Free Cash Flow Increases 16%; Generates $0.98 of Diluted EPS from
Continuing Operations
NEW BRITAIN, Conn., Oct. 21 /PRNewswire-FirstCall/ -- The Stanley Works
(NYSE: SWK) announced third quarter 2008 financial results today.
Highlights are summarized below:
-- Net sales from continuing operations were $1.12 billion, up 1% vs. prior
year despite the unfavorable impact of global economic conditions on
unit volume. The increase was attributable to acquisitions (+3 pts.)
and currency (+2 pts.), partially offset by lower organic sales (-4
pts.), which were adversely impacted by a 7 pt. volume decline.
-- The 3Q gross margin rate improved 40 bp to a record 38.5%. The increase
was driven by productivity, pricing and acquisitions. Pricing actions
offset approximately 75% of inflation during the quarter. SG&A
expenses were 24.6% of sales, up $23 million vs. the prior year due
primarily to acquisitions, foreign exchange, inflation and investment in
emerging markets, the effects of which were partially offset by second
and third quarter cost reduction actions.
-- Free cash flow increased significantly versus the prior year to $138
million on the strength of working capital performance. Working capital
turns improved 9% to 4.8 from 4.4 as the Stanley Fulfillment System
continued to favorably impact results. In this regard, inventories were
7% lower than a year ago despite the steep decline in unit volume.
Segment Results
Segment results are summarized below:
3Q08 Versus 3Q07
----------------------------- --------------------------
(millions) Segment Segment Segment Segment
Sales Profit Profit Rate Sales Profit Profit Rate
----- ------- ----------- ----- ------- -----------
Security $395 $74 18.7% +7% +8% 30 bp
Industrial $298 $40 13.5% 0% -3% -40 bp
CDIY $427 $54 12.7% -2% -25% -380 bp
-- Security produced strong quarterly results with sales and segment profit
up 7% and 8%, respectively (up 13% and 27%, respectively, ex-Hardware,
which has been impacted in 2008 by the previously disclosed loss of a
major customer). Convergent Security profitability improved
significantly, up 59% versus the prior year, driven by the highly
successful reverse integration of HSM and the recent Sonitrol
acquisition which is performing in line with expectations. Mechanical
Access grew 2% organically, ex-Hardware (the impact of the
aforementioned hardware customer loss will anniversary in mid-4Q08).
-- Industrial segment sales remained consistent with the prior year despite
lower organic volumes which were offset by favorable currency and price.
The company experienced healthy organic growth within its Engineered
Storage and Hydraulics Tools businesses, which was more than offset by
lower unit volumes within the Industrial & Automotive Repair Tools
businesses. With regard to the latter, Facom's organic revenues
were flat versus the prior year as pricing offset the impact of lower
volume due to the contraction of the European economy. In North
America, revenues within automotive repair tools continued to be
adversely impacted by economic factors. Industrial segment profit as a
percent of sales improved 50 bp sequentially vs. the second quarter 2008
but declined 40 bp versus prior year.
-- CDIY sales decreased 2%, driven by weakness in the U.S. and European
markets. Pricing actions and currency only partially mitigated the
impact of lower unit volumes (-9 pts.) resulting primarily from
continued softness in North American and European end user markets.
CDIY made progress on price recovery actions and productivity within the
quarter, however, profit as a percent of sales declined to 12.7% as
pressures related to inflation and lower sales volumes more than offset
these benefits.
John F. Lundgren, Chairman and Chief Executive Officer, stated:
"Stanley's solid performance in arguably the most difficult global economic
conditions in recent memory is directly attributable to the diversity of
the company's improved portfolio of businesses and end markets, as well as
the intensity and commitment of our experienced management team. We have
been preparing to operate successfully during a recession of unknown
duration for quite some time now. Our priorities are to preserve our
earnings base and strong cash flow during this period through a sharp focus
on the key operating levers of cost management and asset efficiency. That
approach, combined with our long-standing conservative financial posture,
will enable us to favorably differentiate the company as we proceed through
this down cycle and position us well to meet our long-term financial
objectives as global economic conditions improve."
Management noted that its most recent full year 2008 earnings guidance,
as communicated within its second quarter earnings release, assumed a unit
volume for the second half of 2008 that was approximately equal to the
first half of the year. As a result of the slowing global economy and as
evidenced by lower third quarter unit volume, the company now expects that
second half volume declines will exceed those experienced during the first
half of the year. Accordingly, full year 2008 diluted earnings per share
from continuing operations is expected to approximate $3.75. Further,
management is able to reaffirm its previous estimate of free cash flow of
at or slightly below $500 million, or approximately 18% of the company's
market capitalization as of Friday, October 17th.
Acquisition Activity
Subsequent to the third quarter, the company completed the following
acquisitions both of which were consistent with its stated growth strategy:
On October 1, 2008, the company purchased 100% of the shares of
Generale de Protection ("GdP") from an ownership group comprised of TCR
Industrial Partners and Intermediate Capital Group for 118 million euro
(approximately $166 million). 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 64 million euro ($87 million)
represents Stanley's first significant expansion of its electronic security
platform in continental Europe.
The transaction is expected to have no effect on 2008 earnings per
share from continuing operations and have a modest accretive impact in
2009. The GdP purchase price represents multiples of 33x recurring monthly
revenues ("RMR") and 1.8x revenues based on expected 2008 results.
In addition to GdP, on October 1, 2008, the company completed the
purchase of Scan Modul for $20 million cash. Scan Modul, headquartered in
Hillerod, Denmark, provides engineered healthcare storage equipment and
services throughout Europe. The acquisition of Scan Modul expands the
company's healthcare storage technology offering provided by its existing
Innerspace business acquired in July 2007.
Mr. Lundgren commented that "given the current economic environment,
Stanley plans to reduce its capital outlays associated with large
acquisitions in the near term and will instead focus on maintaining
targeted leverage required to retain its upper tier investment grade rating
and on stock repurchase activity as conditions warrant. While I would not
rule out larger transactions in the coming months, with the company trading
at an enterprise value between 6X and 7X 2008 EBITDA, any such transaction
would need to involve minimal capital consumption and/or be priced at
levels lower than the private M&A multiples we have seen in the recent
past. It is our view that it will take time for private multiples to
adjust, thus creating a window of opportunity for redeployment of capital
to stock repurchases in 2009."
The company will host a conference call with investors at 10:00am EST,
Tuesday, October 21, 2008 to discuss quarterly results. 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 will also be available two hours after the call and can be
accessed at (800) 642-1687 using the conference identification number
57411309.
Operating margin is defined as sales less cost of sales less SG&A.
Management uses operating margin and its percentage of net sales as key
measures to assess the performance of the company as a whole, as well as
the related measures at the segment level.
Free cash flow is defined as cash flow from operations less capital and
capitalized software expenditures. Free cash flow does not reflect, among
other things, deductions for mandatory debt service, other borrowing
activity, discretionary dividends on the company's common stock and
acquisitions. Organic sales growth is defined as total sales growth less
sales of companies acquired in the past twelve months and less foreign
currency impacts. The company believes these are important measures of its
liquidity, of its ability to fund future growth and to provide a return to
the shareowners, and of its sales performance.
The Stanley Works, an S&P 500 company, is a diversified worldwide
supplier of tools and engineered solutions for professional, industrial,
construction and do-it-yourself use, and security solutions for commercial
applications. 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 this press release, including but not limited to those
regarding the Company's ability to: (i) deliver full year 2008 diluted
earnings per share from continuing operations of approximately $3.75; (ii)
deliver free cash flow at or slightly below $500 million; (iii) deliver a
modestly accretive impact on 2009 earnings per share from continuing
operations as a result of the GdP transaction; and (iv) retain its upper
tier investment grade rating (the "Results"); and the Company's plans to
(i) reduce capital outlays associated with large acquisitions in the near
term; and (ii) focus on stock repurchase activity as conditions warrant
(the "Plans") 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. In addition to the
risks, uncertainties and other factors discussed in this press release, 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 of the Company's Annual Report on Form 10-K and
any material changes thereto set forth in any subsequent Quarterly Reports
on Form 10-Q, those contained in the Company's other filings with the
Securities and 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, discontinue certain product
lines, including the consumer metal storage business, during 2008; (ii) the
Company's ability to successfully integrate recent acquisitions (including
Sonitrol, Xmark, Scan Modul and GdP), as well as any future acquisitions,
while limiting associated costs; (iii) the success of the Company's efforts
to expand its tools and security businesses; (iv) the success of the
Company's efforts to build a growth platform and market leadership in
Convergent Securities Solutions; (v) the Company's success in developing
and introducing new products, growing sales in existing markets and
identifying and developing new markets for its products, including its
Convergent Security Solutions products; (vi) the continued acceptance of
technologies used in the Company's products, including Convergent Security
Solutions products; (vii) the Company's ability to manage existing Sonitrol
franchisee relationships; (viii) the Company's ability to minimize costs
associated with any sale or discontinuance of a product line, including any
severance, restructuring, legal or other costs; (ix) the proceeds realized
with respect to any product line disposals; (x) the extent of any asset
impairments with respect to the product lines mentioned; (xiii) the success
of the Company's efforts to manage freight costs, steel and other commodity
costs; (xi) the success of the Company's 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
other inflation increases; (xii) the Company's ability to reduce its costs,
increase its prices, change the manufacturing location or find alternate
sources for products made in China in order to (a) mitigate the impact of
an increase in the VAT rate applicable to products the Company makes or
purchases in China and (b) mitigate the impact of an anti-dumping tariff
recently imposed on certain nails imported from China; (xiii) the Company's
ability to generate free cash flow and maintain a strong debt to capital
ratio; (xiv) the Company's ability to identify and effectively execute
productivity improvements and cost reductions, while minimizing any
associated restructuring charges; (xv) the Company's ability to obtain
favorable settlement of routine tax audits; (xvi) the ability of the
Company to generate earnings sufficient to realize future income tax
benefits during periods when temporary differences become deductible;
(xvii) the continued ability of the Company to access credit markets under
satisfactory terms; and (xviii) the Company's ability to negotiate
satisfactory payment terms under which the Company buys and sells goods,
services, materials and products.
The Company's ability to deliver the Results is also dependent upon:
(i) the continued success of the Company's marketing and sales efforts;
(ii) the success of recruiting programs and other efforts to maintain or
expand overall Mac Tools truck count versus prior years; (iii) the ability
of the Company to maintain or improve production rates in the Company's
manufacturing facilities, respond to significant changes in product demand
and fulfill demand for new and existing products; (iv) the ability to
continue successfully managing and defending claims and litigation; (v) the
Company's ability to continue improvements in working capital; (vi) the
success of the Company's efforts to mitigate any cost increases generated
by, for example, continued increases in the cost of energy or significant
Chinese Renminbi or other currency appreciation; and (vii) the geographic
distribution of the Company's earnings.
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; the impact the tightened credit markets may
have 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. and European economies; the extent to which North
American markets associated with homebuilding and remodeling continue to
deteriorate; and the impact of events that cause or may cause disruption in
the Company's manufacturing, 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, including, but
not limited to, the extent and duration of current recessionary trends in
the US economy.
The Company's Plans may change in response to future events, which may
include, but are not limited to, an improved economic environment, better
than expected performance by the Company during the fourth quarter or in
future periods, and specific acquisition opportunities that may become
actionable.
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)
THIRD QUARTER YEAR TO DATE
------------- ------------
2008 2007 2008 2007
---- ---- ---- ----
NET SALES $1,119.7 $1,106.2 $3,347.6 $3,240.0
COSTS AND EXPENSES
Cost of sales 688.3 684.6 2,068.3 2,009.8
Gross margin 431.4 421.6 1,279.3 1,230.2
% to Net sales 38.5% 38.1% 38.2% 38.0%
Selling, general and
administrative 275.0 252.4 833.3 770.1
% to Net sales 24.6% 22.8% 24.9% 23.8%
Operating margin 156.4 169.2 446.0 460.1
% to Net sales 14.0% 15.3% 13.3% 14.2%
Other - net 28.7 25.2 70.1 67.7
Restructuring charges and
asset impairments 4.8 2.8 25.0 10.4
----- ----- ----- -----
Income from operations 122.9 141.2 350.9 382.0
Interest - net 18.3 20.2 54.5 60.6
----- ----- ----- -----
EARNINGS FROM CONTINUING
OPERATIONS
----- ----- ----- -----
BEFORE INCOME TAXES 104.6 121.0 296.4 321.4
----- ----- ----- -----
Income taxes 26.2 32.5 76.9 84.8
----- ----- ----- -----
NET EARNINGS FROM CONTINUING
OPERATIONS 78.4 88.5 219.5 236.6
----- ----- ----- -----
Earnings from discontinued
operations before income
taxes (including $128.1
million gain on third
quarter 2008 divestiture
and $129.7 million
year-to-date 2008) 130.4 4.6 139.2 12.4
Income taxes on
discontinued operations 44.3 1.7 46.6 4.7
------ ----- ------ ------
NET EARNINGS FROM
DISCONTINUED OPERATIONS 86.1 2.9 92.6 7.7
------ ----- ------ ------
------ ----- ------ ------
NET EARNINGS $164.5 $91.4 $312.1 $244.3
====== ===== ====== ======
BASIC EARNINGS PER SHARE
OF COMMON STOCK
Continuing operations $1.00 $1.08 $2.78 $2.86
Discontinued operations 1.09 0.03 1.17 0.09
----- ----- ----- -----
Total basic earnings per
share of common stock $2.09 $1.11 $3.96 $2.96
----- ----- ----- -----
DILUTED EARNINGS PER SHARE
OF COMMON STOCK
Continuing operations $0.98 $1.05 $2.74 $2.80
Discontinued operations 1.08 0.03 1.16 0.09
----- ----- ----- -----
Total diluted earnings per
share of common stock $2.06 $1.09 $3.90 $2.89
----- ----- ----- -----
DIVIDENDS PER SHARE $0.32 $0.31 $0.94 $0.91
===== ===== ===== =====
AVERAGE SHARES OUTSTANDING
(in thousands)
Basic 78,808 82,288 78,867 82,616
====== ====== ====== ======
Diluted 79,846 83,999 80,025 84,417
====== ====== ====== ======
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
September December
27, 2008 29, 2007
--------- ---------
ASSETS
Cash and cash equivalents $299.3 $240.4
Accounts and notes receivable 884.7 831.1
Inventories 571.4 556.4
Other current assets 93.1 192.0
-------- --------
Total current assets 1,848.5 1,819.9
-------- --------
Property, plant and equipment, net 588.7 564.9
Goodwill and other intangibles, net 2,486.9 2,206.7
Other assets 197.2 188.4
-------- --------
Total assets $5,121.3 $4,779.9
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Short-term borrowings $456.2 $292.8
Accounts payable 523.8 499.6
Accrued expenses 518.8 486.0
-------- --------
Total current liabilities 1,498.8 1,278.4
-------- --------
Long-term debt 1,194.4 1,212.1
Other long-term liabilities 556.6 560.9
Shareowners' equity 1,871.5 1,728.5
-------- --------
Total liabilities and equity $5,121.3 $4,779.9
======== ========
THE STANLEY WORKS AND SUBSIDIARIES
SUMMARY OF CASH FLOW ACTIVITY
(Unaudited, Millions
of Dollars)
THIRD QUARTER YEAR TO DATE
------- ------------
2008 2007 2008 2007
---- ---- ---- ----
OPERATING ACTIVITIES
Net earnings $164.5 $91.4 $312.1 $244.3
Depreciation and amortization 47.2 42.2 128.5 120.1
Changes in working capital 40.2 (22.3) 7.5 (54.4)
Net gain on sale of businesses (84.3) - (85.9) -
Other (1.7) 19.0 (5.1) 16.2
------ ------ ------ ------
Net cash provided by operating
activities 165.9 130.3 357.1 326.2
INVESTING AND FINANCING ACTIVITIES
Capital and software expenditures (28.3) (11.5) (81.9) (55.0)
Proceeds from sale of business,
net of income taxes paid 162.5 - 165.8 -
Business acquisitions and asset
disposals (336.2) (55.9) (363.2) (619.1)
Proceeds on long-term borrowings 0.2 - 0.2 529.8
Cash dividends on common stock (25.2) (25.4) (73.8) (74.9)
Other (23.8) 17.4 54.7 (3.0)
------ ------ ------ ------
Net cash used in investing and
financing activities (250.8) (75.4) (298.2) (222.2)
Increase (Decrease) in Cash and Cash
Equivalents (84.9) 54.9 58.9 104.0
Cash and Cash Equivalents, Beginning
of Period 384.2 225.7 240.4 176.6
------ ------ ------ ------
Cash and Cash Equivalents, End of
Period $299.3 $280.6 $299.3 $280.6
====== ====== ====== ======
Free Cash Flow Computation
--------------------------
Operating cash flow $165.9 $130.3 $357.1 $326.2
Less: capital and software
expenditures (28.3) (11.5) (81.9) (55.0)
------ ------ ------ ------
Free cash flow (before dividends) $137.6 $118.8 $275.2 $271.2
====== ====== ====== ======
Free cash flow is defined as cash flow from operations less capital and
capitalized software expenditures. The company believes this is an
important measure of its liquidity, of its ability to fund future growth
and to provide a return to the shareowners. Free cash flow does not
reflect, among other things, deductions for mandatory debt service, other
borrowing activity, discretionary dividends on the Company's common stock
and acquisitions.
The change in working capital is comprised of current accounts
receivable, inventory and accounts payable.
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
THIRD QUARTER YEAR TO DATE
------------- ------------
2008 2007 2008 2007
---- ---- ---- ----
NET SALES
Construction & DIY $426.7 $437.5 $1,284.3 $1,274.4
Industrial 298.1 298.1 969.0 908.4
Security 394.9 370.6 1,094.3 1,057.2
-------- -------- -------- --------
Total $1,119.7 $1,106.2 $3,347.6 $3,240.0
======== ======== ======== ========
SEGMENT PROFIT
Construction & DIY $54.2 $72.2 $167.0 $194.0
Industrial 40.2 41.4 133.0 132.5
Security 74.0 68.3 192.9 181.3
------ ------ ------ ------
Segment Profit 168.4 181.9 492.9 507.8
Corporate Overhead (12.0) (12.7) (46.9) (47.7)
------ ------ ------ ------
Total $156.4 $169.2 $446.0 $460.1
====== ====== ====== ======
Segment Profit as a
Percentage of Net Sales
Construction & DIY 12.7% 16.5% 13.0% 15.2%
Industrial 13.5% 13.9% 13.7% 14.6%
Security 18.7% 18.4% 17.6% 17.1%
---- ---- ---- ----
Segment Profit 15.0% 16.4% 14.7% 15.7%
Corporate Overhead -1.0% -1.1% -1.4% -1.5%
---- ---- ---- ----
Total 14.0% 15.3% 13.3% 14.2%
==== ==== ==== ====
SOURCE The Stanley Works
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Related links:
http://www.stanleyworks.com
http://www.prnewswire.com/comp/874363.html
CONTACT:
Greg Waybright, Interim VP Investor
Relations, +1-860-827-3544, gwaybright@stanleyworks.com
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