57.2 53.8 Raw materials 57.9 62.9 ------ ------ $ 432.2 $ 398.1 ====== ====== -6-
NOTE D - OTHER-NET Other-net for the nine months ended September 29, 2001 includes a pre-tax nonrecurring pension curtailment gain that occurred in the first quarter of $29 million, or $0.22 per share, net of taxes. This gain was recorded in accordance with SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". NOTE E - NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No.'s 141, "Business Combinations" and 142, "Goodwill and Other Intangibles". FASB 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FASB 142, goodwill is no longer amortized over its estimated useful life but is subject to at least an annual assessment for impairment applying a fair-value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. The statements are effective for the Company's fiscal year 2002 and the company is in the process of determining the impact of these pronouncements on its financial position and results of operations. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to Be Disposed Of. This Statement retains the requirements of SFAS No. 121 regarding impairment loss recognition and measurement. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. This Statement is effective for fiscal years beginning after December 15, 2001. The Company has not determined the impact, if any, that this statement will have on its financial statements. NOTE F - SUBSEQUENT EVENT In October 2001, the Company eliminated approximately 475 salaried positions and identified several additional actions, primarily facility closures and additional work force reductions. The Company expects to record a restructuring charge in the fourth quarter totaling approximately $60 million. -7-
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales were $676 million for the third quarter of 2001, as compared to $684 million in the third quarter of 2000, a 1% decrease. The primary reason for lower sales is continued softness in the commercial and industrial markets that serve as the Company's largest channel. Net sales were $1,979 million for the nine months ended September 29, 2001 as compared to $2,083 for the nine months ended September 30, 2001, representing a decrease of 5%. The year to date decrease is driven by a unit volume decrease. This unfavorable volume is a result of a weak industrial market and repositioning initiatives in the Tools segment. The Company reported gross profit of $239 million, or 35.4% of net sales for the third quarter of 2001 as compared to $245 million, or 35.8% of net sales for the third quarter of 2000. The decline in gross margin is due to a shift in product mix to the retail channels as solid productivity gains were not adequate to offset this unfavorable shift. Gross profit for the nine months ended September 29, 2001 totaled $706 million, or 35.6% of net sales compared to $758 million, or 36.4%, for the nine months ended September 30, 2000. Excluding the impact of $6 million of one-time charges (primarily business repositioning actions) that were incurred in the first quarter of 2001, the drivers for the year to date gross profit and gross margin declines were consistent with those of the quarterly period. Selling, general and administrative ("S,G&A") expenses were $152 million for the 2001 third quarter. Excluding the impact of a $5 million one-time charge (primarily additional severance charges), that were incurred in the 2001 third quarter, SG&A expenses amounted to $147 million, as compared to $162 million for the third quarter of 2000. S,G&A expenses were 21.8% of net sales for the 2001 third quarter as compared with 23.7% for the third quarter of 2000, an improvement of 190 basis points. S,G&A expenses were $457 million for the first nine months of 2001. Excluding the impact of $8 million of one-time business repositioning charges that were incurred in the first and third quarters of 2001, year to date S,G&A expenses were $53 million, or 11%, below year to date 2000 levels. Excluding these special charges, S,G&A expenses as a percentage of net sales improved 140 basis points from 24.1% for the first nine months of 2000 to 22.7% for the same period in 2001. Improvements in S,G&A expenses are attributable to continued cost reductions achieved from changes made within the information management infrastructure, downward adjustments to employment levels in response to weak economic markets and the benefits attained from the Company's restructuring and repositioning efforts. Interest-net for the 2001 third quarter and year to date was relatively flat as compared to the amounts reported for the comparable periods in 2000. For the nine months ended September 29, 2001, other-net includes the gain recorded in conjunction with the Company's curtailment of U.S. pension plans of $29 million. The Company's income tax rates for the third quarter and the nine months ended September 29, 2001 were 28.9% and 31.8%, respectively, of pre-tax income. The difference between the statutory rate of 34% and the Company's effective rates for the third quarter and year to date 2001 are primarily from certain nonrecurring tax transactions in the current quarter. Excluding these items, the Company's effective tax rate was 33% in the quarter and year to date. The Company's income tax rate for the third quarter and nine months ended September 30, 2000 was 34% for each period. The tax rate decreases from 34% to 33% reflect the continued benefit of structural changes implemented within the Company's tax structure and the nonrecurring tax transactions. -8-
BUSINESS SEGMENT RESULTS The Tools segment includes carpenters, mechanics, pneumatic and hydraulic tools as well as tool sets. The Doors segment includes commercial and residential doors, both automatic and manual, as well as closet doors and systems, home decor and door and consumer hardware. Segment eliminations are excluded. Tools sales declined in the second quarter from $531 million in 2000 to $514 million in 2001, a decrease of 3%. For the first nine months, Tools sales were $1,531 million as compared to $1,622 million, a decrease of 6%. The sales decrease for both the quarter and year to date is primarily the result of unit volume declines by the Mac Tools repositioning in the first quarter of 2001 and weak industrial markets in North America. Despite lower sales, Tools operating profit as a percentage of net sales improved for the 2001 third quarter as compared to the 2000 third quarter by 140 basis points from 12.9% to 14.3% (excluding one-time charges). Year to date, Tools operating profit as a percentage of sales (excluding one-time charges) improved from 13.5% to 14.3% or 80 basis points. Doors sales were $162 million in the third quarter of 2001 as compared to $154 million in the third quarter of 2000 and $461 million in the first nine months of 2001 versus $448 million for the same period in 2000. The third quarter increase in sales is attributable to a new program launch with The Home Depot. The decline in sales for the Doors segment year to date is a result of a sluggish market in the Americas. Operating profit for Doors totaled 11.4% of net sales in the third quarter of 2001 as compared to 9.2% for the third quarter of 2000 and was 9.9% of total net sales for the nine months ended September 29, 2001 as compared to 8.0% for the nine months ended September 30, 2001. The improvements in operating profit, as a percentage of sales, for both segments are attributable to improved productivity and the continued reduction of selling, general and administrative expenses. RESTRUCTURING Restructuring reserves as of the beginning of 2001 were $19 million. These reserves consisted of $13 million related to severance, $3 million related to asset write-downs, and $3 million related to other exit costs. The Company also recorded additional restructuring reserves of $18 million during the first quarter of 2001 for new initiatives pertaining to the further reduction of its cost structure and executed several business repositionings intended to improve its competitiveness, primarily for severence-related obligations. These actions have resulted in a net employment reduction of approximately 800 people and the closure of five facilities. For the first nine months of 2001, The Company charged $30.1 million against these reserves; $24.0 million for severance and $6.1 million for asset write-off's and other exit costs. FINANCIAL CONDITION LIQUIDITY AND SOURCES OF CAPITAL For the nine months ended September 29, 2001, cash flows from operations of $104 million were $17 million lower than the nine months ended September 30, 2000. The decline in cash flows from operations is a result of a decrease in cash generated from net income as the Company recorded a noncash gain of $29 million in 2001 for which the cash proceeds related to such gains will not be realized until 2002. This gain was offset by the impact of an $18.3 million restructuring charge recorded in the first quarter of 2001. -9-
PART II OTHER INFORMATION ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS (c) RECENT SALES OF UNREGISTERED SECURITIES During the 2nd fiscal quarter of 2001, 33,102 shares of the Company's common stock were issued to an individual shareowner and chief executive of Contact East as part of that acquisition and said executive's continuing employment with the Company. The shares were issued at $33.23 per share with an aggregate value of $1,099,979.46 and were issued without registration based on the exemption provided by Section 4(2) of the Securities Act of 1933. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS (10)(i) 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Registration Statement No. 333-64326 filed July 2, 2001). (B) REPORTS ON FORM 8-K. (1) The Company filed a Current Report on Form 8-K, dated July 17, 2001, in respect of the Company's press release announcing first quarter 2001 results. -10-
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE STANLEY WORKS Date: November 13, 2001 By:/s/James M. Loree ----------------- James M. Loree Vice President, Finance and Chief Financial Officer -11-