10-K
The
Stanley Works
10-K
FILING
FISCAL 2008
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
X ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended January 3, 2009
OR
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
COMMISSION
FILE 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
Incorporation Or Organization)
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(I.R.S. Employer
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)
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860-225-5111
(Registrants
Telephone Number)
Securities Registered Pursuant To Section 12(b) Of The Act:
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Name Of Each Exchange
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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
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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
X No
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 No
X
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes
X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of 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 No X
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 X
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Accelerated filer
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Non-accelerated
filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2).
Yes No X
As of June 27, 2008, the aggregate market values of voting
common equity held by non-affiliates of the registrant was
$3,524,499,508 based on the New York Stock Exchange closing
price for such shares on that date. On February 18, 2009,
the registrant had 78,883,885 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
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 $4.4 billion in 2008
reflecting 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 F,
Acquisitions, and Note U, 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 3, 2009, Stanley employed
approximately 18,225 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.
(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 P, 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 Q, 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, 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.
Industrial
The Industrial segment manufactures and markets: professional
industrial and automotive mechanics tools and storage systems;
engineered healthcare 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 mechanics tools and storage systems include
wrenches, sockets, electronic diagnostic tools, tool boxes and
high-density industrial storage and retrieval systems.
Engineered healthcare storage systems are
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customized cabinetry and storage solutions used to store and
track clinical supplies. Hydraulic tools and accessories include
hand-held hydraulic tools and accessories used by 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 & DIY
The Construction & Do-It-Yourself (CDIY)
segment manufactures and markets hand tools, consumer mechanics
tools, storage systems, pneumatic tools and fasteners. These
products are sold to professional end users as well as
consumers, and are distributed through retailers (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
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
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 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 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 6% in 2008.
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.
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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 2, 2009, the Company had
approximately $348 million in unfilled orders. All of these
orders are reasonably expected to be filled within the current
fiscal year. As of February 2, 2008, unfilled orders
amounted to $368 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 design 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®,
HSM®,
National®,
Sonitrol®,
GdPtm,
and
Xmark®
trademarks are material to the Security segment.
LaBounty®,
MAC®,
Mac
Tools®,
Proto®,
Vidmar®,
Facom®,
Virax®
and
USAG®
trademarks are material to the Industrial segment. In the CDIY
segment, the
Bostitch®,
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 fifteen 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
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information that becomes available. As of January 3, 2009,
the Company had reserves of $29 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 3, 2009, the Company had approximately
18,225 employees, nearly 8,900 of whom were employed in the
U.S. Approximately 750 U.S. employees are covered by
collective bargaining agreements negotiated with 18 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 2009, 2010 and 2011. 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 Q,
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.
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 housing and construction
markets in the Americas, Europe or Asia, or general recessionary
conditions worsen, it could have a material adverse effect on
the Companys business.
Approximately 37% of 2008 sales were in the Construction and
Do-It-Yourself segment, and 29% in the Industrial segment. The
Company experienced 10% sales unit volume declines in existing
businesses, i.e. excluding acquisitions, in the fourth quarter
of 2008, and 7% in the third quarter, primarily in these
segments, as the recession spread worldwide. The Companys
business has been adversely affected by the decline in the
U.S. and international economies, particularly with respect
to housing and general construction markets. It is
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possible this softness will be prolonged and to the extent it
persists there is likely to be an unfavorable impact on sales,
earnings and cash flows. It is possible the Security segment,
which thus far has not experienced significant recession-related
volume declines, may become more affected if the recessionary
impacts permeate other market sectors, particularly construction
within the retail sector. Further deterioration of these housing
and construction markets, and 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.
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, and thereby reduce the risk
associated with large customer concentrations. The strategy has
been advanced over the last several years with the sales of the
Companys CST/berger laser measuring, residential entry
door and home décor businesses, and 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 has made a number of acquisitions in the past three
years, including, but not limited to: GdP in October 2008,
Sonitrol and Xmark in July 2008, InnerSpace in July 2007, HSM in
January 2007, Besco in July 2006, and Facom in January 2006. 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.
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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.
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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,
Xmark, Sonitrol, InnerSpace and other acquisitions with its
existing businesses and
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operations. The Company cannot ensure that such integrations
will be successfully completed, or that all of the planned
synergies will be realized.
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 7 and Note I,
Long-Term Debt and Financing Arrangements, of the Notes to the
Consolidated Financial Statements in Item 8, the Company
issued $450 million of Enhanced Trust Preferred
Securities through its Trust subsidiary in 2005, the net
proceeds of which were used to finance a portion of the
acquisitions of Facom and National. In March 2007, 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 revolving credit agreement, expiring
in February 2013, enabling 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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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;
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a restriction on entering into certain sale-leaseback
transactions; and
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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.
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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. 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.
Tightening
of 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
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lines. While the Company has not encountered financing
difficulties to date, the capital and credit markets have been
experiencing extreme volatility and disruption in late 2008 and
early 2009 which 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 business, 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. This occurred in the
latter half of 2008 and is expected to persist in 2009. 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. While the 7% appreciation of the RMB which
occurred in both 2007 and 2008 has not generated material cost
increases for products sourced from China, further significant
appreciation of the RMB or other currencies in countries where
the Company sources product could adversely impact
profitability. 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 such as the U.S. or the European
Union, or make 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
7
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.
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. For example,
severe inventory adjustments (pertaining to reducing the number
of weeks supply on hand) taken by certain large North American
home center customers in December 2005 negatively impacted sales
by approximately $30 million versus normal levels.
Significant impacts from customer inventory adjustments may
re-occur in the future.
Customer
consolidation could have a material adverse effect on the
Companys business.
A substantial portion of the Companys products in the CDIY
and Industrial segments are sold through home centers and mass
merchant distribution channels. 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 $1.747 billion
of goodwill, $300 million of indefinite-lived trade names,
and $557 million of definite-lived intangible assets
recorded on its Consolidated Balance Sheet at January 3,
2009. 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
8
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 T, 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. 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.
9
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 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.
Despite efforts to prevent such situations, 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.
10
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 benefit plan
expense is affected by the market value of the Companys
common stock.
As described in further detail in Note M, 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
$20 million to its pension and other post-retirement
defined benefit plans in 2009.
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 2008 there was a
$71 million loss on pension plan assets. The fair value of
these assets at January 3, 2009 was $265 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 expense amounted to $11 million in 2008
and $2 million in both 2007 and 2006. The increase in
expense was mostly attributable to the average market value of
shares released which decreased from $49.28 in 2006 to $43.65 in
2008. However, the Company has discontinued the 401(k) and other
defined contribution benefits in the ESOP for 2009 as part of
its cost reduction initiatives and thus there will be a
reduction in fiscal 2009 expense. In the event these defined
contribution benefits are offered again, ESOP expense could
increase in the future if the market value of the Companys
common stock declines.
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.
As of January 3, 2009, the Company and its subsidiaries
owned or leased material facilities (facilities over
50,000 square feet) for manufacturing, distribution and
sales offices in 17 states and 15 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.
11
Industrial
Phoenix, Arizona; Dallas, Texas; Two Harbors, Minnesota;
Columbus, Georgetown, and Sabina, Ohio; Allentown, Pennsylvania;
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; Pittsfield,
Vermont; 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.
Industrial
Kentwood, Michigan; Highland Heights and Westerville, Ohio;
Milwaukie, Oregon; Morangis, France.
CDIY
Miramar, Florida; Fishers, Indiana; Kannapolis, North Carolina;
Epping, Australia; Mechelen, Belgium; Oakville, Canada; 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
Smiths Falls, Canada (owned) 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 2008 to a
vote of security holders.
12
PART II
|
|
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 3, 2009 and December 29, 2007 follow:
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|
|
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|
|
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|
|
2008
|
|
|
2007
|
|
|
|
|
|
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|
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|
Dividend
|
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|
|
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|
Dividend
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Per
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|
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|
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Per
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|
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|
Common
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|
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Common
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High
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Low
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Share
|
|
|
High
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Low
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Share
|
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|
QUARTER:
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|
|
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|
|
|
|
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|
|
First
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|
$52.18
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$43.69
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|
$0.31
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|
$58.99
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|
|
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$49.95
|
|
|
|
$0.30
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|
Second
|
|
|
$51.08
|
|
|
|
$44.50
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|
|
|
$0.31
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|
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|
$63.68
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|
|
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$54.63
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|
|
$0.30
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Third
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|
$49.58
|
|
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|
$40.56
|
|
|
|
$0.32
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|
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|
$64.25
|
|
|
|
$52.41
|
|
|
|
$0.31
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|
Fourth
|
|
|
$43.93
|
|
|
|
$24.19
|
|
|
|
$0.32
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|
|
|
$58.99
|
|
|
|
$47.01
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|
|
|
$0.31
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|
|
|
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|
|
|
|
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|
|
|
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Total
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$1.26
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|
$1.22
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As of February 17, 2009 there were 12,622 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 3, 2009:
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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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Purchased As
|
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Number
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|
(a)
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|
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|
Part Of A
|
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|
Of Shares That
|
|
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|
Total
|
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Average
|
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|
Publicly
|
|
|
May
|
|
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|
Number
|
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|
Price
|
|
|
Announced
|
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|
Yet Be Purchased
|
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|
|
Of Shares
|
|
|
Paid
|
|
|
Plan
|
|
|
Under The
|
|
2008
|
|
Purchased
|
|
|
Per Share
|
|
|
or Program
|
|
|
Program
|
|
|
September 28 November 1
|
|
|
506
|
|
|
|
$32.80
|
|
|
|
|
|
|
|
|
|
November 2 November 29
|
|
|
|
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|
|
|
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|
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|
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November 30 January 3
|
|
|
28,117
|
|
|
|
$32.71
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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28,623
|
|
|
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$32.71
|
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During the first quarter of 2008, the Company repurchased
$100.1 million (2.2 million shares) of its common
stock associated with the prior authorization of the repurchase
of 10.0 million shares on December 12, 2007. As of
January 3, 2009, 7.8 million shares of common stock
remain authorized for repurchase. 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 of the
Companys benefit plans to satisfy the participants
taxes related to the vesting or delivery of time vesting
restricted share units under those plans. |
13
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The Company made significant acquisitions during the five-year
period presented below that affect comparability of results.
Refer to Note F, Acquisitions, of the Notes to Consolidated
Financial Statements in Item 8 for further information.
Additionally, as detailed in Note U, Discontinued
Operations, and prior year
10-K
filings, results in all years have been recast to remove the
effects of certain discontinued operations for comparability (in
millions, except per share amounts):
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|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Continuing Operations:
|
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|
|
|
|
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|
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|
|
|
|
|
|
Net sales
|
|
|
$4,426
|
|
|
|
$4,360
|
|
|
|
$3,897
|
|
|
|
$3,183
|
|
|
|
$2,930
|
|
Net earnings
|
|
|
$225
|
|
|
|
$325
|
|
|
|
$279
|
|
|
|
$262
|
|
|
|
$229
|
|
Basic earnings per share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$2.86
|
|
|
|
$3.95
|
|
|
|
$3.40
|
|
|
|
$3.15
|
|
|
|
$2.79
|
|
Discontinued operations
|
|
|
$1.11
|
|
|
|
$0.14
|
|
|
|
$0.13
|
|
|
|
$0.09
|
|
|
|
$1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings per share
|
|
|
$3.97
|
|
|
|
$4.09
|
|
|
|
$3.54
|
|
|
|
$3.23
|
|
|
|
$4.47
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$2.82
|
|
|
|
$3.87
|
|
|
|
$3.33
|
|
|
|
$3.07
|
|
|
|
$2.72
|
|
Discontinued operations
|
|
|
$1.10
|
|
|
|
$0.13
|
|
|
|
$0.13
|
|
|
|
$0.08
|
|
|
|
$1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings per share
|
|
|
$3.92
|
|
|
|
$4.00
|
|
|
|
$3.46
|
|
|
|
$3.16
|
|
|
|
$4.36
|
|
Percent of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
62.2%
|
|
|
|
62.1%
|
|
|
|
63.7%
|
|
|
|
64.1%
|
|
|
|
63.3%
|
|
Selling, general and administrative*
|
|
|
25.0%
|
|
|
|
23.8%
|
|
|
|
23.9%
|
|
|
|
22.5%
|
|
|
|
23.2%
|
|
Interest, net
|
|
|
1.6%
|
|
|
|
1.8%
|
|
|
|
1.7%
|
|
|
|
1.1%
|
|
|
|
1.2%
|
|
Other, net
|
|
|
2.4%
|
|
|
|
2.0%
|
|
|
|
1.4%
|
|
|
|
1.4%
|
|
|
|
1.5%
|
|
Earnings before income taxes
|
|
|
6.8%
|
|
|
|
10.0%
|
|
|
|
8.9%
|
|
|
|
10.8%
|
|
|
|
10.6%
|
|
Net earnings
|
|
|
5.1%
|
|
|
|
7.5%
|
|
|
|
7.2%
|
|
|
|
8.2%
|
|
|
|
7.8%
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets**
|
|
|
$4,879
|
|
|
|
$4,763
|
|
|
|
$3,935
|
|
|
|
$3,545
|
|
|
|
$2,851
|
|
Long-term debt
|
|
|
$1,419
|
|
|
|
$1,212
|
|
|
|
$679
|
|
|
|
$895
|
|
|
|
$482
|
|
Shareowners equity***
|
|
|
$1,688
|
|
|
|
$1,729
|
|
|
|
$1,552
|
|
|
|
$1,445
|
|
|
|
$1,237
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
2.2
|
|
|
|
1.7
|
|
Total debt to total capital
|
|
|
49.4%
|
|
|
|
46.5%
|
|
|
|
39.2%
|
|
|
|
42.4%
|
|
|
|
32.1%
|
|
Income tax rate continuing operations
|
|
|
25.2%
|
|
|
|
25.1%
|
|
|
|
19.8%
|
|
|
|
23.4%
|
|
|
|
26.5%
|
|
Return on average equity continuing operations
|
|
|
13.2%
|
|
|
|
19.8%
|
|
|
|
18.6%
|
|
|
|
19.6%
|
|
|
|
21.6%
|
|
Common stock data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
|
$1.26
|
|
|
|
$1.22
|
|
|
|
$1.18
|
|
|
|
$1.14
|
|
|
|
$1.08
|
|
Equity per share at year-end
|
|
|
$21.40
|
|
|
|
$21.50
|
|
|
|
$18.96
|
|
|
|
$17.24
|
|
|
|
$15.01
|
|
Market price per share high
|
|
|
$52.18
|
|
|
|
$64.25
|
|
|
|
$54.59
|
|
|
|
$51.75
|
|
|
|
$49.33
|
|
Market price per share low
|
|
|
$24.19
|
|
|
|
$47.01
|
|
|
|
$41.60
|
|
|
|
$41.51
|
|
|
|
$36.42
|
|
Average shares outstanding (in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
78,897
|
|
|
|
82,313
|
|
|
|
81,866
|
|
|
|
83,347
|
|
|
|
82,058
|
|
Diluted
|
|
|
79,874
|
|
|
|
84,046
|
|
|
|
83,704
|
|
|
|
85,406
|
|
|
|
84,244
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of employees
|
|
|
17,862
|
|
|
|
17,344
|
|
|
|
16,699
|
|
|
|
13,605
|
|
|
|
12,817
|
|
Shareowners of record at end of year
|
|
|
12,593
|
|
|
|
12,482
|
|
|
|
12,755
|
|
|
|
13,137
|
|
|
|
13,238
|
|
|
|
|
*
|
|
SG&A is inclusive of the
Provision for Doubtful Accounts
|
|
**
|
|
Item includes discontinued
operations in all years.
|
|
***
|
|
Shareowners equity was
reduced by $14 million in fiscal 2007 for the adoption of
FIN 48, Accounting for Uncertainty in Income
Taxes an Interpretation of
SFAS No. 109. 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 an
132(R).
|
14
|
|
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.
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. 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
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, hardware 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; engineered
healthcare 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 as well as consumers, and are distributed
through retailers (including home centers, mass merchants,
hardware stores, and retail lumber yards).
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 deliberate reduction of the Companys dependence on
sales to U.S. home centers and mass merchants. Sales
outside the U.S. represented 43% of the total in 2008, 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 13% in 2008. Execution of this strategy
has entailed approximately $2.8 billion of acquisitions
since the beginning of 2002, several divestitures, and increased
brand investments. Additionally, the strategy reflects
managements vision to build a growth platform in security
while expanding the valuable branded tools and storage platform.
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.
15
Free cash flow, as defined in the following table, was
$422 million in 2008, $457 million in 2007, and
$359 million in 2006, 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
|
$517
|
|
|
|
$544
|
|
|
|
$439
|
|
Less: capital expenditures
|
|
|
(95
|
)
|
|
|
(66
|
)
|
|
|
(60
|
)
|
Less: capitalized software
|
|
|
(46
|
)
|
|
|
(21
|
)
|
|
|
(20
|
)
|
Add: taxes paid on CST/berger divestiture included in operating
cash flow
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
|
$422
|
|
|
|
$457
|
|
|
|
$359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company strives to reinvest its free cash flow in high
return businesses in order to generate strong return on assets
and improve working capital efficiency.
Significant areas of tactical emphasis related to execution of
the Companys diversification strategy, as well as events
impacting the Companys financial performance in 2008 and
2007, are discussed below.
CONTINUED
GROWTH OF SECURITY BUSINESS
During 2008, 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
$1.497 billion, or 34% of 2008 sales, up from
$216 million, or 10% of 2001 sales. Key events pertaining
to the growth of this segment in the past year include the
following:
|
|
|
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 will complement 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, will enhance the Companys personal
security business.
|
|
|
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 2007
revenues totaling approximately $87 million represents
Stanleys first significant expansion of its electronic
security platform in continental Europe.
|
Several other smaller acquisitions were completed for a total
purchase price of $49 million including 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 Company continues to focus on
integrating the acquired businesses as it expands the suite of
security product and service offerings. The Sonitrol integration
into HSM is well underway with the business sharing the same
information technology platform while duplicative field offices
are being eliminated. The reverse integration of the
Companys pre-existing systems integration business into
HSM progressed further in 2008 contributing to a 80 basis
point expansion in the segment profit rate to 17.9%.
16
Drive
Further Profitable Growth in Branded Tools and
Storage
While diversifying the business portfolio through expansion into
Security is important, management recognizes that the branded
construction & do-it-yourself products and industrial
businesses are the foundations on which the Company was
established and provide strong growth and cash flow generation
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. Two events in branded tools and storage are
noteworthy:
|
|
|
|
|
In October 2008, the Company acquired Scan Modul, headquartered
in Hillerod, Denmark, for $20 million cash. Scan Modul
provides engineered healthcare storage equipment and services
throughout Europe. The acquisition expands the Companys
healthcare storage technology offering provided by its existing
Innerspace business acquired in July 2007.
|
|
|
|
In July 2008, the Company completed the sale of the CST/berger
laser leveling and measuring business for $197 million in
cash, net of transaction costs. The transaction generated a net
book gain of $84 million, and $150 million in net
after-tax cash proceeds. CST/berger had 2007 revenues of
$80 million. As a result, CST/berger, along with three
unrelated small businesses, is reported in discontinued
operations and prior periods have been recast for comparability.
|
Continue
to Invest in the Stanley Brand
Stanley has an excellent portfolio of brands 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
was increased over the past several years, including television
advertising campaigns associated with new product roll-outs,
continued NASCAR racing sponsorships as well as print and
outdoor advertising that generate approximately one billion
brand impressions annually. These advertising and marketing
campaigns yielded strong results as evidenced by a 40% increase
in Stanley hand tool brand awareness since 2003.
Institutionalize
the Stanley Fulfillment System
The Company continued to practice the operating disciplines
encompassed by the Stanley Fulfillment System (SFS),
which is a transformation of processes, systems, and structure
that enables improvements in operations and creates customer
value. The Company employs lean, value stream mapping, and other
continuous improvement techniques to streamline operations and
drive improvements throughout the supply chain. The foundation
of SFS centers on lean, common platforms, sales and operations
planning (S&OP), and complexity reduction.
Benefits of SFS include reductions in lead times, costs and
working capital, service level improvement, and focus on
employee safety. The Company applies SFS to many aspects of its
business including maximizing customer fill rates through
S&OP, and acquisition integration. SFS entails lean
manufacturing disciplines and maximizing common platforms to
drive operational excellence and asset efficiency. The SFS
program 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
2008 and the 11% improvement in working capital turns to 5.9 in
2008. In 2009 and beyond, the Company plans to further leverage
SFS to achieve higher working capital turns, decreased cycle
times, reduced complexity in operations and increased customer
service levels. The Company is also migrating toward common
systems platforms to reduce costs and provide scalability to
support its long-term acquisition growth strategy.
Aside from the strategic commentary above, other matters having
a significant impact on the Companys results were
inflation, currency exchange rate fluctuations and share
repurchases. Additionally, the U.S. recessionary
environment and slowing global demand in the second half of 2008
necessitated significant cost reduction actions which will
reduce the Companys cost structure in 2009.
17
The Company has been negatively impacted by inflation, primarily
commodity and freight, which has increased costs by an estimated
$252 million over the past three years. During this period,
more than two-thirds of the cost increase was recovered through
customer pricing actions, and the remainder was mostly offset
through various cost reduction initiatives. Inflationary trends
have largely abated and are expected to be considerably less of
a headwind in 2009. Inflation is estimated at $30 million
for the first half of 2009. Due to the lagging nature of
customer price increases, the Company expects a favorable
carryover effect from previous customer pricing actions of
approximately $30 - 50 million in 2009.
In recent years, the strengthening of foreign currencies had a
favorable impact on the translation of foreign
currency-denominated operating results into U.S. dollars.
The favorable impact of foreign currency translation, including
acquired companies, contributed an estimated $.09, $.18 and $.04
of diluted earnings per share from continuing operations in
2008, 2007 and 2006, 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. Although the overall translation impact in 2008
was positive, the U.S. dollar strengthened in the second
half of 2008 causing unfavorable effects that are expected to
persist in 2009. Refer to the Market Risk section of this
MD&A for further discussion.
During 2008 and 2007, the Company executed share repurchases of
2.2 million and 3.6 million outstanding shares of its
common stock, respectively, for $100 million in 2008 and
$200 million in 2007. The share repurchase benefit was
partially offset by the issuance of 3.1 million shares of
common stock under various employee plans over the two year
period, and also by higher interest expense associated with
short-term borrowings made to finance the share repurchases.
In response to the continued decline in the U.S. housing
market combined with deteriorating global demand in the second
half of 2008, the Company took actions to reduce its cost
structure and recognized $86 million in pre-tax
restructuring and asset impairment charges, or $0.80 per diluted
share. The pre-tax earnings benefit from the cost actions
implemented both at mid-year 2008 and in conjunction with the
restructuring announced on December 11, 2008 is expected to
total approximately $195 million, or $1.75 per diluted
share in 2009, with an additional $.24 per share benefit in
2010. The Company likely will incur 2009 restructuring and
related charges of approximately $40 - $50 million pre-tax
for certain productivity initiatives and the continued
rationalization of its manufacturing footprint, inclusive of
approximately $10 million in carryover charges pertaining
to the actions announced in December 2008.
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.
Net Sales: 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.
Net sales from continuing operations were $4.360 billion in
2007, as compared to $3.897 billion in 2006, a 12%
increase. Acquisitions contributed 7%, or $263 million, of
the sales increase. Organic volume and pricing
18
both increased 1%, while favorable foreign currency translation
in all regions increased sales 3% versus the prior year. Strong
performance in the Industrial segment, particularly by the
hydraulic and mechanics tools businesses, was supplemented by
more modest gains in the CDIY and Security segments. CDIY
achieved robust growth internationally that was partially offset
by weakness in the U.S. associated with housing market
declines. In the Security segment, solid gains by the automatic
door and mechanical lock businesses, as well as overall pricing
actions, more than compensated for lower sales in the legacy
electronic security integration business as it shed unprofitable
equipment installations.
Gross Profit: 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. As previously mentioned, the Company expects
such inflation will increase first half 2009 costs by
$30 million, which management plans to mitigate through the
carryover effect from previous customer pricing actions, while
it appears likely that inflationary effects may subside in the
second half of 2009.
The Company reported gross profit from continuing operations of
$1.653 billion, or 38% of net sales, in 2007, compared to
$1.413 billion, or 36% of net sales, in 2006. The acquired
businesses increased gross profit by $136 million. Core
gross profit for 2007 was $1.517 billion, or 37% of net
sales, up $104 million from the prior year. The core gross
margin rate expanded on strong performances from certain
Industrial segment businesses, primarily Facom and mechanics
tools, as well as the absence of $22 million of inventory
step-up
amortization from the initial turnover of acquired inventory in
2006. This was partially offset by a decline in the CDIY segment
gross margin rate mainly from un-recovered cost inflation. In
addition, the legacy security integration business had lower
margins on certain equipment installations. Price and
productivity actions in 2007 more than offset $67 million
of material, energy and wage cost inflation.
SG&A Expense: Selling, general and
administrative expenses, inclusive of the provision for doubtful
accounts, were $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.
Selling, general and administrative expenses were
$1.038 billion, or 24% of net sales, in 2007 consistent
with the 24% of sales represented by $932 million of
expense in 2006. Acquired companies contributed $70 million
of the increase, and the remaining $36 million increase is
largely attributable to foreign currency translation.
Interest and
Other-net: Net
interest expense from continuing operations in 2008 was
$73 million, compared to $80 million in 2007. The
decrease 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 $250 million of term debt issued in
September 2008.
Net interest expense from continuing operations in 2007 was
$80 million, compared to $65 million in 2006. The
higher interest expense stems from borrowings necessary to fund
the January 2007 acquisition of HSM. Refer to the Financial
Condition section for additional discussion of the HSM
acquisition financing.
Other-net
from continuing operations totaled $104 million of expense
in 2008 compared to $87 million of expense in 2007. The
increase mainly relates to higher intangible asset amortization
expense due to recent acquisitions, as well as currency losses,
partially offset by a $9 million gain on extinguishment of
debt.
19
Other-net
from continuing operations totaled $87 million of expense
in 2007 compared to $54 million of expense in 2006. The
increase pertained primarily to higher intangible asset
amortization expense due to recent acquisitions.
Income Taxes: The Companys effective
income tax rate from continuing operations was 25% in both 2008
and 2007, compared to 20% for 2006. The lower effective tax rate
in 2006 primarily relates to benefits realized upon resolution
of tax audits that did not re-occur. The effective income tax
rate may vary in future periods based on the distribution of
foreign earnings or changes in tax law in the jurisdictions
where the Company operates, among other factors.
Discontinued Operations: 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 both 2007 and 2006 reflects the operating results of
CST/berger and the aforementioned other minor businesses.
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, interest income, interest expense,
other-net
(inclusive of intangible asset amortization expense),
restructuring and asset impairments, 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 P, Restructuring and Asset Impairments, and
Note G, 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)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales from continuing operations
|
|
$1,497
|
|
$1,400
|
|
$1,127
|
Segment profit from continuing operations
|
|
$269
|
|
$240
|
|
$169
|
% of Net sales
|
|
17.9%
|
|
17.1%
|
|
15.0%
|
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 a 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.
Security segment sales increased 24% in 2007. HSM and other
acquisitions contributed 21%, while price grew 3%, currency 2%
and organic volume declined 2%. Organic sales gains in automatic
doors and mechanical locks were achieved on the strength of
national and strategic account growth, while the hardware
business demonstrated resilience in recovering from the loss of
a key customer. Effective pricing actions to recover
20
inflation in raw material costs also contributed to sales growth
in the segment. Shrinkage in the legacy U.S. security
integration (USSI) business sales and segment
profit was a necessary by-product of a business model change
entailing a shift away from low profitability equipment
installation to an emphasis on higher margin, recurring service
revenues. The reverse integration of USSI into HSM, with its
superior bidding and project management disciplines, progressed
well. The broader security segment product line enabled the
Company to compete more effectively in the architectural bidding
process to attain gains in commercial construction markets. The
2007 segment profit rate showed a strong expansion of
210 basis points over 2006. This improvement was
attributable to HSM, the non-recurring inventory
step-up
amortization for the National hardware acquisition recorded in
2006, the benefits of a partial shift in hardware production to
Asia, and overall pricing and productivity in excess of
inflation. These positive factors were partially offset by the
previously discussed decline in the legacy security integration
businesses.
Industrial:
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales from continuing operations
|
|
$1,274
|
|
$1,246
|
|
$1,129
|
Segment profit from continuing operations
|
|
$164
|
|
$183
|
|
$123
|
% of Net sales
|
|
12.9%
|
|
14.7%
|
|
10.9%
|
Industrial segment net sales increased 2% in 2008 versus 2007,
attributable to the Innerspace and Scan Modul healthcare storage
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.
Industrial segment net sales increased 10% in 2007 from 2006,
comprised of a 4% volume increase, a 4% favorable foreign
currency impact, 1% favorable pricing, and 1% from the
Innerspace acquisition. Hydraulic tools and mechanics tools
achieved robust sales increases, along with strong performance
from the Facom and engineered storage businesses. The hydraulic
tools sales increase was attributable to sustained high demand
for recent shear product offerings, strong international sales,
and favorable steel scrap markets. Industrial mechanics tools
benefited from strong demand in the U.S. oil and gas
industry. The higher Facom sales pertained to new product
introductions and improved European economic conditions.
Intensified marketing efforts, including an expanded sales
force, contributed to the
U.S.-based
engineered storage business growth. Segment profit as a
percentage of net sales improved 380 basis points.
Excluding the effect of the one-time inventory
step-up
charge from the initial turn of Facom acquired inventory in
2006, segment profit increased 270 basis points. Customer
price increases effectively offset the impact of cost inflation,
while productivity initiatives further contributed to the
segment profit rate expansion. Additionally, Facoms
contribution to the higher segment profit rate reflected
favorable currency translation and the benefits of acquisition
integration actions.
CDIY:
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales from continuing operations
|
|
$1,656
|
|
$1,715
|
|
$1,641
|
Segment profit from continuing operations
|
|
$191
|
|
$254
|
|
$252
|
% of Net sales
|
|
11.5%
|
|
14.8%
|
|
15.4%
|
21
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 dramatically
affected by lower sales volumes, and to a lesser extent
strategic investments that will help generate future emerging
markets growth. Productivity projects and cost reduction actions
partially mitigated these unfavorable impacts.
CDIY net sales from continuing operations increased 5% in 2007
from 2006. Foreign currency translation contributed 3% to the
higher sales, pricing 1%, acquisitions 1%, and organic volume
remained flat. The U.S. was adversely impacted by the
housing market contraction as repair and remodel activity
declined along with new construction. Sales were very strong in
Canada, Europe, Australia, and Asia, in particular for the
consumer tools and storage business. This positive international
performance was bolstered by new product introductions including
the
FatMax®
XL line, as well as favorable economic conditions outside
the U.S. Fastening systems also experienced an overall
decline in sales due to the U.S. housing down-turn,
although its industrial channel and office product sales
remained stable. During 2007, the Company took actions to
improve the fastening systems cost structure including a Mexican
plant closure, and the first wave of a pneumatic tool production
shift to Asia, enabled by the 2006 Besco acquisition. As a
result, fastening systems improved its margin rate slightly,
despite the lower sales volume. The Company completed the
migration of a second wave of fastening systems tool production
to Asia during 2008, which further aided in reducing the cost
structure. The segment profit rate decline of 60 basis
points in 2007 was mainly attributable to un-recovered cost
inflation, a product mix shift to lower margin tools along with
a channel mix shift in the U.S., and unfavorable absorption on
inventory reductions. These factors were partially offset by the
favorable impact of foreign currency translation and the
previously mentioned improvement in the fastening systems
business.
22
RESTRUCTURING
ACTIVITIES
At January 3, 2009, the restructuring reserve balance was
$67.9 million. A summary of the restructuring reserve
activity and related charges from December 29, 2007 to
January 3, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
12/29/07
|
|
|
Accrual
|
|
|
Additions
|
|
|
Usage
|
|
|
Currency
|
|
|
1/3/09
|
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
$18.8
|
|
|
|
$5.3
|
|
|
|
$
|
|
|
|
$(12.8
|
)
|
|
|
$(0.5
|
)
|
|
|
$10.8
|
|
Facility closure
|
|
|
1.6
|
|
|
|
1.1
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
1.8
|
|
Other
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal acquisitions
|
|
|
21.4
|
|
|
|
6.4
|
|
|
|
|
|
|
|
(14.7
|
)
|
|
|
(0.5
|
)
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Actions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
|
|
|
|
|
|
|
|
70.0
|
|
|
|
(15.5
|
)
|
|
|
(0.4
|
)
|
|
|
54.1
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
13.6
|
|
|
|
(13.6
|
)
|
|
|
|
|
|
|
|
|
Facility closure
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2008 actions
|
|
|
|
|
|
|
|
|
|
|
85.5
|
|
|
|
(29.8
|
)
|
|
|
(0.4
|
)
|
|
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-2008 Actions
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$23.7
|
|
|
|
$6.4
|
|
|
|
$85.5
|
|
|
|
$(46.8
|
)
|
|
|
$(0.9
|
)
|
|
|
$67.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Actions: During 2008, the Company
initiated cost reduction initiatives 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 business conditions resulting from the
recessionary U.S. economic weakness and slowing global
demand, primarily in its CDIY and Industrial segments. Severance
charges of $70.0 million have been recorded relating to the
reduction of approximately 2,700 employees. In addition to
severance, $13.6 million in charges were recognized
pertaining to asset impairments for production assets and real
estate, and $0.7 million for facility closure costs. The
$1.2 million in other charges stemmed from the termination
of service contracts. Of the amount recorded in 2008,
$29.8 million has been utilized to date, for a remaining
reserve as of January 3, 2009 of $55.3 million. The
Company will utilize a majority of these reserves in 2009, and
estimates approximately 30% will be expended in 2010 primarily
pertaining to the timing of approvals from European governmental
agencies.
Pre-2008 Actions: During 2007, the Company
initiated $11.8 million of cost reduction actions in
various businesses. These actions were comprised of severance
for 525 employees and the exit of a leased facility. The
remaining reserves were fully utilized in 2008.
Acquisition Related: During 2008,
$6.4 million of reserves were established related to the
Companys current year acquisitions. Of this amount
$5.3 million was for severance and related costs for
approximately 200 employees and $1.1 million related
to the closure of nine branch facilities. As of January 3,
2009, $2.2 million has been utilized, leaving
$4.2 million remaining. The Company also utilized
$12.5 million of restructuring reserves during 2008
established for various prior year acquisitions, principally
Facom and HSM. As of January 3, 2009, $8.4 million in
accruals remain for the prior year acquisitions. Of this balance
approximately $7 million pertains to Facom for which the
timing of payments depends upon the actions of certain European
governmental agencies.
23
Restructuring and asset impairment charges by segment were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Security
|
|
$
|
13.8
|
|
|
$
|
5.3
|
|
|
$
|
5.9
|
|
Industrial
|
|
|
29.7
|
|
|
|
1.5
|
|
|
|
1.6
|
|
CDIY
|
|
|
35.6
|
|
|
|
5.6
|
|
|
|
5.3
|
|
Non-operating
|
|
|
6.4
|
|
|
|
0.4
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
85.5
|
|
|
$
|
12.8
|
|
|
$
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $35.6 million of restructuring and asset impairment
charges noted above for the CDIY segment, $13.6 million is
for asset impairments related to the current and planned closure
of several facilities. There were no asset impairments for the
Security and Industrial segments in 2008. Fair value for
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. Real estate
values were based on estimates of anticipated sales values (less
costs to sell) which contemplated sales of comparable properties
and estimates from third party brokers.
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 2008, cash flow from operations totaled
$517 million, down $27 million compared to 2007.
Operating cash flow reflects a $46 million reduction for
the 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 (receivables, inventories
and accounts payable) 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 in the fourth quarter and
the continuing payments under Facom Europe initiatives.
In 2007, cash flow from operations totaled $544 million, up
$105 million compared to 2006. The favorable increase
principally stems from an expansion of cash earnings and
improved working capital performance. In this regard, the higher
non-cash intangibles amortization expense from acquisitions
reduced earnings but not cash flows. Working capital generated
$23 million of higher cash inflows in 2007 compared with
2006. This working capital improvement reflects leaner inventory
positions achieved through process improvement efforts, while
maintaining customer service levels, and was accomplished
despite lower receivable sale proceeds in 2007 versus 2006.
These favorable impacts were partially offset by cash outflows
for restructuring activities which amounted to $58 million
in 2007, an increase of $29 million over 2006, primarily
pertaining to payments for the Facom Europe initiatives.
Capital expenditures were $141 million in 2008,
$87 million in 2007, and $80 million in 2006. 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 purchase of a
previously leased distribution facility. The increase in 2007
capital expenditures versus 2006 pertained to investments for
plant productivity improvements as well as ongoing information
system spending for a major SAP implementation in the Americas.
Free cash flow, as defined in the following table, was
$422 million in 2008, $457 million in 2007, and
$359 million in 2006, 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
24
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
|
$517
|
|
|
|
$544
|
|
|
|
$439
|
|
Less: capital expenditures
|
|
|
(95)
|
|
|
|
(66)
|
|
|
|
(60)
|
|
Less: capitalized software
|
|
|
(46)
|
|
|
|
(21)
|
|
|
|
(20)
|
|
Add: taxes paid on CST/berger divestiture included in
operating cash flow
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
|
$422
|
|
|
|
$457
|
|
|
|
$359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on its demonstrated ability to generate cash flow from
operations as well as its strong balance sheet and credit
position at January 3, 2009, 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. If lower sales volumes and earnings pressures
pertaining to the weakened global economy persist, free cash
flow may decrease in 2009, although continued efforts to improve
working capital efficiency are expected to partially offset
these headwinds. As a result of the recessionary environment,
the Company anticipates that in 2009 it may have lower
acquisition and share repurchase activity, and that free cash
flow will likely be deployed for debt reduction to a greater
extent than in the past few years.
In 2008, acquisition spending totaled $575 million, mainly
for the GdP, Scan Modul, Sonitrol and Xmark businesses. 2007
acquisition spending amounted to $643 million, primarily
pertaining to the HSM, InnerSpace and Bedcheck businesses.
Pursuant to its profitable growth strategy, the Company will
continue to assess its current business portfolio for
disposition opportunities and evaluate acquisition opportunities
in favored markets while minimizing the risk associated with
large customer concentrations.
Investing cash flows 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.
During 2006, the Company entered into a sale-leaseback
transaction of its corporate headquarters building. Under the
terms of the transaction, the Company received $23 million
in cash proceeds, reported in investing cash flows, and recorded
a deferred gain of $11 million which will be amortized over
the 15 year operating lease term. The cash proceeds were
utilized to pay down short-term borrowings.
Financing Activities: Payments on long-term
debt amounted to $45 million in 2008, $228 million in
2007, and $4 million in 2006. Net repayments of short-term
borrowings totaled $74 million 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. Repayments of short-term borrowings amounted to a
cash outflow of $66 million in 2006 as commercial paper was
paid down utilizing a portion of the strong operating cash flows.
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 3, 2009, there were no outstanding loans under this
facility and the Company had $206 million of commercial
paper outstanding. In addition, the Company has uncommitted
short-term lines of credit with numerous foreign banks
aggregating $246 million, of which $234 million was
available at January 3, 2009. Short-term arrangements are
reviewed annually for renewal. Aggregate credit lines amount to
$1.046 billion.
25
The Companys debt is currently rated by
Standard & Poors (S&P),
Moodys Investor Service (Moodys) and
Fitch Ratings (Fitch). As of January 3, 2009
the ratings for senior unsecured debt were A, A2, and A by
S&P, Moodys, and Fitch, respectively, each with a
stable outlook on the Company. The short-term debt, or
commercial paper, ratings are
A-1,
P-1, and F1
by S&P, Moodys, and Fitch, respectively. On
January 22, 2009, Moodys placed the Companys
debt under review for possible downgrade. Failure to maintain
the current 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.
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
$1.26 in 2008. Dividends per common share increased 3.3% in
2008, 3.4% in 2007, and 3.5% in 2006.
The Company repurchased 2.2 million shares of its common
stock in 2008 for $103 million (an average cost of $46.21).
In 2007 the Company repurchased 3.8 million shares of its
common stock for $207 million (an average of $54.64 per
share), and in 2006 it repurchased 4.0 million shares for
$202 million (an average of $50.07 per share).
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.
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 essentially 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 $54.45
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
$64.80, 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 $54.45 or market value at that time.
26
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 $64.80. 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 4.9 million of unregistered
stock warrants that are exercisable during the period
August 17, 2012 through September 28, 2012, with a
strike price of $87.12 (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 $54.45 market value of the Companys common stock at
inception, 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 $54.45 or market price in May 2010. Refer to
Note I, 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
|
|
|
2009
|
|
|
2010 2011
|
|
|
2012 2013
|
|
|
Thereafter
|
|
|
Long-term debt
|
|
$
|
1,433
|
|
|
$
|
14
|
|
|
$
|
213
|
|
|
$
|
791
|
|
|
$
|
415
|
|
Interest payments on long-term
debt(a)
|
|
|
256
|
|
|
|
65
|
|
|
|
102
|
|
|
|
65
|
|
|
|
24
|
|
Operating leases
|
|
|
130
|
|
|
|
34
|
|
|
|
46
|
|
|
|
22
|
|
|
|
28
|
|
Derivatives(b)
|
|
|
52
|
|
|
|
2
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
Equity purchase contract fees
|
|
|
25
|
|
|
|
17
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Material purchase commitments
|
|
|
15
|
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
21
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
12
|
|
Outsourcing and other
obligations(c)
|
|
|
27
|
|
|
|
13
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Pension funding
obligations(d)
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,979
|
|
|
$
|
181
|
|
|
$
|
438
|
|
|
$
|
881
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Future interest payments on
long-term debt reflect the applicable fixed interest rate or the
variable rate in effect at January 3, 2009 for floating
rate debt.
|
|
(b)
|
|
Future cash flows on derivative
financial instruments reflect the fair value as of
January 3, 2009. The ultimate cash flows on these
instruments will differ, perhaps significantly, based on
applicable market interest and foreign currency rates at their
maturity.
|
|
(c)
|
|
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 $43 million of such liabilities at
January 3, 2009, the Company is unable to make a reliable
estimate of when (if at all) amounts may be paid to the
respective taxing authorities.
|
|
(d)
|
|
The Company anticipates that
funding of its pension and post-retirement benefit plans in 2009
will approximate $20 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 2009 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.
|
27
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
Commercial Commitments
Amounts
of Commitments Expiration Per Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
Total
|
|
|
2009
|
|
|
2010 2011
|
|
|
2012 2013
|
|
|
Thereafter
|
|
|
U.S. lines of credit
|
|
$
|
800
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
800
|
|
|
$
|
|
|
Short-term borrowings, long-term debt and lines of credit are
explained in detail within Note I, Long-Term Debt and
Financing Arrangements, of the Notes to the Consolidated
Financial Statements. Operating leases and other commercial
commitments are further detailed in Note S, Commitments and
Guarantees, 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 including: 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 unhedged. 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 2008 would have been
approximately a $9 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. As articulated
in the Companys fourth quarter earnings release filed on
Form 8-K
on January 28, 2009, if the U.S. dollar were to remain
at levels prevailing in mid-January throughout fiscal 2009
(including euro 1.34; Canadian $0.84; Pound Sterling 1.50;
and Australian $0.69), then the combined unfavorable currency
effect from both the translational and transactional aspects
would be approximately $0.50
28
in lower diluted earnings per share as compared with 2008. In
that event, the unfavorable impact would occur largely in the
first half of 2009. Management estimates the combined
translational and transactional impact of a 10% overall movement
in exchange rates is approximately $0.30 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 RMB or these other currencies appreciate with respect to the
U.S. dollar, the Company may experience cost increases on such
purchases. While the 7% appreciation of the RMB during 2008 has
not as yet generated material cost increases for products
sourced from China, further significant appreciation of the RMB
or other currencies in countries where the Company sources
product 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 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. 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 3, 2009, 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 2008, the Company
experienced approximately $140 million of commodity, energy
and wage inflation, most of which was recovered through
favorable pricing actions. Such inflation increased costs by
approximately $67 million in 2007 and $45 million in
2006, which management mitigated through various customer
pricing actions and cost reduction initiatives. If commodity
prices further increase, the Companys exposure could
increase from the expected levels for 2009 as previously
discussed.
Fluctuations in the fair value of the Companys common
stock affect domestic retirement plan expense as discussed in
the ESOP section of Managements Discussion and Analysis.
Additionally, the Company has $14 million in 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 $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 increase to approximately $20 million
in 2009 as compared with $18 million in 2008. 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 credit crunch
that has recently arisen. 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
29
as normal. Accordingly, based on present conditions and past
history, management believes it is unlikely that operations will
be materially affected by any potential further 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 M, 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 expense amounted to
$11 million in 2008 and was $2 million in both 2007
and 2006. The increase in expense was mostly attributable to the
average market value of shares released which decreased from
$49.28 in 2006 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. However, the Company has
discontinued these benefits for 2009 as part of the cost actions
taken and thus there will be a reduction in expense in fiscal
2009.
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 receivables
aging categories. These percentages are based on historical
collection and write-off experience.
30
If circumstances change, for example, 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 reserves 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, reserves would have to be adjusted accordingly.
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 $14 million in asset impairment losses in 2008
primarily as a result of key restructuring programs, and such
losses may occur in the future.
GOODWILL AND INTANGIBLE ASSETS The Company completed
acquisitions in 2008 and 2007 valued at $572 million and
$646 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 $1.747 billion of goodwill and
$300 million of indefinite-lived trade names at
January 3, 2009.
In accordance with SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment testing. The
identification and measurement of goodwill and unamortized
intangible asset impairment involves the estimation of fair
value. Impairment testing of goodwill also requires the
identification and valuation of reporting units. The estimates
of fair value of goodwill, indefinite-lived intangible assets
and related reporting units are based on the information
available at the date of assessment, including management
assumptions about future cash flows, discount rates and royalty
rates which are utilized to estimate the present value of future
cash flows to be generated by the indefinite-lived assets.
Future cash flows can be affected by changes in industry or
market conditions or the rate and extent to which anticipated
synergies or cost savings are realized with acquired entities.
While the Company has not recorded goodwill or other intangible
asset impairment losses in many years, it is possible
impairments may occur in the future in the event expected
profitability, cash flows or trade name usage change from
current estimates. This is particularly the case with respect to
the convergent security solutions reporting unit which
encompasses many recent acquisitions, and the fastening systems
reporting unit which continues to rationalize its cost
structure. Deteriorating global economic conditions increase the
risk that impairment losses may occur in the future.
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.
31
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 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. 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 3, 2009, the Company had reserves
of $29 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
$19 million to $51 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. While
the Company believes the $29 million liability recorded for
environmental matters is adequate, it is possible that future
developments may require charges for environmental exposures in
excess of this reserve.
INCOME TAXES The future tax benefit arising from net
deductible temporary differences and tax loss carry-forwards is
$102 million at January 3, 2009. 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 3, 2009 amounted to $25 million.
In assessing the need for a valuation allowance, the Company
estimates future taxable income, considering the feasibility of
ongoing tax planning strategies and the realizability of tax
loss carry-forwards. 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. When it is deemed probable that an adjustment will
be asserted, the Company accrues its best estimate of the tax
liability, inclusive of related interest charges. See
Note R, Income Taxes, of the Notes to the Consolidated
Financial Statements for further discussion.
RISK INSURANCE To some extent, the Company self
insures for various business exposures. For domestic
workers compensation, automobile and product liability,
the Company generally purchases outside insurance coverage only
for severe losses (stop loss insurance). The two
risk areas involving the most significant accounting estimates
are workers compensation and product liability (liability
for alleged injuries associated with the Companys
products). Actuarial valuations performed by an outside risk
insurance consultant form the basis for workers
compensation and product liability loss reserves recorded. The
actuary contemplates 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. The specific reserves for individual known
claims are quantified by third party administrator specialists
(insurance companies) for workers compensation and by
in-house legal counsel in consultation with outside attorneys
for automobile and product liability. The cash outflows related
to risk insurance claims are expected to occur over
approximately 8 to 10 years, and the present value of
expected future claim payments is reserved. The Company believes
the liability recorded for such risk insurance reserves as of
January 3, 2009 is adequate, but due to judgments inherent
in the reserve estimation process it is possible the ultimate
costs will differ from this estimate.
32
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 $66 million reserve for expected
warranty claims as of January 3, 2009 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. These
lease programs are utilized primarily to reduce overall cost and
to retain flexibility. The cash outflows for lease payments
approximate the $16 million of rent expense recognized in
fiscal 2008. As of January 3, 2009, the estimated fair
value of assets and remaining obligations for these properties
were $68 million and $58 million, respectively.
CAUTIONARY
STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Certain statements contained in this Annual Report on
Form 10-K,
including, but not limited to, the statements regarding the
Companys ability to: (i) achieve higher working
capital turns, decrease cycle times, reduce complexity in
operations and increase customer services levels;
(ii) realize a favorable carryover effect from previous
customer pricing actions of approximately $30-50 million in
2009; (iii) generate a pre-tax benefit from cost actions
implemented at mid-year 2008 and in conjunction with the
restructuring announced on December 11, 2008 of
approximately $195 million, or $1.75 per diluted share, in
2009 with an additional $0.24 per share benefit in 2010;
(iv) limit 2009 restructuring and related charges for
certain productivity initiatives and the continued
rationalization of the Companys manufacturing footprint to
approximately $40-50 million pre-tax; (v) limit
inflation-related cost increases in the first half of 2009 to
$30 million; (vi) continue to make acquisitions and
dispositions; and (vii) limit funding obligations on the
Companys defined benefit plans to approximately
$20 million in 2009 are forward-looking statements and are
based on current expectations. 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 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, those contained in the Companys other
filings with the Securities and Exchange Commission and those
set forth below.
The Companys ability to deliver the results described
above (the Results) is dependent upon: (i) the
Companys ability to implement the cost savings measures
discussed in its December 11, 2008 press release within
anticipated time frames and to limit associated costs;
(ii) the Companys ability to identify appropriate
acquisition and disposition opportunities and to complete such
acquisitions and dispositions; (iii) the Companys
ability to successfully integrate recent acquisitions (including
GdP, Sonitrol, Xmark and Scan Modul), as well as future
acquisitions, while limiting associated costs; (iv) the
success of the Companys efforts to manage freight costs,
steel and other commodity costs; (v) the success of the
Companys efforts 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; (vi) the Companys
ability to identify and effectively execute productivity
improvements and cost reductions while minimizing any
33
associated restructuring charges; (vii) the continued
ability of the Company to access credit markets under
satisfactory terms; and (viii) the Companys ability
to negotiate satisfactory payment terms under which the Company
buys and sells goods, materials and products.
The Companys ability to deliver the Results is also
dependent upon: (i) the continued 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; and (iii) the Companys ability
to continue improvements in working capital.
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 market
may have on the Company or its customers or suppliers; the
extent to which the Company has to write off accounts receivable
or assets 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 in 2009;
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
continue to deteriorate; the impact of events that cause or may
cause disruption in the Companys manufacturing,
distribution and sales networks such as war, terrorist
activities, or 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.
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.
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.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The Company incorporates by reference the material captioned
Market Risk in Item 7 and the material in
Note J, Financial Instruments, of the Notes to Consolidated
Financial Statements in Item 8.
34
|
|
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.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
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 3,
2009. 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 3,
2009. Managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did
not include the internal controls of Sonitrol Corporation
(Sonitrol) which was acquired on July 18, 2008
and Generale de Protection (GdP) which was acquired
on October 1, 2008. Both Sonitrol and GdP are included in
the 2008 consolidated financial statements of The Stanley Works
and constituted total assets of approximately $564 million
at January 3, 2009 and approximately $78 million of
revenues for the year then ended. 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 44.
There has been no change in Stanleys internal control over
financial reporting during the fiscal quarter ended
January 3, 2009 that has materially affected, or is
reasonably likely to materially affect, Stanleys internal
control over financial reporting.
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 evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to
Rule 13a-15(e)
of the Securities Exchange Act of 1934. Based upon that
evaluation, as of the end of the period covered by this Annual
Report, the Companys Chairman and Chief Executive Officer
and its Vice President and Chief Financial Officer have
concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in its periodic Securities
and Exchange Commission filings. There have been no significant
changes in the Companys internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of their evaluation.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On February 23, 2009, the Company entered into a Change in
Control Severance Agreement (the Agreement) with
Donald Allan Jr., and Mr. Allan ceased to be a participant
in the Companys Special Severance Plan. The Agreement is
in the same form as agreements previously executed by other
senior executives and provides for the following upon a
qualifying termination: (i) a lump sum cash payment equal
to 2.5 times annual base salary; (ii) a cash payment equal
to 2.5 times average annual bonus over the three years prior to
termination; (iii) continuation of certain benefits and
perquisites for 2.5 years (or, if shorter, until similar
benefits are provided by Mr. Allans new employer);
(iv) a payment reflecting the actuarial value of an
additional 2.5 years of service credit for retirement
pension accrual purposes under any defined benefit or defined
contribution plans maintained by Stanley; and
(v) outplacement services (with the cost to the Company
capped at $50,000). Mr. Allan also will be entitled to
receive additional payments to the extent necessary to
35
compensate him for any excise taxes payable by him under the
federal laws applicable to excess parachute payments.
The foregoing description does not purport to be a complete
statement of the parties rights and obligations under the
Agreement, and is qualified in its entirety by reference to the
Agreement, which is being filed as an exhibit to this Annual
Report on
Form 10-K.
PART III
|
|
ITEM 10.
|
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 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.
The following is a list of the executive officers of the Company
as of February 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Elected to
|
Name, Age, Date of
Birth
|
|
|
Office
|
|
|
Office
|
John F. Lundgren (57) (09/03/51)
|
|
|
Chairman and Chief Executive Officer. President, European
Consumer Products, Georgia-Pacific Corporation (2000).
|
|
|
03/01/04
|
Donald Allan, Jr. (44) (3/21/64)
|
|
|
Vice President & Chief Financial Officer since January 1,
2009, Vice President & Corporate Controller (2002);
Corporate Controller (2000); Assistant Controller (1999).
|
|
|
10/24/06
|
Jeffery D. Ansell (41) (01/05/68)
|
|
|
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).
|
|
|
02/22/06
|
Bruce H. Beatt (56) (07/24/52)
|
|
|
Vice President, General Counsel and Secretary since October 2000.
|
|
|
10/09/00
|
Brett D. Bontrager (46) (10/27/62)
|
|
|
President, Convergent Security Solutions and Vice President,
Business Development (2007); Vice President, Business
Development (2004); Director, Business Development (2003).
|
|
|
04/25/07
|
Justin C. Boswell (41) (12/03/67)
|
|
|
Vice President & President, Mechanical Access Solutions
since January 2007. President, Stanley Securities Solutions
(2003). President Stanley Access Technologies (2000).
|
|
|
07/26/05
|
Jeff Chen (50)
(08/22/58)
|
|
|
Vice President & President, Asia; Director, Asia Operations
(2002); Managing Director, Thailand (1999).
|
|
|
04/27/05
|
Hubert Davis, Jr. (60) (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
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
Date Elected to
|
Name, Age, Date of
Birth
|
|
Office
|
|
Office
|
James M. Loree (50) (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.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
|
The information required by Items 201(d) and 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, Executive Compensation, and
2009 LTIP Benefits 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 3, 2009
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
|
|
|
8,132,898(1)
|
|
|
$37.08(2)
|
|
|
6,278,122
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,132,898
|
|
|
$37.08
|
|
|
6,278,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of shares underlying
outstanding stock options (whether vested or unvested), 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. All stock-based compensation plans
are discussed in Note K, 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)
|
|
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 M, Employee Benefit Plans, to the Consolidated
Financial Statements of this
Form 10-K.
Prior to January 1, 2009 the Company contributed an amount
equal to one-half of the employee contribution up to the first
7% of their salary. The investment of the employees
contribution and the
|
37
|
|
|
|
|
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 3, 2009 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.
|
|
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 40.
3. Exhibits
See Exhibit Index in this
Form 10-K
on page 85.
(b) See Exhibit Index in this
Form 10-K
on page 85.
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(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 40.
|
38
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
John F. Lundgren, Chairman
and Chief Executive Officer
Date: February 25, 2009
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.
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Signature
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Title
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Date
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/s/ John
F. Lundgren
John
F. Lundgren
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Chairman and Chief Executive
Officer and Director
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February 25, 2009
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/s/ Donald
Allan, Jr.
Donald
Allan, Jr.
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Vice President and Chief Financial Officer and Principal
Accounting Officer
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February 25, 2009
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*
John
G. Breen
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Director
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February 25, 2009
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*
Patrick
D. Campbell
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Director
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February 25, 2009
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*
Carlos
M. Cardoso
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Director
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February 25, 2009
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*
Virgis
W. Colbert
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Director
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February 25, 2009
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*
Robert
B. Coutts
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Director
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February 25, 2009
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*
Eileen
S. Kraus
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Director
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February 25, 2009
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*
Marianne
M. Parrs
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Director
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February 25, 2009
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*
Lawrence
A. Zimmerman
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Director
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February 25, 2009
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*By: /s/ Bruce H. Beatt
Bruce H. Beatt
(As
Attorney-in-Fact)
39
FORM 10-K
ITEM 15(a)
(1) AND (2)
THE
STANLEY WORKS AND SUBSIDIARIES
INDEX TO
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts
of The Stanley Works and subsidiaries is included in
Item 15 (page 41).
Managements Report on Internal Control Over Financial
Reporting (page 42).
Report of Independent Registered Public Accounting
Firm Financial Statement Opinion (page 43).
Report of Independent Registered Public Accounting
Firm Internal Control (page 44).
Consolidated Statements of Operations fiscal years
ended January 3, 2009, December 29, 2007, and
December 30, 2006 (page 45).
Consolidated Balance Sheets January 3, 2009 and
December 29, 2007 (page 46).
Consolidated Statements of Cash Flows fiscal years
ended January 3, 2009, December 29, 2007, and
December 30, 2006 (page 47).
Consolidated Statements of Changes in Shareowners
Equity fiscal years ended January 3, 2009,
December 29, 2007, and December 30, 2006
(page 48).
Notes to Consolidated Financial Statements (page 49).
Selected Quarterly Financial Data (Unaudited) (Page 84).
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.
40
Schedule II
Valuation and Qualifying Accounts
The Stanley Works and Subsidiaries
Fiscal years ended January 3, 2009, December 29, 2007
and December 30, 2006
(Millions of Dollars)
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ADDITIONS
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Charged to
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(b) Charged
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Beginning
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Costs and
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To Other
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(a)
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Ending
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Description
|
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Balance
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Expenses
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Accounts
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Deductions
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Balance
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Allowance for Doubtful Accounts:
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Year Ended 2008
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Current
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$40.3
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$17.5
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$6.1
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$24.1
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$39.8
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Non-current
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0.8
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0.1
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(0.4)
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0.5
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Year Ended 2007
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Current
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$33.3
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$9.3
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$5.5
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$7.8
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$40.3
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Non-current
|
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2.0
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(0.7)
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0.5
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0.8
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Year Ended 2006
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Current
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$34.4
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$3.8
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$2.0
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$6.9
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$33.3
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Non-current
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2.3
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(0.3)
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2.0
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Tax Valuation Allowance:
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Year Ended 2008
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$27.3
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$2.5
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$(2.1)
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$3.2
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$24.5
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Year Ended 2007
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26.8
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3.4
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1.7
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4.6
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27.3
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Year Ended 2006
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27.2
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2.6
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2.8
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5.8
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26.8
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(a) |
|
With respect to the allowance for doubtful accounts, represents
amounts charged-off, less recoveries of accounts previously
charged-off. |
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(b) |
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Represents foreign currency translation impact, acquisitions,
and net transfers to / from other accounts. |
41
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 3, 2009. 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 3, 2009. Managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Sonitrol Corporation (Sonitrol) which
was acquired on July 18, 2008 and Generale de Protection
(GdP) which was acquired on October 1, 2008.
Both Sonitrol and GdP are included in the 2008 consolidated
financial statements of The Stanley Works and constituted total
assets of approximately $564 million at January 3,
2009 and approximately $78 million of revenues for the year
then ended. 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 44.
/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
42
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 3, 2009
and December 29, 2007, 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 3, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements 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 3, 2009 and December 29, 2007, and the
consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended
January 3, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note R to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
SFAS No. 109, effective December 31, 2006.
As discussed in Note M to the consolidated financial
statements, the Company adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Post-retirement Plans An amendment to FASB
Statement Nos. 87, 88, 106 and 132(R) effective
December 30, 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 3, 2009, 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, 2009 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 19, 2009
43
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 3, 2009, 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.
As indicated in the accompanying Managements Report on
Internal Control over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Sonitrol Corporation (Sonitrol) and
Generale de Protection (GdP), companies acquired in
2008, which are included in the 2008 consolidated financial
statements of The Stanley Works and constituted total assets of
approximately $564 million at January 3, 2009 and
approximately $78 million of revenues for the fiscal year
then ended. Our audit of internal control over financial
reporting of The Stanley Works also did not include an
evaluation of the internal control over financial reporting of
Sonitrol and GdP.
In our opinion, The Stanley Works maintained, in all material
respects, effective internal control over financial reporting as
of January 3, 2009, 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 3, 2009 and December 29, 2007,
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 3, 2009 and
our report dated February 19, 2009 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 19, 2009
44
Consolidated
Statements of Operations
Fiscal years ended January 3, 2009, December 29, 2007
and December 30, 2006
(In Millions of Dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Sales
|
|
|
$4,426.2
|
|
|
|
$4,360.5
|
|
|
|
$3,897.3
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
$2,754.8
|
|
|
|
$2,707.5
|
|
|
|
$2,484.3
|
|
Selling, general and administrative
|
|
|
1,090.0
|
|
|
|
1,029.1
|
|
|
|
928.5
|
|
Provision for doubtful accounts
|
|
|
17.6
|
|
|
|
9.3
|
|
|
|
3.8
|
|
Interest income
|
|
|
(9.2)
|
|
|
|
(5.1)
|
|
|
|
(4.4)
|
|
Interest expense
|
|
|
82.0
|
|
|
|
85.2
|
|
|
|
69.3
|
|
Other-net
|
|
|
104.2
|
|
|
|
87.1
|
|
|
|
54.3
|
|
Restructuring charges and asset impairments
|
|
|
85.5
|
|
|
|
12.8
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4,124.9
|
|
|
|
$3,925.9
|
|
|
|
$3,549.6
|
|
Earnings from continuing operations before income taxes
|
|
|
301.3
|
|
|
|
434.6
|
|
|
|
347.7
|
|
Income taxes
|
|
|
75.9
|
|
|
|
109.3
|
|
|
|
69.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
|
$225.4
|
|
|
|
$325.3
|
|
|
|
$278.7
|
|
Earnings from discontinued operations before income taxes
|
|
|
132.8
|
|
|
|
16.5
|
|
|
|
17.9
|
|
Income taxes on discontinued operations
|
|
|
44.9
|
|
|
|
5.2
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operations
|
|
|
$87.9
|
|
|
|
$11.3
|
|
|
|
$10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
$313.3
|
|
|
|
$336.6
|
|
|
|
$289.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$2.86
|
|
|
|
$3.95
|
|
|
|
$3.40
|
|
Discontinued operations
|
|
|
1.11
|
|
|
|
0.14
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings per share of common stock
|
|
|
$3.97
|
|
|
|
$4.09
|
|
|
|
$3.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$2.82
|
|
|
|
$3.87
|
|
|
|
$3.33
|
|
Discontinued operations
|
|
|
1.10
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings per share of common stock
|
|
|
$3.92
|
|
|
|
$4.00
|
|
|
|
$3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
45
Consolidated
Balance Sheets
January 3, 2009 and December 29, 2007
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$211.6
|
|
|
|
$240.4
|
|
Accounts and notes receivable, net
|
|
|
677.7
|
|
|
|
805.7
|
|
Inventories, net
|
|
|
514.7
|
|
|
|
556.4
|
|
Deferred taxes
|
|
|
39.4
|
|
|
|
22.3
|
|
Assets held for sale
|
|
|
|
|
|
|
115.7
|
|
Other current assets
|
|
|
55.9
|
|
|
|
60.6
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,499.3
|
|
|
|
1,801.1
|
|
Property, Plant and Equipment, net
|
|
|
579.8
|
|
|
|
564.9
|
|
Goodwill
|
|
|
1,747.4
|
|
|
|
1,512.5
|
|
Customer Relationships, net
|
|
|
482.3
|
|
|
|
321.4
|
|
Trade names, net
|
|
|
333.6
|
|
|
|
332.2
|
|
Other Intangible Assets, net
|
|
|
41.0
|
|
|
|
40.6
|
|
Other Assets
|
|
|
195.8
|
|
|
|
190.3
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$4,879.2
|
|
|
|
$4,763.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareowners Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
$213.8
|
|
|
|
$282.5
|
|
Current maturities of long-term debt
|
|
|
13.9
|
|
|
|
10.3
|
|
Accounts payable
|
|
|
461.5
|
|
|
|
498.6
|
|
Accrued expenses
|
|
|
508.0
|
|
|
|
450.9
|
|
Liabilities held for sale
|
|
|
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,197.2
|
|
|
|
1,262.7
|
|
Long-Term Debt
|
|
|
1,419.5
|
|
|
|
1,212.1
|
|
Deferred Taxes
|
|
|
119.5
|
|
|
|
80.5
|
|
Other Liabilities
|
|
|
455.0
|
|
|
|
479.2
|
|
|
|
|
|
|
|
|
|
|
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 2008 and 2007
|
|
|
233.9
|
|
|
|
233.9
|
|
Retained earnings
|
|
|
2,269.5
|
|
|
|
2,045.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
(151.4)
|
|
|
|
47.7
|
|
ESOP
|
|
|
(87.2)
|
|
|
|
(93.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,264.8
|
|
|
|
2,233.3
|
|
Less: cost of common stock in treasury (13,467,376 shares
in 2008 and 11,964,623 shares in 2007)
|
|
|
576.8
|
|
|
|
504.8
|
|
|
|
|
|
|
|
|
|
|
Total Shareowners Equity
|
|
|
1,688.0
|
|
|
|
1,728.5
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareowners Equity
|
|
|
$4,879.2
|
|
|
|
$4,763.0
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
46
Consolidated
Statements of Cash Flows
Fiscal years ended January 3, 2009, December 29, 2007
and December 30, 2006
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
$313.3
|
|
|
|
$336.6
|
|
|
|
$289.5
|
|
Adjustments to reconcile net earnings to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
183.0
|
|
|
|
162.2
|
|
|
|
121.2
|
|
Pretax (gain) loss on sale of businesses
|
|
|
(126.5)
|
|
|
|
|
|
|
|
1.5
|
|
Other non-cash items
|
|
|
113.3
|
|
|
|
48.8
|
|
|
|
47.5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
129.1
|
|
|
|
(30.6)
|
|
|
|
50.9
|
|
Inventories
|
|
|
26.5
|
|
|
|
47.4
|
|
|
|
(62.7)
|
|
Accounts payable
|
|
|
(32.9)
|
|
|
|
34.9
|
|
|
|
40.5
|
|
Accrued expenses
|
|
|
12.7
|
|
|
|
(47.9)
|
|
|
|
(49.6)
|
|
Income taxes (includes taxes on gain on sale of business)
|
|
|
(17.3)
|
|
|
|
14.4
|
|
|
|
(30.0)
|
|
Other
|
|
|
(84.6)
|
|
|
|
(21.7)
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
516.6
|
|
|
|
544.1
|
|
|
|
439.1
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(94.6)
|
|
|
|
(65.5)
|
|
|
|
(59.6)
|
|
Capitalized software
|
|
|
(46.2)
|
|
|
|
(21.4)
|
|
|
|
(20.9)
|
|
Proceeds from sales of assets
|
|
|
4.3
|
|
|
|
17.6
|
|
|
|
31.9
|
|
Business acquisitions
|
|
|
(575.0)
|
|
|
|
(642.5)
|
|
|
|
(571.8)
|
|
Proceeds from sales of businesses
|
|
|
204.6
|
|
|
|
|
|
|
|
0.9
|
|
Net investment hedge terminations
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
23.2
|
|
|
|
(5.1)
|
|
|
|
(6.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(464.6)
|
|
|
|
(716.9)
|
|
|
|
(626.3)
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(44.9)
|
|
|
|
(227.6)
|
|
|
|
(4.2)
|
|
Proceeds from long-term borrowings
|
|
|
249.7
|
|
|
|
529.9
|
|
|
|
|
|
Convertible notes hedge premium
|
|
|
0.1
|
|
|
|
(49.3)
|
|
|
|
|
|
Net proceeds (repayments) on short-term borrowings
|
|
|
(73.5)
|
|
|
|
192.3
|
|
|
|
(66.4)
|
|
Debt issuance costs and interest rate swap terminations
|
|
|
14.7
|
|
|
|
(12.1)
|
|
|
|
5.9
|
|
Stock purchase contract fees, net of partial extinguishment
|
|
|
(11.1)
|
|
|
|
(10.4)
|
|
|
|
|
|
Purchase of common stock for treasury
|
|
|
(103.3)
|
|
|
|
(206.9)
|
|
|
|
(201.6)
|
|
Proceeds from issuance of common stock and warrants
|
|
|
19.1
|
|
|
|
96.5
|
|
|
|
64.4
|
|
Cash dividends on common stock
|
|
|
(99.0)
|
|
|
|
(99.8)
|
|
|
|
(96.1)
|
|
Other
|
|
|
|
|
|
|
(2.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(48.2)
|
|
|
|
210.6
|
|
|
|
(298.0)
|
|
Effect of exchange rate changes on cash
|
|
|
(32.6)
|
|
|
|
26.0
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
(28.8)
|
|
|
|
63.8
|
|
|
|
(481.2)
|
|
Cash and cash equivalents, beginning of year
|
|
|
240.4
|
|
|
|
176.6
|
|
|
|
657.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
$211.6
|
|
|
|
$240.4
|
|
|
|
$176.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
47
Consolidated
Statements of Changes in Shareowners Equity
Fiscal years ended January 3, 2009, December 29, 2007
and December 30, 2006
(Millions of Dollars, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
Treasury
|
|
|
Shareowners
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
ESOP
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance December 31, 2005
|
|
|
$237.7
|
|
|
|
$1,657.2
|
|
|
|
$(91.3)
|
|
|
|
$(108.2)
|
|
|
|
$(250.5)
|
|
|
|
$1,444.9
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
289.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289.5
|
|
Currency translation adjustment and other
|
|
|
|
|
|
|
|
|
|
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
57.3
|
|
Cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
Minimum pension liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360.1
|
|
Cash dividends declared$1.18 per share
|
|
|
|
|
|
|
(96.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96.1)
|
|
Issuance of common stock
|
|
|
|
|
|
|
(6.8)
|
|
|
|
|
|
|
|
|
|
|
|
69.3
|
|
|
|
62.5
|
|
Repurchase of common stock (4,026,224 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201.6)
|
|
|
|
(201.6)
|
|
Minority interest common stock
|
|
|
(3.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.8)
|
|
Other, stock-based compensation related, net of tax
|
|
|
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.4
|
|
Adoption of SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
(61.1)
|
|
|
|
|
|
|
|
|
|
|
|
(61.1)
|
|
Tax benefit related to stock options exercised
|
|
|
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1
|
|
ESOP and related tax benefit
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
7.3
|
|
|
|
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 30, 2006
|
|
|
233.9
|
|
|
|
1,883.6
|
|
|
|
(81.8)
|
|
|
|
(100.9)
|
|
|
|
(382.8)
|
|
|
|
1,552.0
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
336.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336.6
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466.1
|
|
Cash dividends declared$1.22 per share
|
|
|
|
|
|
|
(99.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.8)
|
|
Issuance of common stock
|
|
|
|
|
|
|
(16.3)
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Issuance of stock warrants
|
|
|
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.8
|
|
Equity purchase contract and issuance costs
|
|
|
|
|
|
|
(56.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56.7)
|
|
Other, stock-based compensation related, net of tax
|
|
|
|
|
|
|
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
|
|
|
233.9
|
|
|
|
2,045.5
|
|
|
|
47.7
|
|
|
|
(93.8)
|
|
|
|
(504.8)
|
|
|
|
1,728.5
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
313.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313.3
|
|
Currency translation adjustment and other
|
|
|
|
|
|
|
|
|
|
|
(158.0)
|
|
|
|
|
|
|
|
|
|
|
|
(158.0)
|
|
Cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
|
|
(0.3)
|
|
|
|
|
|
|
|
|
|
|
|
(0.3)
|
|
Change in pension, net of tax
|
|
|
|
|
|
|
|
|
|
|
(40.8)
|
|
|
|
|
|
|
|
|
|
|
|
(40.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114.2
|
|
Cash dividends declared$1.26 per share
|
|
|
|
|
|
|
(99.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.0)
|
|
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 units repurchase
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
Other, stock-based compensation related, net of tax
|
|
|
|
|
|
|
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
|
|
|
$233.9
|
|
|
|
$2,269.5
|
|
|
|
$(151.4)
|
|
|
|
$(87.2)
|
|
|
|
$(576.8)
|
|
|
|
$1,688.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
48
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 53 weeks in the fiscal year
2008 and 52 weeks in both of the fiscal years 2007 and 2006.
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 $2.0 million for 2008 and net losses of
$1.4 million and $3.8 million for 2007 and 2006,
respectively.
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 internal 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 primarily 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
|
|
10 20
|
Buildings
|
|
40
|
Machinery and equipment
|
|
3 15
|
Computer software
|
|
3 5
|
Leasehold improvements are depreciated over the shorter of the
estimated useful life or the term of the lease.
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
49
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. 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. During 2008, asset
impairments totaled $13.6 million related to the
Companys restructuring actions which are described further
in Note P Restructuring and Asset Impairments. PP&E
impairment losses were minor in 2007 and 2006.
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
may have 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 2008, 2007 or 2006.
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 fair values of
derivatives accounted for as fair value hedges are recorded in
earnings along with the changes in the fair value of the hedged
items that relate to the hedged risk. 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 Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended, and any portion of a hedge that is
considered ineffective, are reported in earnings in either Cost
of sales for those derivatives relating to inventory purchases
or Other-net
for all other derivatives.
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, collectibility
is reasonably assured, and the risks and rewards of ownership
have transferred to the customer,
50
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.
Multiple Element Arrangements: In 2008,
approximately $975 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.
Customer billings for equipment not yet installed and for
monitoring services not yet rendered are deferred. The
associated deferred revenue is included in Accrued expenses in
the Consolidated Balance Sheets to the extent that customers
have paid in advance of equipment or service delivery.
When a sales agreement involves multiple elements, deliverables
are separately identified and consideration is allocated based
on their relative fair values in accordance with Emerging Issues
Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Fair value is generally determined by reference to the prices
charged in standalone transactions.
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 $39.3 million in
2008, $42.1 million in 2007 and $42.1 million in 2006.
Cooperative advertising expense reported as a deduction in net
sales was $29.0 million in 2008, $28.0 million in 2007
and $25.8 million in 2006.
ACQUISITION COSTS 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
SFAS No. 141, Business Combinations
(SFAS 141). Beginning in fiscal 2009 all such
costs associated with new business acquisitions will be expensed
as incurred. Refer to the section entitled New Accounting
Standards also included within Note A for further details.
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
$129.7 million, $130.1 million and $124.9 million
in 2008, 2007 and 2006, respectively. Distribution costs are
classified as SG&A and amounted to $122.2 million,
$128.7 million and $118.2 million in 2008, 2007 and
2006, 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 became 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 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 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.
51
NEW
ACCOUNTING STANDARDS
Implemented: In September 2006, the FASB
issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurements.(SFAS 157). 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 Staff Positions (FSPs)
No. 157-1
and
No. 157-2,
which, respectively, remove leasing transactions from the scope
of SFAS 157 and defer 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 has 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). The adoption of SFAS 157 for these items
did not have a material affect on the Company. The remaining
assets and liabilities, to which the
FSP 157-2
deferral relates, will be measured at fair value as applicable
beginning in fiscal 2009. This deferral relates to such items as
impairment testing for goodwill, other intangible and long-lived
assets and nonfinancial assets and nonfinancial liabilities
initially measured at fair value in a business combination.
Refer to Note N for disclosures required by this
pronouncement.
In February 2007, the FASB issued SFAS No 159, The
Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). This statement
became effective for the Company at the beginning of 2008.
SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The
Company did not elect to utilize voluntary fair value
measurements as permitted by the standard.
Not Yet Implemented: In May 2008, the FASB issued
Staff Position 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).
FSP APB 14-1
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 Statement of
Operations. The Company is in the process of assessing the
impact of FSP APB
14-1, but
estimates that approximately $55 million of Long-term debt
will be reclassified to equity as of the inception of the
$330.0 million of convertible notes issued in March 2007.
The estimated $55 million debt discount will be amortized
to interest expense resulting in the recognition of
approximately $8 $12 million of additional
non-cash interest expense annually. This non-cash interest
expense is expected to total approximately $11 million in
2009. The non-cash interest recognized will gradually increase
over time using the effective interest method. FSP APB
14-1 will
become effective for the Company beginning in the first quarter
of 2009 and is required to be applied retrospectively with early
adoption prohibited.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). 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
52
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, will have to be expensed as incurred rather than
recorded to goodwill as is generally permitted under
SFAS 141. Additionally, contingent purchase price
arrangements (also known as earn-outs) will be re-measured to
estimated fair value with the impact reported in earnings,
whereas under present rules the contingent purchase
consideration is recorded to goodwill when determined.
SFAS 141(R) applies prospectively for the Company to
business combinations for which the acquisition date is on or
after January 4, 2009.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires reporting
entities to present non-controlling (minority) interests as
equity (as opposed to a liability or mezzanine equity) and
provides guidance on the accounting for transactions between an
entity and non-controlling interests. SFAS 160 will apply
prospectively and is effective as of the beginning of fiscal
2009, except for the presentation and disclosure requirements
which will be applied retrospectively for all periods presented
upon adoption. The Company has determined that the adoption of
SFAS 160 will have a minimal impact on its results of
operations and financial position.
In June 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP)
Emerging Issues Task Force (EITF)
No. 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. Under
the FSP, unvested share-based payment awards that contain rights
to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the
two-class method of computing EPS. The FSP is effective for
fiscal years beginning after December 15, 2008, and interim
periods within those years, with retrospective application
required. It is not expected to have a significant impact on the
Companys calculation of earnings per share.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 which is effective for fiscal years and
interim periods beginning after November 15, 2008. Upon
adoption in the first quarter of fiscal 2009, the statement will
require enhanced disclosures related to the Companys
derivative instruments and will not impact the accounting for
derivative instruments.
RECLASSIFICATIONS The assets and liabilities
of discontinued operations have been reclassified as held for
sale in the Consolidated Balance Sheets, and earnings from
discontinued operations have been reclassified within the
Consolidated Statement of Operations. Certain other prior year
amounts have been reclassified to conform to the current year
presentation.
|
|
B.
|
ACCOUNTS
AND NOTES RECEIVABLE
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
Trade accounts and notes receivable
|
|
|
$682.2
|
|
|
|
$802.1
|
|
Other receivables
|
|
|
35.3
|
|
|
|
43.9
|
|
|
|
|
|
|
|
|
|
|
Gross accounts and notes receivable
|
|
|
717.5
|
|
|
|
846.0
|
|
Allowance for doubtful accounts
|
|
|
(39.8)
|
|
|
|
(40.3)
|
|
|
|
|
|
|
|
|
|
|
Net accounts and notes receivable
|
|
|
$677.7
|
|
|
|
$805.7
|
|
|
|
|
|
|
|
|
|
|
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.
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
53
and $18.0 million in 2007. 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. The amounts deducted from
receivables in the December 29, 2007 Consolidated Balance
Sheet under this arrangement was $42.3 million.
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
Finished products
|
|
|
$365.0
|
|
|
|
$392.1
|
|
Work in process
|
|
|
58.2
|
|
|
|
57.4
|
|
Raw materials
|
|
|
91.5
|
|
|
|
106.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$514.7
|
|
|
|
$556.4
|
|
|
|
|
|
|
|
|
|
|
Net inventories in the amount of $159.2 million at
January 3, 2009 and $204.7 million at
December 29, 2007 were valued at the lower of LIFO cost or
market. If the LIFO method had not been used, inventories would
have been $76.0 million higher than reported at
January 3, 2009 and $66.0 million higher than reported
at December 29, 2007.
D. ASSETS
HELD FOR SALE
Assets held for sale are reported at the lower of fair value
less cost to sell or carrying value. At December 29, 2007,
$115.7 million of assets were classified as held for sale
including $91.4 million in assets of the CST/berger
business and three other small businesses as more fully
discussed in Note U, Discontinued Operations. Additionally
at December 29, 2007, $24.3 million of financing lease
receivables generated by the Blick business within the Security
segment were classified as held for sale. These receivables were
sold for an amount approximating net book value. There are no
assets held for sale in the January 3, 2009 balance sheet
as all sales were completed during the current year.
|
|
E.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
Land
|
|
|
$42.9
|
|
|
|
$41.9
|
|
Land improvements
|
|
|
19.4
|
|
|
|
17.2
|
|
Buildings
|
|
|
277.9
|
|
|
|
273.2
|
|
Leasehold improvements
|
|
|
24.7
|
|
|
|
23.6
|
|
Machinery and equipment
|
|
|
900.3
|
|
|
|
937.4
|
|
Computer software
|
|
|
192.8
|
|
|
|
155.7
|
|
|
|
|
|
|
|
|
|
|
Gross PP&E
|
|
|
$1,458.0
|
|
|
|
$1,449.0
|
|
Less: accumulated depreciation and amortization
|
|
|
878.2
|
|
|
|
884.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$579.8
|
|
|
|
$564.9
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense associated with PP&E
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Depreciation
|
|
|
$74.0
|
|
|
|
$66.1
|
|
|
|
$69.4
|
|
Amortization
|
|
|
18.5
|
|
|
|
17.1
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
$92.5
|
|
|
|
$83.2
|
|
|
|
$81.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts above are inclusive of depreciation and amortization
expense for discontinued operations amounting to
$0.5 million in 2008, $0.9 million in 2007 and
$1.4 million in 2006.
The Company completed 30 acquisitions during 2008, 2007 and
2006. These businesses were acquired pursuant to the
Companys growth and portfolio repositioning strategy. The
acquisitions were accounted for by
54
the purchase method in accordance with SFAS 141, and their
results 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. SFAS 141 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.
Integration of certain acquisitions requires reduction of
redundant personnel, closure of facilities, and other
restructuring actions related to the acquired businesses. In
such cases, a restructuring accrual is recorded for actions
identified in integration strategy plans initially developed by
the Company as of the acquisition date, with a resulting
increase to goodwill. As integration strategies are executed,
the Company monitors the previously established restructuring
accruals and makes adjustments to the extent actual expenditures
differ from the estimated accruals. Adjustments recorded to
previously established restructuring accruals until the time
integration plans are fully executed, not to exceed one year
from the date of original acquisition, are reflected in the
final goodwill amount included in the purchase price allocation.
Adjustments made subsequent to the finalization of integration
strategies, or after one year from the date of original
acquisition, are appropriately reflected in earnings if
increases to the originally established accruals are required,
while accruals that are not fully utilized are recorded as a
reduction of goodwill.
2008 ACQUISITIONS In July 2008, the Company
completed the acquisition of Sonitrol Corporation
(Sonitrol) for $282.1 million in cash. Sonitrol
is a market leader in North American commercial security
monitoring services, access control and fire detection systems,
with annual revenues of approximately $110 million. The
acquisition will complement 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 $47.1 million in
cash. Xmark, headquartered in Canada, markets and sells radio
frequency identification-based systems used to identify, locate
and protect people and assets, with annual revenues of
approximately $30 million. The acquisition expands the
Companys personal security business.
In October of 2008, the Company completed the acquisition of
Generale de Protection (GdP) for $168.6 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. GdPs annual revenues are approximately
$87 million.
The Company also made eleven small acquisitions relating to its
mechanical access systems, convergent security solutions,
industrial healthcare storage and fastening businesses during
2008. These eleven acquisitions were completed for a combined
purchase price of $74.6 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 is deductible for
income tax purposes amounts to $40.7 million. 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.
55
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
|
|
$
|
72.3
|
|
Property, plant, and equipment
|
|
|
10.4
|
|
Goodwill
|
|
|
329.3
|
|
Trade names
|
|
|
21.1
|
|
Customer relationships
|
|
|
239.5
|
|
Technology
|
|
|
14.1
|
|
Other intangible assets
|
|
|
1.4
|
|
Other assets
|
|
|
8.7
|
|
|
|
|
|
|
Total assets
|
|
$
|
696.8
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
74.4
|
|
Deferred tax liabilities and other
|
|
|
50.0
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
124.4
|
|
|
|
|
|
|
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 I, 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, industrial 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
|
|
|
|
|
|
|
56
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.
PRO FORMA EARNINGS FOR ACQUISITIONS The
information for 2008, 2007 and 2006 set forth below reflects the
pro forma consolidated results as if the 2008, 2007, and 2006
acquisitions had occurred at the beginning of 2006.
Non-recurring expenses of the acquired companies have been
eliminated, while the effects of the Companys inventory
step-up
charges, increased intangible asset amortization expense, taxes
and interest have been added to the results below.
Operating results for the acquisitions during these
pre-acquisition periods were not necessarily indicative of
future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars, except per share amounts)
(Unaudited)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
|
$4,659.5
|
|
|
|
$4,721.6
|
|
|
|
$4,480.7
|
|
Net earnings
|
|
|
$319.6
|
|
|
|
$340.4
|
|
|
|
$293.7
|
|
Diluted earnings per share
|
|
|
$4.00
|
|
|
|
$4.05
|
|
|
|
$3.51
|
|
G.
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 December 29, 2007
|
|
|
$911.1
|
|
|
|
$387.3
|
|
|
|
$214.1
|
|
|
|
$1,512.5
|
|
Acquisitions during the year
|
|
|
324.5
|
|
|
|
4.8
|
|
|
|
|
|
|
|
329.3
|
|
Foreign currency translation and other
|
|
|
(69.5)
|
|
|
|
(17.8)
|
|
|
|
(7.1)
|
|
|
|
(94.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 3, 2009
|
|
|
$1,166.1
|
|
|
|
$374.3
|
|
|
|
$207.0
|
|
|
|
$1,747.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INTANGIBLE ASSETS Other intangible
assets at January 3, 2009 and December 29, 2007 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
(Millions of Dollars)
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortized Intangible Assets
Definite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and copyrights
|
|
|
$50.4
|
|
|
|
$(33.3)
|
|
|
|
$57.0
|
|
|
|
$(32.1)
|
|
Trade names
|
|
|
60.0
|
|
|
|
(26.2)
|
|
|
|
41.2
|
|
|
|
(20.7)
|
|
Customer relationships
|
|
|
661.6
|
|
|
|
(179.3)
|
|
|
|
446.9
|
|
|
|
(125.5)
|
|
Other intangible assets
|
|
|
54.1
|
|
|
|
(30.2)
|
|
|
|
41.9
|
|
|
|
(26.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$826.1
|
|
|
|
$(269.0)
|
|
|
|
$587.0
|
|
|
|
$(204.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived trade names are $299.8 million at
January 3, 2009 and $311.7 million at
December 29, 2007. The decrease is attributable to foreign
currency fluctuations.
Aggregate other intangible assets amortization expense by
segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Security
|
|
|
$79.6
|
|
|
|
$65.5
|
|
|
|
$28.5
|
|
Industrial
|
|
|
8.0
|
|
|
|
6.8
|
|
|
|
5.0
|
|
CDIY
|
|
|
2.9
|
|
|
|
6.7
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
$90.5
|
|
|
|
$79.0
|
|
|
|
$39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future amortization expense in each of the next five years
amounts to $101.7 million for 2009, $86.1 million for
2010, $72.5 million for 2011, $59.1 million for 2012
and $49.4 million for 2013.
57
Accrued expenses at January 3, 2009 and December 29,
2007 were as follows:
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
Payroll and related taxes
|
|
|
$107.6
|
|
|
|
$102.6
|
|
Restructuring costs
|
|
|
67.9
|
|
|
|
23.7
|
|
Trade allowances
|
|
|
65.0
|
|
|
|
79.3
|
|
Income and other taxes
|
|
|
40.6
|
|
|
|
39.1
|
|
Deferred revenue
|
|
|
34.7
|
|
|
|
33.6
|
|
Insurance and benefits
|
|
|
33.3
|
|
|
|
29.7
|
|
Other
|
|
|
158.9
|
|
|
|
142.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$508.0
|
|
|
|
$450.9
|
|
|
|
|
|
|
|
|
|
|
|
|
I.
|
LONG-TERM
DEBT AND FINANCING ARRANGEMENTS
|
Long-term debt and financing arrangements at January 3,
2009 and December 29, 2007 follow:
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
Interest Rate
|
|
2008
|
|
|
2007
|
|
U.K. loan notes, payable on demand
|
|
UK Libor less 0.5%
|
|
|
$0.7
|
|
|
|
$1.3
|
|
ESOP loan guarantees, payable in varying monthly installments
through 2009
|
|
6.1%
|
|
|
1.3
|
|
|
|
4.2
|
|
Industrial Revenue Bonds due in 2010
|
|
6.3-6.8%
|
|
|
|
|
|
|
5.6
|
|
Notes payable due in 2010
|
|
5.0%
|
|
|
199.9
|
|
|
|
199.8
|
|
Notes payable due in 2012
|
|
4.9%
|
|
|
208.4
|
|
|
|
200.0
|
|
Notes payable due in 2013
|
|
6.15%
|
|
|
257.2
|
|
|
|
|
|
Convertible notes payable due in 2012
|
|
3 month LIBOR less 3.5%
|
|
|
320.0
|
|
|
|
330.0
|
|
Notes payable due in 2045 (subordinated)
|
|
5.9%
|
|
|
415.7
|
|
|
|
450.1
|
|
Other, payable in varying amounts through 2013
|
|
0.0-6.6%
|
|
|
30.2
|
|
|
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
$1,433.4
|
|
|
|
$1,222.4
|
|
Less: current maturities
|
|
|
|
|
13.9
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
$1,419.5
|
|
|
|
$1,212.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate annual maturities of long-term debt for each of the
years from 2009 to 2013 are $13.9 million,
$207.2 million, $5.7 million, $532.1 million and
$258.8 million, respectively. Interest paid during 2008,
2007, and 2006 amounted to $78.9 million,
$85.0 million and $70.3 million, respectively.
On February 27, 2008, the Company amended its 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.
Included in Short-term borrowings on the Consolidated Balance
Sheets as of January 3, 2009 and December 29, 2007, is
commercial paper of $205.7 million and $277.7 million,
respectively. In addition, the Company has uncommitted
short-term lines of credit with numerous banks aggregating
$246.0 million, of which $233.7 million was available
at January 3, 2009. Short-term arrangements are reviewed
annually for renewal. The aggregate long-term and short-term
lines amounted to $1.046 billion. The weighted average
interest rates on short-term borrowings at January 3, 2009
and December 29, 2007 were 2.4% and 4.6%, 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
58
Company used the net proceeds from the offering primarily to
reduce borrowings under its existing commercial paper program.
The $257.2 million of debt reported at January 3, 2009
reflects 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 J 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 May 2008, the Company entered into a fixed-to-floating
interest rate swap on its $200.0 million notes payable due
in 2012. The $8.4 million increase in the carrying value of
the debt at January 3, 2009 pertains to the gain recognized
upon termination of this swap in December 2008 as more fully
discussed in Note J 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. The Trust, which was not consolidated in accordance with
Financial Accounting Standards Board Interpretation
No. 46R, Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51
(FIN 46R), 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
in Other-net
in the Statement of Operations pertaining to the partial
extinguishment of this debt.
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.
59
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, and recorded
$330.0 million in long-term debt for the Convertible Notes.
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
essentially 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 $54.45 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 Contract
Adjustment Payment fees 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.
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 $54.45 per share. The daily
settlement amount for each trading day during the observation
period is calculated as follows:
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if the applicable market value of the Companys common
stock on that trading day is less than or equal to $54.45 (the
reference price), the daily settlement amount for
that trading day will be 0.9183 shares of the
Companys common stock; and
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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.
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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
60
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 3,
2009 the liability reported for the Contract Adjustment Payments
amounted to $22.9 million.
Convertible
Notes:
The $320.0 million Convertible Notes currently outstanding
have a five-year maturity and are due May 17, 2012. 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 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.
The conversion premium for the Convertible Notes is 19.0%,
equivalent to the initial conversion price of $64.80 based on
the $54.45 value of the Companys common stock at the date
of issuance. 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 15.4332 shares (equivalent to the initial conversion
price set at $64.80) and the applicable market value of the
Companys common stock. The ultimate conversion rate may be
increased above 15.4332 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, (initially
set at a rate equating to $64.80 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
SFAS No. 128, Earnings Per Share.
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
61
$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 $87.12
established at 160.0% of the market value of $54.45 on the
issuance date. 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 $87.12 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 $.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 3, 2009.
The Companys objectives in using debt and foreign currency
related financial instruments are to obtain the lowest cost
source of funds within a targeted range of variable to
fixed-rate debt proportions, to better match financial
obligations to sources of operating cash flows, and to minimize
the foreign exchange risks arising from cross-border cash flows.
To meet these risk management objectives, the Company enters
into interest rate swap and currency swap agreements, purchased
currency options and foreign exchange contracts. Derivative
instruments are not employed for speculative purposes and are
recognized in the Consolidated Balance Sheets at fair value. If
the Company elects to do so, hedge accounting is applied based
on the criteria specified in SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities(as amended) whereby management designates its
derivative instruments as cash flow hedges, fair value hedges or
net investment hedges.
CASH FLOW HEDGES Foreign exchange forward
contracts are used to hedge multi-currency inter-company and
trade cash flows expected to occur generally over a twelve to
eighteen month period. The objective of these instruments is to
minimize the impact of foreign currency fluctuations on
operating results. In addition, interest rate swaps are utilized
to manage the mix of fixed versus floating rate liabilities.
Forward contracts: The Company has entered
into foreign exchange forward contracts denominated in
Australian dollars, Canadian dollars, Chinese renminbi, euros,
Great Britain pounds, Polish zloty, Taiwanese dollars, and Thai
bhat. At January 3, 2009 and December 29, 2007 the
notional value of forward contracts designated as cash flow
hedges and hedging inter-company transactions totaled $85.9
million and $206.3 million, respectively. The aggregate
fair value of these contracts is a loss of $1.5 million
that is recorded in Other current assets and Accrued expenses in
the Consolidated Balance Sheet. The pre-tax amount recorded in
Accumulated other comprehensive income related to forwards
designated as cash flow hedges as of January 3, 2009 is
$5.3 million. These amounts are expected to be reclassified
into earnings over the next 12 months as the underlying
hedged transactions affect earnings.
62
Interest rate swaps: 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%) for a period of three
years. 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. At January 3, 2009, the aggregate fair
value of the outstanding interest rate swaps is a net loss of
$6.6 million as reflected in Accrued expenses and Other
Liabilities in the Consolidated Balance Sheet.
In 2005 the Company entered into a thirty year floating to fixed
interest rate swap with a notional value of $150.0 million.
The swap hedged the interest rate exposure associated with the
forecasted refinancing of the $150.0 million 3.5% bonds
maturing November 2007. During 2006 the swap was terminated,
resulting in a $5.9 million gain before tax. The
termination of this financial instrument was consistent with the
Companys risk management objective to obtain the lowest
cost source of funds within a targeted range of variable to
fixed rate interest rate proportions. The gain arising from the
swap termination was reflected in Accumulated other
comprehensive income in the Consolidated Balance Sheet during
2006. In November 2007, upon the maturity of the bonds linked to
the associated hedged interest rate exposure, $5.0 million
of the gain was reclassified out of Accumulated other
comprehensive income and recorded as a gain in
Other-net in
the Consolidated Statement of Operations. The remaining
$0.9 million in Accumulated other comprehensive income will
be amortized as a reduction to interest expense through May 2012.
Cross 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 (United States dollar and euro). In order to
better match the cash flows of its inter-company obligations
with cash flows from operations, the Company enters into cross
currency swaps. At January 3, 2009, the aggregate fair
value of the Companys cross currency swaps that were
designated as cash flow hedges was a net loss of
$21.4 million as reflected in Accrued expenses and Other
liabilities in the Consolidated Balance Sheet. The swaps have an
aggregate United States dollar notional value of
$150.0 million and maturity dates in November 2010. In
December 2008, the Company made a payment of $13.4 million
related to the termination of a $90.5 million cross
currency swap hedging an affiliate loan. The termination had a
nominal impact to the Companys earnings.
For derivative instruments that are so designated at inception
and qualify as cash flow 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. 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,
generally
Other-net.
There is a $4.8 million after-tax gain reported for cash
flow hedge effectiveness in Accumulated other comprehensive
income as of January 3, 2009. Of this amount
$4.6 million is expected to be reclassified to earnings as
the hedged transactions occur or as amounts are amortized within
the next 12 months, with the remainder through 2010. The
ultimate amount recognized will vary based on fluctuations of
the hedged currencies (Australian dollar, Canadian dollar,
Chinese renminbi, euro, Great Britain pound, Polish zloty,
Taiwanese dollar, Thai baht and United States dollar) through
the maturity dates. During 2008, 2007, and 2006,
$42.9 million, $(31.7) million, and
$25.7 million, respectively, pertaining to cash flow
hedges, 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.
63
FAIR VALUE HEDGES For derivative instruments
that are designated and qualify as fair value hedges, the
Company recognizes the gain or loss on the derivative instrument
in earnings in the same caption where the offsetting gain or
loss on the hedged item is recognized in the current period.
Interest rate swaps: In an effort to continue
to optimize the mix of fixed versus floating rate debt in the
Companys capital structure, in May 2008 and November 2008
the Company entered into interest rate swaps with notional
values which equaled the Companys $200.0 million
4.9% notes due November 2012 and $250.0 million
6.15% notes due 2013. The interest rate swaps effectively
converted the Companys fixed rate debt to floating rate
debt based on LIBOR, thereby hedging the fluctuation in the 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.
In December 2008, the Company terminated both interest rate
swaps resulting in pre-tax gains of $16.5 million which was
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 will be amortized
over the remaining term of the notes as a reduction of interest
expense. The swaps were highly effective and, accordingly, no
amount is recorded for ineffectiveness in the Consolidated
Statement of Operations.
Cross currency swaps: During 2008, the Company
elected to discontinue the practice of designating cross
currency swaps as fair value hedges. Previously designated cross
currency swaps were dedesignated, and new cross currency swaps
are undesignated. There was minimal impact to the Companys
financial statements resulting from this policy change.
NET INVESTMENT HEDGE The Company utilizes net
investment hedges to offset the translation adjustment arising
from remeasuring its investment in the assets, liabilities,
revenues, and expenses of its foreign subsidiaries. For
derivative instruments that are designated and qualify as net
investment hedges, the Company records the effective portion of
the gain or loss on the derivative instrument in Accumulated
other comprehensive income. The Company had cross currency swaps
and foreign exchange contracts denominated in Great Britain
pounds and euro with an aggregate United States dollar notional
value of $281.6 million to hedge its net investments of
certain Great Britain pound and euro denominated assets. During
the fourth quarter 2008, these contracts were terminated and
resulted in gains of $19.1 million that will remain in
Accumulated other comprehensive income until the underlying
assets are disposed of. In order to continue to offset the
translation adjustment of its net investment in euro assets, in
December 2008 the Company entered into a foreign exchange
contract to hedge its net investment on euro assets. The
contract has a notional value $223.4 million United States
dollars, and a maturity of February 2010. At January 3,
2009, the fair value of this contract was a loss of
$20.7 million and is recorded in Other liabilities in the
Consolidated Balance Sheet and the pre-tax loss on the net
investment hedge included in Accumulated other comprehensive
income is $20.7 million.
UNDESIGNATED HEDGES Cross 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 (i.e. affiliate
loans, payables, receivables). The objective of these practices
is to minimize the impact of foreign currency fluctuations on
operating results.
At January 3, 2009 and December 29, 2007, the notional
amount of forward contracts hedging inter-company transactions
totaled $203.9 million. These foreign exchange forward
contracts are denominated in the Australian dollar, Canadian
dollar, Czech koruna, Danish krone, euro, Japanese yen, Great
Britain pound, Mexican peso, New Zealand dollar, Polish zloty,
South African rand, Swiss franc, Swedish krona, Taiwanese dollar
and Thai baht. The contracts mature in less than one year. The
aggregate fair value of these forward contracts is a
$3.8 million gain that is recorded in Other current assets
and Accrued expenses in the Consolidated Balance Sheet.
At January 3, 2009, the notional amount of cross currency
swaps hedging inter-company transactions totaled
$259.3 million. These swaps are denominated in Canadian
dollars, euros, Great Britain pounds and United States dollars.
The contracts have maturities ranging January 2009 to September
2010. The aggregate fair
64
value of these contracts is a net loss of $6.0 million that
is recorded in Other currents assets, Accrued expenses, Other
assets and Other liabilities in the Consolidated Balance Sheet.
HEDGE EFFECTIVENESS For forward contracts and
cross currency swaps designated as cash flow, fair value or net
investment hedges, 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. The ineffective portion, if any, of the hedge is
recognized in earnings immediately. Hedge ineffectiveness was
negligible for 2008, 2007, and 2006.
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 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 of
default is considered remote.
The carrying values and fair values of the Companys
financial instruments at January 3, 2009 and
December 29, 2007 follow:
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2008
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2007
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Carrying
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Carrying
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Fair
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(Millions of Dollars, (asset)/liability)
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Value
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Fair Value
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Value
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Value
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Long Term Debt, Including Current Portion
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$1,433.4
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$1,106.5
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$1,222.4
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$1,152.0
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Undesignated Hedges:
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Forward Contracts
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(3.8)
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(3.8)
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(0.9)
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|
|
(0.9)
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Cross currency swaps
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6.0
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6.0
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Cash Flow Hedges:
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Forward contracts
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1.5
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1.5
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(5.4)
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(5.4)
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Interest rate swaps
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6.6
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6.6
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6.1
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6.1
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Cross currency swaps
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21.4
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21.4
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68.0
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68.0
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Fair Value Hedges:
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Cross currency swaps
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-
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-
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(0.8)
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(0.8)
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Net Investment Hedges:
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Cross currency swaps
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-
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-
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14.5
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14.5
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Forward contracts
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20.7
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20.7
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-
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-
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Total Financial Instruments
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$1,485.8
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$1,158.9
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$1,303.9
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$1,233.5
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The fair values of long-term debt instruments are estimated
using discounted cash flow analysis, based on the Companys
marginal borrowing rates. The fair values of foreign currency
and interest rate swap agreements are based on current
settlement values. The carrying amount of cash equivalents and
short-term borrowings approximates fair value.
WEIGHTED-AVERAGE SHARES OUTSTANDING Weighted-average
shares outstanding used to calculate basic and diluted earnings
per share for each year were as follows:
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2008
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2007
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2006
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Basic earnings per share, weighted-average shares outstanding
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78,897,131
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82,312,724
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81,866,241
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Dilutive effect of stock options and awards
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977,017
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|
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1,732,848
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1,838,131
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Diluted earnings per share, weighted-average shares outstanding
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79,874,148
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84,045,572
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|
|
|
83,704,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As further detailed in Note I, Long-Term Debt and Financing
Arrangements, in March 2007, the Company issued warrants to
purchase up to 5,092,956 shares of its common stock with a
strike price of $87.12 which
65
are anti-dilutive since the strike price of the warrants is
greater than the market price of the Companys common
stock. There were 4,938,624 warrants outstanding at
January 3, 2009 reflecting cancellations pertaining to the
$10.0 million of Equity Units repurchased in November, 2008.
The following weighted-average stock options and warrants to
purchase the Companys common stock were not included in
the computation of diluted shares outstanding because the effect
would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Number of stock options (in thousands)
|
|
|
2,101
|
|
|
|
824
|
|
|
|
738
|
|
Number of stock warrants (in thousands)
|
|
|
5,069
|
|
|
|
3,918
|
|
|
|
-
|
|
COMMON STOCK SHARE ACTIVITY Common stock share
activity for 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Outstanding, beginning of year
|
|
|
80,378,787
|
|
|
|
81,841,627
|
|
|
|
83,791,129
|
|
Issued from treasury
|
|
|
737,698
|
|
|
|
2,323,973
|
|
|
|
2,076,722
|
|
Returned to treasury
|
|
|
(2,240,451)
|
|
|
|
(3,786,813)
|
|
|
|
(4,026,224)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
78,876,034
|
|
|
|
80,378,787
|
|
|
|
81,841,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK RESERVED Common stock shares reserved for
issuance under various employee and director stock plans at
January 3, 2009 and December 29, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Employee stock purchase plan
|
|
|
3,216,631
|
|
|
|
3,278,892
|
|
Other stock-based compensation plans
|
|
|
3,061,491
|
|
|
|
3,894,296
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,278,122
|
|
|
|
7,173,188
|
|
|
|
|
|
|
|
|
|
|
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 3, 2009, there were 78,876,034 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. 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
66
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
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding, beginning of year
|
|
|
7,053,899
|
|
|
|
$37.83
|
|
|
|
8,456,508
|
|
|
|
$36.31
|
|
|
|
9,559,604
|
|
|
|
$34.06
|
|
Granted
|
|
|
849,360
|
|
|
|
33.73
|
|
|
|
743,000
|
|
|
|
53.11
|
|
|
|
934,000
|
|
|
|
50.44
|
|
Exercised
|
|
|
(400,972)
|
|
|
|
31.44
|
|
|
|
(1,820,355)
|
|
|
|
36.10
|
|
|
|
(1,817,695)
|
|
|
|
31.44
|
|
Forfeited
|
|
|
(420,063)
|
|
|
|
48.31
|
|
|
|
(325,254)
|
|
|
|
42.99
|
|
|
|
(219,401)
|
|
|
|
37.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
7,082,224
|
|
|
|
$37.08
|
|
|
|
7,053,899
|
|
|
|
$37.83
|
|
|
|
8,456,508
|
|
|
|
$36.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
5,368,989
|
|
|
|
$35.30
|
|
|
|
5,114,357
|
|
|
|
$33.46
|
|
|
|
5,619,112
|
|
|
|
$32.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 3, 2009, the range of exercise prices on
outstanding stock options was $19.34 to $63.04. Stock option
expense was $4.9 million, $8.6 million and
$8.2 million for the years ended January 3, 2009,
December 29, 2007 and December 30, 2006, 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
2008, 2007 and 2006, respectively: dividend yield of 3.8%, 2.4%
and 2.4%; expected volatility of 45.0%, 28.0%, 26.0%; and
risk-free interest rates of 1.8%, 3.6%, 4.2%. An expected life
of 5 years was used in each period and a weighted average
vesting period of 2.0 years in 2008, 2.5 years in 2007
and 2.3 years in 2006. The weighted average fair value of
stock options granted in 2008, 2007 and 2006 was $9.25, $12.15,
and $12.03, respectively.
At January 3, 2009, the Company had $15.3 million of
unrecognized pre-tax compensation expense for stock options.
This expense will be recognized over the remaining vesting
periods which are 2.0 years on a weighted average basis.
During 2008, the Company received $12.6 million in cash
from the exercise of stock options. The related tax benefit from
the exercise of these options is $2.5 million. During 2008,
2007 and 2006 the total intrinsic value of options exercised was
$6.8 million, $37.9 million and $35.5 million,
respectively. When options are exercised, the related shares are
issued from treasury stock.
SFAS 123R requires the benefit arising from tax deductions
in excess of recognized compensation cost to be classified as a
financing cash flow rather than as an operating cash flow as all
such tax benefits were classified under earlier accounting
guidance. To quantify the recognized compensation cost on which
the excess tax benefit is computed, both actual compensation
expense recorded following the adoption of SFAS 123R and
pro-forma compensation cost reported in disclosures under the
previous SFAS 123 standard in earlier periods is
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 2008 and 2007, the Company reported $3.8 million and
$8.6 million, respectively, of excess tax benefits as a
financing cash flow.
67
Outstanding and exercisable stock option information at
January 3, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
Exercise Price Ranges
|
|
Options
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
$30.00 and below
|
|
|
831,592
|
|
|
|
1.51
|
|
|
|
$22.39
|
|
|
|
831,592
|
|
|
|
$22.39
|
|
$30.01 45.00
|
|
|
4,380,690
|
|
|
|
4.65
|
|
|
|
34.25
|
|
|
|
3,555,330
|
|
|
|
34.45
|
|
$45.01 higher
|
|
|
1,869,942
|
|
|
|
7.80
|
|
|
|
50.26
|
|
|
|
982,067
|
|
|
|
49.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,082,224
|
|
|
|
5.12
|
|
|
|
$37.08
|
|
|
|
5,368,989
|
|
|
|
$35.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ($48.85 per share for fiscal year 2008 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 2008, 2007 and
2006 shares totaling 62,261, 68,848 and 64,590,
respectively, were issued under the plan at average prices of
$37.31, $44.33 and $39.26 per share, respectively and the
intrinsic value of the ESPP purchases was $0.4 million,
$0.8 million and $0.6 million respectively. For 2008,
the Company received $2.3 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
2008, 2007 and 2006, respectively: dividend yield of 3.7%, 2.2%
and 2.4%; expected volatility of 28.0%, 22.0% and 23.0%;
risk-free interest rates of 0.3%, 4.4% and 4.3%; and expected
lives of one year. The weighted average fair value of those
purchase rights granted in 2008, 2007 and 2006 was $6.59, $10.95
and $9.70, 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 241,036 shares,
228,125 shares and 169,675 shares in 2008, 2007 and
2006, respectively. The weighted-average grant date fair value
of RSUs granted in 2008, 2007 and 2006 was $35.28, $49.13
and $49.28 per share, respectively. Total compensation expense
recognized for RSUs amounted to $6.3 million,
$7.6 million and $4.1 million, respectively; and the
related tax benefit recorded was $2.1 million,
$2.2 million and $1.0, respectively, in 2008, 2007 and
2006. As of January 3, 2009, unrecognized compensation
expense for RSUs amounted to $15.8 million and this
cost will be recognized over a weighted-average period of
1.9 years.
A summary of non-vested restricted stock unit activity as of
January 3, 2009, and changes during the twelve month period
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Restricted Share
|
|
|
Grant
|
|
|
|
Units
|
|
|
Date Fair Value
|
|
Non-vested at December 29, 2007
|
|
|
406,723
|
|
|
|
$48.68
|
|
Granted
|
|
|
241,036
|
|
|
|
35.28
|
|
Vested
|
|
|
(122,043)
|
|
|
|
47.46
|
|
Forfeited
|
|
|
(44,845)
|
|
|
|
47.17
|
|
|
|
|
|
|
|
|
|
|
Non-vested at January 3, 2009
|
|
|
480,871
|
|
|
|
$42.55
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested (market value on the date
vested) during 2008, 2007 and 2006 was $4.4 million,
$5.1 million and $5.2 million, respectively.
68
Additionally, 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.
The after-tax expense recognized for such grants amounted to
$0.2 million in 2008, $0.4 million in 2007, and
$0.5 million in 2006.
Long-Term
Performance Awards:
Cyclical
3-year
Plans: The Company has granted Long Term
Performance Awards (LTIPs) under its 1997 and 2001
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 are three award cycles in progress: one
for the three year period ending in December, 2008, the second
for the three year period ending in December, 2009, and the
third for the three year period ending in December, 2010. The
ultimate issuance of shares, if any, is determined based on
performance in the final year of the cycle. Based on performance
in fiscal 2008, a total of 27,031 shares will be issued to
senior management in 2009.
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
performance during the performance period.
Expense recognized for the various performance-contingent grants
amounted to $1.9 million in 2008, $1.5 million in 2007
and $7.4 million in 2006. In the event performance goals
are not met, no compensation cost is 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 December 29, 2007
|
|
|
472,519
|
|
|
|
$48.14
|
|
Granted
|
|
|
238,068
|
|
|
|
44.22
|
|
Vested
|
|
|
(110,033)
|
|
|
|
48.61
|
|
Forfeited
|
|
|
(30,751)
|
|
|
|
50.25
|
|
|
|
|
|
|
|
|
|
|
Non-vested at January 3, 2009
|
|
|
569,803
|
|
|
|
$49.50
|
|
|
|
|
|
|
|
|
|
|
L.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) at the end of each
fiscal year was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Currency translation adjustment
|
|
|
$(66.6)
|
|
|
|
$99.3
|
|
|
|
$(8.3)
|
|
Pension loss, net of tax
|
|
|
(83.0)
|
|
|
|
(42.2)
|
|
|
|
(68.9)
|
|
Fair value of net investment hedge effectiveness, net of tax
|
|
|
(6.6)
|
|
|
|
(14.5)
|
|
|
|
(9.0)
|
|
Fair value of cash flow hedge effectiveness, net of tax
|
|
|
4.8
|
|
|
|
5.1
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
$(151.4)
|
|
|
|
$47.7
|
|
|
|
$(81.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
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. An employer match benefit is 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
69
employer match benefit totaled $10.4 million,
$8.4 million and $7.9 million, in 2008, 2007 and 2006,
respectively.
In addition, approximately 4,100 U.S. salaried and
non-union hourly employees 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 1,300 U.S. employees receive an
additional average 1.7% contribution actuarially designed to
replace previously curtailed pension benefits. Allocations for
benefits earned under the Cornerstone plan were
$15.6 million in 2008, $13.8 million in 2007, and
$13.2 million in 2006. Assets held in participant
Cornerstone accounts are invested in target date retirement
funds which are 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 are guaranteed by the
Company and are 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 Statement of Position
(SOP)
76-3,
Accounting Practices for Certain Employee Stock Ownership
Plans, as affected by the Emerging Issues Task Force
(EITF)
89-8,
Expense Recognition for 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. Net ESOP expense was $10.6 million in 2008,
$1.6 million in 2007 and $2.4 million in 2006. 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 $43.65 per share in
2008, $56.04 per share in 2007 and $49.28 in 2006.
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
$9.7 million in 2008, $11.0 million in 2007 and
$11.7 million in 2006. 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 2008, 2007 and
2006 were $0.2 million, $0.3 million and
$0.3 million, respectively. Interest costs incurred by the
ESOP on the 1991 internal loan, which have no earnings impact,
were $8.4 million, $8.7 million and $9.2 million
for 2008, 2007, and 2006, respectively. Both allocated and
unallocated ESOP shares are treated as outstanding for purposes
of computing earnings per share. As of January 3, 2009, the
number of ESOP shares allocated to participant accounts was
3,630,455 and the number of unallocated shares was 4,704,184. At
January 3, 2009, there were 30,475 released shares in the
ESOP trust holding account pending allocation. The Company made
cash contributions to the ESOP totaling $15.6 million in
2008, $11.7 million in 2007 and $11.2 million in 2006.
PENSION AND OTHER BENEFIT PLANS The Company
sponsors pension plans covering most domestic hourly and certain
executive employees, and approximately 4,300 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:
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(Millions of Dollars)
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2008
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2007
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2006
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Multi-employer plan expense
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$0.6
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$0.5
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$0.5
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Other defined contribution plan expense
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$5.0
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$6.5
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$4.7
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70
The components of net periodic pension expense are as follows:
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U.S. Plans
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Non-U.S. Plans
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(Millions of Dollars)
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2008
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2007
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2006
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2008
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2007
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2006
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Service cost
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$
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2.7
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$
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2.7
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$
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2.6
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$
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4.7
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$
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4.4
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$
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5.9
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Interest cost
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9.8
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9.0
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8.1
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15.4
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15.0
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13.8
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Expected return on plan assets
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(10.3)
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(9.8)
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(7.9)
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(19.0)
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(18.2)
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(16.9)
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Amortization of prior service cost
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1.4
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1.5
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1.4
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0.1
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0.1
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0.2
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Transition amount amortization
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-
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-
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-
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0.1
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0.1
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-
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Actuarial loss amortization
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-
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0.6
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1.1
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3.9
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6.3
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6.4
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Settlement / curtailment loss
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-
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-
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-
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1.0
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0.6
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6.1
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Net periodic pension expense
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$
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3.6
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$
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4.0
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$
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5.3
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$
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6.2
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$
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8.3
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$
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15.5
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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 7,500 participants
are covered under these plans. Net periodic post-retirement
benefit expense was $1.9 million in 2008, $2.2 million
in 2007 and $2.7 million in 2006.
Changes in plan assets and benefit obligations recognized in
other comprehensive income in 2008 are as follows:
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(Millions of Dollars)
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2008
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Current year actuarial loss
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$85.9
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Amortization of actuarial loss
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(3.6)
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Amortization of prior service costs
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(1.3)
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Amortization of transition obligation
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(0.1)
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Currency / other
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(21.7)
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Total loss recognized in other comprehensive income (pre-tax)
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$59.2
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The amounts in Accumulated Other Comprehensive Loss expected to
be recognized as components of net periodic benefit costs during
2009 total $6.3 million, representing amortization of
$5.1 million of actuarial loss, $1.1 million of prior
service cost, and $0.1 million of transition obligation.
71
The Company uses a fiscal year end date to value all its plans.
The changes in the pension and other post-retirement benefit
obligations, fair value of plan assets as well as amounts
recognized in the Consolidated Balance Sheets, are shown below:
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U.S. Plans
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Non-U.S. Plans
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Other Benefits
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2008
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2007
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2008
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2007
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2008
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2007
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Change in benefit obligation
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Benefit obligation at end of prior year
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$
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155.5
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$
|
148.2
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$
|
299.5
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|
$
|
312.9
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|
$
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24.5
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|
$
|
27.5
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|
Service cost
|
|
|
2.7
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|
|
|
2.7
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|
|
|
4.7
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|
|
|
4.4
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|
1.0
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1.1
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|
Interest cost
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|
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9.8
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|
|
|
9.0
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|
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|
15.4
|
|
|
|
15.0
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|
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|
1.4
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1.4
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|
Settlements / curtailments
|
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|
-
|
|
|
|
-
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|
|
(1.3)
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|
|
|
(5.3)
|
|
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|
-
|
|
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|
-
|
|
Actuarial (gain) loss
|
|
|
8.4
|
|
|
|
(7.9
|
)
|
|
|
(22.4)
|
|
|
|
(26.4)
|
|
|
|
(1.0)
|
|
|
|
(3.4)
|
|
Plan amendments
|
|
|
1.1
|
|
|
|
-
|
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|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
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|
Foreign currency exchange rates
|
|
|
-
|
|
|
|
-
|
|
|
|
(64.0)
|
|
|
|
14.3
|
|
|
|
-
|
|
|
|
-
|
|
Participant contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
-
|
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|