THE STANLEY WORKS 2003 ANNUAL REPORT ©2004 the STANLEY WORKS STWKS-AR-04 65754 Pages COVERS Master 4/1/04 10:33 AM Page C4
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65754 Pages COVERS Master 4/1/04 10:14 AM Page C4 The Stanley Works World Headquarters: 1000 Stanley Drive, New Britain, Connecticut 06053 www.stanleyworks.com THE STANLEY WORKS 2003 ANNUAL REPORT ©2004 THE STANLEY WORKS STWKS-AR-04 65754 Pages COVERS Master 4/1/04 10:33 AM Page C4 STANLEY: AT A GLANCE 161ST MANAGEMENT LETTER TO SHAREOWNERS The 161st year (Millions of Dollars, except per share amounts) 2003 2002 Change Closing market price per share $ 37.05 $ 34.63 7% in our Company’s history was one whose two halves were dramatically Total return (share price change plus dividends) 11% (24)% different as to both marketplace and financial performances. Responding Financial Highlights to a first half of 2003 that was clearly a continuation and worsening of a Net sales $ 2,678 $ 2,384 12% Operating income $ 255 $ 264 (3)% multi-year economic recession, we took swift actions – terminating our Percent of sales 9.5% 11.1% (160)bp Net earnings from continuing operations $97 $ 170 (43)% Mac Direct business initiative, announcing a series of cost reductions Net earnings $ 108 $ 185 (42)% including a corporate reorganization, effecting selective price increases Per share $ 1.27 $ 2.10 (40)% Return on capital employed 7.3% 12.8% (550)bp and reducing outstanding shares by approximately 9%. Dividends per share $ 1.03 $.99 4% These actions, combined with the successful integration of Best Access Systems (acquired late in 2002) and the beginnings of a long-awaited eco- The Stanley Works, an S&P 500 company, is a worldwide supplier nomic recovery, enabled us to restore some luster to our second half per- of tools, hardware and security solutions for professional, industrial and consumer use. formance. Second-half revenues gained strength, earnings climbed, cash flows surged to new heights, cash dividends were increased for the 36th HAND TOOLS Carpenters’ hand tools, electronic and SECURITY SOLUTIONS Power-operated doors, locking masonry tools. Stanley® / FatMax® / MaxGrip™ / DynaGrip® / systems, sensors, related commercial hardware; instal- Powerlock® / IntelliTools™ / CST® / Berger® / David White® lation, configuration, specification, repair and mainte- consecutive year and the Company exited 2003 with the greatest levels of nance services. Stanley® / Magic-Door® / Best® / CJ Rush™ / MECHANICS TOOLS Mechanics and industrial hand Blick® momentum and earnings power in recent memory. The process of shifting tools, tool sets and toolboxes. Stanley® / Proto® / Husky® / Vidmar® / Stanley® Professional Grade™ / ZAG® / Jensen® / CONSUMER HARDWARE Residential entry door hard- our business portfolio into market segments with above average prof- Contact East® ware; consumer, residential, architectural and industrial hardware. Stanley® FASTENING SYSTEMS Pneumatic fastening tools and itability was advanced with a number of strategic steps completed and fasteners. Bostitch® / Atro® HOME DÉCOR Bi-fold and sliding closet doors, mir- rored doors and decorative mirrors. several more announced. MAC TOOLS Mechanics and industrial hand tools, air Stanley-Acmetrack™ / Monarch™ / Acme® tools, toolboxes, electronic diagnostic tools. Mac® DOOR SYSTEMS Residential entry doors; held for sale.* ASSEMBLY TOOLS DC electric and pneumatic preci- Stanley® Wall Street reacted negatively to early 2003 operational setbacks, as sion assembly tools and systems for the vehicle assem- bly market. Stanley® / Cobotics™ shares declined nearly 40% to a low of $21, but recognized the improved HYDRAULIC TOOLS Handheld tools; mounted break- * On March 2, 2004 the sale of this business to Masonite ers, shears and crushers. Stanley® / LaBounty® Corporation was completed. second half results and exciting outlook for the future. Stanley Works’ shares rose 80% above the April 2003 low point to close the year at ON THE COVER Stanley Security Solutions advanced its presence into the U.K. with the early 2004 acquisition of Blick plc. Blick provides security systems integration for customers such as Cardiff University in Wales. $37.05, up 7% for the total year. 1 65754 Pages 1-25 Master 4/1/04 10:03 AM Page 02 IN 2003, STANLEY WAS NAMED VENDOR OF THE YEAR AND RECEIVED AWARDS IN THE HAND TOOLS CATEGORY AND FOR NEW PRODUCT MERCHANDISING SUMMARY OF 2003 RESULTS Sales from continuing passing the record set in 2002, when operating cash with key retail customers, the cost structure has been platforms: Tools and Security Solutions. The first, Tools, operations – in other words, excluding the sales of our flows increased 29%. greatly reduced and the portfolio of businesses has been made key advances in 2003 to accelerate growth. residential entry doors business whose sale to Masonite advanced considerably toward favored markets. Our Corporation was completed in March 2004 – were $2.7 Dividends increased 4% to $1.03 per share and the divi- vision is unchanged…we desire to become a Great PLATFORM FOR GROWTH: TOOLS The vigor and pre- billion, up 12% over last year. The full-year inclusion of dend rate was increased by 2% to $1.04 per share. This Brand, winning on both Main Street and Wall Street. dictability of new product innovation continued, as 2003 Best Access added 10%, while retail and industrial share marked our 127th consecutive year of paying a cash divi- was the sixth consecutive year with over 100 new prod- gains and the aforementioned second-half strength pro- dend and the 36th consecutive year it has been raised. EXPANSION PHASE BEGINS The period 1997-2001 ucts introduced. We were awarded our seventh United vided some modest growth. First-half sales from continu- was the rationalization phase of our journey. It was com- States patent for the Stanley® FatMax® tape rule, the ing operations increased only 10% including the benefit Free cash flow (after capital expenditures and dividend prised of facility closures, streamlining of the organiza- industry’s top selling tape rule. The Home Channel News of Best Access, but second-half sales on the same basis payments) surged to $339 million, increasing 131% over a tional structure, reduction of stock keeping units (SKUs) recognized our innovation with three prestigious Golden soared, increasing 14%. record 2002 in which it increased 116%. and decapitalization of the asset base. The Stanley brand Hammer Awards: The Gold Product Category Award for was enhanced through renewed emphasis on product Hand Tools, The Communications Award for New Product Earnings from continuing operations of $2.10 per diluted Debt-to-capitalization increased to 45% versus 42% a development and consistency of our image in the mar- Merchandising and The Vendor of the Year Award. This share (aside from nonrecurring charges and credits) year ago, despite additional borrowings of $213 million ketplace. A much leaner organization resulted; it has marks the 5th consecutive year Stanley has been honored were down 2%. The first half of the year showed earn- for the repurchase of 9% of outstanding shares. The recently taken itself to new levels of performance due to with Golden Hammer Awards. ings per share decreases (36% in the first quarter and strong cash flow performance enabled us to fund its cash-generating abilities. 30% in the second quarter) that accompanied continua- a number of acquisitions in higher-than-average-growth The Tools marketing team kept pace with the new prod- tion of our own late-2002 operational issues, the indus- markets near year-end, while reducing outstanding In 2003, for the first time since 1994, sales increased by uct introductions; the business considerably advanced its trial recession and (U.S.) retail inventory contraction. But shares to eliminate our equity hedge position and con- a double-digit percentage. Two contributing factors were ability to drive sales at retail through innovative and second-half earnings were up 34% as we successfully tinuing to maintain “A” credit ratings. We count our the successful integration of Best Access Systems and practical presentations of products. Stanley has won tackled operating issues, the industrial recession abated Company’s financial strength and ongoing cash generat- a second half in which recent share gains, marketing eight awards this year related to the Preview Dealer and the U.S. retail inventory contraction ended in ing abilities among its most formidable competitive initiatives and stellar performance by our 14,000 associ- Program: the Golden Hammer Communication Award, response to accelerated end-user spending. growth advantages. ates capitalized upon improvements in the economy and four American Graphic Design awards and all the awards the marketplace. We have been positioning our Company – Gold, Silver and Bronze – given at the P.O.P. Design of Operating cash flow (from continuing operations) in- As we enter 2004, profitability and cash generation rates for growth and we are seeing the results. Our Company the Times competition in the category of home center creased 63% to $464 million or $5.48 per share, far sur- are strong, considerable market share has been gained has entered its expansion phase, evident in two growth and hardware store temporary displays. 2 3 65754 Pages 1-25 Master 4/1/04 10:03 AM Page 04 These measures, executed by a fully engaged team, suc- Our Security Solutions business, too, had a number of key These companies are integrators of security solutions announced in the fourth quarter; that business is present- cessfully led the tools business down the path to growth advances in 2003 that position it to accelerate growth with leading shares in their local markets; their