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 March 30, 2002. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from [ ] to [ ] Commission file number 1-5224 THE STANLEY WORKS (Exact name of registrant as specified in its charter) CONNECTICUT 06-0548860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Stanley Drive New Britain, Connecticut 06053 (Address of principal executive offices) (Zip Code) (860) 225-5111 (Registrant's telephone number) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 85,262,792 shares of the company's Common Stock ($2.50 par value) were outstanding as of May 3, 2002.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) First Quarter 2002 2001 ------- ------- Net sales $ 616.7 $ 621.6 Costs and expenses Cost of sales 401.2 398.5 Selling, general and administrative 135.1 148.9 Interest expense 7.1 8.3 Interest income (0.7) (1.7) Other - net 2.1 (21.1) Restructuring charge - 18.3 ------- ------- 544.8 551.2 ------- ------- Earnings before income taxes 71.9 70.4 Income taxes 23.0 23.8 ------- ------- Net earnings $ 48.9 $ 46.6 ======= ======= Net earnings per share of common stock Basic $ 0.57 $ 0.54 ======= ======= Diluted $ 0.56 $ 0.54 ======= ======= Dividends per share $ 0.24 $ 0.23 ======= ======= Average shares outstanding (in thousands) Basic 85,518 85,897 ======= ======= Diluted 87,889 87,113 ======= ======= See notes to consolidated financial statements. -1-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED, MILLIONS OF DOLLARS) March 30 December 29 2002 2001 -------- ----------- ASSETS Current assets Cash and cash equivalents $ 109.9 $ 115.2 Accounts and notes receivable 566.8 551.3 Inventories 394.6 410.1 Other current assets 71.8 64.8 -------- -------- Total current assets 1,143.1 1,141.4 Property, plant and equipment 1,232.9 1,229.7 Less: accumulated depreciation (742.0) (735.4) -------- -------- 490.9 494.3 Goodwill and other intangibles 235.4 236.1 Other assets 194.5 183.9 -------- -------- $ 2,063.9 $ 2,055.7 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Short-term borrowings $ 181.5 $ 177.3 Current maturities of long-term debt 119.9 120.1 Accounts payable 249.9 247.7 Accrued expenses 258.6 280.4 -------- -------- Total current liabilities 809.9 825.5 Long-term debt 194.8 196.8 Other liabilities 182.4 201.1 Shareowners' equity Common stock 230.9 230.9 Retained earnings 1,217.9 1,184.9 Accumulated other comprehensive loss (138.8) (138.9) ESOP debt (186.0) (187.7) -------- -------- 1,124.0 1,089.2 Less: cost of common stock in treasury 247.2 256.9 -------- -------- Total shareowners' equity 876.8 832.3 -------- -------- $ 2,063.9 $ 2,055.7 ======== ======== See notes to consolidated financial statements. -2-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, MILLIONS OF DOLLARS) First Quarter 2002 2001 ------ ------ Operating Activities Net earnings $ 48.9 $ 46.6 Depreciation and amortization 16.7 22.3 Restructuring charge - 18.3 Other non-cash items (15.1) (30.4) Changes in working capital (5.9) (46.0) Changes in other operating assets and liabilities (24.1) (32.0) ------ ------ Net cash provided by (used in) operating activities 20.5 (21.2) Investing Activities Capital expenditures (18.7) (15.9) Other 0.2 (1.9) ------ ------ Net cash used in investing activities (18.5) (17.8) Financing Activities Proceeds from long-term borrowings 0.5 - Net short-term borrowings 4.4 72.7 Proceeds from issuance of common stock 8.1 5.2 Purchase of common stock for treasury (0.1) (0.1) Cash dividends on common stock (20.4) (19.7) ------ ------ Net cash provided by (used in) financing activities (7.5) 58.1 Effect of exchange rate changes on cash 0.2 (1.3) ------ ------ Increase (decrease) in cash and cash equivalents (5.3) 17.8 Cash and cash equivalents, beginning of period 115.2 93.6 ------ ------ Cash and cash equivalents, end of first quarter $109.9 $111.4 ====== ====== See notes to consolidated financial statements. -3-
THE STANLEY WORKS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED, MILLIONS OF DOLLARS) Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners' Stock Earnings (Loss) Debt Stock Equity --------------------------------------------------------- Balance Dec 29, 2001 $230.9 $1,184.9 $(138.9) $(187.7) $(256.9) $832.3 Comprehensive income: Net earnings 48.9 48.9 Foreign currency translation & other 0.1 0.1 Total comprehensive ----- income 49.0 Cash dividends declared (20.4) (20.4) Net common stock activity 2.0 9.7 11.7 ESOP debt 1.7 1.7 ESOP & stock option tax benefit 2.5 2.5 --------------------------------------------------------- Balance Mar. 30 2002 $230.9 $1,217.9 $(138.8) $(186.0) $(247.2) $876.8 ========================================================= Accumulated Other Compre- hensive Total Common Retained Income ESOP Treasury Shareowners' Stock Earnings (Loss) Debt Stock Equity --------------------------------------------------------- Balance Dec 30, 2000 $230.9 $1,039.6 $(124.5) $(194.8) $(214.7) $736.5 Comprehensive income: Net earnings 46.6 46.6 Foreign currency translation & other (12.7) (12.7) Total comprehensive ----- income 33.9 Cash dividends declared (19.7) (19.7) Net common stock activity 2.2 3.6 5.8 ESOP debt 1.8 1.8 ESOP & stock option tax benefit 0.8 0.8 --------------------------------------------------------- Balance Mar 31, 2001 $230.9 $1,069.5 $(137.2) $(193.0) $(211.1) $759.1 ========================================================= See notes to consolidated financial statements. -4-
THE STANLEY WORKS AND SUBSIDIARIES BUSINESS SEGMENT INFORMATION (UNAUDITED, MILLIONS OF DOLLARS) First Quarter 2002 2001 ------- ------- INDUSTRY SEGMENTS Net sales Tools $ 478.0 $ 488.0 Doors 138.7 133.6 ------- ------- Consolidated $ 616.7 $ 621.6 ======= ======= Operating profit Tools $ 61.8 $ 62.7 Doors 18.6 11.5 ------- ------- $ 80.4 $ 74.2 ======== ======== See notes to consolidated financial statements. -5-
THE STANLEY WORKS AND SUBSIDIARIES NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 2002 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 29, 2001. NOTE B - EARNINGS PER SHARE COMPUTATION The following table reconciles the weighted average shares outstanding used to calculate basic and diluted earnings per share. First Quarter 2002 2001 ---------- ---------- Net earnings - basic and diluted $ 48.9 $ 46.6 =========== =========== Basic earnings per share - weighted average shares 85,517,563 85,897,217 Dilutive effect of employee stock options 2,371,342 1,215,773 ---------- ---------- Diluted earnings per share - weighted average shares 87,888,905 87,112,990 =========== =========== NOTE C - INVENTORIES The components of inventories at the end of the first quarter of 2002 and at year-end 2001, in millions of dollars, are as follows: March 30 December 29 2002 2001 ------- ------- Finished products $ 300.3 $ 308.0 Work in process 51.7 49.1 Raw materials 42.6 53.0 ------- ------- $ 394.6 $ 410.1 ======= ======= -6-
NOTE D - GOODWILL AND OTHER INTANGIBLES The components of goodwill and other intangibles at the end of the first quarter of 2002 and at year-end 2001, in millions of dollars, are as follows: March 30 December 29 2002 2001 -------- ----------- Goodwill $ 215.2 $ 216.2 Other intangibles 54.9 54.3 Accumulated amortization (34.7) (34.4) ------- ------- $ 235.4 $ 236.1 ======= ======= In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), there is no amortization of goodwill recorded in the first quarter of 2002. The company records amortization expense for its other intangibles, primarily patents, copyrights and trademarks. First quarter amortization expense for these assets totaled $0.4 million in 2002 and $0.7 million in 2001. NOTE E - OTHER-NET Other-net in the first quarter of 2001 included a pre-tax non-recurring pension curtailment gain of $29.3 million, or $0.22 per share. NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS In January, 2002 the company adopted Emerging Issues Task Force (EITF) Issue Number 00-25 "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services". EITF 00-25 requires the reclassification of certain customer promotional payments previously reported in selling, general and administrative (SG&A) expenses as a reduction of revenue, and prior periods must be restated for comparability of results. First quarter 2002 net sales include $4.9 million of co-operative advertising (co-op) amounts that would have been recorded to SG&A under the company's previous accounting policy. In addition, first quarter 2001 net sales and SG&A are $4.6 million lower than previously published amounts reflecting reclassification of co-op expenses. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. The Company adopted the statement effective January 1, 2002. As a result of adopting SFAS No. 142, the Company will no longer record goodwill amortization. Goodwill amortization included in other-net for the first quarter of 2001, totaled $1.3 million ($0.9 million, net of taxes), or $.01 per share. Thus first quarter 2001 pro forma net income and diluted earnings per share, excluding goodwill amortization, is $47.5 million and $0.55, respectively. The company did not recognize an impairment loss upon adoption of this statement in 2002. NOTE G - SUBSEQUENT EVENT At the company's annual meeting on May 9, 2002, shareholders voted, among other things, to approve the previously announced proposal to reincorporate in Bermuda. At the annual meeting certain shareholders who were participants in the company's 401(k) plan expressed some confusion with respect to voting procedures for shares held in the plan. Although the company believes the shareholder vote at the annual meeting to be fair and appropriate, it acknowledged concerns that participants in the company's 401(k) plan may have been confused about 401(k) plan voting procedures. In order to eliminate any confusion and even the appearance of impropriety and to ensure that the company acts in accordance with its shareholders' wishes, on May 10, 2002, the company's Board of Directors authorized a revote on the reorganization. -7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales were $617 million in the first quarter of 2002 as compared to $622 million in the first quarter of 2001, representing a decrease of less than 1%. The company continues to experience sales volume declines in the Tools segment due to the softness in the commercial and industrial tools markets. The decline was attributable to the continued weakness across industrial tools channels. The decline in these markets was partially offset by an increase in net sales from strong sales in the Tools and Doors segments within the consumer markets. The company reported gross profit of $216 million, or 34.9% of net sales in the first quarter of 2002 compared to $223 million, or 35.9% of net sales in 2001. Included in the cost of sales in 2001 were $6 million of one-time business repositioning charges. Gross profit in 2001, excluding these special charges, was 36.8%. The decline in the gross profit percentage of 190 basis points versus the prior year was primarily the result of a mix shift from higher margin to lower margin activities as well as lower production levels. Selling, general and administrative expenses (SG&A) reported by the company were $135 million, or 21.9% of net sales, in the first quarter of 2002, compared to $149 million, or 24.0% of net sales, in the prior year. Included in SG&A for 2001 were $3 million of one-time business repositioning charges. Excluding these costs, SG&A decreased $11 million or 150 basis points below first quarter 2001 levels. The decline in SG&A was a result of the company's restructuring initiatives in the first and fourth quarters of 2001 that were highlighted by a decline in personnel and facility costs. Partially offsetting the decline in SG&A costs in the first quarter of 2002 were approximately $2 million in expenses related to the company's proposed reincorporation to Bermuda. Other-net in 2001 includes a $29 million pension curtailment gain as well as $2 million of one-time business repositioning charges. Excluding these one-time charges and credits, other-net expenses in 2002 decreased as a result of the elimination of $1.3 million of goodwill amortization from the implementation of SFAS 142 and improvement in the company's Mac Advantage financing program. The company's income tax rate was 32% in the first quarter this year compared to 33%, excluding the tax impact of special charges and credits, in the prior year. The decline in the effective rate reflects the continued benefit of organizational and structural changes, primarily in Europe. The discussion of the results of operations above include special charges and credits that were incurred in the first quarter of 2001. These items include: o a pre-tax, non-recurring $29 million pension curtailment gain pertaining to the U.S. plans in accordance with SFAS Statement No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". -8-
o an $11 million one-time charge associated with several business repositionings, primarily in the Tools segment. These charges were classified in the statement of operations for 2001 as follows: (i) $0.7 - net sales, (ii) $5.5 million - cost of sales, (iii) $3.3 million - SG&A and (iv) $1.7 million - other net. 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 in the first quarter of 2002 decreased 2% to $478 million from $488 million in the prior year's first quarter. The decrease was primarily from continued declines caused by weak industrial and commercial markets partially offset by strong sales in consumer markets. The Tools segment operating profit, excluding special credits and charges of $10 million in 2001, was 14.6% of net sales for the first quarter of 2001 as compared with 12.9% in 2002. The decline in operating profit is a result of the sales decline and the shift of those sales from the industrial channels to the less profitable retail channels. Doors segment sales increased to $139 million, or 4% in the first quarter of 2002, on strong sales to the consumer markets. The Doors segment operating profit increased to 13.4% of net sales in the first quarter of 2002 compared with 8.8% of net sales, excluding special credits and charges, in the same period last year. This increase was driven primarily from productivity gains within the company's hardware business as a result of manufacturing moves to low cost countries. RESTRUCTURING As a result of initiatives for reduction of its cost structure the company recorded an $18 million charge for restructuring-related severance obligations in the first quarter of 2001. Restructuring reserves as of the beginning of 2002 were $39 million. These reserves consisted of $27 million related to severance, $6 million related to asset write-downs, and $6 million related to other exit costs. In the first quarter of 2002, severance of $11 million and asset write-downs and other exit costs of $5 million, reduced these reserves to $23 million. FINANCIAL CONDITION LIQUIDITY AND SOURCES OF CAPITAL In the first quarter of 2002, the company's cash from operating activities increased from the prior year from a use of $21 million in 2001 to a source of cash totaling $21 million in 2002. The primary driver for the positive cash flow in the first quarter of 2002 versus 2001 was the management of inventory levels that resulted in a source of cash in 2002 of $11 million as inventory balances declined from year-end. In 2001, increasing inventory levels resulted in a use of cash of $29 million. As a result of the company's positive operating cash flow in the first quarter of 2002, net cash from financing activities changed significantly from a source of funds in 2001 of $58 million to a use of funds in 2002 of $8 million as the company did not have to draw on funds to manage working capital requirements -9-
PART II OTHER INFORMATION ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K. (1) Registrant filed a Current Report on Form 8-K, dated January 24, 2002, in respect of the Registrant's press release announcing fourth quarter 2001 results. (2) Registrant filed a Current Report on Form 8-K, dated February 8, 2002, in respect of the Registrant's press release, disclosing earnings guidance for the first quarter and full year 2002 given at a presentation to analysts. (3) Registrant filed a Current Report on Form 8-K, dated February 25, 2002, in respect of the Registrant's press release announcing it's strategic alliance with the Home Depot. -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: May 14, 2002 By: James M. Loree James M. Loree Vice President, Finance and Chief Financial Officer -11-