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 July 3, 1999.
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 88,911,723
as of August 13, 1999.
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)
Second Quarter Six Months
1999 1998 1999 1998
------- ------- --------- ---------
Net Sales $ 685.5 $ 691.8 $ 1,369.2 $ 1,363.7
Costs and Expenses
Cost of sales 455.1 448.9 906.5 883.9
Selling, general and
administrative 182.2 166.1 355.3 337.2
Interest - net 7.7 5.2 14.9 10.0
Other - net 2.4 4.1 7.0 6.9
------- ------- --------- ---------
647.4 624.3 1,283.7 1,238.0
------- ------- --------- ---------
Earnings before
income taxes 38.1 67.5 85.5 125.7
Income Taxes 12.8 25.3 29.9 47.1
------- ------- --------- ---------
Net Earnings $ 25.3 $ 42.2 $ 55.6 $ 78.6
======= ======= ========= =========
Net Earnings Per
Share of Common Stock
Basic $ 0.28 $ 0.47 $ 0.62 $ 0.88
======= ======= ========= =========
Diluted $ 0.28 $ 0.47 $ 0.62 $ 0.87
======= ======= ========= =========
Dividends per share $ 0.215 $ 0.20 $ 0.43 $ 0.40
======= ======= ========= =========
Average shares outstanding
(in thousands)
Basic 89,447 89,405 89,439 89,442
======= ======= ========= =========
Diluted 89,831 90,442 89,751 90,464
======= ======= ========= =========
See notes to consolidated financial statements.
-1-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
July 3 January 2
1999 1999
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 84.8 $ 110.1
Accounts and notes receivable 534.8 517.0
Inventories 370.8 380.9
Other current assets 77.6 78.4
-------- --------
Total Current Assets 1,068.0 1,086.4
Property, plant and equipment 1,184.1 1,198.5
Less: accumulated depreciation (693.5) (687.1)
-------- --------
490.6 511.4
Goodwill and other intangibles 187.1 196.9
Other assets 142.3 138.2
-------- --------
$ 1,888.0 $ 1,932.9
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term borrowings $ 240.5 $ 207.8
Current maturities of long-term debt 11.2 14.2
Accounts payable 173.6 172.1
Accrued expenses 274.9 308.0
-------- --------
Total Current Liabilities 700.2 702.1
Long-Term Debt 298.7 344.8
Other Liabilities 208.2 216.6
Shareowners' Equity
Common stock 230.9 230.9
Retained earnings 881.9 867.2
Accumulated other comprehensive loss (97.3) (84.6)
ESOP debt (207.7) (213.2)
-------- --------
807.8 800.3
Less: cost of common stock in treasury 126.9 130.9
-------- --------
Total Shareowners' Equity 680.9 669.4
-------- --------
$ 1,888.0 $ 1,932.9
======== ========
See notes to consolidated financial statements.
-2-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Millions of Dollars)
Second Quarter Six Months
1999 1998 1999 1998
------ ------ ------ ------
Operating Activities
Net earnings $ 25.3 $ 42.2 $ 55.6 $ 78.6
Depreciation and amortization 21.2 18.3 45.3 38.1
Other non-cash items 9.4 10.0 13.8 10.6
Changes in operating assets
and liabilities (0.2) (59.3) (54.5) (137.5)
------ ------ ------ ------
Net cash provided (used) by
operating activities 55.7 11.2 60.2 (10.2)
Investing Activities
Capital expenditures (20.1) (13.5) (40.5) (20.9)
Capitalized software (5.6) (1.4) (10.2) (1.8)
Proceeds from sales of businesses - - - 3.0
Proceeds from sales of assets 9.5 5.0 14.9 5.8
Other (2.2) 1.1 (4.1) (0.1)
------ ------ ------ ------
Net cash used by
investing activities (18.4) (8.8) (39.9) (14.0)
Financing Activities
Payments on long-term borrowings (2.3) (1.6) (156.0) (38.1)
Proceeds from long-term borrowings - - 120.9 -
Net short-term borrowings (7.5) 8.3 34.7 36.5
Proceeds from issuance of common stock 3.4 5.6 5.0 14.5
Purchase of common stock for treasury (6.7) (13.4) (8.9) (29.6)
Cash dividends on common stock (19.2) (17.8) (38.3) (35.6)
------ ------ ------ ------
Net cash used by
financing activities (32.3) (18.9) (42.6) (52.3)
Effect of Exchange Rate Changes on Cash (0.7) 0.7 (3.0) 1.7
------ ------ ------ ------
Increase (Decrease) in Cash and
Cash Equivalents 4.3 (15.8) (25.3) (74.8)
Cash and Cash Equivalents,
Beginning of Period 80.5 93.2 110.1 152.2
------ ------ ------ ------
Cash and Cash Equivalents,
End of Second Quarter $ 84.8 $ 77.4 $ 84.8 $ 77.4
====== ====== ====== ======
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 Jan. 2, 1999 $230.9 $867.2 $(84.6) $(213.2) $(130.9) $669.4
Comprehensive income:
Net earnings 55.6
Foreign currency
translation (12.7)
Total comprehensive
income 42.9
Cash dividends
declared (38.3) (38.3)
Net common stock
activity (4.4) 4.0 (0.4)
Tax benefit related
to stock options 0.4 0.4
ESOP debt 5.5 5.5
ESOP tax benefit 1.4 1.4
---------------------------------------------------------
Balance July 3, 1999 $230.9 $881.9 ($97.3) ($207.7) ($126.9) $680.9
=========================================================
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareowners'
Stock Earnings (Loss) Debt Stock Equity
---------------------------------------------------------
Balance Jan. 3, 1998 $230.9 $806.6 $(85.3) $(223.8) $(120.6) $607.8
Comprehensive income:
Net earnings 78.6
Foreign currency
translation -
Total comprehensive
income 78.6
Cash dividends
declared (35.6) (35.6)
Net common stock
activity (5.9) (6.1) (12.0)
Tax benefit related
to stock options 3.2 3.2
ESOP debt 2.6 2.6
ESOP tax benefit 1.3 1.3
---------------------------------------------------------
Balance July 4,1998 $230.9 $848.2 $(85.3) $(221.2) $(126.7) $645.9
=========================================================
See notes to consolidated financial statements.
-4-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
Second Quarter Six Months
1999 1998 1999 1998
------- ------- --------- ---------
INDUSTRY SEGMENTS
Net Sales
Tools $ 533.2 $ 532.7 $ 1,058.6 $ 1,045.2
Doors 152.3 159.1 310.6 318.5
------- ------- --------- ---------
Consolidated $ 685.5 $ 691.8 $ 1,369.2 $ 1,363.7
======= ======= ========= =========
Operating Profit
Tools $ 74.1 $ 79.2 $ 140.6 $ 146.3
Doors 8.8 13.9 21.7 28.9
------- ------- --------- ---------
82.9 93.1 162.3 175.2
Restructuring-related
transition and other
non-recurring costs (34.7) (16.3) (54.9) (32.6)
Interest-net (7.7) (5.2) (14.9) (10.0)
Other-net (2.4) (4.1) (7.0) (6.9)
------- ------- --------- ----------
Earnings Before
Income Taxes $ 38.1 $ 67.5 $ 85.5 $ 125.7
======= ======= ========= ==========
GEOGRAPHIC NET SALES
United States $ 485.3 $ 502.1 $ 970.1 $ 977.4
Other Americas 52.7 57.0 99.2 112.5
Europe 124.5 109.6 253.7 229.5
Asia 23.0 23.1 46.2 44.3
------- ------- --------- ----------
Consolidated $ 685.5 $ 691.8 $ 1,369.2 $ 1,363.7
======= ======= ========= ==========
See notes to consolidated financial statements.
-5-
THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 3, 1999
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 January 2, 1999.
NOTE B - Earnings Per Share Computation
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
Second Quarter Six Months
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net earnings -
basic and diluted $ 25.3 $ 42.2 $ 55.6 $ 78.6
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 89,446,907 89,404,624 89,439,257 89,442,431
Dilutive effect of
employee stock options 383,664 1,037,239 311,322 1,021,113
---------- ---------- ----------- ----------
Diluted earnings per share -
weighted average shares 89,830,571 90,441,863 89,750,579 90,463,544
========== ========== =========== ==========
NOTE C - Inventories
The components of inventories at the end of the second quarter of 1999
and at year-end 1998, in millions of dollars, are as follows:
July 3 January 2
1999 1999
------ ------
Finished products $ 267.6 $ 273.3
Work in process 48.5 52.5
Raw materials 54.7 55.1
------ ------
$ 370.8 $ 380.9
====== ======
-6-
NOTE D - Cash Flow Information
Interest paid during the second quarters of 1999 and 1998 amounted to $8.7
million and $7.5 million, respectively. Interest paid for the six months of
1999 and 1998 amounted to $17.4 million and $14.4 million, respectively.
Income taxes paid during the second quarters of 1999 and 1998 were $13.0
million and $37.2 million, respectively. Income taxes paid for the six months
of 1999 and 1998 were $21.0 million and $46.6 million, respectively.
NOTE E - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting For Derivative
Instruments and Hedging Activities," which was originally to be effective in
fiscal year 2000. In May 1999, the Financial Accounting Standards Board
deferred the effective date for one year and the standard now will be
effective in fiscal year 2001. The adoption of this standard is not expected
to have a material impact on the company's balance sheet, operating results or
cash flows.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company's goal is to become one of the world's Great Brands,
delivering sustained, profitable growth. To achieve this goal the company
has undertaken a major restructuring to consolidate manufacturing and
distribution operations, simplify the organizational structure and make
other changes to position itself as a low cost producer. The savings
associated with those changes are targeted for reinvestment in growth
initiatives such as new product and brand development. In the first six
months of 1999, progress has been slow and the company continues to be
hampered by fundamental operating inefficiencies in manufacturing and
distribution. As a result, the company is presently developing new sales
and marketing programs to stimulate sales growth and initiatives designed
to lower the company's cost structure.
Net sales were $686 million, down 1% from $692 million in the same
quarter last year. ZAG Industries Ltd. ("ZAG"), which was acquired in
August 1998, contributed 3% to the sales growth. This growth was offset
by a 4% reduction in sales from ongoing businesses. The net effect of
pricing and foreign currency translation caused 1% of this decline. The
remaining 3% decline was due to decreases in unit sales volume. Lingering
effects of poor 1998 fill rates in hardware and tools continue to depress
sales even though many of those operational problems have been corrected.
Additionally, a weak Latin American economy, the softening of industrial
markets and difficulties associated with the implementation of SAP
software in a part of the company's doors business contributed to the
lower sales volumes. Net sales were $1,369 million for the first six
months of 1999 which was relatively flat to the same period last year.
ZAG contributed 3% to the sales growth, which was offset primarily by
reduced sales volume from ongoing businesses.
The company's restructuring initiatives require expenditures which affect
the financial statements. Restructuring-related transition costs are
costs resulting from these initiatives that are classified as period
operating expenses within cost of sales or selling, general and
administrative expense. These include the costs of moving production
equipment, operating duplicate facilities while transferring production
or distribution, consulting costs incurred in planning and implementing
changes, and other types of costs that have been incurred to facilitate
the changes encompassed by the restructuring initiatives. Management uses
its judgment to determine which costs should be classified as transition
costs based on whether the costs are unusual in nature, incurred only
because of restructuring initiatives and are expected to cease when the
transition activities end. In addition, the company is incurring costs to
remediate its computer and related systems so that these systems will
function properly with regard to date issues related to the year 2000
("Y2K"). Because the presence of restructuring charges, restructuring-
related transition costs and non-recurring Y2K remediation costs obscure
the underlying trends within the company's business, the company also
provides information on its reported results excluding these identifiable
costs. These pro forma or "core" results are the basis of business
segment information. In addition, the narrative regarding results of
operations has been expanded to provide information as to the effects of
these items on each financial statement category. As these costs are
expected to be significantly lower in future periods, the company will no
longer distinguish between reported and "core" beginning in the third
quarter of 1999 and thereafter.
-8-
The company reported gross profit of $230 million, or 33.6% of net sales.
This represented a decrease of 5% from $243 million, or 35.1% of net
sales, reported in the second quarter of 1998. Included in the second
quarter cost of sales for 1999 was $14 million of restructuring-related
transition costs, primarily for plant rationalization activities, as
compared with $3 million recorded in the second quarter of 1998. The
increase represented much greater plant closure activity. Core gross
profits were 35.7% of net sales, compared with 35.5% in the second
quarter of 1998. The company reported gross profit of $463 million, or
33.8% of net sales for the first six months of 1999 compared to 35.2% of
net sales in 1998. Included in the cost of sales for 1999 was $20 million
of restructuring-related transition costs, primarily for plant
rationalization activities, as compared with $7 million recorded in the
same period of 1998. Core gross profits were 35.3% of net sales, compared
with 35.7% for the first six months of 1998. During the first six months
of 1999, the productivity savings from restructuring and centralized
procurement activities were almost entirely offset by production and
distribution inefficiencies.
Selling, general and administrative expenses were $182 million, or 26.6%
of net sales, in the second quarter of 1999, as compared with $166
million, or 24.0% of net sales in the second quarter of 1998. The
increase in spending is partially attributed to a $8 million increase in
restructuring-related transition and other non-recurring costs, which
increased from $13 million in 1998 to $21 million in 1999. The increase
resulted from additional spending on transition to centralized European
distribution centers, consulting costs and other costs incurred for
structural reorganization and administrative efficiency solutions.
Incremental Y2K costs incurred in the second quarter were $8 million. On
a core basis, selling, general and administrative expenses increased to
$162 million in the second quarter of 1999 from $153 million in the
second quarter of 1998. This increase is the result of the Zag
acquisition, higher selling and administrative costs inherent in the
MacDirect [TM] program and reinvestment of savings achieved from
restructuring into spending on brand and new product development.
Selling, general and administrative expenses were $355 million, or 26.0%
of net sales, in the six month period of 1999, as compared with $337
million, or 24.7% of net sales in 1998. The increase in spending is
partially attributed to a $9 million increase in restructuring-related
transition and other non-recurring costs, which increased from $26
million in 1998 to $35 million in 1999. On a core basis, selling, general
and administrative expenses increased to $320 million in 1999 from $311
million in 1998. This increase is the result of the Zag acquisition,
higher selling and administrative costs inherent in the MacDirect [TM]
program and increased spending on brand and new product development.
Net interest expense was $8 million in the second quarter of 1999 and $15
million for the first six months of 1999 compared to $5 million and $10
million, respectively, for the same periods in 1998. These increases are
attributed to the acquisition of ZAG and the funding of working capital
increases.
The company's 1999 effective annual income tax rate was reduced to 35.0%
during the second quarter. This resulted in a 33.8% effective tax rate in
the quarter, versus 37.5% for the second quarter and first six months of
last year. This reduction reflected the continued benefit of structural
changes implemented in late 1998, as well as an increase in the company's
-9-
ability to utilize foreign tax credits associated with a higher portion
of the company's taxable income being earned overseas.
Net earnings for the second quarter were $25 million, or $.28 per diluted
share, compared with the prior year's net income of $42 million, or $.47
per diluted share. Net earnings on a core basis, would have been $48
million, or $.54 per diluted share in the second quarter of 1999 compared
with $52 million, or $.58 per diluted share in 1998.
Net earnings for the first six months of 1999 were $56 million, or $.62
per diluted share, compared with the prior year's net income of $79
million, or $.87 per diluted share. Net earnings on a core basis, would
have been $91 million, or $1.02 per diluted share in the first six months
of 1999 compared with $99 million, or $1.09 per diluted share in 1998.
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. The company assesses
the performance of its business segments using core operating profit,
which excludes restructuring charges, restructuring-related transition
and other non-recurring costs. Segment eliminations are also excluded.
As reflected in the table, "Business Segment Information", Tools sales
in the second quarter of 1999 were $533 million, essentially flat with
the second quarter last year. This segment was positively impacted by the
ZAG acquisition, which generated a 4% increase in Tools sales, and the
continued growth in the Mac Tools business. These increases were
completely offset by lower unit volume in hand tools in the U.S. and
Latin America, fastening systems and hydraulic tools. The Tools segment
core operating profit was 13.9% of net sales for the second quarter of
1999, compared with 14.9% of net sales in the same period last year,
reflecting the effects of customer service related cost inefficiencies
and higher selling, general and administrative costs. This also
contributed to the decline in core operating profits for the six month
period which were $141 million, or 13.3% of net sales, compared to $146
million, or 14.0% of net sales in 1998.
Doors segment sales decreased to $152 million, approximately 4% below
1998's second quarter. Strong unit volume sales of North American
residential entry doors and double digit unit volume growth in U.S. home
decor products were more than offset by declines in the U.S. hardware and
access technology unit sales volume. The decline in access technology's
sales was the result of difficulties associated with the implementation
of SAP software. Hardware sales were also depressed due to the lingering
effects of poor 1998 service fill rates, despite recent improvements. The
Doors segment core operating profit decreased to 5.8% of net sales in the
second quarter of 1999, compared with 8.7% of net sales in the same
period last year, largely due to pricing pressures in the U.S hardware
business and the difficulties associated with the SAP implementation.
These issues combined with a shift in the mix of product to lower-margin
retail channels, resulted in decreased core operating profits for the six
month period of $22 million, or 7.0% of net sales, compared to $29
million, or 9.1% of net sales in 1998.
-10-
Restructuring
At January 2, 1999, reserve balances related to the company's
restructuring initiatives were $154 million, of which $44 million relate
to the write-down of impaired assets. The remaining $110 million included
$73 million related to severance, and $37 million to environmental
remediation and other exit costs. For the six months ended July 3, 1999,
asset write-downs of $7 million, severance of $21 million and payments
for other exit costs of $11 million reduced these reserves. The reserve
balances at the end of the second quarter were $115 million, of which $37
million related to the write-down of impaired assets, $52 million related
to severance, and $26 million to environmental remediation and other exit
costs.
The company is currently re-evaluating the scope of initiatives
encompassed by the remaining restructuring reserves. The objective of
the review is to determine which restructuring initiatives should be
completed and also to identify new initiatives to further lower the
company's cost structure. The outcome of this effort, which will be
completed prior to December 1999, will be a reversal of reserves for
actions the company will not complete and will be offset to some extent
by a charge for reserves related to new initiatives. Until the detailed
planning has been completed the net effect will not be known, however,
management currently anticipates that the impact will not result in a net
charge to operations.
FINANCIAL CONDITION
Liquidity and Sources of Capital
In the second quarter of 1999, the company generated $56 million in
operating cash flow compared to $11 million in the second quarter of
1998. This significant increase was driven by better working capital
management. In the second quarter of 1998, operating cash flow was
reduced by significantly higher inventory levels built in response to
customer service and other operational problems. For the six months of
1999, the company's receivables have increased by $18 million and the
inventory has declined by $10 million. The receivables increase is
primarily attributable to the Zag and Mac Tools growth. The inventory
decrease is primarily attributed to SKU reductions combined with order
fill rates that are approaching customer-required levels in a number of
the company's business units.
Capital expenditures were $20 million for the second quarter of 1999
representing a substantial increase over the second quarter of last year.
Investment in capital during the first half 1998 was lower than
traditional levels and lower than depreciation and amortization.
Facility consolidations, continued outsourcing and the Stanley Production
System (which focuses on continuous improvement) collectively reduced the
requirement for operating capital on a temporary basis. The level of
spending has returned to more traditional levels during the second
quarter and first half of 1999.
Strategic changes were made in the company's debt portfolio during early
1999. In 1998, funding for working capital and the acquisition of ZAG was
provided by increased short-term borrowings. Short-term sources of funds
were used at that time with the intent of subsequently securing medium
term financing for the acquisition component of the requirement. In the
first quarter 1999, the company issued $120 million of 5 year debt to
capitalize on the current rate environment and reduce its reliance on
short-term sources of funds.
-11-
Year 2000 Update
Since many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, these business
systems may be unable to process accurately certain data before, during
or after the year 2000. As a result, business and governmental entities
are at risk for possible miscalculations or systems failures causing
disruptions in their business operations. This is commonly known as the
Year 2000 or Y2K issue. The Y2K issue can arise at any point in the
company's supply, manufacturing, distribution and financial chains.
A Y2K project office was established in September 1997 and is staffed
with internal managers who are responsible for oversight and
implementation of the principal portions of the Y2K project.
Approximately 60% of the internal information technology resources were
committed to Y2K remediation efforts in the second quarter of 1999. The
scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on mainframe, PC and LAN
platforms; addressing issues related to software and non-IT embedded
systems used in plant and distribution facilities; and addressing the
compliance of key suppliers and customers. The project has four phases:
inventory and assessment of systems and equipment affected by the Y2K
issue; definition of strategies to address affected systems and
equipment; remediation or replacement of affected systems and equipment;
and testing that each is Y2K compliant.
With respect to ensuring the compliance of all applications, operating
systems and hardware (other than PCs) on the company's various computer
platforms, the assessment and definition of strategies phases have been
completed. Remediation or replacement and testing phases have been
completed for approximately 80% of information systems. As part of the
remediation process, approximately 20% of the company's current business
transaction systems were to be replaced with new business transaction
systems, principally SAP. These plans were subsequently modified to
reduce the number of SAP conversions and to instead remediate the
existing systems. Project plans for this change are currently being
developed; however, initial assessments are that the conversions and
remediation will be completed by year-end.
The inventory of all PC's and related equipment is 100% complete with
assessment, remediation and testing complete in North and South America,
90% complete in Asia and on schedule for completion in Europe by October
1999.
With respect to addressing issues related to software and non-IT embedded
systems used in the company's manufacturing and distribution facilities,
the assessment and definition of strategies phases have been completed.
The remediation or replacement phase, as well as such testing as is
judged appropriate, is expected to be completed by the end of third
quarter 1999.
In addition, the company has begun to develop contingency plans to
address the most reasonably likely worst case scenario, although such
scenario has not yet been identified. Contingency plans will provide for
process changes, alternative methods of processing including manual,
temporary inventory builds, adjustments to staffing and other strategies
to minimize disruption caused by any Y2K failure.
It is currently estimated that the aggregate cost of the company's Y2K
efforts, which include internal and incremental costs, will be
-12-
approximately $95 to $105 million. Approximately $75 million of
these costs have been spent to date. It is expected that no more than
25% of the total cost will be capitalized.
The company relies on numerous third party suppliers in the operation of
its business. Interruption in the operations of any supplier due to Y2K
issues would affect company operations. The company has initiated
efforts to evaluate the status of its most critical suppliers' progress
and this process is expected to be completed in the next few months.
Interruptions in customers' operations due to Y2K issues would result in
reduced sales, increased inventory or receivable levels and cash flow
reductions. While these events are possible, the company's customer and
supplier base is broad enough to minimize the impact of the failure of
any single interface. The company is currently assessing its customer
interfaces and expects to begin testing in the next few months.
Additional discussion of the risks associated with potential Y2K failures
is provided in the last paragraph under Risk/Cautionary Statements.
Risk/Cautionary Statements
The statements contained in this Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 regarding (1) the company's ability to achieve operational
excellence and deliver sustained, profitable growth, (e.g., sales growth at
twice the industry rate, earnings growth in the low to mid teens and dividend
growth) and (2) initiatives and programs being developed and undertaken to
improve earnings and sales are forward looking and inherently subject to risk
and uncertainty.
The Company's drive for operational excellence is focused on improving
customer service, consolidating multiple manufacturing and distribution
facilities, outsourcing non-core activities and converting to common systems.
The ability to implement the initiatives associated with these goals is
dependent on the Company's ability to increase the effectiveness of its
routine business processes and to develop and execute comprehensive plans for
facility consolidations, the ability of the organization to complete the
transition to a product management structure without losing focus on the
business, the availability of vendors to perform non-core functions being
outsourced, the successful recruitment and training of new employees, the
resolution of any labor issues related to closing facilities, the need to
respond to significant changes in product demand during the transition and
other unforeseen events.
The Company's ability to generate sustained, profitable growth is dependent on
successfully freeing up resources to fund new product and brand development
and new ventures to broaden its markets, and to defend market share in the
face of price and other competition. Success at developing new products will
depend on the ability of the new product development process to foster
creativity and identify viable new product ideas as well as the Company's
ability to attract new product engineers and to design and implement
strategies to effectively commercialize the new product ideas. The
achievement of growth through new ventures will depend upon the ability to
successfully identify, negotiate, consummate and integrate into operations
acquisitions, joint ventures and/or strategic alliances.
As many of the initiatives and programs to improve earnings and sales are
still being developed at this time, the company is unable to identify all of
the risk factors that should be taken into account in gauging its ability to
-13-
achieve improved sales and earnings. Some of the risk factors to be
considered include: (1) the ability to recruit and retain a sales force to
implement the sales and marketing programs, (2) the ability of these programs
to stimulate demand for products, (3) the ability of the current sales force
to adapt to changes made in the sales organization and maintain adequate
customer coverage, (4) the implementation of productivity improvements in
manufacturing operations, (5) the ability to adapt output to meet changing
demand, (6) the successful installation and implementation of SAP and other
critical business transaction systems scheduled for the second half of this
year and (7) the need to respond to significant changes in product demand and
other unforeseen events.
The Company's ability to achieve the objectives discussed above will be
affected by external factors. These include pricing pressure and other
changes within competitive markets, the continued consolidation of customers
in consumer channels, increasing competition, changes in trade, monetary and
fiscal policies and laws, inflation, currency exchange fluctuations, the
impact of dollar/foreign currency exchange rates on the competitiveness of
products and recessionary or expansive trends in the economies of the world in
which the company operates.
Many statements contained in the discussion of the state of the company's Y2K
readiness are forward looking and are inherently subject to risk and
uncertainty. The nature, scope and cost of the company's Y2K project are
based on management's best estimates. These estimates are based in part on
information obtained from third parties (including customers, suppliers and
consultants hired to assist in the Y2K compliance program) and in part on
numerous assumptions regarding future events (including the ability of
software vendors to implement new operating systems or deliver upgrades and
repairs as promised, and the availability of new computer hardware and
consultants to meet the company's planned needs). Due to the level of
uncertainty inherent in Y2K analysis and the complexity of the remediation
activity, the company is unable to determine conclusively whether the
consequences of potential Y2K failures by either the company or its customers
and key suppliers will have a material impact on the company's results of
operations, liquidity or financial condition. It is likely, however, that if
the company is unable to complete its Y2K project as planned or if the
company's key suppliers and customers or a sizable number of its smaller
suppliers and customers fail to remediate their systems, this will have a
material adverse impact on the company's results of operations, liquidity and
financial condition. The company's Y2K project is expected to significantly
reduce the company's level of uncertainty about the Y2K problem, and to reduce
the likelihood of risk of interruptions to routine business operations.
-14-
PART II OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
(A) During the second fiscal quarter of 1999, options to purchase 63,548
shares of the Company's common stock at a purchase price of $24.60 per share
were subscribed to by 306 employees under the Company's U.K. Savings Related
Share Plan (the "Savings Plan"). In addition, 1,176 shares were issued to
certain participants under the Savings Plan. Under the Savings Plan, shares
are issued to employees who elect at the end of the five year savings period
or upon termination of employment to receive the accumulated savings in the
form of shares of the Company's stock rather than cash.
(B) Participation in the Savings Plan is offered to all employees of the
Company's subsidiaries in the United Kingdom.
(C) The total dollar value of the shares issued during the quarter was
$22,433.83.
Under the Savings Plan:
172 shares were issued at $15.5334 per share with an aggregate value of
$2,671.74.
574 shares were issued at $15.8834 per share with an aggregate value of
$9,117.07.
401 shares were issued at $24.15 per share with an aggregate value of
$9,684.15.
29 shares were issued at $33.1333 per share with an aggregate value of
$960.87.
(D) Neither the options nor the underlying shares have been registered in
reliance on an exemption from registration found in several no-action letters
issued by the Division of Corporation Finance of the Securities and Exchange
Commission. Registration is not required because the Company is a reporting
company under the Securities Exchange Act of 1934, its shares are actively
traded, the number of shares issuable under the Savings Plan is small relative
to the number of shares outstanding, all eligible employees are entitled to
participate, the shares are being issued in connection with the employees'
compensation, not in lieu of it and there is no negotiation between the
Company and the employee regarding the grant.
(E) Under the Savings Plan, employees are given the right to buy a specified
number of shares with the proceeds of a "Save-as-You-Earn" savings contract.
Under the savings contract, the employee authorizes 60 monthly deductions from
his or her paycheck. At the end of the five year period, the employee may
elect to (i) use all or a part of the accumulated savings to buy all or some
of the shares under the employee's options, (ii) leave the accumulated savings
with the financial institution that has custody of the funds for an additional
two years or (iii) take a cash distribution of the accumulated savings. The
option to purchase shares will lapse at the end of the five year period if not
exercised at that time.
-15-
Item 4. - Submission of Matters to a Vote of Security-Holders
(a) The Company's Annual Meeting was held on April 28, 1999.
(b) (i) The following directors were elected:
Shares Voted Shares
For Withheld Non-Votes
Stillman B. Brown 61,876,696 0 7,878,542
Mannie L. Jackson 61,774,437 0 7,980,800
Kathryn D. Wriston 61,892,402 0 7,862,835
(ii) Ernst & Young LLP was approved as the Company's independent
auditors by the following vote:
FOR 65,158,121 AGAINST 3,775,049
ABSTAIN 822,066 NOT VOTED 0
Item 5. - Other Information
At a meeting of the Board of Directors held on May 19, 1999, Ronald L. Newcomb
was elected Vice President, Operations of the Company and was designated an
"executive officer", as such term is defined in Rule 3b-7 under the Securities
Exchange Act of 1934 and as such term is used in Item 401(b) of Regulation S-
K, and as an "officer" for purposes of Section 16 of the Act.
At a meeting of the Board of Directors held on July 14, 1999, James M. Loree
was elected Vice President, Finance and Chief Financial Officer of the Company
and was designated an "executive officer", as such term is defined in Rule 3b-
7 under the Securities Exchange Act of 1934 and as such term is used in Item
401(b) of Regulation S-K, and as an "officer" for purposes of Section 16 of
the Act.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) See Exhibit Index on page 18.
(b) Reports on Form 8-K.
(1) Registrant filed a Current Report on Form 8-K, dated April
21, 1999, in respect of the Registrant's press release
announcing first quarter results.
(2) Registrant filed a Current Report on Form 8-K, dated April
28, 1999, which contained a letter to Stanley's Financial
Analysts summarizing the highlights of the annual meeting.
(3) Registrant filed a Current Report on Form 8-K, dated May 12,
1999, announcing the appointment of Ronald L. Newcomb as Vice
President, Operations.
(4) Registrant filed a Current Report on Form 8-K, dated June 22,
1999, announcing the appointment of James M. Loree as Chief
Financial Officer.
-16-
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: August 17, 1999 By: James M. Loree
James M. Loree
Vice President, Finance and
Chief Financial Officer
By: Theresa F. Yerkes
Theresa F. Yerkes
Vice President and
Controller (Chief Accounting
Officer)
-17-
EXHIBIT INDEX
EXHIBIT LIST
(10)(i) Engagement Letter, dated May 7, 1999 between The Stanley Works
and Ron Newcomb
(10)(ii) Engagement Letter, dated June 9, 1999 between The Stanley Works
and James Loree
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
-18-
Exhibit 10(i)
May 7, 1999
Mr. Ron Newcomb REVISED
364 Vista Glen Drive
Cincinnati, OH 45246
Dear Ron:
I am pleased to confirm our offer of the position of Vice President -
Operations, for the Stanley Works, reporting to me. Employment will
continue as long as mutually acceptable until December 31, 2001.
Employment may be extended beyond December 31, 2001 subject to written
agreement between the parties. The position is based in New Britain,
Connecticut.
Your base salary will be $250,000 per year, paid monthly. You will also
participate in the Corporate Management Incentive Compensation Program with
an incentive payout of $125,000 pro-rated for 1999, which is payable in
February 2000. The incentive is based on the performance of the Company as
defined in the MICP Revised Plan. You will also receive four weeks of
vacation per year.
On joining the Company, you will receive a grant of a 75,000 share stock
option under the terms of the 1990 Special Stock Option Plan. The Option
Purchase Price will be the price of the stock on the date of the Board of
Directors Meeting following your start date. One-third (25,000 shares) of
this option grant will vest and become exercisable 12 months following the
grant date, and two-thirds (50,000 shares) will vest and become exercisable
on December 31, 2001. You will also receive a grant of a 25,000-share
option in October 2000. The option purchase price will be set after the
October Board meeting. This option grant will vest and becomes exercisable
12 months following the grant date. In the event your employment is ended
on December 31, 2001 in accordance with this agreement, your vested stock
options may be exercised at any time until the expiration of its original
term. In addition, you will participate in our Long Term Performance Award
Plan at the senior level. The measurement period for this plan is the
three-year period from 2000 through 2002. Therefore, your payment if any
will be pro-rated based on the percentage of the targets achieved by
December 31, 2001.
As an Officer of The Stanley Works, your will participate in current and
future executive benefit programs including our Financial Planning Service,
Executive Life Insurance Program, and the Executive Physical Program. The
Company will also lease and insure a car for your use. You may select any
make and model up to a Fair Market Value of $60,000. Details of the
executive benefit programs are attached.
In addition, the Company's Employee Stock Purchase Program (ESPP) allows
you to purchase company stock up to 15% of your base pay annually (capped
at $25,000), at 15% below the market price. The Company's 401k Plan will
match 50% of employee contributions up to 7% of your pay. You will not
participate in any of the Company's Pension Plans.
Page 2
The commencement of employment is contingent upon our Medical Department
determining that you are physically suited for the duties of the position.
This includes a drug-screening test. Please contact Meg Rounds, at 860-
827-553998 to make the necessary arrangements.
In the event your employment is terminated by Stanley (except for willful
misconduct, gross negligence or insubordination) prior to December 31,
2001, the severance for such involuntary termination would include 26 weeks
base salary. In the event of such involuntary termination, you will have 8
months to exercise any options that were vested at the time of termination.
The Stanley Works Insurance plans become effective on the thirty-first day
of employment. They will be explained to you in detail on your first day
of employment. You can usually extend your existing medical coverage for a
limited period of time to cover any lapse between the plans.
Ron, this is the key role in driving competitiveness and customer
satisfaction throughout the Company. You will lead an organization that
will help make it happen. I am delighted that you are considering joining
our team. If you have any questions, please give me a call at 860-827-3990
or Mark Mathieu at 860-827-3818.
Best regards,
John Trani Ron Newcomb
- ------------- -------------
John Trani Ron Newcomb
Chairman & CEO
Enclosures: Deferred Compensation Plan (December 19, 1995)
1990 Stock Option Plan
Executive Life Insurance Program
Financial Planning Service
Senior Management Income Protection Plan
Executive Physical Program
Employee Benefits Booklet
Executive Car Program
Pre-employment Medical Forms
Exhibit 10(ii)
June 9, 1999
Mr. James Loree
22 Clarington Way
Barrington, IL 60010-6932
Dear Mr. Loree:
I am pleased to confirm our offer of the position of Chief Financial
Officer (CFO), for The Stanley Works, reporting to me. Employment will
continue as long as mutually acceptable. The position is based in New
Britain, Connecticut.
Your base salary will be $325,000 per year, paid monthly. You will also
participate in the Corporate Management Incentive Compensation Program with
an incentive payout of $225,000 guaranteed for 1999, which is payable in
February 2000. The incentive is based on the performance of the Company as
defined in the MICP. You will also receive four weeks of vacation per
year.
On joining the Company, you will receive a sign-on bonus of $70,000 (net)
and grant of a 150,000 - share stock option under the terms of the 1990
Special Stock Option Plan. The Option Purchase Price will be the price of
the stock on the date of the Board of Directors Meeting following your
start date. One-third of this option grant becomes exercisable 12 months
following the grant date, and one-third becomes excercisable 24 months
following the grant date, and the last third becomes exercisable 36 months
following the grant date. Starting in 2000, your stock options will be
targeted at the 40,000 level annually. On joining the Company, you will
also receive a grant of 80,000 restricted share units including dividend
equivalent rights on these units. Based on the current dividend payment
rate per share of $.86, the total annual dividend equivalent on the 80,000
units will equal $68,800. The shares underlying these units will be issued
to you per the attached schedule so long as you are still in Stanley's
employ. In addition, you will participate in our Long-Term Performance
Award Plan at the senior level. Payment of the plan will be made in
February 2003 for the 3-year measurement period beginning January 1, 2000
and ending December 31, 2002. Also, Stanley will match the payment you
would have received under the GE Long Term Plan ending December 31,1999.
Payment will be made, once confirmed, in February 2000.
As an Officer of The Stanley Works, you will participate in current and
future executive benefit programs including our Financial Planning Service,
Executive Life Insurance Program, and the Executive Physical Program.
The Company will also lease and insure a car for your use. You may select
any make and model up to a Fair Market Value of $60,000. Details of the
executive benefit programs are attached.
In addition, the Company's Employee Stock Purchase Program (ESPP) allows
you to purchase company stock up to 15% of your base pay annually (capped
at $25,000), at 15% below the market price. The Company's 401k Plan will
match 50% of employee contributions up to 7% of your pay, and you will have
Page 2
the choice of entering the Stanley Senior Executive Retirement Plan (SERP
enclosed) or you may elect to be treated as if you were still in the GE
Supplemental Plan, in which Stanley would honor the current terms of that
plan which would entitle you to benefits as of age 60.
The Company will cover the standard relocation costs associated with the
sale of your current home and the purchase of your new home in Connecticut.
In addition, the Company will provide you temporary living accommodations
until you are situated in your new home.
The commencement of employment is contingent upon our Medical Department
determining that you are physically suited for the duties of the position.
This includes a drug-screening test. Please contact Mark Mathieu, at 860-
827-3818 to make the necessary arrangements.
The Stanley Works Insurance plans become effective on the first day of the
month following your employment. They will be explained to you in detail
on your first day of employment. You can usually extend your existing
medical coverage for a limited period of time to eliminate any coverage
gap.
Jim, this is the key role in driving excellence throughout the Company.
You will lead a major effort that will help make it happen. I am delighted
that you are considering joining our team. If you have any questions,
please give me a call at 860-827-3990 or Mark Mathieu at 860-827-3818.
Please indicate your acceptance by signing below.
Best regards,
John Trani James M. Loree
- -------------- -----------------
John Trani James M. Loree
Chairman & CEO
Enclosures: Senior Executive Retirement Plan (SERP)
Deferred Compensation Plan (December 19, 1995)
1990 Stock Option Plan
Executive Life Insurance Program
Financial Planning Service
Executive Physical Program
Employee Benefits Booklet
Change of Control
Stanley Choice Account (40lk)
Employee Stock Purchase Plan
Relocation (Enhanced)
Exhibit 12
THE STANLEY WORKS AND SUBSIDIAIRES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(In Millions of Dollars)
SECOND QUARTER SIX MONTHS
1999 1998 1999 1998
------ ------ ------ ------
Earnings before income taxes $38.1 $67.5 $85.5 $125.7
Add: Interest expense 8.6 6.5 17.3 13.3
Portion of rents representative of
interest factor 3.7 2.9 7.5 5.8
Amortization of expense on long-
term debt - 0.1 0.1 0.1
------ ------ ------ ------
Income as adjusted $50.4 $77.0 $110.4 $144.9
====== ====== ====== ======
Fixed charges:
Interest expense $8.6 $6.5 $17.3 $13.3
Portion of rents representative of
interest factor 3.7 2.9 7.5 5.8
Amortization of expense on long-
term debt - 0.1 0.1 0.1
------ ------ ------ ------
Fixed charges $12.3 $9.5 $24.9 $19.2
====== ====== ====== ======
Ratio of earnings to fixed charges 4.10 8.11 4.43 7.55
====== ====== ====== ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Stanley Works and Subsidiaries Consolidated Balance Sheets and Statements of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 84,800
<SECURITIES> 0
<RECEIVABLES> 534,800
<ALLOWANCES> 0
<INVENTORY> 370,800
<CURRENT-ASSETS> 1,068,000
<PP&E> 1,184,100
<DEPRECIATION> 693,500
<TOTAL-ASSETS> 1,888,000
<CURRENT-LIABILITIES> 700,200
<BONDS> 298,700
0
0
<COMMON> 230,900
<OTHER-SE> 450,000
<TOTAL-LIABILITY-AND-EQUITY> 1,888,000
<SALES> 1,369,200
<TOTAL-REVENUES> 1,369,200
<CGS> 906,500
<TOTAL-COSTS> 906,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,900
<INCOME-PRETAX> 85,500
<INCOME-TAX> 29,900
<INCOME-CONTINUING> 55,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,600
<EPS-BASIC> .62
<EPS-DILUTED> .62
</TABLE>
