UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2001
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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Common Stock--Par Value $2.50 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
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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].
The aggregate market value of Common Stock, par value $2.50 per share, held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on January 25, 2002 was approximately $3.7 billion. As of January 25,
2002, there were 85,081,072 shares of Common Stock, par value $2.50 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Form S-4 Registration Statement dated February 8, 2002, filed
with the Commission pursuant to Regulation under the Securities Act of 1933, are
incorporated by reference into Part III.
The undersigned registrant hereby amends the following items of its Annual
Report for the year ended December 29, 2001 on Form 10-K as set forth hereto:
Item 1: Business.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 14, Exhibit 1: Financial Statements.
The items amended herein are for additional disclosure only based on a review of
the company's annual report on form 10-K by the United States Securities and
Exchange Commission (the "Commission"). The review of form 10-K was done in
conjunction with the Commission's review of the company's form S-4 filing on
February 8, 2002 for its pending reorganization to Bermuda.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this amendment to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE STANLEY WORKS
April 2, 2002
By /s/ James M. Loree
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James M. Loree, Vice President Finance
and Chief Financial Officer
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FORM 10-K
Part I
Item 1. Business.
Part I, Item 1 of the company's form 10-K for the year ended December 29, 2001
has been amended to expand the disclosure of section 1(c), Narrative Description
of Business, specifically the section captioned "Customers", by including the
name of its largest customer and disclosing the percentage of that customer's
sales to each business segment.
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 2001, Stanley had net sales of $2.624 billion and employed approximately
14,400 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 N 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 O 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
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(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(TM), 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.
Doors. The Doors segment manufactures and markets commercial and
residential doors, both automatic and manual, as well as closet doors and
systems, home decor and door and consumer hardware. 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) and Acme(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
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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
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,
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 2001, 2000
and 1999 approximately 19%, 17% and 15%, respectively, of the company's
consolidated net sales were to Home Depot. For 2001, 2000 and 1999, net sales to
this one customer amounted to approximately 45%, 42% and 38%, respectively, for
the Doors segment and approximately 11%, 10% and 10%, respectively for the Tools
segment. 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
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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.
Backlog. At December 29, 2001, the company had $125 million in unfilled
orders compared with approximately $148 million in unfilled orders at February
3, 2001. 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 utilized in its businesses
worldwide. The STANLEY(R) and STANLEY (in a notched rectangle)(R) 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)(R), LaBounty(R),
MAC(R), Proto(R), Jensen(R), Goldblatt(R), Husky(R), Vidmar(R) and Zag(R)
trademarks are also material to the business.
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.
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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 parties, has been named as a potentially
responsible party ("PRP") in a number of administrative or judicial proceedings
for the remediation of various waste sites, including ten (10) 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 29, 2001, the company had
reserves of approximately $14.6 million, primarily for remediation activities
associated with company-owned properties as well as for Superfund sites.
The amount recorded for identified contingent liabilities is based on estimates.
Amounts recorded are reviewed periodically and adjusted to reflect additional
technical and legal information that becomes available. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
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 29, 2001, the company had approximately 14,400
employees, approximately 7,000 of whom were employed in the U.S. Of these 7,000
U.S. employees, approximately 11.2% are covered by collective bargaining
agreements negotiated with 15 different local labor unions who are, in turn,
affiliated with approximately 7 different
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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 2002, 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 O of the Notes to Consolidated Financial Statements in Item 8.
1(e) Cautionary Statements. The company incorporates by reference the
material captioned "Cautionary Statements" in Item 7.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II, Item 7 of the company's form 10-k for the year ended December 29, 2001
has been amended to expand the disclosure of its asset impairment charges under
the caption "Restructuring Activities" and to include quantitative information
on its synthetic leases within the caption "Off-Balance Sheet Arrangements".
RESULTS OF OPERATIONS
Results of Operations. Net sales were $2,624 million for 2001, as
compared to $2,749 million in 2000, a 5% decrease. 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 (approximately
1%) from the translation of foreign currency as these currencies, primarily in
Europe and Asia, continue to weaken against the U.S. dollar.
Net sales in 2000 of $2,749 million were relatively flat as compared to 1999.
Overall unit volume growth was completely offset by a reduction from the net
effect of foreign currency translation, primarily in Europe. The company
experienced sales volume growth in the Tools segment which was partially offset
by the effects of weakening markets on the Doors segment.
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 continues to rationalize its cost structure and
headcount. In addition, the company incurred certain credits and charges during
2001 that were determined by management to be special, or non-recurring. 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 special charges related to several business
repositionings. The repositionings were principally in the Tools segment and
included 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 special 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 special charge of $6 million for the disposition of
inventories associated principally with discontinued manufacturing plants and
SKU's. These special
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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 the special charges and
credits amounted to $18 million.
Financial results for the first six months of 1999 include transition expenses
related to the company's restructuring initiatives. These costs were classified
as period operating expenses within cost of sales ($20 million) and SG&A
expenses ($35 million). They included the costs of moving production equipment,
operating duplicate facilities while transferring production or distribution,
consulting costs incurred in planning and implementing changes, recruiting and
relocation of employees, the cost of transition employees involved in
reorganizing the functions, and other types of costs that were incurred to
facilitate restructuring. In addition, the company incurred costs to remediate
its computer and related systems so that these systems would function properly
with regard to date issues pertaining to the Year 2000 ("Y2K").
Results in 1999 also included a $20 million special charge in the fourth quarter
as the company recorded higher estimates for certain loss provisions related to
its mechanics tools businesses, principally MacDirect. The changes in estimates
were based on the company's evolving experience in managing a direct mobile
sales force in the automotive channel as well as inefficiencies in operating
mechanisms and systems. Of the total $20 million special charges to income: $3
million was included in net sales, $11 million was included in cost of sales,
$11 million was included in SG&A expenses and a credit of $5 million was
included in Other-net.
Because the presence of restructuring charges and asset impairments, special
credits and charges, restructuring-related transition costs and non-recurring
Y2K remediation costs obscure the underlying trends within the company's
business, 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 2001, the company reported gross profit of $923 million, or 35.2% of net
sales compared to $997 million or 36.3% of net sales in 2000. Included in gross
profit for 2001 were $13 million of special charges taken in the first and
fourth quarters related to business repositioning initiatives within the Tools
segment and
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the disposition of inventories principally with discontinued manufacturing
plants and SKU's. Gross profit excluding these costs amounted to $936 million or
35.6% of net sales. The reduction in gross profit was a result of a shift in
sales mix to retail and independent Mac sales channels versus industrial and
direct Mac sales channels, partially offset by $80 million in productivity
improvements. The company also experienced a decrease in cost of sales as a
result of Last-in, First-Out (LIFO) reserve decreases as the company continues
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.
In 2000, the company reported gross profit of $997 million, or 36.3% of net
sales compared to 34.1% in 1999. Included in cost of sales for 1999 were $20
million of restructuring-related transition costs, primarily for plant
rationalization activities, and a portion of the mechanic tools' special charges
of $11 million. Gross profit in 1999, excluding these restructuring-related and
special charges was 35.3% of net sales. This significant improvement in gross
profit was attributable to a combination of the company's improved ability to
adjust employment and production plans as market demand fluctuated, improved
cost controls in operations, the benefits of the company's restructuring
programs, and continued progress on purchased material costs despite
inflationary pressures.
Selling, general and administrative ("SG&A") expenses were $594 million for
2001. Excluding the impact of $8 million in special 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, SG&A
expenses amounted to $586 million, or 22.3% of net sales, as compared to $657
million for 2000, or 23.9% of net sales. Improvements in SG&A expenses are
attributable to continued cost reductions achieved from changes made within the
information management infrastructure, downward adjustments to employment levels
in response to weak economic markets and the benefits attained from the
company's restructuring and repositioning efforts.
SG&A expenses were $657 million, or 23.9% of net sales, in 2000, as compared
with $703 million, or 25.5% of net sales in 1999. Included in 1999 were $35
million of restructuring-related transition and other non-recurring costs and
fourth quarter special charges related to mechanics' tools of $11 million.
Excluding these costs, SG&A expenses were $657 million in 1999, or 23.9% of net
sales. The company made significant strides in the latter half of 2000 in its
continual effort to reduce SG&A expenses. In the first half of 2000, the
company's expenses were
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6% higher than 1999 expenses for the same period, primarily the result of
increased distribution costs, information management infrastructure costs, and
selling and administrative costs related to an increased number of sales
representatives in the MacDirect program. However, in the second half of 2000,
the company's expenses were 6% lower than 1999 expenses for the same period.
Significant cost reductions were achieved pertaining to information management
infrastructure, distribution, and administrative activities. In 2000, SG&A
expenses were also favorably impacted as compared to 1999 as a result of an
increase in income related to U.S. pension plans.
Interest-net was $26 million in 2001 as compared to $27 million in 2000. The
decrease was a result of a decline in interest rates partially offset by an
increase in weighted average debt levels in 2001.
Interest-net of $27 million in 2000 represented a slight decrease from $28
million in 1999 as debt levels were relatively consistent from year to year.
Other-net for 2001 represents income of $5 million. Excluding the gain recorded
in conjunction with the company's curtailment of a U.S. pension plan of $29
million and a special charge of $2 million, both occurring in the first quarter
of 2001, Other-net amounted to expense of $22 million as compared to expense of
$20 million in 2000.
Other-net was $20 million of expense in 2000 compared with $3 million in income
for 1999. The company experienced lower gains from asset sales in 2000 and
incurred a write-off of the remaining interest in a previously disposed
equipment rental business. Additionally, included in 1999 results were
non-recurring currency related gains of $11 million realized upon the
termination of a cross-currency financial instrument.
The company's effective income tax rate for 2001 was 33% as compared to 34% for
2000 and 35% for 1999. 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.
In addition, the company recorded special credits in the third quarter of 2001
for tax benefits of $3 million. These special credits were entirely offset by
reduced tax benefits related to the restructuring charges and special charges.
Business Segment Results. The Tools segment includes carpenters,
mechanics, pneumatic and hydraulic tools, as well as
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tool sets. The Doors segment includes commercial and residential doors, both
automatic and manual, as well as closet doors and systems, home decor and door
and consumer hardware. The information presented below excludes
restructuring-related transition costs for the first half of 1999. Segment
eliminations are also excluded. Special fourth quarter 1999 charges related to
Mechanics' Tools of $25 million are reflected in Tools 1999 segment results.
TOOLS
(Millions of Dollars) 2001 2000 1999
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Net sales $2,022 $2,143 $2,116
Operating profit $ 266 $ 286 $ 248
% of Net sales 13.2% 13.3% 11.7%
Tools sales declined in 2001 as compared to 2000 by 6%. The sales decrease is
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 continued to decline against the US dollar. Despite lower
sales, Tools operating profit as a percentage of net sales remained fairly
static as compared to 2000. Excluding the net impact of special credits and
charges allocated to the Tools segment totaling $15 million, operating profit
totaled $281 million, or 13.9% of net sales. The improvements in operating
margin, exclusive of special credits and charges, are primarily a result of SG&A
reductions.
Tools sales increased 1% in 2000 as compared to 1999 primarily from unit volume
improvements. A 3% unit volume increase was almost completely offset by a 2%
reduction in sales from the net effect of foreign currency translation,
primarily due to weaker European currencies. Operating profit in 2000 for the
tools segment was 13.3% of net sales compared to 1999, excluding special
charges, of 12.9% of net sales. The increase from prior year is due to improved
cost controls in operations, the benefits of the company's restructuring
initiatives, and higher unit volumes.
DOORS
(Millions of Dollars) 2001 2000 1999
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Net sales $ 602 $ 606 $ 636
Operating profit $ 64 $ 55 $ 42
% of Net sales 10.6% 9.1% 6.6%
Doors sales were fairly static in 2001, representing a decrease of less than 1%.
Net sales in the Doors segment reflect strong sales attributable to a new
program launch with a significant customer, offset by certain sluggish market
conditions in the Americas. Operating profit for Doors totaled 10.6% of net
sales
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in 2001 as compared to 9.1% for 2000. Excluding the impact of net special
credits and charges allocated to the Doors segment totaling $5 million,
operating profit totaled $69 million, or 11.4% of net sales. The improvements in
operating profit, as a percentage of sales, is a result of improved productivity
in the hardware business as the company shifted the production base to low-cost
countries, and the continued reduction of SG&A expenses.
Net sales decreased by 5% in 2000 as compared to 1999, driven by declining
hardware sales. This decline was partially offset by sales unit volume growth in
automated door products. Operating profit in 2000 was 9.1% of net sales compared
to operating profit of 6.6% for 1999. This increase is due primarily to
realization of benefits associated with various productivity programs.
Restructuring Activities. In 2001, the company undertook new
initiatives to reduce its cost structure and executed several business
repositionings intended to improve its competitiveness. These actions have or
will result in the closure of thirteen facilities and a net employment reduction
of approximately 2,100 production, selling and administrative people. As a
result, the company recorded $18 million and $54 million of restructuring and
asset impairment charges in the first and fourth quarters, respectively.
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 are primarily related to
manufacturing and other assets that are being retired and disposed of as a
result of the closure of manufacturing facilities. The majority of these assets
are written down to zero as they have no future internal use and nominal market
value. These initiatives are expected to be substantially completed by the
middle of 2003.
In 1999, the company completed an evaluation of the remaining reserves that were
established in 1997 for restructuring and asset impairment charges and
determined that certain projects would be cancelled in order to reapply company
resources to higher payback areas. Accordingly, in the fourth quarter of 1999,
the company reversed $62 million of reserves established for such actions.
Also in 1999, new projects were approved to achieve improved cost productivity.
These new initiatives included facility closures and the related relocation of
production, a reduction in work force in administrative functions and the
outsourcing of non-core activities as well as related asset impairments. The
company recorded restructuring and asset impairments charges related to these
new initiatives of $40 million, of which $30 million related to severance, $8
million related to asset impairment
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charges, and $2 million related to other exit costs.
In 2000, the company completed the restructuring initiatives announced in 1997
and 1999 and will be incurring run-off expenditures of $2 million over the next
two years.
To date the company has closed 66 facilities and reduced employment by
approximately 8,300 people related to all restructuring initiatives.
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 2001, cash flows from operations were $222 million as compared to
$236 million in 2000. The decline in operating cash flow was primarily the
result of an increase in cash payments for restructuring in 2001 of $45 million
as compared with $32 million in 2000, partially offset by an increase in
non-cash earnings.
During 2000 the company generated $236 million in operating cash flow, versus
$222 million in 1999. This increase resulted primarily from a significant
reduction in restructuring-related transition costs, which were offset partially
by higher working capital requirements. In 2000, the company's receivables
decreased by $14 million, inventory increased by $17 million, and accounts
payable increased by $15 million. The receivables decrease was primarily
attributed to the doors segment as volume declined. The increased inventory was
in the tools segment. The accounts payable increase resulted from renegotiation
of vendor terms and increased attention to payment management. The company made
cash payments of $32 million for its restructuring activities, primarily
severance.
Capital expenditures in 2001 were $73 million as compared to $64 million in 2000
driven by an increase in costs for software development and acquisition as the
company expands the infrastructure of its systems as well as the addition of
"The Stanley Learning Center" (a major addition at World Headquarters for the
training and development of employees). Capital expenditures were $64 million in
2000 down from $103 million in 1999. Investment in capital for 2000 was lower
than traditional levels as a result of facility consolidations, continued
outsourcing and the Stanley Production System.
The company has unused short and long-term 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
15
long-term. The company has short-term lines of credit with numerous foreign
banks aggregating $113 million, of which $96 million was available at December
29, 2001. 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. On February 7, 2002 the company refinanced
$75 million of commercial paper through the issuance of 5 year notes payable at
a fixed interest rate of 4.5%. This $75 million obligation is classified under
long-term debt at December 29, 2001. 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 29,
2001, the company's maximum available funds under this arrangement were $106
million, of which the company had utilized $22 million.
The following summarizes the company's significant contractual obligations and
commitments that impact its liquidity.
---------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------------------------------------
(in millions) Total Less than 1 1-3 years 4-5 years After 5 years
year
---------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings $177.3 $177.3 $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
Long-term Debt 316.9 120.1 108.1 3.4 85.3
---------------------------------------------------------------------------------------------------------------------
Operating Leases 74.9 13.6 42.0 8.1 11.2
---------------------------------------------------------------------------------------------------------------------
Other Commercial Commitments 61.6 12.9 17.6 15.4 15.7
---------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH $630.7 $323.9 $167.7 $ 26.9 $ 112.2
OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS AMOUNTS OF COMMITMENTS EXPIRATION PER PERIOD
---------------------------------------------------------------------------------------------------------------------
(in millions) Total Amounts Less than 1 1-3 years 4-5 years After 5 years
Committed year
---------------------------------------------------------------------------------------------------------------------
U.S. Lines of Credit $350.0 $250.0 $ - $100.0 $ -
---------------------------------------------------------------------------------------------------------------------
International Lines of Credit $ 95.5 $ 95.5 $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL COMMITMENTS $445.5 $345.5 $ - $100.0 $ -
---------------------------------------------------------------------------------------------------------------------
Short-term borrowings, long-term debt and lines of credit are explained in
detail within Note H of the Notes to Consolidated Financial Statements in Item
8. Operating leases and other commercial commitments are explained in detail in
Note Q of the Notes to Consolidated Financial Statements in Item 8.
16
The company's desired objective is to increase dividends by at least one-half
the company's earnings growth rate, ultimately reaching a dividend payout ratio
of 25%. Dividends increased 4.4% in 2001, 3.5% in 2000 and 5% in 1999.
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 has indicated that it may
continue to repurchase its shares when deemed 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 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 2001 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 risk comes
17
from its floating rate debt in the US, Canada and Europe and is fairly
represented by changes in LIBOR rates. At December 29, 2001, the result of a
hypothetical one percentage point increase in short term LIBOR rates would not
have resulted in a material impact on the pretax profit of the company.
The company has access to financial resources and borrowing capabilities around
the world. 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 the restructuring
and 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 consolidated
financial position, results of operations or liquidity.
New Accounting Standards. Refer to Note A of the Notes to Consolidated
Financial Statements in Item 8 for a discussion of new accounting pronouncements
and the potential impact to the company's consolidated results of operations and
consolidated financial position.
Critical Accounting Policies. The company has determined that the
following accounting policies are critical due to the amount of estimation
required:
Allowance for doubtful accounts. The company's estimate for its
allowance for doubtful accounts related to trade receivables is based on two
methods. The amounts calculated from each of
18
these methods are combined to determine the total amount reserved. First, the
company evaluates specific accounts where we have information that the customer
may have an inability to meet its financial obligations (bankruptcy, etc.). In
these cases, the company uses its judgment, based on the best available facts
and circumstances, and records a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. 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. If circumstances change (i.e. higher than expected
defaults or an unexpected material adverse change in a major customer's ability
to meet its financial obligation to the company), the company's estimates of the
recoverability of amounts due the company could be reduced by a material amount.
Inventories - lower of cost or market, slow moving and obsolete. The
company ensures inventory is valued at the lower of cost or market, and
continually reviews the book value of discontinued product lines and SKU's to
determine if these items are properly valued. The company identifies these items
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 issues with obsolete inventory due to the nature
of its products. If the company is not able to achieve its expectations of the
net realizable value of the inventory at its current value, the company would
have to adjust its reserves accordingly.
Off-Balance Sheet Arrangements. The company's off-balance sheet
arrangements include the following:
The company has agreements to sell, on a revolving basis, pools of accounts and
notes receivables to two Qualified Special Purpose Entities, which qualify to be
accounted for as unconsolidated subsidiaries ("QSPE's"). The entities are
19
designed to facilitate the securitization of certain trade accounts receivable
and are used to fund the Mac Advantage financing program and as an additional
source of liquidity. Assets and related debt off-balance sheet were $82 and $64
million at December 29, 2001 and $69 and $66 million at December 30, 2000,
respectively. The company is responsible for servicing these accounts and
receives a servicing fee, while the QSPE's bear the risk of noncollection.
The company has $212 million in equity forward contracts, maturing December 31,
2002, with major U.S. financial institutions. 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. The
structure requires net share settlement, and is accounted for within equity.
Cash settlements may be elected at the option of the company. The company has
made no cash settlement elections during the contract period.
The equity forward contracts contain registration and unwind triggers in the
event the company's stock price declines below $19 per share, or its credit
rating is downgraded to below investment grade. 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" which could cause dilution of
earnings per share. The company received 1,432,264 shares valued at $67 million
from quarterly net share settlements in fiscal 2001.
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 asset is off-balance
sheet. As of December 29, 2001, the estimated fair values of assets and
remaining obligations for these properties were $32 million and $30 million,
respectively. The company also has numerous assets, predominantly vehicles and
equipment, under a one year term renewable U.S. master personal property lease.
Obligations under this master lease were $46 million at December 29, 2001. The
company believes that the obligations under these leases approximate the fair
value of the related assets. The company does not anticipate any material
liabilities associated with these transactions.
Cautionary Statements. The statements contained in this Annual Report
(Form 10-K) to shareowners regarding the company's ability (i) reduce its cost
structure, including the reduction of facilities and employees, and improve
competitiveness, (ii) broaden its customer base further in each business
segment, (iii)
20
to increase dividends, and (iv) invest in its businesses and to fund
acquisitions and other initiatives are forward looking and inherently subject to
risk and uncertainty.
The company's ability to lower its overall cost structure is dependent on the
success of various initiatives to improve manufacturing operations and to
implement related cost control systems and to source from and manufacture a
higher percentage of the company's products in low-cost countries. 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 develop and execute comprehensive plans for facility
consolidations, the availability of vendors to perform outsourced functions, the
availability of lower cost raw material of suitable quality from foreign
countries, 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. In addition, the
company's ability to leverage the benefits of gross margin improvements is
dependent upon maintaining selling, general and administrative expense at 2001
levels. The company's ability to maintain the level of selling, general and
administrative expenses is dependent upon various process improvement
activities, the successful implementation of changes to the sales organization,
the recruitment and retention of manufacturers sales representatives and the
reduction of transaction costs.
The company's ability to broaden its customer base in each business segment is
dependent on a number of factors including, the success of the company's sales
and marketing programs and its ability to attract new customers.
The company's ability to increase dividends and invest in its businesses and to
fund acquisitions and other initiatives is dependent on its ability to generate
adequate cash flows and is dependent on all the factors discussed above.
The company's ability to achieve the objectives discussed above will also be
affected by external factors. These external factors include pricing pressure
and other changes within competitive markets, the continued consolidation of
customers in consumer channels, increasing competition, changes in trade,
monetary, fiscal and tax policies and laws, inflation, currency exchange
fluctuations, the impact of dollar/foreign currency exchange rates on the
competitiveness of products and recessionary or expansive trends in the
economies of the world in which the company operates.
21
ITEM 14(a). Financial Statements and Financial Statement Schedules
Item 14(a) of the company's form 10-k for the year ended December 29, 2001 has
been amended to expand the disclosure of Note N. Restructuring and Asset
Impairments, specifically the explanation of asset impairments and Note O.
Business Segment and Geographic Area, by naming the company's largest customer,
changing the percentage of sales to this customer from 18% to 19% for 2001 and
adding disclosure of the percentage of net sales of this customer for each
business segment.
THE STANLEY WORKS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors
Consolidated Statements of Operations--fiscal years ended December 29,
2001, December 30, 2000, and January 1, 2000.
Consolidated Balance Sheets--December 29, 2001 and December 30, 2000.
Consolidated Statements of Cash Flows--fiscal years ended December 29,
2001, December 30, 2000, and January 1, 2000.
Consolidated Statements of Changes in Shareowners' Equity-- fiscal
years ended December 29, 2001, December 30, 2000, and January 1, 2000.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedule of The Stanley
Works and subsidiaries is included in Item 14(d):
F-3 Schedule II--Valuation and Qualifying Accounts
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.
22
Consent of Independent Auditors
We consent to the use of our report dated January 24, 2002, except for Note H
and Note S, as to which the date is February 8, 2002, included in the Annual
Report (Form 10-K) of The Stanley Works for the year ended December 29, 2001,
with respect to the consolidated financial statements, as amended, included in
this Form 10-K/A.
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
April 1, 2002
F-2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE STANLEY WORKS AND SUBSIDIARIES
Fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000
(In Millions of Dollars)
------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------------
Balance (1) (2)
Description at Beginning Charged to Costs Charged to Other Deductions- Balance at End
of Period and Expenses Accounts-Describe Describe of Period
------------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended December 29, 2001
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $41.9 $18.0 ($3.5) (B) $24.1 (A) $32.3
Noncurrent 0.6 - 1.0 (B) 0.2 1.4
Fiscal year ended December 30, 2000
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $43.4 $24.3 $2.2 (B) $28.0 (A) $41.9
Noncurrent 0.7 - (0.1) (B) - 0.6
Fiscal year ended January 1, 2000
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $26.7 $31.3 $3.1 (B) $17.7 (A) $43.4
Noncurrent 0.6 - 0.1 (B) - 0.7
Notes: (A) Represents doubtful accounts charged off, less recoveries of
accounts previously charged off.
(B) Represents net transfers to/from other accounts, foreign currency
translation adjustments and acquisitions/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 29, 2001 and December 30, 2000, 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
29, 2001. Our audits also included the financial statement schedule listed in
the Index at Item 14(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 29, 2001 and December 30, 2000, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended December 29, 2001, 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 a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
January 24, 2002, except for Note H and Note S, as to which the date is February
8, 2002
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000
(Millions of Dollars, except per share amounts) 2001 2000 1999
---- ---- ----
NET SALES $ 2,624.4 $ 2,748.9 $ 2,751.8
COSTS AND EXPENSES
Cost of sales 1,701.3 1,751.5 1,813.9
Selling, general and administrative 593.7 656.6 703.0
Interest-net 25.6 27.1 27.9
Other-net (5.3) 20.0 (2.5)
Restructuring charges and asset impairments 72.4 - (21.3)
------ ------ ------
2,387.7 2,455.2 2,521.0
------ ------ ------
EARNINGS BEFORE INCOME TAXES 236.7 293.7 230.8
INCOME TAXES 78.4 99.3 80.8
------ ------ ------
NET EARNINGS $ 158.3 $ 194.4 $ 150.0
====== ====== ======
NET EARNINGS PER SHARE OF COMMON STOCK
BASIC $ 1.85 $ 2.22 $ 1.67
DILUTED $ 1.81 $ 2.22 $ 1.67
See notes to consolidated financial statements.
F-5
CONSOLIDATED BALANCE SHEETS
December 29, 2001 and December 30, 2000
(Millions of Dollars, except share and per share amounts) 2001 2000
---- ----
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 115.2 $ 93.6
Accounts and notes receivable 551.3 531.9
Inventories 410.1 398.1
Deferred taxes 4.7 29.6
Other current assets 60.1 41.1
------- -------
TOTAL CURRENT ASSETS 1,141.4 1,094.3
PROPERTY, PLANT AND EQUIPMENT 494.3 503.7
GOODWILL AND OTHER INTANGIBLES 236.1 175.9
OTHER ASSETS 183.9 110.9
------- -------
TOTAL ASSETS $ 2,055.7 $ 1,884.8
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 177.3 $ 207.6
Current maturities of long-term debt 120.1 6.1
Accounts payable 247.7 239.8
Accrued expenses 280.4 253.8
------- -------
TOTAL CURRENT LIABILITIES 825.5 707.3
LONG-TERM DEBT 196.8 248.7
RESTRUCTURING RESERVES 11.5 1.3
OTHER LIABILITIES 189.6 191.0
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 2001 and 2000 230.9 230.9
Retained earnings 1,184.9 1,039.6
Accumulated other comprehensive loss (138.9) (124.5)
ESOP debt (187.7) (194.8)
------- -------
1,089.2 951.2
Less: cost of common stock in treasury
(7,684,663 shares in 2001 and 7,155,158 shares in 2000) 256.9 214.7
------- -------
TOTAL SHAREOWNERS' EQUITY 832.3 736.5
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 2,055.7 $ 1,884.8
======= =======
See notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000
(Millions of Dollars) 2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES:
Net earnings $158.3 $194.4 $150.0
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 82.9 83.3 85.6
Provision for bad debts 17.2 24.3 31.3
Restructuring and asset impairments 72.4 - (21.3)
Other non-cash items 0.1 17.9 26.4
Changes in operating assets and liabilities:
Accounts and notes receivable (32.6) (15.8) (66.9)
Inventories (14.6) (29.2) (12.5)
Accounts payable and accrued expenses (66.8) (42.0) 18.1
Income taxes 25.7 9.8 19.8
Other (21.0) (6.5) (8.2)
----- ----- -----
Net cash provided by operating activities 221.6 236.2 222.3
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures (55.7) (59.8) (77.9)
Capitalized software (17.4) (4.6) (25.0)
Proceeds from sales of assets 9.8 14.1 35.1
Business acquisitions (79.3) - -
Other (27.2) (19.7) (0.1)
----- ----- -----
Net cash used by investing activities (169.8) (70.0) (67.9)
----- ----- -----
FINANCING ACTIVITIES:
Payments on long-term debt (2.4) (32.7) (156.7)
Proceeds from long-term borrowings 75.0 - 121.3
Net short-term financing (29.3) 59.7 (61.1)
Proceeds from swap terminations - - 13.9
Proceeds from issuance of common stock 25.4 8.9 10.0
Purchase of common stock for treasury (11.0) (108.6) (21.4)
Cash dividends on common stock (80.5) (78.3) (77.5)
----- ----- -----
Net cash used by financing activities (22.9) (151.0) (171.5)
----- ----- -----
Effect of exchange rate changes on cash (7.4) (9.6) (5.0)
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21.6 5.6 (22.1)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 93.6 88.0 110.1
----- ----- -----
CASH AND CASH EQUIVALENTS, END OF YEAR $ 115.2 $ 93.6 $ 88.0
===== ===== =====
See notes to consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE ESOP TREASURY SHAREOWNERS'
STOCK EARNINGS INCOME (LOSS) DEBT STOCK EQUITY
(Millions of Dollars, except per share amounts)
BALANCE JANUARY 2, 1999 $ 230.9 $ 867.2 $ (84.6) $ (213.2) $ (130.9) $ 669.4
Comprehensive income:
Net earnings 150.0 150.0
Currency translation adjustment (15.6) (15.6)
Minimum pension liability 1.0 1.0
-----
Total comprehensive income 135.4
Cash dividends declared-$.87 per share (77.5) (77.5)
Issuance of common stock (8.3) 21.4 13.1
Purchase of common stock (19.5) (19.5)
Equity hedge shares delivered (8.0) 8.0 -
Tax benefit related to stock options .8 .8
ESOP debt and tax benefit 2.7 11.0 13.7
----- ----- ----- ----- ----- -----
BALANCE JANUARY 1, 2000 230.9 926.9 (99.2) (202.2) (121.0) 735.4
Comprehensive income:
Net earnings 194.4 194.4
Currency translation adjustment (24.6) (24.6)
Minimum pension liability (.7) (.7)
-----
Total comprehensive income 169.1
Cash dividends declared-$.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 (.3) .3 -
Tax benefit related to stock options .8 .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-$.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
===== ======= ====== ====== ====== =====
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
2001, 2000 and 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 2001, 2000 and 1999 of $0.1 million, $2.3 million and $4.8
million, respectively.
Cash Equivalents
----------------
Highly liquid investments with original maturities of three months or less are
considered cash equivalents.
Inventories
-----------
U.S. inventories are valued at the lower of last-in, first-out (LIFO) cost or
market. Other inventories are valued generally at the lower of first-in,
first-out (FIFO) cost or market.
Long-Lived Assets
-----------------
Property, plant and equipment are stated on the basis of historical cost less
accumulated depreciation. Depreciation is provided using a combination of
accelerated and straight-line methods over the estimated useful lives of the
assets.
Goodwill is amortized on a straight-line basis over periods not
F-9
exceeding forty years. The company periodically evaluates the existence of
goodwill impairment on the basis of whether amounts recorded are recoverable
from projected undiscounted cash flows of related businesses. Impairment losses
are valued by comparing the carrying value of the goodwill to its fair value,
determined by the discounted cash flow method.
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.
Impairment losses were charged to operations in 2001 and 1999 and were included
in "Restructuring and Asset Impairments" in the Consolidated Statements of
Operations.
Financial Instruments
---------------------
The company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of SFAS Statement No. 133, on December 31, 2000. As a result of
adoption of SFAS 133 and 138, 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. The effect
of the adoption of SFAS 133 and 138 did not have a material impact on the
company's consolidated balance sheet, operating results or cash flows.
Subsequent to adoption, 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. Hedge ineffectiveness expense of $2.0 million for fiscal
2001 was recorded in other-net.
Prior to December 31, 2000, the company also used interest rate swap agreements,
foreign currency options and foreign exchange contracts for hedging purposes.
F-10
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 earning 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.
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.
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 include the impact of
common stock equivalents using the treasury stock method when the effect is
dilutive.
F-11
Stock-Based Compensation
------------------------
The company accounts for its employee stock compensation plans 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. Pro forma
disclosures of net earnings and earnings per share, as if the fair value based
method of accounting had been applied, are presented in Note J.
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 $136 million, $132 million and $123
million in 2001, 2000 and 1999, respectively. The company records distribution
costs in SG&A expenses and amounted to $75 million, $82 million and $85 million
in 2001, 2000 and 1999, respectively.
New Accounting Standards
------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes both SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30, ("APB 30"), for the disposal of a segment of a business (as
previously defined in APB 30). SFAS No. 144 retains the fundamental provisions
in SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No. 121. SFAS
No. 144 retains the basic provisions of APB 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). The company will
adopt SFAS 144 effective in fiscal year 2002. Upon adoption, management does not
expect SFAS No. 144 to have a material impact on the company's financial
statements.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangibles". Under
SFAS 142, goodwill is no longer amortized over its estimated useful life but is
subject to at least an annual assessment for impairment applying a fair-value
based test. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The statements are effective for the company's fiscal year 2002. The
F-12
company does not expect any impairment of goodwill upon adoption. Goodwill
amortization was $7.6 million in 2001, $5.3 million in 2000 and $5.5 million in
1999.
In June 2001, the FASB issued SFAS 141, "Business Combinations". SFAS 141
supercedes APB Opinion No. 16 by requiring that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS 141 also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. The
issuance of SFAS 141 had no impact on the company during 2001 as no business
combinations were initiated after June 30, 2001.
In April 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services ("EITF 00-25"). This issue
addresses the income statement classification of "slotting fees", cooperative
advertising arrangements and "buydowns". The consensus will require that certain
customer promotional payments that are currently classified as marketing
expenses within selling, general and administrative expense on the statement of
operations be classified as a reduction of revenue. The impact of EITF 00-25 on
the consolidated financial statements is expected to result in an adjustment to
net sales of less than 1% of the amounts already reported. The offset to this
reclassification is primarily within advertising expense. The adoption of EITF
00-25 will have no impact on profit from operations, net income or earnings per
share. The company will adopt EITF 00-25, effective January 1, 2002.
Reclassifications
-----------------
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
B. ACQUISITION
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 electronics in the United States for $79.3 million. The purchase price
was allocated to the fair market value of the assets acquired and liabilities
assumed and resulted in goodwill of $65.1 million, which was being amortized
over a 20 year period.
The aforementioned acquisition was accounted for as a purchase transaction and,
accordingly, the operating results have been included in the company's
consolidated financial statements since the date of acquisition. The acquisition
did not have a material pro forma impact on 2001 operations.
F-13
C. ACCOUNTS AND NOTES RECEIVABLE
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. At December 29, 2001 and
December 30, 2000, allowances for doubtful receivables of $32.3 million and
$41.9 million, respectively, were applied as a reduction of current accounts and
notes receivable. As of December 29, 2001, the company had one customer that
accounted for approximately 10% of its trade receivables.
The company has agreements to sell, on a revolving basis, undivided interests in
defined pools of accounts and notes receivable. At December 29, 2001, the
defined pools of receivables amounted to $271.7 million. The proceeds from sales
of such eligible receivables, primarily to Qualifying Special Purpose Entities
(QSPE's), in revolving-period securitizations were $81.4 million in 2001 and
$86.7 million in 2000, and these amounts have been deducted from receivables in
the December 29, 2001 and December 30, 2000 consolidated balance sheets. There
were no gains or losses on these sales. The company is responsible for servicing
and collecting the receivables sold and held in the QSPE's. Any incremental
additional costs related to such servicing and collection efforts are not
significant.
D. INVENTORIES
(Millions of Dollars) 2001 2000
---- ----
Finished products $ 308.0 $ 281.4
Work in process 49.1 53.8
Raw materials 53.0 62.9
------ ------
$ 410.1 $ 398.1
====== ======
Inventories in the amount of $277.0 million at December 29, 2001 and $252.5
million at December 30, 2000 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 and
$84.0 million higher than reported at December 29, 2001 and December 30, 2000,
respectively.
F-14
E. PROPERTY, PLANT AND EQUIPMENT
(Millions of Dollars) 2001 2000
---- ----
Land $ 24.6 $ 25.4
Buildings 224.5 218.3
Machinery and equipment 904.2 913.8
Computer software 76.4 74.7
------ ------
1,229.7 1,232.2
Less: accumulated depreciation
and amortization 735.4 728.5
------ ------
$ 494.3 $ 503.7
====== ======
Depreciation and amortization expense for 2001, 2000 and 1999 was $71.5, $75.9
and $75.6 million, respectively. The company currently has two properties
identified as held for sale with a book value of $3.0 million as of December 29,
2001.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles at the end of each fiscal year, net of
accumulated amortization of $88.2 million and $79.0 million, were as follows:
(Millions of Dollars) 2001 2000
---- ----
Goodwill $ 216.2 $ 160.4
Other 19.9 15.5
------ ------
$ 236.1 $ 175.9
====== ======
The increase in intangibles is primarily a result of the acquisition of Contact
East during 2001.
G. ACCRUED EXPENSES
(Millions of Dollars) 2001 2000
---- ----
Payroll and related taxes $ 30.3 $ 29.7
Insurance 27.2 31.3
Restructuring 21.2 12.1
Income taxes 77.2 54.8
Other 124.5 125.9
------ ------
$ 280.4 $ 253.8
===== =====
F-15
H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
(Millions of Dollars) 2001 2000
---- ----
Notes payable in 2002 7.4% $ 100.0 $ 100.0
Notes payable in 2004 5.8% 120.0 120.0
Notes payable in 2007 4.5% 75.0 -
Industrial Revenue Bonds due in
varying amounts to 2010 5.8-6.8% 19.6 19.6
ESOP loan guarantees,
payable in varying
monthly installments
through 2009 6.1% 22.5 27.9
Other, including net swap receivables (20.2) (12.7)
------ ------
316.9 254.8
Less: current maturities 120.1 6.1
------ ------
$ 196.8 $ 248.7
====== ======
The company has unused short 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
..06% to .08%. In addition, the company has short-term lines of credit with
numerous foreign banks aggregating $112.8 million, of which $95.5 million was
available at December 29, 2001. 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 29, 2001 and December 30, 2000 were
2.3% and 6.5%, 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 I for more information regarding the
company's interest rate and currency swap agreements.
Aggregate annual maturities of long-term debt for the years 2003 to 2006 are
$7.1 million, $101.0 million, $2.8 million and $0.6 million, respectively, and
$85.3 million thereafter. Interest paid during 2001, 2000 and 1999 amounted to
$33.4 million, $36.1 million and $30.8 million, respectively.
Commercial paper and Extendible Commercial Notes utilized to support working
capital requirements, were $160.0 million and
F-16
$187.8 million, as of December 29, 2001 and December 30, 2000, respectively.
On February 7, 2002 the company refinanced $75.0 million of commercial paper
through the issuance of 5 year notes payable at a fixed interest rate of 4.5%.
This $75.0 million obligation is classified under long-term debt at December 29,
2001.
I. 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.
(Millions of Dollars) 2001 2000
---- ----
Currency swaps $105.3 $112.0
pay rate 4.1% 4.6%
receive rate 4.6% 6.0%
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 29, 2001 and December 30, 2000,
the company had forward contracts hedging intercompany loans and royalty
payments totaling $20.3 million and $11.3 million, respectively. At December 29,
2001 and December 30, 2000, currency options hedged anticipated transactions
totaling $136.5 million and $174.7 million, respectively. The forward contracts
and options are primarily denominated in Canadian dollars, Australian dollars,
Taiwanese dollars, Israeli Shekels and major European currencies 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.
F-17
A summary of the carrying values and fair values of the company's financial
instruments at December 29, 2001 and December 30, 2000 is as follows:
(Millions of Dollars) 2001 2000
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- ------
Long-term debt,
including current portion $341.0 $346.8 $272.2 $270.5
Currency and
interest rate swaps (24.1) (27.6) (17.4) (19.5)
----- ----- ----- -----
$316.9 $319.2 $254.8 $251.0
===== ===== ===== =====
Generally, the carrying value of the debt related financial instruments is
included in the balance sheet in long-term debt. The fair values of long-term
debt are estimated using discounted cash flow analyses, 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.
J. CAPITAL STOCK
Earnings per Share Computation
------------------------------
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
(Millions of Dollars,
except per share amounts) 2001 2000 1999
---- ---- ----
Net earnings $158.3 $194.4 $150.0
Basic earnings per share-
weighted average shares 85,761,275 87,407,282 89,626,424
Dilutive effect of
employee stock options 1,706,074 260,499 260,177
---------- ---------- ----------
Diluted earnings per share-
weighted average shares 87,467,349 87,667,781 89,886,601
========== ========== ==========
Earnings per share:
Basic $ 1.85 $ 2.22 $ 1.67
Diluted $ 1.81 $ 2.22 $ 1.67
F-18
Common Stock Share Activity
---------------------------
The activity in common shares for each year, net of treasury stock, was as
follows:
2001 2000 1999
---- ---- ----
Outstanding, beginning of year 85,188,252 88,945,175 88,771,928
Issued 1,170,480 557,490 1,139,671
Purchased (1,699,985) (4,314,413) (966,424)
---------- ---------- ----------
Outstanding, end of year 84,658,747 85,188,252 88,945,175
========== ========== ==========
Common Stock Reserved
---------------------
At December 29, 2001 and December 30, 2000, the number of shares of common stock
reserved for future issuance under various employee and director stock plans was
as follows:
2001 2000
---- ----
Employee Stock Purchase Plan 3,797,153 4,070,937
Stock Option Plans 22,284,943 13,129,214
---------- ----------
26,082,096 17,200,151
========== ==========
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 $.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
F-19
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 29,
2001, there were 42,329,374 outstanding rights. There are 250,000 shares of
Series A Junior Participating Preferred Stock reserved for issuance in
connection with the rights.
Stock Options and Awards
------------------------
The company has stock option plans for salaried employees, key executives and
outside directors of the company. The plans primarily provide for the grant of
stock options, but also permit grants of restricted stock and other awards.
Options are granted at the market price of the company's stock on the date of
grant and have a term of 10 years. Generally, stock options are 50% exercisable
between one and three years from the anniversary of the grant and the remaining
50% are exercisable between two and five years from the anniversary of the
grant.
Information regarding the company's stock option plans is summarized below:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- ----- --------- ------- --------- --------
Outstanding,
beginning
of year 9,989,441 $27.19 6,413,578 $28.89 4,824,891 $29.56
Granted 1,967,352 38.30 4,142,650 23.89 2,158,350 27.12
Exercised (833,529) 25.19 (356,160) 20.12 (341,263) 21.58
Forfeited (1,267,380) 30.38 (210,627) 22.97 (228,400) 37.15
----------- ------ --------- ------ --------- -----
Outstanding,
end of year 9,855,884 $29.17 9,989,441 $27.19 6,413,578 $28.89
========= ====== ========= ====== ========= ======
Options
exercisable,
end of year 6,382,194 $27.71 6,192,691 $27.28 3,608,261 $29.06
========= ====== ========= ====== ========= ======
Options outstanding as of December 29, 2001 had exercise prices as follows:
3,312,359 options ranging from $18.56 to $24.97, 4,221,173 options ranging from
$25.13 to $34.62 and 2,322,352 options ranging from $35.23 to $55.98. The
weighted average remaining contractual life of these options is 7.7 years.
F-20
Stanley 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 on earnings per share of
in-the-money stock options 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 the risk of non-performance is remote. Interim quarterly settlements
are in shares of stock, not cash, and are accounted for within equity. 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.
The notional amount of the equity forward contracts at December 29, 2001 is $212
million. For the years ended December 29, 2001, December 30, 2000, and January
1, 2000 the company received 1,432,264 shares of common stock valued at $67.0
million, delivered 25,166 shares of common stock valued at $.3 million, and
delivered 227,710 shares of common stock valued at $8.0 million, respectively,
under the equity hedge program.
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 ($17.32 per share for fiscal year
2001 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 2001, 2000 and 1999 shares totaling 273,784, 100,369, and
127,447, respectively, were issued under the plan at average prices of $17.32,
$20.82 and $22.85 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 10,742,
41,532, and 46,746 were issued in 2001, 2000 and 1999, respectively. LTSIP
expense was $.1 million in 2001, $.8 million in 2000 and $.3 million in 1999.
F-21
Stock Compensation Plan
-----------------------
The company accounts for stock option grants under its stock-based compensation
plans and stock purchases under the Employee Stock Purchase Plan in accordance
with APB No. 25. Accordingly, no compensation cost has been recognized for stock
option grants since the options have exercise prices equal to the market value
of the company's common stock at the date of grant. 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:
2001 2000 1999
---- ---- ----
Pro forma net earnings
(in millions) $154.5 $173.2 $141.4
Pro forma earnings per share:
Basic $ 1.80 $ 1.98 $ 1.58
Diluted $ 1.77 $ 1.97 $ 1.57
Pro forma compensation cost relating to the stock options is recognized over the
six month vesting period for 2000 and prior grants and over the 3.6 year
weighted average vesting period for 2001 grants. 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
2001, 2000 and 1999, respectively: dividend yield of 2.6%, 3.8% and 3.5%;
expected volatility of 40% for 2001, 2000 and 1999; risk-free interest rates of
4.8%, 6.1% and 7.0%, and expected lives of 7 years. The weighted average fair
value of stock options granted in 2001, 2000 and 1999 was $14.31, $8.15 and
$9.92, respectively. As discussed previously under the equity hedge, the impact
of the equity forward contract has been included in the basic shares outstanding
calculation.
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 2001, 2000 and
1999, respectively: dividend yield of 3.0%, 5.2% and 3.5%, expected volatility
of 40% for 2001, 2000 and 1999; risk-free interest rates of 2.0%, 6.0% and 6.4%,
and expected lives of one year. The weighted average fair value of those
purchase rights granted in 2001, 2000 and 1999 was $8.48, $5.68 and $10.09,
respectively.
F-22
K. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated Other Comprehensive Loss at the end of each fiscal year was as
follows:
(Millions of Dollars) 2001 2000 1999
---- ---- ----
Currency translation adjustment ($136.3) ($123.4) ($98.8)
Minimum pension liability (2.9) (1.1) (0.4)
Cash flow hedge effectiveness 0.3 - -
--------- --------- ---------
($138.9) ($124.5) ($99.2)
========= ========= =========
L. 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 2001, 2000 and 1999 under
this matching arrangement were $5.8 million, $7.0 million and $7.1 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 3,000 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 $12.7
million in 2001, $13.0 million in 2000, and $13.9 million in 1999. 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
principle and interest payments as a percentage of total future debt principle
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
F-23
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 2001, $8.6
million in 2000 and $10.7 million in 1999.
Dividends on ESOP shares, which are charged to shareowners' equity as declared,
were $13.6 million in 2001, $14.2 million in 2000 and $14.7 million in 1999.
Interest costs incurred by the ESOP on external debt for 2001, 2000 and 1999
were $1.5 million, $1.9 million and $2.2 million, respectively. Both allocated
and unallocated ESOP shares are treated as outstanding for purposes of computing
earnings per share. As of December 29, 2001 the number of ESOP shares allocated
to participant accounts was 6,001,410 and the number of unallocated shares was
7,637,039. The fair value of the unallocated ESOP shares at December 29, 2001
was $355.3 million.
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 curtailment gain of $29.3 million. The company expects to settle
the pension obligations to participants in 2002.
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. If the plans are terminated or merged with another plan within
three years following a change in control of the company, any excess plan assets
are to be applied to increase the benefits of all participants.
F-24
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) 2001 2000 1999
---- ---- ----
Multi-employer plan expense $ .5 $ .5 $ .2
Defined contribution plan expense $ 3.3 $ 2.3 $ 1.9
The components of net periodic pension cost are as follows:
U.S. Plans Non-U.S. Plans
------------------------------- ----------------------------
(Millions of Dollars) 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Service cost $ 2.6 $ 3.0 $ 3.8 $ 4.7 $ 5.6 $ 4.6
Interest cost 19.4 20.8 21.8 7.5 7.3 7.6
Expected return on plan assets (34.0) (36.8) (33.8) (10.9) (11.7) (12.0)
Amortization of transition asset (.6) (.6) (.6) (.1) (.1) (.1)
Amortization of prior service cost 1.0 .9 .8 .3 .3 .3
Actuarial (gain) loss (3.7) (4.2) .2 - (.8) 1.5
Curtailment gain (29.3) - - - (1.4) (.5)
------ ----- ----- ----- ------ ------
Net periodic pension (income)
expense $ (44.6) $(16.9) $(7.8) $ $1.5 (.8) $1.4
====== ====== ===== ====== ======= =======
The company provides medical and dental benefits for certain retired employees
in the United States. In addition, domestic employees who retire from active
service are eligible for life insurance benefits. Net periodic postretirement
benefit expense was $1.8 million in 2001, $1.7 million in 2000 and $2.3 million
in 1999.
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:
F-25
Pension Benefits Other Benefits
---------------- --------------
U.S. Plans Non-U.S. Plans U.S. Plans
---------- -------------- ----------
(Millions of Dollars) 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at end of
prior year $ 262.6 $ 291.7 $ 120.1 $ 134.6 $ 14.4 $ 16.3
Service cost 2.6 3.0 4.7 5.6 .6 .7
Interest cost 19.4 20.8 7.5 7.3 1.2 1.0
Curtailment gain (29.7) - - - - -
Change in discount rate 14.8 - 2.1 - .7 -
Actuarial (gain) loss 17.4 (8.5) 4.5 (4.6) 2.7 (1.9)
Plan amendments 1.6 1.9 1.5 .7 - -
Foreign currency exchange rates - - (4.6) (9.3) - -
Benefits paid (39.2) (46.3) (5.5) (14.2) (1.7) (1.7)
------ ------ ------ ------ ----- -----
Benefit obligation at end of year $ 249.5 $ 262.6 $ 130.3 $ 120.1 $ 17.9 $ 14.4
====== ====== ====== ====== ===== =====
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
end of prior year $ 406.8 $ 416.2 $ 142.9 $ 167.0 $ - $ -
Actual return on plan assets 28.6 35.8 (15.2) .4 - -
Foreign currency exchange
rate changes - - (5.2) (11.9) - -
Employer contribution .7 1.1 2.6 1.6 1.7 1.7
Benefits paid (39.2) (46.3) (5.5) (14.2) (1.7) (1.7)
------ ------ ------ ------ ------ -----
Fair value of plan assets at
end of plan year $ 396.9 $ 406.8 $ 119.6 $ 142.9 $ $ - $ -
====== ====== ====== ====== ====== =====
Funded status-assets in excess
(less than) benefit obligation $ 147.4 $ 144.2 $ (10.7) $ 22.8 $ (17.9) $ (14.4)
Unrecognized prior service cost 7.1 6.5 4.8 4.1 .1 .2
Unrecognized net actuarial
(gain) loss (90.8) (131.6) 24.4 (7.2) 1.8 (1.7)
Unrecognized net asset
at transition (.6) (1.3) - (.7) - -
------- ----- ------ ----- ------- -----
Net amount recognized $ 63.1 $ 17.8 $ 18.5 $ 19.0 $ (16.0) $ (15.9)
======= ===== ====== ===== ======= =======
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET:
Prepaid benefit cost $ 75.9 $ 28.9 $ 23.9 $ 23.2 $ - $ -
Accrued benefit liability (19.3) (13.5) (5.9) (4.3) (16.0) (15.9)
Intangible asset 3.6 1.3 .5 .1 - -
Accumulated other
comprehensive loss 2.9 1.1 - - - -
------- ----- ----- ----- ------ ------
Net amount recognized $ 63.1 $ 17.8 $ 18.5 $ 19.0 $ (16.0) $ (15.9)
======= ===== ===== ===== ====== ======
F-26
WEIGHTED AVERAGE ASSUMPTIONS USED:
Discount rate 7.0% 7.5% 6.0% 6.25% 7.0% 7.5%
Average wage increase 4.0% 4.0% 3.5% 3.5% - -
Expected return on plan assets 9.0% 9.0% 8.5% 8.5% - -
PENSION PLANS IN WHICH ACCUMULATED
BENEFIT OBLIGATION EXCEEDS PLAN
ASSETS AT YEAR END:
Projected benefit obligation $ 21.1 $ 15.6 $ 30.3 $ 6.2
Accumulated benefit obligation $ 18.8 $ 13.8 $ 24.2 $ 4.3
Fair value of plan assets $ - $ - $ 19.0 $ 1.5
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
2002 reducing gradually to 6% by 2012 and remaining at that level thereafter. A
one percentage point increase in the assumed health care cost trend rate would
have increased the accumulated postretirement benefit obligation by $.6 million
at December 29, 2001 and net periodic postretirement benefit cost for fiscal
2001 by $.1 million.
M. OTHER COSTS AND EXPENSES
Interest-net for 2001, 2000 and 1999 included interest income of $6.7, $7.5 and
$5.4 million, respectively.
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 in 1999 includes a
gain on the termination of a cross-currency financial instrument of $11.4
million ($.08 per share).
Advertising costs are expensed as incurred and amounted to $43.3 million in
2001, $48.7 million in 2000 and $50.2 million in 1999.
N. RESTRUCTURING AND ASSET IMPAIRMENTS
In 2001, the company undertook new initiatives to reduce its cost structure and
executed several business repositionings intended to improve its
competitiveness. These actions have or will result in the closure of thirteen
facilities and a net employment reduction of approximately 2,200 production,
selling and administrative people. As a result, the company recorded $18.3
million and $54.1 million of restructuring and asset impairment charges in the
first and fourth quarters, respectively. 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 are primarily related to manufacturing and other
F-27
assets that are being retired and disposed of as a result of the closure of
manufacturing facilities. The majority of these assets are written down to zero
as they have no future internal use and nominal market value. These initiatives
are expected to be significantly completed by the middle of 2003.
In 1999, the company completed an evaluation of the remaining reserves that were
established in 1997 for restructuring initiatives and determined that certain
projects would be cancelled in order to reapply company resources to higher
payback areas. Accordingly, in the fourth quarter of 1999, the company reversed
$62 million of reserves established for such actions.
Also in 1999, new projects were approved to achieve improved cost productivity.
These new initiatives included facility closures and the related relocation of
production, a reduction in force in administrative functions and the outsourcing
of non-core activities as well as the related asset impairments. The company
recorded restructuring charges related to these new initiatives of $40 million,
of which $30 million related to severance, $8 million related to asset
write-downs and $2 million related to other exit costs.
In 2000, the company completed the restructuring initiatives announced in 1997
and 1999 and will be incurring $2.0 million of certain run-off expenditures,
primarily related to non-cancelable leases over the next two years.
At December 29, 2001 and December 30, 2000, restructuring and asset impairment
reserve balances were $38.5 million and $19.1 million, of which $5.8 million and
$3.3 million relates to the impairment of assets, respectively. The December 29,
2001 balance relates primarily to 2001 fourth quarter initiatives.
As of December 29, 2001, 66 manufacturing and distribution facilities have been
closed as a result of the restructuring initiatives since 1997. In 2001, 2000,
and 1999, approximately 2,100, 900, and 2,300 employees have been terminated as
a result of restructuring initiatives, respectively. Severance payments of $41.7
million, $29.1 million, and $44.4 million and other exit payments of $3.4
million, $3.1 million, and $17.0 million were made in 2001, 2000, and 1999,
respectively. Write-offs of impaired assets were $7.9 million, $7.0 million, and
$13.2 million in 2001, 2000, and 1999, respectively.
O. 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
F-28
automatic and manual, as well as closet doors and systems, home decor and door
and consumer hardware.
BUSINESS SEGMENTS
(Millions of Dollars) 2001 2000 1999
---- ---- ----
NET SALES
Tools $ 2,022.1 $ 2,142.5 $ 2,116.2
Doors 602.3 606.4 635.6
------- ------- -------
Consolidated $ 2,624.4 $ 2,748.9 $ 2,751.8
======= ======= =======
OPERATING PROFIT
Tools $ 265.6 $ 285.7 $ 248.1
Doors 63.8 55.1 41.7
------- ------- -------
329.4 340.8 289.8
Restructuring charges, asset
Impairments, and transition
and other costs (72.4) - (33.6)
Interest-net (25.6) (27.1) (27.9)
Other-net 5.3 (20.0) 2.5
------- ------- -------
Earnings before income taxes $ 236.7 $ 293.7 $ 230.8
======= ======= =======
SEGMENT ASSETS
Tools $ 1,615.8 $ 1,502.4 $ 1,455.1
Doors 318.0 260.3 306.4
------- ------- -------
1,933.8 1,762.7 1,761.5
Corporate assets 121.9 122.1 129.1
------- ------- -------
Consolidated $ 2,055.7 $ 1,884.8 $ 1,890.6
======= ======= =======
CAPITAL EXPENDITURES
Tools $ 59.8 $ 44.5 $ 90.2
Doors 13.3 19.9 12.7
------- ------ ------
Consolidated $ 73.1 $ 64.4 $ 102.9
======= ===== =====
DEPRECIATION AND
AMORTIZATION
Tools $ 69.0 $ 66.2 $ 70.1
Doors 13.9 17.1 15.5
------ ------ ------
Consolidated $ 82.9 $ 83.3 $ 85.6
====== ====== ======
F-29
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-net, other-net, and income tax
expense. In addition, operating profit excludes restructuring and asset
impairments, restructuring-related transition costs associated with the
company's restructuring plans and other non-recurring costs. 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 the Stanley subsidiary.
Sales to Home Depot, the company's largest customer, were approximately 19%, 17%
and 15% of consolidated net sales in 2001, 2000 and 1999, respectively. For
2001, 2000 and 1999, net sales to this one customer amounted to approximately
45%, 42% and 38%, respectively, for the Doors segment and approximately 11%, 10%
and 10%, respectively for the Tools segment.
GEOGRAPHIC AREAS
(Millions of Dollars) 2001 2000 1999
---- ---- ----
NET SALES
United States $ 1,885.2 $ 1,984.0 $ 1,962.5
Other Americas 185.4 203.3 199.0
Europe 456.7 459.3 493.2
Asia 97.1 102.3 97.1
------ ------ ------
Consolidated $ 2,624.4 $ 2,748.9 $ 2,751.8
====== ====== ======
LONG-LIVED ASSETS
United States $ 593.5 $ 458.3 $ 442.1
Other Americas 28.5 31.3 28.1
Europe 254.1 266.7 286.3
Asia 38.2 34.2 36.7
Other - - 6.4
------ ------ ------
Consolidated $ 914.3 $ 790.5 $ 799.6
====== ====== ======
F-30
P. INCOME TAXES
Significant components of the company's deferred tax liabilities and assets as
of the end of each fiscal year were as follows:
(Millions of Dollars) 2001 2000
---- ----
Deferred tax liabilities:
Depreciation $ 78.0 $ 82.4
Other 5.8 16.4
----- -----
Total deferred tax liabilities 83.8 98.8
----- -----
Deferred tax assets:
Employee benefit plans 16.5 26.4
Doubtful accounts 10.8 16.1
Inventories 7.7 13.8
Amortization of intangibles 14.7 16.4
Accruals 12.8 13.9
Restructuring charges 14.9 20.7
Foreign and state operating loss
carryforwards 21.0 16.1
Other 0.8 6.9
----- -----
99.2 130.3
Valuation allowance (21.0) (16.1)
----- -----
Total deferred tax assets 78.2 114.2
----- -----
Net deferred tax (liabilities) asset $ ( 5.6) $ 15.4
===== =====
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-31
Income tax expense consisted of the following:
(Millions of Dollars) 2001 2000 1999
---- ---- ----
Current:
Federal $ 24.1 $ 40.1 $ 25.3
Foreign 19.6 16.7 13.7
State 5.9 7.0 5.6
----- ------ ------
Total current 49.6 63.8 44.6
----- ------ ------
Deferred (benefit):
Federal 33.4 34.7 32.1
Foreign (7.0) (2.9) .8
State 2.4 3.7 3.3
----- ------ ------
Total deferred (benefit) 28.8 35.5 36.2
----- ------ ------
Total $ 78.4 $ 99.3 $ 80.8
===== ====== ======
Income taxes paid during 2001, 2000 and 1999 were $41.4 million and $59.7
million and $22.4 million, respectively.
The reconciliation of federal income tax at the statutory federal rate to income
tax at the effective rate was as follows:
(Millions of Dollars) 2001 2000 1999
---- ---- ----
Tax at statutory rate $ 82.8 $ 102.8 $ 80.8
State income taxes,
net of federal benefits 5.4 6.7 5.8
Difference between foreign
and federal income tax (15.9) (7.0) (4.5)
Other-net 6.1 (3.2) (1.3)
----- ----- -----
Income taxes $ 78.4 $ 99.3 $ 80.8
===== ===== =====
The components of earnings before income taxes consisted of the following:
(Millions of Dollars) 2001 2000 1999
---- ---- ----
United States $212.9 $267.5 $201.0
Foreign 23.8 26.2 29.8
----- ----- -----
Total pretax earnings $236.7 $293.7 $230.8
===== ===== =====
Undistributed foreign earnings of $62.2 million at December 29, 2001 are
considered to be invested indefinitely or will be
F-32
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.
Q. COMMITMENTS
Future minimum lease payments under noncancelable operating leases, principally
related to facilities, vehicles, machinery and equipment, in millions of
dollars, as of December 29, 2001 were $13.6 in 2002, $21.6 in 2003, $20.4 in
2004, $4.9 in 2005, $3.2 in 2006 and $11.2 thereafter. Minimum payments have not
been reduced by minimum sublease rentals of $4.1 million due in the future under
noncancelable subleases. Rental expense for operating leases amounted to $36.8
million in 2001, $46.3 million in 2000 and $42.7 million in 1999.
The company has entered into certain outsourcing arrangements, principally
related to information systems, telecommunications and freight administration,
which expire at various dates through 2009. The future estimated minimum
payments under these commitments, in millions of dollars, as of December 29,
2001 were $12.9 in 2002, $9.6 in 2003, $8.0 in 2004, $7.7 in 2005, $7.7 in 2006
and $15.7 thereafter.
R. CONTINGENCIES
In the normal course of business, the company is involved in various lawsuits
and claims. In addition, the company is a party to a number of proceedings
before federal and state regulatory agencies relating to environmental
remediation. Also, the company, along with many other companies, has been named
as a potentially responsible party (PRP) in a number of administrative
proceedings for the remediation of various waste sites, including nine 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
F-33
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 29, 2001, the company had
reserves of $14.6 million, primarily for remediation activities associated with
company-owned properties as well as for Superfund sites.
The environmental liability for certain sites that have cash payments that are
fixed or reliably determinable have been discounted at a rate of 6%. As of
December 29, 2001, the discounted and undiscounted amount of the liability
relative to these sites is $8,228,000 and $6,332,000, respectively. The payments
relative to these sites are expected to be $4,919,000 in 2002, $1,956,000 in
2003, $439,000 in 2004, $429,000 in 2005, $424,000 in 2006 and $4,576,000
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.
S. SUBSEQUENT EVENT
On February 8, 2002, the company filed a Form S-4 Registration Statement with
the U.S. Securities and Exchange Commission for approval of a reorganization to
reincorporate the company in Bermuda.
*******
F-34
SUPPLEMENTARY DATA
Quarterly Results of Operations (Unaudited)
-------------------------------------------
(Millions of Dollars, except per share amounts) QUARTER YEAR
------------------------------------------------------- -------
FIRST A SECOND THIRD B FOURTH C 2001
------- ------ ------- -------- ----
NET SALES $626.2 $676.5 $676.1 $645.6 $2,624.4
GROSS PROFIT 227.7 239.2 239.3 216.9 923.1
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 153.5 151.0 152.1 137.1 593.7
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 $ .54 $ .59 $ .64 $ .08 $ 1.85
DILUTED $ .54 $ .58 $ .62 $ .07 $ 1.81
2000
Net sales $695.4 $702.8 $684.4 $666.3 $2,748.9
Gross profit 257.4 255.7 245.0 239.3 997.4
Selling, general and administrative expenses 171.9 168.1 162.2 154.4 656.6
Net earnings 48.2 50.6 48.7 46.9 194.4
Net earnings per share:
Basic $ .54 $ .58 $ .56 $ .54 $ 2.22
Diluted $ .54 $ .58 $ .56 $ .54 $ 2.22
A 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 special
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.
B Third quarter results include $5 million of special charges for non-recurring
severance recorded in selling, general and administrative expenses offset by
$5 million in special credits for one-time tax benefits.
C Fourth quarter restructuring and asset impairment charges include $38 million
for severance, $10 million for asset impaiments, and $6 million for other
exit costs. Also included in fourth quarter results is a $6 million special
charge to cost of sales for disposition of inventory for discontinued
manufacturing plants and SKU's.
F-35