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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 28, 2002
COMMISSION FILE 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock--$2.50 Par Value per Share New York Stock Exchange
Pacific Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12-b of the Act)
Yes X No
----- ----
As of June 28, 2002 and February 28, 2003, the aggregate market values of voting
common equity held by non-affiliates of the registrant was $3,509,282,868 and
$2,242,523,117, respectively, based on the last reported respective sale prices
of the registrant's common stock on the New York Stock Exchange. On February 28,
2003, the registrant had 86,885,824 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the registrant's fiscal year are
incorporated by reference in Part III.
FORM 10-K
PART I
ITEM 1. BUSINESS.
1(a) GENERAL DEVELOPMENT OF BUSINESS.
(i) General. The Stanley Works ("Stanley" or the "Company") was founded in 1843
by Frederick T. Stanley and incorporated in 1852. Stanley is a worldwide
producer of tools and door products for professional, industrial and consumer
use. Stanley(R) is a brand recognized around the world for quality and value.
In 2002, Stanley had net sales of $2.6 billion and employed approximately 14,900
people worldwide. The Company's principal executive office is located at 1000
Stanley Drive, New Britain, Connecticut 06053 and its telephone number is (860)
225-5111.
(ii) Restructuring Activities. Information regarding the Company's restructuring
activities is incorporated herein by reference to the material captioned
"Restructuring Activities" in Item 7 and Note O of the Notes to Consolidated
Financial Statements in Item 8.
1(b) Financial Information About Segments. Financial information regarding the
Company's business segments is incorporated herein by reference to the material
captioned "Business Segment Results" in Item 7 and Note P of the Notes to
Consolidated Financial Statements in Item 8.
1(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company's operations are classified into two business segments: Tools and
Doors.
Tools.
The Tools segment manufactures and markets carpenters, mechanics, pneumatic and
hydraulic tools as well as tool sets. These products are distributed directly to
retailers (including home centers, mass merchants and retail lumber yards) and
end users as well as through third party distributors. Carpenters tools include
hand tools such as measuring instruments, planes, hammers, knives and blades,
screwdrivers, saws, garden tools, chisels, boring tools, masonry, tile and
drywall tools, as well as electronic stud sensors, levels, alignment tools and
elevation measuring systems. The Company markets its carpenters tools under the
Stanley(R), FatMax(R), MaxGrip(TM), Powerlock(R), IntelliTools(TM), Contractor
Grade(TM), Dynagrip(R), AccuScape(R) and Goldblatt(R) brands.
Mechanics tools include consumer, industrial and professional mechanics hand
tools, including wrenches, sockets, electronic diagnostic tools, tool boxes and
high-density industrial storage and retrieval systems. Mechanics tools are
marketed under the Stanley(R), Proto(R), Mac(R), Husky(R), Jensen(R), Vidmar(R),
ZAG(R) and Blackhawk(TM) brands.
Pneumatic tools include Bostitch(R) fastening tools and fasteners (nails and
staples) used for construction, remodeling, furniture making, pallet
manufacturing and consumer use and pneumatic air tools marketed under the
Stanley(R) brand (these are high performance, precision assembly tools,
controllers and systems for tightening threaded fasteners used chiefly by
vehicle manufacturers).
Hydraulic tools include Stanley(R) hand-held hydraulic tools used by
contractors, utilities, railroads and public works as well as LaBounty(R)
mounted demolition hammers and compactors designed to work on skid steer
loaders, mini-excavators, backhoes and large excavators.
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Doors.
The Doors segment manufactures and markets commercial and residential doors,
both automatic and manual, as well as closet doors and systems, home decor, door
locking systems, commercial and consumer hardware, security access control
systems and patient monitoring devices. Products in the Doors segment include
residential insulated steel, reinforced fiberglass and wood entrance door
systems, vinyl patio doors, mirrored closet doors and closet organizing systems,
automatic doors as well as related door hardware products ranging from hinges,
hasps, bolts and latches to shelf brackets and lock sets. Door products are
marketed under the Stanley(R), Magic-Door(R), WelcomeWatch(R),
Stanley-Acmetrack(TM), Monarch(TM), Acme(R), WanderGuard(R) , StanVision TM and
BEST(R) brands and are sold directly to end users and retailers as well as
through third party distributors.
Competition.
The Company competes on the basis of its reputation for product quality, its
well-known brands, its commitment to customer service and strong customer
relationships, the breadth of its product lines and its emphasis on product
innovation.
The Company encounters active competition in all of its businesses from both
larger and smaller companies that offer the same or similar products and
services or that produce different products appropriate for the same uses. The
Company has a large number of competitors; however, aside from a small number of
competitors in the consumer hand tool and consumer hardware business, who
produce a range of products somewhat comparable to the Company's, the majority
of its competitors compete only with respect to one or more individual products
or product lines within a particular line. The Company believes that it is one
of the largest manufacturers of hand tools in the world featuring a broader line
than any other toolmaker. The Company also believes that it is a leader in the
manufacture and sale of pneumatic fastening tools and related fasteners to the
construction, furniture and pallet industries as well as a leading manufacturer
of hand-held hydraulic tools used for heavy construction, railroads, utilities
and public works. In the Doors segment, the Company believes that it is a U.S.
leader in the manufacture and sale of insulated steel residential entrance doors
to the retail market, commercial hardware products, mirrored closet doors and
hardware for sliding, folding and pocket doors and the U.S. leader in the
manufacture, sale and installation of automatic sliding and swing powered doors.
Customers.
A substantial portion of the Company's products are sold through home centers
and mass merchant distribution channels in the U.S. In 2002, approximately 21%
of the Company's consolidated sales in the Tools and Doors segments collectively
were to one customer. Because a consolidation of retailers in the home center
and mass merchant distribution channel is occurring, these customers constitute
a growing percent of the Company's sales and are important to the Company's
operating results. While this consolidation and the domestic and international
expansion of these large retailers provide the Company with opportunities for
growth, the increasing size and importance of individual customers creates a
certain degree of exposure to potential volume loss. The loss of this one
customer as well as certain of the other larger home centers as customers would
have a material adverse effect on each of the Company's business segments until
either such customers are replaced or the Company makes the necessary
adjustments to compensate for the loss of business.
Despite the trend toward customer consolidation, the Company has a diversified
customer base and is seeking to broaden its customer base further in each
business segment by identifying and seeking new channels and customers that it
does not currently serve.
Raw Materials.
The Company's products are manufactured of steel and other metals, wood and
plastic. The raw materials required are available from a number of sources at
competitive prices and the Company has multi-year contracts with many of its key
suppliers. The Company has experienced no difficulties in obtaining supplies in
recent periods.
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Backlog.
At December 28, 2002, the Company had $134 million in unfilled orders compared
with approximately $168 million in unfilled orders at March 1, 2003. All of
these orders are reasonably expected to be filled within the current fiscal
year. Most customers place orders for immediate shipment and as a result, the
Company produces primarily for inventory, rather than to fill specific orders.
Patents and Trademarks.
Neither business segment is dependent, to any significant degree, on patents,
licenses, franchises or concessions and the loss of these patents, licenses,
franchises or concessions would not have a material adverse effect on either
business segment. The Company owns numerous patents, none of which are material
to the Company's operations as a whole. These patents expire from time to time
over the next 20 years. The Company holds licenses, franchises and concessions,
none of which individually or in the aggregate is material to the Company's
operations as a whole. These licenses, franchises and concessions vary in
duration from one to 20 years.
The Company has numerous trademarks that are used in its businesses worldwide.
The STANLEY(R) and STANLEY in a notched rectangle design trademarks are material
to both business segments. These well-known trademarks enjoy a reputation for
quality and value and are among the world's most trusted brand names. The
Company's tagline, "Make Something Great(TM)" is the centerpiece of the
Company's brand strategy for both segments. In the Tools segment, the
Bostitch(R), Powerlock(R), Tape Rule Case Design (Powerlock), LaBounty(R),
MAC(R), Proto(R), Jensen(R), Goldblatt(R), Husky(R), Vidmar(R) and Zag(R)
trademarks are also material to the business. In the Doors segment, BEST(R)
is also material to the business. The terms of these trademarks vary from
one to 20 years, with most trademarks being renewable indefinitely for like
terms.
Environmental Regulations.
The Company is subject to various environmental laws and regulations in the U.S.
and foreign countries where it has operations. Future laws and regulations are
expected to be increasingly stringent and will likely increase the Company's
expenditures related to environmental matters.
The Company is a party to a number of proceedings before federal and state
regulatory agencies relating to environmental remediation. Additionally, the
Company, along with many other companies, has been named as a potentially
responsible party ("PRP") in a number of administrative proceedings for the
remediation of various waste sites, including ten active Superfund sites.
Current laws potentially impose joint and several liabilities upon each PRP. In
assessing its potential liability at these sites, the Company has considered the
following: the solvency of the other PRP's, whether responsibility is being
disputed, the terms of existing agreements, experience at similar sites, and the
fact that its volumetric contribution at these sites is relatively small.
The Company's policy is to accrue environmental investigatory and remediation
costs for identified sites when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal
information that becomes available. As of December 28, 2002, the Company had
reserves of approximately $16.7 million, primarily for remediation activities
associated with Company-owned properties as well as for Superfund sites that are
probable and estimable.
The amount recorded for identified contingent liabilities is based on estimates.
Amounts recorded are reviewed periodically and adjusted to reflect additional
technical and legal information that becomes available. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
4
uncertainties in evaluating environmental exposures. Subject to the imprecision
in estimating future environmental costs, the Company does not expect that any
sum it may have to pay in connection with environmental matters in excess of the
amounts recorded will have a materially adverse effect on its consolidated
financial position, results of operations or liquidity.
Employees.
At December 28, 2002, the Company had approximately 14,900 employees, nearly
8,000 of whom were employed in the U.S. Approximately 10% of U.S. employees are
covered by collective bargaining agreements negotiated with 13 different local
labor unions who are, in turn, affiliated with approximately 6 different
international labor unions. The majority of the Company's hourly-paid and
weekly-paid employees outside the U.S. are not covered by collective bargaining
agreements. The Company's labor agreements in the U.S. expire in 2003, 2004 and
2005. There have been no significant interruptions or curtailments of the
Company's operations in recent years due to labor disputes. The Company believes
that its relationship with its employees is good.
1(d) Financial Information About Geographic Areas. Financial information
regarding the Company's geographic areas is incorporated herein by reference to
Note P of the Notes to Consolidated Financial Statements in Item 8.
1(e) Available Information. The Company's website is located at
http://www.Stanleyworks.com. (This URL is intended to be an inactive textual
reference only. It is not intended to be an active hyperlink to our website. The
information on our website is not, and is not intended to be, part of this Form
10-K and is not incorporated into this report by reference.) Stanley makes its
Forms 10-K, 10-Q, 8-K and amendments to each available free of charge on its
website as soon as reasonably practicable after filing them with the U.S.
Securities and Exchange Commission.
ITEM 2. PROPERTIES.
As of December 28, 2002, the Company and its subsidiaries owned or leased
facilities for manufacturing, distribution and sales offices in 17 states and 13
foreign countries. The Company believes that its facilities are suitable and
adequate for its business.
Material locations (over 50,000 square feet) owned by the Company and its
subsidiaries follow:
Tools
Phoenix, Arizona; Visalia, California; Clinton and New Britain, Connecticut;
Shelbyville, Indiana; Two Harbors, Minnesota; Hamlet and Sanford, North
Carolina; Columbus, Georgetown and Sabina, Ohio; Allentown, Pennsylvania; East
Greenwich, Rhode Island; Cheraw, South Carolina; Dallas and Wichita Falls,
Texas; Pittsfield, Vermont; Smiths Falls, Canada; Pecky, Czech Republic;
Northampton and Worsley, England; Besancon Cedex, France; Wieseth, Germany;
Chihuahua and Puebla, Mexico; Wroclaw, Poland; Taichung Hsien, Taiwan; and
Amphur Bangpakong, Thailand.
Doors
Chatsworth, California; Farmington and New Britain, Connecticut; Indianapolis,
Indiana; Richmond, Virginia; Brampton, Canada; Sheffield, England; Marquette,
France and Guang Dong, Peoples Republic of China.
Material locations (over 50,000 square feet) leased by the Company and its
subsidiaries follow:
Tools
New Britain, Connecticut; Miramar, Florida; Covington, Georgia; Fishers,
Indiana; Kannapolis, North Carolina; Highland Heights and Columbus, Ohio;
Milwaukie, Oregon; Somerton, Australia; Smiths Falls, Canada; Hellaby,
Sheffield, Ecclesfield, Northampton and Worsley, England; Izraelim, Israel; and
Biassono, Italy.
5
Doors
Tupelo, Mississippi; Charlotte, North Carolina; Winchester, Virginia; and
Langley and Oakville, Canada.
The aforementioned material properties not being used by the Company include:
Tools
Visalia, California (owned); New Britain, Connecticut (owned); Hamlet, North
Carolina (owned); Wichita Falls (owned), Texas; Northampton (owned), Worsley
(leased) and Ecclesfield England (leased).
Doors
Richmond, Virginia (owned).
ITEM 3. LEGAL PROCEEDINGS.
In June 2002, Stanley Canada Inc. received a letter from the Quebec Ministry of
the Environment indicating that groundwater contaminated with trichloroethene
and its breakdown products had been detected at or near the former Company
facility in Roxton Pond, Quebec. The Ministry claimed that the Company's former
operations were the source of the contamination and is seeking further
investigation and the sharing of certain costs. The Company has been working
cooperatively with the Ministry to negotiate a settlement.
On October 25, 2002, Stanley Mechanics Tools, Inc., The Stanley Works,
Stanley-Proto Industrial Tools, Inc. and certain other parties were served with
a Complaint in the Circuit Court of the State of Oregon for the County of
Clackamas by the City of Milwaukie, Oregon alleging that volatile organic
compounds from the former Company site in Milwaukie have contaminated certain
City water supplies. The City is seeking damages of approximately $4.84 million.
The Company believes that its liability at the site is limited because it
operated at the site for a short time, it has thorough documentation
demonstrating that it never used the compounds in question and there are several
other potentially responsible parties in the area.
The Company does not expect that the resolution of these matters will have a
materially adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 2002 to a vote of security
holders.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is listed and traded on the New York and Pacific
Stock Exchanges under the abbreviated ticker symbol "SWK," and is a component of
the S&P 500 Composite Stock Price Index. The Company's high and low quarterly
stock price on the NYSE for the years ended December 28, 2002 and December 29,
2001 follow:
2002 2001
------------------------------------------------- --------------------------------------------------
Market Price Range Dividend Market Price Range Dividend
--------------------------------- per common ------------------------------------ per common
HIGH LOW share HIGH LOW share
---- --- ----- ---- --- -----
QUARTER:
First $52.00 $40.23 $0.24 $38.35 $28.06 $0.23
Second $51.10 $39.15 $0.24 $41.99 $31.60 $0.23
Third $43.95 $29.90 $0.255 $45.80 $32.64 $0.24
Fourth $36.69 $27.31 $0.255 $46.85 $34.60 $0.24
------------- -------------
Total $0.99 $0.94
============= =============
As of December 28, 2002 there were 14,053 holders of record of the Company's
common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information should be read in conjunction with
the Consolidated Financial Statements and related Notes appearing elsewhere in
this Form 10-K (in millions of dollars, except per share amounts):
2002(A) 2001(B,F) 2000(F) 1999(C) 1998(D) 1997(E)
---- ---- ----- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Net sales $ 2,593 $ 2,607 $ 2,731 $ 2,752 $ 2,729 $ 2,670
Net earnings (loss) $ 185 $ 158 $ 194 $ 150 $ 138 $ (42)
Net earnings (loss) per share
Basic $ 2.14 $ 1.85 $ 2.22 $ 1.67 $ 1.54 $ (0.47)
Diluted $ 2.10 $ 1.81 $ 2.22 $ 1.67 $ 1.53 $ (0.47)
Percent of net sales:
Cost of sales 67.8% 65.3% 64.1% 65.9% 65.7% 66.8%
Selling, general and administrative 21.1% 22.1% 23.4% 25.5% 25.1% 23.5%
Interest-net 0.9% 1.0% 1.0% 1.0% 0.8% 0.6%
Other-net (0.3)% (0.2)% 0.7% (0.1)% 0.5% 0.8%
Earnings (loss) before income taxes 10.5% 9.1% 10.8% 8.4% 7.9% (0.7)%
Net earnings (loss) 7.1% 6.1% 7.1% 5.5% 5.1% (1.6)%
BALANCE SHEET DATA:
Total assets $ 2,418 $ 2,056 $ 1,885 $ 1,891 $ 1,933 $ 1,759
Long-term debt $ 564 $ 197 $ 249 $ 290 $ 345 $ 284
Shareowners' equity $ 984 $ 832 $ 737 $ 735 $ 669 $ 608
RATIOS:
Current ratio 1.7 1.4 1.5 1.6 1.5 1.6
Total debt to total capital 42.1% 37.3% 38.6% 37.8% 45.8% 40.5%
Income tax rate 32.1% 33.1% 34.0% 35.0% 36.0% (125.4)%
Return on average equity 20.4% 20.2% 26.4% 21.4% 21.6% (6.0)%
COMMON STOCK DATA:
Dividends per share $ 0.99 $ 0.94 $ 0.90 $ 0.87 $ 0.83 $ 0.77
Equity per share at year-end $11.33 $ 9.83 $ 8.65 $ 8.27 $ 7.54 $ 6.85
Market price-high $52.00 $ 46.85 $ 31 7/8 $ 35.00 $ 57 1/4 $ 47 3/8
Market price -low $27.31 $ 28.06 $ 18 7/16 $ 22.00 $ 23 1/2 $ 28.00
Average shares outstanding (in thousands)
Basic 86,453 85,761 87,407 89,626 89,408 89,470
Diluted 88,246 87,467 87,668 89,887 90,193 89,470
OTHER INFORMATION:
Average number of employees 13,198 14,514 16,297 16,890 18,319 18,377
Shareowners of record at end of year 14,053 15,290 16,014 16,947 17,963 18,503
(A) Includes the following: a $22.2 million, or $0.17 per share, charge related
to (1) a reassessment of Mac Tools' retail inventory and accounts
receivable valuations as a result of a new retail control system (2) an
inventory valuation adjustment in Fastening Systems associated with recent
cost estimation process improvements and (3) a fixed asset impairment
related primarily to domestic plant consolidation; an $8.4 million, or
$0.06 per share, charge for severance and related expenses associated with
selling, general and administrative reductions; an $18.4 million gain
associated with the final settlement of a U.S. defined benefit plan, which
resulted in a $0.06 per share gain. Also includes a $5.5 million income tax
credit, or $0.06 per share, related to a favorable foreign tax development
and $11.3 million, or $0.09 per share, in environmental income arising from
a settlement with an insurance carrier.
Includes $5.6 million, or $0.04 per share, of accounting corrections, as
discussed in Management's Discussion and Analysis in Item 7 of this Form
10-K.
(B) Includes restructuring-related charges and asset impairments of $72.4
million, or $0.58 per share; a gain of $29.3 million, or $0.22 per share
for a pension curtailment; $11.2 million in charges for business
repositionings and initiatives at Mac Tools, or $0.09 per share; $4.8
million , or $0.04 per share, in
8
severance charges; $3.4 million, or $0.04 per share, in credits for tax
benefits; and $6.4 million, or $0.05 per share, in certain inventory charges.
(C) Includes restructuring-related transition and other costs of $54.9 million,
or $0.40 per share; a net restructuring credit of $21.3 million, or $0.15
per share; a Mechanics Tools' charge of $20.1 million, or $0.14 per share;
and a gain realized upon the termination of a cross-currency financial
instrument of $11.4 million, or $0.08 per share.
(D) Includes restructuring-related transition and other costs of $85.9 million,
or $0.61 per share.
(E) Includes charges for restructuring and asset impairments of $238.5 million,
or $2.00 per share; related transition costs of $71.0 million, or $0.49 per
share; and a non-cash charge of $10.6 million, or $0.07 per share, for a
stock option grant as specified in the Company's employment contract with
its Chief Executive Officer.
(F) Net sales and selling, general and administrative (SG&A) expenses for 2001
and 2000 have been restated from prior published amounts in accordance with
an accounting pronouncement which requires the reclassification of certain
customer promotional payments previously reported in SG&A as a reduction of
revenue, as well as restatement of prior periods ($17.8 million
reclassification in 2001 and $18.3 million in 2000) for comparability
purposes. It is not practicable to determine the amounts prior to fiscal
2000.
Note: Earnings per share amounts within footnotes A through E above are net of
taxes and are on a diluted basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales were $2,593 million for 2002, as compared to $2,607 million in 2001, a
1% decrease. Sales in 2002 increased 2% from acquisitions, and 1% from the
translation of foreign currencies, which strengthened against the U.S. dollar.
Organic sales declined 4% principally due to the negative impact of the
Mechanics Tools plant consolidation, continued overall price erosion, and
ongoing weakness in industrial markets.
Net sales in 2001 of $2,607 million were down 5% as compared to 2000. The
Company experienced sales volume declines in the Tools segment due to softness
in the commercial and industrial markets. Sales in 2001 were also negatively
impacted, by approximately 1%, from the translation of foreign currencies, which
weakened against the U.S. dollar.
During 2002, the Company reported a second quarter U.S. pension settlement
pre-tax gain of $18 million. Also in the second quarter, the Company incurred $8
million in severance and related expenses associated with selling, general and
administrative (SG&A) cost reductions. In the third quarter, the Company
reported a $6 million income tax credit related to a favorable foreign tax
development. In the fourth quarter, the Company recorded $22 million in non-cash
charges for increased inventory and receivable loss provisions and for specific
manufacturing equipment impairments related to the following: (1) a reassessment
of Mac Tools inventory and accounts receivable valuations, as a result of a new
retail control system; (2) an inventory valuation adjustment in Fastening
Systems associated with recent cost estimation process improvements; and (3)
impairment of certain fixed assets related primarily to the Wichita Falls and
Dallas, Texas plants consolidation. Other significant credits in 2002 include
$11 million in environmental income arising from a settlement with an insurance
carrier recognized in the third and fourth quarters. These credits and charges
were classified within the 2002 Consolidated Statement of Operations as follows:
(i) cost of sales -- $13 million charge; (ii) SG&A expenses -- $10 million
charge; (iii) other-net -- $22 million credit; and (iv) income taxes -- $6
million credit. The tax benefit of these charges and credits was $12 million.
The audited Consolidated Financial Statements for the year ended December 28,
2002 include $5.6 million or $0.04 per share of accounting corrections. These
corrections relate primarily to expense
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capitalization and depreciation which arose in prior fiscal years and account
for the difference between earnings set forth in these financial statements and
unaudited amounts included in the Company's January 24, 2003 earnings release.
These costs were classified within the 2002 Consolidated Statement of Operations
as follows: (i) sales -- $0.5 million, (ii) cost of sales $4.4 million; and
(iii) other-net -- $0.7 million. Management believes that these corrections are
immaterial to any previously reported results of prior periods, but has recorded
them in the aggregate in the fourth quarter of the year ended December 28, 2002.
During 2001, the Company recorded charges related to restructuring initiatives
totaling $72 million ($18 incurred in the first quarter and $54 incurred in the
fourth quarter). These costs consisted primarily of severance and asset
impairments as the Company continued to rationalize its cost structure and
reduce employment. In addition, the Company incurred certain other significant
credits and charges during 2001. In the first quarter, the Company recorded a
pre-tax $29 million pension curtailment gain pertaining to its U.S. pension
plan. Also in the first quarter, the Company recorded $11 million of charges
related to several business repositionings. The repositionings were principally
in the Tools segment and related to the continuing movement of production,
permanent reduction of the overhead cost structure of its manufacturing system,
and a series of initiatives at Mac Tools. In the third quarter, the Company
recorded a charge of $5 million for severance costs incurred due to lower sales
volumes and the continuing weakness in the industrial markets. Also in the third
quarter, the Company recorded $3 million in special credits for tax benefits. In
the fourth quarter, the Company recorded a charge of $6 million for the
disposition of inventories associated principally with discontinued
manufacturing plants and stock-keeping-units (SKUs). These credits and charges
were classified as period income and expenses and were specifically classified
within the Consolidated Statement of Operations as follows: (i) sales -- $1
million charge; (ii) cost of sales -- $12 million charge; (iii) SG&A expenses --
$8 million charge; (iv) interest-net -- $0.2 million credit; (v) other-net --
$28 million credit; and (vi) income taxes -- $3 million credit. The tax benefit
of the restructuring charges and these other charges and credits amounted to $18
million.
10
Since significant credits and charges obscure underlying trends, the narrative
regarding results of operations and business segments has been expanded to
provide information as to the effects of these items on each financial statement
category.
In 2002, the Company reported gross profit of $836 million, or 32.2% of net
sales compared to $905 million or 34.7% of net sales in 2001. Included in gross
profit for 2002 were $13 million of fourth quarter charges related to Mac Tools
retail and Fastening Systems inventory as discussed previously. Gross profit in
2001 included $13 million of charges taken in the first and fourth quarters
related to business repositioning initiatives within the Tools segment and the
disposition of inventories principally from discontinued manufacturing plants
and SKUs. Gross profit before these costs amounted to $849 million or 32.7% of
net sales in 2002, and $918 million or 35.2% of net sales in 2001. The $69
million, or 250 basis point, decline in gross profit in 2002 is attributed to
the following issues, primarily within the Tools segment: (i) the costs
associated with the consolidation of two Mechanics Tools manufacturing plants,
related production inefficiencies and sales declines due to U.S. plant supply
chain problems; (ii) consumer business price erosion due to the continued
customer mix shift towards home centers and mass merchants; (iii) Fastening
Systems price erosion associated with intensified generic nail competition as
well as a strategy shift to large distributors and away from smaller customers;
(iv) a reduction in Last-In, First-Out (LIFO) related inventory benefit in 2002
versus 2001; (v) increased inventory loss provisions; (vi) and lower U.S.
pension income. These issues were offset, to some extent, by favorable material
and other productivity variances. Acquisitions contributed approximately $22
million to gross profit in 2002. The Company anticipates continued pricing
pressure in the foreseeable future due to continued supply-demand imbalances in
the market. The Company expects to recover a significant portion of the negative
impact to gross profit related to the Mechanics Tools plant consolidation in
2003.
In 2001, the Company reported gross profit of $905 million, or 34.7% of net
sales compared to $997 million or 36.3% of net sales in 2000. Excluding the
charges discussed previously, 2001 gross profit was $918 million or 35.2% of
sales. The reduction in gross profit was a result of a shift in sales mix to
retail and independent Mac Tools sales channels versus industrial and direct Mac
Tools sales channels, partially offset by $80 million in productivity
improvements. The Company experienced a LIFO reserve decline as the Company
continued to reduce its cost of manufacturing and product costs by moving
operations to low-cost countries. These LIFO benefits were offset by increases
in transportation costs and other inventory valuation reserves.
SG&A expenses were $547 million or 21.1% of net sales in 2002. This includes $10
million in charges from second quarter severance and related expenses ($8
million) and fourth quarter Mac Tools expenses ($2 million) discussed
previously. SG&A expenses in 2001 totaled $576 million or 22.1% of net sales
which included $8 million in charges ($3 million in the first quarter and $5
million in the third quarter) from business repositionings and additional
severance charges apart from the restructuring initiatives. Excluding these
items, SG&A expenses amounted to $537 million, or 20.7% of net sales in 2002, as
compared to $568 million, or 21.8% of net sales in 2001. The Company reduced
spending in many functions, particularly selling expenses in Mac Tools as a
result of lower retail distributor headcount. There was a $12 million decline in
the provision for doubtful accounts mainly attributable to a decrease in Mac
Tools provisions due to lower sales as compared with 2001 and the mix shift from
retail to wholesale sales which involve reduced credit risk. These favorable
items more than offset a decrease in net U.S. pension income in 2002.
SG&A expenses were $576 million, or 22.1% of net sales in 2001, as compared with
$638 million, or 23.4% of net sales in 2000. Excluding the charges previously
detailed, SG&A expenses were $568 million or 21.8% of net sales in 2001.
Improvements in 2001 SG&A expenses were 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.
11
Interest-net for 2002 was $25 million, down slightly from $26 million in 2001.
The decrease was a result of lower interest rates and weighted average debt
levels in 2002. Interest-net of $26 million in 2001 represented a small decrease
from $27 million in 2000 due to a decline in interest rates partially offset by
an increase in weighted average debt levels in 2001.
Other-net in 2002 was $8 million in income compared to $5 million of income in
2001. The 2002 amount includes an $18 million gain from the second quarter U.S.
pension settlement and $8 million in fourth quarter fixed asset impairment
losses. The third and fourth quarters of 2002 reflect $11 million in income from
an environmental settlement with an insurance carrier, which was offset by a $2
million increase in other environmental expense. The 2001 amount includes a $29
million U.S. pension plan curtailment gain and a charge of $2 million related to
Mac Tools business repositionings, both occurring in the first quarter of 2001.
There was no goodwill amortization expense in 2002, due to adoption of Statement
of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Intangible
Assets", while goodwill amortization was $8 million in 2001. Asset disposals
generated $1 million in gains in 2002 as compared to $1 million in losses in
2001. The Company expects non-cash intangibles amortization expense to increase
to approximately $10 million in 2003 based on preliminary acquisition purchase
accounting, as compared with $4 million in 2002.
Other-net represented $5 million of income in 2001 compared with $20 million
expense in 2000. Excluding the aforementioned pension curtailment gain of $29
million and charges of $2 million, 2001 other-net amounted to $22 million
expense.
The Company's effective income tax rate for 2002 was 32% as compared to 33% for
2001 and 34% for 2000. The tax rate decreases reflect the continued benefit of
organizational and operational changes during recent years that have generated a
higher percentage of taxable income in countries with lower statutory rates,
primarily in Europe, Israel, and the Far East. The third quarter of 2002
reflects a favorable foreign tax development that reduced income taxes by $6
million, which was offset by the impact of non-deductible excise tax associated
with the termination of the defined benefit pension plan.
In addition, the Company recorded a non-recurring tax benefit in the third
quarter of 2001 amounting to $3 million. These benefit items were entirely
offset by reduced tax benefits related to the restructuring and other charges.
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, and associated services, as well as closet
doors and systems, home decor, door locking systems, commercial and consumer
hardware.
Tools
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Net sales $ 1,954 $ 2,008 $ 2,129
Operating profit $ 208 $ 266 $ 286
% of Net sales 10.6% 13.2% 13.4%
Tools sales declined 2.7% in 2002 as compared to 2001. The sales decrease was
mainly the result of price erosion and unfavorable channel mix in several
businesses, and the Mechanics Tools plant consolidation previously mentioned,
offset by $23 million in higher sales from acquisitions. Tools operating profit
excluding the net impact of the charges allocated to the Tools segment totaling
$23 million in 2002 and $15 million in 2001, totaled $231 million or 11.8% of
net sales and $281 million or 14.0% of net sales, respectively. The $50 million
decline was primarily attributable to the previously detailed Mechanics Tools
domestic plant consolidation and internal product sourcing matters, price
concessions in the consumer and Fastening Systems businesses, lower LIFO related
inventory valuation change in 2002 as compared with 2001, and increased
inventory loss provisions. Cost structure improvements
12
including shifting production to low cost countries and SG&A cost reductions
were more than offset by the above items.
Tools sales decreased 6% in 2001 as compared to 2000. The sales decrease was
primarily the result of unit volume declines from the Mac Tools repositioning in
the first quarter of 2001 and weak industrial markets in North America. Also
contributing to the sales decline was the effect of foreign currency translation
as European currencies weakened against the U.S. dollar. Despite lower sales,
Tools operating profit as a percentage of net sales remained fairly static as
compared to 2000. Excluding the impact of $15 million in 2001 special charges
allocated to the Tools segment, operating profit was $281 million, or 13.9% of
net sales. The improvement in 2001 operating margin as a percentage of net sales
excluding special charges, was primarily a result of SG&A expense reductions.
Doors
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Net sales $ 639 $ 599 $ 602
Operating profit $ 81 $ 64 $ 55
% of Net sales 12.7% 10.7% 9.2%
Doors sales increased 6.7% in 2002, primarily due to the Best and Senior
Technologies acquisitions. Increases in Hardware and Access Technologies organic
sales were offset by declines in Home Decor. Operating profit was 12.7% of net
sales as compared to 10.7% for 2001. Acquired companies contributed $8 million
operating profit. The remaining increase in operating profit reflects favorable
production costs in low cost countries and lower SG&A expenses. Excluding the
impact of severance charges allocated to the Doors segment of $1 million in 2002
and $5 million in 2001, operating profit was $82 million or 12.8% of net sales
in 2002, compared to $69 million, or 11.5% of net sales in 2001.
Net sales for 2001 were fairly static, representing a decrease of less than 1%.
Strong sales attributable to a new program launch with a significant customer
were offset by sluggish market conditions in the Americas. Operating profit in
2001 was 10.7% of net sales compared to operating profit of 9.2% for 2000.
Excluding the impact of $5 million in charges allocated to the Doors segment in
2001, operating profit was $69 million, or 11.5% of sales. The improvement in
operating profit, as a percentage of sales, is a result of increased
productivity in the Hardware business as the Company shifted the production base
to low-cost countries, and the reduction of SG&A expenses.
RESTRUCTURING ACTIVITIES
In 2001, the Company undertook initiatives to reduce its cost structure and
executed several business repositionings intended to improve its
competitiveness. These actions resulted in the closure of 13 facilities and a
net employment reduction of approximately 2,200 production, selling and
administrative people. As a result, the Company recorded $72 million of
restructuring and asset impairment charges. Reserves were established for these
initiatives consisting of $55 million for severance, $10 million for asset
impairment charges and $7 million for other exit costs. The charges for asset
impairments were primarily related to manufacturing and other assets that were
retired and disposed of as a result of manufacturing facility closures.
At December 28, 2002 and December 29, 2001, restructuring and asset impairment
reserve balances were $2 million and $39 million, respectively. The December 29,
2001 balance reflects $6 million related to the impairment of assets. The
December 28, 2002 balance relates primarily to 2001 initiatives.
As of December 28, 2002, 86 manufacturing and distribution facilities had been
closed as a result of the restructuring initiatives since 1997. In 2002, 2001
and 2000, approximately 1,000, 2,100 and 900 employees have been terminated as a
result of restructuring initiatives, respectively. Severance payments of $26
million, $42 million and $29 million and other exit payments of $4 million, $4
million and $3 million were made in 2002, 2001 and 2000, respectively.
Write-offs of impaired assets were $6 million, $8 million and $7 million in
2002, 2001 and 2000, respectively.
13
In June 2002 and September 2001, $8 million and $5 million in severance charges
were recorded, respectively, as the Company continued to rationalize its
headcount to provide further SG&A expense reductions. These charges were
classified within SG&A expense in the Consolidated Statements of Operations.
These actions resulted in the termination of approximately 200 selling and
administrative employees in each year. As of December 28, 2002, no accrual
remained. The Company expects to continue restructuring activities in the future
primarily in connection with the movement of manufacturing or sourcing to low
cost countries and SG&A expense reductions.
In 2002, $6.4 million in restructuring reserves were established in purchase
accounting for the Best acquisition, due to planned closure of several Best
offices and synergies in certain centralized functions. The $6.4 million is
comprised of $5.3 million for severance and $1.1 million for other exit costs
primarily related to non-cancelable leases.
FINANCIAL CONDITION
LIQUIDITY, SOURCES AND USES OF CAPITAL
The Company's primary sources of liquidity are cash flows from operations and
borrowings under various credit facilities. The Company has historically
generated strong cash flows from operations. In 2002, cash flows from operations
were $285 million as compared to $222 million in 2001. In the second half of
2002, the Company received a gross pension settlement of $115 million; an
ongoing U.S. defined contribution plan was pre-funded with $29 million, and
excise and income taxes totaling $48 million were paid, providing a net $38
million cash inflow from the pension settlement. In the fourth quarter, one of
the Company's major customers changed its payment practices enabling
acceleration of accounts receivable collections by approximately $30 million.
Excluding the $38 million pension settlement and the $30 million impact of a
change in a major customer's payment practice, 2002 operating cash flows were
$217 million, consistent with 2001. Cash payments related to restructuring and
other charges of $42 million in 2002 were comparable to 2001.
During 2001, the Company generated $222 million in operating cash flow as
compared to $236 million in 2000. The decline in operating cash flows was
primarily the result of an increase in cash payments for restructuring in 2001
of $45 million as compared with $32 million in 2000.
Capital expenditures were $52 million in 2002 as compared to $73 million in
2001. The Company incurred higher capital expenditures in 2001 for "The Stanley
Learning Center" (a major addition at world headquarters for the training and
development of employees), investment in various plants including movement of
production to low cost countries, and increased costs for software development
and acquisitions as the Company expanded the infrastructure of its systems.
Capital expenditures were $73 million in 2001 as compared to $64 million in
2000.
In 2002, the Company received $338 million in net proceeds from issuance of
long-term debt, and disbursed $356 million for business acquisitions. The
Company made $154 million in payments on borrowings. These debt proceeds and
repayments, in addition to debt issuance costs and currency fluctuations,
resulted in a $220 million increase in the Company's short-term and long-term
borrowings.
The Company has unused short-(364 day) and long-term (multi-year) credit
arrangements with several banks to borrow up to $350 million at the lower of
prime or money market rates. Of this amount, $100 million is long-term. In
addition, the Company has short-term lines of credit with numerous foreign banks
aggregating $98 million, of which $87 million was available at December 28,
2002. Short-term arrangements are reviewed annually for renewal. Of the
long-term and short-term lines, $350 million is available to support the
Company's commercial paper program. In addition to these lines of credit, the
Company maintains a facility designed for the securitization of certain trade
accounts receivable for purposes of additional liquidity. As of December 28,
2002, the Company's maximum available funds under this arrangement were $106
million, of which the Company had utilized $33 million.
14
The Company also has numerous assets, predominantly vehicles and equipment,
under a one-year term renewable U.S. master personal property lease. Residual
value obligations, which approximate the fair value of the related assets, under
this master lease were $43 million at December 28, 2002. The Company does not
anticipate any material liabilities associated with these transactions.
The following summarizes the Company's significant contractual obligations and
commitments that impact its liquidity.
CONTRACTUAL OBLIGATIONS
Payments Due by Period
----------------------
(in millions) Total ( 1 year 1-3 yrs 4-5 yrs ) 5 yrs
Short-Term Borrowings $ 140.1 $ 140.1 $ - $ - $ -
Long-term Debt 573.8 9.5 128.3 226.1 209.9
Operating Leases 92.3 43.6 25.9 12.6 10.2
Unconditional Purchase
Commitments 60.7 49.9 8.0 2.8 -
Other Contractual
Obligations 31.3 16.3 5.0 5.0 5.0
Total Contractual
Cash Obligations $ 898.2 $ 259.4 $ 167.2 $ 246.5 $ 225.1
OTHER COMMERCIAL COMMITMENTS
Amounts of Commitments Expiration Per Period
--------------------------------------------
(in millions) Total ( 1 year 1-3 yrs 4-5 yrs ) 5 yrs
U.S. Lines of Credit $ 350.0 $250.0 $ - $ 100.0 $ -
International
Lines of Credit 87.0 87.0 - - -
Total Commercial
Commitments $ 437.0 $ 337.0 $ - $ 100.0 $ -
Short-term borrowings, long-term debt and lines of credit are explained in
detail within Note I Long Term Debt and Financing Arrangements of the Notes to
the Consolidated Financial Statements in Item 15 of this Form 10-K. Operating
leases and other commercial commitments are explained in detail in Note R of the
Consolidated Financial Statements in Item 15 of this Form 10-K.
The Company's objective is to increase dividends by approximately one-half the
Company's earnings growth rate, ultimately reaching a dividend payout ratio of
25%. Dividends increased 5.3% in 2002, 4.4% in 2001 and 3.5% in 2000. The
Company plans to use a significant portion of free cash flow (operating cash
flow less dividends and capital expenditures) to fund future acquisitions in
commercial and industrial markets.
The Company repurchased 4.3 million shares of its common stock in 2000. The net
effect was a decrease in equity of $111 million. These repurchases were funded
primarily by cash flow from operations. The Company may resume repurchase of its
shares as it deems appropriate.
MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company is exposed to market
risk from changes in foreign currency exchange rates and interest rates.
Exposure to foreign currency risk results because the Company, through its
global businesses, enters into transactions and makes investments denominated in
multiple currencies. The Company's predominant exposures are in European,
Canadian and Asian currencies. Certain cross-currency trade flows arising from
sales and procurement activities are consolidated prior to obtaining risk
15
protection, primarily purchased options. The Company is thus able to capitalize
on its global positioning by taking advantage of naturally offsetting exposures
to reduce the cost of purchasing protection. At times, the Company also enters
into forward exchange contracts and purchased options to reduce the earnings and
cash flow impact of non-functional currency denominated receivables and
payables, predominately intercompany transactions. Gains and losses from these
hedging instruments offset the gains or losses on the underlying net exposures,
assets and liabilities being hedged. Management determines the nature and extent
of currency hedging activities, and in certain cases, may elect to allow certain
currency exposures to remain unhedged. The Company has also entered into several
cross-currency interest rate swaps, primarily to reduce overall borrowing costs,
but also to provide a partial hedge of the net investments in certain
subsidiaries. Sensitivity to foreign currency exposure risk from these financial
instruments at the end of 2002 would have been immaterial based on the potential
loss in fair value from a hypothetical 10% adverse movement in all currencies.
The Company's exposure to interest rate risk results from its outstanding debt
obligations, short-term investments and derivative financial instruments
employed in the management of its debt portfolio. The debt portfolio is managed
to achieve capital structure targets and reduce the overall cost of borrowing by
using a combination of fixed and floating rate debt as well as interest rate
swaps, caps and cross-currency interest rate swaps. The Company's primary
exposure to interest rate risk comes from its floating rate debt in the U.S.,
Canada and Europe and is fairly represented by changes in LIBOR rates. At
December 28, 2002, the result of a hypothetical one percentage point increase in
short-term LIBOR rates would not have resulted in a material impact on the
pre-tax profit of the Company.
Fluctuations in the fair value of the Company's common stock affect ESOP expense
as well as diluted shares outstanding as discussed in the U.S. Pension and ESOP,
and Off-Balance Sheet Arrangements (Equity Hedge) sections of Management
Discussion and Analysis, respectively.
The Company has access to financial resources and borrowing capabilities around
the world. There are no material instruments within the debt structure that
would accelerate payment requirements due to a change in credit rating, and no
significantly restrictive covenants. The Company believes that its strong
financial position, operating cash flows and borrowing capacity provide the
financial flexibility necessary to continue its record of annual dividend
payments, to invest in the routine needs of its businesses, to make strategic
acquisitions and to fund other initiatives encompassed by its growth strategy.
OTHER MATTERS
ENVIRONMENTAL The Company incurs costs related to environmental issues as a
result of various laws and regulations governing current operations as well as
the remediation of previously contaminated sites. Future laws and regulations
are expected to be increasingly stringent and will likely increase the Company's
expenditures related to routine environmental matters.
The Company accrues for anticipated costs associated with investigatory and
remediation efforts in accordance with appropriate accounting guidelines which
address probability and the ability to reasonably estimate future costs. The
liabilities are reassessed whenever circumstances become better defined or
remediation efforts and their costs can be better estimated. Subject to the
imprecision in estimating future environmental costs, the Company believes that
any sum it may pay in connection with environmental matters in excess of the
amounts recorded will not have a materially adverse effect on its financial
position, results of operations or liquidity. Refer to Note T Contingencies of
the Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K
for further information on environmental liabilities and related cash flows.
U.S. PENSION AND ESOP In June 2002, the Company recorded an $18 million pre-tax
pension settlement gain in other-net. This involved the termination and
settlement of the primary U.S. salaried employee plan as well as settlement of
most of the liabilities in the ongoing plan for hourly employees. In addition to
the settlement gain, the Company recorded $8 million of operating income related
to these plans in 2002, whereas in 2003 the ongoing hourly plan will reflect
approximately $2 million in expense.
16
As detailed in Note M Employee Benefit Plans to the Consolidated Financial
Statements in Item 15 of this Form 10-K, the Company has an Employee Stock
Ownership Plan (ESOP) under which the ongoing U.S. defined contribution and
401(k) plans are funded. Overall ESOP expense is affected by the market value of
Stanley stock on the monthly dates when shares are released. In 2002, the market
value of shares released averaged $39.62 per share and the net ESOP expense was
negligible. In the event the market value of Stanley stock on the 2003 ESOP
share release dates is below the $39.62 2002 average, the net ESOP expense will
increase.
The Company provides a 5% guaranteed rate of return on participant contributions
made to the tax deferred savings plan (401K) prior to July 1998 when all
contributions were invested in Stanley common stock. The value of the shares
participants purchased prior to July 1998 along with the 5% cumulative
guaranteed rate of return on Stanley common stock is known as an Investment
Protection Account (IPA). Beginning in July 1998 the investment options for plan
participant contributions were enhanced to include a variety of investment funds
in addition to the Company's common stock, and there is no guaranteed rate of
return to participants on any contributions made after that time. The IPA
guarantee for participants who are not considered highly compensated is now
included in the actuarial valuation of an ongoing U.S. pension plan. Payments
related to the IPA guarantees, if they have any value, would be made to
participants over a period of many years, generally commencing with retirement.
In the event the market value of Stanley common stock declines, additional costs
may be triggered by the IPA benefit guarantee.
NEW ACCOUNTING STANDARDS
Refer to Note A Significant Accounting Policies of the Notes to the Consolidated
Financial Statements in Item 15 of this Form 10-K for a discussion of new
accounting pronouncements and the potential impact to the Company's consolidated
results of operations and financial position.
CRITICAL ACCOUNTING ESTIMATES Preparation of the Company's financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Significant accounting
policies used in the preparation of the Consolidated Financial Statements in
Item 15 of this Form 10-K are described in Note A Significant Accounting
Policies thereto. Management believes the most complex and sensitive judgments,
because of their significance to the Consolidated Financial Statements, result
primarily from the need to make estimates about the effects of matters with
inherent uncertainty. The most significant areas involving management estimates
are described below. Actual results in these areas could differ from
management's estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS Stanley's estimate for its allowance for
doubtful accounts related to trade receivables is based on two methods. The
amounts calculated from each of these methods are combined to determine the
total amount reserved. First, the Company evaluates specific accounts where
information indicates the customers may have an inability to meet financial
obligations, such as bankruptcy. In these cases, the Company uses its judgment,
based on the best available facts and circumstances, to record a specific
reserve for those customers against amounts due to reduce the receivable to the
amount expected to be collected. These specific reserves are reevaluated and
adjusted as additional information is received. Second, a general reserve is
established for all customers based on a range of percentages applied to
receivables aging categories. These percentages are based on historical
collection and write-off experience.
If circumstances change, for example higher than expected defaults or a material
adverse change in a major customer's ability to meet its financial obligation to
the Company, estimates of the recoverability of receivable amounts due could be
reduced.
In addition, Mac Tools retail related receivables, $43 million, net, at December
28, 2002, are comprised of thousands of high credit risk, individually small,
accounts. While some customers remit payments by mail, to a large extent these
receivables are collected by distributors in direct contact with customers on
truck routes, and by outside collection agencies on certain open routes and
delinquent accounts. The Company continues to reduce the number of Mac Tools
employee distributors who support the retail channel of the
17
business, and increase the number of wholesale non-employee distributors. This
retail to wholesale mix shift in the Mac Tools business has an inherent positive
impact on the asset quality going forward but increases the collection risk of
these Mac Tools retail related receivables. Realization of these receivables is
dependent upon information systems and effective management of collection
efforts by distributors and outside agencies.
INVENTORIES - LOWER OF COST OR MARKET, SLOW MOVING AND OBSOLETE U.S. inventories
are valued at the lower of LIFO cost or market. The calculation of LIFO
reserves, and therefore the net inventory valuation, is affected by inflation
and deflation in inventory components. The Company ensures all inventory is
valued at the lower of cost or market, and continually reviews the book value of
discontinued product lines and SKUs to determine if these items are properly
valued. The Company identifies these inventories and assesses the ability to
dispose of them at a price greater than cost. If it is determined that cost is
less than market value, then cost is used for inventory valuation. If market
value is less than cost, then the Company writes down the related inventory to
that value. If a write down to the current market value is necessary, the market
value cannot be greater than the net realizable value, or ceiling (defined as
selling price less costs to complete and dispose), and cannot be lower than the
net realizable value less a normal profit margin, also called the floor. The
Company also continually evaluates the composition of its inventory and
identifies slow-moving inventories. Inventory items identified as slow-moving
are evaluated to determine if reserves are required. Generally, the Company does
not experience significant issues with obsolete inventory due to the nature of
its products. If the Company is not able to achieve its expectations regarding
net realizable value of inventory at its current value, reserves would have to
be adjusted accordingly.
GOODWILL AND INTANGIBLE ASSETS The Company completed acquisitions in 2002 valued
at $359 million. The assets and liabilities of acquired businesses are recorded
under the purchase method at their fair values at the date of acquisition.
Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. The Company had recorded goodwill of $348
million at December 28, 2002 and $216 million at December 29, 2001.
In accordance with SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives are not amortized, but are subject to annual impairment
testing. The identification and measurement of goodwill and unamortized
intangibles impairment involves the estimation of the fair value of reporting
units. The estimates of fair value of reporting units are based on the best
information available at the date of assessment, which primarily incorporate
management assumptions about future cash flows. Future cash flows can be
affected by changes in industry or market conditions or the rate and extent to
which anticipated synergies or cost savings are realized with newly acquired
entities. While the Company has not recorded intangibles impairment losses in
several years, it is possible impairments may occur in the future in the event
expected cash flows change significantly. Specifically, the Fastening Systems
reporting unit is experiencing margin declines due primarily to the intensified
generic nail competition and industrial channel movement to large distributors.
Fastening Systems had $33 million of recorded goodwill at December 28, 2002.
There is potential for future goodwill impairment losses if Fastening Systems
projected profits and cash flows continue to decline. See Note G Goodwill and
Other Intangible Assets of the Notes to the Consolidated Financial Statements in
Item 15 of this Form 10-K for further discussion.
PROPERTY, PLANT AND EQUIPMENT (PP&E) The Company generally values PP&E at
historical cost less accumulated depreciation. Impairment losses are recorded
when indicators of impairment, such as plant closures, are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount. The Company assesses whether machinery and equipment can be
used at other facilities and if not, estimates the proceeds to be realized upon
sale of the assets. The impairment loss is then quantified by comparing the
carrying amount of the assets to the weighted average discounted cash flows,
which consider various possible outcomes for the disposition of the assets.
Primarily as a result of plant rationalization, certain facilities and equipment
are not currently used in operations. The Company has recorded impairment losses
related to unused assets and such losses may potentially occur in the future.
18
The Company initiated a worldwide PP&E physical inventory in 2002 which is
expected to be complete in 2003. Upon completion of this physical inventory, it
is possible losses may be detected.
RISK INSURANCE To some extent, the Company self insures for various business
exposures. For domestic workers compensation and product liability, the Company
generally purchases outside insurance coverage only for catastrophic losses
("stop loss" insurance). The two risk areas involving the most significant
accounting estimates are workers compensation and product liability (liability
for alleged injuries associated with the Company's products). Actuarial
valuations performed by an outside risk insurance expert form the basis for
workers compensation and product liability loss reserves recorded. The actuary
contemplates the Company's specific loss history, actual claims reported, and
industry trends among statistical and other factors to determine the range of
estimated reserve required. Risk insurance reserves are comprised of specific
reserves for individual claims and additional amounts expected for development
of these claims as well as for incurred but not yet reported claims. The
specific reserves for individual known claims are quantified by third party
administrator specialists (insurance companies) for workers compensation and by
in-house legal counsel in consultation with outside attorneys for product
liability. The cash outflows related to risk insurance claims are expected to
occur over approximately 8 to 10 years, and the present value of expected claim
payments is reserved. The Company believes the liability recorded for such risk
insurance reserves as of December 28, 2002 is adequate, but due to judgments
inherent in the reserve process it is possible the ultimate costs will differ
from this estimate.
FREIGHT ACCRUAL As a result of the continued movement of U.S. based
manufacturing operations to low cost country manufacturing and outsourcing, the
Company has experienced increased transportation costs over the past three
years, as well as increased complexity in the accrual estimation process for
these costs. The Company's accrual estimation methodology is based on data from
a third party transportation administrator and historical trends or lag factors
applied to such underlying data.
OFF-BALANCE SHEET ARRANGEMENTS The Company's off-balance sheet arrangements
include the following:
RECEIVABLE SECURITIZATIONS The Company has agreements to sell, on a revolving
basis, pools of accounts and notes receivables to two Qualified Special Purpose
Entities (QSPEs), which qualify to be accounted for as unconsolidated
subsidiaries. The entities are designed to facilitate the securitization of
certain trade accounts receivable, are used to fund the Mac Advantage financing
program as well as provide long-term secured financing to Mac Tools
distributors, and as an additional source of liquidity. Assets and related debt
off-balance sheet were $98 and $77 million at December 28, 2002 and $85 and $64
million at December 29, 2001, respectively. The Company is responsible for
servicing these accounts and receives a servicing fee, while the QSPEs bear the
risk of noncollection. The proceeds from sales of eligible receivables to QSPEs
were $80 million in 2002 and $81 million in 2001. There were no gains or losses
on these sales.
At December 28, 2002, the Company has a $23 million long-term investment in the
QSPEs. In the event the QSPEs incur future losses, this investment would be
written down with associated losses reflected in the Consolidated Statements of
Operations. As of December 28, 2002 and December 29, 2001, the Company had $32
million and $25 million, respectively, in receivables due from the Mac Tools
related QSPE.
STANLEY COMMON STOCK EQUITY HEDGE The Company has $213 million in equity forward
contracts with major U.S. financial institutions, of which $175 million matures
on December 31, 2003 and $38 million on September 24, 2004. The equity forwards
on Stanley common shares are designed to partially hedge the dilutive effect on
earnings per share of "in-the-money" stock options as the stock price
fluctuates, and to reduce potential cash outflow for the repurchase of the
Company's stock to offset option exercises. The structure requires interim
quarterly net share settlement, and is accounted for within equity. Cash
settlements may be elected at the option of the Company. The Company has
historically made no cash settlement elections.
19
The equity forward contracts contain registration event triggers applicable if
the Company's credit rating is downgraded to BBB and Baa2 as determined by
Standard & Poor's Rating Service and Moody's Investor Services, respectively. A
registration event requires the Company to make its best effort to register the
shares under the hedge. In addition the equity forward contracts contain unwind
triggers commencing when the Company's stock price declines below $19 to $15 per
share varying by contract (a weighted average of $16.73), or its credit rating
is downgraded to BBB- and Baa3 as determined by Standard & Poor's Rating Service
and Moody's Investor Services, respectively. In the event of an unwind caused by
share price decline or a credit rating downgrade, the Company is obligated to
make its best efforts to register shares under the hedge. The Company, as its
liquidity permits, may elect to repurchase shares from the counterparties, who
are otherwise entitled to sell these shares into the market.
If the stock price declines, the Company may issue shares to the counterparties
that exceed the favorable offset of stock options coming "out-of-the-money"
resulting in dilution of earnings per share. The Company delivered 1,338,708
shares of common stock with a market value of $47 million ($42 million book
value) from quarterly net share settlements in 2002. In 2001, the Company
received 1,432,264 shares of common stock with a market value and book value of
$67 million from settlements. The following chart summarizes hypothetical net
share settlements occurring at various Stanley common stock prices, assuming the
final 2002 quarterly interim settlement share price of $34.83, or 6.1 million
underlying shares, as the starting point.
Incr (Decr) in Equity Hedge Net Diluted Shares
Share Diluted Shares Settlement Shares Outstanding
price from Options Delivered (Received) Increase (Decrease)
$ 20 (1,302,128) 4,541,149 3,239,021
$ 30 (651,273) 986,010 334,737
$ 40 612,801 (791,564) (178,763)
The accounting treatment on the equity forward contracts is expected to change
in the third quarter of 2003 based on an exposure draft issued by the Financial
Accounting Standards Board (FASB). Currently, activity on the equity hedge is
accounted for entirely within equity whereas under the proposed new rules "mark
to market" accounting will be required. The rule change, if enacted, would mean
gains and losses related to fair value of the shares delivered or received under
the quarterly interim share settlements would be reported in the Company's
income statement. In addition, the proposed rule changes may require the Company
to report the $213 million notional amount of the equity forward contracts as
debt. The Company is evaluating various alternatives including maintainance,
modification, and termination of its equity hedge program but has not decided on
any course of action.
SYNTHETIC LEASES The Company is a party to synthetic leasing programs for two of
its major distribution centers. The leases are designed and qualify as operating
leases for accounting purposes, where only the monthly lease amount is recorded
in the income statement and the liability and value of underlying assets are
off-balance sheet. The reasons for these programs are primarily to reduce
overall cost and to retain flexibility. As of December 28, 2002, the estimated
fair values of assets and remaining obligations for these two properties were
$34 million and $24 million, respectively. FASB Interpretation No. (FIN) 46
"Consolidation of Variable Interest Entities" will affect the accounting for one
of these synthetic leases in the third quarter of 2003. Upon adoption of FIN 46,
$17 million in assets and $11 million in obligations for one of the properties
under synthetic leases will be reflected in the Consolidated Balance Sheets. The
Company is considering various alternatives to change the lease structure but
has not determined a course of action.
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The statements contained in this Annual Report to shareowners regarding the
Company's ability (i) to generate cash and realize outstanding receivables, (ii)
to increase shareowner returns and dividends, (iii) to improve its brand, (iv)
to maintain or increase sales and gain retail share, (v) to reduce its cost
structure, restructure and continue productivity gains, including the reduction
of facilities and employees,
20
and improve competitiveness, (vi) to recover a significant portion of the
negative impact to gross profit of the Mechanics Tools plant consolidation and
(vii) to maintain the level of ongoing expense of the hourly pension plan are
forward looking and inherently subject to risk and uncertainty.
The Company's ability to generate cash, increase shareowner returns and
dividends and maintain or increase sales and gain retail share is dependent on
both internal and external factors, including (i) the success of the Company's
efforts to redress production problems in its Mechanics Tools business, (ii) the
success of the Company's marketing and sales efforts, (iii) the continued
success of initiatives with The Home Depot, Lowe's and WalMart, (iv) continuing
improvements in productivity and cost reductions, including inventory
reductions, continued improvement in the payment terms under which the Company
buys and sells goods, materials and product and continued reduction of SG&A
expenses as a percentage of sales, (v) the ability of the sales force to adapt
to changes made in the sales organization and achieve adequate customer
coverage, (vi) the absence of increased pricing pressures from customers and
competitors and the ability to defend market share in the face of price
competition, (vii) the acceptance of the Company's new products in the
marketplace as well as the ability to satisfy demand for these products, (viii)
the successful integration of the Company's recent acquisitions (ix) outcomes of
pending and future litigation and (x) the strength of the United States economy
and the relative strength of foreign currencies, including, without limitation,
the Euro and the Taiwan dollar. Additionally, the realization of Mac Tools
retail receivables in particular is dependent upon information systems and
effective management of collection efforts by distributors and outside agencies
pertaining to covered and open routes.
The Company's ability to improve its brand is dependent upon a number of
factors, including the success of the marketing efforts of the Company and its
customers and the success and acceptance of the Company's new products.
The Company's ability to reduce its cost structure, restructure and continue
productivity gains, including the reduction of facilities and employees, and
improve competitiveness is dependent on the success of various initiatives that
are underway or are being developed to improve manufacturing and sales
operations and to implement related control systems, which initiatives include
certain facility closures and related workforce reductions expected to be
completed in 2003. The success of these initiatives is dependent on the
Company's ability to increase the efficiency of its routine business processes,
to develop and implement process control systems, to mitigate the effects of any
material cost inflation, to develop and execute comprehensive plans for facility
consolidations, the availability of vendors to perform outsourced functions, 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 while any facility consolidation is in process and
other unforeseen events.
The Company's ability to recover a significant portion of the negative impact to
gross profit related to flawed execution in Mechanics Tools consolidations is
dependent on the continued ability of the affected facilities to maintain
current production rates, the successful integration and performance of new
Mechanics Tools operations and management personnel and processes and the
successful recovery of demand for Mac and Mechanics Tools products affected by
the aforementioned flawed execution.
The Company's ability to maintain the level of ongoing expense of the hourly
pension plan is dependent on the Company's employment levels and interest rates.
The Company's ability to achieve the objectives discussed above will also be
affected by other external factors. These external factors include pricing
pressure and other changes within competitive markets, the continued
consolidation of customers in consumer channels, inventory management pressures
on the Company's customers, 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, the impact of events that cause or may cause disruption in the
Company's distribution and sales networks such as the recent closure of ports on
the West Coast, the events of
21
September 11, 2001, war, political unrest and recessionary or expansive trends
in the economies of the world in which the Company operates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company incorporates by reference the material captioned "Market Risk" in
Item 7 and the material in Note J of the Notes to Consolidated Financial
Statements in Item 15 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15 for an index to Financial Statements and Financial Statement
Schedules. Such Financial Statements and Financial Statement Schedule are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Items 401 and 405 of Regulation S-K, except for Item
401 with respect to the executive officers as described below, is incorporated
herein by reference to the information set forth in the section of the Company's
definitive proxy statement (which will be filed pursuant to Regulation 14A under
the Exchange Act within 120 days after the close of the Company's fiscal year)
entitled Information Concerning Nominees for Election as Directors and
Information Concerning Directors Continuing in Office under the following
subsection Item 1 - Election of Directors.
Executive Officers
The following is a list of the executive officers of the Company as of December
28, 2002:
Name, Age
(as of 12/28/02) Elected
Birth date Office to Office
- ---------- ------ ---------
J.M. Trani (57) Chairman and Chief Executive Officer. 12/31/96
(03/15/45) Joined Stanley December 1996;
President and Chief Executive
Officer of GE Medical Systems (1986).
B.H. Beatt (50) Vice President, General Counsel and 10/09/00
(07/24/52) Secretary. Joined Stanley October 2000;
Vice President, General Counsel
and Secretary, Dexter Corporation (1991).
J. H. Garlock Jr. (48) Vice President, Stanley October 2002, 10/28/02
(06/05/54) President, Stanley Fastening Systems.
Joined Stanley September 2000 as President, Stanley
Doors; President, Porter Cable corporation (1997).
P.E. Haviland (48) Vice President, Corporate Planning and 10/16/02
(07/23/54) Development. Joined Stanley September
2002. Vice President, Corporate
Development, Exelon Corporation (1998);
Senior Vice President, Planning and
Administration, Bovis Incorporated (1993).
23
W.D. Hill (53) Vice President, Engineering. 09/17/97
(09/18/49) Joined Stanley August 1997; Director
Product Management-Tool Group, Danaher Tool (1996);
Vice President, Product Development Global
Accessories, The Black & Decker Corporation (1994).
P.M.Isabella (47) Vice President - Operations. 10/18/01
(10/14/55) Joined Stanley May 1999; January
1998, Vice President Operations, GE
Industrial Systems; January 1995,
General Manager Switchgear/Busway
Operation.
K.O. Lewis (49) Vice President, Marketing and Brand 11/03/97
(5/28/53) Development. Joined Stanley November
1997; Executive Vice President
Strategic Alliances, Marvel Entertainment
Group (1996); Director Participant Marketing,
Walt Disney Attractions (1986).
J.M. Loree (44) Executive Vice President, September 2002, 07/19/99
(06/14/58) and Chief Financial Officer. Joined Stanley
July 1999; Vice President, Finance & Strategic
Planning, GE Capital Auto Financial Services (1997);
President & Chief Executive Officer, GE Capital
Modular Space (1995).
M.J. Mathieu (50) Vice President, Human Resources. 09/17/97
(02/20/52) Joined Stanley September 1997;
Manager-Human Resources, GE Motors & Industrial
Systems (1996); Consultant-Executive Staffing,
General Electric Company (1994).
D.R. McIlnay(52) President, Consumer Sales Americas. 10/04/99
(06/11/50) Joined Stanley October 1999;
President & Chief Executive Officer, The
Gibson-Homans Company (1997); President, Levolor Home
Fashions, a Newell Company (1993).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 402 of Regulation S-K is incorporated herein by
reference to the information set forth under the section entitled Executive
Compensation of the Company's definitive proxy statement, which will be filed
pursuant to Regulation 14A under the Exchange Act within 120 days after the
close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 403 of Regulation S-K, except for the equity
compensation plan information that follows, is incorporated herein by reference
to the information set forth under the sections entitled Security Ownership and
Executive Compensation of the Company's definitive proxy statement, which will
be filed pursuant to Regulation 14A under the Exchange Act within 120 days after
the close of the Company's fiscal year.
24
EQUITY COMPENSATION PLAN INFORMATION
Compensation plans under which the Company's equity securities are authorized
for issuance at December 28, 2002 follow:
- ------------------------------- ---------------------------- ------------------------- -------------------------------
(A) (B) (C)
- ------------------------------- ---------------------------- ------------------------- -------------------------------
PLAN CATEGORY Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options and outstanding options and future issuance under equity
restricted stock shares restricted stock shares compensation plans (excluding
securities reflected in
column (A))
- ------------------------------- ---------------------------- ------------------------- -------------------------------
Equity compensation plans
approved by security holders 11,009,696 $ 30.06 22,699,966
- ------------------------------- ---------------------------- ------------------------- -------------------------------
Equity compensation plans not
approved by security holders (a) (a) (a)
- ------------------------------- ---------------------------- ------------------------- -------------------------------
Total 11,009,696 $ 30.06 22,699,966
- ------------------------------- ---------------------------- ------------------------- -------------------------------
(a) There is a non-qualified deferred tax savings plan for highly compensated
salaried employees which mirrors the qualified plan provisions but was not
specifically approved by security holders. U.S. employees are eligible to
contribute from 1% to 15% of their salary to a tax deferred savings plan as
described in the Employee Stock Ownership Plan (ESOP) section of Item 15
Note M Employee Benefit Plans to the consolidated financial statements. The
Company contributes an amount equal to one-half of the employee
contribution up to the first 7% of their salary, all of which is invested
in Stanley common stock for qualified employees. The same matching
arrangement is provided for highly compensated salaried employees in the
"non-qualified" plan, except that the arrangement for these employees is
outside of the ESOP, and is not funded in advance of distributions. Shares
of the Company's common stock may be issued at the time of a distribution
from the plan. The number of securities remaining available for issuance
under the plan at December 28, 2002 is not determinable, since the plan
does not authorize a maximum number of securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
None.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this report, under the
supervision and with the participation of management, including the Company's
Chief Executive Officer and Chairman and its Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chairman and its Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in its periodic Securities Exchange
Commission filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a). Index to documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedules.
The response to this portion of Item 15 is submitted as a separate
section of this report beginning with an index thereto on page F-1.
3. Exhibits
See Exhibit Index in this Form 10-K on page E-1.
(b). The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
Date of Report Items Reported
November 25, 2002 Press Release dated November 25, 2002
announcing the acquisition of Best Lock
Corporation d.b.a. Best Access Systems, and
comments on the Company's expectations for
this acquisition.
November 5, 2002 Press Release dated November 1, 2002
announcing the completion of an offering of
$350 million in aggregate principal amount
of notes.
October 16, 2002 Press Release dated October 16, 2002
providing earnings guidance for the fourth
quarter and full year 2002 and for the full
year 2003 and commentary regarding gross
margin projections and consumer and
industrial sales expectations. In a
conference call with industry analysts,
shareowners and other participants, the
Company reviewed the earnings guidance and
commentary regarding gross margin
projections and consumer and industrial
sales expectations.
October 10, 2002 Press Release dated October 10, 2002
commenting on sales and profit outlooks and
announcing that the Company will acquire
Best Lock Corporation d.b.a. Best Access
Systems and has formed an access controls
group.
(c) See Exhibit Index in this Form 10-K on page E-1.
(d) The response in this portion of Item 15 is submitted as a separate section
of this Form 10-K with an index thereto beginning on page F-1.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE STANLEY WORKS
By /s/ John M. Trani
-----------------------------------------------
John M. Trani, Chairman
and Chief Executive Officer
March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated.
/s/ John M. Trani /s/ James M. Loree
- --------------------------------- ------------------------------------------
John M. Trani, Chairman, Chief James M. Loree, Executive Vice
Executive Officer and Director President, Finance and Chief Financial
Officer
/s/ Donald Allan Jr.
- --------------------------------- ------------------------------------------
Donald Allan Jr., Vice President, John G. Breen, Director
and Corporate Controller
* *
- --------------------------------- ------------------------------------------
Robert G. Britz, Director Stillman B. Brown, Director
*
- --------------------------------- ------------------------------------------
Emmanuel A. Kampouris, Director Eileen S. Kraus, Director
*
- --------------------------------- ------------------------------------------
John D. Opie, Director Derek V. Smith, Director
*
- ---------------------------------
Kathryn D. Wriston, Director
*By: /s/ Bruce H. Beatt
-------------------------------------
Bruce H. Beatt
(As Attorney-in-Fact)
27
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John M. Trani, certify that:
1. I have reviewed this anual report on Form 10-K of The Stanley Works and
subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ John M. Trani
----------------------------------
John M. Trani
Chairman and Chief Executive Officer
28
I, James M. Loree, certify that:
1. I have reviewed this annual report on Form 10-K of The Stanley Works and
subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ James M. Loree
------------------------------
James M. Loree
Executive Vice President, Finance
and Chief Financial Officer
29
FORM 10-K
ITEM 15(a) (1) AND (2)
THE STANLEY WORKS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts of The Stanley Works and
subsidiaries is included in Item 15 (page F-3).
Report of Independent Auditors (page F-4)
Consolidated Statements of Operations--fiscal years ended December 28,
2002, December 29, 2001, and December 30, 2000 (page F-5).
Consolidated Balance Sheets--December 28, 2002 and December 29, 2001
(page F-6).
Consolidated Statements of Cash Flows--fiscal years ended December 28,
2002, December 29, 2001, and December 30, 2000 (page F-7).
Consolidated Statements of Changes in Shareowners' Equity--fiscal years
ended December 28, 2002, December 29, 2001, and December 30, 2000.
(page F-8)
Notes to Consolidated Financial Statements (page F-9).
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
Consent of Independent Auditors
We consent to the incorporation by reference in the following registration
statements of The Stanley Works and subsidiaries of our report dated March 21,
2003, with respect to the consolidated financial statements and schedule of The
Stanley Works and subsidiaries included in this Annual Report (Form 10-K) for
the year ended December 28, 2002.
o Registration Statement (Form S-8 No. 2-93025)
o Registration Statement (Form S-8 No. 2-96778)
o Registration Statement (Form S-8 No. 2-97283)
o Registration Statement (Form S-8 No. 33-16669)
o Registration Statement (Form S-3 No. 33-12853)
o Registration Statement (Form S-3 No. 33-19930)
o Registration Statement (Form S-8 No. 33-39553)
o Registration Statement (Form S-8 No. 33-41612)
o Registration Statement (Form S-3 No. 33-46212)
o Registration Statement (Form S-3 No. 33-47889)
o Registration Statement (Form S-8 No. 33-55663)
o Registration Statement (Form S-8 No. 33-62565)
o Registration Statement (Form S-8 No. 33-62567)
o Registration Statement (Form S-8 No. 33-62575)
o Registration Statement (Form S-8 No. 333-42346)
o Registration Statement (Form S-8 No. 333-42582)
o Registration Statement (Form S-8 No. 333-64326)
o Registration Statement (Form S-4 No. 333-89200)
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
March 27, 2003
F-2
Schedule II - Valuation and Qualifying Accounts
The Stanley Works and Subsidiaries
Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000
(In Millions of Dollars)
- ---------------------------------------- -------------- ---------------------------------- --------------- -----------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------- -------------- ---------------------------------- --------------- -----------
ADDITIONS
- ---------------------------------------- -------------- ---------------- ----------------- --------------- -----------
(1) (2)
CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER ENDING
DESCRIPTION BALANCE EXPENSES ACCOUNTS(B) DEDUCTIONS BALANCE
- ---------------------------------------- -------------- ---------------- ----------------- --------------- -----------
YEAR ENDED 2002 RESERVES AND
ALLOWANCES DEDUCTED FROM
ASSET ACCOUNTS:
Allowance for doubtful accounts:
Current............................... $32.3 $ 9.9 $(0.8) $ 15.0(a) $26.4
Non-current........................... 1.4 -- (0.2) -- 1.2
YEAR ENDED 2001 RESERVES AND
ALLOWANCES DEDUCTED FROM
ASSET ACCOUNTS:
Allowance for doubtful accounts:
Current............................... 41.9 18.0 (3.5) 24.1(a) 32.3
Non-current........................... 0.6 -- 1.0 0.2 1.4
YEAR ENDED 2000 RESERVES AND
ALLOWANCES DEDUCTED FROM
ASSET ACCOUNTS:
Allowance for doubtful accounts:
Current............................... 43.4 24.3 2.2 28.0(a) 41.9
Non-current........................... 0.7 -- (0.1) -- 0.6
- ----------
(a) Represents doubtful accounts charged-off, less recoveries of accounts
previously charged-off.
(b) Represents net transfers to and from other accounts, foreign currency
translation adjustments and acquisitions and divestitures.
F-3
REPORT OF INDEPENDENT AUDITORS
The Shareowners
The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley
Works and subsidiaries as of December 28, 2002 and December 29, 2001, and the
related consolidated statements of operations, changes in shareowners' equity,
and cash flows for each of the three fiscal years in the period ended December
28, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Stanley Works and subsidiaries at December 28, 2002 and December 29, 2001, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note G to the Consolidated Financial Statements, effective
December 30, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets."
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
March 21, 2003
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000
(in millions of dollars, except per share amounts) 2002 2001 2000
--------- --------- ---------
Net Sales $ 2,593.0 $ 2,606.6 $ 2,730.6
Costs and Expenses
Cost of sales $ 1,757.2 $ 1,701.3 $ 1,751.5
Selling, general and administrative 547.2 575.9 638.3
Interest income (4.0) (6.7) (7.5)
Interest expense 28.5 32.3 34.6
Other-net (8.4) (5.3) 20.0
Restructuring charges and asset impairments -- 72.4 --
2,320.5 2,369.9 2,436.9
Earnings Before Income Taxes 272.5 236.7 293.7
Income Taxes 87.5 78.4 99.3
Net Earnings $ 185.0 $ 158.3 $ 194.4
Net Earnings Per Share of Common Stock
Basic $ 2.14 $ 1.85 $ 2.22
Diluted $ 2.10 $ 1.81 $ 2.22
See notes to Consolidated Financial Statements.
F-5
CONSOLIDATED BALANCE SHEETS
December 28, 2002 and December 29, 2001
(Millions of Dollars) 2002 2001
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 121.7 $ 115.2
Accounts and notes receivable 548.0 551.3
Inventories 414.7 410.1
Deferred taxes 21.2 4.7
Prepaid expenses 68.2 55.6
Properties held for sale 5.2 3.1
Other current assets 11.4 4.5
Total Current Assets 1,190.4 1,144.5
Property, Plant and Equipment 494.8 491.2
Goodwill and Other Intangibles 544.9 236.1
Other Assets 188.1 183.9
Total Assets $2,418.2 $2,055.7
Liabilities and Shareowners' Equity
Current Liabilities
Short-term borrowings $ 140.1 $ 177.3
Current maturities of long-term debt 9.5 120.1
Accounts payable 260.3 247.7
Accrued expenses 271.0 280.4
Total Current Liabilities 680.9 825.5
Long-Term Debt 564.3 196.8
Other Liabilities 189.2 201.1
Commitments and Contingencies (Notes R and T)
Shareowners' Equity
Preferred stock, without par value:
Authorized and unissued 10,000,000 shares
Common stock, par value $2.50 per share:
Authorized 200,000,000 shares;
issued 92,343,410 shares
in 2002 and 2001 230.9 230.9
Retained earnings 1,244.6 1,184.9
Accumulated other comprehensive loss (123.4) (138.9)
ESOP debt (180.8) (187.7)
1,171.3 1,089.2
Less: cost of common stock in treasury
(5,508,293 shares in 2002 and 7,684,663 shares in 2001) 187.5 256.9
Total Shareowners' Equity 983.8 832.3
Total Liabilities and Shareowners' Equity $2,418.2 $2,055.7
See notes to Consolidated Financial Statements.
F-6
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Operating Activities:
Net earnings $ 185.0 $ 158.3 $ 194.4
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 71.2 81.8 82.1
Provision for doubtful accounts 6.7 17.2 24.3
Restructuring and asset impairments - 72.4 -
Other non-cash items 29.4 1.2 19.1
Changes in operating assets and liabilities:
Accounts and notes receivable 29.0 (32.6) (15.8)
Inventories (8.4) (14.6) (29.2)
Accounts payable and accrued expenses 3.4 (66.8) (42.0)
Income taxes (49.1) 25.7 9.8
Other 17.9 (21.0) (6.5)
Net cash provided by operating activities 285.1 221.6 236.2
Investing Activities:
Capital expenditures (37.2) (55.7) (59.8)
Capitalized software (15.1) (17.4) (4.6)
Proceeds from sales of assets 11.5 9.8 14.1
Business acquisitions (355.9) (79.3) -
Other 1.2 (27.2) (19.7)
Net cash used in investing activities (395.5) (169.8) (70.0)
Financing Activities:
Payments on long-term debt (115.0) (2.4) (32.7)
Proceeds from long-term borrowings 352.5 75.0 -
Net short-term financing (39.3) (29.3) 59.7
Debt issuance costs (15.0) - -
Proceeds from issuance of common stock 17.4 25.4 8.9
Purchase of common stock for treasury - (11.0) (108.6)
Cash dividends on common stock (85.6) (80.5) (78.3)
Net cash provided by (used in) financing activities 115.0 (22.8) (151.0)
Effect of exchange rate changes on cash 1.9 (7.4) (9.6)
Increase in cash and cash equivalents 6.5 21.6 5.6
Cash and cash equivalents, beginning of year 115.2 93.6 88.0
Cash and cash equivalents, end of year $ 121.7 $ 115.2 $ 93.6
See notes to Consolidated Financial Statements.
F-7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000
Accumulated
Other
Common Retained Comprehensive ESOP Treasury Shareowners'
(Millions of Dollars, except per share amounts) Stock Earnings Income (Loss) Debt Stock Equity
Balance January 1, 2000 $ 230.9 $ 926.9 $ (99.2) $ (202.2) $ (121.0) $ 735.4
Comprehensive income:
Net earnings 194.4 194.4
Currency translation adjustment (24.6) (24.6)
Minimum pension liability (0.7) (0.7)
Total comprehensive income 169.1
Cash dividends declared-$0.90 per share (78.3) (78.3)
Issuance of common stock (6.5) 17.5 11.0
Purchase of common stock (111.5) (111.5)
Equity hedge shares delivered (0.3) 0.3 -
Tax benefit related to stock options 0.8 0.8
ESOP debt and tax benefit 2.6 7.4 10.0
Balance December 30, 2000 230.9 1,039.6 (124.5) (194.8) (214.7) 736.5
Comprehensive income:
Net earnings 158.3 158.3
Currency translation adjustment
and other (12.6) (12.6)
Minimum pension liability (1.8) (1.8)
Total comprehensive income 143.9
Cash dividends declared-$0.94 per share (80.5) (80.5)
Issuance of common stock (9.0) 35.6 26.6
Purchase of common stock (10.8) (10.8)
Equity hedge shares received 67.0 (67.0) -
Tax benefit related to stock options 3.7 3.7
ESOP debt and tax benefit 5.8 7.1 12.9
Balance December 29, 2001 230.9 1,184.9 (138.9) (187.7) (256.9) 832.3
Comprehensive income:
Net earnings 185.0 185.0
Currency translation adjustment
and other 17.8 17.8
Minimum pension liability (2.3) (2.3)
Total comprehensive income 200.5
Cash dividends declared-$0.99 per share (85.6) (85.6)
Issuance of common stock (5.1) 27.8 22.7
Equity hedge shares delivered (41.6) 41.6 -
Tax benefit related to stock options 3.0 3.0
ESOP debt and tax benefit 4.0 6.9 10.9
Balance December 28, 2002 $ 230.9 $ 1,244.6 $ (123.4) $ (180.8) $ (187.5) $ 983.8
See notes to Consolidated Financial Statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts
of the Company and its majority-owned subsidiaries which require consolidation,
after the elimination of intercompany accounts and transactions. The Company's
fiscal year ends on the Saturday nearest to December 31. There were 52 weeks in
fiscal years 2002, 2001, and 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. While management believes that the estimates and assumptions used
in the preparation of the financial statements are appropriate, actual results
could differ from these estimates.
FOREIGN CURRENCY TRANSLATION For foreign operations with functional currencies
other than the U.S. dollar, asset and liability accounts are translated at
current exchange rates; income and expenses are translated using weighted
average exchange rates. Resulting translation adjustments, as well as gains and
losses from certain intercompany transactions, are reported in a separate
component of shareowners' equity. Translation adjustments for operations in
highly inflationary economies and exchange gains and losses on transactions are
included in earnings, and amounted to net losses for 2002, 2001 and 2000 of $0.9
million, $0.1 million and $2.3 million, respectively.
CASH EQUIVALENTS Highly liquid investments with original maturities of three
months or less are considered cash equivalents.
ACCOUNTS RECEIVABLE Trade receivables are stated at gross invoice amount less
discounts, other allowances and rebates and provision for uncollectible
accounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company estimates its allowance for doubtful
accounts using two methods. First, the Company determines a specific reserve for
individual accounts where information is available that the customer may have an
inability to meet its financial obligations. Second, a general reserve is
established for all customers based on a range of percentages applied to aging
categories. These percentages are based on historical collection and write-off
experience. The same methodology is utilized in estimating the allowance for
doubtful accounts for off-balance sheet trade receivables discussed in Note C.
INVENTORIES U.S. inventories are valued at the lower of Last-In, First-Out
(LIFO) cost or market. Other inventories are valued generally at the lower of
First-In, First-Out (FIFO) cost or market.
FIXED ASSETS Property, plant and equipment are stated on the basis of historical
cost less accumulated depreciation. Depreciation is provided using straight-line
methods over the estimated useful lives of the assets.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
Company assesses whether machinery and equipment can be used at other facilities
and if not, estimates the proceeds to be realized upon the sale of the assets.
The impairment loss is then quantified by comparing the carrying amount of the
assets to the weighted average discounted cash flows, which consider various
possible outcomes for the disposition of the assets. Primarily as a result of
plant rationalization, certain facilities and equipment are not currently used
in operations. The Company recognized $8.4 million in impairment losses in the
Tools segment in 2002 classified in other-net in the Consolidated Statements of
Operations. Impairment losses of $10.4 million in 2001 were included in
"Restructuring Charges and Asset Impairments" in the Consolidated Statements of
Operations of which $0.3 million and $10.1 million related to the Doors and
Tools segments, respectively.
F-9
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents costs in excess of fair
values assigned to the underlying net assets of acquired businesses. Intangible
assets acquired are recorded at cost. Goodwill and other intangible assets were
historically amortized using the straight-line method of amortization over their
estimated useful lives.
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under the
provisions of this Statement, goodwill and intangible assets deemed to have
indefinite lives are no longer subject to amortization. Annual impairment
testing must be performed on these assets using the guidance and criteria
described in the Statement. All other intangible assets are amortized over their
estimated useful lives.
FINANCIAL INSTRUMENTS The Company recognizes all derivative financial
instruments, such as interest rate swap agreements, foreign currency options,
and foreign exchange contracts, in the Consolidated Financial Statements at fair
value regardless of the purpose or intent for holding the instrument. Changes in
the fair value of derivative financial instruments are either recognized
periodically in income or in shareowners' equity as a component of comprehensive
income depending on whether the derivative financial instrument qualifies for
hedge accounting, and if so, whether it qualifies as a fair value hedge or cash
flow hedge. Generally, changes in fair values of derivatives accounted for as
fair value hedges are recorded in income along with the portions of the changes
in the fair values of the hedged items that relate to the hedged risk. Changes
in fair values of derivatives accounted for as cash flow hedges, to the extent
they are effective as hedges, are recorded in other comprehensive income.
Changes in fair value of derivatives used as hedges of the net investment in
foreign operations are reported in other comprehensive income as part of the
cumulative translation adjustment. Changes in fair values of derivatives not
qualifying as hedges are reported in income.
Prior to December 31, 2000, the Company also used interest rate swap agreements,
foreign currency options and foreign exchange contracts for hedging purposes.
The net interest paid or received on the swaps is recognized as interest
expense. Gains resulting from the early termination of interest rate swap
agreements are deferred and amortized as adjustments to interest expense over
the remaining period originally covered by the terminated swap. The Company
manages exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of forward exchange contracts or currency
options. The Company enters into forward exchange contracts to hedge
intercompany loans and enters into purchased foreign currency options to hedge
anticipated transactions. Gains and losses on forward exchange contracts are
deferred and recognized as part of the underlying transactions. Changes in the
fair value of options, representing a basket of foreign currencies to hedge
anticipated cross-currency cash flows, are included in cost of sales. The
Company does not use financial instruments for trading or speculative purposes.
REVENUE RECOGNITION Revenue is recognized when the earnings process is complete
and the risks and rewards of ownership have transferred to the customer, which
is generally considered to have occurred upon shipment of the finished product.
In limited instances, certain sale transactions contain multiple elements for
which revenue is recorded as the earnings process for these elements are
completed. In circumstances where long-term contracts exist for customized
product, revenue is recognized over the term of the contract using the
percentage of completion method.
The Company enters into arrangements licensing its brand name on specifically
approved products. The licensees pay the Company royalties as products are sold,
subject to annual minimum guaranteed amounts. For those arrangements where the
Company has continuing involvement with the licensee, royalty revenues are
recognized as they are earned over the life of the agreement. For certain
agreements, where the Company has no further continuing involvement with the
licensee, the Company recognizes the guaranteed minimum royalties at the time
the arrangement becomes effective and all applicable products have been
approved.
F-10
INCOME TAXES Income tax expense is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, and are measured by applying enacted tax
rates in effect in years in which the differences are expected to reverse.
EARNINGS PER SHARE Basic earnings per share equals net earnings divided by
weighted average shares outstanding during the year. Diluted earnings per share
includes the impact of common stock equivalents using the treasury stock method
when the effect is dilutive.
SHIPPING AND HANDLING FEES AND COSTS It is the general practice of the Company
to not bill customers for freight. Shipping and handling costs associated with
inbound freight are included in cost of sales. Shipping costs associated with
outbound freight are included as a reduction in net sales and amounted to $119
million, $136 million and $132 million in 2002, 2001 and 2000, respectively. The
Company records distribution costs in selling, general and administrative (SG&A)
expenses that amounted to $72 million, $75 million and $82 million in 2002, 2001
and 2000, respectively.
NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible, long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred by capitalizing it as part of the carrying amount of the long-lived
assets. As required by SFAS No. 143, the Company will adopt this new accounting
standard beginning in fiscal 2003. The Company does not expect the adoption of
SFAS No. 143 to have a material impact.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This statement requires costs associated with exit
or disposal activities to be recognized when they are incurred and applies
prospectively to such activities that are initiated in fiscal 2003 and beyond.
Adoption of this standard is expected to impact the timing of recognition of
costs associated with future exit and disposal activities, but will not impact
the recognition of costs under the Company's existing programs.
In November 2002, FASB Interpretation No. (FIN) 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" was issued. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The Company adopted the disclosure requirements as required by the
Interpretation as of December 28, 2002. The Interpretation also requires that a
liability for fair value of the obligation be recorded at the inception of a
guarantee, for all guarantees issued or modified after December 31, 2002. The
Company will adopt this accounting for fiscal 2003. The Company is currently
assessing the impact this interpretation will have on its financial statements.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities." This Interpretation addresses consolidation of variable interest
entities which have equity investment at risk insufficient to permit the entity
to finance its activities without additional subordinated financial support from
other parties or entities with equity investors lacking certain essential
characteristics of controlling financial interest. This Interpretation is
effective immediately for variable interests created or obtained after January
31, 2003. For interests acquired prior to February 1, 2003, this Interpretation
applies to the Company in the third quarter of 2003. Upon adoption of FIN 46 for
existing variable interests, the Company expects to consolidate assets and
obligations for one property under synthetic lease in the Consolidated Balance
Sheets. As of December 28, 2002, the estimated fair values of assets and
remaining obligations under the synthetic lease were $17.3 million and $10.8
million, respectively.
F-11
STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation
plans using the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost is recognized for stock-based compensation unless the quoted
market price of the stock at the grant date is in excess of the amount the
employee must pay to acquire the stock. Stock-based employee compensation is
discussed fully in Note K Capital Stock.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates consistent with the method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net earnings and earnings per share would have been adjusted to the
pro forma amounts indicated below:
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Net income, as reported $185.0 $ 158.3 $194.4
Add: Tax (benefit)
on actual option
exercises included in
reported net income (3.0) (3.7) (0.8)
Less: Stock-based employee
compensation expense
determined under fair
value method, net of
related tax effects 5.4 3.8 21.2
Pro forma net income,
fair value method $176.6 $ 150.8 $172.4
Earnings per share:
Basic, as reported $ 2.14 $ 1.85 $ 2.22
Basic, pro forma $ 2.04 $ 1.76 $ 1.97
Diluted, as reported $ 2.10 $ 1.81 $ 2.22
Diluted, pro forma $ 2.00 $ 1.72 $ 1.97
Pro forma compensation cost relating to the stock options is recognized over the
vesting period. The vesting periods used for 2002, 2001 and 2000 stock option
grants are 3.9 years, 3.6 years and six months, respectively. The fair value of
each stock option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield
of 3.2%, 2.6% and 3.8%; expected volatility of 30% for 2002, and 40% for 2001
and 2000; risk-free interest rates of 3.2%, 4.8% and 6.1%; and expected lives of
5 years in 2002, and 7 years in 2001 and 2000. The weighted average fair value
of stock options granted in 2002, 2001 and 2000 was $7.30, $14.31 and $8.15,
respectively.
Employee Stock Purchase Plan compensation cost is recognized in the fourth
quarter when the purchase price for the following fiscal year is established.
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the following assumptions for 2002, 2001 and
2000, respectively: dividend yield of 3.3%, 3.0% and 5.2%; expected volatility
of 30% for 2002, and 40% for 2001 and 2000; risk-free interest rates of 1.9%,
2.0% and 6.0%, and expected lives of one year. The weighted average fair value
of those purchase rights granted in 2002, 2001 and 2000 was $7.50, $8.48 and
$5.68, respectively.
RECLASSIFICATIONS Certain prior years' amounts have been reclassified to conform
to the current year presentation.
In January 2002, the Company adopted Emerging Issues Task Force (EITF) Issue No.
00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser
of the Vendor's Products or Services." EITF No. 00-25 requires the
reclassification of certain customer promotional payments previously reported in
SG&A expenses as a reduction of revenue, and prior periods must be restated for
comparability of results. Net sales and SG&A expenses are $17.8 million and
$18.3 million lower for fiscal
F-12
years 2001 and 2000, respectively, than previously published amounts, reflecting
reclassification of certain cooperative advertising expenses.
B. ACQUISITIONS
In November 2002, the Company completed the acquisition of Best Lock Corporation
dba Best Access Systems (Best) for $316.0 million. Best is a global provider of
security access control systems. In 2003, the Company made an additional
purchase price payment for Best totaling $0.6 million which will be accounted
for as an increase to goodwill. Amounts assigned to major balance sheet
categories for the Best acquisition include: current assets of $63.6 million,
consisting principally of accounts receivables and inventories; long-term assets
of $313.1 million, consisting of fixed assets and goodwill and other intangibles
(see Note G Goodwill and Other Intangible Assets) and current liabilities of
$38.3 million. If the results of operations of Best were included for the entire
2002 and 2001 fiscal years, net sales would have been $220.1 million and $243.3
million higher than the results reported in the 2002 and 2001 Consolidated
Statements of Operations, respectively. Net income and earnings per share during
these periods would not have been significantly different; however, Best's
operating results during these periods are not necessarily indicative of future
operating results.
During 2002, the Company acquired five other small businesses at a total cost of
$42.7 million.
In April 2001, the Company acquired Contact East, a leading business to business
distributor of mission critical tools and supplies for assembly, testing and
repair of electronics in the United States for $79.3 million.
The aforementioned acquisitions were accounted for as purchase transactions and,
accordingly, the operating results have been included in the Company's
Consolidated Financial Statements since the date of acquisition. In connection
with these acquisitions, the Company has recorded liabilities of $2.8 million in
2002 related to purchase contingencies. The acquisitions did not have a material
impact on 2002 or 2001 operations.
Purchase accounting for the 2002 acquisitions is preliminary, primarily with
respect to identification and valuation of intangibles, and is expected to be
finalized by mid 2003. Further, $6.4 million in restructuring reserves were
established in purchase accounting for the November 2002 Best acquisition due to
planned closure of several Best offices and synergies in certain centralized
functions. The $6.4 million is comprised of $5.3 million for severance and $1.1
million of other exit costs primarily related to non-cancelable leases. The
Company began formulating the restructuring plans during the pre-acquisition due
diligence work and these plans include activities initiated by Best management
prior to the acquisition. It is possible that additional restructuring reserves
for acquired companies may be required in the future.
C. ACCOUNTS AND NOTES RECEIVABLE
(Millions of Dollars) 2002 2001
---- ----
Trade receivables $ 507.1 $ 486.0
Other 67.3 97.6
-------- --------
Gross accounts and
notes receivable 574.4 583.6
Allowance for doubtful accounts (26.4) (32.3)
-------- --------
Net accounts and notes receivable $ 548.0 $ 551.3
======== ========
Trade receivables are dispersed among a large number of retailers, distributors
and industrial accounts in many countries. Adequate provisions have been
established to cover anticipated credit losses. As of December 29, 2001, the
Company had one customer that accounted for approximately 10% of its net
receivables.
The Company has agreements to sell, on a revolving basis, undivided interests in
defined pools of accounts and notes receivable to two Qualified Special Purpose
Entities (QSPEs). The entities are
F-13
designed to facilitate the securitization of certain trade accounts receivable,
to fund the Mac Advantage financing program as well as provide long-term secured
financing to Mac Tools wholesale distributors, and are used as an additional
source of liquidity. At December 28, 2002 and December 29, 2001, the defined
pools of receivables amounted to $238.1 million and $271.7 million,
respectively. The proceeds from sales of such eligible receivables, to QSPEs, in
revolving-period securitizations were $79.7 million in 2002 and $81.4 million in
2001, and these amounts have been deducted from receivables in the December 28,
2002 and December 29, 2001 Consolidated Balance Sheets. There were no gains or
losses on these sales. As of December 28, 2002 and December 29, 2001, the
Company had $32.4 million and $25.3 million, respectively, in receivables due
from the Mac Tools related QSPE. The Company is responsible for servicing and
collecting the receivables sold and held in the QSPEs. Any incremental
additional costs related to such servicing and collection efforts are not
significant.
D. INVENTORIES
(Millions of Dollars) 2002 2001
---- ----
Finished products $ 324.0 $ 308.0
Work in process 44.9 49.1
Raw materials 45.8 53.0
-------- --------
$ 414.7 $ 410.1
======== ========
Inventories in the amount of $314.4 million at December 28, 2002 and $277.0
million at December 29, 2001 were valued at the lower of LIFO cost or market. If
the LIFO method had not been used, inventories would have been $49.9 million
higher than reported at December 28, 2002 and December 29, 2001. The LIFO method
is utilized in determining inventory value as it results in a better matching of
cost and revenues.
E. PROPERTIES HELD FOR SALE
At December 28, 2002, the Company has five properties, valued at $5.2 million,
classified as held for sale due to the Company's continued plant rationalization
efforts. These assets are all reported within the Tools segment and consist of
real property which is expected to be disposed of throughout the next year. At
December 29, 2001, the Company had two properties held for sale with a book
value of $3.1 million. Properties held for sale are carried at the lower of fair
value or book value.
F. PROPERTY, PLANT AND EQUIPMENT
Useful
life
(Millions of Dollars) 2002 2001 (Years)
---- ---- --------
Land $ 23.6 $ 24.4 N/A
Land Improvements 17.4 16.0 10-20
Buildings 219.7 202.3 40
Machinery and equipment 963.8 903.9 3-15
Computer software 94.2 76.4 3-5
1,318.7 1,223.0
Less: accumulated
depreciation and
amortization 823.9 731.8
$ 494.8 $ 491.2
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Depreciation $ 57.2 $ 59.1 $ 61.7
Amortization 10.3 12.4 12.1
Depreciation and
amortization expense $ 67.5 $ 71.5 $ 73.8
F-14
G. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL In January 2002, the Company adopted SFAS No. 142 which changed the
accounting for goodwill and intangible assets with an indefinite life whereby
such assets are no longer amortized. For these assets, SFAS No. 142 requires an
initial evaluation for impairment upon adoption and annual evaluations
thereafter. The Company performed the initial evaluation upon adoption and a
subsequent evaluation was performed in the third quarter of 2002; neither
evaluation resulted in an impairment loss. The table below shows comparative
pro-forma financial information as if goodwill had not been amortized for all
periods presented (in millions, except per share amounts).
(Year Ended) 2002 2001 2000
---- ---- ----
Reported net income $ 185.0 $ 158.3 $ 194.4
Goodwill amortization,
net of tax - 6.6 4.3
Adjusted net income $ 185.0 $ 164.9 $ 198.7
Reported basic earnings
per share $ 2.14 $ 1.85 $ 2.22
Goodwill amortization,
net of tax, per share - 0.07 0.05
Adjusted basic earnings
per share $ 2.14 $ 1.92 $ 2.27
Reported diluted earnings
per share $ 2.10 $ 1.81 $ 2.22
Goodwill amortization,
net of tax, per share - 0.07 0.05
Adjusted diluted earnings
per share $ 2.10 $ 1.88 $ 2.27
The changes in the carrying amount of goodwill by segment are as follows:
(Millions of Dollars) Tools Doors Total
----- ----- -----
Balance December 29, 2001 $ 203.4 $ 12.8 $ 216.2
Goodwill acquired
during the year - 126.1 126.1
Foreign currency translation
and other 5.6 - 5.6
Balance December 28, 2002 $ 209.0 $ 138.9 $ 347.9
The increase in goodwill during 2002 resulted from business combinations
completed or finalized during the period, primarily the acquisition of Best.
When the purchase accounting for 2002 acquisitions is finalized, goodwill may be
adjusted.
F-15
OTHER INTANGIBLE ASSETS Other intangible assets, at December 28, 2002 and
December 29, 2001 were as follows:
(Millions of Dollars) 2002 2001
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets
Patents and copyrights $ 17.6 $ (13.2) $ 17.3 $ (17.0)
Trademark 16.7 (9.1) 17.8 (11.6)
Customer relationships 109.9 (1.2) - -
Other intangible assets 11.3 (6.2) 15.6 (5.9)
Total $ 155.5 $ (29.7) $ 50.7 $ (34.5)
Unamortized Intangible Assets
Trademark $ 67.7 $ -
Minimum pension liability 3.5 3.7
Total $ 71.2 $ 3.7
Aggregate other intangibles amortization expense was $3.7 milli on, $2.7 million
and $3.0 million for the years ended December 28, 2002, December 29, 2001 and
December 30, 2000, respectively. Estimated amortization expense is $9.6 million
for 2003, $9.3 million for 2004, $9.2 million for 2005, $8.9 million for 2006
and $8.4 million for 2007.
During 2002, the Company acquired certain businesses as discussed in Note B. In
connection with these acquisitions, the Company recorded intangible assets. The
purchase accounting, including amounts attributable to the fair value of
identifiable intangible assets, is preliminary. When the purchase accounting is
finalized, these amounts may be adjusted. The major intangible asset classes
associated with these acquisitions have the following balances at December 28,
2002:
Weighted
Gross Average
Carrying Accumulated Useful Life
(Millions of Dollars) Amount Amortization (years)
Amortized Intangible Assets
Patents and copyrights $ 1.5 $ (0.1) 6
Customer relationships 109.9 (1.2) 16
Other intangible assets 0.2 - 3
Total $ 111.6 $ (1.3)
Unamortized Intangible Assets
Trademark $ 67.7
H. ACCRUED EXPENSES
Accrued expenses at December 28, 2002 and December 29, 2001 follow:
(Millions of Dollars) 2002 2001
---- ----
Payroll and related taxes $ 28.9 $ 30.3
Insurance 38.6 27.2
Restructuring 8.7 21.2
Income taxes 59.5 77.2
Other 135.3 124.5
$ 271.0 $ 280.4
F-16
I. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
(Millions of Dollars) 2002 2001
---- ----
Notes payable in 2002 7.4% $ - $ 100.0
Notes payable in 2004 5.8% 120.0 120.0
Notes payable in 2007 4.5% 75.0 75.0
Notes payable in 2007 3.5% 150.0 -
Notes payable in 2012 4.9% 200.0 -
Industrial Revenue Bonds due in
varying amounts to 2010 5.8-6.8% 5.6 19.6
ESOP loan guarantees,
payable in varying
monthly installments
through 2009 6.1% 17.4 22.5
Other, including net
swap receivables 2.0-10.1% 5.8 (20.2)
573.8 316.9
Less: current maturities 9.5 120.1
$ 564.3 $ 196.8
The Company has unused short-term and long-term credit arrangements with several
banks to borrow up to $350.0 million at the lower of prime or money market
rates. Of this amount, $100.0 million is long-term. Commitment fees range from
0.06% to 0.08%. In addition, the Company has short-term lines of credit with
numerous foreign banks aggregating $98.0 million, of which $87.0 million was
available at December 28, 2002. Short-term arrangements are reviewed annually
for renewal. Of the long-term and short-term lines, $350.0 million is available
to support the Company's commercial paper program. The weighted average interest
rates on short-term borrowings at December 28, 2002 and December 29, 2001 were
1.7% and 2.3%, respectively.
To manage interest costs and foreign exchange risk, the Company maintains a
portfolio of interest rate swap agreements. The portfolio includes currency
swaps that convert $90.5 million of fixed rate United States dollar debt into
4.4% fixed rate Euro debt. The Company also has currency swaps that convert
$39.0 million of variable rate United States dollar debt to variable rate Euro
debt (3.4% weighted average rate). See Note J for more information regarding the
Company's interest rate and currency swap agreements.
Aggregate annual maturities of long-term debt for each of the years from 2004 to
2007 are $122.7 million, $4.7 million, $0.9 million and $226.1 million,
respectively. Interest paid during 2002, 2001 and 2000 amounted to $25.8
million, $33.4 million and $36.1 million, respectively.
Included in short-term borrowings on the Consolidated Balance Sheets are
commercial paper and Extendible Commercial Notes utilized to support working
capital requirements, which were $129.0 million and $160.0 million, as of
December 28, 2002 and December 29, 2001, respectively.
On November 1, 2002, the Company issued 5-year and 10-year notes payable of
$150.0 million and $200.0 million, respectively. The proceeds from these notes
were used to acquire Best Lock Corporation and for general corporate purposes.
J. FINANCIAL INSTRUMENTS
The Company's objectives in using debt related financial instruments are to
obtain the lowest cost source of funds within an acceptable range of variable to
fixed-rate debt proportions and to minimize the foreign exchange risk of
obligations. To meet these objectives the Company enters into interest rate swap
and currency swap agreements. A summary of instruments and weighted average
interest rates follows. The weighted average variable pay and receive rates are
based on rates in effect at the balance sheet dates. Variable rates are
generally based on LIBOR or commercial paper rates with no leverage features.
F-17
(Millions of Dollars) 2002 2001
---- ----
Currency swaps $ 124.2 $ 105.3
pay rate 4.1% 4.1%
receive rate 4.6% 4.6%
maturity dates 2004-2005 2004-2005
The Company uses purchased currency options and forward exchange contracts to
reduce exchange risks arising from cross-border cash flows expected to occur
over the next one year period. In addition, the Company enters into forward
exchange contracts to hedge intercompany loans and royalty payments. The
objective of these practices is to minimize the impact of foreign currency
fluctuations on operating results. At December 28, 2002 and December 29, 2001,
the Company had forward contracts hedging intercompany loans and royalty
payments totaling $12.7 million and $20.3 million, respectively. At December 28,
2002 and December 29, 2001, currency options hedged anticipated transactions
totaling $128.1 million and $136.5 million, respectively. The forward contracts
and options are primarily denominated in Canadian dollars, Australian dollars,
Taiwanese dollars, Japanese Yen, Thailand Baht, Great Britain Pound, Israeli
Shekels and Euro and generally mature within the next one year period.
The counterparties to these interest rate and currency financial instruments are
major international financial institutions. The Company is exposed to credit
risk for net exchanges under these agreements, but not for the notional amounts.
The Company considers the risk of default to be remote.
A summary of the carrying values and fair values of the Company's financial
instruments at December 28, 2002 and December 29, 2001 is as follows:
(Millions of Dollars) 2002 2001
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
Long-term debt,
including current portion $ 578.9 $ 597.0 $ 341.0 $ 346.8
Currency and
interest rate swaps (5.1) (27.6) (24.1) (27.6)
$ 573.8 $ 569.4 $ 316.9 $ 319.2
Generally, the carrying value of the debt related financial instruments is
included in the balance sheet in long-term debt. The fair values of long-term
debt are estimated using discounted cash flow analysis, based on the Company's
marginal borrowing rates. The fair values of foreign currency and interest rate
swap agreements are based on current settlement values. The carrying amount of
cash equivalents and short-term borrowings approximates fair value.
K. CAPITAL STOCK
WEIGHTED-AVERAGE SHARES OUTSTANDING Weighted-average shares outstanding used to
calculate basic and diluted earnings per share follows:
(Millions of Dollars, except per share amounts) 2002 2001 2000
---- ---- ----
Basic earnings per share-
weighted-average
shares outstanding 86,452,974 85,761,275 87,407,282
Dilutive effect of
stock options and awards 1,793,381 1,706,074 260,499
Diluted earnings per share-
weighted-average
shares outstanding 88,246,355 87,467,349 87,667,781
F-18
COMMON STOCK SHARE ACTIVITY Common stock share activity for 2002, 2001 and 2000
follows:
2002 2001 2000
---- ---- ----
Outstanding,
beginning of year 84,658,747 85,188,252 88,945,175
Issued from treasury 2,181,151 1,170,480 557,490
Returned to treasury (4,781) (1,699,985) (4,314,413)
Outstanding, end of year 86,835,117 84,658,747 85,188,252
COMMON STOCK RESERVED Common stock shares reserved for issuance under various
employee and director stock plans at December 28, 2002 and December 29, 2001
follows:
2002 2001
---- ----
Employee Stock Purchase Plan 3,677,300 3,797,153
Stock-based compensation plans 19,022,666 20,769,666
22,699,966 24,566,819
PREFERRED STOCK PURCHASE RIGHTS Each outstanding share of common stock has one
half of a share purchase right. Each purchase right may be exercised to purchase
one two-hundredth of a share of Series A Junior Participating Preferred Stock at
an exercise price of $220.00, subject to adjustment. The rights, which do not
have voting rights, expire on March 10, 2006, and may be redeemed by the Company
at a price of $0.01 per right at any time prior to the tenth day following the
public announcement that a person has acquired beneficial ownership of 10% or
more of the outstanding shares of common stock.
In the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
(other than a holder who is a 10%-or-more shareowner) shall have the right to
receive, upon exercise thereof, that number of shares of common stock of the
surviving Company having a market value equal to two times the exercise price of
the right. Similarly, if anyone becomes the beneficial owner of more than 10% of
the then outstanding shares of common stock (except pursuant to an offer for all
outstanding shares of common stock which the independent directors have deemed
to be fair and in the best interest of the Company), provision will be made so
that each holder of a right (other than a holder who is a 10%-or-more
shareowner) shall thereafter have the right to receive, upon exercise thereof,
common stock (or, in certain circumstances, cash, property or other securities
of the Company) having a market value equal to two times the exercise price of
the right. At December 28, 2002, there were 43,417,559 outstanding rights. There
are 250,000 shares of Series A Junior Participating Preferred Stock reserved for
issuance in connection with the rights.
STOCK-BASED COMPENSATION PLANS The Company has stock-based compensation plans
for salaried employees and non-employee directors of the Company and its
affiliates. The plans provide for discretionary grants of stock options,
restricted stock shares and other stock-based awards. Stock options are granted
at the market price of the Company's stock on the date of grant and have a
ten-year term. Generally, stock option grants made in 2001 and later years
become 50% vested after three years from the date of grant and the remaining 50%
become vested after five years, whereas grants made in fiscal 2000 and earlier
years generally vested 50% after one year from date of grant and the remaining
50% vested after two years.
Stock option amounts and weighted-average exercise prices follow:
2002 2001 2000
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding,
beginning
of year 9,855,884 $ 29.17 9,989,441 $ 27.19 6,413,578 $ 28.89
Granted 1,944,250 32.91 1,967,352 38.30 4,142,650 23.89
Exercised (593,188) 24.72 (833,529) 25.19 (356,160) 20.12
Forfeited (197,250) 29.65 (1,267,380) 30.38 (210,627) 22.97
Outstanding,
end of year 11,009,696 $ 30.06 9,855,884 $ 29.17 9,989,441 $ 27.19
Exercisable,
end of year 7,326,094 $ 27.31 6,382,194 $ 27.71 6,192,691 $ 27.28
F-19
Outstanding and exercisable stock option information at December 28, 2002
follows:
Outstanding Exercisable
Stock Options Stock Options
------------- -------------
Weighted-
average Weighted- Weighted-
Exercise Remaining average average
Price Contractual Exercise Exercise
Ranges Options Life Price Options Price
------- ------- ---- ----- ------- -----
$19.34-24.97 2,867,521 7.0 $ 21.70 2,867,521 $21.70
$25.13-34.62 5,645,573 7.1 $ 29.56 3,844,823 $28.83
$35.23-55.98 2,496,602 7.9 $ 40.79 613,750 $44.00
11,009,696 7.3 $ 30.06 7,326,094 $27.31
EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan enables
substantially all employees in the United States, Canada and Belgium to
subscribe at any time to purchase shares of common stock on a monthly basis at
the lower of 85% of the fair market value of the shares on the first day of the
plan year ($32.56 per share for fiscal year 2002 purchases) or 85% of the fair
market value of the shares on the last business day of each month. A maximum of
6,000,000 shares are authorized for subscription. During 2002, 2001 and 2000
shares totaling 119,853, 273,784, and 100,369, respectively, were issued under
the plan at average prices of $31.42, $17.32 and $20.82 per share, respectively.
LONG-TERM STOCK INCENTIVE PLAN The Long-Term Stock Incentive Plan (LTSIP)
provides for the granting of awards to senior management employees for achieving
Company performance measures. The Plan is administered by the Compensation and
Organization Committee of the Board of Directors consisting of non-employee
directors. Awards are generally payable in shares of common stock as directed by
the Committee. Shares totaling 12,035, 10,742, and 41,532 were issued in 2002,
2001 and 2000, respectively. LTSIP expense was $0.2 million in 2002, $0.1
million in 2001 and $0.8 million in 2000.
COMMON STOCK EQUITY HEDGE The Company enters into equity hedges, in the form of
equity forwards on Stanley common shares, to offset the dilutive effect of
in-the-money stock options on earnings per share and to reduce potential cash
outflow for the repurchase of the Company's stock to offset stock option
exercises. The counterparties to these forward contracts are major U.S.
financial institutions with whom management believes the risk of non-performance
is remote. Interim quarterly settlements are in shares of stock, not cash, and
are accounted for within equity. Cash settlements may be elected at the option
of the Company. The Company has historically made no cash settlement elections.
The Company is obligated to issue the number of shares equating to $6.1 million
in market value for every $1 decrease in the stock price. The maximum number of
shares that could be issued in net settlement of the equity hedge contracts is
75.4 million shares; the maximum share issuance would occur only if the
Company's stock price declined to $2.83 per share. At December 28, 2002 there
were 6.1 million shares underlying the $213.3 million notional amount of the
equity forward contracts, of which $174.6 million matures on December 31, 2003
and $38.7 million on September 24, 2004.
When the price of Stanley stock has appreciated since the last quarterly interim
settlement, the Company receives Stanley common shares from the counterparties.
When the price of Stanley stock has depreciated since the last quarterly interim
settlement, the Company delivers Stanley common stock from treasury shares to
the counterparties. If the stock price declines, the Company may issue shares to
the counterparties that exceed the favorable offset of stock options coming "out
of the money," resulting in dilution of earnings per share.
Aggregate annual settlement activity under the equity hedge was as follows:
1,338,708 shares of common stock with a market value of $46.6 million ($41.6
million book value) delivered in 2002; 1,432,264 shares of common stock with a
market and book value of $67.0 million received in 2001; and 25,166 shares of
common stock with a $0.3 million value delivered in 2000.
F-20
L. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss at the end of each fiscal year was as
follows:
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Currency translation
adjustment ($119.2) ($136.3) ($123.4)
Minimum pension liability (5.2) (2.9) (1.1)
Cash flow hedge
effectiveness 1.0 0.3 -
Accumulated other
comprehensive loss ($123.4) ($138.9) ($124.5)
M. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Substantially all U.S. employees may
contribute from 1% to 15% of their salary to a tax deferred savings plan.
Employees elect where to invest their own contributions. The Company contributes
an amount equal to one-half of the employee contribution up to the first 7% of
their salary, all of which is invested in the Company's common stock. The
amounts in 2002, 2001 and 2000 under this matching arrangement were $5.7
million, $5.8 million and $7.0 million, respectively.
The Company also provides a non-contributory benefit for U.S. salaried and
non-union hourly employees, called the Cornerstone plan. Under this benefit
arrangement, the Company contributes amounts ranging from 3% to 9% of employee
compensation based on age. Approximately 2,500 U.S. employees receive an
additional average 1.5% contribution actuarially designed to replace the pension
benefits curtailed in 2001. Contributions under the Cornerstone plan were $12.8
million in 2002, $12.7 million in 2001 and $13.0 million in 2000. Assets of the
Cornerstone defined contribution plan are invested in equity securities and
bonds.
Shares of the Company's common stock held by the ESOP were purchased with the
proceeds of external borrowings in 1989 and borrowings from the Company in 1991.
The external ESOP borrowings are guaranteed by the Company and are included in
long-term debt. Shareowners' equity reflects both the internal and the external
borrowing arrangements.
Unallocated shares are released from the trust based on current period debt
principal and interest payments as a percentage of total future debt principal
and interest payments. These released shares along with allocated dividends,
dividends on unallocated shares acquired with the 1991 loan, and shares
purchased on the open market are used to fund employee contributions, employer
contributions and dividends earned on participant account balances. Dividends on
unallocated shares acquired with the 1989 loan are used only for debt service.
Net ESOP activity recognized is based on total debt service and share purchase
requirements less employee contributions and dividends on ESOP shares. The
Company's net ESOP activity resulted in expense of $0.1 million in 2002, $0.1
million in 2001 and $8.6 million in 2000. ESOP expense is affected by the market
value of Stanley common stock on the monthly dates when shares are released. In
2002, the market value of shares released averaged $39.62 per share and the net
ESOP expense was negligible. ESOP expense may increase in the future in the
event the market value of shares declines.
Dividends on ESOP shares, which are charged to shareowners' equity as declared,
were $12.6 million in 2002, $13.6 million in 2001 and $14.2 million in 2000.
Interest costs incurred by the ESOP on external debt for 2002, 2001 and 2000
were $1.2 million, $1.5 million and $1.9 million, respectively. Both allocated
and unallocated ESOP shares are treated as outstanding for purposes of computing
earnings per share. As of December 28, 2002, the number of ESOP shares allocated
to participant accounts was 5,092,393 and the number of unallocated shares was
7,126,731. The fair value of the unallocated ESOP shares at December 28, 2002
was $246.8 million.
F-21
PENSION AND OTHER BENEFIT PLANS The Company sponsors pension plans covering most
domestic hourly and executive employees, and approximately 2,250 foreign
employees. Benefits are generally based on salary and years of service, except
for collective bargaining employees whose benefits are based on a stated amount
for each year of service.
In 2001, the Company curtailed the U.S. salaried and non-union hourly plan with
respect to eliminating the impact from future salary increases on benefits,
resulting in a pre-tax curtailment gain of $29.3 million. The Company recorded
an $18.4 million pre-tax gain associated with final settlement of these pension
obligations in June 2002, which reflects a reduction for excise taxes and other
expenses from the $37.2 million actuarially determined settlement gain reported
in the pension expense table below. U.S. Pension income through the June, 2002
settlement date reflects a 9% expected rate of return on plan assets. After the
settlement date, a 7% expected return on plan assets assumption was applied
reflecting the Company's intention to invest these assets more conservatively in
future.
The Company's funding policy for its defined benefit plans is to contribute
amounts determined annually on an actuarial basis to provide for current and
future benefits in accordance with federal law and other regulations. Plan
assets are invested in equity securities, bonds, real estate and money market
instruments.
The Company contributes to multi-employer plans for certain collective
bargaining U.S. employees. In addition, various other defined contribution plans
are sponsored worldwide.
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Multi-employer plan expense $ 0.4 $ 0.5 $ 0.5
Defined contribution
plan expense $ 0.9 $ 3.3 $ 2.3
The components of net periodic pension cost are as follows:
U.S. Plans Non-U.S. Plans
---------- --------------
(Millions of Dollars) 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Service cost $ 3.0 $ 2.6 $ 3.0 $ 5.1 $ 4.7 $ 5.6
Interest cost 8.4 19.4 20.8 8.2 7.5 7.3
Expected return
on plan assets (15.0) (34.0) (36.8) (11.0) (10.9) (11.7)
Amortization of
transition asset (0.3) (0.6) (0.6) (0.2) (0.1) (0.1)
Amortization of prior
service cost 1.0 1.0 0.9 0.5 0.3 0.3
Actuarial gain (1.1) (3.7) (4.2) (0.2) - (0.8)
Settlement /
Curtailment gain (37.2) (29.3) - 0.2 - (1.4)
Net periodic
pension (income)
expense $(41.2) $(44.6) $(16.9) $ 2.6 $1.5 $(0.8)
The Company provides medical and dental benefits for certain retired employees
in the United States. In addition, U.S. employees who retire from active service
are eligible for life insurance benefits. Net periodic postretirement benefit
expense was $1.5 million in 2002, $1.8 million in 2001 and $1.7 million in 2000.
F-22
The changes in the pension and other postretirement benefit obligations, fair
value of plan assets as well as amounts recognized in the consolidated balance
sheets, are shown below:
Pension Benefits Other Benefits
------------------- --------------
U.S. Plans Non-U.S. Plans U.S. Plans
(Millions of Dollars) 2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- -------
Change in benefit obligation:
Benefit obligation at end of
prior year $ 249.5 $ 262.6 $ 130.3 $ 120.1 $ 17.9 $ 14.4
Service cost 3.0 2.6 5.1 4.7 0.4 0.6
Interest cost 8.4 19.4 8.2 7.5 1.1 1.2
Curtailments / settlements (187.0) (29.7) 0.1 - - -
Change in discount rate 2.0 14.8 (2.1) 2.1 0.7 0.7
Actuarial (gain) loss 39.0 17.4 (1.7) 4.5 0.2 2.7
Plan amendments 0.1 1.6 0.9 1.5 (0.8) -
Foreign currency exchange rates - - 12.3 (4.6) - -
Acquisitions 12.6 - 0.2 - - -
Benefits paid (82.7) (39.2) (9.2) (5.5) (2.2) (1.7)
Benefit obligation at end of year $ 44.9 $ 249.5 $ 144.1 $ 130.3 $ 17.3 $ 17.9
Change in plan assets:
Fair value of plan assets at
end of prior year $ 396.9 $ 406.8 $ 119.6 $ 142.9 $ - -
Actual return on plan assets (6.8) 28.6 (10.7) (15.2) - -
Foreign currency exchange
rate changes - - 10.6 (5.2) - -
Employer contribution 1.3 0.7 11.3 2.6 2.2 1.7
Curtailments / settlements (301.8) - - - - -
Benefits paid (82.7) (39.2) (9.2) (5.5) (2.2) (1.7)
Acquisitions 7.1 - - - - -
Fair value of plan assets at
end of plan year $ 14.0 $ 396.9 $ 121.6 $ 119.6 - -
Funded status-assets (less than)
in excess benefit obligation $ (30.9) $ 147.4 $ (22.5) $ (10.7) $ (17.3) $ (17.9)
Unrecognized prior service cost 6.2 7.1 5.4 4.8 (0.6) 0.1
Unrecognized net actuarial
loss (gain) 10.1 (90.8) 40.0 24.4 2.7 1.8
Unrecognized net asset
at transition - (0.6) 0.1 - - -
Net amount recognized $ (14.6) $ 63.1 $ 23.0 $ 18.5 $ (15.2) $ (16.0)
Amounts recognized in the
consolidated balance sheet:
Prepaid benefit cost $ 5.8 $ 75.9 $ 35.6 $ 23.9 $ - $ -
Accrued benefit liability (28.7) (19.3) (13.0) (5.9) (15.2) (16.0)
Intangible asset 3.1 3.6 0.4 0.5 - -
Accumulated other
comprehensive loss 5.2 2.9 - - - -
Net amount recognized $ (14.6) $ 63.1 $ 23.0 $ 18.5 $ (15.2) $ (16.0)
WEIGHTED AVERAGE ASSUMPTIONS USED:
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------
U.S. Plans Non-U.S. Plans U.S. Plans
(Millions of Dollars) 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Discount rate 6.5% 7.0% 6.0% 6.0% 6.5% 7.0%
Average wage increase 4.0% 4.0% 3.25% 3.5% - -
Expected return on plan assets 8.75% 9.0% 7.75% 8.5% - -
U.S. PLANS NON-U.S. PLANS
2002 2001 2002 2001
---- ---- ---- ----
Projected benefit obligation $ 39.9 $ 21.1 $ 143.4 $ 30.3
Accumulated benefit obligation $ 36.0 $ 18.8 $ 130.7 $ 24.2
Fair value of plan assets $ 7.1 $ - $ 120.4 $ 19.0
The weighted average annual assumed rate of increase in the per-capita cost of
covered benefits (i.e., health care cost trend rate) is assumed to be 12.0% for
2003, reducing gradually to 6% by 2013 and remaining at that level thereafter. A
one percentage point change in the assumed health care cost trend rate would
have the following effects as of December 28, 2002:
F-23
(Millions of Dollars) 1 % POINT INCREASE 1 % POINT DECREASE
------------------ ------------------
Effect on the net periodic postretirement benefit cost $ 0.1 $ (0.1)
Effect on the postretirement benefit obligation 0.7 (0.6)
N. OTHER COSTS AND EXPENSES
Other-net in 2002 includes a pre-tax nonrecurring pension settlement gain of
$18.4 million ($0.06 per share), and $11.3 million in pre-tax income ($0.09 per
share) from an environmental settlement with an insurance carrier. In addition,
2002 reflects $8.4 million of impairment losses recognized on machinery and
equipment primarily related to plant rationalization activities. There was no
goodwill amortization expense in 2002, due to the adoption of SFAS No. 142,
while goodwill amortization expense was $7.6 million in 2001 and $5.3 million in
2000. Other-net in 2001 includes a pre-tax nonrecurring pension curtailment gain
of $29.3 million, or $0.22 per share, net of taxes. Other-net is primarily
comprised of intangibles amortization expense, gains and losses on asset
dispositions, currency impact, environmental expense, results from
unconsolidated entities, and expenses related to the Mac Advantage financing
program.
Advertising costs, classified in SG&A expenses, are expensed as incurred and
amounted to $21.6 million in 2002, $25.5 million in 2001 and $30.3 million in
2000. Cooperative advertising expense reported as a deduction in net sales was
$24.2 million in 2002, $18.2 million in 2001 and $19.1 million in 2000.
Research and development costs were $9.1 million, $12.5 million and $13.6
million for the fiscal years 2002, 2001 and 2000, respectively.
O. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER SPECIAL CHARGES
In 2001, the Company undertook initiatives to reduce its cost structure and
executed several business repositionings intended to improve its
competitiveness. These actions resulted in the closure of 13 facilities and a
net employment reduction of approximately 2,200 production, selling and
administrative people. As a result, the Company recorded $72.4 million of
restructuring and asset impairment charges. Reserves were established for these
initiatives consisting of $54.8 million for severance, $10.4 million for asset
impairment charges and $7.2 million for other exit costs. The charges for asset
impairments were primarily related to manufacturing and other assets that were
retired and disposed of as a result of manufacturing facility closures.
At December 28, 2002 and December 29, 2001, restructuring and asset impairment
reserve balances were $2.3 million and $38.5 million. The December 29, 2001
balance reflects $5.8 million related to the impairment of assets. The December
28, 2002 balance relates primarily to 2001 initiatives.
As of December 28, 2002, 86 manufacturing and distribution facilities have been
closed as a result of the restructuring initiatives since 1997. In 2002, 2001
and 2000, approximately 1,000, 2,100 and 900 employees had been terminated as a
result of restructuring initiatives, respectively. Severance payments of $26.0
million, $41.7 million and $29.1 million and other exit payments of $4.4
million, $3.4 million and $3.1 million were made in 2002, 2001 and 2000,
respectively. Write-offs of impaired assets were $5.8 million, $7.9 million and
$7.0 million in 2002, 2001 and 2000, respectively.
In June 2002 and September 2001, $8.4 million and $4.8 million in severance
charges were recorded, respectively, as the Company continued to rationalize its
headcount to provide further SG&A expense reductions. These charges were
classified within SG&A expense in the Consolidated Statements of Operations.
These actions resulted in the termination of approximately 200 selling and
administrative
F-24
employees in each year. As of December 28, 2002, no accrual remained as all of
the severance has been expended.
In 2002, $6.4 million in restructuring reserves were established in purchase
accounting for the Best acquisition, due to planned closure of several Best
offices and synergies in certain centralized functions. The $6.4 million is
comprised of $5.3 million for severance and $1.1 million for other exit costs
primarily related to non-cancelable leases.
P. BUSINESS SEGMENT AND GEOGRAPHIC AREA
The Company operates worldwide in two reportable business segments: Tools and
Doors. The Tools segment includes carpenters, mechanics, pneumatic and hydraulic
tools as well as tool sets. The Doors segment includes commercial and
residential doors, both automatic and manual, as well as closet doors and
systems, home decor, door locking systems, commercial and consumer hardware.
BUSINESS SEGMENTS
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Net Sales
Tools $ 1,954.3 $ 2,007.9 $ 2,128.8
Doors 638.7 598.7 601.8
Consolidated $ 2,593.0 $ 2,606.6 $ 2,730.6
Operating Profit
Tools $ 207.6 $ 265.6 $ 285.7
Doors 81.0 63.8 55.1
Consolidated 288.6 329.4 340.8
Restructuring charges and
asset impairments - (72.4) -
Interest income 4.0 6.7 7.5
Interest expense (28.5) (32.3) (34.6)
Other-net 8.4 5.3 (20.0)
Earnings before income taxes $ 272.5 $ 236.7 $ 293.7
Segment Assets
Tools $ 1,564.0 $ 1,615.8 $ 1,502.4
Doors 710.0 318.0 260.3
2,274.0 1,933.8 1,762.7
Corporate assets 144.2 121.9 122.1
Consolidated $ 2,418.2 $ 2,055.7 $ 1,884.8
Capital Expenditures
Tools $ 41.4 $ 59.8 $ 44.5
Doors 10.9 13.3 19.9
Consolidated $ 52.3 $ 73.1 $ 64.4
Depreciation and Amortization
Tools $ 59.6 $ 67.9 $ 65.0
Doors 11.6 13.9 17.1
Consolidated $ 71.2 $ 81.8 $ 82.1
The Company assesses the performance of its reportable business segments using
operating profit, which follows the same accounting policies as those described
in Note A. Operating profit excludes interest income, interest expense,
other-net, and income tax expense. In addition, operating profit excludes
restructuring charges and asset impairments. Corporate and shared expenses are
allocated to each segment. Sales between segments are not material. Segment
assets primarily include accounts receivable, inventory, other current assets,
property, plant and equipment, intangible assets and other miscellaneous assets.
Corporate assets and unallocated assets are cash, deferred income taxes and
certain other assets. Geographic net sales and long-lived assets are attributed
to the geographic regions based on the geographic location of each Stanley
subsidiary.
F-25
Sales to The Home Depot were approximately 21%, 20% and 18% of consolidated net
sales in 2002, 2001 and 2000, respectively. For 2002, 2001 and 2000 net sales to
this one customer amounted to approximately 47%, 45% and 40% of segment net
sales, respectively, for the Doors segment and approximately 13%, 12% and 11%,
respectively for the Tools segment.
GEOGRAPHIC AREAS
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Net Sales
United States $ 1,841.7 $ 1,885.2 $ 1,984.0
Other Americas 185.3 167.6 185.0
Europe 472.1 456.7 459.3
Asia 93.9 97.1 102.3
Consolidated $ 2,593.0 $ 2,606.6 $ 2,730.6
Long-Lived Assets
United States $ 878.8 $ 590.4 $ 458.3
Other Americas 31.8 28.5 31.3
Europe 278.1 254.1 266.7
Asia 39.1 38.2 34.2
Consolidated $ 1,227.8 $ 911.2 $ 790.5
Q. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of the end of each fiscal year were as follows:
(Millions of Dollars) 2002 2001
---- ----
Deferred tax liabilities:
Depreciation $ 80.6 $ 78.0
Other 11.6 5.8
Total deferred tax liabilities 92.2 83.8
Deferred tax assets:
Employee benefit plans 27.3 16.5
Doubtful accounts 9.5 10.8
Inventories 14.6 7.7
Amortization of intangibles 23.6 14.7
Accruals 12.0 12.8
Restructuring charges 11.7 14.9
Foreign and state operating loss
carryforwards 15.2 21.0
Other 9.3 0.8
123.2 99.2
Valuation allowance (15.2) (21.0)
Total deferred tax assets 108.0 78.2
Net deferred tax asset (liability) $ 15.8 $ (5.6)
Valuation allowances reduced the deferred tax asset attributable to foreign and
state loss carryforwards to the amount that, based upon all available evidence,
is more likely than not to be realized. Reversal of the valuation allowance is
contingent upon the recognition of future taxable income and capital gains in
specific foreign countries and specific states, or changes in circumstances
which cause the recognition of the benefits to become more likely than not.
F-26
Income tax expense consisted of the following:
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Current:
Federal $ 98.0 $ 24.1 $ 40.1
Foreign 13.7 19.6 16.7
State 10.4 5.9 7.0
Total current 122.1 49.6 63.8
Deferred (benefit):
Federal (36.0) 33.4 34.7
Foreign 1.4 (7.0) (2.9)
State - 2.4 3.7
Total deferred (benefit) (34.6) 28.8 35.5
Total $ 87.5 $ 78.4 $ 99.3
Income taxes paid during 2002, 2001 and 2000 were $120.0 million and $41.4
million and $59.7 million, respectively. During 2002, the Company had tax
holidays with Poland, Thailand, and China. Tax holidays resulted in a $2.2
million reduction in tax expense in 2002, $4.2 million in 2001, and $2.2 million
in 2000. The tax holidays in Poland and China expired in 2002, the tax holiday
in Thailand is in place until 2010.
The reconciliation of federal income tax at the statutory federal rate to income
tax at the effective rate was as follows:
(Millions of Dollars) 2002 2001 2000
---- ---- ----
Tax at statutory rate $ 95.5 $ 82.8 $ 102.8
State income taxes,
net of federal benefits 6.7 5.4 6.7
Difference between foreign
and federal income tax (14.3) (15.9) (7.0)
Other-net (0.4) 6.1 (3.2)
Income taxes $ 87.5 $ 78.4 $ 99.3
The components of earnings before income taxes consisted of the following:
(Millions of Dollars) 2002 2001 2000
---- ---- ----
United States $ 180.6 $ 193.6 $ 241.9
Foreign 91.9 43.1 51.8
Total pre-tax earnings $ 272.5 $ 236.7 $ 293.7
Undistributed foreign earnings of $119.4 million at December 28, 2002 are
considered to be invested indefinitely or will be remitted substantially free of
additional tax. Accordingly, no provision has been made for taxes that might be
payable upon remittance of such earnings, nor is it practicable to determine the
amount of this liability.
R. COMMITMENTS
The Company has noncancelable operating lease agreements, principally related to
facilities, vehicles, machinery and equipment. At December 28, 2002, the
aggregate amount of all future minimum lease payments was $92.3 million
allocated as follows (in millions of dollars): $43.6 in 2003, $16.1 in 2004,
$9.8 in 2005, $6.8 in 2006, $5.8 in 2007 and $10.2 thereafter. Minimum payments
have not been reduced by minimum sublease rentals of $3.0 million due in the
future under noncancelable subleases. Rental expense for operating leases was
$36.4 million in 2002, $36.8 million in 2001 and $46.3 million in 2000.
The Company has $31.3 million in commitments for outsourcing arrangements,
principally related to information systems and telecommunications, which expire
at various dates through 2009. In addition, the Company has approximately $60.7
million in material purchase commitments expiring through 2006. The
F-27
future estimated minimum payments under these commitments, in millions of
dollars, as of December 28, 2002 were $66.2 in 2003, $7.7 in 2004, $5.3 in 2005,
$5.3 in 2006, $2.5 in 2007 and $5.0 thereafter.
The Company has numerous assets, predominantly vehicles and equipment, under a
one-year term renewable U.S. master personal property lease. Residual value
obligations, which approximate the fair value of the related assets, under this
master lease were $42.9 million at December 28, 2002. The U.S. master personal
property lease obligations are not reflected in the future minimum lease
payments since the initial and remaining term does not exceed one year. The
Company routinely exercises various lease renewal options and frequently
purchases leased assets for fair value at the end of lease terms.
S. GUARANTEES
Maximum Carrying
Potential Amount of
(Millions of Dollars) Payment Liability
------- ---------
Financial guarantees:
Credit facilities and debt obligations -
consolidated subsidiaries $ 19.8 $ -
Commercial customer financing
arrangements 1.9 -
Standby letters of credit 14.7 -
Government guarantees 0.1 -
Guarantees on the residual values
of leased properties 10.7 -
Guarantees on leases for divested
business which are subleased 1.2 0.3
Balance December 28, 2002 $ 48.4 $ 0.3
The Company has sold various businesses and properties over many years and
provided standard indemnification to the purchasers with respect to any unknown
liabilities, such as environmental, which may arise in the future that are
attributable to the time of Stanley's ownership. The Company has not accrued any
liabilities associated with these general indemnifications since there are no
identified exposures.
The Company provides product and service warranties which vary across its
businesses. The types of warranties offered generally range from one year to
limited lifetime, while certain products carry no warranty. Further, the Company
incurs discretionary costs to service its products in connection with product
performance issues. Historical warranty and service claim experience forms the
basis for warranty obligations recognized. Adjustments are recorded to the
warranty liability as new information becomes available.
The changes in the carrying amount of product and service warranties for the
year ended December 28, 2002 are as follows:
(Millions of Dollars)
Balance December 29, 2001 $ 6.6
Warranties and guarantees issued 15.1
Warranty payments (15.3)
Adjustments to provision (0.1)
Balance December 28, 2002 $ 6.3
T. CONTINGENCIES
The Company is involved in various legal proceedings relating to environmental
issues, employment, product liability and workers' compensation claims and other
matters. The Company periodically reviews the status of these proceedings with
both inside and outside counsel, as well as an actuary for risk insurance.
Management believes that the ultimate disposition of these matters will not have
a material adverse effect on operations or financial condition taken as a whole.
F-28
The Company recognizes liabilities for contingent exposures when analysis
indicates it is both probable that an asset has been impaired or that a
liability has been incurred and the amount of impairment or loss can reasonably
be estimated. When a range of probable loss can be estimated, the Company
accrues the most likely amount. In the event that no amount in the range of
probable loss is considered most likely, the minimum loss in the range is
accrued.
In the normal course of business, the Company is involved in various lawsuits
and claims. In addition, the Company is a party to a number of proceedings
before federal and state regulatory agencies relating to environmental
remediation. Also, the Company, along with many other companies, has been named
as a potentially responsible party (PRP) in a number of administrative
proceedings for the remediation of various waste sites, including ten active
Superfund sites. Current laws potentially impose joint and several liability
upon each PRP. In assessing its potential liability at these sites, the Company
has considered the following: the solvency of the other PRPs, whether
responsibility is being disputed, the terms of existing agreements, experience
at similar sites, and the fact that the Company's volumetric contribution at
these sites is relatively small.
The Company's policy is to accrue environmental investigatory and remediation
costs for identified sites when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal
information that becomes available. As of December 28, 2002 and December 29,
2001, the Company had reserves of $16.7 million and $14.6 million respectively,
primarily for remediation activities associated with Company-owned properties as
well as for Superfund sites that are probable and estimable. The range of
environmental remediation costs that is reasonably possible is $16.7 to $41.0
million.
The Company may be liable for environmental remediation of sites it no longer
owns. Liabilities have been recorded on those sites in accordance with policy.
The environmental liability for certain sites that have cash payments that are
fixed or reliably determinable have been discounted to present value. The
discounted and undiscounted amount of the liability relative to these sites is
$5.5 million and $7.7 million, respectively, as of December 28, 2002 and $8.2
million and $6.3 million, respectively, as of December 29, 2001. The payments
relative to these sites are expected to be $1.2 million in 2003, $1.4 million in
2004, $1.0 million in 2005, $0.3 million in 2006, $0.3 million in 2007 and $3.5
million thereafter.
The amount recorded for identified contingent liabilities is based on estimates.
Amounts recorded are reviewed periodically and adjusted to reflect additional
technical and legal information that becomes available. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating certain exposures. Subject to the imprecision in
estimating future contingent liability costs, the Company does not expect that
any sum it may have to pay in connection with these matters in excess of the
amounts recorded will have a materially adverse effect on its financial
position, results of operations or liquidity.
F-29
QUARTERLY RESULTS OF OPERATIONS (unaudited)
Millions of Dollars, except per share amounts) Quarter Year
------- ----
2002 First Second(A) Third Fourth(B,C)
- ---- ----- ------ ----- ------
Net sales $ 616.7 $ 649.1 $ 665.5 $ 661.7 $ 2,593.0
Gross profit 215.5 223.0 209.9 187.4 835.8
Selling, general and administrative expenses 135.1 134.9 133.4 143.8 547.2
Net earnings 48.9 63.3 54.7 18.1 185.0
Net earnings per share:
Basic $ 0.57 $ 0.74 $ 0.63 $ 0.21 $ 2.14
Diluted $ 0.56 $ 0.72 $ 0.62 $ 0.20 $ 2.10
2002 First(D) Second Third(E) Fourth(F)
- ---- ----- ------ ----- ------
Net sales $ 621.6 $ 671.6 $ 671.4 $ 642.0 $ 2,606.6
Gross profit 223.1 234.3 234.6 213.3 905.3
Selling, general and administrative expenses 148.9 146.1 147.4 133.5 575.9
Restructuring and asset impairment charges 18.3 0.0 0.0 54.1 72.4
Net earnings 46.6 50.7 54.5 6.5 158.3
Net earnings per share:
Basic $ 0.54 $ 0.59 $ 0.64 $ 0.08 $ 1.85
Diluted $ 0.54 $ 0.58 $ 0.62 $ 0.07 $ 1.81
(A) Second quarter results include an $8.4 million charge to selling, general
and administrative expenses for severance and related costs associated with
employment reductions. This charge was offset by an $18.4 million gain
associated with the final settlement of a defined benefit plan recorded in
other-net. The second quarter charges and credit had a zero net income
impact.
(B) Fourth quarter results include pre-tax charges of $22.2 million related to
the following: an $8.0 million reassessment of Mac Direct inventory and
accounts receivable valuations as a result of a new retail control system
($6.5 million reflected in cost of sales and $1.5 million included in
selling, general and administrative expenses); a $6.8 million inventory
valuation adjustment recorded in cost of sales attributable to Fastening
Systems business recent cost estimation process improvements; and a $7.4
million fixed asset impairment related primarily to the U.S. plant
consolidation, included in other-net. In addition the Company recognized
$8.7 million, or $0.07 per share, in environmental income arising from a
settlement with an insurance carrier.
(C) Fourth quarter results include $5.6 million or $0.04 per share of
accounting corrections. These corrections relate primarily to expense
capitalization and depreciation which arose in prior fiscal years and
account for the difference between earnings set forth in these financial
statements and unaudited amounts included in the Company's January 24, 2003
earnings release. These costs were classified within the 2002 Consolidated
Statement of Operations as follows -- (i) sales -- $0.5 million, (ii) cost
of sales $4.4 million; and (iii) other-net -- $0.7 million. Management
believes that these corrections are immaterial to any previously reported
results of prior periods, but has recorded them in the aggregate in the
fourth quarter of the year ended December 28, 2002.
(D) First quarter restructuring and asset impairment charges include $17
million for severance and $1 million for other exit costs. First quarter
results also include a pension curtailment gain of $29 million, and $11
million in charges related to several business repositionings and a series
of initiatives at Mac Tools. The $11 million was classified in the
statement of operations as follows: $6 million in cost of sales, $3 million
in selling, general and administrative expenses and $2 million in
other-net.
(E) Third quarter results include $5 million of charges for severance recorded
in selling, general and administrative expenses offset by $5 million in
credits for tax benefits.
(F) Fourth quarter restructuring and asset impairments charges include $38
million for severance, $10 million for asset impairments, and $6 million
for other exit costs. Also included in fourth quarter results is a $6
million charge to cost of sales for disposition of inventory for
discontinued manufacturing plants and SKUs.
F-30
EXHIBIT INDEX
THE STANLEY WORKS
EXHIBIT LIST
(3) (i) Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3(i) to the Annual Report on Form 10-K for the year ended January 2,
1999)
(ii) The Stanley Works By-laws as amended October 17, 2001
(incorporated by reference to Exhibit 3(ii) to the Annual Report on Form 10-K
for the year ended December 29, 2001).
(4) (i) Indenture, dated as of April 1, 1986 between the Company and State
Street Bank and Trust Company, as successor trustee, defining the rights of
holders of 5.75% Notes due March 1, 2004 (incorporated by reference to Exhibit
4(a) to Registration Statement No. 33-4344 filed March 27, 1986)
(ii) First Supplemental Indenture, dated as of June 15, 1992 between
the Company and State Street Bank and Trust Company, as successor trustee
(incorporated by reference to Exhibit (4)(c) to Registration Statement No.
33-46212 filed July 21, 1992)
(a) Certificate of Designated Officers establishing Terms of
5.75% Notes due March 1, 2004 (incorporated by reference to Exhibit 4(ii)(b) to
the Annual Report on Form 10-K for the year ended January 2, 1999)
(iii) Rights Agreement, dated January 31, 1996 (incorporated by
reference to Exhibit (4)(i) to Current Report on Form 8-K dated January 31,
1996)
(iv) Amended and Restated Facility A (364 Day) Credit Agreement, dated
as of October 16, 2002, with the banks named therein and Citibank, N.A. as
administrative agent.
(v) Facility B (Five Year) Credit Agreement, dated as of October 17,
2001, with the banks named therein and Citibank, N.A. as administrative agent
(incorporated by reference to Exhibit 4(v) to the Annual Report on Form 10-K for
the year ended December 29, 2001).
(vi) Indenture, dated as of November 1, 2002 between the Company and
JPMorgan Chase Bank, as trustee, defining the rights of holders of 3-1/2% Notes
Due November 1, 2007 and 4-9/10% Notes due November 1, 2012.
(vii) Registration Rights Agreement dated November 1, 2002 among the
Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith
Barney Inc., BNP Paribas Corp. and Fleet Securities, Inc. as Purchasers.
(10) (i) Deferred Compensation Plan for Non-Employee Directors as amended
December 11, 2000 (incorporated by reference to Exhibit 10(ii) to the Annual
Report on Form 10-K for the year ended December 30, 2000.)*
(ii) 1988 Long-Term Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10(iii) to the Annual Report on Form 10-K for the year
ended January 3, 1998)*
(iii) Management Incentive Compensation Plan effective January 4, 1998
(incorporated by reference to Exhibit 10(iii) to the Quarterly Report on Form
10-Q for the quarter ended July 4, 1998)*
(iv) Deferred Compensation Plan for Participants in Stanley's
Management Incentive Plan effective January 1, 1996 (incorporated by reference
to Exhibit 10(v) to the Annual Report on Form 10-K for the year ended December
30, 1995)*
(v) Supplemental Retirement and Account Value Plan for Salaried
Employees of The Stanley Works amended and restated as of June 30, 2001
(incorporated by reference to Exhibit 10(vi) to the Annual Report on Form 10-K
for the year ended December 29, 2001).*
(vi) Note Purchase Agreement, dated as of June 30, 1998, between the
Stanley Account Value Plan Trust, acting by and through Citibank, N.A. as
trustee under the trust agreement for the
E-1
Stanley Account Value Plan, for $41,050,763 aggregate principal amount of 6.07%
Senior ESOP Guaranteed Notes Due December 31, 2009 (incorporated by reference to
Exhibit 10(i) to the Quarterly Report on Form 10-Q for the quarter ended July 4,
1998)
(vii) New 1991 Loan Agreement, dated June 30, 1998, between The Stanley
Works, as lender, and Citibank, N.A. as trustee under the trust agreement for
the Stanley Account Value Plan, to refinance the 1991 Salaried Employee ESOP
Loan and the 1991 Hourly ESOP Loan and their related promissory notes
(incorporated by reference to Exhibit 10(ii) to the Quarterly Report on Form
10-Q for the quarter ended July 4, 1998)
(viii) (a) Supplemental Executive Retirement Program amended and
restated and effective September 19, 2001 (incorporated by reference to Exhibit
10(ix) to the Annual Report on Form 10-K for the year ended December 29, 2001).*
(b) Amendment to John M. Trani's supplemental Executive
Retirement Program, dated September 17, 1997 (incorporated by reference to
Exhibit 10(ix)(b) to the Annual Report on Form 10-K for the year ended January
3, 1998)*
(ix) (a) The Stanley Works Non-Employee Directors' Benefit Trust
Agreement dated December 27, 1989 and amended as of January 1, 1991 by and
between The Stanley Works and Fleet National Bank, as successor trustee
(incorporated by reference to Exhibit (10)(xvii)(a) to the Annual Report on Form
10-K for year ended December 29, 1990)
(b) Stanley Works Employees' Benefit Trust Agreement dated
December 27, 1989 and amended as of January 1, 1991 by and between The Stanley
Works and Fleet National Bank, as successor trustee (incorporated by reference
to Exhibit (10)(xvii)(b) to the Annual Report on Form 10-K for year ended
December 29, 1990)
(x) Restated and Amended 1990 Stock Option Plan (incorporated by
reference to Exhibit 10(xiii) to the Annual Report on Form 10-K for the year
ended December 28, 1996)
(xi) Master Leasing Agreement, dated September 1, 1992 between BLC
Corporation and The Stanley Works (incorporated by reference to Exhibit 10(i) to
the Quarterly Report on Form 10-Q for the quarter ended September 26, 1992)
(xii) The Stanley Works Stock Option Plan for Non-Employee Directors,
as amended December 18, 1996 (incorporated by reference to Exhibit 10(xvii) to
the Annual Report on Form 10-K for the year ended January 3, 1998)
(xiii) Employment Agreement dated as of January 1, 2000 between The
Stanley Works and John M. Trani (incorporated by reference to Exhibit 10(i) to
Current Report on Form 8-K dated June 23, 2000)*
(xiv) 1997 Long-Term Incentive Plan (incorporated by reference to
Exhibit 99.2 to Registration Statement No. 333-42582 filed July 28, 2000)*
(xv) 2001 Long-Term Incentive Plan (incorporated by reference to
Exhibit 99.1 to Registration Statement No. 333-64326 filed July 2, 2001).*
(xvi) Engagement Letter, dated August 26, 1999 between The Stanley
Works and Donald McIlnay.*
(xvii) Agreement, dated June 9, 1999 between The Stanley Works and
James Loree (incorporated by reference to Exhibit 10(ii) to the Quarterly Report
on Form 10-Q for the quarter ended July 3, 1999).*
(xviii) Engagement Letter, dated January 2, 2001 between The Stanley
Works and Paul Isabella (incorporated by reference to Exhibit 10 (xix) of the
Annual Report on Form 10-K for the year ended December 29, 2001). *
(xix) Engagement Letter, dated September 12, 2000 between The Stanley
Works and Jack Garlock.*
E-2
(11) Statement re computation of per share earnings (the information required to
be presented in this exhibit appears in Notes A and K to the Company's
Consolidated Financial Statements set forth in this Form 10-K)
(12) Statement re computation of ratio of earnings to fixed charges
(21) Subsidiaries of Registrant
(23) Consent of Independent Auditors (at page F-2)
(24) Power of Attorney
(99) (i) Policy on Confidential Proxy Voting and Independent Tabulation and
Inspection of Elections as adopted by The Board of Directors October 23, 1991
(incorporated by reference to Exhibit (28)(i) to the Quarterly Report on Form
10-Q for the quarter ended September 28, 1991)
(ii) Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(iii) Certification by CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensation plan or arrangement
E-3