Revenues $839 Million Up 6%; Continuing Operations Diluted Earnings Per Share
75 cents; $200 Million Share Repurchase Program Announced
NEW BRITAIN, Conn., Jan. 25 /PRNewswire-FirstCall/ -- The Stanley Works
(NYSE: SWK) announced that fourth quarter 2005 net income from continuing
operations was $64 million (75 cents per fully-diluted share). These results
compare with net earnings of $64 million (76 cents per fully-diluted share)
from continuing operations in 2004.
Net sales were $839 million, up 6% over last year. On an organic basis,
excluding the impact of acquisitions, revenues were flat, with a 4% sales
decrease in Consumer Products due primarily to significant inventory
adjustments at its larger U.S. retail customers during the last three weeks of
December. This sudden and severe curtailment of orders, reducing forecasted
sales by $30 million, was unanticipated inasmuch as retail point-of-sales
performance of Stanley's consumer tools and storage products was strong and
improving and customers' inventory levels of Stanley products were not
unusually high at the time the order flow was halted. Industrial Tools sales
were up 2%. Security Solutions revenues increased 23% in total, due to recent
acquisitions and 2% organic growth. Security Solutions organic growth in North
America was 4%.
Gross profit from continuing operations was $289 million, or 34.5% of
sales, versus $291 million or 36.8% last year. The decline of 230bps was
attributed to negative leverage associated with the lower U.S. consumer hand
tool volumes as well as mix and cost absorption issues in other segments.
Selling, general and administrative ("SG&A") expenses from continuing
operations were $185 million (22.0% of sales) compared with $182 million, or
23.1% of sales last year. Acquired businesses accounted for $10 million of
SG&A expense increase, as a $7 million decrease was achieved in the remainder
of the company. Excluding acquisitions, SG&A expenses as a percentage of sales
decreased from 23.1% to 22.2%.
Operating income was 12.4%, a decrease of 130bps vs. 13.7% from continuing
operations in the fourth quarter of 2004. The company's effective income tax
rate on continuing operations was 20%, up slightly from the 18% rate in the
fourth quarter of 2004.
John F. Lundgren, Chairman and Chief Executive Officer, stated: "The
unexpected and dramatic customer inventory reductions in our North American
consumer tools businesses were clearly detrimental to our fourth quarter
performance, costing us about 10 cents per fully-diluted share vs. our
estimates, all in the final weeks of the quarter. The reductions, while
directionally consistent across our larger U.S. retail customers, appear to be
a by-product of larger, enterprise-wide decisions on their part and did not
appear to arise from Stanley-specific concerns.
"In fact, we were encouraged by the strong end user demand and retail
sell-through of our consumer tools throughout the quarter, as our aggregate
retail sell-through to our larger customers has been strong and accelerating.
Although the corrections are continuing well into January, our larger
customers' store inventories of Stanley products are presently below ten
weeks' supply in the aggregate and, as a consequence, more normal ordering
patterns are expected in the near future. Coupled with a robust first-half new
product introduction lineup, we remain confident that our Consumer Products
segment will have a strong 2006, while the first quarter will remain a
challenge."
Consumer Products operating margin was 15.6% versus 16.6% last year, due
primarily to negative operating leverage attributable to the lower sales
volume.
Industrial Tools sales increased 2% to $339 million. Strong organic sales
growth in industrial mechanics tools, industrial tool storage and laser
leveling tools, plus a modest volume increase in Fastening Systems, more than
offset a sales decline in Assembly Technologies and a modest sales decline in
Mac Tools. Operating margin was 9.1% vs. 10.6% in 2004, as unfavorable mix and
cost absorption in Fastening Systems was somewhat offset by profit improvement
in Mac Tools and volume leverage in higher-margin laser tools, mechanics tools
and industrial storage.
Security Solutions revenues increased 23% to $210 million. Organic revenue
growth was 2%, as 4% growth in North America was partially offset by weakness
in the U.K. (most of which was currency exchange-related). The automatic
doors, mechanical access and systems integration components of the business
all experienced low single-digit percentage growth.
Security Solutions' operating margin was 13.4% vs. 14.9% in 2004. A less
favorable revenue mix (growth in systems integration vs. product sales),
commodity cost inflation and other cost issues all contributed to the decline.
Mr. Lundgren commented: "While we expect our Security Solutions business
to consistently raise its operating margin performance over time, it is
emerging and developing and thus does not yet have the size and scale needed
to do so on a quarter-to-quarter basis. It is noteworthy that operating
margins improved from 14.4% in the first half of 2005 to 15.8% in the second
half. This is largely the result of ongoing integrations of recently acquired
businesses and the implementation of profit improvement initiatives early in
2005. With additional cost actions that are being taken in January, we see a
clear path to further improvement to over 16% in 2006 and beyond."
For the total company, full year 2005 sales from continuing operations
were $3,285 million, an increase of 10%, with 4% organic growth and 6% from
acquisitions. Operating margins of 13.5% declined 30 basis points and earnings
per fully diluted share from continuing operations were $3.18, an increase of
13% over 2004 earnings from continuing operations of $2.81.
Free cash flow before dividends (cash from operations less capital
expenditures) was $294 million vs. $317 million last year. Free cash flow
equaled 109% of net income.
Mr. Lundgren noted: "With 10% total sales growth, 13% earnings per share
growth, almost $300 million of free cash flow, the acquisition of Security
companies totaling $140 million in annual revenues, and the financing and
virtual completion of the Facom Tools and National Hardware acquisitions, 2005
was certainly a successful year for our company and one consistent with our
long term financial objectives. I am pleased with our early progress toward
integrating our two latest acquisitions, as the Stanley-Facom and Stanley-
National teams have come together quickly to initiate programs designed to
deliver anticipated earnings accretion and strategic benefits from these
transactions.
"The transition of our portfolio is enabling higher growth and
profitability, while lessening our dependency on large retail customers and we
are likely to pursue additional acquisitions and divestitures to further
diversify our revenue base. We are well-positioned to exceed $4 billion in
revenues and, as appropriate, to continue the upgrading of our portfolio of
businesses."
During the fourth quarter, the company repatriated $245 million of cash
from foreign locations to the U.S. in connection with the American Jobs
Creation Act. A related $15 million charge (17 cents per fully-diluted share)
associated with the cost of the repatriation was included in the results of
the previous quarter.
The acquisition of National Hardware was completed on November 30, 2005
and Facom Tools on January 1, 2006 while $450 million was raised through an
Enhanced Trust Preferred Securities offering as part of the funding strategy
for those two acquisitions. The company also recently announced the
discontinuation of its appliance hardware and U.K. paint decorator tools
businesses. Income from these businesses was excluded from continuing
operations of the fourth quarters of 2005 and 2004 and both full years.
In view of its reduced fourth quarter 2005 organic sales growth as well as
to provide a more tempered outlook for the overall market environment, the
company has undertaken cost reduction actions expected to deliver
approximately $40 million of benefit in 2006, most of which have already been
implemented or will be by the end of January. These actions will require
approximately $16 million pre-tax, or 13 cents per fully diluted share, of
one-time costs (primarily severance-related), of which approximately 11 cents
will be incurred in the first quarter of 2006.
In addition, management plans to commence the expenditure of approximately
$200 million to repurchase outstanding shares of the company's common stock.
The repurchase program is expected to be completed over the next several
months. Savings from such cost actions and benefits of the share repurchase
activity are expected to enable the company to achieve strong 2006 EPS growth
despite its more cautious stance on external market conditions, as shown
below.
Total sales growth of 24-26% and organic sales growth of 2-4% are now
expected in 2006, approximately 2% (200bp) lower than previously forecast. A
detailed breakout by Segment by quarter is included as an exhibit to this
press release. The company also expects that full year 2006 earnings per fully
diluted share from continuing operations will approximate $3.45-$3.65, an
increase of approximately 8-15% over $3.18 earned in 2005:
2005 EPS $3.18
Earnings growth from operations (up 14-17%) $0.45 - $0.53
Stock option expense (FAS 123R) ($0.06)
Higher income tax rate ($0.18 - $0.22)
Share repurchase benefit $0.10 - $0.15
Sub-total, base - operating (EPS up 8-14%) $3.45 - $3.62
Facom Tools & National Hardware operations $0.41
2006 Security acquisitions ($100 million revenues) $0.02
Sub-total - operating (EPS up 22-27%) $3.88 - $4.05
Non-cash inventory step-up charges -
(Facom Tools & National Hardware) ($0.27 - $0.30)
Restructuring charge ($0.13)
2006 GAAP EPS estimate (EPS up 8-15%) $3.45 - $3.65
Free cash flow is expected to approximate $350 million in 2006 and
expected costs and benefits from the aforementioned cost actions are included
in the 2006 free cash flow and earnings estimates.
First quarter organic sales growth is forecast at 0-2%, approximately 3-4%
lower than previously expected, as major inventory corrections have continued
into January. Total sales growth is expected to be in the 22-24% range due to
the recent acquisitions of Facom Tools and National Hardware. GAAP earnings
from continuing operations are estimated at 40-45 cents per fully-diluted
share in the first quarter (including the effect of 35-37 cents of charges for
restructuring and acquisition inventory accounting) vs. 77 cents per fully-
diluted share from continuing operations in the first quarter of 2005:
First quarter 2005 EPS $0.77
Earnings impact of Consumer volume decline ($0.07 - $0.08)
Earnings growth from other operations $0.04 - $0.05
Stock option expense (FAS 123R) ($0.02)
Higher income tax rate ($0.03 - $0.04)
Share repurchase benefit $0.01
Sub-total, base - operating $0.68 - $0.71
Facom Tools & National Hardware operations $0.09
Sub-total - operating $0.77 - $0.80
Non-cash inventory step-up charges -
(Facom Tools & National Hardware) ($0.24 - $0.26)
Restructuring charge ($0.11)
2006 earnings estimate (GAAP) $0.40 - $0.45
Benefits of share repurchase activity are not expected to be significant
until the second quarter and benefits from the cost actions are included in
the first quarter 2006 earnings estimate.
The company noted that there are no material changes to the 2007 - 2008
outlook it provided on October 25. Such outlook was provided to clarify the
earnings impact of recent acquisitions and it is not the company's practice to
provide such outlooks on a regular basis. Accordingly, the company does not
plan to update them in future periods.
A conference call with investors has been scheduled for 11:00am Eastern
time tomorrow, Thursday, January 26, to discuss the information in this
release. The call is accessible by telephone at (800) 267-8424 (domestic) and
(706) 634-0695 (international) and via the Internet at
http://www.stanleyworks.com by selecting "Investor Relations". A slide
presentation to accompany the call will be available at
http://www.stanleyworks.com and will remain available after the call.
A replay of the call will also be available two hours after the completion
of the conference call and will remain available for one week and can be
accessed at (800) 642-1687 (domestic) or (706) 645-9291 (international) by
entering the conference identification number 4293554.
Free cash flow is defined as cash flow from operations less capital
investments; the company believes this is an important measure of its
liquidity, as well as its ability to fund future growth and to provide a
return to the shareowners.
The Stanley Works, an S&P 500 company, is a worldwide supplier of consumer
products, industrial tools and security solutions for professional, industrial
and consumer use. More information about The Stanley Works can be found at
http://www.stanleyworks.com .
The Stanley Works corporate press releases are available on the company's
Internet web site at http://www.stanleyworks.com .
CAUTIONARY STATEMENTS
Under the Private Securities Litigation Reform Act of 1995
Statements in the company's press releases attached to this Current Report
on Form 8-K including but not limited to those regarding the company's ability
to: (i) deliver operation margins of over 16% in its Security Solutions
business in 2006 and beyond; (ii) pursue further acquisitions and divestitures
to further diversify its revenue base; (iii) exceed $4 billion in revenues;
(iv) deliver full year 2006 earnings per fully diluted share from continuing
operations of approximately $3.45-$3.65; (v) deliver free cash flow of
approximately $350 million in 2006; (vi) deliver GAAP earnings from continuing
operations estimated at 40-45 cents per fully-diluted share in the first
quarter; and (vii) realize, without material changes, the other results set
forth for 2007 and 2008 on the chart entitled "The Stanley Works and
Subsidiaries 2005-2008 Outlook" attached to the Company's October 25 press
release are "forward looking statements" and subject to risk and uncertainty.
The company's ability to deliver the results as described above (the
"Results") is based on current expectations and involves inherent risks and
uncertainties, including factors listed below and other factors that could
delay, divert, or change any of them, and could cause actual outcomes and
results to differ materially from current expectations.
The company's ability to deliver the Results is dependent upon: (i) the
company's ability to deliver total sales growth of 24-26% and organic sales
growth of 2-4% in 2006; (ii) the company's ability to deliver first quarter
organic sales growth of 0-2% and total sales growth in the 22-24% range; (iii)
the company's ability to deliver sales growth by segment by quarter as
outlined in the exhibit to this press release; (iv) the company's ability to
deliver sales growth in 2007 and 2008 as outlined in the chart attached to the
Company's October 25 press release; (v) the company's ability to identify and
close additional acquisitions, generating approximately $100 million revenue
in each of 2006, 2007 and 2008; (vi) the company's ability to successfully
integrate the Facom, National and other recent acquisitions, as well as future
acquisitions, while limiting associated costs; (vii) the ability of the
company to identify and implement, for the most part by the end of January,
approximately $40 million of cost reductions in 2006 while limiting associated
costs to $16 million pre-tax; (viii) the success of the company's efforts to
raise prices in order to, among other things, offset the impact of steel and
other commodity and material price inflation; (ix) the need to respond to
significant changes in product demand due to economic and other changes; (x)
continued improvements in productivity and cost reductions; (x) the final
geographic distribution of future earnings; (xi) the identification of
overhead cost reduction opportunities and effective execution of the same;
(xii) the company's ability to structure its operations to minimize its
effective tax rate; (xiii) the company's ability to obtain favorable
settlement of routine tax audits; (xiv) the company's ability to limit the
stock option expense to 2 cents per fully diluted share in the first quarter
and 6 cents for the year; (xv) satisfactory payment terms under which the
company buys and sells goods, materials and products; and (xvi) the success of
the Company's efforts to promptly replace old equipment with more energy
efficient and technologically superior equipment, enforce existing contracts
relating to energy use and prices, manage energy use to maximize usage during
lower cost periods and shift to lower cost sources of energy where appropriate
and feasible.
The company's ability to deliver the results is also dependent upon: (i)
the continued success of the company's marketing and sales efforts, including
the company's ability to recruit and retain an adequate sales force; (ii) the
continued success of The Home Depot, Lowe's and Wal-Mart sales initiatives as
well as other programs to stimulate demand for company products; (iii) the
success of recruiting programs and other efforts to maintain or expand overall
Mac Tools truck count versus prior years; (iv) the ability of the sales force
to adapt to changes made in the sales organization and achieve adequate
customer coverage; (v) the ability of the company to fulfill increasing demand
for its products; (vi) the ability to continue successfully managing and
defending claims and litigation; and (vii) the absence or mitigation of
increased pricing pressures from customers and competitors and the ability to
defend market share in the face of price competition; and (viii) the
mitigation of any cost increases generated by, for example, continued increase
in the cost of energy or significant RMB or other currency appreciation.
The company's 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
company's customers, increasing competition, changes in trade, monetary, tax
and fiscal policies and laws, inflation, currency exchange fluctuations, the
impact of dollar/foreign currency exchange and interest rates on the
competitiveness of products and the company's debt program, the strength of
the U.S. economy and the impact of events that cause or may cause disruption
in the company's distribution and sales networks such as war, terrorist
activities, political unrest and recessionary or expansive trends in the
economies of the world in which the company operates.
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.
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Millions of Dollars Except Per Share Amounts)
FOURTH QUARTER YEAR TO DATE
2005 2004 2005 2004
NET SALES $839.4 $790.9 $3,285.3 $2,997.4
COSTS AND EXPENSES
Cost of sales 550.1 500.0 2,104.0 1,893.8
Selling, general and administrative 184.9 182.4 736.8 691.3
Interest - net 9.9 9.7 33.8 34.4
Other - net 13.8 12.2 47.9 46.0
Restructuring charges 0.7 7.7 4.6 7.7
759.4 712.0 2,927.1 2,673.2
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 80.0 78.9 358.2 324.2
Income taxes 15.8 14.5 86.5 87.3
NET EARNINGS FROM CONTINUING
OPERATIONS $64.2 $64.4 $271.7 $236.9
Earnings (loss) from discontinued
operations (including gain
on disposal of $38.5 million fourth
quarter and $180.7 million year to
date 2004) before income taxes (3.8) 42.6 (1.2) 200.8
Income taxes on discontinued
operations 0.2 18.9 0.9 70.8
NET EARNINGS (LOSS) FROM DISCONTINUED
OPERATIONS (4.0) 23.7 (2.1) 130.0
NET EARNINGS $60.2 $88.1 $269.6 $366.9
BASIC EARNINGS PER SHARE OF COMMON
STOCK
Continuing operations $0.76 $0.78 $3.26 $2.89
Discontinued operations (0.05) 0.29 (0.03) 1.58
Total basic earnings per share of
common stock $0.72 $1.07 $3.23 $4.47
DILUTED EARNINGS PER SHARE OF COMMON
STOCK
Continuing operations $0.75 $0.76 $3.18 $2.81
Discontinued operations (0.05) 0.28 (0.02) 1.54
Total diluted earnings per share
of common stock $0.70 $1.04 $3.16 $4.36
DIVIDENDS PER SHARE $0.29 $0.28 $1.14 $1.08
AVERAGE SHARES OUTSTANDING (in
thousands)
Basic 83,915 82,487 83,347 82,058
Diluted 85,856 85,020 85,406 84,244
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
December 31, January 1,
2005 2005
ASSETS
Cash and cash equivalents $657.8 $250.0
Accounts and notes receivable 609.6 575.4
Inventories 460.7 407.3
Other current assets 75.6 82.3
Assets held for sale 13.3 59.9
Total current assets 1,817.0 1,374.9
Property, plant and equipment 467.1 396.2
Goodwill and other intangibles 1,060.4 928.0
Other assets 191.0 168.5
Total assets $3,535.5 $2,867.6
LIABILITIES AND SHAREOWNERS' EQUITY
Short-term borrowings $170.2 $102.5
Accounts payable 327.7 297.9
Accrued expenses 395.0 416.9
Liabilities held for sale 3.1 3.7
Total current
liabilities 896.0 821.0
Long-term debt 895.3 481.8
Other long-term liabilities 309.4 328.2
Shareowners' equity 1,434.8 1,236.6
Total liabilities and
equity $3,535.5 $2,867.6
THE STANLEY WORKS AND SUBSIDIARIES
SUMMARY OF CASH FLOW ACTIVITY
(Unaudited, Millions of Dollars)
FOURTH QUARTER YEAR TO DATE
2005 2004 2005 2004
OPERATING ACTIVITIES
Net earnings $60.2 $88.1 $269.6 $366.9
Depreciation and amortization 25.8 24.7 96.5 95.0
Changes in working capital 90.1 40.0 (23.9) (7.0)
Other (26.1) (23.2) 20.1 (83.4)
Net cash provided by operating
activities 150.0 129.6 362.3 371.5
INVESTING AND FINANCING ACTIVITIES
Capital and software expenditures (24.4) (18.4) (68.4) (54.8)
Proceeds (taxes paid) from sale
of business - 75.4 (20.6) 204.9
Business acquisitions and asset
disposals (174.5) (40.7) (282.9) (298.2)
Cash dividends on common stock (24.3) (24.0) (94.9) (89.4)
Other 392.9 (128.2) 512.3 (88.4)
Net cash provided by (used in)
investing and financing
activities 169.7 (135.9) 45.5 (325.9)
Increase (decrease) in Cash and
Cash Equivalents 319.7 (6.3) 407.8 45.6
Cash and Cash Equivalents,
Beginning of Period 338.1 256.3 250.0 204.4
Cash and Cash Equivalents, End of
Period $657.8 $250.0 $657.8 $250.0
Free Cash Flow Computation
Operating Cash Flow $150.0 $129.6 $362.3 $371.5
Less: capital and software
expenditures (24.4) (18.4) (68.4) (54.8)
Free Cash Flow (before dividends) $125.6 $111.2 $293.9 $316.7
Free cash flow is defined as cash flow from operations less capital
expenditures; the company believes this is an important measure of its
liquidity, as well as its ability to fund future growth and to provide
a return to the shareowners.
The change in working capital is comprised of accounts receivable,
inventory and accounts payable.
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
FOURTH QUARTER YEAR TO DATE
2005 2004 2005 2004
NET SALES
Consumer Products $289.5 $288.6 $1,097.8 $1,042.7
Industrial Tools 339.4 331.6 1,369.5 1,292.5
Security Solutions 210.5 170.7 818.0 662.2
Total $839.4 $790.9 $3,285.3 $2,997.4
OPERATING PROFIT
Consumer Products $45.2 $48.0 $185.2 $171.4
Industrial Tools 30.9 35.1 135.5 133.1
Security Solutions 28.3 25.4 123.8 107.8
Total $104.4 $108.5 $444.5 $412.3
THE STANLEY WORKS AND SUBSIDIARIES
2006 SALES GROWTH
(Unaudited, Millions of Dollars)
2006 Earnings Outlook:
Total Year Spit By Quarter
Sales Growth: 2006 Q1 Q2 Q3 Q4
Consumer Products 2-3% (1-2%) 4-6% 2-4% 3-4%
Industrial Tools 1-2% (0-1%) 2-3% 2-3% 1-2%
Security Solutions 3-4% 2-3% 4-5% 4-5% 2-3%
Core Organic: 2-4% ~1% ~4% ~4% ~3%
Facom Tools $450M 27% 25% 22% 26%
National Hardware $185M 24% 27% 25% 24%
06 Acquisitions $100M 0% 0% 50% 50%
+24% - 26%
SOURCE The Stanley Works
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Related links:
http://www.StanleyWorks.com
Company News On-Call:
http://www.prnewswire.com/comp/874363.html
CONTACT:
Gerry Gould, V.P. - Investor Relations, The
Stanley Works, +1-860-827-3833, or ggould@stanleyworks.com
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