Stanley Works Reports 2Q 2008 Results

Tag : Non-ferrous Metal

NEW BRITAIN, Conn., July 21 /PRNewswire-FirstCall/ -- The StanleyWorks announced second quarter 2008 financial results today. Highlightsare summarized in the following paragraphs:
Net sales from continuing operations were $1.15 billion, up 5%,driven by currency (+4%) and acquisitions (+1%). Fully dilutedearnings per share from continuing operations was $0.95. Excluding(1) the dilutive effect of operations discontinued during thequarter and (2) a $0.07 closure charge associated with the plannedexit of the consumer metal storage business (all of which wascontemplated in the company's June 11, 2008 press release), fullydiluted earnings per share was $1.05, up 4%. The $1.05 earnings pershare reflects the basis under which the company's previous 2008annual guidance was established.
2Q and year-to-date free cash flow totaled $55 million and $138million, respectively. These results were reduced by $17 millionrelating to the company's 2Q termination of its receivablesecuritization facility. Excluding the impact of this action,year-to-date free cash flow is $3 million greater than the prioryear. Working capital turns increased to 4.8 from 4.5 as theStanley Fulfillment System continued to provide cash flow benefits.
-- CDIY sales increased 4%, driven by strength in Europe, whichgrew 20% in total (7% organically), with pervasive world-widepricing actions to mitigate inflation more than offsetting theadverse impact of lower U.S. unit volumes due to continued weaknessin the relevant North American end user markets. Segment profit asa percent of sales remained flat at a healthy 14.6% despitesignificant pressures relating to inflation and lower absorption offixed costs, as price realization and productivity initiativesprovided offsetting benefits.
-- Industrial segment sales increased 12% as a result of currency(8 pts.), acquisitions (2 pts.) and organic growth (2 pts.); thelatter driven primarily by Engineered Solutions and Facom.Engineered Solutions posted a strong quarter, with revenues up 20%reflecting the Innerspace acquisition as well as double-digitorganic growth in engineered storage. Within Industrial &Automotive Repair Tools, Facom revenues grew 20% in total and 4%organically. Revenues within North American automotive repair toolscontinue to be adversely impacted by the U.S. economy. Segmentprofit as a percent of sales declined 220bp versus the prior yeardriven by inflation, unfavorable product mix and strategicinvestments in emerging markets and Stanley Fulfillment Systeminitiatives.
-- Excluding hardware, which has been adversely impacted in 2008 bythe previously disclosed loss of a major customer, the Securitysegment performed well. On that basis, sales increased 7%attributable to organic growth (4 pts.), acquisitions (2 pts.) andcurrency (1 pt.). Convergent Security organic growth (5 pts.) andprofitability continued to benefit from the highly successfulreverse integration of HSM. Mechanical access organic growth was 2%excluding hardware. The segment profit rate (ex-hardware) was astrong 18.7%, consistent with the prior year. The hardware issuesrelated to the loss of its major customer anniversary in the middleof 4Q 2008, at which time it is expected that a more typicalorganic growth rate will resume.
John F. Lundgren, Chairman and Chief Executive Officer, stated:"As expected, U.S. market conditions remained challengingduring the second quarter. The proactive cost containment actionsimplemented by our operating teams, complemented by our strongprice realization processes and the benefits of a more diversifiedrevenue base have positioned the company to protect its earningsbase and cash flows despite a highly inflationary environment andweakened U.S. economy."
Management noted that it now fully expects the recessionaryconditions experienced in the first half of 2008 to continue intothe second half of the year and possibly into 2009. Therefore, thecompany implemented contingency plans (as referenced in its 1Qearnings release and investor call) during the quarter and in Julywith pre-tax benefits totaling approximately $20 million in 2008(net of $15 million in related severance charges, of which $8million was recorded during 2Q and the balance to be recorded in3Q) and $60 million annually. In addition, during the last 30-45days, the company has experienced a marked acceleration ininflation, especially related to steel. As a result, the full yearestimate of total cost inflation has increased from $100 million asdiscussed during the company's April investor call to a currentview of $150 million. Due to rapid deployment of related priceincreases throughout the company, it is still expected thatapproximately 90% of this $150 million impact will be recovered in2008. As a result of these timely actions, management expects topreserve its 2008 fully diluted earnings per share from continuingoperations at a level approximately equal to the prior year. Freecash flow is expected to be at or slightly below $500 million.
Although the company does not provide quarterly earnings guidanceas a matter of policy, it is advising analysts and investors thatin the process of setting their 3Q EPS expectations that, amongother factors, they should consider both the impact of (1) higherseverance (as noted above) and (2) lag time in recovering the mostrecent wave of inflation, which is estimated to be approximately$0.15 per share versus the prior year when taken together.
Mr. Lundgren added, "As demonstrated by our first halfresults, the company continues to gain share in markets within itsCDIY segment, as well as pursue growth within its Industrial andSecurity platforms. Despite the challenges associated with astrained U.S. economy, with solid free cash flow and strongperformance in non-U.S. markets, Stanley continues to be wellpositioned to sustain its earnings base and achieve its long-termfinancial objectives."
The company will host a conference call with investors at 10:00amEDT, Tuesday, July 22, 2008 to discuss quarterly results. The callis accessible by telephone at (800) 267-8424 (domestic) and (706)634-0695 (international) and via the Internet at www.stanleyworks.com by selecting "Investor Relations". A slide presentationto accompany the call will be available at www.stanleyworks.com and will remain available after the call. A replay will also beavailable two hours after the call and can be accessed at (800)642-1687 using the conference identification number 45127121.
The following is a reconciliation of diluted earnings per sharefrom continuing operations for the second quarter of 2008 to thesame measure on a pro-forma basis comparable to previously providedearnings guidance:
(1) These charges are reflected in continuing operations until therelated business closure has occurred at which time all results ofthis entity will be reclassified to discontinued operations.
Management believes the pro-forma diluted earnings per share fromcontinuing operations is useful in assessing the company's actualresults on a basis consistent with the full year earnings guidanceof $4.20 - $4.40 per share first provided on January 7, 2008.
Operating margin is defined as sales less cost of sales lessSG&A. Management uses operating margin and its percentage ofnet sales as key measures to assess the performance of the companyas a whole, as well as the related measures at the segment level.
Free cash flow is defined as cash flow from operations less capitaland capitalized software expenditures (reconciliation on pg. 9).Free cash flow does not reflect, among other things, deductions formandatory debt service, other borrowing activity, discretionarydividends on the company's common stock and acquisitions. Organicsales growth is defined as total sales growth less sales ofcompanies acquired in the past twelve months and less foreigncurrency impacts. The company believes these are important measuresof its liquidity, of its ability to fund future growth and toprovide a return to the shareowners, and of its sales performance.
The Stanley Works, an S&P 500 company, is a diversifiedworldwide supplier of tools and engineered solutions forprofessional, industrial, construction and do-it-yourself use, andsecurity solutions for commercial applications. More informationabout The Stanley Works can be found at http://www.stanleyworks.com .
The Stanley Works corporate press releases are available on thecompany's Internet web site at http://www.stanleyworks.com .
Statements in this press release, including but not limited tothose regarding the Company's ability to: (i) deliver organicgrowth in its hardware business at a more typical growth ratebeginning in the middle of the fourth quarter of 2008; (ii) deliverpre-tax benefits from contingency plans totaling approximately $20million in 2008 (net of $15 million in related severance charges)and $60 million annually; (iii) limit total cost inflation incurredin 2008 to $150 million; (iv) recover approximately 90% of the costinflation impact through price increases; (v) preserve fullydiluted earnings per share from continuing operations at a levelapproximately equal to the prior year; (vi) deliver free cash flowat or slightly below $500 million; and (vii) limit the earnings pershare impact of higher severance and cost inflation to $.15 perfully diluted share in the third quarter are "forward lookingstatements" and subject to risk and uncertainty.
The Company's ability to deliver the results as described above(the "Results") is based on current expectations andinvolves inherent risks and uncertainties, including factors listedbelow and other factors that could delay, divert, or change any ofthem, and could cause actual outcomes and results to differmaterially from current expectations. In addition to the risks,uncertainties and other factors discussed in this press release,the risks, uncertainties and other factors that could cause orcontribute to actual results differing materially from thoseexpressed or implied in the forward looking statements include,without limitation, those set forth under Item 1A Risk Factors ofthe Company's Annual Report on Form 10-K and any material changesthereto set forth in any subsequent Quarterly Reports on Form 10-Q,those contained in the Company's other filings with the Securitiesand Exchange Commission, and those set forth below.
The Company's ability to deliver the Results is dependent upon: (i)the Company's ability to sell, or if appropriate discontinuecertain product lines, including the consumer metal storagebusiness during 2008; (ii) the Company's ability to successfullyintegrate recent acquisitions (including Sonitrol and Xmarkacquired on July 18, 2008), as well as future acquisitions, whilelimiting associated costs; (iii) the Company's ability to continueto deliver cost reductions and profit improvement in its FasteningSystems business; (iv) the Company's ability to minimize the coststo relocate equipment and inventory; (v) the Company's ability tocomplete a reorganization of its Fastening Systems business withinthe anticipated time frame; (vi) the success of the Company'sefforts to expand its tools and security businesses; (vii) theCompany's success at new product development and introduction andidentifying and developing new markets; (viii) the success of theCompany's efforts to manage freight costs, steel and othercommodity costs; (ix) the success of the Company's efforts tosustain or increase prices in order to, among other things, offsetor mitigate the impact of steel, freight, energy, non-ferrouscommodity and other commodity costs and other inflation increases;(x) the Company's ability to reduce its costs, increase its prices,change the manufacturing location or find alternate sources forproducts made in China in order to (a) mitigate the impact of anincrease in the VAT rate applicable to products the Company makesor purchases in China and (b) mitigate the impact of ananti-dumping tariff recently imposed on certain nails imported fromChina; (xi) the Company's ability to generate free cash flow andmaintain a strong debt to capital ratio; (xii) the Company'sability to identify and effectively execute productivityimprovements and cost reductions, including the contingency plansmentioned above, while minimizing any associated restructuringcharges; (xiii) the Company's ability to obtain favorablesettlement of routine tax audits; (xiv) the ability of the Companyto generate earnings sufficient to realize future income taxbenefits during periods when temporary differences becomedeductible; (xv) the continued ability of the Company to accesscredit markets under satisfactory terms; and (xvi) the Company'sability to negotiate satisfactory payment terms under which theCompany buys and sells goods, services, materials and products.
The Company's ability to deliver the Results is also dependentupon: (i) the continued success of the Company's marketing andsales efforts; (ii) the success of recruiting programs and otherefforts to maintain or expand overall Mac Tools truck count versusprior years; (iii) the ability of the Company to maintain orimprove production rates in the Company's manufacturing facilities,respond to significant changes in product demand and fulfill demandfor new and existing products; (iv) the ability to continuesuccessfully managing and defending claims and litigation; (v) theCompany's ability to continue improvements in working capital; (vi)the success of the Company's efforts to mitigate any cost increasesgenerated by, for example, continued increases in the cost ofenergy or significant Chinese Renminbi or other currencyappreciation; and (vii) the geographic distribution of theCompany's earnings.
The Company's ability to achieve the Results will also be affectedby external factors. These external factors include: pricingpressure and other changes within competitive markets; thecontinued consolidation of customers particularly in consumerchannels; inventory management pressures on the Company'scustomers; increasing competition; changes in trade, monetary, taxand fiscal policies and laws; inflation; currency exchangefluctuations; the impact of dollar/foreign currency exchange andinterest rates on the competitiveness of products and the Company'sdebt program; the strength of the U.S. economy; the extent to whichNorth American markets associated with homebuilding and remodelingcontinue to deteriorate; and the impact of events that cause or maycause disruption in the Company's manufacturing, distribution andsales networks such as war, terrorist activities, political unrestand recessionary or expansive trends in the economies of the worldin which the Company operates, including, but not limited to, theextent and duration of current recessionary trends in the USeconomy.
The Company undertakes no obligation to publicly update or reviseany forward-looking statements to reflect events or circumstancesthat may arise after the date hereof.
Free cash flow is defined as cash flow from operations less capitaland capitalized software expenditures. The company believes this isan important measure of its liquidity, of its ability to fundfuture growth and to provide a return to the shareowners. Free cashflow does not reflect, among other things, deductions for mandatorydebt service, other borrowing activity, discretionary dividends onthe Company's common stock and acquisitions.
The change in working capital is comprised of current accountsreceivable, inventory and accounts payable. The Stanley Works

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