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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE 1-5224
THE STANLEY WORKS
(Exact Name Of Registrant As Specified In Its Charter)
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Connecticut
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06-0548860 |
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(State Or Other Jurisdiction Of
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(I.R.S. Employer |
Incorporation Or Organization)
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Identification Number) |
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1000 Stanley Drive |
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New Britain, Connecticut
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06053 |
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(Address Of Principal Executive Offices)
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(Zip Code) |
860-225-5111
(Registrants Telephone Number)
Securities Registered Pursuant To Section 12(b) Of The Act:
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Name Of Each Exchange |
Title Of Each Class
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On Which Registered |
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Common Stock-$2.50 Par Value per Share
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New York Stock Exchange |
Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act of 1933.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
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 registrants 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.
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
Yes o No þ
As of July 2, 2009, the aggregate market values of voting common equity held by non-affiliates of
the registrant was $2,570,162,646 based on the New York Stock Exchange closing price for such
shares on that date. On February 16, 2010, the registrant had 80,619,167 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the registrants fiscal year are incorporated by reference in
Part III of the Annual Report on Form 10-K.
TABLE OF CONTENTS
FORM 10-K
PART I
ITEM 1. BUSINESS
1(a) GENERAL DEVELOPMENT OF BUSINESS
(i) General. The Stanley Works (Stanley or the Company) was founded in 1843 by Frederick T.
Stanley and incorporated in 1852. Stanley is a diversified worldwide supplier of tools and
engineered solutions for professional, industrial and construction and do-it-yourself use, as well
as engineered security solutions for industrial and commercial applications. Stanley® is
a brand recognized around the world for quality and value.
Net sales from continuing operations have increased from $2.2 billion in 2002 to a record $4.4 billion in 2008, declining to $3.7 billion in
2009 associated with the economic recession. The increase reflects execution of the Companys profitable growth and diversification strategy. The
growth in net sales from continuing operations predominantly relates to acquisitions, particularly
in the Industrial and Security segments. The Company sold the CST/berger business in 2008, and the
entry door and home décor businesses in 2004, along with several other small divestitures over the
past few years. Results have been recast for these discontinued operations. Refer to Note E,
Acquisitions, and Note T, Discontinued Operations, of the Notes to the Consolidated Financial
Statements in Item 8 for a discussion of acquisitions and divestitures over the past three years.
At January 2, 2010, Stanley employed approximately 16,700 people worldwide. The Companys principal
executive office is located at 1000 Stanley Drive, New Britain, Connecticut 06053 and its telephone
number is (860) 225-5111.
On November 2, 2009, the Company entered into an Agreement and Plan of Merger with The Black &
Decker Corporation (Black & Decker), a global manufacturer and marketer of quality power tools
and accessories, hardware and home improvement products, and technology-based fastening systems.
Under the terms of the transaction, which has been approved by the Boards of Directors of both
companies, Black & Decker shareholders will receive a fixed ratio of 1.275 shares of the Companys
common stock for each share of Black & Decker common stock they own. Based on the $52.47 closing
price of the Companys common stock on January 27, 2010, the consideration to be received by Black
& Decker shareholders represents $66.90 per Black & Decker share, or approximately $4.2 billion in
aggregate value. Upon closing, it is expected that the Companys shareholders will own
approximately 50.5% of the equity of the combined company and Black & Decker shareholders will own
approximately 49.5%. While the U.S. anti-trust review is complete, the closing of the transaction
is subject to other customary closing conditions, including foreign regulatory approvals and the
approval of Stanley and Black & Decker shareholders who will vote on the merger proposal in special
meetings to be held on March 12, 2010. Closing of the transaction is expected to occur on March
12, 2010.
(ii) Restructuring Activities. Information regarding the Companys restructuring activities is
incorporated herein by reference to the material captioned Restructuring Activities in Item 7 and
Note O, Restructuring and Asset Impairments, of the Notes to the Consolidated Financial Statements
in Item 8.
1(b) FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information regarding the Companys business segments is incorporated herein by reference
to the material captioned Business Segment Results in Item 7 and Note P, Business Segments and
Geographic Areas, of the Notes to the Consolidated Financial Statements in Item 8.
1(c) NARRATIVE DESCRIPTION OF BUSINESS
The Companys operations are classified into three business segments: Security, Industrial, and
Construction & Do-It-Yourself. All segments have significant international operations in developed
countries, but do not have large investments that would be subject to expropriation risk in
developing countries. Fluctuations in foreign currency exchange rates affect the U.S. dollar
translation of international operations in each segment.
Security
The Security segment is a provider of access and security solutions primarily for retailers,
educational, financial and healthcare institutions, as well as commercial, governmental and
industrial customers. The Company provides an extensive suite of mechanical and electronic security
products and systems, and a variety of security services. These include security integration
systems, software, related installation, maintenance, monitoring services, automatic doors,
door closers, exit devices, healthcare storage and supply chain solutions, patient protection
products, hardware (includes hinges, gate hardware, cabinet pulls, hooks, braces and shelf
brackets) and locking mechanisms.
Security products are sold primarily on a direct sales basis and, in certain instances, through third party distributors.
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Industrial
The Industrial segment manufactures and markets: professional and automotive mechanics tools and
storage systems; hydraulic tools and accessories; plumbing, heating and air conditioning tools;
assembly tools and systems; and specialty tools. These products are sold to industrial customers
and distributed primarily through third party distributors as well as through direct sales forces.
Professional and automotive mechanics tools and storage systems include wrenches, sockets,
electronic diagnostic tools, tool boxes and high-density industrial storage and retrieval systems.
Hydraulic tools and accessories include hand-held hydraulic tools and mounted hydraulic tools used
by scrap yards, contractors, utilities, railroads and public works as well as mounted demolition
hammers and compactors designed to work on skid steer loaders, mini-excavators, backhoes and large
excavators. Plumbing, heating and air conditioning tools include pipe wrenches, pliers, press
fitting tools, and tubing cutters. Assembly tools and systems include electric and pneumatic
assembly tools; these are high performance precision tools, controllers and systems for tightening
threaded fasteners used chiefly by vehicle manufacturers. Specialty tools are used for assembling,
repairing and testing electronic equipment.
Construction & Do-It-Yourself
The Construction & Do-It-Yourself (CDIY) segment manufactures and markets hand tools, consumer
mechanics tools, storage systems, and pneumatic tools and fasteners. These products are sold to
professional end users as well as consumers, and are distributed primarily through retailers and
distributors (including home centers, mass merchants, hardware stores, and retail lumber yards).
Hand tools include measuring and leveling tools, planes, hammers, demolition tools, knives and
blades, screwdrivers, saws, chisels and consumer tackers. Consumer mechanics tools include wrenches
and sockets. Storage systems include plastic and metal tool boxes and storage units. Pneumatic
tools and fasteners include nail guns, staplers, nails and staples that are used for construction,
remodeling, furniture making, pallet manufacturing and other applications involving the attachment
of wooden materials.
Competition
The Company competes on the basis of its reputation for product quality, its well-known brands, its
commitment to customer service, strong customer relationships, the breadth of its product lines and
its emphasis on product innovation.
The Company encounters active competition in all of its businesses from both larger and smaller
companies that offer the same or similar products and services or that produce different products
appropriate for the same uses. The Company has a large number of competitors; however, aside from a
small number of competitors in the consumer hand tool and consumer hardware businesses who produce
a range of products somewhat comparable to the Companys, the majority of its competitors compete
only with respect to one or more individual products or product lines in that segment. Certain
large customers offer private label brands (house brands) that compete across a wider spectrum of
the Companys CDIY segment product offerings. The Company is one of the largest manufacturers of
hand tools in the world. The Company is a significant manufacturer of pneumatic fastening tools and
related fasteners for the construction, furniture and pallet industries as well as a leading
manufacturer of hydraulic tools used for heavy construction, railroad, utilities and public works.
The Company also believes that it is among the largest direct providers of commercial access
security integration and alarm monitoring services in North America.
Customers
A substantial portion of the Companys products are sold to home centers and mass merchants in the
U.S. and Europe. A consolidation of retailers both in North America and abroad has occurred over
time. 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 sales volume loss. The loss of
certain of the larger home centers or mass merchants as customers could have a material adverse
effect on the Company until either such customers were replaced or the Company made the necessary
adjustments to compensate for the loss of business. Despite the trend toward customer
consolidation, the Company has been able to maintain a diversified customer base and has decreased
customer concentration risk over the past several years, as sales from continuing operations in
markets outside of the home center and mass merchant distribution channels have grown at a
greater rate through a combination of acquisitions and other efforts to broaden the customer base,
primarily in the Security and Industrial segments.
In this regard, sales to the Companys largest customer as a percentage of total sales
have decreased from 22% in 2002 to less than 6% in 2009.
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Within the Security segment, a large portion of sales are generated in the retail sector. The
Security segment also has significant sales to commercial, governmental and educational customers.
Raw Materials
The Companys products are manufactured using both ferrous and non-ferrous metals including, but
not limited to steel, aluminum, zinc, brass, copper and nickel, as well as resin. Additionally, the
Company uses other commodity based materials for components and packaging including, but not
limited to, plastics, wood, and other corrugated products. The raw materials required are procured
globally and available from multiple sources at competitive prices. The Company does not anticipate
difficulties in obtaining supplies for any raw materials or energy used in its production
processes.
Backlog
Due to short order cycles and rapid inventory turnover in most of the Companys CDIY and Industrial
segment businesses, backlog is generally not considered a significant indicator of future
performance. At February 6, 2010, the Company had approximately $320 million in unfilled orders.
All of these orders are reasonably expected to be filled within the current fiscal year. As of
February 2, 2009, unfilled orders amounted to $348 million.
Patents and Trademarks
No 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 any of the business segments. The Company owns numerous patents, none of
which individually is material to the Companys operations as a whole. These patents expire at
various times over the next 20 years. The Company holds licenses, franchises and concessions, none
of which individually or in the aggregate are material to the Companys operations as a whole.
These licenses, franchises and concessions vary in duration, but generally run from one to
40 years.
The Company has numerous trademarks that are used in its businesses worldwide. The
STANLEY® and STANLEY in a Notched Rectangle® trademarks are material to all
three business segments. These well-known trademarks enjoy a reputation for quality and value and
are among the worlds most trusted brand names. The Companys tagline, Make Something
Greattm is the centerpiece of the brand strategy for all segments. The
BEST®, Blick®, HSM®, National®, Sargent &
Greenleaf®, S&G® Sonitrol®, Sonitrol Globe
Design®, GdPtm, and Xmark® trademarks are material to
the Security segment. The LaBounty®, MAC®, Mac Tools®,
Proto®, Vidmartm, Facom®, Virax® and
USAG® trademarks are material to the Industrial segment. In the CDIY segment, the
Bostitch®, Bailey®, Powerlock®, Tape Rule Case Design
(Powerlock), and FatMax® family of trademarks are material. The terms of these
trademarks vary, typically, from 10 to 20 years, with most trademarks being renewable indefinitely
for like terms.
Environmental Regulations
The Company is subject to various environmental laws and regulations in the U.S. and foreign
countries where it has operations. Future laws and regulations are expected to be increasingly
stringent and will likely increase the Companys expenditures related to environmental matters.
The Company is a party to a number of proceedings before federal and state regulatory agencies
relating to environmental remediation. Additionally, the Company, along with many other companies,
has been named as a potentially responsible party (PRP) in a number of administrative proceedings
for the remediation of various waste sites, including sixteen 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: whether responsibility is being
disputed, the terms of existing agreements, experience at similar sites, and the Companys
volumetric contribution at these sites.
The Companys 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
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reflect
additional technical and legal information that
becomes available. As of January 2, 2010, the Company had reserves of $30 million for remediation
activities associated with Company-owned properties, as well as for Superfund sites, for losses
that are probable and estimable.
The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal information that
becomes available. Actual costs to be incurred in future periods may vary from the estimates, given
the inherent 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 January 2, 2010, the Company had approximately 16,700 employees, nearly 8,200 of whom were
employed in the U.S. Approximately 700 U.S. employees are covered by collective bargaining
agreements negotiated with 19 different local labor unions who are, in turn, affiliated with
approximately 6 different international labor unions. The majority of the Companys hourly-paid and
weekly-paid employees outside the U.S. are not covered by collective bargaining agreements. The
Companys labor agreements in the U.S. expire in 2010, 2011 and 2012. There have been no
significant interruptions or curtailments of the Companys 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 Companys geographic areas is incorporated herein by reference
to Note P, Business Segments and Geographic Areas, of the Notes to the Consolidated Financial
Statements in Item 8.
1(e) AVAILABLE INFORMATION
The Companys website is located at http://www.stanleyworks.com. This URL is intended to be an
inactive textual reference only. It is not intended to be an active hyperlink to our website. The
information on our website is not, and is not intended to be, part of this Form 10-K and is not
incorporated into this report by reference. Stanley makes its Forms 10-K, 10-Q, 8-K and amendments
to each available free of charge on its website as soon as reasonably practicable after filing them
with, or furnishing them to, the U.S. Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
The Companys business, operations and financial condition are subject to various risks and
uncertainties. You should carefully consider the risks and uncertainties described below, together
with all of the other information in this Annual Report on Form 10-K, including those risks set
forth under the heading entitled Cautionary Statements Under the Private Securities Litigation
Reform Act of 1995, and in other documents that the Company files with the U.S. Securities and
Exchange Commission, before making any investment decision with respect to its securities. If any
of the risks or uncertainties actually occur or develop, the Companys business, financial
condition, results of operations and future growth prospects could change. Under these
circumstances, the trading prices of the Companys securities could decline, and you could lose all
or part of your investment in the Companys securities.
If the current weakness continues in the retail, residential and commercial markets in the
Americas, Europe or Asia, or general economic conditions worsen, it could have a material adverse
effect on the Companys business.
Approximately 35% of 2009 sales were in the CDIY segment and 24% in the Industrial segment. The
Company experienced a 20% sales unit volume decline in its existing businesses, (i.e. excluding
acquisitions) during 2009, primarily in these two segments, as the recession spread worldwide. The
Companys businesses have been adversely affected by the decline in the U.S. and international
economies, particularly with respect to residential and commercial markets. It is possible this
softness will be prolonged and to the extent it persists there may be an unfavorable impact on
sales, earnings and cash flows. It is possible the Security segment, which experienced an 8% unit
volume declines in existing businesses in 2009, may become more affected if the economic weakness
permeates other market sectors it serves. Further deterioration of these retail, residential or
commercial construction markets, or in general economic conditions, could reduce demand for Company
products and therefore have a material adverse effect on sales,
earnings and cash flows. In addition, due to current economic conditions, it is possible certain customers credit-worthiness
may erode resulting in increased write-offs of customer receivables.
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The Companys growth and repositioning strategies include acquisitions. The Companys recent
acquisitions may not further its strategies and the Company may not be able to identify suitable
future acquisition candidates.
In 2002, the Company embarked on a growth strategy to shift its business portfolio toward favored
growth markets through acquisitions and divestitures. The strategy has been advanced over the last
several years with the acquisition of a number of companies, including General de Protection
(GdP), Xmark Corporation (Xmark), Sonitrol Corporation (Sonitrol), HSM Electronic Protection
Services, Inc. (HSM), Facom S.A. (Facom), National Manufacturing Co. (National), Besco
Pneumatic Corporation (Besco), Blick plc (Blick), Frisco Bay Industries Ltd (Frisco Bay), ISR
Solutions, Inc. (ISR), Security Group, Inc. (Security Group) and Best Lock Corporation and its
affiliates (Best Access).
Although the Company has extensive experience with acquisitions, there can be no assurance that
recently acquired companies will be successfully integrated or that anticipated synergies will be
realized. If the Company successfully integrates the acquired companies and effectively implements
its repositioning strategy, there can be no assurance that its resulting business segments will
enjoy continued market acceptance or profitability.
In addition, there can be no assurance that the Company will be able to successfully identify
suitable future acquisition candidates, negotiate appropriate terms, obtain the necessary
financing, complete the transactions or successfully integrate the new companies as necessary to
continue its growth and repositioning strategies.
The Companys acquisitions may result in certain risks for its business and operations.
The Company made six small acquisitions in 2009 and a number of more significant acquisitions in
2008 and 2007, including, but not limited to: GdP in October 2008, Sonitrol and Xmark in July 2008,
InnerSpace in July 2007, and HSM in January 2007. The Company may make additional acquisitions in
the future. Acquisitions involve a number of risks, including:
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the diversion of Company managements attention and other resources, |
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the incurrence of unexpected liabilities, and |
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the loss of key personnel and clients or customers of acquired companies. |
Any intangible assets that the Company acquires may have a negative effect on its earnings and
return on capital employed. In addition, the success of the Companys future acquisitions will
depend in part on its ability to:
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combine operations, |
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integrate departments, systems and procedures, and |
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obtain cost savings and other efficiencies from the acquisitions. |
Failure to effectively consummate or manage future acquisitions may adversely affect the Companys
existing businesses and harm its operational results. The Company is still in the process of
integrating the businesses and operations of GdP. The Company cannot ensure that such integrations
will be successfully completed, or that all of the planned synergies will be realized.
On November 2, 2009 the Company announced that it has entered into a definitive merger agreement
with Black & Decker in an all-stock transaction. Under the terms of the agreement, which has been
approved by the Boards of Directors of the Company and Black & Decker, each outstanding share of
Black & Decker will be converted into the right to receive 1.275 shares of the Companys common
stock. Upon closing it is expected that the Companys shareholders will own approximately 50.5% of
the equity of the combined company and Black & Decker shareholders will own approximately 49.5%.
The Company expects the transaction, which is subject to, among other things, the approval of the
merger by Black & Deckers shareholders, the approval of the issuance of the Companys common stock
and certain amendments to the Companys certificate of incorporation by the Companys shareholders,
as well as customary regulatory approvals and closing conditions, to close on March 12, 2010.
Please read the section entitled Risk Factors beginning on page 19 of the Joint Proxy
Statement/Prospectus contained in the Companys Registration Statement on Form S-4, as amended,
filed with the Securities and Exchange Commission on February 2,
2010, for certain risks associated
with this particular transaction.
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The Company may incur significant additional indebtedness, or issue additional equity securities,
in connection with future acquisitions which may restrict the manner in which it conducts business.
The potential issuance of such securities may limit the Companys ability to implement elements of
its growth strategy and may have a dilutive effect on earnings.
As more fully described in Item 1, on November 2, 2009 the Company entered into an Agreement and
Plan of Merger with Black & Decker which has been approved by the boards of directors of both
companies. The Merger will entail a material issuance of common stock if consummated.
As more fully described in Item 7 and Note H, Long-Term Debt and Financing Arrangements, of the
Notes to the Consolidated Financial Statements in Item 8, the Company completed concurrent
offerings of Floating Rate Equity Units and 5% Senior Notes due 2010, the net proceeds of which
were used to finance a portion of the acquisition of HSM. In addition, the Company has a committed
revolving credit agreement, expiring in February 2013, supporting borrowings up to $800 million.
This agreement includes provisions that allow designated subsidiaries to borrow up to $250 million
in Euros and Pounds Sterling, which may be available to, among other things, fund acquisitions.
The instruments and agreements governing certain of the Companys current indebtedness contain
requirements or restrictive covenants that include, among other things:
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a limitation on creating liens on certain property of the Company and its subsidiaries; |
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a restriction on entering into certain sale-leaseback transactions; |
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customary events of default. If an event of default occurs and is continuing, the Company
might be required to repay all amounts outstanding under the respective instrument or
agreement; and |
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maintenance of specified financial ratios. Failure to maintain such ratios could
adversely affect further access to liquidity and require the Company to pay all interest
coupons on certain debt securities through the issuance of common stock before making
further dividend payments on its common shares outstanding. |
The Company has an interest coverage covenant that must be maintained to permit continued access to
its $800 million Revolving Credit Facility. The interest coverage ratio tested for covenant
compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to
adjusted Interest Expense (adjusted EBITDA/ adjusted Interest Expense), as both terms are
defined in the debt agreement. Adjusted EBITDA represents earnings before interest, taxes,
depreciation and amortization, excluding certain restructuring charges and with interest expense
adjusted as follows. Adjusted interest expense excludes imputed (non-cash) interest expense in
respect of convertible bonds issued by the Company as calculated in accordance with the Financial
Accounting Standards Boards Accounting Standards Codification 470-20, Debt with Conversion and
Other Options. The ratio required for compliance is 3.5 adjusted EBITDA to 1.0 adjusted Interest
Expense and is computed quarterly, on a rolling twelve months (last twelve months) basis. Under
this covenant definition, the interest coverage ratio was 10 times adjusted EBITDA or higher in
each of the 2009 quarterly measurement periods. Management does not believe it is reasonably
likely the Company will breach this covenant.
Future instruments and agreements governing indebtedness may impose other restrictive
conditions or covenants. Such covenants could restrict the Company in the manner in which it
conducts business and operations as well as in the pursuit of its growth and repositioning
strategies.
The Companys results of operations could be negatively impacted by inflationary or deflationary
economic conditions that affect the cost of raw materials, freight, energy, labor and sourced
finished goods.
The Companys products are manufactured of both ferrous and non-ferrous metals, including but not
limited to steel, aluminum, zinc, brass, nickel and copper, as well as resin. Additionally, the
Company uses other commodity based materials for components and packaging including, but not
limited to: plastics, wood, and other corrugated products. The Companys cost base also reflects
significant elements for freight, energy and labor. The Company also sources certain finished goods
directly from vendors. As described in more detail in Item 7 hereto, the Company has been
negatively impacted by inflation in recent years. If the Company is unable to mitigate any
inflationary increases through various customer pricing actions and cost reduction initiatives, its
profitability may be adversely affected.
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Conversely, in the event there is deflation, the Company may experience pressure from its customers to reduce prices; there
can be no assurance that the Company would be able to reduce its cost base (through negotiations
with suppliers or other measures) to offset any such price concessions which could adversely impact
results of operations and cash flows.
Tight capital and credit markets could adversely affect the Company by limiting the Companys or
its customers ability to borrow or otherwise obtain cash.
The Companys growth plans are dependent on, among other things, the availability of funding to
support corporate initiatives and complete appropriate acquisitions and the ability to increase
sales of existing product lines. While the Company has not encountered financing difficulties to
date, the capital and credit markets experienced extreme volatility and disruption in late 2008 and
in early 2009. Market conditions could make it more difficult for the Company to borrow or
otherwise obtain the cash required for significant new corporate initiatives and acquisitions. In
addition, there could be a number of follow-on effects from the credit crisis on the Companys
businesses, including insolvency of key suppliers resulting in product delays; inability of
customers to obtain credit to finance purchases of the Companys products and/or customer
insolvencies; and failure of derivative counterparties and other financial institutions negatively
impacting the Companys treasury operations.
The Company is exposed to market risk from changes in foreign currency exchange rates which could
negatively impact profitability.
Exposure to foreign currency risk results because the Company, through its global operations,
enters into transactions and makes investments denominated in multiple currencies. The Companys
predominant exposures are in European, Canadian, British, and Asian currencies, including the
Chinese Renminbi (RMB). In preparing its financial statements, for foreign operations with
functional currencies other than the U.S. dollar, asset and liability accounts are translated at
current exchange rates, and income and expenses are translated using weighted-average exchange
rates. With respect to the effects on translated earnings, if the U.S. dollar strengthens relative
to local currencies, the Companys earnings could be negatively impacted. In 2009, foreign
currency translation negatively impacted earnings by $0.04 per diluted share. The translation
impact has been more material in the past and may be more material in the future. Although the
Company utilizes risk management tools, including hedging, as it deems appropriate, to mitigate a
portion of potential market fluctuations in foreign currencies, there can be no assurance that such
measures will result in all market fluctuation exposure being eliminated. The Company does not make
a practice of hedging its non-U.S. dollar earnings.
The Company sources many products from China and other Asian low-cost countries for resale in other
regions. To the extent the RMB or other currencies appreciate with respect to the U.S. dollar, the
Company may experience cost increases on such purchases. The Company may not be successful at
implementing customer pricing or other actions in an effort to mitigate the related cost increases
and thus its profitability may be adversely impacted.
The Companys business is subject to risks associated with sourcing and manufacturing overseas.
The Company imports large quantities of finished goods, components and raw materials. Substantially
all of its import operations are subject to customs requirements and to tariffs and quotas set by
governments through mutual agreements, bilateral actions or, in some cases unilateral action. In
addition, the countries in which the Companys products and materials are manufactured or imported
may from time to time impose additional quotas, duties, tariffs or other restrictions on its
imports (including restrictions on manufacturing operations) or adversely modify existing
restrictions. Imports are also subject to unpredictable foreign currency variation which may
increase the Companys cost of goods sold. Adverse changes in these import costs and restrictions,
or the Companys suppliers failure to comply with customs regulations or similar laws, could harm
the Companys business.
The Companys operations are also subject to the effects of international trade agreements and
regulations such as the North American Free Trade Agreement, and the activities and regulations of
the World Trade Organization. Although these trade agreements generally have positive effects on
trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties
and/or quotas assessed on products manufactured in a particular country, trade agreements can also
impose requirements that adversely affect the Companys business, such as setting quotas on
products that may be imported from a particular country into key markets including the U.S. or the
European Union, or making it easier for other companies to compete, by eliminating restrictions on
products from countries where the Companys competitors source products.
The Companys ability to import products in a timely and cost-effective manner may also be affected
by conditions at ports or issues that otherwise affect transportation and warehousing providers,
such as port and shipping capacity, labor disputes, severe weather or increased homeland security
requirements in the U.S. and other countries. These issues could delay importation of products or
require the Company to locate alternative ports or warehousing providers to avoid disruption to customers.
These alternatives may not be available on short notice or could result in
higher transit costs, which could have an adverse impact on the Companys business and financial
condition.
8
Large customer concentrations and related customer inventory adjustments may negatively impact
sales, results of operations and cash flows.
The Company has certain significant customers, particularly home centers and major retailers,
although no one customer represents more than 10% of consolidated net sales. The loss or material
reduction of business from, or the lack of success of sales initiatives for the Companys products
related to, any such significant customer could have a material adverse impact on the Companys
results of operations and cash flows. In addition, unanticipated inventory adjustments by these
customers can have a negative impact on sales.
During 2009 the Company experienced significant distributor inventory corrections reflecting
de-stocking of the supply chain associated with difficult credit markets. Such distributor
de-stocking exacerbated sales volume declines pertaining to weak end user demand and the broader
economic recession. The Industrial segment generally sells to distributors where the Company does
not have point of sale data to see end user demand trends, however, a substantial portion of the
overall 30% volume declines within the Industrial segment is believed to be attributable to such
de-stocking or customer inventory adjustments. The Companys results may be adversely impacted in
future periods by such customer inventory adjustments.
Customer consolidation could have a material adverse effect on the Companys business.
A substantial portion of the Companys products are sold through home centers and mass merchant
distribution channels in the U.S. and Europe. A consolidation of retailers in both North America
and abroad has occurred over time and the increasing size and importance of individual customers
creates risk of exposure to potential volume loss. The loss of certain larger home centers as
customers would have a material adverse effect on the Companys business until either such
customers were replaced or the Company made the necessary adjustments to compensate for the loss of
business.
If the Company were required to write down all or part of its goodwill, indefinite-lived trade
names, or other definite-lived intangible assets, its net income and net worth could be materially
adversely affected.
As a result of acquisitions, the Company has $1.818 billion of goodwill, $305 million of
indefinite-lived trade names, and $472 million of definite-lived intangible assets at January 2,
2010. The Company is required to periodically, at least annually, determine if its goodwill or
indefinite-lived trade names have become impaired, in which case it would write down the impaired
portion of the intangible asset. The definite-lived intangible assets, including customer
relationships, are amortized over their estimated useful lives; such assets are also evaluated for
impairment when appropriate. Impairment of intangible assets may be triggered by developments
outside of the Companys control, such as worsening economic conditions, technological change,
intensified competition or other matters causing a decline in expected future cash flows.
Income tax payments may ultimately differ from amounts currently recorded by the Company. Future
tax law changes may materially increase the Companys prospective income tax expense.
The Company is subject to income taxation in the U.S. as well as numerous foreign jurisdictions.
Judgment is required in determining the Companys worldwide income tax provision and accordingly
there are many transactions and computations for which the final income tax determination is
uncertain. The Company is routinely audited by income tax authorities in many tax jurisdictions.
Although management believes the recorded tax estimates are reasonable, the ultimate outcome from
any audit (or related litigation) could be materially different from amounts reflected in the
Companys income tax provisions and accruals. Future settlements of income tax audits may have a
material effect on earnings between the period of initial recognition of tax estimates in the
financial statements and the point of ultimate tax audit settlement. Additionally, it is possible
that future income tax legislation may be enacted that could have a material impact on the
Companys worldwide income tax provision beginning with the period that such legislation becomes
effective. Also, while a reduction in statutory rates would result in a favorable impact on future
net earnings, it would require an initial write down of any deferred tax assets in the related
jurisdiction.
The Companys failure to continue to successfully avoid, manage, defend, litigate and accrue for
claims and litigation could negatively impact its results of operations or cash flows.
As described in further detail in Items 1 and 3 and Note S, Contingencies, of the Notes to the
Consolidated Financial Statements in Item 8, the Company is exposed to and becomes involved in
various litigation matters arising out of the ordinary routine conduct of its business, including,
from time to time, actual or threatened litigation relating to such items as commercial
transactions, product liability, workers compensation, the Companys distributors and franchisees,
intellectual property claims, regulatory actions and environmental matters.
9
There can be no assurance that the Company will be able to continue to successfully avoid, manage and defend such
matters. In addition, given the inherent uncertainties in evaluating certain exposures, actual
costs to be incurred in future periods may vary from the Companys estimates for such contingent
liabilities.
The Companys brands are important assets of its businesses and violation of its trademark rights
by imitators, or the failure of its licensees or vendors to comply with the Companys product
quality, manufacturing requirements, marketing standards, and other requirements could negatively
impact revenues and brand reputation.
The Companys trademarks enjoy a reputation for quality and value and are important to its success
and competitive position. Unauthorized use of the Companys trademark rights may not only erode
sales of the Companys products, but may also cause significant damage to its brand name and
reputation, interfere with its ability to effectively represent the Company to its customers,
contractors, suppliers, and/or licensees, and increase litigation costs. Similarly, failure by
licensees or vendors to adhere to the Companys standards of quality and other contractual
requirements could result in loss of revenue, increased litigation, and/or damage to the Companys
reputation and business. There can be no assurance that the Companys on-going effort to protect
its brand and trademark rights and ensure compliance with its licensing and vendor agreements will
prevent all violations.
Successful sales and marketing efforts depend on the Companys ability to recruit and retain
qualified employees.
The success of the Companys efforts to grow its business depends on the contributions and
abilities of key executives, its sales force and other personnel, including the ability of its
sales force to adapt to any changes made in the sales organization and achieve adequate customer
coverage. The Company must therefore continue to recruit, retain and motivate management, sales and
other personnel sufficiently to maintain its current business and support its projected growth. A
shortage of these key employees might jeopardize the Companys ability to implement its growth
strategy.
The Company faces active competition and if it does not compete effectively, its business may
suffer.
The Company faces active competition and resulting pricing pressures. The Companys products
compete on the basis of, among other things, its reputation for product quality, its well-known
brands, price, innovation and customer service capabilities. The Company competes with both larger
and smaller companies that offer the same or similar products and services or that produce
different products appropriate for the same uses. These companies are often located in countries
such as China, Taiwan and India where labor and other production costs are substantially lower than
in the U.S., Canada and Western Europe. Also, certain large customers offer house brands that
compete with some of the Companys product offerings as a lower-cost alternative. To remain
profitable and defend market share, the Company must maintain a competitive cost structure, develop
new products and services, respond to competitor innovations and enhance its existing products in a
timely manner. The Company may not be able to compete effectively on all of these fronts and with
all of its competitors, and the failure to do so could have a material adverse effect on its sales
and profit margins.
The Stanley Fulfillment System (SFS) is a continuous operational improvement process applied to
many aspects of the Companys business such as procurement, quality in manufacturing, maximizing
customer fill rates, integrating acquisitions and other key business processes. In the event the
Company is not successful in effectively applying the SFS disciplines to its key business
processes, including those of acquired businesses, its ability to compete and future earnings could
be adversely affected.
In addition, the Company may have to reduce prices on its products and services, or make other
concessions, to stay competitive and retain market share. The Company engages in restructuring
actions, sometimes entailing shifts of production to low-cost countries, as part of its efforts to
maintain a competitive cost structure. If the Company does not execute restructuring actions well,
its ability to meet customer demand may decline, or earnings may otherwise be adversely impacted;
similarly if such efforts to reform the cost structure are delayed relative to competitors or other
market factors the Company may lose market share and profits.
The performance of the Company may suffer from business disruptions associated with information
technology, system implementations, or catastrophic losses affecting distribution centers and other
facilities.
The Company relies heavily on computer systems to manage and operate its businesses, and record and
process transactions. Computer systems are important to production planning, customer service and
order fulfillment among other business-critical processes. Consistent and efficient operation of
the computer hardware and software systems is imperative to the successful sales and earnings
performance of the various businesses in many countries.
10
Despite efforts to prevent such situations, and insurance policies that partially mitigate these
risks, the Companys systems may be affected by damage or interruption from, among other causes,
power outages, computer viruses, or security breaches. Computer hardware and storage equipment that
is integral to efficient operations, such as e-mail, telephone and other functionality, is
concentrated in certain physical locations in the various continents in which the Company operates.
Management believes it has effective disaster recovery plans and that it is unlikely there would be
more than a short-lived disruption to its computer and communication systems due to these physical
concentrations of equipment, or from potential occurrences of damage and interruption. However, it
is reasonably possible that results could be adversely impacted if equipment outages were prolonged
due to an unusually serious event. In addition, the Company is planning system conversions to SAP
to provide a common platform across most of its businesses. The implementations from legacy systems
to SAP will occur in carefully managed stages over a period of several years in the Americas, and
ultimately thereafter in Europe and Asia. Management believes the planned system conversions are
cost-beneficial and will further enhance productivity in its operations. There can be no assurances
that expected expense synergies will be achieved or that there will not be delays to the expected
timing. It is possible the costs to complete the system conversions may exceed current
expectations, and that significant costs may be incurred that will require immediate expense
recognition as opposed to capitalization. The risk of disruption to key operations is increased
when complex system changes such as the SAP conversions are undertaken. If systems fail to function
effectively, or become damaged, operational delays may ensue and the Company may be forced to make
significant expenditures to remedy such issues. Any significant disruption in the Companys
computer operations could have a material adverse impact on its business and results of operations.
The Companys operations are significantly dependent on infrastructure, notably certain
distribution centers and security alarm monitoring facilities which are concentrated in various
geographic locations. If any of these were to experience a catastrophic loss, such as a fire or
flood, it could disrupt operations, delay production, shipments and revenue and result in large
expenses to repair or replace the facility. The Company maintains business interruption insurance,
but it may not fully protect the Company against all adverse effects that could result from
significant disruptions.
If the investments in employee benefit plans do not perform as expected, the Company may have to
contribute additional amounts to these plans, which would otherwise be available to cover operating
and other expenses. Certain U.S. employee and director benefit plan expense is affected by the
market value of the Companys common stock.
As described in further detail in Note L, Employee Benefit Plans, of the Notes to the Consolidated
Financial Statements in Item 8, the Company sponsors pension and other post-retirement defined
benefit plans, as well as an Employee Stock Ownership Plan (ESOP) under which the primary
U.S. defined contribution and 401(k) plans are funded. The Companys defined benefit plan assets
are currently invested in equity securities, bonds and other fixed income securities, and money
market instruments. The Companys funding policy is to contribute amounts determined annually on an
actuarial basis to provide for current and future benefits in accordance with applicable law which
require, among other things, that the Company make cash contributions to under-funded pension
plans. The Company expects to contribute approximately $17 million to its pension and other
post-retirement defined benefit plans in 2010.
There can be no assurance that the value of the defined benefit plan assets, or the investment
returns on those plan assets, will be sufficient in the future. It is therefore possible that the
Company may be required to make higher cash contributions to the plans in future years which would
reduce the cash available for other business purposes, and that the Company will have to recognize
a significant pension liability adjustment which would decrease the net assets of the Company and
result in higher expense in future years. During 2009 there was a $48 million gain on pension plan
assets. The fair value of these assets at January 2, 2010 was $320 million.
Overall ESOP expense is affected by the market value of Stanley stock on the monthly dates when
shares are released, among other factors. Net ESOP activity amounted to income of $8 million in
2009, and expense of $11 million and $2 million in both 2008 and 2007, respectively. The ESOP
income in 2009 stems from the suspension of certain employee benefits as part of cost saving
actions. The Company has reinstated these benefits in 2010 and expects there will be an increase in
expense in 2010 more aligned with 2008 and prior years. The increase in expense from 2007 to 2008
was mostly attributable to the average market value of shares released which decreased from $56.04
in 2007 to $43.65 in 2008 as well as increased benefits pertaining to headcount expansions related
to acquisitions. ESOP expense could increase in the future if the market value of the Companys
common stock declines.
11
The Company is exposed to credit risk on its accounts receivable.
The Companys outstanding trade receivables are not generally covered by collateral or credit
insurance. While the Company has procedures to monitor and limit exposure to credit risk on its
trade and non-trade receivables, there can be no assurance such procedures will effectively limit
its credit risk and avoid losses, which could have an adverse affect on the Companys financial
condition and operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of January 2, 2010, the Company and its subsidiaries owned or leased material facilities
(facilities over 50,000 square feet) for manufacturing, distribution and sales offices in 16 states
and 14 foreign countries. The Company believes that its material facilities are suitable and
adequate for its business.
Certain properties are utilized by more than one segment and in such cases the property is reported
in the segment with highest usage.
Material facilities owned by the Company and its subsidiaries follow:
Security
Farmington, Connecticut; Sterling and Rock Falls, Illinois; Indianapolis, Indiana; Nicholasville,
Kentucky; Richmond, Virginia; Cobourg, Canada; Nueva Leon, Mexico; and Xiaolan, Peoples Republic of
China.
Industrial
Phoenix, Arizona; Two Harbors, Minnesota; Columbus, Georgetown, and Sabina, Ohio; Allentown,
Pennsylvania; Dallas, Texas; Pecky, Czech Republic; Epernay, Ezy Sur Eure, Feuquieres en Vimeu,
Morangis and Villeneuve Le Roi, France; and Fano, Gemonio and Monvalle, Italy.
CDIY
Clinton and New Britain, Connecticut; Shelbyville, Indiana; East Greenwich, Rhode Island; Cheraw,
South Carolina; Smiths Falls, Canada; Hellaby and Northampton, England; Arbois, Besancon Cedex, and
Lassiey, France; Puebla, Mexico; Jiashan City, Langfang, and Xiaolan, Peoples Republic of China;
Wroclaw, Poland; Taichung Hsien, Taiwan and Amphur Bangpakong, Thailand.
Material facilities leased by the Company and its subsidiaries follow:
Corporate Offices
New Britain, Connecticut.
Security
Noblesville, Indiana; Kentwood, Michigan.
Industrial
Highland Heights and Westerville, Ohio; Milwaukie, Oregon; Morangis, France.
12
CDIY
Miramar, Florida; Fishers, Indiana; Kannapolis, North Carolina; Epping, Australia; Mechelen,
Belgium; Oakville, Canada; Leeds, England; Karmiel and Migdal, Israel; Biassono and Figino Serenza,
Italy and Pietermaritzburg, South Africa.
The aforementioned material facilities not being used by the Company are:
Security
Richmond, Virginia (owned).
Industrial
Ezy Sur Eure and Villeneuve Le Roi, France (owned).
CDIY
Clinton, Connecticut (owned); Smiths Falls, Canada (owned); Leeds, England (leased) and one of the
two properties located in Amphur Bangpakong, Thailand (owned).
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in various lawsuits and claims, including
product liability, environmental and distributor claims, and administrative proceedings. The
Company does not expect that the resolution of these matters will have a materially adverse effect
on the Companys consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2009 to a vote of security holders.
13
PART II
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ITEM 5. |
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |
The Companys common stock is listed and traded on the New York Stock Exchange, Inc. (NYSE) under
the abbreviated ticker symbol SWK, and is a component of the Standard & Poors (S&P) 500
Composite Stock Price Index. The Companys high and low quarterly stock prices on the NYSE for the
years ended January 2, 2010 and January 3, 2009 follow:
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2009 |
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|
2008 |
|
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|
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Dividend |
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|
|
Dividend |
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Per |
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|
|
|
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|
Per |
|
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|
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Common |
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Common |
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High |
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|
Low |
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Share |
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|
High |
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|
Low |
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Share |
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QUARTER: |
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First |
|
$ |
36.38 |
|
|
$ |
22.75 |
|
|
$ |
0.32 |
|
|
$ |
52.18 |
|
|
$ |
43.69 |
|
|
$ |
0.31 |
|
Second |
|
$ |
40.01 |
|
|
$ |
29.91 |
|
|
$ |
0.32 |
|
|
$ |
51.08 |
|
|
$ |
44.50 |
|
|
$ |
0.31 |
|
Third |
|
$ |
42.69 |
|
|
$ |
31.28 |
|
|
$ |
0.33 |
|
|
$ |
49.58 |
|
|
$ |
40.56 |
|
|
$ |
0.32 |
|
Fourth |
|
$ |
53.13 |
|
|
$ |
40.97 |
|
|
$ |
0.33 |
|
|
$ |
43.93 |
|
|
$ |
24.19 |
|
|
$ |
0.32 |
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|
|
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|
|
|
|
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|
|
|
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Total |
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|
|
$ |
1.30 |
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|
|
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|
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$ |
1.26 |
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As of February 16, 2010 there were 12,206 holders of record of the Companys common stock.
Information required by Item 201(d) of Regulation S-K concerning securities authorized for issuance
under equity compensation plans can be found under Item 12 of this Annual Report on Form 10-K.
The following table provides information about the Companys purchases of equity securities that
are registered by the Company pursuant to Section 12 of the Exchange Act for the three months ended
January 2, 2010:
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Total |
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Number |
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Of Shares |
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|
Maximum |
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|
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Purchased As |
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|
Number |
|
|
|
(a) |
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|
|
|
|
|
Part Of A |
|
|
Of Shares That |
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|
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Total |
|
|
Average |
|
|
Publicly |
|
|
May |
|
|
|
Number |
|
|
Price |
|
|
Announced |
|
|
Yet Be Purchased |
|
|
|
Of Shares |
|
|
Paid |
|
|
Plan |
|
|
Under The |
|
2009 |
|
Purchased |
|
|
Per Share |
|
|
or Program |
|
|
Program |
|
October 4 - November 7 |
|
|
1,119 |
|
|
$ |
45.76 |
|
|
|
|
|
|
|
|
|
November 8 - December 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 6 - January 2 |
|
|
34,766 |
|
|
$ |
49.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,885 |
|
|
$ |
49.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
As of January 2, 2010, 7.8 million shares of common stock remain authorized for repurchase,
associated with the prior authorization of the repurchase of 10.0 million shares on December 12,
2007. The Company may continue to repurchase shares in the open market or through privately
negotiated transactions from time to time pursuant to this prior authorization to the extent
management deems warranted based on a number of factors, including the level of acquisition
activity, the market price of the Companys common stock and the current financial condition of the
Company.
(a) |
|
The shares of common stock in this column were deemed surrendered to
the Company by participants in various benefit plans
of the Company to satisfy the participants taxes related to the vesting or delivery
of time vesting restricted share units under those plans. |
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below has been recast for the years 2005 through 2008 for the
retrospective adoption of FSP APB 14-1, SFAS 160 and FSP EITF 03-6-1
as further described in Note A, Significant Accounting Policies, of
the Notes to Consolidated Financial Statements of Item 8. The Company made significant acquisitions during the five-year period presented below
that affect comparability of results. Refer to Note E, Acquisitions, of the Notes to Consolidated
Financial Statements for further information. Additionally, as detailed in Note T,
Discontinued Operations, and prior year 10-K filings, the
results in 2005 through 2007 were recast for certain discontinued operations for comparability (in millions, except per
share amounts):
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2009 (b) |
|
|
2008 (f) |
|
|
2007 |
|
|
2006 (g) |
|
|
2005 |
|
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,737 |
|
|
$ |
4,426 |
|
|
$ |
4,360 |
|
|
$ |
3,897 |
|
|
$ |
3,183 |
|
Net earnings attributable to The Stanley Works |
|
$ |
227 |
|
|
$ |
219 |
|
|
$ |
321 |
|
|
$ |
279 |
|
|
$ |
262 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.84 |
|
|
$ |
2.77 |
|
|
$ |
3.89 |
|
|
$ |
3.40 |
|
|
$ |
3.14 |
|
Discontinued operations (a) |
|
$ |
(0.03 |
) |
|
$ |
1.11 |
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings per share |
|
$ |
2.81 |
|
|
$ |
3.88 |
|
|
$ |
4.03 |
|
|
$ |
3.53 |
|
|
$ |
3.23 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.82 |
|
|
$ |
2.74 |
|
|
$ |
3.82 |
|
|
$ |
3.33 |
|
|
$ |
3.07 |
|
Discontinued operations (a) |
|
$ |
(0.03 |
) |
|
$ |
1.10 |
|
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings per share |
|
$ |
2.79 |
|
|
$ |
3.84 |
|
|
$ |
3.95 |
|
|
$ |
3.46 |
|
|
$ |
3.16 |
|
Percent of net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
59.6 |
% |
|
|
62.2 |
% |
|
|
62.1 |
% |
|
|
63.7 |
% |
|
|
64.1 |
% |
Selling, general and administrative (c) |
|
|
27.5 |
% |
|
|
25.0 |
% |
|
|
23.8 |
% |
|
|
23.9 |
% |
|
|
22.5 |
% |
Other, net |
|
|
3.7 |
% |
|
|
2.3 |
% |
|
|
1.9 |
% |
|
|
1.3 |
% |
|
|
1.4 |
% |
Interest, net |
|
|
1.6 |
% |
|
|
1.9 |
% |
|
|
2.0 |
% |
|
|
1.7 |
% |
|
|
1.1 |
% |
Earnings before income taxes |
|
|
7.6 |
% |
|
|
6.6 |
% |
|
|
9.8 |
% |
|
|
9.0 |
% |
|
|
10.8 |
% |
Net earnings attributable to The Stanley Works |
|
|
6.1 |
% |
|
|
4.9 |
% |
|
|
7.4 |
% |
|
|
7.2 |
% |
|
|
8.2 |
% |
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (d) |
|
$ |
4,769 |
|
|
$ |
4,867 |
|
|
$ |
4,741 |
|
|
$ |
3,926 |
|
|
$ |
3,545 |
|
Long-term debt |
|
$ |
1,085 |
|
|
$ |
1,384 |
|
|
$ |
1,165 |
|
|
$ |
679 |
|
|
$ |
895 |
|
The Stanley Works Shareowners Equity (e) |
|
$ |
1,986 |
|
|
$ |
1,706 |
|
|
$ |
1,754 |
|
|
$ |
1,548 |
|
|
$ |
1,437 |
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio |
|
|
1.2 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
2.2 |
|
Total debt to total capital |
|
|
41.1 |
% |
|
|
48.6 |
% |
|
|
45.4 |
% |
|
|
39.2 |
% |
|
|
42.6 |
% |
Income tax rate continuing operations |
|
|
19.2 |
% |
|
|
24.7 |
% |
|
|
24.9 |
% |
|
|
19.8 |
% |
|
|
23.4 |
% |
Return on average equity continuing operations |
|
|
12.4 |
% |
|
|
12.8 |
% |
|
|
19.5 |
% |
|
|
18.9 |
% |
|
|
19.8 |
% |
Common stock data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
1.30 |
|
|
$ |
1.26 |
|
|
$ |
1.22 |
|
|
$ |
1.18 |
|
|
$ |
1.14 |
|
Equity per share at year-end |
|
$ |
24.68 |
|
|
$ |
21.63 |
|
|
$ |
21.82 |
|
|
$ |
18.92 |
|
|
$ |
17.15 |
|
Market price per share high |
|
$ |
53.13 |
|
|
$ |
52.18 |
|
|
$ |
64.25 |
|
|
$ |
54.59 |
|
|
$ |
51.75 |
|
Market price per share low |
|
$ |
22.75 |
|
|
$ |
24.19 |
|
|
$ |
47.01 |
|
|
$ |
41.60 |
|
|
$ |
41.51 |
|
Average shares outstanding (in 000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
79,788 |
|
|
|
78,897 |
|
|
|
82,313 |
|
|
|
81,866 |
|
|
|
83,347 |
|
Diluted |
|
|
80,396 |
|
|
|
79,874 |
|
|
|
84,046 |
|
|
|
83,704 |
|
|
|
85,406 |
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of employees |
|
|
17,393 |
|
|
|
17,862 |
|
|
|
17,344 |
|
|
|
16,699 |
|
|
|
13,605 |
|
Shareowners of record at end of year |
|
|
12,315 |
|
|
|
12,593 |
|
|
|
12,482 |
|
|
|
12,755 |
|
|
|
13,137 |
|
|
|
|
(a) |
|
Amounts in 2008 reflect an $84 million, or $1.05 per
diluted share, after-tax gain recorded in discontinued operations
for the sale of the CST/berger laser measuring business. |
|
(b) |
|
In the second quarter of 2009, the Company recognized a $0.34 per diluted
share gain on debt extinguishment from the repurchase of
$103.0 million of junior subordinated debt securities.
In the fourth quarter of 2009, the Company incurred $0.22 per diluted share in charges related
to the transaction and integration planning costs associated with the pending Black & Decker
merger. |
|
(c) |
|
SG&A is inclusive of the Provision for Doubtful Accounts. |
|
(d) |
|
Item includes assets held for sale related to discontinued operations as of the fiscal years
ended 2007, 2006, and 2005. |
15
|
|
|
(e) |
|
The Stanley Works Shareowners Equity was reduced by $14 million in fiscal 2007 for the
adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of Statement of Financial Accounting Standards
(SFAS) No. 109, codified in FASB Accounting
Standards Codification (ASC) 740 Income Taxes. The Stanley Works Shareowners Equity as of
December 30, 2006 decreased $61 million from the adoption of SFAS 158, Employers Accounting
for Defined Benefit Pension and Other Post-retirement Plans an amendment of FASB Statements
No. 87, 88, 106 and 132(R), codified in ASC 715 Compensation Retirement Benefits. |
|
(f) |
|
In the fourth quarter of 2008, Stanley recognized
$61 million, or $0.54 per diluted share, of
pre-tax restructuring and asset impairment charges from continuing operations pertaining to
cost actions taken in response to weak economic conditions. |
|
(g) |
|
Diluted earnings per share in 2006 reflect $0.07 of expense for stock options related to the
adoption of SFAS No. 123 (R), Share Based Payment, codified in ASC 718 Compensation Stock
Compensation, under the modified prospective method. As a
result, while 2006 and later years reflect stock-based compensation
expense, 2005 does not. |
16
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial and business analysis below provides information which the Company believes is
relevant to an assessment and understanding of its consolidated financial position, results of
operations and cash flows. This financial and business analysis should be read in conjunction with
the consolidated financial statements and related notes. All references to Notes in this Item 7
refer to the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
The following discussion and certain other sections of this Annual Report on Form 10-K contain
statements reflecting the Companys views about its future performance that constitute
forward-looking statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, estimates, forecasts and projections
about the industry and markets in which the Company operates and managements beliefs and
assumptions. Any statements contained herein (including without limitation statements to the effect
that The Stanley Works or its management believes, expects, anticipates, plans and similar
expressions) that are not statements of historical fact should be considered forward-looking
statements. These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. There are a number of important
factors that could cause actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set forth, or
incorporated by reference, below under the heading Cautionary Statements. Unless stated
otherwise, all forward-looking information contained in this Managements Discussion and Analysis
of Financial Condition and Results of Operations does not take into account or give any effect to
the impact of the Companys planned combination with Black & Decker. The Company does not intend
to update publicly any forward-looking statements whether as a result of new information, future
events or otherwise.
BUSINESS OVERVIEW
Business Segments
The Company is a diversified worldwide supplier of tools and engineered solutions for professional,
industrial, construction, and do-it-yourself (DIY) use, as well as engineered and security
solutions for industrial and commercial applications. Its operations are classified into three
business segments: Security, Industrial and Construction & DIY (CDIY). The Security segment is a
provider of access and security solutions primarily for retailers, educational, financial and
healthcare institutions, as well as commercial, governmental and industrial customers. The Company
provides an extensive suite of mechanical and electronic security products and systems, and a
variety of security services. These include security integration systems, software, related
installation, maintenance, monitoring services, automatic doors, door closers, exit devices,
healthcare storage and supply chain solutions, patient protection products, hardware (including
hinges, gate hardware, cabinet pulls, hooks, braces and shelf brackets) and locking mechanisms.
Security products are sold primarily on a direct sales basis and in certain instances, through
third party distributors. The Industrial segment manufactures and markets: professional industrial
and automotive mechanics tools and storage systems; assembly tools and systems; plumbing, heating
and air conditioning tools; hydraulic tools and accessories; and specialty tools. These products
are sold to industrial customers and distributed primarily through third party distributors as well
as direct sales forces. The CDIY segment manufactures and markets hand tools, consumer mechanics
tools, storage systems, pneumatic tools and fastener products which are principally utilized in
construction and do-it-yourself projects. These products are sold primarily to professional end
users, distributors, as well as consumers, and are distributed mainly through retailers (including
home centers, mass merchants, hardware stores, and retail lumber yards).
Pending Black & Decker Merger
On November 2, 2009, the Company and Black & Decker announced that their Boards of Directors
unanimously approved a definitive merger agreement under which Stanley and Black & Decker will
combine, under the name Stanley Black & Decker, in an all-stock transaction. Under the terms of the
agreement each outstanding share of Black & Decker will be converted into a fixed ratio of 1.275
shares of the Companys common stock. Based on the closing price of the Companys common stock on
January 27, 2010, the consideration to be received by Black & Decker shareholders in the merger has
a value of approximately $66.90 per Black & Decker share, or $4.2 billion in the aggregate. The
final consideration to be received by Black & Decker shareholders will be measured at the closing
date of the merger using the market price of the Companys
common stock at that time. Upon closing, it is expected that the Companys shareholders will own approximately 50.5% of the equity of the
combined company and Black & Decker shareholders will own approximately 49.5%. The terms of the
proposed combination and other information about both companies are included in the Form S-4
registration statement and proxy declared effective February 3, 2010.
17
While the U.S. anti-trust review is
complete, the closing of the transaction is subject to other customary closing conditions,
including foreign regulatory approvals and the approval of Stanley and Black & Decker shareholders
who will vote on the merger proposal in special meetings to be held on March 12, 2010. Closing of
the transaction is expected to occur on March 12, 2010.
Management believes the pending Black & Decker merger is a transformative opportunity to bring
together two highly complementary companies, with iconic brands and rich histories, yet with
virtually no overlap. The merger would enable a comprehensive global offering in both hand and
power tools, among other product offerings. Management believes the value unlocked by the
anticipated $350 million of annual cost synergies, expected to be achieved within three years, will
help fuel future growth and cement global cost leadership.
Strategic Objectives
For several years, the Company has pursued a diversification strategy to enable profitable growth.
The strategy involves industry, geographic and customer diversification, as exemplified by the
expansion of security solution product offerings, the growing proportion of sales outside the U.S.,
and the reduction of the Companys dependence on sales to U.S.
home centers and mass merchants. In addition, the Company has
indicated a desire to be a consolidator of the Tool Industry. Sales outside the U.S. represented 42% of the total in 2009, up from 29% in 2002. Sales to U.S.
home centers and mass merchants have declined from a high point of approximately 40% in 2002 to
approximately 15% in 2009. Execution of this strategy has entailed approximately $2.8 billion of
acquisitions since the beginning of 2002, several divestitures, and increased brand investments.
Over the past several years, the Company has generated strong free cash flow and received
substantial proceeds from divestitures that enabled a transformation of the business portfolio.
The Companys long-term capital allocation objectives pertaining to the deployment of free cash
flow after meeting its debt service obligations are:
|
|
|
Target strong investment grade credit rating |
|
|
|
|
Invest approximately 2/3 in acquisitions and growth |
|
|
|
|
Return approximately 1/3 to shareowners, split approximately equally between the
long-standing quarterly common stock dividend and share buybacks. The Company remains
committed to continued prudent dividend growth. |
The Company strives to operate in markets where the brand is meaningful, the value proposition is
definable, and sustainable through innovation, and global cost leadership is achievable. The
long-term capital allocation strategy with respect to growth is focused on three strong existing
platforms: convergent security, mechanical security, and industrial and automotive tools. The
Company plans to expand these existing platforms through both organic growth and international
acquisitions. Management intends to be a consolidator in the tool industry and to increase its
relative weighting in emerging markets, objectives which are both well met by the pending Black &
Decker merger. The merger will also round out the mechanical security product offerings, and brings
with it another strong growth platform in engineered fastening. Additionally, the Company has begun
to develop two emerging growth platforms, healthcare and infrastructure.
Significant areas of tactical emphasis related to execution of the Companys diversification
strategy, as well as events impacting the Companys financial performance in 2009 and 2008, are
discussed below.
Continued Growth in the Security Business
During 2009, the Company further advanced its strategy of becoming a global market leader in the
commercial security industry. Annual revenues of the Security segment have grown to $1.560 billion, or 42% of 2009 sales, up from
$216 million, or 10% of 2001 sales (the year the security
expansion strategy was launched). Key recent events pertaining to the growth of this segment include the following:
|
|
|
Management completed $24 million of small bolt-on acquisitions
during 2009, as capital was allocated more toward debt reduction in
2009 than in recent years. The security bolt-ons acquired have
further expanded the Companys U.S. security footprint. |
|
|
|
|
On July 18, 2008, the Company completed the acquisitions of Sonitrol Corporation
(Sonitrol), for $282 million in cash, and Xmark Corporation (Xmark), for $47 million in
cash. Sonitrol, with annual revenue totaling approximately $110 million, provides security
monitoring services, access control and fire detection systems to commercial customers in
North America. Sonitrol complements the product offering of the pre-existing security
integration and monitoring businesses, including HSM acquired in early 2007. Xmark,
headquartered in Canada, markets and sells radio frequency identification (RFID)-based
systems used to identify, locate and protect people and assets. Xmark, with annual revenues
exceeding $30 million, enhances the Companys personal security business. |
18
|
|
|
On October 1, 2008, the Company completed the acquisition of Générale de Protection
(GdP) for $169 million in cash. GdP, headquartered in Vitrolles, France, is a leading
provider of audio and video security monitoring services, primarily for small and mid-sized
businesses located in France and Belgium. GdP, with approximately $90 million in annual
revenues, represents Stanleys first significant expansion of its electronic security
platform in continental Europe. |
|
|
|
|
Several other smaller acquisitions were completed in 2008 for a total purchase price of
$68 million including Scan Modul, a European engineered healthcare storage business, access
technologies distributors, a mechanical lock business, and security monitoring businesses. |
The acquisitions complement the existing Security segment product offerings, increase its scale and
strengthen the value proposition offered to customers as industry dynamics favor multi-solution
providers that offer one-stop shopping. The Sonitrol integration into HSM is essentially complete
with the business sharing the same information technology platform; duplicative field offices and a
monitoring center have been closed. The reverse integration of the Companys pre-existing systems
integration business into HSM is also complete, which contributed to the continuing improvement in
the segment profit rate to 19.7% in 2009, up from 17.9% in 2008.
Drive Further Profitable Growth in Branded Tools and Storage
While diversifying the business portfolio through expansion in the security platforms is important,
management recognizes that the branded tool and storage product offerings in the CDIY and
Industrial segment businesses are important foundations of the Company that provide strong cash
flow generation and growth prospects. Management is committed to growing these businesses through
innovative product development, brand support, an increased weighting in emerging markets, and
relentless focus on global cost competitiveness to foster vitality over the long term.
Acquisition-related growth will also be pursued where appropriate. The previously
discussed pending Black & Decker merger clearly is an indicator
of the Companys commitment to the strategic objective.
Continue to Invest in the Stanley Brand
Stanley has a strong portfolio of brands associated with high-quality products including
Stanley®, Facom®, Mac®, Proto ® , Vidmar ® ,
Bostitch ® and Fatmax ®. The Stanley ® brand is recognized as one
of the worlds great brands and is one of the Companys most valuable assets. Brand support
spending has averaged approximately $21 million annually since 2005, up sharply from the preceding
years. This sustained brand support has yielded a steady improvement across the spectrum of brand
awareness measures, notably a climb in unaided Stanley hand tool brand awareness from 27% in 2005
to 48% in 2009. Stanley had prominent signage at 11 major league
baseball stadiums throughout 2009 and is continuing its program in
the coming season. The Company is also maintaining long-standing NASCAR racing
sponsorships which will entail brand exposure over 38
race weekends in 2010. Stanley recently entered a
ten-year alliance agreement with the Walt Disney World Resort® whereby
Stanley® logos are displayed on construction walls throughout the theme parks and
Stanley®, Mac®, Proto ®, and Vidmar ® brand logos
and/or products are featured in various attractions where they will be seen by millions of visitors
each year. Additionally, Stanley is The Official Tool Provider of the Walt Disney World
Resort®. In 2009 the Company also began advertising in the English Premier League
which is the number one soccer league in the world, watched weekly by 650 million people around the
world. The Company will continue to allocate its brand and advertising spend wisely, primarily to the
outdoor marketing campaigns described above that foster television exposure, along with various
print advertisements, generating more than 25 billion brand impressions annually.
Continuous Improvement from the Stanley Fulfillment System
The Company continued to practice the operating disciplines encompassed by the Stanley Fulfillment
System (SFS). SFS employs continuous improvement techniques to streamline operations and drive
efficiency throughout the supply chain. SFS has four primary elements that work in concert: sales
and operations planning (S&OP), common system platforms, Transformational Lean, and complexity
reduction. S&OP focuses on keeping supply in sync with demand for products, to minimize inventory
while maximizing customer fill rates. Common systems entail standardization of processes and IT
platforms to provide scalability that facilitates efficiency and rapid acquisition integrations.
Transformational Lean combines traditional supply chain and manufacturing lean with back office
functions to enable transformation of business models to drive
competitive advantage. Complexity reduction focuses on standardizing
processes and eradicating complexity in all
19
operational aspects, except where customers gain value
and are willing to pay for customized offerings.
Other benefits of SFS include reductions in lead
times, rapid realization of synergies during acquisition integrations, and focus on employee
safety. SFS disciplines helped to mitigate the substantial impact of material and energy price
inflation that was experienced in recent years. It was instrumental in the reduction of working
capital during 2009 as evidenced by the 34% improvement in working capital turns from 5.9 at
year-end 2008 to 7.9 at year-end 2009. In 2010 and beyond, the Company plans to further leverage
SFS to generate ongoing improvements in working capital turns, cycle times, complexity reduction
and customer service levels.
Certain Items Impacting Earnings
Aside from the strategic commentary above, other matters having a significant impact on the
Companys results in 2009 and / or 2008 were inflation, currency exchange rate fluctuations, costs
associated with the Black & Decker merger, and debt extinguishment gains. In addition, the weak
economic conditions necessitated cost reduction actions in 2009 and 2008.
|
|
|
While the Company experienced deflation in 2009, inflation (primarily
commodity and freight) amounted to approximately $140 million in 2008 and $67 million in
2007. During this period more than two thirds of the cost increase was recovered through
customer pricing actions. Inflationary trends have resumed somewhat,
but the effect of inflation net of
customer pricing actions is projected to have almost no impact in
2010 if commodity prices do not increase significantly from year end
2009 levels. |
|
|
|
|
The fluctuation of foreign currencies impacts the translation of foreign
currency-denominated operating results into U.S. dollars. Foreign currency translation
contributed an estimated unfavorable impact of $0.04 of diluted earnings per share from
continuing operations in 2009, and a favorable impact of $0.09 and $0.18 in 2008 and 2007,
respectively. Fluctuations in foreign currency exchange rates relative to the U.S. dollar
may have a significant impact, either positive or negative, on future earnings. Refer to
the Market Risk section of this Managements Discussion and
Analysis (MD&A) for further discussion. |
|
|
|
|
In the fourth quarter of 2009, the Company incurred $0.22 per
diluted share in charges primarily related to the transaction and integration planning costs associated with the pending Black
& Decker merger. |
|
|
|
|
In 2009 the Company realized a $0.34 per diluted share gain on debt extinguishment as
compared with an $0.08 per diluted share gain in 2008. |
|
|
|
|
The Company took decisive action to right-size its cost structure in response to slowing
demand (unit volume decreased 20% in 2009) due to the recessionary environment. Restructuring, asset impairment and related
pre-tax charges totaled $45 million and $92 million in 2009 and 2008, respectively.
Employee headcount was reduced by approximately 3,000 as a result of restructuring actions
taken in the fourth quarter of 2008 and through year end 2009. The total 2009 cost savings
from the various actions taken were approximately $265 million, pre-tax, of which
approximately $150 million pertained to selling, general and administrative functions.
Management believes the cost reduction and other strategic actions taken were judicious and
position Stanley well to deliver favorable operating leverage as demand recovers. |
Outlook for 2010
This outlook discussion is intended to provide broad insight into the Companys near-term earnings
prospects, and not to discuss the various factors affecting such projections. Accordingly, the
purpose is to clarify that 2010 diluted earnings per share are projected to be higher than 2009,
and that 2010 free cash flow (as defined in the Financial Condition section of this MD&A) is
projected to be lower than 2009 (working capital improvement in 2010
expected to be modest). On a stand-alone basis (i.e. excluding all impacts from the Black
& Decker merger), management expects 2010 diluted earnings per share to be in the range of $3.00 -
$3.25, and 2010 free cash flow in the range of $300 to $350 million.
RESULTS OF OPERATIONS
Below is a summary of the Companys operating results at the consolidated level, followed by an
overview of business segment performance. The terms organic and core are utilized to describe
results aside from the impact of acquisitions during their initial 12 months of ownership. This
ensures appropriate comparability to operating results of prior periods.
20
Net Sales: Net sales from continuing operations were $3.737 billion in 2009, as compared to $4.426
billion in 2008, a 16% decrease. Price increases provided a 2% sales benefit in 2009, which was
offset by 2% from unfavorable foreign currency translation in all regions, with the largest impact
in Europe. Acquisitions within the Security segment, primarily the carryover effect from the 2008
Sonitrol, GdP and Scan Modul acquisitions, contributed a 4% increase in net sales. Organic unit
volume declined 20% reflecting weak global economic conditions. Geographically, the 2009 volume
decrease was most severe in Europe at 24%, as compared with 18% in the Americas and 11% in the less
significant Asian region. The Industrial and CDIY segments, with their high European content,
experienced 31% and 21% unit volume declines, respectively, while the Security segment had the best
performance with only an 8% drop in organic volume. Aside from reduced end user demand, the
Industrial segment was adversely affected by inventory de-stocking throughout the supply chain
which abated by the end of the fourth quarter. The consolidated organic sales unit volume decline was 19% in
the first quarter of 2009, deteriorated to 24% in the second quarter, and improved sequentially to
20% in the third quarter and again to 16% in the fourth quarter. The sequential percentage
improvements in the 2009 fiscal quarters partly relate to easier comparisons to 2008, which had a
challenging second half when the recession deepened, but also reflect some encouraging
macro-economic trends. The CDIY segment is most affected by the residential construction market,
which appears to have stabilized, as well as consumer confidence which has improved in the U.S. and
Europe in the second half of 2009. Industrial production worldwide is up and management expects
that will ultimately have a positive impact on our Industrial segment. There is a continued slowdown in
commercial construction, particularly in the U.S., which is affecting the Security segment.
Management is focusing on education, healthcare and other verticals in its efforts to mitigate the
commercial construction impact on the Security segment. Management remains cautious moving
forward into 2010 and expects modestly positive sales growth from 2009 levels, aside from
acquisitions. The Company will continue to focus on innovative new product development and
marketing as key sales drivers in its efforts to gain market share in this difficult economic
environment.
Net sales from continuing operations were $4.426 billion in 2008, as compared to $4.360 billion in
2007, a 2% increase. As a result of significant commodity inflation, the Company increased pricing
on its products and services which provided a 3% sales benefit in 2008. Sales growth related to
acquisitions, principally from Sonitrol, GdP and other small Security segment acquisitions,
contributed nearly 4% in higher sales. Organic unit volume decreased 6%, while favorable foreign
currency translation in all regions increased sales 1% versus the prior year. The organic unit
volume decline reflects deteriorating economic conditions which spread from the U.S. to other
regions in the second half of 2008. Sequentially, organic unit volume was down 4% for the first
half of 2008, associated with the contraction in the U.S. residential construction market, and
declined 7% and 10% in the third and fourth quarters, respectively. The CDIY segment unit volume
was most affected by the economic downturn. In the Industrial segment, the U.S.-based,
automotive-related businesses suffered sharp declines, which were partially offset by strength in
industrial storage. Aside from the hardware business, which had lower sales pertaining to the loss
of a major customer in 2007, the Security segment had positive organic sales volume for the year
reflecting solid demand in its diversified end markets.
Gross Profit: The Company reported gross profit from continuing operations of $1.508 billion, or
40% of net sales, in 2009, compared to $1.671 billion, or 38% of net sales, in 2008. Acquisitions
within the Security segment contributed $100 million of gross profit in 2009. Core gross profit for 2009 was $1.408
billion, down $186 million from the prior year due to the previously discussed sales volume
pressures pertaining to broad economic weakness, and to a much smaller extent unfavorable foreign
currency translation. The 40% core gross margin rate represents a
record rate for the Company, up nearly 200 basis points versus the prior year. Several factors enabled this strong performance with
respect to the gross margin rate, including the carryover effect of customer pricing increases
implemented to help recover the significant inflation experienced in 2008. Inflation abated in 2009
such that lower commodity costs offset the gross margin rate impact of cost under-absorption
associated with lower volume. Tight operational management, reflecting the disciplines of the
previously discussed Stanley Fulfillment System, enabled substantial benefits from productivity
projects and the execution of cost reduction actions taken in response to slower demand. The gross
margin rate was further bolstered by improved sales mix associated
with the Security segment.
The Company reported gross profit from continuing operations of $1.671 billion, or 38% of net
sales, in 2008, compared to $1.653 billion, or 38% of net sales, in 2007. The acquired businesses
increased gross profit by $77 million and were modestly accretive to the gross margin rate. Core
gross profit for 2008 was $1.594 billion, or 37% of net sales, down $59 million, or 60 basis
points, from the prior year. The Security segment achieved gross profit expansion associated with
the higher monitoring services sales mix emanating from the reverse integration of the legacy
security integration business into HSM. However, this was more than offset by gross profit declines
in the CDIY and Industrial segments reflecting sales volume pressures. Aggregate pricing and
productivity actions in 2008 largely offset $140 million of material, energy and wage cost
inflation.
21
SG&A Expense: Selling, general and administrative expenses, inclusive of the provision for doubtful
accounts (SG&A), were $1.028 billion, or 27.5% of net sales, in 2009 as compared with $1.108
billion, or 25.0% of net sales in 2008. Aside from acquisitions, SG&A was $142 million lower than
2008. The decrease in SG&A pertains to headcount reductions and various cost containment actions
such as temporarily suspending certain U.S. retirement benefits in 2009 and sharply curtailing
travel and other discretionary spending. There was also a reduction in variable selling and other
costs, as well as favorable foreign currency translation. Partially offsetting these decreases was
$22 million of increased spending to expand the convergent security business sales force and
various brand awareness advertising campaigns, and $5 million for Black & Decker integration
planning.
Corporate overhead, which is not allocated to the business segments, amounted to $71 million in
2009, $60 million in 2008 and $62 million in 2007. The increase in 2009 expense mainly pertains to
mark-to-market accounting on unfunded benefit plans where the liability due to participants
increased from the higher Stanley common stock price and broader market recovery relative to year
end 2008.
SG&A was $1.108 billion, or 25% of net sales, in 2008 as compared with $1.038 billion, or 24%
of net sales in 2007. Acquired companies contributed $46 million of the increase. The remaining $24
million increase is largely attributable to foreign exchange impact, higher bad debt expense, and
strategic investments including those to foster growth in emerging markets, partially offset by
benefits from the cost reduction initiatives previously mentioned.
Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs)
are classified within SG&A. This classification may differ
from other companies who may report such expenses within cost of sales. Due to diversity in
practice, to the extent the classification of these distribution costs differs from other
companies, the Companys gross margins may not be comparable. Such distribution costs classified in
SG&A amounted to $102 million, $122 million and $129 million in 2009, 2008 and 2007, respectively.
Interest and Other-net: Net interest expense from continuing operations in 2009 was $61 million,
compared to $83 million in 2008 and $88 million in 2007. The decline in 2009 relates to reduced
short-term borrowing levels along with sharply lower applicable interest rates. Additionally, the
favorable effects of fixed-to-floating interest rate swaps, coupled with the reduction in interest
expense from the early retirement of $137 million of junior subordinated debt securities, more than
offset the increased interest expense from the September 2008 $250 million debt issuance. The
decrease in 2008 versus 2007 net interest expense is primarily due to lower applicable interest
rates on commercial paper borrowings in 2008. The remainder of the decrease predominantly relates
to repayment of $150 million of debt that matured in November 2007, partially offset by interest
expense on the $250 million of term debt issued in September 2008.
Other-net from continuing operations totaled $139 million of expense in 2009 compared to $112
million of expense in 2008. The increase is related to higher intangible asset amortization
expense, mainly associated with the 2008 Sonitrol and GdP acquisitions. Additionally, the Company
incurred $20 million in acquisition deal costs, primarily for Black & Decker, which are required to
be expensed rather than capitalized in goodwill under new accounting rules that became effective in
January 2009.
Other-net from continuing operations amounted to $112 million of expense in 2008 compared to $85
million of expense in 2007. The increase pertained primarily to higher intangible asset
amortization expense due to acquisitions, primarily Sonitrol and GdP, as well as currency losses.
Gain on Debt Extinguishment: In May 2009, the Company repurchased $103 million of its junior
subordinated debt securities for $59 million in cash and recognized a $44 million pre-tax gain on
extinguishment. In October 2008, $34 million of these securities were repurchased for $25 million
in cash resulting in a $9 million pre-tax gain thereon. The remaining principal obligation on these
debt securities at January 2, 2010 is $313 million.
Income Taxes: The Companys effective income tax rate from continuing operations was 19% in 2009,
compared to 25% in both 2008 and 2007. The lower effective tax rate in 2009 primarily relates to
benefits realized upon resolution of tax audits which are not expected to re-occur to the same
extent in future periods. The effective income tax rate may vary in future periods based on the
distribution of domestic and foreign earnings or changes in tax law in the jurisdictions where the
Company operates, among other factors.
Discontinued Operations: The $3 million net loss from discontinued operations in 2009 is associated
with the wind-down of one small divestiture and purchase price adjustments for CST/berger and the
other small businesses divested in 2008. The $88 million of net earnings from discontinued
operations in 2008 is attributable to the $84 million net gain from the sale of the CST/berger
business along with three other small businesses divested in 2008, and also reflects the operating
results of these businesses through the dates of disposition.
The $11 million of net earnings from
discontinued operations reported in 2007 reflects the operating results of CST/berger and the
aforementioned other minor businesses.
22
Business Segment Results
The Companys reportable segments are aggregations of businesses that have similar products,
services and end markets, among other factors. The Company utilizes segment profit (which is
defined as net sales minus cost of sales, and SG&A aside from corporate overhead expense), and
segment profit as a percentage of net sales to assess the profitability of each segment. Segment
profit excludes the corporate overhead expense element of SG&A, other-net (inclusive of intangible
asset amortization expense), restructuring and asset impairments, interest income, interest
expense, and income tax expense. Corporate overhead is comprised of world headquarters facility
expense, cost for the executive management team and the expense pertaining to certain centralized
functions that benefit the entire Company but are not directly attributable to the businesses, such
as legal and corporate finance functions. Refer to Note O, Restructuring and Asset Impairments, and
Note F, Goodwill and Other Intangible Assets, of the Notes to the Consolidated Financial Statements
for the amount of restructuring charges and asset impairments, and intangibles amortization
expense, respectively, attributable to each segment. As discussed previously, the Companys
operations are classified into three business segments: Security, Industrial, and Construction and
Do-It-Yourself (CDIY).
Security:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2007 |
Net sales from continuing operations |
|
$ |
1,560 |
|
|
$ |
1,497 |
|
|
$ |
1,400 |
|
Segment profit from continuing operations |
|
$ |
307 |
|
|
$ |
269 |
|
|
$ |
240 |
|
% of Net sales |
|
|
19.7 |
% |
|
|
17.9 |
% |
|
|
17.1 |
% |
Security segment sales increased 4% in 2009 reflecting a 12% contribution from acquisitions, mainly
Sonitrol (acquired in July 2008) and GdP (acquired in October 2008). Price provided a 2% sales
benefit which was offset by nearly 2% of unfavorable foreign currency translation. Organic sales
volume decreased 8% as the segment was affected by the contraction in U.S. commercial construction
and other capital spending delays associated with weak economic conditions. Mechanical access had
somewhat steeper volume declines than convergent security, but was aided by stabilization in the
residential hardware markets and a hardware products roll-out at a major North American retailer in the
second half of the year. Additionally, cross selling of mechanical products to convergent
customers, retention of national account customers and select new product introductions helped
alleviate mechanical access sales volume pressures. Lower organic volume in convergent (electronic)
security pertained primarily to weakness in system installations, although there were some signs of
improvement with national accounts late in the year. As a result there was a favorable mix shift in
convergent security and the overall segment to higher margin recurring monthly service revenue
(including security monitoring and maintenance) which grew organically in a high single digit
percentage range. This improved sales mix shift in the segment is partially attributable to the
recent expansion of the core commercial account sales force as well as a strategic emphasis on
recurring service revenue and away from certain installation-only jobs. The increase in the segment profit
amount was attributable to acquisitions, while the sustainment of organic profit at the prior year
level is notable considering the headwinds from lower sales. The robust 180 basis point segment
profit rate expansion was enabled by the ongoing successful integration of accretive acquisitions,
the previously mentioned mix shift to higher margin recurring monthly service revenues, the
benefits of customer pricing and proactive cost reductions.
Security segment sales increased 7% in 2008 primarily driven by acquisitions, notably Sonitrol and
GdP, which contributed 9%. Customer price increases amounted to 3%, while foreign currency and
organic volume declined 1% and 4%, respectively. The hardware business posted significant volume
declines associated with the loss of a major customer in late 2007. Aside from hardware, the
Security segment had an increase in organic volume reflecting solid demand from its
well-diversified customer base and associated recurring monthly revenues from service contracts for
security monitoring and system maintenance. The access technologies and mechanical lock businesses
delivered organic sales growth pertaining to modest volume increases and disciplined recovery of
inflation through customer pricing actions. The reverse integration of the U.S.-based legacy
security integration business as well as the integration of the July 2008 Sonitrol acquisition into
HSM provided cost synergies and fostered an 80 basis point expansion of the segment profit rate.
The segment profit improvement was also attributable to strong execution of productivity projects,
partially offset by the impact of the previously discussed hardware business sales volume decline.
Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2007 |
Net sales from continuing operations |
|
$ |
882 |
|
|
$ |
1,274 |
|
|
$ |
1,246 |
|
Segment profit from continuing operations |
|
$ |
89 |
|
|
$ |
164 |
|
|
$ |
183 |
|
% of Net sales |
|
|
10.1 |
% |
|
|
12.9 |
% |
|
|
14.7 |
% |
23
Industrial segment net sales decreased 31% in 2009 compared with 2008. Price provided a 2% benefit
which was offset by 2% of unfavorable foreign currency translation. Unit volume fell 31%, about
evenly in the Americas and Europe which was partially offset by growth in the Companys relatively
less significant Asian region. Industrial channels were down more severely than automotive
repair channels. The unit volume declines reflected ongoing severe economic weakness in the U.S. and
Europe. In addition to broad-based, reduced end market demand, the segment was adversely impacted
by pervasive inventory corrections throughout the supply chain which
abated in the fourth quarter. There are signs of stabilization in the
channels this business segment serves. Management is focusing on complexity
reduction (including appropriate sku rationalization) and new product
introductions in the Facom, Proto and Mac industrial and automotive repair businesses, and believes there are opportunities
to gain share in this environment. Segment profit fell $75 million from the prior year due to the
precipitous sales volume decline which was also reflected in the segment profit rate contraction.
However price realization partially mitigated the sales volume and
related negative manufacturing productivity
effects, along with a solid improvement in Mac Tools profit reflecting disciplined cost and other
actions. The Company initiated extensive cost actions throughout the segment in late 2008, but
they took longer to implement in Europe due to the country-specific works council process. Those
actions are largely complete and were supplemented by other ongoing restructuring initiatives in
2009, as reflected in the quarterly segment profit rate that hit a trough of 9.2% in the third
quarter and recovered to 11.3% in the fourth quarter.
Industrial segment net sales increased 2% in 2008 versus 2007, attributable to acquisitions.
Foreign currency translation provided a 3% benefit, and favorable pricing 2%, which were offset by
a 5% unit volume decline. The North American automotive repair business was adversely affected by
distributor attrition and the deteriorating U.S. economy. European sales volumes, which had been
positive in the first half of the year, declined in the second half as Facom and other businesses
reflected the contraction of the European economy. These volume declines were partially offset by
strong sales growth in U.S.-based engineered storage and to a lesser extent the hydraulic tools
business. The sales growth in engineered storage was driven by government spending, particularly by
army and navy bases, and also strength with commercial customers. The sales volume declines created
substantial headwinds from unfavorable manufacturing plant absorption causing a decrease in the
segment profit. Strong focus on customer pricing and productivity initiatives more than offset the
effects of inflation. Additionally, the benefits of cost reduction actions partially mitigated the
unfavorable impact of sales volume declines on segment profit.
CDIY:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2007 |
Net sales from continuing operations |
|
$ |
1,295 |
|
|
$ |
1,656 |
|
|
$ |
1,715 |
|
Segment profit from continuing operations |
|
$ |
154 |
|
|
$ |
191 |
|
|
$ |
254 |
|
% of Net sales |
|
|
11.9 |
% |
|
|
11.5 |
% |
|
|
14.8 |
% |
CDIY net sales from continuing operations decreased 22% in 2009 from 2008. Customer pricing
contributed 2% to sales which was more than offset by 3% of unfavorable foreign currency
translation in all regions. Segment unit volumes declined 21% overall, comprised of 22% in both
the Americas and Europe and 16% in Asia. The sales volume declines were more pronounced in
fastening systems (Bostitch), which has higher commercial construction and industrial channel
content, than in consumer tools and storage. However the majority of this segment is driven by
consumer and residential construction channels which have largely stabilized. Key customer point of
sale data remains steady. Segment profit declined $37 million attributable to the sales volume
pressure. The ongoing integration of the Bostitch business into consumer tools and storage has
generated efficiencies that significantly aided the segment profit rate recovery from a trough of
6.4% in the fourth quarter of 2008. The aforementioned Bostitch integration, along with other
cost actions and productivity initiatives, as well as the carryover effect of price increases and
lower commodity costs, enabled the 40 basis point improvement in the segment profit rate despite
sharply lower sales.
CDIY net sales from continuing operations decreased 3% in 2008 from 2007. Customer pricing
increases, in response to rising commodity costs in the first three quarters of 2008, contributed
3% to sales. Foreign currency translation increased sales by 2%, while organic volume declined 8%.
Volume was negatively impacted by the contraction in residential construction in both the Americas
and Europe, reductions in consumer spending, as well as a decline in industrial markets served by
fastening systems, reflecting increasingly weak macro-economic conditions. Fastening systems
continued its planned shift toward more profitable business which resulted in additional volume
pressure. The sales volume decline also partially pertained to the shut-down of the unprofitable
consumer metal storage business. Europe had essentially flat unit volume in the first half of 2008
but declined significantly in the second half. Despite declines in unit volume, CDIY retained focus
on inventory levels and contributed a substantial part of the Companys total working capital
improvement. Progress was made on executing customer pricing actions but these benefits were
significantly outpaced by cost inflation contributing to the profit rate erosion. The profit rate
was also affected by lower sales volumes. Productivity projects and cost reduction actions partially mitigated these unfavorable impacts.
24
RESTRUCTURING ACTIVITIES
At January 2, 2010, the Companys restructuring reserve balance was $46.4 million, the vast
majority of which is expected to be utilized in 2010. A summary of the restructuring reserve
activity from January 3, 2009 to January 2, 2010 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Additions/ |
|
|
|
|
|
|
|
|
|
|
|
|
1/3/09 |
|
|
Accrual |
|
|
(Reversals) |
|
|
Usage |
|
|
Currency |
|
|
1/2/10 |
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
$ |
10.8 |
|
|
$ |
(1.7 |
) |
|
$ |
|
|
|
$ |
(4.1 |
) |
|
$ |
(0.3 |
) |
|
$ |
4.7 |
|
Facility closure |
|
|
1.8 |
|
|
|
1.7 |
|
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal acquisitions |
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
(5.7 |
) |
|
|
(0.3 |
) |
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Actions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
|
|
|
|
|
|
|
|
|
42.4 |
|
|
|
(18.1 |
) |
|
|
0.3 |
|
|
|
24.6 |
|
Asset impairments |
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
Facility closure |
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2009 actions |
|
|
|
|
|
|
|
|
|
|
48.6 |
|
|
|
(24.1 |
) |
|
|
0.3 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-2009 Actions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
|
54.1 |
|
|
|
|
|
|
|
(7.6 |
) |
|
|
(31.2 |
) |
|
|
(0.3 |
) |
|
|
15.0 |
|
Asset impairments |
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
1.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Pre-2009 actions |
|
|
55.3 |
|
|
|
|
|
|
|
(7.9 |
) |
|
|
(32.1 |
) |
|
|
(0.3 |
) |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
67.9 |
|
|
$ |
|
|
|
$ |
40.7 |
|
|
$ |
(61.9 |
) |
|
$ |
(0.3 |
) |
|
$ |
46.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, asset impairment and
related pre-tax charges totaled $45 million in 2009, of which $41 million was classified in
Restructuring charges and asset impairments and $4 million
in Cost of sales and SG&A.
2009 Actions: In response to further sales volume declines associated with the economic recession,
the Company initiated various cost reduction programs in 2009. Severance charges of $42.4 million
were recorded relating to the reduction of approximately 1,500 employees. In addition, $4.0 million
in charges were recognized for asset impairments related to closing several small distribution
centers, consolidating production facilities, and exiting certain businesses. Facility closure
costs totaled $1.8 million. Also, $0.4 million in other charges stemmed mainly from the termination
of service contracts. Of the $48.6 million recognized for these actions, $24.1 million has been
utilized to date, with $24.8 million of reserves remaining as of January 2, 2010. Of the charges
recognized in 2009, $9.7 million pertains to the Security segment; $21.4 million to the Industrial
segment; $15.5 million to the CDIY segment; and $2.0 million to non-operating entities.
Pre-2009 Actions: During 2008, the Company initiated cost reduction actions in order to maintain
its cost competitiveness. A large portion of these actions were initiated in the fourth quarter as
the Company responded to deteriorating macro-economic conditions and slowing global demand,
primarily in its CDIY and Industrial segments. Severance charges of $70.0 million were recorded
relating to the reduction of approximately 2,700 employees. In addition, $13.6 million in charges
were recognized related to asset impairments for production assets and real estate, and
$0.7 million for facility closure costs. Also, $1.2 million in other charges stemmed from the
termination of service contracts. Of the $85.5 million in full year 2008 restructuring and asset
impairment charges, $13.8 million, $29.7 million, $35.6 million, and $6.4 million pertained to the
Security, Industrial, and CDIY segments, and non-operating entities, respectively. During 2007, the
Company also initiated $11.8 million of cost reduction actions in various businesses entailing
severance for 525 employees and the exit of a leased facility.
As of January 3, 2009, the reserve balance related to these prior actions totaled $55.3 million of
which $32.1 million was utilized in 2009. In addition, $7.6 million of severance-related costs
accrued prior to 2009 were reversed in 2009 due in part to a reduction in the number of employee
terminations pertaining to recent changes in regional European labor statutes. The remaining
reserve balance of $15.0 million predominantly relates to actions in Europe and is expected to be
utilized in 2010.
Acquisition Related: During 2009, $2.7 million of reserves were established for acquisitions
consummated in the latter half of 2008 primarily related to the consolidation of security
monitoring call centers. Of this amount, $1.0 million was for the severance of approximately
90 employees and $1.7 million related to the closure of a branch facility, primarily from remaining
lease obligations. In 2009, $2.7 million of severance reserves previously established in purchase
accounting that are no longer needed were reversed to goodwill. The Company utilized $5.7 million
of the restructuring reserves during 2009 established for previous acquisitions.
As of January 2, 2010, $6.6 million in acquisition-related accruals remain. Those accruals are expected
to be utilized predominantly in 2010.
25
FINANCIAL CONDITION
Liquidity, Sources and Uses of Capital: The Companys primary sources of liquidity are cash flows
generated from operations and available lines of credit under various credit facilities.
Operating and Investing Activities: The Company has consistently generated strong operating cash
flows over many years. In 2009, cash flow from operations totaled $539 million, up over $22 million
compared to 2008. Working capital (receivables, inventories and accounts payable) generated $226
million of cash inflows, driven by inventory and accounts receivable reductions which were
partially offset by lower accounts payable. These working capital reductions, while partially
attributable to lower sales volumes, were engendered by broadly practiced SFS disciplines
including effective sales and operations planning, a deliberate focus on reducing slow moving
inventories, and vigilant receivable collections. Additionally, the Company implemented a
receivable securitization facility in December 2009 which enabled a $35 million cash inflow. This
strong working capital performance is apparent from the improvement in working capital turns from
5.9 in 2008 to a record 7.9 at year-end 2009. Cash outflows for restructuring activities totaled
$58 million in 2009, an increase of $25 million over 2008, arising from the significant cost
reduction actions initiated in the fourth quarter of 2008 and the first half of 2009 as the Company
right-sized its cost structure amidst sales pressures associated with weak macro-economic
conditions.
In 2008, cash flow from operations totaled $517 million, down $27 million compared to 2007.
Operating cash flow reflects a $46 million reduction for taxes paid on the gain from the CST/berger
divestiture, even though the directly related gross proceeds are reported as an investing cash
flow. Working capital generated $123 million of cash inflows, driven by accounts receivables
reflecting the disciplines of SFS and a concerted effort to reduce past due accounts, and to a
lesser extent inventory reductions. Cash outflows for restructuring activities totaled $33 million
in 2008, a decrease of $25 million over 2007, primarily pertaining to cost reduction actions
initiated in the fourth quarter and the continuing payments under the Facom Europe initiatives.
The other non-cash element of cash provided by operating activities is comprised of various items
including non-cash gains on debt extinguishments, inventory losses, interest accretion on the
convertible notes, and loan cost amortization among other factors. Other non-cash operating cash
flows represent items necessary to reconcile net earnings to net cash provided by operating
activities.
Capital expenditures were $93 million in 2009, $141 million in 2008, and $87 million in 2007. The
lower capital expenditures in 2009 pertain to reduced capitalized software investments and the
prior year purchase of a previously leased distribution facility that did not re-occur. The higher
capital expenditures in 2008 as compared with 2007 were primarily attributable to investment in the
North American SAP information system implementation, and the aforementioned purchase of a
distribution facility.
Free cash flow, as defined in the following table, was $446 million in 2009, $422 million in 2008,
and $457 million in 2007, considerably exceeding net earnings. Management considers free cash flow
an important indicator of its liquidity, as well as its ability to fund future growth and provide a
dividend to shareowners. In 2008, free cash flow also excludes the income taxes paid on the
CST/berger divestiture due to the fact the taxes are non-recurring and the directly related gross
cash proceeds are classified in investing cash flows. Free cash flow does not include deductions
for mandatory debt service, other borrowing activity, discretionary dividends on the Companys
common stock and business acquisitions, among other items.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
539 |
|
|
$ |
517 |
|
|
$ |
544 |
|
Less: capital expenditures |
|
|
(73 |
) |
|
|
(95 |
) |
|
|
(66 |
) |
Less: capitalized software |
|
|
(20 |
) |
|
|
(46 |
) |
|
|
(21 |
) |
Add: taxes paid on CST/berger divestiture
included in operating cash flow |
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
446 |
|
|
$ |
422 |
|
|
$ |
457 |
|
|
|
|
|
|
|
|
|
|
|
Based on its demonstrated ability to generate cash flow from operations as well as its strong
balance sheet and credit position at January 2, 2010, the Company believes over the long term it
has the financial flexibility to deploy capital to its shareholders advantage through a
combination of acquisitions, dividends, debt repayment, and potential future share repurchases. The
Company expects free cash flow in 2010 to be approximately $300 to $350 million which assumes a
modest improvement in working capital turns from 2009 year-end levels.
26
This forecast represents approximately a $100 to
$150 million reduction from the 2009 free cash flow, primarily because the 2.0 times improvement in
working capital turns achieved in 2009 as reflected in the $226 million increase in current year
free cash flow will not repeat to the same extent in 2010. The projected 2010 free cash flow is
more than sufficient to meet the Companys requirements for funding the stock dividend, debt
service and other matters.
In 2009, the Company expended $24 million for several small acquisitions. In 2008, acquisition
spending totaled $575 million, mainly for the GdP, Scan Modul, Sonitrol and Xmark businesses within
the Security segment. 2007 acquisition spending amounted to $643 million, primarily pertaining to
the HSM, InnerSpace and Bedcheck businesses.
Investing cash flows, aside from the previously discussed capital expenditures and acquisitions,
were minor in 2009. Such other investing cash flows in 2008 include $205 million in gross proceeds
from sales of businesses, after transaction costs, primarily pertaining to the divestiture of the
CST/berger laser measuring tool business in July 2008. As previously mentioned, the $46 million of
income taxes paid on the gain are reported as an operating cash outflow and thus the total cash
inflow from the 2008 divestitures amounts to $159 million.
On February 27, 2008, the Company amended its credit facility to provide for an increase and
extension of its committed credit facility to $800 million from $550 million. In May 2008, the
Companys commercial paper program was also increased to $800 million. The credit facility is
diversified amongst thirteen financial institutions. The credit facility is designated as a
liquidity back-stop for the Companys commercial paper program. The amended and restated facility
expires in February 2013. As of January 2, 2010, there were no outstanding loans under this
facility and the Company had $87 million of commercial paper outstanding. In addition, the Company
has uncommitted short-term lines of credit with numerous foreign banks aggregating $197 million, of
which $188 million was available at January 2, 2010. Short-term arrangements are reviewed annually
for renewal. Aggregate credit lines total $997 million, of which $90 million was utilized and
reported as outstanding short-term borrowings as of January 2, 2010.
Liquidity and Related Outlook Following Consummation of the Black & Decker Merger: It is currently
anticipated that, upon closing of the merger, the Company will enter into a new, additional
revolving credit facility of approximately $700 million, and will increase its commercial paper
facility by this same amount. The terms of such facility (including with respect to interest rates
and other matters) will be negotiated and are not currently known. Stanley intends to target
strong investment grade credit ratings following the merger.
The Companys stand-alone debt is currently rated by Standard & Poors (S&P), Moodys Investor
Service (Moodys) and Fitch Ratings (Fitch). As of January 2, 2010 the ratings for senior
unsecured debt were A, A3, and A by S&P, Moodys, and Fitch, respectively, each with a negative ratings outlook or under review for
possible downgrade associated with the pending merger with Black & Decker. The
Companys stand-alone short-term debt, or commercial paper, ratings are A-1, P-2, and F2 by S&P,
Moodys, and Fitch, respectively. Black & Deckers stand-alone ratings for senior unsecured debt as
of year end 2009 were BBB, Baa3, and BBB by S&P, Moodys, and Fitch, respectively. Failure to
maintain strong investment grade ratings level could adversely affect the Companys cost of funds,
liquidity and access to capital markets, but would not have an adverse effect on the Companys
ability to access the previously discussed $800 million committed credit facility, nor the proposed
incremental committed credit facility the Company plans to put in place post-merger.
Based upon discussions with all three ratings agencies, the Company expects that following the consummation of the merger,
its senior unsecured debt will be rated A, Baa1, and
A- by S&P, Moodys and Fitch, respectively, and anticipates its short term borrowing ratings will be
A-2, P-2 and F2 by S&P, Moodys and Fitch, respectively.
The Company will receive $320 million of cash proceeds in May, 2010 from the forward stock purchase
contracts element of the Equity Units, which will be used to repay current debt maturities and
reduce commercial paper borrowings. The Company has $401 million of cash and $87 million of
commercial paper outstanding at January 2, 2010. In their Form 10-K filing on February 19, 2010,
Black & Decker reported $1.083 billion of cash at December 31, 2009 and no amount outstanding under
its revolving credit facility, although this position may fluctuate in the normal course of
business through the merger closing date. As of January 28, 2010, as disclosed in the previously
mentioned Form S-4 filing, Black & Decker had $175 million of long-term bank debt that is subject
to change-in-control covenants, which will be repaid by the Company at or within 90 days of
closing. Post-merger, the combined debt of the new Stanley Black & Decker, which will aggregate
approximately $2.6 billion, will have well-staggered maturities over many years. Management
believes the combined Stanley Black & Decker will have ample liquidity and a healthy capital
structure both for the near and long-term following the consummation of the merger expected to
occur on March 12, 2010.
Financing Activities: Payments on long-term debt amounted to $65 million in 2009, $45 million in
2008, and $228 million in 2007. Net repayments of short-term borrowings totaled $120 million in
2009 and $74 million in 2008. In 2009 free cash flow (after paying the long-standing common stock
dividend) was largely deployed toward debt reduction,
including the previously mentioned $59 million payment to early extinguish $103 million of junior
subordinated debt securities.
27
In 2008, the Company utilized the proceeds from the $250 million of
long-term debt issued in September 2008 as well as the $159 million in net proceeds from
divestitures to repay short-term borrowings, which was partially offset by the cash outflows for
business acquisitions and other matters. Net proceeds from short-term borrowings totaled $192
million in 2007, and the cash inflows were used to fund acquisitions and repurchases of common
stock.
On September 29, 2008 the Company issued $250.0 million of unsecured Term Notes maturing October 1,
2013 (the 2013 Term Notes) with fixed interest payable semi-annually, in arrears at a rate of
6.15% per annum. The 2013 Term Notes rank equally with all of the Companys existing and future
unsecured and unsubordinated debt. The Company received net proceeds of $248.0 million which
includes a discount of $0.5 million to achieve a 6.15% interest rate and $1.5 million of fees
associated with the transaction. The proceeds were utilized to repay short-term borrowings.
The Company increased its cash dividend per common share to $1.30 in 2009. Dividends per common
share increased 3.2% in 2009, 3.3% in 2008, and 3.4% in 2007. The Company intends to maintain its
historical dividend policy with a commitment to responsible, continued dividend growth.
The Company repurchased $3 million of common stock in 2009. In 2008 the Company repurchased 2.2
million shares of its common stock for $103 million (an average of $46.11 per share), and in 2007
3.8 million shares were repurchased for $207 million (an average of $54.64 per share).
Proceeds from the issuance of common stock totaled $61 million in 2009, $19 million in 2008 and $97
million in 2007, with fluctuations related to the level of employee and retiree stock option
exercises. In 2007 this includes $19 million in proceeds from the sale of stock warrants in
connection with the Equity Units offering discussed further below.
The Company initially funded the $546 million HSM acquisition with a combination of short-term
borrowings and cash. A $500 million 364-day revolving credit bridge facility was entered into on
January 8, 2007, of which $130.0 million was utilized to acquire HSM; the remainder of the HSM
purchase price was funded through commercial paper borrowings and cash.
On March 20, 2007, the Company completed two security offerings: Equity Units, which consisted of
$330 million of five-year convertible notes and $330 million of three-year forward stock purchase
contracts; and $200 million of unsecured three-year fixed-rate term notes. With respect to the $860
million in offerings, the Company will not receive the cash pertaining to the forward stock
purchase contracts until May 2010. The $488 million net cash proceeds of these offerings and the
related equity instruments described below were used to pay down the short-term bridge facility and
commercial paper borrowings. As more fully discussed in Note A Significant Accounting Policies,
after application of FSP APB 14-1, the $330 million five-year convertible notes were bifurcated
into $275 million of debt and $55 million of equity, pertaining to the conversion option feature of
the convertible notes.
In November 2008, the Company repurchased $10 million of the Equity Units for $5.3 million in cash.
To properly account for the transaction, the Equity Unit elements were bifurcated as effectively
the Company paid $10 million to extinguish the convertible notes and received $4.7 million from the
seller to settle its obligation under the forward stock purchase contracts to purchase shares of
the Companys common stock at a minimum purchase price of approximately $54.23 per share on May 17,
2010. At the repurchase date, the Companys common stock had a closing market value of $25.38. The
remaining liability for fees payable associated with the $10 million of settled forward stock
purchase contracts was reversed, resulting in an increase to equity of $0.7 million. The related
$10 million in convertible note hedges and stock warrants, which are described further below, were
unwound with a nominal impact to equity. As a result of the various elements associated with the
$10 million Equity Unit repurchase transaction there was an insignificant gain recorded in earnings
and a net increase in equity of $5.4 million.
The convertible notes are pledged and held as collateral to guarantee the Equity Unit investors
obligation to purchase shares in May 2010 under the stock purchase contracts. The convertible notes
reflect a conversion price of approximately $64.50, or a 19% premium as of the date of issuance. At
maturity, the Company must repay the convertible note principal in cash. Additionally, to the
extent that the conversion option is in the money the Company, at its election, will deliver
either cash or shares of common stock based on a conversion rate and the applicable market value of
the Companys common stock at that time. A maximum of approximately 5.9 million shares may be
issued in May 2010 under the stock purchase contracts, essentially at the higher of approximately
$54.23 or market value at that time.
The Company simultaneously entered into related convertible note hedge and stock warrant
transactions with financial institutions. Share dilution pertaining to the conversion option of the
convertible notes will occur in interim periods if the share price exceeds approximately $64.50.
28
At maturity in 2012, the convertible note hedge will
offset the potentially dilutive impact of the conversion option aspect of the convertible notes.
Because the convertible note hedge is anti-dilutive, it will not be included in any diluted shares
outstanding computation prior to its maturity. However, at maturity, the aggregate effect of the
convertible notes and the convertible note hedge is that there will be no net increase in the
Companys common shares. The Company also issued unregistered stock warrants that are exercisable
during the period August 17, 2012 through September 28, 2012; the 4.9 million stock warrants
outstanding as of January 2, 2010 have a strike price of $86.83 (subject to standard anti-dilution
protection for increases in the dividend rate, stock splits etc.). In the event the stock warrants
become in the money during their 5 year term, due to the market value of the Companys common
stock exceeding the strike price, there will be a related increase in diluted shares outstanding
utilized in the determination of diluted earnings per share.
The combined terms of the convertible note hedge, stock warrants, and convertible notes in
substance re-establish the conversion option aspect of the convertible notes at 60% above the
$54.23 market value of the Companys common stock, such that in effect the Company will retain the
benefits of share price appreciation, if any, up to a market value equal to the stock warrant
strike price. Additionally the Company will retain benefits of share price appreciation, if any,
through the maturity of the stock purchase contract element of the Equity Units that will entail
issuance of $320 million of common shares at the higher of approximately $54.23 or market price in
May 2010. Refer to Note H, Long-Term Debt and Financing Arrangements, for further detail.
Contractual Obligations: The following summarizes the Companys significant contractual obligations
and commitments that impact its liquidity:
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Total |
|
|
2010 |
|
|
2011 - 2012 |
|
|
2013 - 2014 |
|
|
Thereafter |
|
Long-term debt(a) |
|
$ |
1,293 |
|
|
$ |
208 |
|
|
$ |
512 |
|
|
$ |
260 |
|
|
$ |
313 |
|
Interest payments on long-term debt(b) |
|
|
141 |
|
|
|
49 |
|
|
|
61 |
|
|
|
26 |
|
|
|
5 |
|
Operating leases |
|
|
126 |
|
|
|
37 |
|
|
|
46 |
|
|
|
21 |
|
|
|
22 |
|
Derivatives(c) |
|
|
51 |
|
|
|
78 |
|
|
|
(20 |
) |
|
|
(7 |
) |
|
|
|
|
Equity purchase contract fees |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Material purchase commitments |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
20 |
|
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
|
|
10 |
|
Outsourcing and other obligations(d) |
|
|
36 |
|
|
|
20 |
|
|
|
6 |
|
|
|
3 |
|
|
|
7 |
|
Pension funding obligations(e) |
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
1,701 |
|
|
$ |
429 |
|
|
$ |
609 |
|
|
$ |
306 |
|
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Future payments on long-term debt above encompass all payments related to aggregate debt
maturities. Refer to Note A Significant Accounting Policies, under the caption New Accounting
Standards, for more information regarding the interest accretion that will gradually increase
the carrying value of the Convertible Notes to $320 million in May 2012. |
|
(b) |
|
Future interest payments on long-term debt reflect the applicable fixed interest rate or the
variable rate in effect at January 2, 2010 for floating rate debt. |
|
(c) |
|
Future cash flows on derivative financial instruments reflect the fair value as of January 2,
2010. The ultimate cash flows on these instruments will differ, perhaps significantly, based
on applicable market interest and foreign currency rates at their maturity. |
|
(d) |
|
To the extent the Company can reliably determine when payments will occur pertaining to
unrecognized tax benefit liabilities, the related amount will be included in the table above.
However, due to the high degree of uncertainty regarding the timing of potential future cash
flows associated with the $30 million of such liabilities at January 2, 2010, the Company is
unable to make a reliable estimate of when (if at all) amounts may be paid to the respective
taxing authorities. |
|
(e) |
|
The Company anticipates that funding of its pension and post-retirement benefit plans in 2010
will approximate $17 million. That amount principally represents contributions either required
by regulations or laws or, with respect to unfunded plans, necessary to fund current benefits.
The Company has not presented estimated pension and post-retirement funding in the table above
beyond 2010 as funding can vary significantly from year to year based upon changes in the fair
value of the plan assets, actuarial assumptions, and curtailment/settlement actions. |
29
The merger agreement with Black & Decker contains certain termination rights and provides that upon
the termination of the merger under specific circumstances, including a change in the
recommendation of the Companys Board of Directors, the Company would owe Black & Decker a cash
termination fee of $125 million.
Aside from debt payments, for which there is no tax benefit associated with repayment of principal,
and the equity purchase contract fees, payment of the above contractual obligations will typically
generate a cash tax benefit such that the net cash outflow will be lower than the gross amounts
indicated.
Other Significant Commercial Commitments:
Amount of Commitment Expirations Per Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Total |
|
2010 |
|
2011 - 2012 |
|
2013 - 2014 |
|
Thereafter |
U.S. lines of credit |
|
$ |
800 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
800 |
|
|
$ |
|
|
Short-term borrowings, long-term debt and lines of credit are explained in detail within Note H,
Long-Term Debt and Financing Arrangements, of the Notes to the Consolidated Financial Statements.
MARKET RISK
Market risk is the potential economic loss that may result from adverse changes in the fair value
of financial instruments, currencies, commodities and other items traded in global markets. The
Company is exposed to market risk from changes in foreign currency exchange rates, interest rates,
stock prices, and commodity prices. Exposure to foreign currency risk results because the Company,
through its global businesses, enters into transactions and makes investments denominated in
multiple currencies. The Companys predominant exposures are in European, Canadian, British,
Australian, and Asian currencies, including the Chinese Renminbi (RMB) and the Taiwan Dollar.
Certain cross-currency trade flows arising from sales and procurement activities as well as
affiliate cross-border activity are consolidated and netted prior to obtaining risk protection
through the use of various derivative financial instruments which may include: purchased basket
options; purchased options; and currency forwards. The Company is thus able to capitalize on its
global positioning by taking advantage of naturally offsetting exposures and portfolio efficiencies
to reduce the cost of purchasing derivative 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 for affiliate
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 un-hedged. The Company has also entered into cross-currency swaps, to provide a
partial hedge of the net investments in certain subsidiaries and better match the cash flows of
operations to debt service requirements. Management estimates the foreign currency impact from
these financial instruments at the end of 2009 would have been approximately an $8 million pre-tax
loss based on a hypothetical 10% adverse movement in all derivative currency positions; this effect
would occur from an appreciation of the foreign currencies relative to the U.S. dollar. The Company
follows risk management policies in executing derivative financial instrument transactions, and
does not use such instruments for speculative purposes. The Company does not hedge the translation
of its non-U.S. dollar earnings in foreign subsidiaries.
As mentioned above, the Company routinely has cross-border trade and affiliate flows that cause a
transactional impact on earnings from foreign exchange rate movements. The Company is also
exposed to currency fluctuation volatility from the translation of foreign earnings into U.S.
dollars, as previously discussed. It is more difficult to quantify the transactional effects from
currency fluctuations than the translational effects. Aside from the use of derivative instruments
which may be used to mitigate some of the exposure, transactional effects can potentially be
influenced by actions the Company may take; for example, if an exposure occurs from a European
entity sourcing product from a U.S. supplier it may be possible to change to a European supplier.
Management estimates the combined translational and transactional impact of a 10% overall movement
in exchange rates is approximately $0.25 per diluted share. With respect to transactional foreign
currency market risk, the Company sources significant products from China and other Asian low cost
countries for resale in other regions. To the extent the Chinese RMB or these other currencies
appreciate with respect to the U.S. dollar, the Company may experience cost increases on such
purchases which could adversely impact profitability. In the event significant RMB or other
currency appreciation occurs, the Company would initiate customer pricing or other actions in an
effort to mitigate the related cost increases, but it is possible such actions would not fully
offset the potential unfavorable impact.
The Companys 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 including both trade and affiliate debt, 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, and cross-currency swaps.
30
The Companys primary exposure to interest rate risk comes from its floating rate debt in the U.S. and Europe and
is fairly represented by changes in LIBOR and EURIBOR rates. At January 2, 2010, the impact of a
hypothetical 10% increase in the interest rates associated with the Companys floating rate
derivative and debt instruments would have an immaterial effect on the Companys financial position
and results of operations.
The Company has exposure to commodity prices in many businesses, particularly brass, nickel, resin,
aluminum, copper, zinc, steel, and energy used in the production of finished goods. Generally,
commodity price exposures are not hedged with derivative financial instruments, but instead are
actively managed through customer product and service pricing actions, procurement-driven cost
reduction initiatives and other productivity improvement projects. In 2009, the Company experienced
much less significant commodity, energy and wage inflation than in the past few years. However
such inflation increased costs by approximately $140 million in 2008 and $67 million in 2007, which
management mitigated to a large extent through various customer pricing actions and cost reduction
initiatives. Management presently expects inflation in 2010 to be recovered through customer
pricing and as a result it is not anticipated that such net inflation will have a material
adverse impact on 2010 earnings. However if commodity prices increase in the future, there would
be an unfavorable impact on earnings to the extent not recovered through pricing and other actions.
Fluctuations in the fair value of the Companys common stock affect domestic retirement plan
expense as discussed in the ESOP section of MD&A. Additionally, the
Company has $21 million of liabilities as of January 2, 2010 pertaining to unfunded defined
contribution plans for certain U.S. employees for which there is mark-to-market exposure.
The assets held by the Companys defined benefit plans are exposed to fluctuations in the market
value of securities, primarily global stocks and fixed-income securities. The funding obligations
for these plans would increase in the event of adverse changes in the plan asset values, although
such funding would occur over a period of many years. This is exemplified by the fact that while
there was a $48 million gain on pension plan assets in 2009 and a $71 million loss on pension plan
assets in 2008 associated with volatile financial markets, the Company expects funding obligations
on its defined benefit plans will modestly decrease to approximately $17 million in 2010 as
compared with $20 million in 2009. The Company employs diversified asset allocations to help
mitigate this risk. Management has worked to minimize this exposure by freezing and terminating
defined benefit plans where appropriate.
The Company has access to financial resources and borrowing capabilities around the world. There
are no instruments within the debt structure that would accelerate payment requirements due to a
change in credit rating.
The Company has the flexibility to elect deferral of interest payments on its ETPS obligation for
up to 5 years. While there can be no guarantee of the future, the Company has an investment-grade
credit rating and has enjoyed uninterrupted access to the commercial paper and bank markets
throughout the recent credit crunch. Further, the Company has not encountered liquidity
difficulties historically when similar credit tightening has occurred due to macro-economic issues.
Moreover, the Companys existing credit facilities and sources of liquidity, including operating
cash flows, are considered adequate to conduct business as normal. Accordingly, based on present
conditions and past history, management believes it is unlikely that operations will be materially
affected by any potential deterioration of the general credit markets that may occur. The Company
believes that its strong financial position, operating cash flows, committed long-term credit
facilities and borrowing capacity, and ready access to equity markets provide the financial
flexibility necessary to continue its record of annual dividend payments, to invest in the routine
needs of its businesses, to make strategic acquisitions and to fund other initiatives encompassed
by its growth strategy.
OTHER MATTERS
Employee Stock Ownership Plan As detailed in Note L, Employee Benefit Plans, of the Notes to the
Consolidated Financial Statements, the Company has an Employee Stock Ownership Plan (ESOP) under
which the ongoing U.S. Cornerstone and 401(K) defined contribution plans are funded. Overall ESOP
expense is affected by the market value of Stanley stock on the monthly dates when shares are
released, among other factors. Net ESOP activity amounted to income of $8 million in 2009, and $11
million and $2 million of expense in 2008 and 2007, respectively. The ESOP income in 2009 stems
from the suspension of the Cornerstone benefits and the reduction of the 401(K) match, as a
percentage of employee contributions, as part of cost saving actions. The Company has reinstated
these benefits for 2010 and expects there will be an increase in expense in 2010 more aligned with
2008 and prior years. The increase in expense in 2008 versus 2007 was mostly attributable to the
average market value of shares released which decreased from $56.04 in 2007 to $43.65 in 2008, as
well as increased benefits pertaining to the headcount expansion from acquisitions. ESOP expense
could increase in the future if the market value of the Companys common stock declines.
31
Customer-Related Risks The Company has significant customers, particularly home centers and major
retailers, though individually there are none that exceed 6% of consolidated sales. The loss or
material reduction of business from any such significant customer could have a material adverse
impact on the Companys results of operations and cash flows, until either such customers were
replaced or the Company made the necessary adjustments to compensate for the loss of business.
There are no individually material credit exposures from particular customers. While the Company
has strong credit policies and disciplined management of receivables, due to weak economic
conditions or other factors it is reasonably possible that certain customers creditworthiness may
decline and losses from receivable write-offs may increase.
NEW ACCOUNTING STANDARDS Refer to Note A, Significant Accounting Policies, of the Notes to the
Consolidated Financial Statements for a discussion of new accounting pronouncements and the
potential impact to the Companys consolidated results of operations and financial position.
CRITICAL ACCOUNTING ESTIMATES Preparation of the Companys Consolidated Financial Statements
requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Significant accounting policies used in the preparation of the
Consolidated Financial Statements are described in Note A, Significant Accounting Policies.
Management believes the most complex and sensitive judgments, because of their significance to the
Consolidated Financial Statements, result primarily from the need to make estimates about the
effects of matters with inherent uncertainty. The most significant areas involving management
estimates are described below. Actual results in these areas could differ from managements
estimates.
Allowance For Doubtful Accounts The Companys estimate for its allowance for doubtful accounts
related to trade receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, a specific reserve is
established for individual accounts where information indicates the customers may have an inability
to meet financial obligations. In these cases, management uses its judgment, based on the
surrounding facts and circumstances, to record a specific reserve for those customers against
amounts due to reduce the receivable to the amount expected to be collected. These specific
reserves are reevaluated and adjusted as additional information is received. Second, a reserve is
determined for all customers based on a range of percentages applied to receivable aging
categories. These percentages are based on historical collection and write-off experience.
If circumstances change, for example, due to the occurrence of higher than expected defaults or a
significant adverse change in a major customers ability to meet its financial obligation to the
Company, estimates of the recoverability of receivable amounts due could be reduced.
Inventories Lower Of Cost or Market, Slow Moving and Obsolete Inventories in the U.S. are
predominantly valued at the lower of LIFO cost or market, while non-U.S. inventories are valued at
the lower of FIFO cost or market. The calculation of LIFO reserves, and therefore the net inventory
valuation, is affected by inflation and deflation in inventory components. The Company ensures all
inventory is valued at the lower of cost or market, and continually reviews the carrying value of
discontinued product lines and stock-keeping-units (SKUs) to determine that these items are
properly valued. The Company also continually evaluates the composition of its inventory and
identifies obsolete and/or slow-moving inventories. Inventory items identified as obsolete and/or
slow-moving are evaluated to determine if write-downs are required. The Company assesses the
ability to dispose of these inventories at a price greater than cost. If it is determined that cost
is less than market value, cost is used for inventory valuation. If market value is less than cost,
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 sell and dispose), and cannot be lower than the net
realizable value less a normal profit margin, also called the floor. If the Company is not able to
achieve its expectations regarding net realizable value of inventory at its current value, further
write-downs would be recorded.
Property, Plant and Equipment The Company generally values Property, Plant and Equipment (PP&E)
at historical cost less accumulated depreciation. Impairment losses are recorded when indicators of
impairment, such as plant closures, are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount. The impairment loss is quantified by
comparing the carrying amount of the assets to the weighted average discounted cash flows, which
consider various possible outcomes for the disposition of the assets (i.e. sale, leasing, etc.).
Primarily as a result of plant rationalization, certain facilities and equipment are not currently
used in operations. The Company recorded $7 million in asset impairment losses in 2009 primarily as
a result of restructuring initiatives, and such losses may occur in the future.
32
Goodwill and Intangible Assets The Company acquires businesses in purchase transactions that result
in the recognition of goodwill and other intangible assets. The determination of the value of
intangible assets requires management to make estimates and assumptions. In accordance with
Accounting Standards Codification (ASC) 350-20 Goodwill acquired goodwill and indefinite-lived
intangible assets are not amortized but are subject to impairment testing at least annually and
when an event occurs or circumstances change that indicate it is more likely than not an impairment
exists. Other intangible assets are amortized and are tested for impairment when appropriate. The
Company completed acquisitions in 2009 and 2008 valued at $24 million and $572 million
respectively. The assets and liabilities of acquired businesses are recorded at fair value at the
date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. The Company reported $1.818 billion of goodwill and $305 million
of indefinite-lived trade names at January 2, 2010.
In accordance with ASC 350-20, management tests goodwill for impairment at the reporting unit
level. A reporting unit is a reportable operating segment as defined in ASC 280, Segment
Reporting, or one level below a reportable operating segment (component level) as determined by
the availability of discrete financial information that is regularly reviewed by operating segment
management or an aggregate of component levels of a reportable operating segment having similar
economic characteristics. The Company has seven reporting units. If the carrying value of a
reporting unit (including the value of goodwill) is greater than its fair value, an impairment may
exist. An impairment charge would be recorded to the extent that the recorded value of goodwill
exceeded the implied fair value.
The Company assesses the fair value of its reporting units based on a discounted cash flow
valuation model. The key assumptions used are discount rates and perpetual growth rates applied to
cash flow projections. Also inherent in the discounted cash flow valuation are near-term revenue
growth rates over the next five years. These assumptions contemplate business, market and overall
economic conditions. The fair value of indefinite-lived trade names is also assessed using a
discounted cash flow valuation model. The key assumptions used include discount rates, royalty
rates, and perpetual growth rates applied to the projected sales.
As required by the Companys policy, goodwill and indefinite-lived trade names were tested for
impairment in the third quarter of 2009. Based on this testing, the Company determined that the
fair value of its reporting units and indefinite-lived trade names exceeded their carrying values.
The discount rate used in testing goodwill for impairment in the third quarter of 2009 was 10.5%
for all reporting units. The near-term revenue growth rates and the perpetual growth rates, which
varied for each reporting unit, ranged from -1% to 9%, and 2% to 5%, respectively. In 2009 as
compared with 2008, in consideration of market conditions, the discount rate assumption increased
100 basis points, and perpetual growth rates decreased 100 basis points in some reporting units,
which had the effect of reducing the estimated fair values. Management performed sensitivity
analyses on the fair values resulting from the discounted cash flows valuation utilizing more
conservative assumptions that reflect reasonably likely future changes in the discount rate,
perpetual and near-term revenue growth rates in all reporting units. The discount rate was
increased by 100 basis points with no impairment indicated. The perpetual growth rates were
decreased by 100 basis points with no impairment indicated. The near-term revenue growth rates were
reduced by 150 basis points with no impairment indicated. Based upon our 2009 annual impairment
testing analysis, including our consideration of reasonably likely adverse changes in assumptions
described above, management believes it is not reasonably likely that an impairment will occur in
any of the reporting units over the next twelve months.
In the event that our operating results in the future do not meet current expectations, management,
based upon conditions at the time, would consider taking restructuring or other actions as
necessary to maximize profitability. Accordingly, the above sensitivity analysis, while a useful
tool, should not be used as a sole predictor of impairment. A thorough analysis of all the facts
and circumstances existing at that time would need to be performed to determine if recording an
impairment loss was appropriate.
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 Companys expenditures related to routine environmental matters.
The Companys 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.
33
As of January 2, 2010, the Company
had reserves of $30 million for remediation activities associated with Company-owned properties as
well as for Superfund sites, for losses that are probable and estimable. The range of environmental
remediation costs that is reasonably possible is $16 million to $52 million which is subject to
change in the near term. The Company may be liable for environmental remediation of sites it no
longer owns. Liabilities have been recorded on those sites in accordance with this policy.
Income Taxes The future tax benefit arising from net deductible temporary differences and tax loss
carry-forwards is $49 million at January 2, 2010. The Company believes earnings during the periods
when the temporary differences become deductible will be sufficient to realize the related future
income tax benefits. For those jurisdictions where the expiration date of tax loss carry-forwards
or the projected operating results indicate that realization is not likely, a valuation allowance
is provided. The valuation allowance as of January 2, 2010 amounted to $24 million.
In assessing the need for a valuation allowance, the Company estimates future taxable income,
considering the feasibility of ongoing tax planning strategies, the realizability of tax loss
carry-forwards and the future reversal of existing temporary differences. Valuation allowances
related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax
rates and future taxable income levels. In the event the Company were to determine that it would
not be able to realize all or a portion of its deferred tax assets in the future, the unrealizable
amount would be charged to earnings in the period in which that determination is made. By contrast,
if the Company were to determine that it would be able to realize deferred tax assets in the future
in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a
favorable adjustment to earnings in the period in which that determination is made.
The Company periodically assesses its liabilities and contingencies for all tax years still under
audit based on the most current available information, which involves inherent uncertainty. For
those tax positions where it is more likely than not that a tax benefit will be sustained, we have
recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized
upon ultimate settlement with a taxing authority that has full knowledge of all relevant
information. For those income tax positions where it is not more likely than not that a tax benefit
will be sustained, no tax benefit has been recognized in the financial statements. See Note Q,
Income Taxes, of the Notes to the Consolidated Financial Statements for further discussion.
Risk Insurance To manage its insurance costs efficiently, the Company self insures for certain U.S.
business exposures and generally has low deductible plans internationally. For domestic workers
compensation, automobile and product liability (liability for alleged injuries associated with the
Companys products), the Company generally purchases outside insurance coverage only for severe
losses (stop loss insurance) and these lines of insurance involve the most significant accounting
estimates. While different stop loss deductibles exist for each of these lines of insurance, the
maximum stop loss deductible is set at no more than $5 million per occurrence and $27 million in
the aggregate. The process of establishing risk insurance reserves includes consideration of
actuarial valuations that reflect the Companys specific loss history, actual claims reported, and
industry trends among statistical and other factors to estimate the range of reserves required.
Risk insurance reserves are comprised of specific reserves for individual claims and additional
amounts expected for development of these claims, as well as for incurred but not yet reported
claims discounted to present value. The cash outflows related to risk insurance claims are expected
to occur over a maximum of approximately 8 to 10 years. The Company believes the liabilities
recorded for these U.S. risk insurance reserves, totaling $42 million and $45 million as of January
2, 2010 and January 3, 2009, respectively, are adequate. Due to judgments inherent in the reserve
estimation process it is possible the ultimate costs will differ from this estimate.
Warranty The Company provides product and service warranties which vary across its businesses. The
types of warranties offered generally range from one year to limited lifetime, while certain
products carry no warranty. Further, the Company sometimes incurs discretionary costs to service
its products in connection with product performance issues. Historical warranty and service claim
experience forms the basis for warranty obligations recognized. Adjustments are recorded to the
warranty liability as new information becomes available. The Company believes the $67 million
reserve for expected warranty claims as of January 2, 2010 is adequate, but due to judgments
inherent in the reserve estimation process, including forecasting future product reliability levels
and costs of repair as well as the estimated age of certain products submitted for claims, the
ultimate claim costs may differ from the recorded warranty liability.
OFF-BALANCE SHEET ARRANGEMENT
Synthetic Leases The Company is a party to synthetic leasing programs for one of its major
distribution centers and certain U.S. personal property, predominately vehicles and equipment. The
programs qualify as operating leases for accounting purposes, such that only the monthly rent
expense is recorded in the Statement of Operations and the liability
and value of the underlying assets are off-balance sheet.
34
These lease programs are utilized
primarily to reduce overall cost and to retain flexibility. The cash outflows for lease payments
approximate the $15 million of rent expense recognized in fiscal 2009. As of January 2, 2010, the
estimated fair value of assets and remaining obligations for these properties were $51 million and
$44 million, respectively.
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Certain statements contained in this Annual Report on Form 10-K that are not historical, including
but not limited to those regarding the Companys ability to: (i) complete the pending combination
with Black & Decker; (ii) expect to complete the pending combination with Black & Decker on March
12, 2010; (iii) achieve a healthy capital
structure and ample liquidity, with respect to the combined company following the completion of the
pending combination with Black & Decker; (iv) achieve a comprehensive global offering in both hand
and power tools, among other product offerings as a result of the pending Black & Decker
transaction; (v) within three years, realize $350 million of annual cost synergies in connection
with the pending Black & Decker transaction which will in turn help fuel future growth and cement
global cost leadership; (vi) meet its long term capital allocation objectives pertaining to free
cash flow including, targeting a strong investment grade credit rating, investing approximately 2/3
in acquisitions and growth and returning approximately 1/3 to shareowners (split approximately
equally between the long-standing quarterly dividend and share buybacks); (vii) be a consolidator
in the tool industry and to increase its relative weighting in emerging markets; (viii) grow its
CDIY and Industrial businesses through innovative product development, brand support, an increased
weighting in emerging markets and relentless focus on global cost competitiveness; (ix) further
leverage SFS to generate ongoing improvements in working capital turns, cycle times, complexity
reduction and customer service levels; (x) be lean, flexible and able to respond effectively to
future demand fluctuations when sales recover; (xi) generate full year 2010 diluted EPS in the
range of $3.00 3.25 per diluted share; (xii) generate free cash flow of approximately $300 -
$350 million for 2010 which will be more than sufficient to meet its requirements for funding stock
dividend, debt service and other matters; (xiii) enter into a new $700 million dollar credit
facility and increase its commercial paper program by that same amount; (xiv) achieve A, Baa1, and
A- credit rating for its senior unsecured debt from S&P, Moodys and Fitch, respectively, and A-2,
P-2 and F2 for its short term borrowings by S&P, Moodys and Fitch, respectively, all following the
consummation of the pending transaction with Black & Decker; (xv) maintain it historic dividend
policy with a commitment to responsible and continued dividend growth; (xvi) maintain financial
flexibility to invest in routine business needs, to make strategic acquisitions and to fund other
initiatives; and (xvii) not incur a goodwill asset impairment in any of its reporting units over
the next twelve months (collectively, the Results); are forward looking statements and subject
to risk and uncertainty.
These forward looking statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. There are a number of risks,
uncertainties and important factors that could cause actual results to differ materially from those
indicated by such forward-looking statements. In addition to any such risks, uncertainties and
other factors discussed elsewhere herein, the risks, uncertainties and other factors that could
cause or contribute to actual results differing materially from those expressed or implied in the
forward looking statements include, without limitation, those set forth under Item 1A Risk Factors
hereto or, with respect to Results that relate to the pending combination with Black & Decker,
Black & Deckers Annual Report on Form 10-K, and any material changes thereto set forth in any
subsequent Quarterly Reports on Form 10-Q, those contained in the Companys Registration Statement
on Form S-4 related to the pending combination with Black & Decker, those contained in the
Companys or, with respect to Results that relate to the pending combination with Black & Decker,
Black & Deckers other filings with the Securities and Exchange Commission, and those set forth
below.
The Companys ability to deliver the Results is dependent, or based, upon: (i) the satisfaction of
the conditions to closing the pending combination with Black & Decker, including, approval of the
merger by Black & Decker shareholders, the approval of the issuance of Stanley common stock and
certain amendments to the Companys certificate of incorporation by the Companys shareholders, and
the satisfaction of customary closing conditions and regulatory approvals including clearance by
the European Commission under the EC Merger Regulation and certain other foreign jurisdictions;
(ii) the Companys ability to effectively execute integration plans after the completion of the
combination with Black & Decker; (iii) the Companys ability to achieve the synergies, capitalize
on growth opportunities and achieve the anticipated results of a combination with Black & Decker;
(iv) the Companys ability to expand convergent security, mechanical security, and industrial and
automotive tool platforms through both organic growth and acquisitions; (v) generating net sales
increase between 2% 4% from 2009 levels; (vi) the non-recurrence of the $0.34 gain on the
extinguishment of debt and the $0.22 charge per share related to the Black & Decker transaction
costs; (vii) the resulting dilutive impact of the higher share count primarily associated with the
issuance of approximately 6 million
35
shares of common stock in May 2010 in
connection with the Companys equity unit hybrid instrument; (viii) the impact of approximately
$0.20 $0.25 per share related to an increased tax rate; (ix) the Company realizing the positive
carryover effect of approximately $75 million related to cost actions taken in 2009 (partially
offset by approximately $25 million of additional brand and Security related investments); (x)
restructuring, impairment and related charges remaining relatively flat to those taken in 2009;
(xi) almost no impact from price and inflation based on no significant increase in commodity levels; (xii) successful
integration of businesses and acquisitions; (xiii) the continued acceptance of technologies used in
the Companys products and services; (xiv) the Companys ability to manage existing Sonitrol
franchisee and Mac Tools distributor relationships; (xv) the Companys ability to minimize costs
associated with any sale or discontinuance of a business or product line, including any severance,
restructuring, legal or other costs; (xvi) the proceeds realized with respect to any business or
product line disposals; (xvii) the extent of any asset impairments with respect to any businesses
or product lines that are sold or discontinued as well as the Companys ability to test and analyze
the possibility of asset impairment; (xviii) the success of the Companys efforts to manage
freight costs, steel and other commodity costs; (xix) the Companys ability to sustain or increase
prices in order to, among other things, offset or mitigate the impact of steel, freight, energy,
non-ferrous commodity and other commodity costs and any inflation increases; (xx) the Companys
ability to generate free cash flow and maintain a strong debt to capital ratio; (xxi) the Companys
ability to identify and effectively execute productivity improvements and cost reductions, while
minimizing any associated restructuring charges; (xxii) the Companys ability to obtain favorable
settlement of routine tax audits; (xxiii) the ability of the Company to generate earnings
sufficient to realize future income tax benefits during periods when temporary differences become
deductible; (xxiv) the continued ability of the Company to access credit markets under satisfactory
terms; and (xxv) the Companys ability to negotiate satisfactory payment terms under which the
Company buys and sells goods, services, materials and products.
The Companys ability to deliver the Results is also dependent upon: (i) the success of the
Companys marketing and sales efforts; (ii) the ability of the Company to maintain or improve
production rates in the Companys manufacturing facilities, respond to significant changes in
product demand and fulfill demand for new and existing products; (iii) the Companys ability to
continue improvements in working capital through effective management of accounts receivable and
inventory levels; (iv) the ability to continue successfully managing and defending claims and
litigation; (v) the success of the Companys efforts to mitigate any cost increases generated by,
for example, increases in the cost of energy or significant Chinese Renminbi or other currency
appreciation; (vi) the geographic distribution of the Companys earnings; and (vii) the commitment
to and success of the Stanley Fulfillment System.
The Companys ability to achieve the Results will also be affected by external factors. These
external factors include: pricing pressure and other changes within competitive markets; the
continued consolidation of customers particularly in consumer channels; inventory management
pressures on the Companys customers; the impact the tightened credit markets may have on the
Company or its customers or suppliers; the extent to which the Company has to write off accounts
receivable or assets or experiences supply chain disruptions in connection with bankruptcy filings
by customers or suppliers; increasing competition; changes in laws, regulations and policies that
affect the Company, including, but not limited to trade, monetary, tax and fiscal policies and
laws; the timing and extent of any inflation or deflation; currency exchange fluctuations; the
impact of dollar/foreign currency exchange and interest rates on the competitiveness of products
and the Companys debt program; the strength of the U.S. and European economies; the extent to
which world-wide markets associated with homebuilding and remodeling stabilize and rebound; the
impact of events that cause or may cause disruption in the Companys manufacturing, distribution
and sales networks such as war, terrorist activities, and political unrest; and recessionary or
expansive trends in the economies of the world in which the Company operates, including, but not
limited to, the extent and duration of the current recession in the US economy and fluctuations in
the securities markets.
Unless required by applicable federal securities laws, the Company undertakes no obligation to
publicly update or revise any forward looking statements to reflect events or circumstances that
may arise after the date hereof. Investors are advised, however, to consult any further disclosures
made on related subjects in the Companys reports filed with the Securities and Exchange
Commission.
In addition to the foregoing, some of the agreements included as exhibits to this Annual Report on
Form 10-K (whether incorporated by reference to earlier filings or otherwise) may contain
representations and warranties, recitals or other statements that appear to be statements of fact.
These agreements are included solely to provide investors with information regarding their terms
and are not intended to provide any other factual or disclosure information about the Company or
the other parties to the agreements. Representations and warranties, recitals, and other common
disclosure provisions have been included in the agreements solely for the benefit of the other
parties to the applicable agreements and often are used as a means of allocating risk among the
parties.
36
Accordingly, such statements (i) should not be treated as categorical
statements of fact;
(ii) may be qualified by disclosures that were made to the other parties in connection with the
negotiation of the applicable agreements, which disclosures are not necessarily reflected in the
agreement or included as exhibits hereto; (iii) may apply standards of materiality in a way that is
different from what may be viewed as material by or to investors in or lenders to the Company; and
(iv) were made only as of the date of the applicable agreement or such other date or dates as may
be specified in the agreement and are subject to more recent developments.
Accordingly, representations and warranties, recitals or other disclosures contained in agreements
may not describe the actual state of affairs as of the date they were made or at any other time and
should not be relied on by any person other than the parties thereto in accordance with their
terms. Additional information about the Company may be found in this Annual Report on Form 10-K and
the Companys other public filings, which are available without charge through the SECs website at
http://www.sec.gov.
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ITEM 7A. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company incorporates by reference the material captioned Market Risk in Item 7 and the
material in Note I, Derivative Financial Instruments, of the Notes to Consolidated Financial
Statements in Item 8.
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ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Item 15 for an index to Financial Statements and Financial Statement Schedules. Such Financial
Statements and Financial Statement Schedules are incorporated herein by reference.
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ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. |
|
CONTROLS AND PROCEDURES |
The management of Stanley is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Management has assessed
the effectiveness of Stanleys internal control over financial reporting as of January 2, 2010. In
making its assessment, management has utilized the criteria set forth by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control Integrated
Framework. Management concluded that based on its assessment, Stanleys internal control over
financial reporting was effective as of January 2, 2010. Ernst & Young LLP, the auditor of the
financial statements included in this annual report, has issued an attestation report on the
registrants internal control over financial reporting, a copy of which appears on page 47.
Under the supervision and with the participation of management, including the Companys Chairman
and Chief Executive Officer and its Vice President and Chief Financial Officer, the Company has,
pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
evaluated the effectiveness of the design and operation of its disclosure controls and procedures
(as defined under Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Companys
Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer have
concluded that, as of January 2, 2010, the Companys disclosure controls and procedures are
effective. There has been no change in the Companys internal control over financial reporting that
occurred during the fiscal quarter ended January 2, 2010 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
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ITEM 9B. |
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OTHER INFORMATION |
None
37
PART III
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ITEM 10. |
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information required by this Item, except for certain information with respect to the Companys
Code of Ethics, the identification of the executive officers of the Company and any material
changes to the procedures by which security holders may recommend nominees to the Companys Board
of Directors, as set forth below, is incorporated herein by reference to the information set forth
in the section of the Companys definitive proxy statement (which will be filed pursuant to
Regulation 14A under the Exchange Act within 120 days after the close of the Companys fiscal year)
under the headings Information Concerning Nominees for Election as Directors, Information
Concerning Directors Continuing in Office, Board of Directors, and Section 16(a) Beneficial
Ownership Reporting Compliance.
In addition to Business Conduct Guidelines that apply to all directors and employees of the
Company, the Company has adopted a Code of Ethics that applies to the Companys Chief Executive
Officer and all senior financial officers, including the Chief Financial Officer and principal
accounting officer. A copy of the Companys Code of Ethics is available on the Companys website at
www.stanleyworks.com.
38
The following is a list of the executive officers of the Company as of February 19, 2010:
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Date Elected to |
Name, Age, Date of Birth |
|
Office |
|
Office |
John F. Lundgren (58)
(09/03/51)
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Chairman and Chief Executive Officer. President,
European Consumer Products, Georgia-Pacific
Corporation (2000).
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03/01/04 |
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Donald Allan, Jr. (45)
(3/21/64)
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Vice President & Chief Financial Officer since
January 1, 2009, Vice President & Corporate
Controller (2002); Corporate Controller (2000);
Assistant Controller (1999).
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10/24/06 |
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Jeffery D. Ansell (42)
(01/05/68)
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Vice President & President, Stanley Consumer Tools
Group. President Consumer Tools and Storage
(2004); President of Industrial Tools & Storage
(2002); Vice President Global Consumer Tools
Marketing (2001); Vice President Consumer Sales
America (1999).
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02/22/06 |
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Michael A. Bartone (50)
(07/17/59)
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Vice President Corporate Tax since January 2002.
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07/17/09 |
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Bruce H. Beatt (57)
(07/24/52)
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Vice President, General Counsel and Secretary since
October 2000.
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10/09/00 |
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D. Brett Bontrager (47)
(10/27/62)
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President, Convergent Security Solutions and Vice
President, Business Development (2007); Vice
President, Business Development (2004); Director,
Business Development (2003).
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08/01/08 |
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Justin C. Boswell (42)
(12/03/67)
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Vice President & President, Mechanical Access
Solutions since January 2007. President, Stanley
Securities Solutions (2003). President Stanley
Access Technologies (2000).
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07/26/05 |
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Jeff Chen (51)
(08/22/58)
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Vice President & President, Asia; Director, Asia
Operations (2002); Managing Director, Thailand
(1999).
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04/27/05 |
|
|
|
|
|
Hubert Davis, Jr. (61)
(08/28/48)
|
|
Senior Vice President, Business Transformation since
2006. Vice President, Chief Information Officer
(June 2000). Chief Information Officer and
e-commerce Leader (2000).
|
|
05/25/04 |
|
|
|
|
|
Craig A. Douglas (55)
(02/17/55)
|
|
Vice President & Treasurer since January 2002.
Treasurer 1998, Director Corporate Finance 1990.
|
|
07/17/09 |
|
|
|
|
|
James M. Loree (51)
(06/14/58)
|
|
Executive Vice President and Chief Operating Officer
since January 1, 2009. Executive Vice President
Finance and Chief Financial Officer (1999).
|
|
07/19/99 |
|
|
|
|
|
Mark J. Mathieu (57)
(02/20/52)
|
|
Vice President, Human Resources since September 1997.
|
|
09/17/97 |
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to the information set
forth under the section entitled Executive Compensation of the Companys definitive proxy
statement, which will be filed pursuant to Regulation 14A under the Exchange Act within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K.
39
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS |
The information required by Item 403 of Regulation S-K, is incorporated herein by reference to the
information set forth under the sections entitled Security Ownership of Certain Beneficial
Owners, Security Ownership of Directors and Officers, and Executive Compensation, of the
Companys definitive proxy statement, which will be filed pursuant to Regulation 14A under the
Exchange Act within 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K.
EQUITY COMPENSATION PLAN INFORMATION
Compensation plans under which the Companys equity securities are authorized for issuance at
January 2, 2010 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
(B) |
|
(C) |
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
future issuance under |
|
|
Number of securities to |
|
|
|
equity compensation |
|
|
be issued upon exercise of |
|
Weighted-average |
|
plans (excluding |
|
|
outstanding options |
|
exercise price of |
|
securities reflected in |
Plan category |
|
and stock awards |
|
outstanding options |
|
column (A)) |
Equity
compensation plans
approved by
security holders |
|
|
7,538,373 |
(1) |
|
$ |
39.75 |
(2) |
|
|
7,187,480 |
(3) |
Equity compensation
plans not approved
by security
holders(4) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,538,373 |
|
|
$ |
39.75 |
|
|
|
7,187,480 |
(3) |
|
|
|
(1) |
|
Consists of 5,839,417 shares underlying outstanding stock options
(whether vested or unvested) with a weighted average exercise price of
$39.75 and a weighted average term of 5.44 years; 1,518,346 shares
underlying time-vesting restricted stock units that have not yet
vested and the maximum number of shares that will be issued pursuant
to outstanding long term performance awards if all established goals
are met; and 180,610 of shares earned but related to which
participants elected deferred of delivery. All stock-based compensation plans are discussed
in Note J, Capital Stock, of the Notes to the Consolidated Financial
Statements in Item 8. |
|
(2) |
|
There is no cost to the recipient for shares issued pursuant to
time-vesting restricted stock units or long term performance awards.
Because there is no strike price applicable to these stock awards they
are excluded from the weighted-average exercise price which pertains
solely to outstanding stock options. |
|
(3) |
|
Consists of 3,100,855 of shares available for purchase under the employee stock purchase plan
(ESPP) at the election of
employees, and 4,086,625 securities available for future grants by the board of directors under stock-based compensation
plans. Note that the comparable figures presented on page 130 of the Companys Registration
Statement on Form S-4, filed
February 2, 2010, do not include the 3,100,855 shares of common stock available for issuance under the ESPP which are
included in the figures presented herein.
In accordance with the terms of such Registration
Statement, the figures presented
herein are automatically incorporated by reference into such Registration Statement and supersede and update the data presented therein. |
|
(4) |
|
There is a non-qualified deferred tax savings plan for highly
compensated salaried employees which mirrors the qualified plan
provisions, but was not specifically approved by security holders.
U.S. employees are eligible to contribute from 1% to 15% of their
salary to a tax deferred savings plan as described in the ESOP section
of Item 8 Note L, Employee Benefit Plans, to the Consolidated
Financial Statements of this Form 10-K. Prior to 2009, Stanley
contributed an amount equal to one half of the employee contribution
up to the first 7% of salary. In 2009, an employer match benefit was
provided under the plan equal to one-quarter of each employees
tax-deferred contribution up to the first 7% of their compensation.
The investment of the employees contribution and the Companys
contribution was controlled by the employee participating in the plan
and may include an election to invest in Company stock. The same
matching arrangement was provided for highly compensated salaried
employees in the non-qualified plan, except that the arrangement for
these employees is outside of the ESOP, and is not funded in advance
of distributions. Shares of the Companys common stock may be issued
at the time of a distribution from the plan. The number of securities
remaining available for issuance under the plan at January 2, 2010 is
not determinable, since the plan does not authorize a maximum number
of securities. |
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Items 404 and 407(a) of Regulation S-K is incorporated by reference to
the information set forth under the section entitled Board of Directors Related Party
Transactions of the Companys definitive proxy statement, which will be filed pursuant to
Regulation 14A under the Exchange Act within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
40
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 9(e) of Schedule 14A is incorporated herein by reference to the
information set forth under the section entitled Fees of Independent Auditors of the Companys
definitive proxy statement, which will be filed pursuant to Regulation 14A under the Exchange Act
within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) |
|
Index to documents filed as part of this report: |
|
|
|
1. and 2. Financial Statements and Financial Statement Schedules. |
|
|
|
The response to this portion of Item 15 is submitted as a separate section of this report
beginning with an index thereto on page 43. |
|
|
|
3. Exhibits |
|
|
|
See Exhibit Index in this Form 10-K on page 88. |
|
(b) |
|
See Exhibit Index in this Form 10-K on page 88. |
|
(c) |
|
The response in this portion of Item 15 is submitted as a separate section of this Form 10-K
with an index thereto beginning on page 43. |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
THE STANLEY WORKS |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John F. Lundgren
John F. Lundgren, Chairman
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: February 19, 2010 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Company and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
/s/ John F. Lundgren
John F. Lundgren
|
|
Chairman and Chief Executive
Officer and Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ Donald Allan, Jr.
Donald Allan, Jr.
|
|
Vice President and Chief
Financial Officer and Principal
Accounting Officer
|
|
February 19, 2010 |
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Bruce H. Beatt
|
|
|
Bruce H. Beatt |
|
|
(As Attorney-in-Fact) |
|
|
42
FORM 10-K
ITEM 15(a) (1) AND (2)
THE STANLEY WORKS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Selected
Quarterly Financial Data (Unaudited) (Page 87).
Consent of Independent Registered Public Accounting Firm and Report on Schedule (Exhibit 23).
All other schedules are omitted because either they are not applicable or the required information
is shown in the financial statements or the notes thereto.
43
Schedule II Valuation and Qualifying Accounts
The Stanley Works and Subsidiaries
Fiscal years ended January 2, 2010, January 3, 2009, December 29, 2007
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONS |
|
|
|
|
|
|
|
|
|
|
Charged to |
|
(b) Charged |
|
|
|
|
|
|
Beginning |
|
Costs and |
|
To Other |
|
(a) |
|
Ending |
Description |
|
Balance |
|
Expenses |
|
Accounts |
|
Deductions |
|
Balance |
Allowance for Doubtful Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
39.8 |
|
|
$ |
13.7 |
|
|
$ |
0.2 |
|
|
$ |
21.8 |
|
|
$ |
31.9 |
|
Non-current |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
2.4 |
|
|
|
|
|
|
|
3.2 |
|
Year Ended 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
40.3 |
|
|
$ |
17.5 |
|
|
$ |
6.1 |
|
|
$ |
24.1 |
|
|
$ |
39.8 |
|
Non-current |
|
|
0.8 |
|
|
|
0.1 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
0.5 |
|
Year Ended 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
33.3 |
|
|
$ |
9.3 |
|
|
$ |
5.5 |
|
|
$ |
7.8 |
|
|
$ |
40.3 |
|
Non-current |
|
|
2.0 |
|
|
|
|
|
|
|
(0.7 |
) |
|
|
0.5 |
|
|
|
0.8 |
|
Tax Valuation Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2009 |
|
$ |
23.5 |
|
|
$ |
2.4 |
|
|
$ |
0.7 |
|
|
$ |
2.2 |
|
|
$ |
24.4 |
|
Year Ended 2008 |
|
|
27.3 |
|
|
|
2.5 |
|
|
|
(2.1 |
) |
|
|
4.2 |
|
|
|
23.5 |
|
Year Ended 2007 |
|
|
26.8 |
|
|
|
3.4 |
|
|
|
1.7 |
|
|
|
4.6 |
|
|
|
27.3 |
|
|
|
|
(a) |
|
With respect to the allowance for doubtful accounts, represents amounts charged-off, less
recoveries of accounts previously charged-off. |
|
(b) |
|
Represents foreign currency translation impact, acquisitions, and net transfers to / from
other accounts. |
44
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of The Stanley Works is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance with accounting
principles generally accepted in the United States of America. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Management has
assessed the effectiveness of The Stanley Works internal control over financial reporting as of
January 2, 2010. In making its assessment, management has utilized the criteria set forth by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control
Integrated Framework. Management concluded that based on its assessment, The Stanley Works
internal control over financial reporting was effective as of January 2, 2010. Ernst & Young LLP,
the auditor of the financial statements included in this annual report, has issued an attestation
report on the registrants internal control over financial reporting, a copy of which appears on
page 47.
|
|
|
/s/ John F. Lundgren
John F. Lundgren, Chairman and Chief Executive Officer
|
|
|
|
|
|
/s/ Donald Allan Jr.
Donald Allan Jr., Vice President and Chief Financial Officer
|
|
|
45
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley Works and subsidiaries
as of January 2, 2010 and January 3, 2009, 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 January 2, 2010. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule are the responsibility of the Companys
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 the standards of the Public Company Accounting Oversight
Board (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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of The Stanley Works and subsidiaries at January 2,
2010 and January 3, 2009, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 2, 2010, in conformity with U.S.
generally accepted accounting principles. 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.
As discussed in Note A to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board (FASB) Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
(codified in ASC 470-20, Debt with Conversion and Other Options), FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (codified
in ASC 810, Consolidation), and FASB Staff Position EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
(codified in ASC 260, Earnings Per Share), all effective for the Company on
January 4, 2009. As discussed in Note Q to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation
of SFAS No. 109 (codified in FASB ASC 740, Income Taxes), effective for the Company on
December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), The Stanley Works internal control over financial reporting as of January
2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated February 19,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young, LLP
Hartford, Connecticut
February 19, 2010
46
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of The Stanley Works
We have audited The Stanley Works internal control over financial reporting as of January 2, 2010,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Stanley Works
management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Stanley Works maintained, in all material respects, effective internal control
over financial reporting as of January 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of The Stanley Works and subsidiaries as of
January 2, 2010 and January 3, 2009, 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
January 2, 2010 and our report dated February 19, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young, LLP
Hartford, Connecticut
February 19, 2010
47
Consolidated Statements of Operations
Fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007
(In Millions of Dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net Sales |
|
$ |
3,737.1 |
|
|
$ |
4,426.2 |
|
|
$ |
4,360.5 |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
2,228.8 |
|
|
$ |
2,754.8 |
|
|
$ |
2,707.5 |
|
Selling, general and administrative |
|
|
1,014.4 |
|
|
|
1,090.0 |
|
|
|
1,029.1 |
|
Provision for doubtful accounts |
|
|
14.0 |
|
|
|
17.6 |
|
|
|
9.3 |
|
Other-net |
|
|
139.1 |
|
|
|
111.6 |
|
|
|
84.8 |
|
Restructuring charges and asset impairments |
|
|
40.7 |
|
|
|
85.5 |
|
|
|
12.8 |
|
Gain on debt extinguishment |
|
|
(43.8 |
) |
|
|
(9.4 |
) |
|
|
|
|
Interest income |
|
|
(3.1 |
) |
|
|
(9.2 |
) |
|
|
(5.1 |
) |
Interest expense |
|
|
63.7 |
|
|
|
92.1 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,453.8 |
|
|
$ |
4,133.0 |
|
|
$ |
3,931.2 |
|
Earnings from continuing operations before income taxes |
|
|
283.3 |
|
|
|
293.2 |
|
|
|
429.3 |
|
Income taxes on continuing operations |
|
|
54.5 |
|
|
|
72.5 |
|
|
|
106.8 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
228.8 |
|
|
$ |
220.7 |
|
|
$ |
322.5 |
|
Less: Net earnings attributable to noncontrolling interests |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations attributable to The Stanley Works |
|
|
226.8 |
|
|
|
219.0 |
|
|
|
320.6 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations before income taxes |
|
|
(5.8 |
) |
|
|
132.8 |
|
|
|
16.5 |
|
Income taxes (benefit) on discontinued operations |
|
|
(3.3 |
) |
|
|
44.9 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from discontinued operations |
|
$ |
(2.5 |
) |
|
$ |
87.9 |
|
|
$ |
11.3 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to The Stanley Works |
|
$ |
224.3 |
|
|
$ |
306.9 |
|
|
$ |
331.9 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.84 |
|
|
$ |
2.77 |
|
|
$ |
3.89 |
|
Discontinued operations |
|
|
(0.03 |
) |
|
|
1.11 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings per share of common stock |
|
$ |
2.81 |
|
|
$ |
3.88 |
|
|
$ |
4.03 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.82 |
|
|
$ |
2.74 |
|
|
$ |
3.82 |
|
Discontinued operations |
|
|
(0.03 |
) |
|
|
1.10 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings per share of common stock |
|
$ |
2.79 |
|
|
$ |
3.84 |
|
|
$ |
3.95 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
48
Consolidated
Balance Sheets
January 2, 2010 and January 3, 2009
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
400.7 |
|
|
$ |
211.6 |
|
Accounts and notes receivable, net |
|
|
532.0 |
|
|
|
677.7 |
|
Inventories, net |
|
|
366.2 |
|
|
|
514.7 |
|
Prepaid expenses |
|
|
73.2 |
|
|
|
45.5 |
|
Other current assets |
|
|
39.8 |
|
|
|
48.5 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,411.9 |
|
|
|
1,498.0 |
|
Property, Plant and Equipment, net |
|
|
575.9 |
|
|
|
579.8 |
|
Goodwill |
|
|
1,818.4 |
|
|
|
1,739.2 |
|
Customer Relationships, net |
|
|
413.4 |
|
|
|
482.3 |
|
Trade Names, net |
|
|
331.1 |
|
|
|
333.6 |
|
Other Intangible Assets, net |
|
|
31.9 |
|
|
|
41.0 |
|
Other Assets |
|
|
186.5 |
|
|
|
192.7 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
4,769.1 |
|
|
$ |
4,866.6 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareowners Equity |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
90.4 |
|
|
$ |
213.8 |
|
Current maturities of long-term debt |
|
|
208.0 |
|
|
|
13.9 |
|
Accounts payable |
|
|
410.1 |
|
|
|
461.5 |
|
Accrued expenses |
|
|
483.5 |
|
|
|
504.0 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
1,192.0 |
|
|
|
1,193.2 |
|
Long-Term Debt |
|
|
1,084.7 |
|
|
|
1,383.8 |
|
Deferred Taxes |
|
|
120.4 |
|
|
|
119.5 |
|
Other Liabilities |
|
|
360.5 |
|
|
|
445.3 |
|
Shareowners Equity |
|
|
|
|
|
|
|
|
The Stanley Works 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 2009 and 2008 |
|
|
230.9 |
|
|
|
230.9 |
|
Retained earnings |
|
|
2,295.5 |
|
|
|
2,199.9 |
|
Additional paid in capital |
|
|
126.7 |
|
|
|
91.5 |
|
Accumulated other comprehensive loss |
|
|
(76.5 |
) |
|
|
(152.0 |
) |
ESOP |
|
|
(80.8 |
) |
|
|
(87.2 |
) |
|
|
|
|
|
|
|
|
|
|
2,495.8 |
|
|
|
2,283.1 |
|
Less: cost of common stock in treasury (11,864,786 shares in 2009 and 13,467,376 shares in 2008) |
|
|
509.7 |
|
|
|
576.8 |
|
|
|
|
|
|
|
|
The Stanley Works Shareowners Equity |
|
|
1,986.1 |
|
|
|
1,706.3 |
|
Non-controlling interests |
|
|
25.4 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
Total Shareowners Equity |
|
|
2,011.5 |
|
|
|
1,724.8 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareowners Equity |
|
$ |
4,769.1 |
|
|
$ |
4,866.6 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
49
Consolidated Statement of Cash Flows
January 2, 2010, January 3, 2009 and December 29, 2007
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
226.3 |
|
|
$ |
308.6 |
|
|
$ |
333.8 |
|
Less: net earnings attributable to noncontrolling interest |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Stanley Works |
|
$ |
224.3 |
|
|
$ |
306.9 |
|
|
$ |
331.9 |
|
Adjustments to reconcile net earnings to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
200.1 |
|
|
|
183.0 |
|
|
|
162.2 |
|
Pre-tax (gain) loss on sale of businesses |
|
|
1.6 |
|
|
|
(126.5 |
) |
|
|
|
|
Asset impairments |
|
|
6.8 |
|
|
|
17.1 |
|
|
|
2.6 |
|
Stock based compensation expense |
|
|
20.7 |
|
|
|
13.9 |
|
|
|
14.1 |
|
Provision for doubtful accounts |
|
|
14.0 |
|
|
|
17.6 |
|
|
|
9.3 |
|
Other non-cash items |
|
|
(16.1 |
) |
|
|
71.1 |
|
|
|
27.5 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
130.5 |
|
|
|
129.1 |
|
|
|
(30.6 |
) |
Inventories |
|
|
152.8 |
|
|
|
26.5 |
|
|
|
47.4 |
|
Accounts payable |
|
|
(57.3 |
) |
|
|
(32.9 |
) |
|
|
34.9 |
|
Accrued expenses |
|
|
(62.0 |
) |
|
|
12.7 |
|
|
|
(47.9 |
) |
Income taxes (includes taxes on gain on sale of business) |
|
|
16.2 |
|
|
|
(17.3 |
) |
|
|
14.4 |
|
Other current assets |
|
|
(24.8 |
) |
|
|
(12.7 |
) |
|
|
5.2 |
|
Long-term receivables |
|
|
(24.4 |
) |
|
|
(16.6 |
) |
|
|
(5.0 |
) |
Retirement liabilities |
|
|
(17.4 |
) |
|
|
(22.9 |
) |
|
|
(22.3 |
) |
Other |
|
|
(25.6 |
) |
|
|
(32.4 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
539.4 |
|
|
|
516.6 |
|
|
|
544.1 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(72.9 |
) |
|
|
(94.6 |
) |
|
|
(65.5 |
) |
Capitalized software |
|
|
(20.5 |
) |
|
|
(46.2 |
) |
|
|
(21.4 |
) |
Proceeds from sales of assets |
|
|
2.5 |
|
|
|
4.3 |
|
|
|
17.6 |
|
Business acquisitions |
|
|
(24.3 |
) |
|
|
(575.0 |
) |
|
|
(642.5 |
) |
Proceeds from sales of businesses |
|
|
|
|
|
|
204.6 |
|
|
|
|
|
Net investment hedge terminations |
|
|
|
|
|
|
19.1 |
|
|
|
|
|
Other |
|
|
|
|
|
|
23.2 |
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(115.2 |
) |
|
|
(464.6 |
) |
|
|
(716.9 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(64.5 |
) |
|
|
(44.9 |
) |
|
|
(227.6 |
) |
Proceeds from long-term borrowings |
|
|
|
|
|
|
249.7 |
|
|
|
529.9 |
|
Convertible notes hedge premium |
|
|
|
|
|
|
0.1 |
|
|
|
(49.3 |
) |
Net proceeds (repayments) on short-term borrowings |
|
|
(119.9 |
) |
|
|
(73.5 |
) |
|
|
192.3 |
|
Debt issuance costs and interest rate swap terminations |
|
|
|
|
|
|
14.7 |
|
|
|
(12.1 |
) |
Stock purchase contract fees, net of partial extinguishment |
|
|
(15.2 |
) |
|
|
(11.1 |
) |
|
|
(10.4 |
) |
Purchase of common stock for treasury |
|
|
(2.6 |
) |
|
|
(103.3 |
) |
|
|
(206.9 |
) |
Net premium (paid) and settlement of equity option |
|
|
(9.2 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and warrants |
|
|
61.2 |
|
|
|
19.1 |
|
|
|
96.5 |
|
Cash dividends on common stock |
|
|
(103.6 |
) |
|
|
(99.0 |
) |
|
|
(99.8 |
) |
Other |
|
|
4.8 |
|
|
|
|
|
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(249.0 |
) |
|
|
(48.2 |
) |
|
|
210.6 |
|
Effect of exchange rate changes on cash |
|
|
13.9 |
|
|
|
(32.6 |
) |
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents |
|
|
189.1 |
|
|
|
(28.8 |
) |
|
|
63.8 |
|
Cash and cash equivalents, beginning of year |
|
|
211.6 |
|
|
|
240.4 |
|
|
|
176.6 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
400.7 |
|
|
$ |
211.6 |
|
|
$ |
240.4 |
|
|
|
|
|
|
|
|
|
|
|
50
Consolidated Statements of Changes in Shareowners Equity
Fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007
(Millions of Dollars, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Common |
|
|
Paid In |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Treasury |
|
|
Controlling |
|
|
Shareowners |
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
ESOP |
|
|
Stock |
|
|
Interest |
|
|
Equity |
|
Balance December 30, 2006 |
|
$ |
230.9 |
|
|
|
86.6 |
|
|
$ |
1,797.0 |
|
|
$ |
(82.3 |
) |
|
$ |
(100.9 |
) |
|
$ |
(382.8 |
) |
|
$ |
18.7 |
|
|
$ |
1,567.2 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
331.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
333.8 |
|
Less: Redeemable interest reclassified to liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Currency translation adjustment and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.1 |
|
Cash flow hedge, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Change in pension, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
331.9 |
|
|
|
129.5 |
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
462.9 |
|
Cash dividends declared-$1.22 per share |
|
|
|
|
|
|
|
|
|
|
(99.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.8 |
) |
Cash dividends declared to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Issuance of common stock |
|
|
|
|
|
|
(4.3 |
) |
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
84.9 |
|
|
|
|
|
|
|
68.6 |
|
Repurchase of common stock (3,786,813 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206.9 |
) |
|
|
|
|
|
|
(206.9 |
) |
Adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.5 |
) |
Convertible notes hedge, net of tax benefit |
|
|
|
|
|
|
(36.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.3 |
) |
Convertible option feature of convertible notes |
|
|
|
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.7 |
|
Issuance of stock warrants |
|
|
|
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.8 |
|
Equity purchase contract and issuance costs |
|
|
|
|
|
|
(56.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56.7 |
) |
Other, stock-based compensation related |
|
|
|
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1 |
|
Tax benefit related to stock options exercised |
|
|
|
|
|
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.8 |
|
ESOP and related tax benefit |
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 29, 2007 |
|
|
230.9 |
|
|
|
68.7 |
|
|
|
2,005.8 |
|
|
|
47.2 |
|
|
|
(93.8 |
) |
|
|
(504.8 |
) |
|
|
18.2 |
|
|
|
1,772.2 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
306.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
308.6 |
|
Less: Redeemable interest reclassified to liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Currency translation adjustment and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158.1 |
) |
Cash flow hedge, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
Change in pension, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
306.9 |
|
|
|
(199.2 |
) |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
108.9 |
|
Cash dividends declared-$1.26 per share |
|
|
|
|
|
|
|
|
|
|
(99.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.0 |
) |
Cash dividends declared to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
(16.0 |
) |
|
|
|
|
|
|
|
|
|
|
31.3 |
|
|
|
|
|
|
|
15.3 |
|
Repurchase of common stock (2,240,451 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103.3 |
) |
|
|
|
|
|
|
(103.3 |
) |
Tax benefit on convertible notes hedge |
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
Equity unit repurchase |
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
Other, stock-based compensation related |
|
|
|
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.9 |
|
Tax benefit related to stock options exercised |
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
ESOP and related tax benefit |
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 3, 2009 |
|
$ |
230.9 |
|
|
|
91.5 |
|
|
$ |
2,199.9 |
|
|
$ |
(152.0 |
) |
|
$ |
(87.2 |
) |
|
$ |
(576.8 |
) |
|
$ |
18.5 |
|
|
$ |
1,724.8 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
224.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
226.3 |
|
Currency translation adjustment and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77.1 |
|
Change in pension, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
224.3 |
|
|
|
75.5 |
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
301.8 |
|
Cash dividends declared-$1.30 per share |
|
|
|
|
|
|
|
|
|
|
(103.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103.6 |
) |
Issuance of common stock |
|
|
|
|
|
|
(6.9 |
) |
|
|
(27.1 |
) |
|
|
|
|
|
|
|
|
|
|
95.1 |
|
|
|
|
|
|
|
61.1 |
|
Repurchase of common stock (62,336 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.6 |
) |
|
|
|
|
|
|
(2.6 |
) |
Net premium paid and settlement of equity option |
|
|
|
|
|
|
16.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.4 |
) |
|
|
|
|
|
|
(9.2 |
) |
Formation of joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9 |
|
|
|
4.9 |
|
Stock-based compensation and other |
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.7 |
|
Tax benefit related to stock options exercised |
|
|
|
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2 |
|
ESOP and related tax benefit |
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 2, 2010 |
|
$ |
230.9 |
|
|
|
126.7 |
|
|
$ |
2,295.5 |
|
|
$ |
(76.5 |
) |
|
$ |
(80.8 |
) |
|
$ |
(509.7 |
) |
|
|
25.4 |
|
|
|
2,011.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
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 Companys fiscal year ends on the Saturday nearest to December 31.
There were 52, 53 and 52 weeks in the fiscal years 2009, 2008 and 2007 respectively.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial
statement disclosures. While management believes that the estimates and assumptions used in the
preparation of the financial statements are appropriate, actual results could differ from these
estimates.
FOREIGN CURRENCY TRANSLATION For foreign operations with functional currencies other than the U.S.
dollar, asset and liability accounts are translated at current exchange rates; income and expenses
are translated using weighted-average exchange rates. Resulting translation adjustments are
reported in a separate component of shareowners equity. Exchange gains and losses on transactions
are included in earnings, and amounted to a net gain of $0.7 million for 2009, a net gain of $2.0
million in 2008 and a net loss of $1.4 million for 2007.
CASH EQUIVALENTS Highly liquid investments with original maturities of three months or less are
considered cash equivalents.
ACCOUNTS AND NOTES RECEIVABLE Trade receivables are stated at gross invoice amount less discounts,
other allowances and provision for uncollectible accounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company estimates its allowance for doubtful accounts using two
methods. First, a specific reserve is established for individual accounts where information
indicates the customers may have an inability to meet financial obligations. Second, a reserve is
determined for all customers based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. Actual write-offs are
charged against the allowance when collection efforts have been unsuccessful.
INVENTORIES U.S inventories are predominantly valued at the lower of Last-In First-Out (LIFO)
cost or market because the Company believes it results in better matching of costs and revenues.
Other inventories are valued at the lower of First-In, First-Out (FIFO) cost or market
because LIFO is not permitted for statutory reporting outside the U.S. See Note C, Inventory, for a
quantification of the LIFO impact on inventory valuation.
PROPERTY, PLANT AND EQUIPMENT The Company generally values property, plant and equipment (PP&E),
including capitalized software, on the basis of historical cost less accumulated depreciation and
amortization. Costs related to maintenance and repairs which do not prolong the assets useful
lives are expensed as incurred. Depreciation and amortization are provided using straight-line
methods over the estimated useful lives of the assets as follows:
|
|
|
|
|
|
|
Useful Life |
|
|
(Years) |
Land improvements |
|
|
1020 |
|
Buildings |
|
|
40 |
|
Machinery and equipment |
|
|
315 |
|
Computer software |
|
|
35 |
|
Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of
the lease.
The Company reports depreciation and amortization of property, plant and equipment in cost of sales
and selling, general and administrative expenses based on the nature of the underlying assets.
Depreciation and amortization related to the production of inventory and delivery of services is
recorded in cost of sales. Depreciation and amortization related to distribution center activities,
selling and support functions are reported in selling, general and administrative expenses.
The Company assesses its long-lived assets for impairment when indicators that the carrying values
may not be recoverable are present. In assessing long-lived assets for impairment, the Company
groups its long-lived assets with other assets and liabilities at the lowest level for which
identifiable cash flows are generated (asset group) and estimates the undiscounted future cash
flows that are
directly associated with and expected to be generated from the use of and eventual disposition of
the asset group.
52
If the carrying value is greater than the undiscounted cash flows, an impairment
loss must be determined and the asset group is written down to fair value. The impairment loss is
quantified by comparing the carrying amount of the asset group to the estimated fair value, which
is determined using weighted-average discounted cash flows that consider various possible outcomes
for the disposition of the asset group.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents costs in excess of fair values assigned to
the underlying net assets of acquired businesses. Intangible assets acquired are recorded at
estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are tested for impairment annually during the third quarter, and at any time when
events suggest an impairment more likely than not has occurred. To assess goodwill for impairment, the Company
determines the fair value of its reporting units, which are primarily determined using managements
assumptions about future cash flows based on long-range strategic plans. This approach incorporates
many assumptions including future growth rates, discount factors and tax rates. In the event the
carrying value of a reporting unit exceeded its fair value, an impairment loss would be recognized
to the extent the carrying amount of the reporting units goodwill exceeded the implied fair value
of the goodwill. Indefinite-lived intangible asset carrying amounts are tested for impairment by
comparing to current fair market value, usually determined by the estimated cost to lease the asset
from third parties. Intangible assets with definite lives are amortized over their estimated useful
lives generally using an accelerated method. Under this accelerated method, intangible assets are
amortized reflecting the pattern over which the economic benefits of the intangible assets are
consumed. Definite-lived intangible assets are also evaluated for impairment when impairment
indicators are present. If the carrying value exceeds the total undiscounted future cash flows, a
discounted cash flow analysis is performed to determine the fair value of the asset. If the
carrying value of the asset were to exceed the fair value, it would be written down to fair value.
No goodwill or other intangible asset impairments were recorded during 2009, 2008 or 2007.
FINANCIAL INSTRUMENTS Derivative financial instruments are employed to manage risks, including
foreign currency and interest rate exposures, and are not used for trading or speculative purposes.
The Company recognizes all derivative instruments, such as interest rate swap agreements, foreign
currency options, and foreign exchange contracts, in the Consolidated Balance Sheets at fair value.
Changes in the fair value of derivatives are recognized periodically either in earnings or in
Shareowners Equity as a component of other comprehensive income, depending on whether the
derivative financial instrument is undesignated or qualifies for hedge accounting, and if so,
whether it qualifies as a fair value, cash flow, or net investment hedge. Changes in the fair value of
derivatives accounted for as fair value hedges are recorded in earnings along with the changes in
the fair value of the hedged items. Gains and losses on derivatives
designated as cash flow hedges, to the extent they are effective, are recorded in other
comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged
items when they occur. In the event it becomes probable the forecasted transaction to which a cash
flow hedge relates will not occur, the derivative would be terminated and the amount in other
comprehensive income would generally be recognized in earnings. Changes in the fair value of
derivatives used as hedges of the net investment in foreign operations are reported in other
comprehensive income. Changes in the fair value of derivatives not designated as hedges under FASB Accounting Standards Codification, (ASC)
815 Derivatives and Hedging (ASC 815), and any portion of a hedge that is considered
ineffective, are reported in earnings in the same caption where the hedged items are recognized.
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains
and losses resulting from the early termination of interest rate swap agreements are deferred and
amortized as adjustments to interest expense over the remaining period of the debt originally
covered by the terminated swap.
REVENUE RECOGNITION General: Revenue is recognized when the earnings process is complete,
collectability is reasonably assured, and the risks and rewards of ownership have transferred to
the customer, which generally occurs upon shipment of the finished product but sometimes is upon
delivery to customer facilities.
Provisions for customer volume rebates, product returns, discounts and allowances are recorded as a
reduction of revenue in the same period the related sales are recorded. Consideration given to
customers for cooperative advertising is recognized as a reduction of revenue except to the extent
that there is an identifiable benefit and evidence of the fair value of the advertising, in which
case the expense is classified as Selling, general, and administrative expense.
Multiple Element Arrangements: In 2009, approximately $900 million in revenues were generated by
multiple element arrangements, primarily in the Security segment. These sales contracts typically
consist of products sold and installed by the Company at the customer location. Revenue from
equipment sales is generally recognized once installation is complete. Certain sales agreements
also include maintenance and monitoring services pertaining to the installed equipment. Service
revenue is recognized ratably over the contract term as services are rendered.
53
Customer billings for equipment not yet installed and for monitoring services not yet rendered are
deferred to the extent paid in advance by customers.
When a sales agreement involves multiple elements, deliverables are separately identified and
consideration is allocated based on their relative fair values in accordance ASC 605-25, Revenue
Recognition Multiple-Element Arrangements. Fair value is generally determined by reference to
the prices charged in stand-alone transactions.
COST OF SALES AND SELLING, GENERAL & ADMINISTRATIVE Cost of sales includes the cost of products and
services provided reflecting costs of manufacturing and preparing the product for sale. These costs
include expenses to acquire and manufacture products to the point that they are allocable to be
sold to customers and costs to perform services pertaining to service revenues (e.g. installation
of security systems, automatic doors, and security monitoring costs). Cost of sales is primarily
comprised of inbound freight, direct materials, direct labor as well as overhead which includes
indirect labor, facility and equipment costs. Cost of sales also includes quality control,
procurement and material receiving costs as well as internal transfer costs. Selling general and
administrative (SG&A) costs include the cost of selling products as well as administrative function costs.
These expenses generally represent the cost of selling and distributing the products once they are
available for sale and primarily include salaries and commissions of the Companys sales force,
distribution costs, notably salaries and facility costs, as well as administrative expense for
certain support functions and related overhead.
ADVERTISING COSTS Television advertising is expensed the first time the advertisement airs, whereas
other advertising is expensed as incurred. Advertising costs are classified in
SG&A and amounted to $30.8 million in 2009, $39.3 million in 2008 and $42.1 million
in 2007. Expense pertaining to cooperative advertising with customers reported as a reduction of
net sales was $23.3 million in 2009, $29.0 million in 2008 and $28.0 million in 2007. Cooperative
advertising with customers classified as SG&A expense amounted to
$5.7 million in 2009, $6.6 million in 2008, and $5.9 million in 2007.
ACQUISITION COSTS In fiscal 2009 costs associated with new business acquisitions are
expensed as incurred as required under SFAS No. 141(R), Business Combinations, (FAS 141(R))
codified in ASC 805, Business Combinations (ASC 805). Refer to the section entitled New
Accounting Standards also included within Note A for further details. Certain costs directly
related to acquisitions including legal, audit and other fees, were recorded to goodwill for all
acquisitions consummated during 2008 and earlier years as required under previous accounting rules.
SALES TAXES Sales and value added taxes collected from customers and remitted to governmental
authorities are excluded from Net sales reported in the Consolidated Statements of Operations.
SHIPPING AND HANDLING COSTS The Company generally does not bill customers for freight. Shipping and
handling costs associated with inbound freight are reported in cost of sales. Shipping costs
associated with outbound freight are reported as a reduction of Net sales and amounted to $87.1
million, $129.7 million and $130.1 million in 2009, 2008 and 2007, respectively. Distribution costs
are classified as SG&A and amounted to $102.2 million, $122.2 million and $128.7 million in 2009,
2008 and 2007, respectively.
STOCK-BASED COMPENSATION Compensation cost relating to stock-based compensation grants is
recognized on a straight-line basis over the vesting period, which is generally four years. The
expense for stock options and restricted stock units awarded to retirement eligible employees
(those aged 55 and over, and with 10 or more years of service) is recognized by the date they
become retirement eligible.
INCOME TAXES Income tax expense is based on reported earnings before income taxes. Interest and
penalties related to income taxes are classified as Income taxes on continuing operations in the Consolidated Statements of
Operations. 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. A valuation allowance is recorded to reduce deferred tax
assets to the amount that is more likely than not to be realized.
EARNINGS PER SHARE Basic earnings per share equals net earnings attributable to The Stanley Works,
less earnings allocated to restricted stock units with non-forfeitable dividend rights, 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.
54
SUBSEQUENT EVENTS The Company has evaluated subsequent events through February 19, 2010, the
date of issuance of the Companys annual financial statements.
NEW ACCOUNTING STANDARDS
Implemented:
In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, (SFAS 168) codified in ASC 105,
Generally Accepted Accounting Principles (ASC 105), which establishes the FASB Accounting
Standards Codification (ASC) as the single source of authoritative generally accepted accounting
principles. The Codification superseded all then-existing non-SEC accounting and reporting
standards. The issuance of this statement does not change generally accepted accounting principles;
it has, however, changed the applicable citations and naming conventions used when referencing
generally accepted accounting principles. The adoption of SFAS 168 has had no impact on the
Companys consolidated financial statements.
In May 2008, the FASB issued Staff Position (FSP) Accounting Principles Board (APB) 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement), (FSP APB 14-1) codified in ASC 470-20 Debt with Conversion and Other
Options which applies to convertible debt instruments that have a net settlement feature
permitting settlement partially or fully in cash upon conversion. The guidance requires issuers of
such convertible debt securities to separately account for the liability and equity components in a
manner that reflects the issuers nonconvertible, unsecured debt borrowing rate. The FSP requires
bifurcation of a component of the debt into equity, representative of the approximate fair value of
the conversion feature at inception, and the amortization of the resulting debt discount to
interest expense in the Consolidated Statements of Operations. The FSP was effective for the
Company beginning in January 2009 and has been applied retrospectively, as required. The impact of
adoption of the FSP at the March 2007 issuance date of the $330.0 million of Convertible Notes was
a $54.9 million decrease in Long-term debt, a $20.9 million increase in associated deferred tax
liabilities pertaining to the interest accretion, and a $0.3 million reclassification of debt
issuance costs, net of tax, related to the conversion option feature of the Convertible Notes,
totaling a $33.7 million increase to Shareowners equity. As described more fully in Note H,
Long-Term Debt and Financing Arrangements, the Company repurchased and thereby extinguished
$10.0 million of the Convertible Notes. As a result, the debt discount was reduced by $1.2 million
and Shareowners equity decreased $0.7 million net of tax. The remaining $53.7 million debt
discount is being amortized to interest expense using the effective interest method through the
Convertible Notes maturity in May 2012. Interest accretion to be recognized under the FSP in each
year is as follows: $7.7 million in 2007; $10.3 million in 2008; $10.2 million in 2009;
$10.6 million in 2010; $11.0 million in 2011; and $3.9 million in 2012. The net earnings impact of
the interest accretion recognized in accordance with the FSP was $6.3 million, or 8 cents per
diluted share for the year ended January 2, 2010, $6.4 million or 8 cents per diluted share for the
year ended January 3, 2009 and $4.8 million or 6 cents per diluted share for the year ended
December 27, 2007. Refer to Note H Long-Term Debt and Financing Arrangements for further details.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157) codified
in ASC 820, Fair Value Measurement and Disclosure (ASC 820). SFAS 157 establishes a single
definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy
to be used to classify the source of information used in fair value measurements, and requires new
disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.
SFAS 157 indicates that an exit value (selling price) should be utilized in fair value
measurements rather than an entrance value, or cost basis, and that performance risks, such as
credit risk, should be included in the measurements of fair value even when the risk of
non-performance is remote. SFAS 157 also clarifies the principle that fair value measurements
should be based on assumptions the marketplace would use when pricing an asset whenever
practicable, rather than company-specific assumptions. In February 2008, the FASB issued FSP No.
157-1 and 157-2, which respectively removed leasing transactions and deferred its effective date
for one year relative to nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). Accordingly, in fiscal 2008 the Company applied SFAS 157 guidance to: (i) all applicable
financial assets and liabilities; and (ii) nonfinancial assets and liabilities that are recognized
or disclosed at fair value in the Companys financial statements on a recurring basis (at least
annually). In January 2009, the Company applied this guidance to all remaining assets and
liabilities measured on a non-recurring basis at fair value. The adoption of SFAS 157 for these
items did not have an effect on the Company. Refer to Note M, Fair Value Measurements for
disclosures relating to ASC 820.
In June 2008, the FASB issued EITF No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities, (EITF 03-6-1) codified in
ASC 260, Earnings Per Share. Under EITF 03-6-1, unvested share-based payment awards with rights to
receive non-forfeitable dividends (whether paid or unpaid) are participating securities that must
be included in the two-class method of computing EPS. In 2007 and earlier years the Company granted
restricted stock units (RSUs) to
certain executives with non-forfeitable dividend rights which are considered participating
securities under EITF 03-6-1.
55
Approximately 80,000, 118,000 and 144,000 of these RSUs were
outstanding at the end of 2009, 2008, and 2007, respectively. The Company adopted EITF 03-6-1 as of
January 3, 2009 and calculated basic and diluted earnings per share under both the treasury stock
method and the two-class method for all periods presented. There was no difference in the earnings
per share under the two methods for the fiscal years 2009, 2008 and 2007 and the treasury stock
method continues to be reported as detailed in Note J Capital Stock.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R))
codified in ASC 805, Business Combinations. SFAS 141(R) requires the acquiring entity in a
business combination to recognize the full fair value of assets acquired and liabilities assumed in
the transaction (whether a full or partial acquisition), establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities assumed, and requires
the acquirer to disclose the information needed to evaluate and understand the nature and effect of
the business combination. This statement applies to all transactions or other events in which the
acquirer obtains control of one or more businesses, including those sometimes referred to as true
mergers or mergers of equals and combinations achieved without the transfer of consideration,
for example, by contract alone or through the lapse of minority veto rights. For new acquisitions
made following the adoption of SFAS 141(R), significant costs directly related to the acquisition
including legal, audit and other fees, as well as most acquisition-related restructuring, must be
expensed as incurred. For the year ended January 2, 2010 the Company expensed $24.1 million of
acquisition-related costs. Additionally, as part of SFAS 141(R) contingent purchase price
arrangements (also known as earn-outs) must be re-measured to estimated fair value with the impact
reported in earnings. With respect to all acquisitions, including those consummated in prior years,
changes in tax reserves pertaining to resolution of contingencies or other post acquisition
developments are recorded to earnings rather than goodwill. SFAS 141(R) was applied to the
Companys business combinations completed in fiscal 2009.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial
Statements an amendment of ARB No. 51, (SFAS
160) codified in ASC 810, Consolidation. SFAS
160 requires reporting entities to present noncontrolling (minority) interests as equity (as
opposed to a liability or mezzanine equity) and provides guidance on the accounting for
transactions between an entity and noncontrolling interests. SFAS 160 has been applied beginning in
fiscal 2009 as required and the presentation and disclosure requirements have been applied
retrospectively as required for all periods presented. As a result of the implementation of SFAS
160, $25.4 million, $18.5 million, and $18.2 million relating to noncontrolling interests as of
January 2, 2010, January 3, 2009, and December 29, 2007, respectively, are recorded in
noncontrolling interests within Equity.
Not Yet Implemented:
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605) -
Multiple-Deliverable Revenue Arrangements. This ASU eliminates the requirement that all
undelivered elements must have objective and reliable evidence of fair value before a company can
recognize the portion of the consideration that is attributable to items that already have been
delivered. This may allow some companies to recognize revenue on transactions that involve
multiple deliverables earlier than under the current requirements. Additionally, under the new
guidance, the relative selling price method is required to be used in allocating consideration
between deliverables and the residual value method will no longer be permitted. This ASU is
effective prospectively for revenue arrangements entered into or materially modified beginning in
fiscal 2011 although early adoption is permitted. A company may elect, but will not be required, to
adopt the amendments in this ASU retrospectively for all prior periods. Management is currently
evaluating the requirements of this ASU and has not yet determined the impact, if any, that it will
have on the consolidated financial statements.
In December 2009, the FASB issued ASU No. 2009-16, Accounting for Transfers of Financial
Assets. This ASU eliminates the concept of a qualifying special-purpose entity, clarifies when
a transferor of financial assets has surrendered control over the transferred financial assets,
defines specific conditions for reporting a transfer of a portion of a financial asset as a sale,
requires that a transferor recognize and initially measure at fair value all assets obtained and
liabilities incurred as a result of a transfer of financial assets accounted for as a sale, and
requires enhanced disclosures to provide financial statement users with greater transparency about
a transferors continuing involvement with transferred financial assets. This ASU is effective for
fiscal years beginning after November 15, 2009. The Company has evaluated the ASU and does not
believe it will have a material impact on the consolidated financial statements.
In December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities. This ASU eliminates the concept of a
qualifying special-purpose entity, replaces the quantitative approach for determining which
enterprise has a controlling financial interest in a variable interest entity with a qualitative
approach focused on identifying which enterprise has a controlling financial interest through the
power to direct the activities of a variable interest entity that most significantly impact the
entitys economic performance. Additionally, this ASU requires enhanced disclosures that will
provide users of financial statements with more information about an enterprises involvement in a
variable interest entity. This ASU
is effective for fiscal years beginning after November 15, 2009. The Company is currently
evaluating the ASU, but does not believe it will have a significant impact on the consolidated
financial statements.
56
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current
year presentation.
B. ACCOUNTS AND NOTES RECEIVABLE
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
Trade accounts receivable |
|
$ |
486.4 |
|
|
$ |
643.3 |
|
Trade notes receivable |
|
|
45.7 |
|
|
|
38.9 |
|
Other accounts receivables |
|
|
31.8 |
|
|
|
35.3 |
|
|
|
|
|
|
|
|
Gross accounts and notes receivable |
|
|
563.9 |
|
|
|
717.5 |
|
Allowance for doubtful accounts |
|
|
(31.9 |
) |
|
|
(39.8 |
) |
|
|
|
|
|
|
|
Net short-term accounts and notes receivable |
|
$ |
532.0 |
|
|
$ |
677.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term trade notes receivable, net |
|
$ |
93.2 |
|
|
$ |
60.6 |
|
|
|
|
|
|
|
|
Trade receivables are dispersed among a large number of retailers, distributors and industrial
accounts in many countries. Adequate reserves have been established to cover anticipated credit
losses. Long-term trade notes receivable are predominately related to certain security equipment sales
and are reported within Other assets in the Consolidated Balance Sheets.
In December 2009, the Company entered into an accounts receivable sale program that is scheduled to
expire on December 28, 2010, whereby it is required to sell certain of its trade accounts
receivables at fair value to a wholly-owned, bankruptcy-remote special purpose subsidiary (BRS).
The BRS, in turn, must sell such receivables to a third-party financial institution (Purchaser)
for cash and a deferred purchase price receivable. The Purchasers maximum cash investment in the
receivables at any time is $100.0 million. The purpose of the program is to provide liquidity to
the Company. The Company accounts for these transfers as sales under
ASC 860 Transfers and Servicing. The Company has no
retained interests in the transferred receivables, other than collection and administrative
responsibilities and its right to the deferred purchase price receivable. At January 2, 2010 the
Company did not record a servicing asset or liability related to its retained responsibility, based
on its assessment of the servicing fee, market values for similar transactions and its cost of
servicing the receivables sold.
The $56.1 million initial sale of net receivables resulted in $35.1 million of cash proceeds, a
$0.7 million pre-tax loss (inclusive of set up fees), and a $20.8 million current deferred purchase
price receivable from the Purchaser. The deferred purchase price receivable will be repaid in cash
as receivables are collected, generally within 30 days. The Companys risk of loss following the
sale of the receivables is limited to the deferred purchase price. Cash flows related to new
transfers, collections of previously sold receivables and all fees are settled one month in
arrears, and as such there were no additional cash flows in 2009 related to subsequent sales.
Subsequent 2009 sales of net receivables amounted to $36.7 million, which resulted in a $0.1
million pre-tax loss. The deferred purchase price at January 2, 2010 totaled $17.7 million.
Delinquencies and credit losses on receivables sold in 2009 were nominal.
Previously, the Company had agreements to sell, on a revolving basis, undivided interests in
defined pools of accounts receivable to a Qualified Special Purpose Entity (QSPE). The entity was
designed to facilitate the securitization of certain trade accounts receivable and was used as an
additional source of liquidity. In June 2008, the Company acquired a third partys interest in the
QSPE. As a result, the entity became non-qualified. The net assets of this entity, which consisted
of accounts receivable of $17.3 million, were consolidated in the Companys balance sheet. Net cash
flows between the Company and the entity totaled $43.2 million in 2008. Such activity primarily
related to receivable sales, collections on receivables and servicing fees. In November 2008, this
entity was dissolved. There were no gains or losses upon the acquisition of the third party
interest or upon dissolution of the entity.
57
C. INVENTORY
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
Finished products |
|
$ |
252.8 |
|
|
$ |
365.0 |
|
Work in process |
|
|
49.0 |
|
|
|
58.2 |
|
Raw materials |
|
|
64.4 |
|
|
|
91.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
366.2 |
|
|
$ |
514.7 |
|
|
|
|
|
|
|
|
Net inventories in the amount of $116.0 million at January 2, 2010 and $159.2 million at January 3,
2009 were valued at the lower of LIFO cost or market. If the LIFO method had not been used,
inventories would have been $64.6 million higher than reported at January 2, 2010 and $76.0 million
higher than reported at January 3, 2009. During 2009, inventory quantities were reduced. This
reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years as compared with the cost of 2009 purchases, the effect of which increased Cost of
sales by approximately $6.5 million and decreased Net earnings attributable to The Stanley Works by approximately $4.0 million or $0.05 per
diluted share.
D. PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
Land |
|
$ |
44.1 |
|
|
$ |
42.9 |
|
Land improvements |
|
|
23.8 |
|
|
|
19.4 |
|
Buildings |
|
|
284.2 |
|
|
|
277.9 |
|
Leasehold improvements |
|
|
29.8 |
|
|
|
24.7 |
|
Machinery and equipment |
|
|
902.7 |
|
|
|
900.3 |
|
Computer software |
|
|
209.9 |
|
|
|
192.8 |
|
|
|
|
|
|
|
|
Gross PP&E |
|
$ |
1,494.5 |
|
|
$ |
1,458.0 |
|
Less: accumulated depreciation and amortization |
|
|
918.6 |
|
|
|
878.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
575.9 |
|
|
$ |
579.8 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense associated with property, plant and equipment was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Depreciation |
|
$ |
76.1 |
|
|
$ |
74.0 |
|
|
$ |
66.1 |
|
Amortization |
|
|
19.4 |
|
|
|
18.5 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
$ |
95.5 |
|
|
$ |
92.5 |
|
|
$ |
83.2 |
|
|
|
|
|
|
|
|
|
|
|
The amounts above are inclusive of discontinued operations depreciation and amortization expense of
$0.5 in 2008 and $0.9 million in 2007.
E. ACQUISITIONS
The Company completed twenty nine acquisitions during 2009, 2008, and 2007. These businesses were acquired
pursuant to the Companys growth and portfolio repositioning strategy. The 2008 and 2007 acquisitions were
accounted for as purchases in accordance with SFAS No. 141 Business Combinations. The 2009
acquisitions were accounted for in accordance with SFAS 141(R) which is codified in ASC 805. During
2009, the Company completed six acquisitions for an aggregate value of $24.2 million. During 2008,
the Company completed fourteen acquisitions for an aggregate value of $572.4 million. During 2007, the Company completed nine acquisitions for an aggregate value of $646.2 million.
The results
of the acquired companies are included in the Companys consolidated operating results from the
respective acquisition dates. All of the acquisitions have resulted in the recognition of goodwill.
Goodwill reflects the future earnings and cash flow potential of the acquired business in excess of
the fair values that are assigned to all other identifiable assets and liabilities. Goodwill arises
because the purchase price paid reflects numerous factors including the strategic fit and expected
synergies these targets bring to existing operations, the competitive nature of the bidding process
and the prevailing market value for comparable companies. ASC 805 requires all identifiable assets
and liabilities acquired to be reported at fair value and the excess is recorded as goodwill. The
Company obtains information during due diligence and from other sources which forms the basis for
the initial allocation of purchase price to the estimated fair value of assets and liabilities
acquired. In the months following an acquisition, intangible asset valuation reports, asset
appraisals and other data are obtained in order for management to finalize the fair values assigned
to acquired assets and liabilities.
58
2009 ACQUISITIONS During 2009, the Company completed six minor acquisitions, primarily relating
to the Companys convergent security solutions business, for a combined purchase price of $24.2
million. Amounts allocated to the assets acquired and liabilities assumed are based on their
estimated fair values at the acquisition dates. The purchase price allocations of these
acquisitions are preliminary, mainly with respect to the finalization of intangible asset
valuations, related deferred taxes, and certain other items.
2008 ACQUISITIONS In July 2008, the Company completed the acquisition of Sonitrol Corporation
(Sonitrol) for $282.3 million in cash. Sonitrol is a market leader in North American commercial
security monitoring services, access control and fire detection systems. The acquisition has
complemented the product offering of the pre-existing security integration businesses including HSM
acquired in early 2007.
Also in July 2008, the Company completed the acquisition of Xmark Corporation (Xmark) for $47.0
million in cash. Xmark, headquartered in Canada, markets and sells radio frequency
identification-based systems used to identify, locate and protect people and assets. The
acquisition has expanded the Companys personal security business.
In October 2008, the Company completed the acquisition of Generale de Protection (GdP) for
$168.8 million in cash. GdP, headquartered in Vitrolles, France, is a leading provider of audio and
video security monitoring services, primarily for small and mid-sized businesses located in France
and Belgium.
The Company also made eleven small acquisitions relating to its mechanical access systems,
convergent security solutions, healthcare storage systems and fastening businesses during 2008.
These eleven acquisitions were completed for a combined purchase price of $74.3 million.
The total purchase price of $572.4 million reflects transaction costs and is net of cash acquired;
amounts allocated to the assets acquired and liabilities assumed are based on their estimated fair
values at the acquisition dates. Goodwill associated with the 2008 acquisitions that was deductible
for income tax purposes amounts to $40.7 million. The purchase price allocation of these
acquisitions has been completed.
The following table summarizes the estimated fair values of major assets acquired and liabilities
assumed for the 2008 acquisitions in the aggregate:
|
|
|
|
|
(Millions of Dollars) |
|
2008 |
|
Current assets, primarily accounts receivable and inventories |
|
$ |
64.3 |
|
Property, plant, and equipment |
|
|
7.6 |
|
Goodwill |
|
|
367.8 |
|
Trade names |
|
|
21.1 |
|
Customer relationships |
|
|
238.5 |
|
Technology |
|
|
14.1 |
|
Other intangible assets |
|
|
1.0 |
|
Other assets |
|
|
6.6 |
|
|
|
|
|
Total assets |
|
$ |
721.0 |
|
|
|
|
|
Current liabilities |
|
$ |
74.6 |
|
Deferred tax liabilities and other |
|
|
74.0 |
|
|
|
|
|
Total liabilities |
|
$ |
148.6 |
|
|
|
|
|
The weighted average useful lives assigned to the amortizable assets identified above are trade
names 10 years; customer relationships 13 years; technology 8 years; and other intangible
assets 1 year.
2007 ACQUISITIONS The Company completed the acquisition of HSM Electronic Protection
Services, Inc. (HSM) on January 16, 2007 for $546.1 million which was financed with debt and
equity units as more fully described in Note H, Long-Term Debt and Financing Arrangements. HSM is
a market leader in the North American commercial security monitoring industry, with annual revenues
of approximately $200 million. HSM has a stable customer base, an extensive North American field
network and the second largest market share in the U.S. commercial monitoring market. The
acquisition has served as a growth platform in the monitoring sector of the security industry.
The Company also made eight small acquisitions relating to its hydraulic, access technologies,
healthcare storage, mechanical access solutions and security integration businesses
during 2007 for a combined purchase price of $100.1 million. Goodwill associated with the 2007
acquisitions that is deductible for tax purposes amounted to $104.9 million.
The total purchase price of $646.2 million for the 2007 acquisitions reflects transaction costs and
is net of cash acquired. Amounts allocated to the assets acquired and liabilities assumed are based
on their estimated fair values at the acquisition dates. Adjustments to reflect the fair value of
the assets acquired and liabilities assumed are complete for all 2007 acquisitions.
The following table summarizes the fair values of major assets acquired and liabilities assumed for
all 2007 acquisitions:
|
|
|
|
|
(Millions of Dollars) |
|
2007 |
|
Current assets, primarily accounts receivable and inventories |
|
$ |
44.9 |
|
Property, plant, and equipment |
|
|
10.7 |
|
Goodwill |
|
|
386.4 |
|
Trade names |
|
|
13.1 |
|
Customer relationships |
|
|
227.3 |
|
Technology |
|
|
1.9 |
|
Other intangible assets |
|
|
1.0 |
|
Other assets |
|
|
22.6 |
|
|
|
|
|
Total assets |
|
$ |
707.9 |
|
|
|
|
|
Current liabilities |
|
$ |
59.0 |
|
Deferred tax liabilities and other |
|
|
2.7 |
|
|
|
|
|
Total liabilities |
|
$ |
61.7 |
|
|
|
|
|
The weighted average useful lives assigned to the amortizable assets identified above are trade
names 7 years; customer relationships 15 years; technology 8 years; and other intangible
assets 4 years.
59
F. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL The changes in the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Security |
|
|
Industrial |
|
|
CDIY |
|
|
Total |
|
Balance January 3, 2009 |
|
$ |
1,166.1 |
|
|
$ |
365.8 |
|
|
$ |
207.3 |
|
|
$ |
1,739.2 |
|
Acquisitions during the year |
|
|
5.3 |
|
|
|
3.5 |
|
|
|
|
|
|
|
8.8 |
|
Purchase accounting adjustments |
|
|
36.2 |
|
|
|
(2.1 |
) |
|
|
(0.8 |
) |
|
|
33.3 |
|
Foreign currency translation and other |
|
|
36.4 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 2, 2010 |
|
$ |
1,244.0 |
|
|
$ |
367.8 |
|
|
$ |
206.6 |
|
|
$ |
1,818.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INTANGIBLE ASSETS Other intangible assets at January 2, 2010 and January 3, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
(Millions of Dollars) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Amortized Intangible Assets Definite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and copyrights |
|
$ |
53.1 |
|
|
$ |
(38.7 |
) |
|
$ |
50.4 |
|
|
$ |
(33.3 |
) |
Trade names |
|
|
61.6 |
|
|
|
(35.1 |
) |
|
|
60.0 |
|
|
|
(26.2 |
) |
Customer relationships |
|
|
680.5 |
|
|
|
(267.1 |
) |
|
|
661.6 |
|
|
|
(179.3 |
) |
Other intangible assets |
|
|
58.0 |
|
|
|
(40.5 |
) |
|
|
54.1 |
|
|
|
(30.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
853.2 |
|
|
$ |
(381.4 |
) |
|
$ |
826.1 |
|
|
$ |
(269.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived trade names are $304.6 million at January 2, 2010 and $299.8 million at
January 3, 2009. The increase is attributable to foreign currency fluctuations.
Aggregate other intangible assets amortization expense by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Security |
|
$ |
96.8 |
|
|
$ |
79.6 |
|
|
$ |
65.5 |
|
Industrial |
|
|
4.9 |
|
|
|
8.0 |
|
|
|
6.8 |
|
CDIY |
|
|
2.9 |
|
|
|
2.9 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
104.6 |
|
|
$ |
90.5 |
|
|
$ |
79.0 |
|
|
|
|
|
|
|
|
|
|
|
Future amortization expense in each of the next five years amounts to $86.9 million for 2010, $74.0
million for 2011, $60.6 million for 2012, $51.6 million for 2013 and $43.2 million for 2014.
G. ACCRUED EXPENSES
Accrued expenses at January 2, 2010 and January 3, 2009 were as follows:
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
Payroll and related taxes |
|
$ |
108.8 |
|
|
$ |
107.6 |
|
Derivative financial instruments |
|
|
82.0 |
|
|
|
21.5 |
|
Accrued restructuring costs |
|
|
46.4 |
|
|
|
67.9 |
|
Deferred revenue |
|
|
42.8 |
|
|
|
34.7 |
|
Income and other taxes |
|
|
40.5 |
|
|
|
36.6 |
|
Insurance and benefits |
|
|
21.0 |
|
|
|
33.3 |
|
Other |
|
|
142.0 |
|
|
|
202.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
483.5 |
|
|
$ |
504.0 |
|
|
|
|
|
|
|
|
60
H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt and financing arrangements at January 2, 2010 and January 3, 2009 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Interest Rate |
|
|
2009 |
|
|
2008 |
|
U.K. loan notes, payable on demand |
|
UK Libor less 0.5% |
|
$ |
|
|
|
$ |
0.7 |
|
ESOP loan guarantees, payable in varying monthly installments through 2009 |
|
|
6.1% |
|
|
|
|
|
|
|
1.3 |
|
Notes payable due in 2010 |
|
|
5.0% |
|
|
|
200.0 |
|
|
|
199.9 |
|
Notes payable due in 2012 |
|
|
4.9% |
|
|
|
206.3 |
|
|
|
208.4 |
|
Notes payable due in 2013 |
|
|
6.15% |
|
|
|
253.1 |
|
|
|
257.2 |
|
Convertible notes payable due in 2012 |
|
3 month LIBOR less 3.5% |
|
|
294.5 |
|
|
|
284.3 |
|
Notes payable due in 2045 (subordinated) |
|
|
5.9% |
|
|
|
312.7 |
|
|
|
415.7 |
|
Other, payable in varying amounts through 2013 |
|
|
0.0-6.6% |
|
|
|
26.1 |
|
|
|
30.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
$ |
1,292.7 |
|
|
$ |
1,397.7 |
|
Less: current maturities |
|
|
|
|
|
|
208.0 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
$ |
1,084.7 |
|
|
$ |
1,383.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate annual maturities of long-term debt for each of the years from 2010 to 2014 are $208.0
million, $7.0 million, $505.4 million, $256.0 million and $3.6 million, respectively. Interest paid
during 2009, 2008, and 2007 amounted to $53.7 million, $78.9 million and $85.0 million,
respectively.
On February 17, 2009, the Company amended its committed credit facility to adjust the interest
coverage ratio, the facilitys covenant, and to adjust pricing to current market levels. On
February 27, 2008, the Company amended its committed credit facility to provide for an increase and
extension of its committed credit facility to $800.0 million from $550.0 million. In May 2008, the
Companys commercial paper program was also increased to $800.0 million. The credit facility is
designated as a liquidity back-stop for the Companys commercial paper program. The amended and
restated facility expires in February 2013. In addition, the Company has short-term lines of credit
that are primarily uncommitted, with numerous banks aggregating $197.4 million, of which $188.3
million was available at January 2, 2010. Short-term arrangements are reviewed annually for
renewal. The aggregate long-term and short-term lines amounted to $997.4 million of which $90.4
million was utilized as outstanding short-term borrowings at January 2, 2010. Included in
short-term borrowings in the Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009,
is commercial paper of $87.0 million and $205.7 million, respectively. The weighted average
interest rates on short-term borrowings at January 2, 2010 and January 3, 2009 were 0.3% and 2.4%,
respectively.
On September 29, 2008, the Company issued $250.0 million of unsecured Term Notes maturing October 1,
2013 (the 2013 Term Notes) with fixed interest payable semi-annually, in arrears at a rate of
6.15% per annum. The 2013 Term Notes rank equally with all of the Companys existing and future
unsecured and unsubordinated debt. The Company received net proceeds of $248.0 million which
includes a discount of $0.5 million to achieve a 6.15% interest rate and $1.5 million of fees
associated with the transaction. The Company used the net proceeds from the offering primarily to
reduce borrowings under its existing commercial paper program. The $253.1 million of debt reported
at January 2, 2010 reflects the fair value adjustment related to a fixed-to-floating interest rate
swap entered into at the beginning of 2009, as well as the unamortized balance of the $7.9 million
gain from a December 2008 swap termination. This fixed-to-floating interest rate swap was entered
into upon issuance of the 2013 Term Notes as detailed in Note I, Derivative Financial Instruments.
The 2013 Term Notes include a Change of Control Triggering Event that would apply should a Change
of Control event (as defined in the Indenture governing the 2013 Term Notes) occur.
The Company
would be required to make an offer to repurchase, in cash, all of the outstanding 2013 Term Notes
for a purchase price at 101.0% of the original principal amount, plus any accrued and unpaid
interest outstanding up to the purchase date.
In January 2009, the Company entered into a fixed-to-floating interest rate swap on its $200.0
million notes payable due in 2012. The Company previously had a fixed-to-floating rate swap on
these notes outstanding that was terminated in December 2008. The $6.3 million adjustment to the
carrying value of the debt at January 2, 2010 pertains to the amortized gain on the terminated swap
as well as the fair value adjustment of the new swap, as more fully discussed in Note I, Derivative
Financial Instruments.
Junior Subordinated Debt Securities
In November 2005, the Company issued $450.1 million of junior subordinated debt securities to The
Stanley Works Capital Trust I (the Trust), with a 40-year term and a fixed initial coupon rate of
5.902% for the first five years.
61
The Trust, which was not
consolidated in accordance with ASC 470-20, obtained the funds it loaned to the Company through the
capital market sale of $450.0 million of Enhanced Trust Preferred Securities (ETPS) and through
the sale of $0.1 million in Trust Common Securities to the Company. The obligations, tenor and
terms of the ETPS mirrored those of the junior subordinated debt securities. The securities may be
redeemed after five years without penalty. If not redeemed after 5 years, the coupon rate will
reset quarterly to 1.4% plus the highest of 3-month LIBOR, the 10-Year US Treasury CMT or the
30-Year US Treasury CMT, limited to a maximum rate of 13.25%. Net proceeds of the issuance were
used to partially finance the acquisitions of Facom (January 1, 2006) and National (November 30,
2005).
In October 2008, the Company repurchased $34.3 million of the ETPS for $24.9 million in cash, and
in December 2008 the Trust was dissolved. Upon the dissolution of the Trust, the $0.1 million
investment in the unconsolidated Trust was unwound with a corresponding reduction in debt.
Additionally the Company caused the remaining $415.7 million of junior subordinated debt securities
held by the Trust to be distributed to the holders of ETPS in exchange for the ETPS upon
dissolution of the Trust. A pre-tax gain of $9.4 million was
recognized
pertaining to the partial
extinguishment of this debt.
In May 2009, the Company repurchased $103.0 million of its junior subordinated debt securities for
$58.7 million in cash. The pre-tax gain recorded associated with this extinguishment was $43.8
million, and the principal balance of the debt after this extinguishment and at January 2, 2010 is
$312.7 million.
Financing of the January 2007 HSM Acquisition
During 2007, the Company initially funded the $546.1 million HSM acquisition with a combination of
short-term borrowings and cash. A $500.0 million 364-day revolving credit bridge facility was
entered into on January 8, 2007, of which $130.0 million was utilized to acquire HSM; the remainder
of the HSM purchase price was funded through commercial paper borrowings and cash.
On March 20, 2007, the Company completed two security offerings: Equity Units, which consisted of
$330.0 million of convertible debt and $330.0 million of forward stock purchase contracts and
$200.0 million of unsecured notes (the 2010 Term Notes). With respect to the $860.0 million in
offerings, the Company will not receive the $330.0 million cash pertaining to the forward stock
purchase contracts until May 2010. The $488.1 million net cash proceeds of these offerings and the
related financial instruments described below were used to pay down the short-term bridge facility
and commercial paper borrowings.
The 2010 Term Notes mature March 15, 2010 with fixed interest payable semi-annually, in arrears at
a rate of 5.0% per annum and rank equally with other unsecured and unsubordinated debt of the
Company. The $199.7 million of debt recorded at issuance reflects a $0.3 million discount to
achieve a 5.0% fixed interest rate. The Company received proceeds from the 2010 Term Notes of
$198.9 million net of this discount and underwriters fees; this $1.1 million in discount and fees
will be amortized to expense over the three year term.
The 2010 Term Notes include a change in control provision (Change in Control Provision) that
would apply in the event there is a Change in Control (as defined in the Indenture governing the
2010 Term Notes) and the 2010 Term Notes are rated below investment grade. The Change in Control
Provision provides investors with the right to require the Company to repurchase all or any part of
their 2010 Term Notes in cash at a price equal to 100.0% of the principal amount plus accrued and
unpaid interest.
Equity Units: On March 20, 2007, the Company issued 330,000 Equity Units, each with a stated value
of $1,000. The Equity Units are comprised of a senior convertible note (a Convertible Note) and a
forward common stock purchase contract (an Equity Purchase Contract). The Company received $320.1
million in cash proceeds from the Equity Units offering, net of underwriting fees. These proceeds
were used to repay short-term borrowings and, along with $18.8 million in proceeds from the sale of
stock warrants, to fund the $49.3 million cost of the convertible notes hedge as more fully
described below.
In November 2008, the Company repurchased $10.0 million of the Equity Units for $5.3 million in
cash (the $10 Million Repurchase). To properly account for the transaction, the Equity Unit
elements were bifurcated as effectively the Company paid $10.0 million to extinguish the
Convertible Notes and received $4.7 million from the seller to settle its obligation under the
Equity Purchase Contracts. As further detailed below, the Equity Purchase Contracts obligated the
holder to purchase shares of the Companys common stock at a minimum purchase price of
approximately $54.23 per share on May 17, 2010. At the November 2008 repurchase date, the Companys
common stock had a closing market value of $25.38. The remaining liability for Contract Adjustment
Payment fees, as defined below, associated with the $10.0 million of settled Equity Purchase Contracts was reversed,
resulting in an increase to equity of $0.7 million. The related $10.0 million in Convertible Note
Hedges (the Bond Hedge) and Stock Warrants were unwound with a nominal impact to equity. As a
result of the $10 Million Repurchase, there was an insignificant gain recorded in earnings and a
net increase in equity of $5.4 million.
62
Equity Purchase Contracts:
The Equity Purchase Contracts obligate the holders to purchase on May 17, 2010, newly issued shares
of the Companys common stock for $320.0 million in cash. A maximum of 5.9 million shares of common
stock may be issued on the May 17, 2010 settlement date, subject to adjustment for standard
anti-dilution provisions. Equity Purchase Contract holders may elect to settle their obligation
early, in cash. The Convertible Notes, described further below, are pledged as collateral to
guarantee the holders obligations to purchase common stock under the terms of the Equity Purchase
Contracts. The agreed upon number of shares that each Equity Purchase Contract holder must purchase
is called the settlement amount. The settlement amount is equal to the sum of the daily
settlement amounts determined over a 20 consecutive trading day period (the observation period)
ending on and including the third trading day prior to the purchase contract settlement date. The
settlement amount may be affected by standard anti-dilution protection provisions in the Equity
Purchase Contracts or a cash merger. In effect, the Company will receive a minimum purchase price
from investors of approximately $54.23 per share. The daily settlement amount for each trading day
during the observation period is calculated as follows:
|
|
|
if the applicable market value of the Companys common stock on that trading day is less than
or equal to $54.23 (the reference price), the daily settlement amount for that trading day
will be 0.9219 shares of the Companys common stock; and |
|
|
|
|
if the applicable market value of the Companys common stock on that trading day is greater
than the reference price, the daily settlement amount for that trading day will be a number of
shares of the Companys common stock equal to $50 divided by the applicable market value,
rounded to the nearest ten thousandth share. |
Holders of the Equity Purchase Contract are paid a quarterly contract adjustment payment (Contract
Adjustment Payment) of 5.125% per annum, and the first payment thereof was made August 17, 2007.
The $49.6 million present value of the Contract Adjustment Payments reduced Shareowners Equity at
inception. As each quarterly Contract Adjustment Payment is made, the related liability will be
relieved with the difference between the cash payment and the present value of the Contract
Adjustment Payment recorded as interest expense (at inception approximately $3.9 million accretion
over the three year term). Due to the $10 Million Repurchase, $0.7 million in remaining liability
for the related Contract Adjustment Payments was reversed. At January 2, 2010 the liability
reported for the Contract Adjustment Payments amounted to $7.7 million.
Convertible Notes:
The $320.0 million Convertible Notes principal amount currently outstanding has a five-year, two
month maturity and is due May 17, 2012. As discussed in Note A, Significant Accounting Policies,
the Company adopted FSP APB 14-1 which applies to these Convertible Notes. Accordingly, all related
amounts have been adjusted to reflect the required retrospective application of this topic.
At maturity, the Company is obligated to repay the principal in cash, and may elect to settle the
conversion option value, if any, as detailed further below, in either cash or shares of the
Companys common stock. The Convertible Notes bear interest at an annual rate of 3-month LIBOR
minus 3.5%, reset quarterly (but never less than zero), and initially set at 1.85%. Interest is
payable quarterly commencing August 17, 2007. The Convertible Notes are unsecured general
obligations and rank equally with all of the Companys other unsecured and unsubordinated debt. The
Convertible Notes are pledged as collateral to guarantee the holders obligations to purchase
common stock under the terms of the Equity Purchase Contract described above. The unamortized
discount of the Convertible Notes was $25.5 million and $35.7 million at January 2, 2010 and
January 3, 2009, respectively. The remaining unamortized balance will be recorded to interest
expense through the Convertible Notes maturity in May 2012. The equity component carrying value was
$32.9 million at January 2, 2010 and January 3, 2009.
The Company is obligated to remarket the Convertible Notes commencing on May 10, 2010 to the extent
that holders of the Convertible Note element of an Equity Unit or holders of separate Convertible
Notes elect to participate in the remarketing. Holders of Equity Units who elect to have the
Convertible Note element of these units not participate in the remarketing must create a Treasury
Unit (replace the Convertible Notes with a zero-coupon U.S. Treasury security as substitute
collateral to guarantee their performance under the Equity Purchase Contract), settle the Equity
Purchase Contract early or settle it in cash prior to May 17, 2010. Upon a successful remarketing,
the proceeds will be utilized to satisfy in full the Equity Unit holders obligations to purchase
the Companys common stock under the Equity Purchase Contract. In the event the remarketing of the
Convertible Notes is not successful, the holders may elect to pay cash or to deliver the
Convertible Notes to the Company as consideration to satisfy their obligation to purchase common
shares under the Equity Purchase Contract.
63
The conversion premium for the Convertible Notes is 18.9%, equivalent to the conversion
price of $64.50 based on the $54.23 value of the Companys common stock. Upon conversion on May
17, 2012 (or a cash merger event), the Company will deliver to each holder of the Convertible Notes
$1,000 cash for the principal amount of the note. Additionally at conversion, to the extent, if
any, that the conversion option is in the money, the Company will deliver, at its election,
either cash or shares of the Companys common stock based on an initial conversion rate of 15.4944
shares (equivalent to the conversion price set at $64.50) and the applicable market value
of the Companys common stock. The ultimate conversion rate may be increased above 15.4944 shares
in accordance with standard anti-dilution provisions applicable to the Convertible Notes or in the
event of a cash merger. An increase in the ultimate conversion rate will apply if the Company
increases the per share common stock dividend rate during the five year term of the Convertible
Notes; accordingly such changes to the conversion rate are within the Companys control under its
discretion regarding dividends it may declare. Also, the holders may elect to accelerate
conversion, and make whole adjustments to the conversion rate may apply, in the event of a cash
merger or fundamental change. Subject to the foregoing, if the market value of the Companys
common shares is below the conversion price at conversion, (set at a rate equating to
$64.50 per share), the conversion option would be out of the money and the Company would have no
obligation to deliver any consideration beyond the $1,000 principal payment required under each of
the Convertible Notes. To the extent, if any, that the conversion option of the Convertible Notes
becomes in the money in any interim period prior to conversion, there will be a related increase
in diluted shares outstanding utilized in the determination of the Companys diluted earnings per
share in accordance with the treasury stock method prescribed by ASC 260. As of January 2, 2010 and
January 3, 2009, the conversion option is out of the money.
There was no interest expense recorded for 2009 and $0.6 million for 2008 related to the
contractual interest coupon on the Convertible Notes for the periods presented based upon the
applicable 3-month LIBOR minus 3.5% rate in these periods. The Company has outstanding derivative
contracts fixing the interest rate on the $320.0 million floating rate Convertible Notes (3-month
LIBOR less 350 basis points) at 1.43% and recognized $4.8 million and $4.2 of interest expense
pertaining to these interest rate swaps for the periods ended January 2, 2010 and January 3, 2009.
The non-cash interest expense accretion related to the amortization of the liability balance as
required by the accounting standards totaled $10.2 million for 2009 and $10.3 million for 2008. The
total interest expense recognized on the Convertible Notes reflecting the contractual interest
coupon, the fixed interest rate swaps and the interest accretion required by the accounting
standards represented an effective interest rate of 5.2% for both 2009 and 2008.
Convertible Notes Hedge: In order to offset the common shares that may be deliverable pertaining to
the previously discussed conversion option feature of the Convertible Notes, the Company entered
into Bond Hedges with certain major financial institutions. The Company paid the financial
institutions a premium of $49.3 million for the Bond Hedge which was recorded, net of $14.0 million
of anticipated tax benefits, as a reduction of Shareowners equity. The terms of the Bond Hedge
mirror those of the conversion option feature of the Convertible Notes such that the financial
institutions may be required to deliver shares of the Companys common stock to the Company upon
conversion at its exercise in May 2012. To the extent, if any, that the conversion option feature
becomes in the money during the five year term of the Convertible Notes, diluted shares
outstanding will increase accordingly. Because the Bond Hedge is anti-dilutive, it will not be
included in any diluted shares outstanding computation prior to its maturity. However, at maturity
of the Convertible Notes and the Bond Hedge in 2012, the aggregate effect of these instruments is
that there will be no net increase in the Companys common shares.
Stock Warrants: Simultaneously, the Company issued 5,092,956 of unregistered common stock warrants
(Stock Warrants) to financial institutions for $18.8 million. The cash proceeds received were
recorded as an increase to Shareowners equity. The Stock Warrants are exercisable during the
period August 17, 2012 through September 28, 2012, and have a strike price of $86.83 established at
160.1% of the market value of $54.23. The Stock Warrants will be net share settled and are deemed
to automatically be exercised at their expiration date if they are in the money and were not
previously exercised. The strike price for the Stock Warrants may be adjusted for increases to the
Companys dividend rate per share, or special dividends, if any, that occur during their five year
term (consistent with the standard anti-dilution provisions discussed earlier with respect to the
conversion spread on the Convertible Notes). In the event the Stock Warrants become in the money
during their five year term due to the market value of the Companys common stock exceeding the
$86.83 strike price, there will be a related increase in diluted shares outstanding utilized in the
determination of the Companys diluted earnings per share. In November 2008, 154,332 Stock Warrants
were repurchased from the financial institutions at a cost of $0.15 per warrant, pertaining to the
previously mentioned $10 Million Repurchase. As a result, there were 4,938,624 Stock Warrants
Outstanding as of January 2, 2010.
I. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risk from changes in foreign currency exchange rates, interest
rates, stock prices and commodity prices. As part of the Companys risk management program, it uses
a variety of financial instruments such as interest rate swap and currency swap agreements,
purchased currency options and foreign exchange contracts to mitigate interest rate and foreign
currency
exposure.
64
Generally, commodity price exposures are not hedged with derivative financial instruments
and instead are actively managed through customer pricing initiatives, procurement-driven cost
reduction initiatives and other productivity improvement projects. Financial instruments are not
utilized for speculative purposes. If the Company elects to do so and if the instrument meets the
criteria specified in ASC 815, management designates its derivative instruments as cash flow
hedges, fair value hedges or net investment hedges.
For derivative instruments that are so designated at inception and qualify as cash flow and net
investment hedges, the Company records the effective portions of the gain or loss on the derivative
instrument in Accumulated other comprehensive income, a separate component of Shareowners equity,
and subsequently reclassifies these amounts into earnings in the period during which the hedged
transaction is recognized in earnings. For designated fair value hedges, the Company records the
changes in the fair value of the derivative instrument as well as the hedged item in the
Consolidated Statements of Operations within the same caption. The Company measures hedge
effectiveness by comparing the cumulative change in the hedge contract with the cumulative change
in the hedged item, both of which are based on forward rates. For interest rate swaps designated as
cash flow hedges, the Company measures the hedge effectiveness by offsetting the change in the
variable portion of the interest rate swap with the change in the expected interest flows due to
fluctuations in the LIBOR-based interest rate. The ineffective portion of the gain or loss, if any,
is immediately recognized in the same caption where the hedged items are recognized in the
Consolidated Statements of Operations.
A summary of the fair value of the Companys derivatives recorded in the Consolidated Balance
Sheets are as follows (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
Classification |
|
|
1/2/10 |
|
|
1/3/09 |
|
|
Classification |
|
|
1/2/10 |
|
|
1/3/09 |
|
Derivatives designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
Cash Flow |
|
Other current assets |
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
$ |
2.2 |
|
|
$ |
0.6 |
|
|
|
LT other assets |
|
|
7.3 |
|
|
|
|
|
|
LT other liabilities |
|
|
|
|
|
|
6.0 |
|
Fair Value |
|
Other current assets |
|
|
4.5 |
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
|
LT other assets |
|
|
0.1 |
|
|
|
|
|
|
LT other liabilities |
|
|
2.7 |
|
|
|
|
|
Foreign Exchange Contracts
Cash Flow |
|
Other current assets |
|
|
0.1 |
|
|
|
0.5 |
|
|
Accrued expenses |
|
|
31.2 |
|
|
|
1.4 |
|
|
|
LT other assets |
|
|
|
|
|
|
|
|
|
LT other liabilities |
|
|
|
|
|
|
22.0 |
|
Net Investment Hedge |
|
Other current assets |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
29.1 |
|
|
|
|
|
|
|
LT other assets |
|
|
|
|
|
|
|
|
|
LT other liabilities |
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12.0 |
|
|
$ |
0.5 |
|
|
|
|
|
|
$ |
65.2 |
|
|
$ |
50.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts |
|
Other current assets |
|
$ |
18.5 |
|
|
$ |
10.3 |
|
|
Accrued expenses |
|
$ |
19.5 |
|
|
$ |
19.5 |
|
|
|
LT other assets |
|
|
2.8 |
|
|
|
21.0 |
|
|
LT other liabilities |
|
|
|
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21.3 |
|
|
$ |
31.3 |
|
|
|
|
|
|
$ |
19.5 |
|
|
$ |
33.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The counterparties to all of the above mentioned 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 risk is limited to the asset amounts noted above.
The Company limits its exposure and concentration of risk by contracting with diverse financial
institutions and does not anticipate non-performance by any of its counterparties. Further, as more
fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of
its counterparties at each reporting period and adjusts the carrying value of these assets
accordingly. The risk of default is considered remote.
In 2009, significant cash flows related to derivatives included cash payments of $15.5 million on a
Great Britain pound currency swap maturity and a Canadian dollar swap termination; both of these
swaps were classified as undesignated.
CASH FLOW HEDGES
There was a $4.8 million after-tax gain as of January 2, 2010 and January 3, 2009 and a $5.1
million after-tax gain as of December 29, 2007 reported for cash flow hedge effectiveness in
Accumulated other comprehensive income. A gain of $0.1 million is expected to be reclassified to
earnings as the hedged transactions occur or as amounts are amortized within the next 12 months.
The ultimate amount recognized will vary based on fluctuations of the hedged currencies through the
maturity dates. The table below details pre-tax amounts reclassified from Accumulated other
comprehensive income into earnings during the periods in which the underlying hedged transactions
affected earnings for the twelve months ended January 2, 2010.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of |
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
|
|
|
|
|
|
Gain (Loss) |
|
|
Reclassified from |
|
|
Recognized in |
|
|
|
Gain (Loss) |
|
|
Reclassified from |
|
|
OCI to Income |
|
|
Income |
|
(millions of dollars) |
|
Recorded in OCI |
|
|
OCI to Income |
|
|
(Effective Portion) |
|
|
(Ineffective Portion*) |
|
Interest Rate Contracts |
|
$ |
7.2 |
|
|
Interest expense |
|
$ |
(4.6 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts |
|
$ |
(0.5 |
) |
|
Cost of sales |
|
$ |
4.7 |
|
|
|
|
|
|
|
$ |
(7.7 |
) |
|
Other-net |
|
$ |
(3.5 |
) |
|
|
|
|
|
|
|
* |
|
Includes ineffective portion and amount excluded from effectiveness testing on derivatives. |
For the twelve months ended January 2, 2010, the hedged items impact to the income statement was a
loss of approximately $4.7 million in Cost of sales and a gain of $4.5 million in Other-net. There
was no impact related to the interest rate contracts hedged items. The impact of de-designated
hedges was a pre-tax loss of $0.9 million for 2009.
During 2009, 2008 and 2007, a loss of $1.1 million, a gain of $42.9 million and a loss of
$31.7 million, respectively, was reclassified from Accumulated other comprehensive income into
earnings during the periods in which the underlying hedged transactions affected earnings; due to
the effectiveness of these instruments in matching the underlying on a net basis there was no
significant earnings impact.
Interest Rate Contracts
The Company enters into interest rate swap agreements in order to obtain the lowest cost source of
funds within a targeted range of variable to fixed-rate debt proportions. At January 2, 2010 and
January 3, 2009, the Company had outstanding contracts fixing the interest rate on its
$320.0 million floating rate convertible notes; additionally at January 2, 2010 the Company had
$400.0 million of forward starting swaps outstanding fixing the interest rate on the expected
refinancing of debt in 2012 and 2013 as described below.
In December 2009, the Company executed forward starting interest rate swaps with an aggregate
notional amount of $400.0 million fixing interest at 4.78% with interest payments beginning in
November 2012 and maturity in November 2022. The objective of the hedge is to offset the expected
variability on future payments associated with the interest rate on debt instruments expected to be
issued in November 2012. Gains or losses on the swaps are recorded in Accumulated other
comprehensive income and will be subsequently reclassified into earnings as the future interest
expense is recognized in earnings or as ineffectiveness occurs. These swaps have a mandatory early
termination requirement in November 2012.
In December 2008, the Company terminated its lease and purchased one of its major distribution
centers. In conjunction with the termination of the lease, the Company also terminated the interest
rate swap used to exchange the floating rate rental liability to a fixed rental liability. The
interest rate swap had a notional amount of $14.9 million and resulted in an immaterial gain upon
termination.
In March 2007, concurrent with the issuance of the Equity Units, the Company executed interest rate
swaps with an aggregate notional amount of $330.0 million to convert the floating rate coupon on
the Convertible Notes (LIBOR less 350 basis points) to a fixed rate coupon (1.43%) through May
2010. In November 2008, the Company repurchased $10 million of the Equity Units and reduced the
amount of the interest rate swap by the corresponding amount to ensure that the notional amounts of
the derivative and the underlying continued to match.
Foreign Currency Contracts
Forward contracts: Through its global businesses, the Company enters into transactions and makes
investments denominated in multiple currencies that give rise to foreign currency risk. The Company
and its subsidiaries regularly purchase inventory from non-United States dollar subsidiaries that
creates volatility in the Companys results of operations. The Company utilizes forward contracts
to hedge these forecasted purchases of inventory. Gains and losses reclassified from Accumulated
other comprehensive income for the effective and ineffective portions of the hedge as well as any
amounts excluded from effectiveness testing are recorded in Cost of sales. As of January 2, 2010,
there were no outstanding hedge contracts and at January 3, 2009, the notional value of the hedge
contracts outstanding was $85.9 million.
66
Currency swaps: The Company and its subsidiaries have entered into various inter-company
transactions whereby the notional values are denominated in currencies other than the functional
currencies of the party executing the trade. In order to better match the cash flows of its
inter-company obligations with cash flows from operations, the Company enters into currency swaps.
The notional value of the United States dollar exposure and the related hedge contracts outstanding
as of January 2, 2010 and January 3, 2009 was $150.0 million, maturing November 2010.
FAIR VALUE HEDGES
Interest Rate Risk
In an effort to optimize the mix of fixed versus floating rate debt in the Companys capital
structure, the Company enters into interest rate swaps. In January 2009, the Company entered into
interest rate swaps with notional values which equaled the Companys $200.0 million 4.9% notes due
in 2012 and $250.0 million 6.15% notes due in 2013. The interest rate swaps effectively converted
the Companys fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation
in fair value resulting from changes in interest rates. The changes in fair value of the interest
rate swaps were recognized in earnings as well as the offsetting changes in fair value of the
underlying notes. A summary of the fair value adjustments relating to these swaps for 2009 is as
follows (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
Income Statement |
|
Notional Value of |
|
Gain/(Loss) on |
|
Gain / (Loss) on |
Classification |
|
Open Contracts |
|
Swaps |
|
Borrowings |
Interest Expense |
|
$ |
450.0 |
|
|
$ |
(2.6 |
) |
|
$ |
2.6 |
|
In addition to the amounts in the table above, the net swap settlements that occur each period and
amortization of the gains on terminated swaps discussed below are also reported in interest expense
and totaled $11.6 million reduction of interest expense for 2009. Interest expense was
$25.2 million on the underlying debt.
During 2008, the Company had identical instruments to those described above outstanding that were
terminated in December 2008, resulting in pre-tax gains of $16.5 million, offset by the fair value
adjustment to the carrying value of the underlying notes. At January 3, 2009 the carrying amounts
of the $200.0 million and $250.0 million notes were increased by $8.4 million and $7.7 million
respectively, related to this adjustment and are being amortized over the remaining term of the
notes as a reduction of interest expense.
NET INVESTMENT HEDGES
Foreign Exchange Contracts
The Company utilizes net investment hedges to offset the translation adjustment arising from
remeasurement of its investment in the assets, liabilities, revenues, and expenses of its foreign
subsidiaries. The total after-tax amounts in Accumulated other comprehensive income were losses of
$11.8 million and $6.6 million at January 2, 2010 and January 3, 2009, respectively. As of January
2, 2010 and January 3, 2009, the Company had one foreign exchange contract outstanding hedging its
net investment in euro assets that matures in February 2010 and is detailed in the pre-tax amounts
below (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion* |
|
|
Notional Value |
|
Amount |
|
Effective Portion |
|
Recorded in |
Income Statement |
|
of Open |
|
Recorded in OCI |
|
Recorded in Income |
|
Income |
Classification |
|
Contract |
|
Gain (Loss) |
|
Statement |
|
Statement |
Other-net |
|
$ |
223.4 |
|
|
$ |
(8.5 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
* |
|
Includes ineffective portion and amount excluded from effectiveness testing. |
During 2008, the Company terminated cross currency swaps and foreign exchange contracts with an
aggregate notional value of $281.6 million that hedged its net investments of certain Great Britain
pound and euro denominated assets. The terminations resulted in gains of $19.1 million that will
remain in Accumulated other comprehensive income until the underlying assets are disposed of.
67
UNDESIGNATED HEDGES
Foreign Exchange Contracts
Currency swaps and foreign exchange forward contracts are used to reduce exchange risks arising
from the change in fair value of certain foreign currency denominated assets and liabilities (such
as affiliate loans, payables, receivables). The objective of these practices is to minimize the
impact of foreign currency fluctuations on operating results. The total notional amount of the
contracts outstanding at January 2, 2010 was $182.6 million of forward contracts and $160.5 million
in currency swaps, maturing at various dates through January 2011. The total notional amount of the
contracts outstanding at January 3, 2009 was $203.9 million of forward contracts and $259.3 million
in currency swaps. The income statement impacts related to derivatives not designated as hedging
instruments under ASC 815 for 2009 is as follows (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date |
Derivatives Not |
|
|
|
|
|
Amount of Gain (Loss) |
Designated as Hedging |
|
Income Statement |
|
Recorded in Income on |
Instruments under ASC 815 |
|
Classification |
|
Derivative |
Foreign Exchange Contracts |
|
Other-net |
|
$ |
(7.6 |
) |
J. CAPITAL STOCK
EARNINGS PER SHARE The following table reconciles net earnings attributable to common shareholders
and the weighted average shares outstanding used to calculate basic and diluted earnings per share
for the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007.
Basic Earnings per Share Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Numerator (millions of dollars): |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Stanley Works |
|
$ |
224.3 |
|
|
$ |
306.9 |
|
|
$ |
331.9 |
|
Less: Net earnings allocated to unvested units (A) |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Stanley Works less unvested units |
|
$ |
224.0 |
|
|
$ |
306.3 |
|
|
$ |
331.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The unvested units affecting the calculation of basic earnings per share represent
restricted stock units with non-forfeitable dividend rights. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
Denominator (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, weighted-average shares outstanding |
|
|
79,788 |
|
|
|
78,897 |
|
|
|
82,313 |
|
Dilutive Earnings per Share Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Numerator (millions of dollars): |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Stanley Works |
|
$ |
224.3 |
|
|
$ |
306.9 |
|
|
$ |
331.9 |
|
Denominator (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, weighted-average shares outstanding |
|
|
79,788 |
|
|
|
78,897 |
|
|
|
82,313 |
|
Dilutive effect of stock options and awards |
|
|
608 |
|
|
|
977 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, weighted-average shares outstanding |
|
|
80,396 |
|
|
|
79,874 |
|
|
|
84,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
Earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
$ |
2.81 |
|
|
$ |
3.88 |
|
|
$ |
4.03 |
|
Diluted Earnings Per Share |
|
$ |
2.79 |
|
|
$ |
3.84 |
|
|
$ |
3.95 |
|
68
The following weighted-average stock options, warrants and Equity Purchase Contracts to purchase
the Companys common stock were not included in the computation of diluted shares outstanding
because the effect would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
Number of stock options |
|
|
3,519 |
|
|
|
2,101 |
|
|
|
824 |
|
Number of stock warrants |
|
|
4,939 |
|
|
|
5,069 |
|
|
|
3,918 |
|
Number of shares related to Equity Purchase Contracts |
|
|
5,893 |
|
|
|
6,035 |
|
|
|
4,196 |
|
The Company has warrants outstanding which entitle the holder to purchase up to 4,938,624 shares of
its common stock with a strike price of approximately $86.83. These warrants are anti-dilutive
since the strike price is greater than the market price of the Companys common stock.
The Equity Purchase Contracts will not be dilutive at any time prior to their maturity in May 2010
because the holders must pay the Company the higher of approximately $54.23 or then market price.
Additionally, the Company has Convertible Notes outstanding which may require the Company to
deliver shares of common stock in May 2012. As of January 2, 2010 and January 3, 2009, there were
no shares related to the Convertible Notes included in the calculation of diluted earnings per
share because the effect of the conversion option was not dilutive. The Company intends to net
share settle the conversion value, if any, of these Convertible Notes at their maturity in May
2012. Furthermore, there is a convertible notes hedge in place which would fully offset any such
shares that may be delivered pertaining to the Convertible Notes. These Convertible Notes, as well
as the related forward stock purchase contracts and convertible note hedge, are discussed more
fully in Note H, Long-Term Debt and Financing Arrangements.
COMMON STOCK SHARE ACTIVITY Common stock share activity for 2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Outstanding, beginning of year |
|
|
78,876,034 |
|
|
|
80,378,787 |
|
|
|
81,841,627 |
|
Issued from treasury |
|
|
2,178,203 |
|
|
|
737,698 |
|
|
|
2,323,973 |
|
Returned to treasury |
|
|
(575,613 |
) |
|
|
(2,240,451 |
) |
|
|
(3,786,813 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year |
|
|
80,478,624 |
|
|
|
78,876,034 |
|
|
|
80,378,787 |
|
|
|
|
|
|
|
|
|
|
|
In addition to the common stock share activity described in the Stock-Based Compensation Plans and Equity
Option sections of this footnote, the Company issued 242,653 shares of common stock and received
cash proceeds of $9.5 million during the year.
COMMON STOCK RESERVED Common stock shares reserved for issuance under various employee and director
stock plans at January 2, 2010 and January 3, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Employee stock purchase plan |
|
|
3,100,855 |
|
|
|
3,216,631 |
|
Other stock-based compensation plans |
|
|
4,086,625 |
|
|
|
3,061,491 |
|
|
|
|
|
|
|
|
Total shares reserved |
|
|
7,187,480 |
|
|
|
6,278,122 |
|
|
|
|
|
|
|
|
PREFERRED STOCK PURCHASE RIGHTS Each outstanding share of common stock has a one 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, 2016, and may be redeemed by the
Company at a price of $0.01 per right at any time prior to the tenth day following the public
announcement that a person has acquired beneficial ownership of 15% 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 14.9%-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 15% 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 14.9%-or-more shareowner) shall thereafter have the right to receive, upon
exercise thereof, common stock (or, in certain circumstances, cash, property or other securities of
the Company) having a market value equal to two times the exercise price of the right. At January
2, 2010, there were 80,478,624 outstanding rights.
STOCK-BASED COMPENSATION PLANS The Company has stock-based compensation plans for salaried
employees and non-employee members of the Board of Directors. The plans provide for discretionary
grants of stock options, restricted stock units, and
other stock-based awards.
69
The plans are generally administered by the Compensation and Organization
Committee of the Board of Directors, consisting of non-employee directors.
Stock Options: Stock options are granted at the fair market value of the Companys stock on the
date of grant and have a 10-year term. Generally, stock option grants vest ratably over four years
from the date of grant.
The following describes how certain assumptions affecting the estimated fair value of stock options
are determined: the dividend yield is computed as the annualized dividend rate at the date of grant
divided by the strike price of the stock option; expected volatility is based on an average of the
market implied volatility and historical volatility for the 5 year expected life; the risk-free
interest rate is based on U.S. Treasury securities with maturities equal to the expected life of
the option; and an eight percent forfeiture rate is assumed. The Company uses historical data in
order to estimate exercise, termination and holding period behavior for valuation purposes.
The number of stock options and weighted-average exercise prices are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding, beginning of year |
|
|
7,082,224 |
|
|
$ |
37.08 |
|
|
|
7,053,899 |
|
|
$ |
37.83 |
|
|
|
8,456,508 |
|
|
$ |
36.31 |
|
Granted |
|
|
502,500 |
|
|
|
48.46 |
|
|
|
849,360 |
|
|
|
33.73 |
|
|
|
743,000 |
|
|
|
53.11 |
|
Exercised |
|
|
(1,603,205 |
) |
|
|
30.10 |
|
|
|
(400,972 |
) |
|
|
31.44 |
|
|
|
(1,820,355 |
) |
|
|
36.10 |
|
Forfeited |
|
|
(142,102 |
) |
|
|
44.65 |
|
|
|
(420,063 |
) |
|
|
48.31 |
|
|
|
(325,254 |
) |
|
|
42.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year |
|
|
5,839,417 |
|
|
$ |
39.75 |
|
|
|
7,082,224 |
|
|
$ |
37.08 |
|
|
|
7,053,899 |
|
|
$ |
37.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
|
4,364,180 |
|
|
$ |
38.50 |
|
|
|
5,368,989 |
|
|
$ |
35.30 |
|
|
|
5,114,357 |
|
|
$ |
33.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 2, 2010, the range of exercise prices on outstanding stock options was $19.34 to $63.04.
Stock option expense was $6.1 million, $4.8 million and $7.6 million for the years ended January 2,
2010, January 3, 2009 and December 29, 2007, respectively.
The fair value of each stock option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions used for grants
in 2009, 2008 and 2007, respectively: dividend yield of 2.8%, 3.8% and 2.4%; expected volatility of
32.8%, 45.0%, 28.0%; and risk-free interest rates of 2.2%, 1.8%, 3.6%. An expected life of 5 years
was used in each period and a weighted average vesting period of 2.4 years in 2009, 2.0 years in
2008 and 2.5 years in 2007. The weighted average fair value of stock options granted in 2009, 2008
and 2007 was $11.48, $9.25, and $12.15, respectively.
At January 2, 2010, the Company had $14.4 million of unrecognized pre-tax compensation expense for
stock options. This expense will be recognized over the remaining vesting periods which are 3.0
years on a weighted average basis.
During 2009, the Company received $48.3 million in cash from the exercise of stock options. The
related tax benefit from the exercise of these options is $6.5 million. During 2009, 2008 and 2007
the total intrinsic value of options exercised was $16.5 million, $6.8 million and $37.9 million,
respectively. When options are exercised, the related shares are issued from treasury stock.
ASC 718,
Compensation Stock Compensation, requires the benefit arising from tax deductions in excess of recognized compensation cost
to be classified as a financing cash flow. To quantify the recognized compensation cost on which
the excess tax benefit is computed, both actual compensation expense recorded and pro-forma
compensation cost reported in disclosures are considered. An excess tax benefit is generated on the
extent to which the actual gain, or spread, an optionee receives upon exercise of an option exceeds
the fair value determined at the grant date; that excess spread over the fair value of the option
times the applicable tax rate represents the excess tax benefit. In 2009 and 2008, the Company
reported $0.3 million and $3.8 million, respectively, of excess tax benefits as a financing cash
flow.
Outstanding and exercisable stock option information at January 2, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options |
|
|
Exercisable Stock Options |
|
|
|
|
|
|
|
Weighted-average |
|
|
Weighted-average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Exercise |
|
|
|
|
|
|
Weighted-average |
|
Exercise Price Ranges |
|
Options |
|
|
Contractual Life |
|
|
Price |
|
|
Options |
|
|
Exercise Price |
|
$30.00 and below |
|
|
519,225 |
|
|
|
0.89 |
|
|
$ |
20.85 |
|
|
|
519,225 |
|
|
$ |
20.85 |
|
$30.01 - 45.00 |
|
|
3,112,625 |
|
|
|
4.75 |
|
|
|
35.69 |
|
|
|
2,512,513 |
|
|
|
36.21 |
|
$45.01 - higher |
|
|
2,207,567 |
|
|
|
7.48 |
|
|
|
49.92 |
|
|
|
1,332,442 |
|
|
|
49.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,839,417 |
|
|
|
5.44 |
|
|
$ |
39.75 |
|
|
|
4,364,180 |
|
|
$ |
38.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Compensation cost for new grants is recognized on a straight-line basis over the vesting period.
The expense for retirement eligible employees (those aged 55 and over and with 10 or more years of
service) is recognized by the date they became retirement eligible, as such employees may retain
their options for the 10 year contractual term in the event they retire prior to the end of the
vesting period stipulated in the grant.
Employee Stock Purchase Plan: The Employee Stock Purchase Plan (ESPP) enables substantially all
employees in the United States and Canada 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 grant
date ($28.26 per share for fiscal year 2009 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 2009, 2008 and 2007 shares totaling 115,776 shares, 62,261 shares, and 68,848 shares respectively,
were issued under the plan at average prices of $27.87, $37.31 and $44.33 per share, respectively
and the intrinsic value of the ESPP purchases was $1.8 million, $0.4 million and $0.8 million
respectively. For 2009, the Company received $3.2 million in cash from ESPP purchases, and there is
no related tax benefit. The fair value of ESPP shares was estimated using the Black-Scholes option
pricing model. ESPP compensation cost is recognized ratably over the one-year term based on actual
employee stock purchases under the plan. The fair value of the employees purchase rights under the
ESPP was estimated using the following assumptions for 2009, 2008 and 2007, respectively: dividend
yield of 2.9%, 3.7% and 2.2%; expected volatility of 56.0%, 28.0% and 22.0%; risk-free interest
rates of 0.2%, 2.6% and 4.9%; and expected lives of one year. The weighted average fair value of
those purchase rights granted in 2009, 2008 and 2007 was $10.77, $9.02 and $10.95, respectively.
Total compensation expense recognized for ESPP amounted to $1.2 million, $0.6 million and $0.7
million for 2009, 2008 and 2007, respectively.
Restricted Share Units: Compensation cost for restricted share units, including restricted shares
granted to French employees in lieu of RSUs, (collectively RSUs) granted to employees is
recognized ratably over the vesting term, which varies but is generally 4 years. RSU grants totaled
452,613 shares, 241,036 shares and 228,125 shares in 2009, 2008 and 2007, respectively. The
weighted-average grant date fair value of RSUs granted in 2009, 2008 and 2007 was $37.55, $35.28
and $49.13 per share, respectively. Total compensation expense recognized for RSUs amounted to
$9.4 million, $6.3 million and $3.8 million,
respectively. The actual tax benefit received in the period the
shares were delivered was
$0.1 million, $2.1 million and $2.2 in 2009, 2008 and 2007,
respectively. As of January 2, 2010,
unrecognized compensation expense for RSUs amounted to $22.8 million and this cost will be
recognized over a weighted-average period of 3.2 years.
A summary of non-vested restricted stock unit activity as of January 2, 2010, and changes during
the twelve month period then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Restricted Share |
|
|
Grant |
|
|
|
Units |
|
|
Date Fair Value |
|
Non-vested at January 3, 2009 |
|
|
480,871 |
|
|
$ |
42.55 |
|
Granted |
|
|
452,613 |
|
|
|
38.73 |
|
Vested |
|
|
(157,942 |
) |
|
|
45.76 |
|
Forfeited |
|
|
(16,344 |
) |
|
|
33.94 |
|
|
|
|
|
|
|
|
Non-vested at January 2, 2010 |
|
|
759,198 |
|
|
$ |
39.79 |
|
The total fair value of shares vested (market value on the date vested) during 2009, 2008 and 2007
was $7.2 million, $4.4 million and $5.1 million, respectively.
Non-employee members of the Board of Directors received restricted share-based grants which must be
cash settled and accordingly mark-to-market accounting is applied. Additionally, the Board of
Directors were granted restricted share units for which compensation expense of $0.6 million, $0.6
million and $0.4 million was recognized for 2009, 2008 and 2007, respectively.
Long-Term Performance Awards:
Cyclical 3-year Plans: The Company has granted Long Term Performance Awards (LTIPs) under its
1997, 2001 and 2009 Long Term Incentive Plans to senior management employees for achieving Company
performance measures, specifically earnings per share and return on capital employed. Awards are
payable in shares of common stock, which may be restricted if the employee has not achieved certain
stock ownership levels, and generally no award is made if the employee terminates employment prior
to the payout date.
There is a triennial award cycle in progress for the thirty three
month period ending in December
2010. The ultimate issuance of
shares, if any, is determined based on performance in the final year of the cycle.
71
Additionally, in 2009 an LTIP grant was made indicating separate annual performance goals for 2009,
2010 and 2011 for earnings per share and return on capital employed representing 75% of the total
grant. There is a third market-based element, representing 25% of the total grant, which measures
the Companys common stock return relative to peers over 33 months. The ultimate
delivery of shares will occur in 2012 based on actual performance in relation to these goals.
Special Bonus Program: In 2007, the Company adopted a special bonus program under its 1997 Long
Term Incentive Plan. The program provides senior managers the opportunity to receive stock in the
event certain working capital turn objectives are achieved by December 31, 2009 and sustained for a
period of at least six months. The ultimate issuances of shares, if any, will be determined based
on achievement of objectives during the performance period.
Expense recognized for the various performance-contingent grants amounted to $3.4 million in 2009,
$1.9 million in 2008 and $1.5 million in 2007. With the exception of the market-based award, in the
event performance goals are not met compensation cost is not recognized and any previously
recognized compensation cost is reversed.
A summary of the activity pertaining to the maximum number of shares that may be issued under both
the Cyclical 3-year Plans and the Special Bonus Program is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant |
|
|
Share Units |
|
Date Fair Value |
Non-vested at January 3, 2009 |
|
|
569,803 |
|
|
$ |
49.50 |
|
Granted |
|
|
534,692 |
|
|
|
29.15 |
|
Vested |
|
|
(38,278 |
) |
|
|
52.20 |
|
Forfeited |
|
|
(307,069 |
) |
|
|
48.54 |
|
|
|
|
Non-vested at January 2, 2010 |
|
|
759,148 |
|
|
$ |
35.14 |
|
|
|
|
EQUITY OPTION In January 2009, the Company purchased from financial institutions over the counter
15 month capped call options, subject to adjustments for standard anti-dilution provisions, on
3 million shares of its common stock for an aggregate premium of $16.4 million, or an average of
$5.47 per option. The purpose of the capped call options is to reduce share price volatility on
potential future share repurchases by establishing the prices at which the Company may elect to
repurchase 3 million shares in the 15 month term. In accordance with ASC 815-40 the premium paid
was recorded as a reduction to Shareowners equity. The contracts for each of the three series of options
generally provide that the options may, at the Companys election, be cash settled, physically
settled or net-share settled (the default settlement method). Each series of options has various
expiration dates within the month of March 2010. The options will be automatically exercised if the
market price of the Companys common stock on the relevant expiration date is greater than the
applicable lower strike price (i.e. the options are in-the-money). If the market price of the
Companys common stock at the expiration date is below the applicable lower strike price, the
relevant options will expire with no value. If the market price of the Companys common stock on
the relevant expiration date is between the applicable lower and upper strike prices, the value per
option to the Company will be the then-current market price less that lower strike price. If the
market price of the Companys common stock is above the applicable upper strike price, the value
per option to the Company will be the difference between the applicable upper strike price and
lower strike price.
In August 2009, the Company and one counter-party to the transaction agreed to terminate 886,629
options. The options were cash settled using an average share price of $41.29, resulting in a $7.2
million cash receipt and a corresponding increase to Additional paid-in capital.
In December 2009, the Company and the two remaining counter-parties to the transactions agreed to
terminate 1,000,000 options each. The options were net-share settled using an average share price
of $49.67 and $49.32, respectively. The terminations occurred above the upper strike price,
maximizing the intrinsic value of the contracts. These terminations resulted in 513,277 shares
being delivered to the Company which was recorded to Shareowners equity.
The aggregate fair value of the remaining 113,371 options outstanding at January 2, 2010 was
$1.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Per Share) |
|
|
|
|
|
|
(Per Share) |
|
|
|
Original Number |
|
|
Net Premium |
|
|
Initial |
|
|
Initial Lower |
|
|
Initial Upper |
|
|
Number of |
|
|
Average |
|
Series |
|
of Options |
|
|
Paid (Millions of Dollars) |
|
|
Hedge Price |
|
|
Strike Price |
|
|
Strike Price |
|
|
Unwound Options |
|
|
Settlement Amount |
|
Series I |
|
|
1,000,000 |
|
|
$ |
5.5 |
|
|
$ |
32.97 |
|
|
$ |
31.33 |
|
|
$ |
46.16 |
|
|
|
1,000,000 |
|
|
$ |
12.67 |
|
Series II |
|
|
1,000,000 |
|
|
$ |
5.5 |
|
|
$ |
32.80 |
|
|
$ |
31.16 |
|
|
$ |
45.92 |
|
|
|
886,629 |
|
|
$ |
8.17 |
|
Series III |
|
|
1,000,000 |
|
|
$ |
5.4 |
|
|
$ |
32.73 |
|
|
$ |
31.10 |
|
|
$ |
45.83 |
|
|
|
1,000,000 |
|
|
$ |
12.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000 |
|
|
$ |
16.4 |
|
|
$ |
32.84 |
|
|
$ |
31.19 |
|
|
$ |
45.97 |
|
|
|
2,886,629 |
|
|
$ |
11.31 |
|
72
K. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) at the end of each fiscal year was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Currency translation adjustment |
|
$ |
15.1 |
|
|
$ |
(67.2 |
) |
|
$ |
98.8 |
|
Pension loss, net of tax |
|
|
(84.6 |
) |
|
|
(83.0 |
) |
|
|
(42.2 |
) |
Fair value of net investment hedge effectiveness, net of tax |
|
|
(11.8 |
) |
|
|
(6.6 |
) |
|
|
(14.5 |
) |
Fair value of cash flow hedge effectiveness, net of tax |
|
|
4.8 |
|
|
|
4.8 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
(76.5 |
) |
|
$ |
(152.0 |
) |
|
$ |
47.2 |
|
|
|
|
|
|
|
|
|
|
|
L. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Substantially all U.S. employees may contribute from 1% to
15% of their eligible compensation to a tax-deferred 401(k) savings plan, subject to restrictions
under tax laws. Employees generally direct the investment of their own contributions into various
investment funds. In 2009, an employer match benefit was provided under the plan equal to
one-quarter of each employees tax-deferred contribution up to the first 7% of their compensation.
In 2008 and 2007, an employer match benefit was provided under the plan equal to one-half of each
employees tax-deferred contribution up to the first 7% of their compensation. Participants direct
the entire employer match benefit such that no participant is required to hold the Companys common
stock in their 401(k) account. The employer match benefit totaled $3.9 million, $10.4 million and
$8.4 million, in 2009, 2008 and 2007, respectively. In addition to the regular employer match, in
2009 the Company made an additional $0.9 million contribution to employees accounts based on 2009
forfeitures and a surplus resulting from appreciation of the Companys share value.
In addition, approximately 3,500 U.S. salaried and non-union hourly employees are eligible to
receive a non-contributory benefit under the Cornerstone plan. Cornerstone benefit allocations
range from 3% to 9% of eligible employee compensation based on age. Approximately 1,100 U.S.
employees are eligible to receive an additional average 1.7% contribution actuarially designed to
replace previously curtailed pension benefits. Allocations for benefits earned under the
Cornerstone plan, which were suspended in 2009, were $15.6 million in 2008 and $13.8 million in
2007. Assets held in participant Cornerstone accounts are invested in target date retirement funds
which have an age-based mix of investments.
Shares of the Companys common stock held by the ESOP were purchased with the proceeds of external
borrowings in 1989 and borrowings from the Company in 1991 (1991 internal loan). The external
ESOP borrowings, which were fully repaid in 2009, were guaranteed by the Company and were included
in Long-term debt. Shareowners equity reflects a reduction equal to the cost basis of unearned
(unallocated) shares purchased with the internal and the external borrowings.
The Company accounts for the ESOP under ASC 718-40, Compensation Stock Compensation Employee
Stock Ownership Plans. Net ESOP activity recognized is comprised of the cost basis of shares
released, the cost of the aforementioned Cornerstone and 401(k) match defined contribution
benefits, interest expense on the external 1989 borrowing, less the fair value of shares released
and dividends on unallocated ESOP shares. The Companys net ESOP activity resulted in income of
$8.0 million in 2009, expense of $10.6 million in 2008 and expense of $1.6 million in 2007. ESOP
expense is affected by the market value of the Companys common stock on the monthly dates when
shares are released. The market value of shares released averaged $39.37 per share in 2009, $43.65
per share in 2008 and $56.04 in 2007.
Unallocated shares are released from the trust based on current period debt principal and interest
payments as a percentage of total future debt principal and interest payments. Dividends on both
allocated and unallocated shares may be used for debt service and to credit participant accounts
for dividends earned on allocated shares. Dividends paid on the shares acquired with the 1991
internal loan were used solely to pay internal loan debt service in all periods. Dividends on ESOP
shares, which are charged to shareowners equity as declared, were $10.3 million in 2009, $9.7
million in 2008 and $11.0 million in 2007. Dividends on ESOP shares were utilized entirely for debt
service in all years. Interest costs incurred by the ESOP on the 1989 external debt in 2009, 2008
and 2007 were nominal in 2009 and were $0.2 million and $0.3 million in 2008 and 2007,
respectively. Interest costs incurred by the ESOP on the 1991 internal loan, which have no earnings
impact, were $8.1 million, $8.4 million and $8.7 million for 2009, 2008, and 2007, respectively.
Both allocated and unallocated ESOP shares are treated as outstanding for purposes of computing
earnings per share. As of January 2, 2010, the number of ESOP shares allocated to participant
accounts was 3,324,792 and the number of unallocated shares was 4,351,885. At January 2, 2010,
there were 31,398 released shares in the ESOP trust holding account pending allocation. The Company
made cash contributions to the ESOP totaling $11.4 million in 2009, $15.6 million in 2008 and $11.7
million in 2007.
73
PENSION AND OTHER BENEFIT PLANS The Company sponsors pension plans covering most domestic hourly
and certain executive employees, and approximately 4,600 foreign employees. Benefits are generally
based on salary and years of service, except for U.S. collective bargaining employees whose
benefits are based on a stated amount for each year of service.
The Company contributes to multi-employer plans for certain collective bargaining U.S. employees.
In addition, various other defined contribution plans are sponsored worldwide. The expense for such
defined contribution plans, aside from the earlier discussed ESOP plans, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2007 |
Multi-employer plan expense |
|
$ |
0.5 |
|
|
$ |
0.6 |
|
|
$ |
0.5 |
|
Other defined contribution plan expense |
|
$ |
3.3 |
|
|
$ |
5.0 |
|
|
$ |
6.5 |
|
The components of net periodic pension expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
2.6 |
|
|
$ |
2.7 |
|
|
$ |
2.7 |
|
|
$ |
3.8 |
|
|
$ |
4.7 |
|
|
$ |
4.4 |
|
Interest cost |
|
|
9.8 |
|
|
|
9.8 |
|
|
|
9.0 |
|
|
|
13.3 |
|
|
|
15.4 |
|
|
|
15.0 |
|
Expected return on plan assets |
|
|
(6.7 |
) |
|
|
(10.3 |
) |
|
|
(9.8 |
) |
|
|
(14.9 |
) |
|
|
(19.0 |
) |
|
|
(18.2 |
) |
Amortization of prior service cost |
|
|
1.2 |
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Transition amount amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Actuarial loss amortization |
|
|
2.9 |
|
|
|
|
|
|
|
0.6 |
|
|
|
2.4 |
|
|
|
3.9 |
|
|
|
6.3 |
|
Settlement /curtailment loss (gain) |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
(1.7 |
) |
|
|
1.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
11.0 |
|
|
$ |
3.6 |
|
|
$ |
4.0 |
|
|
$ |
3.1 |
|
|
$ |
6.2 |
|
|
$ |
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides medical and dental benefits for certain retired employees in the United
States. In addition, certain U.S. employees who retire from active service are eligible for life
insurance benefits. Approximately 6,800 participants are covered under these plans. Net periodic
post-retirement benefit expense was $1.8 million in 2009, $1.9 million in 2008 and $2.2 million in
2007.
Changes in plan assets and benefit obligations recognized in other comprehensive income in 2009 are
as follows:
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
Current year actuarial loss |
|
$ |
(1.9 |
) |
Amortization of actuarial loss |
|
|
(5.2 |
) |
Amortization of prior service costs |
|
|
(1.0 |
) |
Amortization of transition obligation |
|
|
(0.1 |
) |
Currency /other |
|
|
9.0 |
|
|
|
|
|
Total loss recognized in other comprehensive income (pre-tax) |
|
$ |
0.8 |
|
|
|
|
|
The amounts in Accumulated other comprehensive loss expected to be recognized as components of net
periodic benefit costs during 2009 total $7.2 million, representing amortization of $6.4 million of
actuarial loss, $0.7 million of prior service cost, and $0.1 million of transition obligation.
The Company uses a fiscal year end date to value all its plans. The changes in the pension and
other post-retirement benefit obligations, fair value of plan assets as well as amounts recognized
in the Consolidated Balance Sheets, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
Other Benefits |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of prior year |
|
$ |
166.9 |
|
|
$ |
155.5 |
|
|
$ |
217.2 |
|
|
$ |
299.5 |
|
|
$ |
23.0 |
|
|
$ |
24.5 |
|
Service cost |
|
|
2.6 |
|
|
|
2.7 |
|
|
|
3.8 |
|
|
|
4.7 |
|
|
|
0.8 |
|
|
|
1.0 |
|
Interest cost |
|
|
9.8 |
|
|
|
9.8 |
|
|
|
13.3 |
|
|
|
15.4 |
|
|
|
1.3 |
|
|
|
1.4 |
|
Settlements / curtailments |
|
|
0.4 |
|
|
|
|
|
|
|
(6.9 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
Actuarial (gain) loss |
|
|
5.5 |
|
|
|
8.4 |
|
|
|
20.1 |
|
|
|
(22.4 |
) |
|
|
0.7 |
|
|
|
(1.0 |
) |
Plan amendments |
|
|
0.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
Foreign currency exchange rates |
|
|
|
|
|
|
|
|
|
|
22.6 |
|
|
|
(64.0 |
) |
|
|
|
|
|
|
|
|
Participant contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Acquisitions, divestitures and other |
|
|
0.3 |
|
|
|
|
|
|
|
1.1 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(9.7 |
) |
|
|
(10.6 |
) |
|
|
(14.6 |
) |
|
|
(15.0 |
) |
|
|
(2.8 |
) |
|
|
(2.9 |
) |
|
|
|
Benefit obligation at end of year |
|
$ |
176.1 |
|
|
$ |
166.9 |
|
|
$ |
256.6 |
|
|
$ |
217.2 |
|
|
$ |
23.0 |
|
|
$ |
23.0 |
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
Other Benefits |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of prior year |
|
$ |
90.5 |
|
|
$ |
129.0 |
|
|
$ |
174.9 |
|
|
$ |
281.4 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
21.0 |
|
|
|
(34.7 |
) |
|
|
26.8 |
|
|
|
(36.6 |
) |
|
|
|
|
|
|
|
|
Participant contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
6.9 |
|
|
|
6.8 |
|
|
|
7.7 |
|
|
|
8.6 |
|
|
|
2.8 |
|
|
|
2.9 |
|
Settlements |
|
|
|
|
|
|
|
|
|
|
(4.6 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
|
|
|
|
20.2 |
|
|
|
(59.4 |
) |
|
|
|
|
|
|
|
|
Acquisitions, divestitures and other |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(9.7 |
) |
|
|
(10.6 |
) |
|
|
(14.6 |
) |
|
|
(15.0 |
) |
|
|
(2.8 |
) |
|
|
(2.9 |
) |
|
|
|
Fair value of plan assets at end of plan year |
|
$ |
108.7 |
|
|
$ |
90.5 |
|
|
$ |
210.8 |
|
|
$ |
174.9 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Funded status assets less than benefit obligation |
|
$ |
(67.4 |
) |
|
$ |
(76.4 |
) |
|
$ |
(45.8 |
) |
|
$ |
(42.3 |
) |
|
$ |
(23.0 |
) |
|
$ |
(23.0 |
) |
Unrecognized prior service cost (credit) |
|
|
4.8 |
|
|
|
6.5 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
Unrecognized net actuarial loss |
|
|
35.7 |
|
|
|
47.5 |
|
|
|
79.1 |
|
|
|
65.7 |
|
|
|
1.2 |
|
|
|
0.3 |
|
Unrecognized net transition liability |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(26.9 |
) |
|
$ |
(22.4 |
) |
|
$ |
34.3 |
|
|
$ |
24.5 |
|
|
$ |
(22.7 |
) |
|
$ |
(23.7 |
) |
|
|
|
Amounts recognized in the Consolidated Balance
Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost (non-current) |
|
$ |
|
|
|
$ |
|
|
|
$ |
4.4 |
|
|
$ |
4.2 |
|
|
$ |
|
|
|
$ |
|
|
Current benefit liability |
|
|
(2.7 |
) |
|
|
(2.8 |
) |
|
|
(1.2 |
) |
|
|
(1.7 |
) |
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Non-current benefit liability |
|
|
(64.7 |
) |
|
|
(73.6 |
) |
|
|
(49.0 |
) |
|
|
(44.8 |
) |
|
|
(21.0 |
) |
|
|
(21.0 |
) |
|
|
|
Net asset (liability) recognized |
|
$ |
(67.4 |
) |
|
$ |
(76.4 |
) |
|
$ |
(45.8 |
) |
|
$ |
(42.3 |
) |
|
$ |
(23.0 |
) |
|
$ |
(23.0 |
) |
|
|
|
Accumulated other comprehensive loss (pre-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit) |
|
$ |
4.8 |
|
|
$ |
6.5 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
(0.9 |
) |
|
$ |
(1.0 |
) |
Actuarial loss |
|
|
35.7 |
|
|
|
47.5 |
|
|
|
79.1 |
|
|
|
65.7 |
|
|
|
1.2 |
|
|
|
0.3 |
|
Transition liability |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40.5 |
|
|
$ |
54.0 |
|
|
$ |
80.1 |
|
|
$ |
66.8 |
|
|
$ |
0.3 |
|
|
$ |
(0.7 |
) |
|
|
|
Net amount recognized |
|
$ |
(26.9 |
) |
|
$ |
(22.4 |
) |
|
$ |
34.3 |
|
|
$ |
24.5 |
|
|
$ |
(22.7 |
) |
|
$ |
(23.7 |
) |
|
|
|
In 2009, the increase of the projected benefit obligation for actuarial losses in the non-U.S.
plans primarily pertains to increased salary rates used to measure the pension liabilities. The
decrease of the projected benefit obligation for actuarial losses in the U.S. plans primarily
relates to decreased discount rates used to measure the pension liability.
The accumulated benefit obligation for all defined benefit pension plans was $412.1 million at
January 2, 2010 and $366.3 million at January 3, 2009. Information regarding pension plans in which
accumulated benefit obligations exceed plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Projected benefit obligation |
|
$ |
176.1 |
|
|
$ |
166.9 |
|
|
$ |
215.9 |
|
|
$ |
184.4 |
|
Accumulated benefit obligation |
|
$ |
174.7 |
|
|
$ |
163.9 |
|
|
$ |
200.9 |
|
|
$ |
172.5 |
|
Fair value of plan assets |
|
$ |
108.7 |
|
|
$ |
90.5 |
|
|
$ |
165.7 |
|
|
$ |
138.0 |
|
Information regarding pension plans in which projected benefit obligations (inclusive of
anticipated future compensation increases) exceed plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
(Millions of Dollars) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Projected benefit obligation |
|
$ |
176.1 |
|
|
$ |
166.9 |
|
|
$ |
215.9 |
|
|
$ |
185.0 |
|
Accumulated benefit obligation |
|
$ |
174.7 |
|
|
$ |
163.9 |
|
|
$ |
200.9 |
|
|
$ |
173.0 |
|
Fair value of plan assets |
|
$ |
108.7 |
|
|
$ |
90.5 |
|
|
$ |
165.7 |
|
|
$ |
138.5 |
|
75
The major assumptions used in valuing pension and post-retirement plan obligations and net costs
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
U.S. Plans |
|
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
Weighted-average
assumptions used to determine
benefit obligations at year
end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.0 |
% |
|
|
6.5 |
% |
|
|
5.75 |
% |
|
|
6.0 |
% |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
Rate of compensation increase |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
4.25 |
% |
|
|
3.5 |
% |
|
|
3.75 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
Weighted-average assumptions
used to determine net
periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.0 |
% |
|
|
6.5 |
% |
|
|
5.75 |
% |
|
|
6.0 |
% |
|
|
5.5 |
% |
|
|
4.75 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
Rate of compensation increase |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
3.5 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
Expected return on plan assets |
|
|
7.5 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
6.75 |
% |
|
|
7.5 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets is determined considering the returns
projected for the various asset classes and the relative weighting for each asset class as
reflected in the target asset allocation below. In addition the Company considers historical
performance, the opinions of outside actuaries and other data in developing the return assumption.
The Company expects to use a weighted-average long-term rate of return assumption of 7.5% for the
U.S. plans and 6.75% for the non-U.S. plans in the determination of fiscal 2010 net periodic
benefit expense.
PENSION PLAN ASSETS Plan assets are invested in equity securities, government and corporate bonds
and other fixed income securities, money market instruments and insurance contracts. The Companys
worldwide asset allocations at January 2, 2010 and January 3, 2009 by asset category and the level
of the valuation inputs within the fair value hierarchy established by ASC 820 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets |
|
2009 Fair Value Hierarch Level |
Asset Category |
|
2009 |
|
2008 |
|
Level 1 |
|
Level 2 |
Cash and cash equivalents |
|
$ |
3.0 |
|
|
$ |
48.1 |
|
|
$ |
3.0 |
|
|
$ |
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity securities |
|
|
69.4 |
|
|
|
38.2 |
|
|
|
6.6 |
|
|
|
62.8 |
|
Foreign equity securities |
|
|
125.8 |
|
|
|
89.6 |
|
|
|
23.1 |
|
|
|
102.7 |
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities |
|
|
62.4 |
|
|
|
51.4 |
|
|
|
23.8 |
|
|
|
38.6 |
|
Corporate securities |
|
|
42.7 |
|
|
|
22.4 |
|
|
|
18.7 |
|
|
|
24.0 |
|
Insurance contracts |
|
|
16.2 |
|
|
|
15.7 |
|
|
|
|
|
|
|
16.2 |
|
|
|
|
Total |
|
$ |
319.5 |
|
|
$ |
265.4 |
|
|
$ |
75.2 |
|
|
$ |
244.3 |
|
U.S. and foreign equity securities primarily consist of companies with large market
capitalizations. Government securities consist of U.S. Treasury securities and foreign government
securities with deminimus default risk. Corporate fixed income securities include publicly traded
U.S. and foreign investment grade and high yield securities. Assets held in insurance contracts
are invested in the general asset pools of the various insurers, mainly debt and equity securities
with guaranteed returns.
The Companys investment strategy for pension plan assets includes diversification to minimize
interest and market risks, and generally does not involve the use of derivative financial
instruments. Plan assets are rebalanced periodically to maintain target asset allocations.
Currently, the Companys target allocations include 50%-70% in equity securities, 20%-40% in fixed
income securities and up to 10% in other securities. Maturities of investments are not necessarily
related to the timing of expected future benefit payments, but adequate liquidity to make immediate
and medium term benefit payments is ensured.
CONTRIBUTIONS The Companys 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. The Company expects to contribute approximately $17 million
to its pension and other post-retirement benefit plans in 2010.
76
EXPECTED FUTURE BENEFIT PAYMENTS Benefit payments, inclusive of amounts attributable to estimated
future employee service, are expected to be paid as follows over the next 10 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Total |
|
Year 1 |
|
Year 2 |
|
Year 3 |
|
Year 4 |
|
Year 5 |
|
Years 6-10 |
Future payments |
|
$ |
320.2 |
|
|
$ |
30.5 |
|
|
$ |
29.9 |
|
|
$ |
27.6 |
|
|
$ |
29.1 |
|
|
$ |
30.6 |
|
|
$ |
172.5 |
|
These benefit payments will be funded through a combination of existing plan assets and amounts to
be contributed in the future by the Company.
HEALTH CARE COST TRENDS 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 9.0% for 2010, reducing
gradually to 6.0% by 2015 and remaining at that level thereafter. A one percentage point change in
the assumed health care cost trend rate would have an immaterial effect on the net periodic
post-retirement benefit cost and the post-retirement benefit obligation as of January 2, 2010.
M. FAIR VALUE MEASUREMENTS
ASC 820 defines, establishes a consistent framework for measuring, and expands disclosure
requirements about fair value. ASC 820 requires the Company to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the
Companys market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs and significant value drivers are observable.
Level 3 Instruments that are valued using unobservable inputs.
The Company holds various derivative financial instruments that are employed to manage risks,
including foreign currency and interest rate exposures. These financial instruments are carried at
fair value and are included within the scope of ASC 820. The Company determines the fair value of
derivatives through the use of matrix or model pricing, which utilizes verifiable inputs such as
market interest and currency rates. When determining the fair value of these financial instruments
for which Level 1 evidence does not exist, the Company considers various factors including the
following: exchange or market price quotations of similar instruments, time value and volatility
factors, the Companys own credit rating and the credit rating of the counter-party.
The following table presents the fair value and the hierarchy levels, for financial assets and
liabilities that are measured at fair value on a recurring basis (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying |
|
|
|
|
|
|
|
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
January 2, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
33.3 |
|
|
$ |
|
|
|
$ |
33.3 |
|
|
$ |
|
|
Derivatives liabilities |
|
$ |
84.7 |
|
|
$ |
|
|
|
$ |
84.7 |
|
|
$ |
|
|
Money market fund |
|
$ |
210.8 |
|
|
$ |
210.8 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
31.8 |
|
|
$ |
|
|
|
$ |
31.8 |
|
|
$ |
|
|
Derivatives liabilities |
|
$ |
84.2 |
|
|
$ |
|
|
|
$ |
84.2 |
|
|
$ |
|
|
The following table presents the fair value and the hierarchy levels, for assets and liabilities
that were measured at fair value on a non-recurring basis during 2009 (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains |
|
|
|
Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) |
|
|
|
January 2, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Year to Date |
|
Long-lived assets held and used |
|
$ |
11.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11.0 |
|
|
$ |
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
In accordance with the provisions of ASC 820, long-lived assets with a carrying amount of $14.5
million were written down to $11.0 million fair value during the twelve months ended January 2,
2010. This was a result of restructuring related asset impairments more fully described in Note O,
Restructuring and Asset Impairments. Fair value for these impaired production assets was based on
the present value of discounted cash flows. This included an estimate for future cash flows as
production activities are phased out as well as auction values (prices for similar assets) for
assets where use has been discontinued or future cash flows are minimal.
A summary of the Companys financial instruments carrying and fair values at January 2, 2010 and
January 3, 2009 follows. Refer to Note I, Derivative Financial Instruments for more details
regarding derivative financial instruments, and Note H, Long-Term Debt and Financing Arrangements
for more information regarding carrying values of the Long-term debt shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
(millions of dollars), (asset)/liability |
|
Value |
|
Value |
|
Value |
|
Value |
Long-term
debt, including current portion |
|
$ |
1,292.7 |
|
|
$ |
1,282.3 |
|
|
$ |
1,397.7 |
|
|
$ |
1,106.5 |
|
Derivative assets |
|
$ |
(33.3 |
) |
|
$ |
(33.3 |
) |
|
$ |
(31.8 |
) |
|
$ |
(31.8 |
) |
Derivative liabilities |
|
$ |
84.7 |
|
|
$ |
84.7 |
|
|
$ |
84.2 |
|
|
$ |
84.2 |
|
The fair values of Long-term debt instruments are estimated using a discounted cash flow analysis,
based on the Companys marginal borrowing rates. The fair values of foreign currency and interest
rate swap agreements, comprising the derivative assets and liabilities in the table above, are
based on current settlement values.
N. OTHER COSTS AND EXPENSES
Other-net is primarily comprised of intangible asset amortization expense, gains and losses on
asset dispositions, currency impact, environmental expense and acquisition related expenses.
Research and development costs were $18.3 million, $25.4 million and $24.5 million for fiscal years
2009, 2008 and 2007, respectively.
O. RESTRUCTURING AND ASSET IMPAIRMENTS
At January 2, 2010, the Companys restructuring reserve balance was $46.4 million, the vast
majority of which is expected to be utilized in 2010. A summary of the restructuring reserve
activity from January 3, 2009 to January 2, 2010 is as follows (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Additions/ |
|
|
|
|
|
|
|
|
|
|
|
|
1/3/09 |
|
|
Accrual |
|
|
(Reversals) |
|
|
Usage |
|
|
Currency |
|
|
1/2/10 |
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
$ |
10.8 |
|
|
$ |
(1.7 |
) |
|
$ |
|
|
|
$ |
(4.1 |
) |
|
$ |
(0.3 |
) |
|
$ |
4.7 |
|
Facility closure |
|
|
1.8 |
|
|
|
1.7 |
|
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal acquisitions |
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
(5.7 |
) |
|
|
(0.3 |
) |
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Actions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
|
|
|
|
|
|
|
|
|
42.4 |
|
|
|
(18.1 |
) |
|
|
0.3 |
|
|
|
24.6 |
|
Asset impairments |
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
Facility closure |
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2009 actions |
|
|
|
|
|
|
|
|
|
|
48.6 |
|
|
|
(24.1 |
) |
|
|
0.3 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-2009 Actions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs |
|
|
54.1 |
|
|
|
|
|
|
|
(7.6 |
) |
|
|
(31.2 |
) |
|
|
(0.3 |
) |
|
|
15.0 |
|
Asset impairments |
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
Other |
|
|
1.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Pre-2009 actions |
|
|
55.3 |
|
|
|
|
|
|
|
(7.9 |
) |
|
|
(32.1 |
) |
|
|
(0.3 |
) |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
67.9 |
|
|
$ |
|
|
|
$ |
40.7 |
|
|
$ |
(61.9 |
) |
|
$ |
(0.3 |
) |
|
$ |
46.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
2009 Actions: In response to further sales volume declines associated with the economic recession,
the Company initiated various cost reduction programs in 2009. Severance charges of $42.4 million
were recorded relating to the reduction of approximately 1,500 employees. In addition, $4.0 million
in charges were recognized for asset impairments related to closing several small distribution
centers, consolidating production facilities, and exiting certain businesses. Facility closure
costs totaled $1.8 million. Also, $0.4 million in other charges stemmed mainly from the termination
of service contracts. Of the $48.6 million recognized for these actions, $24.1 million has been
utilized to date, with $24.8 million of reserves remaining as of January 2, 2010. Of the charges
recognized in 2009, $9.7 million pertains to the Security segment; $21.4 million to the Industrial
segment; $15.5 million to the CDIY segment; and $2.0 million to non-operating entities
Pre-2009 Actions: During 2008, the Company initiated cost reduction actions in order to maintain
its cost competitiveness. A large portion of these actions were initiated in the fourth quarter as
the Company responded to deteriorating macro-economic conditions and slowing global demand,
primarily in its CDIY and Industrial segments. Severance charges of $70.0 million were recorded
relating to the reduction of approximately 2,700 employees. In addition, $13.6 million in charges
were recognized related to asset impairments for production assets and real estate, and
$0.7 million for facility closure costs. Also, $1.2 million in other charges stemmed from the
termination of service contracts. Of the $85.5 million in full year 2008 restructuring and asset
impairment charges, $13.8 million, $29.7 million, $35.6 million, and $6.4 million pertained to the
Security, Industrial, and CDIY segments, and non-operating entities, respectively. During 2007, the
Company also initiated $11.8 million of cost reduction actions in various businesses entailing
severance for 525 employees and the exit of a leased facility.
As of January 3, 2009, the reserve balance related to these prior actions totaled $55.3 million of
which $32.1 million was utilized in 2009. In addition, $7.6 million of severance-related costs
accrued prior to 2009 were reversed in 2009 due in part to a reduction in the number of employee
terminations pertaining to recent changes in regional European labor statutes. The remaining
reserve balance of $15.0 million predominantly relates to actions in Europe and is expected to be
utilized in 2010.
Acquisition Related: During 2009, $2.7 million of reserves were established for acquisitions
consummated in the latter half of 2008 primarily related to the consolidation of security
monitoring call centers. Of this amount, $1.0 million was for the severance of approximately
90 employees and $1.7 million related to the closure of a branch facility, primarily from remaining
lease obligations. In 2009, $2.7 million of severance reserves previously established in purchase
accounting that are no longer needed were reversed to goodwill. The Company utilized $5.7 million
of the restructuring reserves during 2009 established for previous acquisitions. As of January 2,
2010, $6.6 million in acquisition-related accruals remain. Those accruals are expected to be
utilized predominantly in 2010.
P. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Security segment is a provider of access and security solutions primarily for retailers,
educational, financial and healthcare institutions, as well as commercial, governmental and
industrial customers. The Company provides an extensive suite of mechanical and electronic security
products and systems, and a variety of security services. These include security integration
systems, software, related installation, maintenance, monitoring services, automatic doors, door
closers, exit devices, healthcare storage and supply chain solutions, patient protection products,
hardware (includes hinges, gate hardware, cabinet pulls, hooks, braces and shelf brackets) and
locking mechanisms. Security products are sold primarily on a direct sales basis, and in certain
instances, through third party distributors. The Industrial segment manufactures and markets:
professional industrial and automotive mechanics tools and storage systems; hydraulic tools and
accessories; plumbing, heating and air conditioning tools; assembly tools and systems; and
specialty tools. These products are sold to industrial customers and distributed primarily through
third party distributors as well as direct sales forces. The Construction and Do-It-Yourself
(CDIY) segment manufactures and markets hand tools, consumer mechanics tools, storage systems,
and pneumatic tools and fasteners. These products are sold to professional end users,
distributors, as well as consumers, and are distributed through retailers (including home centers,
mass merchants, hardware stores, and retail lumber yards).
The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A
inclusive of the provision for doubtful accounts (aside from corporate overhead expense), and
segment profit as a percentage of net sales to assess the profitability of each segment. Segment
profit excludes the corporate overhead expense element of SG&A, interest income, interest expense,
other-net (inclusive of intangible asset amortization expense), restructuring, and income tax
expense. Refer to Note O, Restructuring and Asset Impairments for the amount of restructuring
charges and asset impairments by segment, and to Note F, Goodwill and Other Intangible Assets for
intangible amortization expense by segment. Corporate overhead is comprised of world headquarters
facility expense, cost for the executive management team and cost for certain centralized functions
that benefit the entire Company but are not directly attributable to the businesses, such as legal
and corporate finance functions. Transactions 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.
79
Corporate assets and unallocated assets are cash and deferred
income taxes. Geographic net sales and long-lived assets are attributed to the geographic regions
based on the geographic location of each Company subsidiary.
The following information excludes the CST/berger laser leveling and measuring business, as well as
three other smaller businesses, which are classified as discontinued operations as disclosed in
Note T, Discontinued Operations, unless otherwise noted.
BUSINESS SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
$ |
1,560.2 |
|
|
$ |
1,497.2 |
|
|
$ |
1,399.5 |
|
Industrial |
|
|
881.6 |
|
|
|
1,273.5 |
|
|
|
1,245.8 |
|
CDIY |
|
|
1,295.3 |
|
|
|
1,655.5 |
|
|
|
1,715.2 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,737.1 |
|
|
$ |
4,426.2 |
|
|
$ |
4,360.5 |
|
|
|
|
|
|
|
|
|
|
|
Segment Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
$ |
307.0 |
|
|
$ |
268.7 |
|
|
$ |
239.9 |
|
Industrial |
|
|
89.3 |
|
|
|
164.2 |
|
|
|
182.7 |
|
CDIY |
|
|
154.1 |
|
|
|
190.7 |
|
|
|
254.2 |
|
|
|
|
|
|
|
|
|
|
|
Segment Profit |
|
|
550.4 |
|
|
|
623.6 |
|
|
|
676.8 |
|
Corporate overhead |
|
|
(70.5 |
) |
|
|
(59.8 |
) |
|
|
(62.2 |
) |
Other-net |
|
|
(139.1 |
) |
|
|
(111.6 |
) |
|
|
(84.8 |
) |
Restructuring charges and asset impairments |
|
|
(40.7 |
) |
|
|
(85.5 |
) |
|
|
(12.8 |
) |
Gain on debt extinguishment |
|
|
43.8 |
|
|
|
9.4 |
|
|
|
|
|
Interest income |
|
|
3.1 |
|
|
|
9.2 |
|
|
|
5.1 |
|
Interest expense |
|
|
(63.7 |
) |
|
|
(92.1 |
) |
|
|
(92.8 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
$ |
283.3 |
|
|
$ |
293.2 |
|
|
$ |
429.3 |
|
|
|
|
|
|
|
|
|
|
|
Capital and Software Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
$ |
33.6 |
|
|
$ |
52.6 |
|
|
$ |
27.1 |
|
Industrial |
|
|
21.1 |
|
|
|
38.5 |
|
|
|
19.5 |
|
CDIY |
|
|
38.7 |
|
|
|
49.3 |
|
|
|
39.3 |
|
Discontinued operations |
|
|
|
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
93.4 |
|
|
$ |
140.8 |
|
|
$ |
86.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
$ |
131.9 |
|
|
$ |
108.6 |
|
|
$ |
90.0 |
|
Industrial |
|
|
27.0 |
|
|
|
30.3 |
|
|
|
25.9 |
|
CDIY |
|
|
41.2 |
|
|
|
42.2 |
|
|
|
42.8 |
|
Discontinued operations |
|
|
|
|
|
|
1.9 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
200.1 |
|
|
$ |
183.0 |
|
|
$ |
162.2 |
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
$ |
2,430.9 |
|
|
$ |
2,378.6 |
|
|
|
|
|
Industrial |
|
|
1,069.1 |
|
|
|
1,218.5 |
|
|
|
|
|
CDIY |
|
|
819.5 |
|
|
|
959.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,319.5 |
|
|
|
4,556.9 |
|
|
|
|
|
Corporate assets |
|
|
449.6 |
|
|
|
309.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
4,769.1 |
|
|
$ |
4,866.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to The Home Depot were 14%, 13% and 16% of the CDIY segment net sales in 2009, 2008 and 2007,
respectively.
80
GEOGRAPHIC AREAS
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2,168.0 |
|
|
$ |
2,514.3 |
|
|
$ |
2,535.0 |
|
Other Americas |
|
|
352.8 |
|
|
|
420.4 |
|
|
|
394.8 |
|
France |
|
|
498.5 |
|
|
|
571.5 |
|
|
|
520.7 |
|
Other Europe |
|
|
505.3 |
|
|
|
680.9 |
|
|
|
664.5 |
|
Asia |
|
|
212.5 |
|
|
|
239.1 |
|
|
|
245.5 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,737.1 |
|
|
$ |
4,426.2 |
|
|
$ |
4,360.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant & Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
292.8 |
|
|
$ |
308.1 |
|
|
|
|
|
Other Americas |
|
|
26.5 |
|
|
|
21.2 |
|
|
|
|
|
France |
|
|
60.3 |
|
|
|
61.9 |
|
|
|
|
|
Other Europe |
|
|
108.6 |
|
|
|
108.1 |
|
|
|
|
|
Asia |
|
|
87.7 |
|
|
|
80.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
575.9 |
|
|
$ |
579.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q. INCOME TAXES
Significant components of the Companys deferred tax assets and liabilities at the end of each
fiscal year were as follows:
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
63.8 |
|
|
$ |
52.8 |
|
Amortization of intangibles |
|
|
153.2 |
|
|
|
149.0 |
|
Discharge of indebtedness |
|
|
15.5 |
|
|
|
|
|
Inventories |
|
|
4.7 |
|
|
|
4.4 |
|
Other |
|
|
13.5 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
250.7 |
|
|
$ |
227.0 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Employee benefit plans |
|
$ |
79.0 |
|
|
$ |
96.0 |
|
Doubtful accounts |
|
|
12.0 |
|
|
|
12.8 |
|
Accruals |
|
|
12.1 |
|
|
|
13.0 |
|
Restructuring charges |
|
|
13.0 |
|
|
|
16.0 |
|
Operating loss carryforwards |
|
|
27.7 |
|
|
|
22.2 |
|
Other |
|
|
53.2 |
|
|
|
55.1 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
197.0 |
|
|
$ |
215.1 |
|
Net Deferred Tax Liabilities before Valuation Allowance |
|
$ |
53.7 |
|
|
$ |
11.9 |
|
|
|
|
|
|
|
|
Valuation Allowance |
|
$ |
24.4 |
|
|
$ |
23.5 |
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities after Valuation Allowance |
|
$ |
78.1 |
|
|
$ |
35.4 |
|
|
|
|
|
|
|
|
The valuation allowance reducing the deferred tax asset is primarily attributable to foreign and
state loss carry-forwards to the amount that, based upon all available evidence, is more likely
than not to be realized. The U.S. federal, foreign and state operating loss carry-forwards expire
in various years beginning in 2010 or have indefinite carry-forwards.
81
The classification of deferred taxes as of January 2, 2010 and January 3, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
|
|
Tax Asset |
|
|
Tax Liability |
|
|
Tax Asset |
|
|
Tax Liability |
|
Current |
|
$ |
(15.3 |
) |
|
$ |
6.4 |
|
|
$ |
(38.1 |
) |
|
$ |
14.1 |
|
Non-current |
|
|
(33.4 |
) |
|
|
120.4 |
|
|
|
(60.1 |
) |
|
|
119.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(48.7 |
) |
|
$ |
126.8 |
|
|
$ |
(98.2 |
) |
|
$ |
133.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1.0 |
) |
|
$ |
27.0 |
|
|
$ |
52.1 |
|
Foreign |
|
|
21.1 |
|
|
|
38.0 |
|
|
|
13.8 |
|
State |
|
|
7.1 |
|
|
|
8.7 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
$ |
27.2 |
|
|
$ |
73.7 |
|
|
$ |
79.3 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
34.4 |
|
|
$ |
(0.9 |
) |
|
$ |
4.5 |
|
Foreign |
|
|
(5.0 |
) |
|
|
2.8 |
|
|
|
27.8 |
|
State |
|
|
(2.1 |
) |
|
|
(3.1 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
27.3 |
|
|
|
(1.2 |
) |
|
|
27.5 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes on continuing operations |
|
$ |
54.5 |
|
|
$ |
72.5 |
|
|
$ |
106.8 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid during 2009, 2008 and 2007 were $58.6 million, $134.4 million and $102.9 million,
respectively. During 2009, the Company had tax holidays in Thailand and China. Tax holidays
resulted in a reduction of tax expense amounting to $2.0 million in 2009, $2.7 million in 2008, and
$4.3 million in 2007. The tax holiday in Thailand is in place until 2010 while the tax holiday in
China expires between 2010 and 2015.
The reconciliation of the U.S. federal statutory income tax to the Income taxes on continuing
operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Tax at statutory rate |
|
$ |
99.2 |
|
|
$ |
102.6 |
|
|
$ |
150.2 |
|
State income taxes, net of federal benefits |
|
|
4.7 |
|
|
|
5.2 |
|
|
|
4.0 |
|
Difference between foreign and federal income tax |
|
|
(28.6 |
) |
|
|
(34.2 |
) |
|
|
(37.5 |
) |
Tax accrual reserve |
|
|
(8.3 |
) |
|
|
2.5 |
|
|
|
7.1 |
|
Tax audit settlements |
|
|
(8.8 |
) |
|
|
(3.0 |
) |
|
|
(4.5 |
) |
Income tax rate change |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(3.4 |
) |
Other-net |
|
|
(3.6 |
) |
|
|
(0.2 |
) |
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income taxes on continuing operations |
|
$ |
54.5 |
|
|
$ |
72.5 |
|
|
$ |
106.8 |
|
|
|
|
|
|
|
|
|
|
|
The components of earnings from continuing operations before income taxes consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
115.1 |
|
|
$ |
94.8 |
|
|
$ |
185.8 |
|
Foreign |
|
|
168.2 |
|
|
|
198.4 |
|
|
|
243.5 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
$ |
283.3 |
|
|
$ |
293.2 |
|
|
$ |
429.3 |
|
|
|
|
|
|
|
|
|
|
|
Undistributed foreign earnings of $868.6 million at January 2, 2010 are considered to be invested
indefinitely or will be remitted substantially free of additional tax. Accordingly, no provision
has been made for taxes that might be payable upon remittance of such earnings, nor is it
practicable to determine the amount of this liability.
82
As of the beginning of the 2007 fiscal year, the Company adopted the provisions of FIN 48
Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No. 109, as codified in
ASC 740, Income Taxes. Unrecognized tax benefits relate to U.S. and various foreign
jurisdictions. The following table summarizes the activity related to the unrecognized tax
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance at beginning of year |
|
$ |
47.8 |
|
|
$ |
49.1 |
|
|
$ |
54.0 |
|
Additions based on tax positions related to current year |
|
|
1.4 |
|
|
|
5.6 |
|
|
|
8.1 |
|
Additions based on tax positions related to prior years |
|
|
2.3 |
|
|
|
7.7 |
|
|
|
1.8 |
|
Reductions based on tax positions related to prior years |
|
|
(10.6 |
) |
|
|
(5.9 |
) |
|
|
(7.3 |
) |
Settlements |
|
|
(2.3 |
) |
|
|
|
|
|
|
(2.6 |
) |
Statute of limitations expirations |
|
|
(8.3 |
) |
|
|
(8.7 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
30.3 |
|
|
$ |
47.8 |
|
|
$ |
49.1 |
|
|
|
|
|
|
|
|
|
|
|
The gross unrecognized tax benefits at January 2, 2010, and January 3, 2009 includes $26.1 million
and $42.4 million, respectively, of tax benefits that, if recognized, would impact the effective
tax rate. The liability for potential penalties and interest related to unrecognized tax benefits
was decreased by $1.2 million in 2009 and increased by $1.3 million and $1.5 million in
2008 and 2007, respectively. The liability for potential penalties and interest totaled
$4.4 million as of January 2, 2010 and $5.9 million as of January 3, 2009. The Company classifies
all tax-related interest and penalties as income tax expense.
It is reasonably possible the Company may recognize up to $2 - $7 million of currently unrecognized
tax benefits over the next 12 months, pertaining primarily to expiration of statutes of limitations
in various jurisdictions.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service
and other tax authorities. Tax years 2005 and 2006 have been settled with the Internal Revenue
Service as of January 2, 2010. The Company files U.S., state and foreign income tax returns in
jurisdictions with varying statutes of limitations. Tax years 2007 and forward remain subject to
federal examination while tax years 2006 and forward generally remain subject to examination by
most state tax authorities. In significant foreign jurisdictions, tax years 2004 and forward
generally remain subject to examination.
R. COMMITMENTS AND GUARANTEES
COMMITMENTS The Company has non-cancelable operating lease agreements, principally related to
facilities, vehicles, machinery and equipment. Minimum payments have not been reduced by minimum
sublease rentals of $2.0 million due in the future under non-cancelable subleases. In addition, the
Company is a party to a synthetic lease, which qualifies as an operating lease, for one of its
major distribution centers. Rental expense, net of sublease income, for operating leases was $65.2
million in 2009, $66.4 million in 2008 and $62.2 million in 2007.
Outsourcing and other commitments are comprised of: $3.2 million for outsourcing arrangements,
primarily related to information systems and telecommunications; and $33.1 million in marketing
obligations.
The following is a summary of the future commitments for operating lease obligations, material
purchase commitments, outsourcing and other arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
Total |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
Operating lease obligations |
|
$ |
125.9 |
|
|
$ |
37.3 |
|
|
$ |
27.8 |
|
|
$ |
18.6 |
|
|
$ |
12.8 |
|
|
$ |
8.6 |
|
|
$ |
20.8 |
|
Material purchase commitments |
|
|
8.8 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outsourcing and other |
|
|
36.3 |
|
|
|
19.8 |
|
|
|
4.4 |
|
|
|
2.3 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
171.0 |
|
|
$ |
65.9 |
|
|
$ |
32.2 |
|
|
$ |
20.9 |
|
|
$ |
14.3 |
|
|
$ |
10.1 |
|
|
$ |
27.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has numerous assets, predominantly vehicles and equipment, under a one-year term U.S.
master personal property lease. Residual value obligations under this master lease were $18.2
million at January 2, 2010 while the fair value of the underlying assets was approximately $20.9
million. The U.S. master personal property lease obligations are not reflected in the future
minimum lease payments since the initial and remaining term does not exceed one year. The Company
routinely exercises various lease renewal options and from time to time purchases leased assets for
fair value at the end of lease terms.
The Company is a party to a synthetic lease for one of its major distribution centers. The program
qualifies as an operating lease for accounting purposes, where only the monthly lease cost is
recorded in earnings and the liability and value of underlying assets are off-balance sheet.
83
As of January 2, 2010, the estimated fair value of assets and remaining obligation
for the property were $30.3 million and $25.5 million respectively.
GUARANTEES The following is a summary of guarantees as of January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Carrying |
|
|
|
|
|
Potential |
|
|
Amount of |
|
(Millions of Dollars) |
|
Term |
|
Payment |
|
|
Liability |
|
Financial guarantees as of January 2, 2010: |
|
|
|
|
|
|
|
|
|
|
Guarantees on the residual values of leased properties |
|
One to five years |
|
$ |
43.7 |
|
|
$ |
|
|
Standby letters of credit |
|
Generally 1 year |
|
|
36.3 |
|
|
|
|
|
Commercial customer financing arrangements |
|
Up to seven years |
|
|
17.7 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
97.7 |
|
|
$ |
14.8 |
|
|
|
|
|
|
|
|
|
|
The Company has guaranteed a portion of the residual value arising from its previously mentioned
synthetic lease and U.S. master personal property lease programs. The lease guarantees aggregate
$43.7 million while the fair value of the underlying assets is estimated at $51.2 million. The
related assets would be available to satisfy the guarantee obligations and therefore it is unlikely
the Company will incur any future loss associated with these lease guarantees.
The Company has issued $36.3 million in standby letters of credit that guarantee future payments
which may be required under certain insurance programs. The Company has sold various businesses and
properties over many years and provided standard indemnification to the purchasers with respect to
any unknown liabilities, such as environmental, which may arise in the future that are attributable
to the time of the Companys ownership. No liabilities have been recorded for these general
indemnifications since there are no identified exposures. The Company provides various limited and
full recourse guarantees to financial institutions that provide financing to U.S. and Canadian Mac
Tool distributors for their initial purchase of the inventory and truck necessary to function as a
distributor. In addition, the Company provides a full recourse guarantee to a financial institution
that extends credit to certain end retail customers of its U.S. Mac Tool distributors. The gross
amount guaranteed in these arrangements is $17.7 million and the $14.8 million fair value of the
guarantees issued is recorded in Long-term debt and Other liabilities with offsetting amount recorded in
Accounts and notes receivable, net and Other assets, as appropriate
in the consolidated balance sheets.
The Company provides product and service warranties which vary across its businesses. The types of
warranties offered generally range from one year to limited lifetime, while certain products carry
no warranty. Further, the Company sometimes incurs discretionary costs to service its products in
connection with product performance issues. Historical warranty and service claim experience forms
the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability
as new information becomes available.
Following is a summary of the warranty liability activity for the years ended January 2, 2010,
January 3, 2009 and December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Beginning balance |
|
$ |
65.6 |
|
|
$ |
63.7 |
|
|
$ |
66.8 |
|
Warranties and guarantees issued |
|
|
18.5 |
|
|
|
21.8 |
|
|
|
23.2 |
|
Warranty payments |
|
|
(21.0 |
) |
|
|
(22.8 |
) |
|
|
(21.8 |
) |
Acquisitions and other |
|
|
4.3 |
|
|
|
2.9 |
|
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
67.4 |
|
|
$ |
65.6 |
|
|
$ |
63.7 |
|
|
|
|
|
|
|
|
|
|
|
S. CONTINGENCIES
The Company is involved in various legal proceedings relating to environmental issues, employment,
product liability, workers compensation claims and other matters. The Company periodically reviews
the status of these proceedings with both inside and outside counsel, as well as an actuary for
risk insurance. Management believes that the ultimate disposition of these matters will not have a
material adverse effect on operations or financial condition taken as a whole.
The Company recognizes liabilities for contingent exposures when analysis indicates it is both
probable that an asset has been impaired or that a liability has been incurred and the amount of
impairment or loss can reasonably be estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount.
84
In the event that no
amount in the range of probable loss is considered most likely, the minimum loss in the range is
accrued.
In the normal course of business, the Company is involved in various lawsuits and claims. In
addition, the Company is a party to a number of proceedings before federal and state regulatory
agencies relating to environmental remediation. Also, the Company, along with many other companies,
has been named as a potentially responsible party (PRP) in a number of administrative proceedings
for the remediation of various waste sites, including 16 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: whether responsibility is being
disputed, the terms of existing agreements, experience at similar sites, and the Companys
volumetric contribution at these sites.
The Companys 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 January 2, 2010 and January 3, 2009, the Company had
reserves of $29.7 million and $28.8 million, respectively, for remediation activities associated
with Company-owned properties, as well as for Superfund sites, for losses that are probable and
estimable. Of the 2009 amount, $8.3 million is classified as current and $21.4 million as long-term
which is expected to be paid over the next ten years. The range of environmental remediation costs
that is reasonably possible is $16.1 million to $51.8 million which is subject to change in the
near term. The Company may be liable for environmental remediation of sites it no longer owns.
Liabilities have been recorded on those sites in accordance with policy.
The environmental liability for certain sites that have cash payments beyond the current year that
are fixed or reliably determinable have been discounted using a rate of 4.1% to 4.8%, depending on
the expected timing of disbursements. The discounted and undiscounted amount of the liability
relative to these sites is $4.9 million and $6.4 million, respectively. The payments relative to
these sites are expected to be $0.8 million in 2010, $1.2 million in 2011, $1.0 million in 2012,
$0.3 million in 2013, $0.3 million in 2014 and $2.8 million thereafter.
The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal information that
becomes available. Actual costs to be incurred in future periods may vary from the estimates, given
the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in
estimating future contingent liability costs, the Company does not expect that any sum it may have
to pay in connection with these matters in excess of the amounts recorded will have a materially
adverse effect on its financial position, results of operations or liquidity.
On November 2, 2009, the Company entered into an Agreement and Plan of Merger with The Black &
Decker Corporation (Black & Decker) as discussed in Note U. The merger agreement contains
certain termination rights and provides that upon the termination of the merger under specific
circumstances, including a change in the recommendation of the Companys Board of Directors, the
Company would owe Black & Decker a cash termination fee of $125 million.
T. DISCONTINUED OPERATIONS
On July 25, 2008, the Company sold its CST/berger laser leveling and measuring business to Robert
Bosch Tool Corporation for $195.6 million in cash and cumulatively has recognized an $81.1 million
after-tax gain as a result of the sale. The Company sold three other smaller businesses during
2008 for total cash proceeds of $7.9 million and a total cumulative after-tax loss of $1.3 million.
The net loss from discontinued operations in 2009 primarily related to the wind-down of one small
divestiture and purchase price adjustments for CST/berger and other small businesses divested in
2008. Discontinued operations in 2008 reflect the gain recognized on the sale of CST/berger and
one small business, as well as the operating results of the businesses prior to divestiture. The
divestures of these businesses were made pursuant to the Companys growth strategy which entails a
reduction of risk associated with certain large customer concentrations and better utilization of
resources to increase shareowner value.
CST/berger, which was formerly in the Companys CDIY segment, manufactures and distributes
surveying accessories as well as building and construction instruments primarily in the Americas
and Europe. Two of the small businesses that were sold were part of the Security segment, while the
third minor business was part of the Industrial segment.
85
In accordance with the provisions of ASC 360 Impairment of Long-Lived Assets, the results of
operations of CST/berger and the three small businesses have been reported as discontinued
operations. The operating results of the four divested businesses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
|
|
|
$ |
60.8 |
|
|
$ |
123.4 |
|
Pretax (loss)/earnings |
|
|
(5.8 |
) |
|
|
132.8 |
|
|
|
16.5 |
|
Income taxes (benefit) |
|
|
(3.3 |
) |
|
|
44.9 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations |
|
$ |
(2.5 |
) |
|
$ |
87.9 |
|
|
$ |
11.3 |
|
|
|
|
|
|
|
|
|
|
|
There were
no significant assets or liabilities of the divested businesses classified as held for sale in the
Consolidated Balance Sheets at January 2, 2010 and January 3, 2009.
U. MERGER AGREEMENT WITH THE BLACK & DECKER CORPORATION
On November 2, 2009 the Company entered into a definitive merger agreement with Black & Decker in
an all-stock transaction. Black & Decker is a leading global manufacturer and marketer of power
tools and accessories, hardware and home improvement products, and technology-based fastening
systems. Under the terms of the agreement,
which has been approved by the boards of directors of both companies, Black & Decker shareholders
will receive a fixed ratio of 1.275 shares of Stanley common stock for each share of Black & Decker
stock. The final value to be received by Black & Decker shareholders will be measured at the
closing date of the merger using the market price of the Stanley common stock at that time.
While the U.S. anti-trust review process is complete, the closing of the transaction remains
subject to other customary closing conditions, including foreign regulatory approvals and the
approval of Stanley and Black & Decker shareholders. An effective registration statement and proxy
pertaining to the merger was filed with the Securities and Exchange Commission on February 2, 2010,
and the shareowner votes on the merger are scheduled to occur in special meetings to be held on
March 12, 2010. Subject to the satisfaction of the remaining closing conditions, closing of the
transaction is currently expected to occur on March 12, 2010.
86
SELECTED
QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars, except per share amounts) |
|
Quarter |
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Year |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
913.0 |
|
|
$ |
919.2 |
|
|
$ |
935.5 |
|
|
$ |
969.4 |
|
|
$ |
3,737.1 |
|
Gross profit |
|
|
361.1 |
|
|
|
366.6 |
|
|
|
386.4 |
|
|
|
394.2 |
|
|
|
1,508.3 |
|
Selling, general and administrative expenses |
|
|
252.7 |
|
|
|
255.3 |
|
|
|
251.4 |
|
|
|
269.0 |
|
|
|
1,028.4 |
|
Net earnings from continuing operations |
|
|
39.0 |
|
|
|
72.0 |
|
|
|
62.1 |
|
|
|
55.7 |
|
|
|
228.8 |
|
Less: Earnings (loss) from noncontrolling interest |
|
|
0.7 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
attributable to The Stanley Works |
|
|
38.3 |
|
|
|
70.8 |
|
|
|
61.8 |
|
|
|
55.9 |
|
|
|
226.8 |
|
Net earnings (loss) from discontinued operations |
|
|
(0.6 |
) |
|
|
(1.3 |
) |
|
|
(1.4 |
) |
|
|
0.8 |
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Stanley Works |
|
$ |
37.7 |
|
|
$ |
69.5 |
|
|
$ |
60.4 |
|
|
$ |
56.7 |
|
|
$ |
224.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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