Revenues Up 12%; EPS $1.09; Operating Margin Rate Reaches Record Levels
NEW BRITAIN, Conn., Oct. 24 /PRNewswire-FirstCall/ -- The Stanley Works
(NYSE: SWK) announced third quarter 2007 financial results today.
Highlights are summarized below:
-- Net sales were $1.13 billion, up 12% vs. the prior year. The increase
was attributable to organic growth (3 pts.), currency (2 pts.) and
acquisitions (7 pts.).
-- Fully-diluted EPS was $1.09, unchanged from the third quarter of 2006.
-- Income tax rate was 27%, compared with 20% a year ago. The higher tax
rate impacted results by $0.10 per fully-diluted share in the third
quarter of 2007.
-- Pretax income and operating margin were up 11% and 20%, respectively.
-- Operating margin rate was a record 15.4%, a 100bp improvement. Gross
margin rate was 38.1%, up 80 bps over the third quarter of 2006 and
SG&A expenses were 22.7% of sales, 20 bps lower than the prior year.
-- Free cash flow was $119 million (130% of net income), up 24%.
Segment Results
Strong performances in Industrial and Security more than offset U.S.
market-related issues in Construction & DIY (CDIY), as summarized in the
following table:
3Q07 Versus 3Q06
(millions) Segment Segment Segment Segment
Sales Profit Profit Rate Sales Profit Profit Rate
CDIY $ 457 $ 77 16.8% + 3% - 5% -130bps
Industrial $ 300 $ 42 13.9% + 13% + 46% +320bps
Security $ 374 $ 69 18.4% + 24% + 34% +130bps
-- In CDIY, double-digit sales increases in Europe, Australia, Latin
America and Asia essentially offset weakness in the U.S. New product
initiatives and currency were the primary drivers of these increases.
The segment profit rate was lower primarily due to product mix and un-
recovered cost inflation within the U.S.
-- Industrial segment sales benefited from 5% organic sales growth in
Industrial and Automotive Repair Tools (Facom, Proto and Mac) and
double-digit organic growth in Engineered Solutions. The profit rate
expanded as a result of strong price realization and productivity.
-- In Security, acquisitions - primarily HSM acquired in early 2007 -
accounted for 20 pts. of the sales increase. Mechanical Access sales
were very strong, partially offset by weak legacy U.S. Systems
Integration (USSI) sales. Segment profit benefited from the inclusion
of HSM, as well as strong price realization and a mix shift between
mechanical access and legacy USSI.
John F. Lundgren, Chairman and Chief Executive Officer, stated: "We
were able to deliver solid earnings and cash flow results this quarter in
spite of the challenging environment in U.S. CDIY. We continue to focus on
reshaping our portfolio of businesses, as well as executing on new
products, brand support, productivity and price/inflation recovery to bring
about profitable growth.
"We are pleased with the status of acquisition integrations, as well as
the stabilization of the legacy USSI business. Security Solutions attained
the highest segment profit percentage in our portfolio and Bostitch (within
the CDIY segment) continued to deliver solid progress toward better
financial performance. We remain confident in our prospects for this year
and beyond."
Management reaffirmed its previous estimates for 2007: the range of
current year EPS expectations is $4.00-$4.05 per fully diluted share, an
increase of 15-17% over 2006 earnings from continuing operations. The
outlook for total sales growth is approximately 10%, including organic
growth of 2%, based on anticipation of continued weak conditions in U.S.
housing-related markets, which affect 25% of the company's total revenues.
Free cash flow is expected to be $400-$450 million, consistent with prior
guidance.
Fourth quarter 2007 total sales growth is expected at approximately 8%,
with organic sales growth of about 2%. Net earnings are estimated at $1.10-
$1.15 per fully diluted share, up 6%-11%, including an income tax rate of
24%- 26% vs. 14% in 2006 resulting in a difference approximating $0.15 -
$0.18 per share in the quarter.
The company also announced that it recently completed two small
strategic acquisitions that advance the ongoing positioning of its business
portfolio toward growth markets:
-- OSI Security Devices Inc. - A supplier of stand-alone electro-
mechanical locks, headquartered in Chula Vista, California. The
acquisition of OSI adds industry-leading wireless technology-based
locking capabilities to the existing Stanley product and service
offering.
-- Automated Entrance Products Inc. - A supplier of power-operated doors
for commercial, retail and healthcare facilities in the upper Midwest,
headquartered in Burnsville, Minnesota.
These are both additions to the Mechanical Access portion of the
Security segment. Combined annual revenues from these two acquisitions are
expected to approximate $10 million and no significant impact on 2007
earnings is anticipated.
The company will host a conference call with investors at 10:00am EDT,
Wednesday, October 24, 2007 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
20199629.
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 (reconciliation on pg. 8). 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 2007 earnings of $4.00 -
$4.05 per fully diluted share; (ii) deliver 2007 total sales growth of
approximately 10% including organic growth of approximately 2%; (iii)
deliver free cash flow of $400-$450 million in 2007; (iv) deliver fourth
quarter total sales growth of 8% with organic sales growth of about 2%; and
(v) deliver fourth quarter net earnings of $1.10-$1.15 per fully diluted
share; and (vi) limit the income tax rate applicable in the fourth quarter
to 24-26% 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 successfully integrate HSM and other recent
acquisitions, as well as future acquisitions, while limiting associated
costs; (ii) the Company's ability to continue to deliver cost reductions
and profit improvement in its Fastening Systems business; (iii) the success
of the Company's efforts to negotiate lease terminations related to its
European reorganization within established parameters; (iv) the Company's
ability to minimize the costs to relocate equipment and inventory; (v) the
Company's ability to complete the Fastening and European reorganizations
within anticipated time frames; (vi) the success of the Company's efforts
to expand its tools and security businesses; (vii) the Company's success at
new product development and introduction and identifying and developing new
markets; (viii) the success of the Company's efforts to manage freight
costs, steel and other commodity costs; (ix) 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; (x) 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 mitigate the impact of an increase in the VAT rate applicable
to products the Company makes or purchases in China; (xi) the Company's
ability to generate free cash flow and maintain a strong debt to capital
ratio; (xii) the Company's ability to identify and effectively execute
productivity improvements and cost reductions while minimizing any
associated restructuring charges; (xiii) the Company's ability to obtain
favorable settlement of routine tax audits; (xiv) the ability of the
Company to generate earnings sufficient to realize future income tax
benefits during periods when temporary differences become deductible; (xv)
the continued ability of the Company to access credit markets under
satisfactory terms; and (xvi) the Company's ability to negotiate
satisfactory payment terms under which the Company buys and sells goods,
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; 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 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.
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
2007 2006 2007 2006
NET SALES $1,131.3 $1,012.7 $3,316.4 $2,999.3
COSTS AND EXPENSES
Cost of sales 700.2 634.9 2,057.9 1,912.9
Gross Margin 431.1 377.8 1,258.5 1,086.4
% to Net Sales 38.1% 37.3% 37.9% 36.2%
Selling, general and
administrative 256.5 231.9 783.7 715.3
% to Net Sales 22.7% 22.9% 23.6% 23.8%
Operating Margin 174.6 145.9 474.8 371.1
% to Net Sales 15.4% 14.4% 14.3% 12.4%
Other - net 25.9 15.4 69.9 45.6
Restructuring charges 2.9 0.9 10.5 10.0
Income from Operations 145.8 129.6 394.4 315.5
Interest - net 20.2 16.5 60.6 49.5
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 125.6 113.1 333.8 266.0
Income taxes 34.2 22.9 89.5 62.3
NET EARNINGS FROM CONTINUING
OPERATIONS $91.4 $90.2 $244.3 $203.7
Loss from discontinued
operations (including loss on
disposal of $1.5 million in
2006) before income taxes - 0.5 - (1.0)
Income tax benefit on
discontinued operations - 0.2 - (0.2)
NET LOSS FROM DISCONTINUED
OPERATIONS - 0.3 - (0.8)
NET EARNINGS $91.4 $90.5 $244.3 $202.9
BASIC EARNINGS (LOSS) PER SHARE OF
COMMON STOCK
Continuing operations $1.11 $1.11 $2.96 $2.49
Discontinued operations - - - (0.01)
Total basic earnings per
share of common stock $1.11 $1.11 $2.96 $2.48
DILUTED EARNINGS (LOSS) PER SHARE
OF COMMON STOCK
Continuing operations $1.09 $1.09 $2.89 $2.43
Discontinued operations - - - (0.01)
Total diluted earnings per
share of common stock $1.09 $1.09 $2.89 $2.43
DIVIDENDS PER SHARE $0.31 $0.30 $0.91 $0.88
AVERAGE SHARES OUTSTANDING (in
thousands)
Basic 82,288 81,206 82,616 81,853
Diluted 83,999 82,867 84,417 83,669
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
September 29, December 30,
2007 2006
ASSETS
Cash and cash equivalents $280.6 $176.6
Accounts and notes receivable 906.2 749.6
Inventories 624.5 598.9
Other current assets 84.3 85.2
Assets held for sale 15.5 28.2
Total current assets 1,911.1 1,638.5
Property, plant and equipment 566.3 559.4
Goodwill and other intangibles 2,256.9 1,621.5
Other assets 131.1 116.0
Total assets $4,865.4 $3,935.4
LIABILITIES AND SHAREOWNERS' EQUITY
Short-term borrowings $396.0 $320.0
Accounts payable 491.9 445.2
Accrued expenses 501.9 485.9
Total current liabilities 1,389.8 1,251.1
Long-term debt 1,212.2 679.2
Other long-term liabilities 568.3 453.1
Shareowners' equity 1,695.1 1,552.0
Total liabilities and equity $4,865.4 $3,935.4
THE STANLEY WORKS AND SUBSIDIARIES
SUMMARY OF CASH FLOW ACTIVITY
(Unaudited, Millions of Dollars)
THIRD QUARTER YEAR TO DATE
2007 2006 2007 2006
OPERATING ACTIVITIES
Net earnings $91.4 $90.5 $244.3 $202.9
Depreciation and amortization 42.2 30.0 120.1 91.3
Changes in working capital (22.3) (38.2) (54.4) (26.5)
Other 19.0 35.0 16.2 52.1
Net cash provided by operating
activities 130.3 117.3 326.2 319.8
INVESTING AND FINANCING ACTIVITIES
Capital and software expenditures (11.5) (21.2) (55.0) (59.8)
Business acquisitions and asset
disposals (55.9) (24.4) (619.1) (540.2)
Proceeds from long-term
borrowings - - 529.8 -
Cash dividends on common stock (25.4) (24.3) (74.9) (71.6)
Other 17.4 (13.2) (3.0) (64.7)
Net cash used in investing and
financing activities (75.4) (83.1) (222.2) (736.3)
Increase (Decrease) in Cash and
Cash Equivalents 54.9 34.2 104.0 (416.5)
Cash and Cash Equivalents,
Beginning of Period 225.7 207.1 176.6 657.8
Cash and Cash Equivalents,
End of Period $280.6 $241.3 $280.6 $241.3
Free Cash Flow Computation
Operating cash flow $130.3 $117.3 $326.2 $319.8
Less: capital and software
expenditures (11.5) (21.2) (55.0) (59.8)
Free cash flow (before dividends) $118.8 $96.1 $271.2 $260.0
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
2007 2006 2007 2006
NET SALES
Construction & DIY $457.4 $445.8 $1,336.2 $1,286.8
Industrial 300.3 266.1 915.5 841.4
Security 373.6 300.8 1,064.7 871.1
Total $1,131.3 $1,012.7 $3,316.4 $2,999.3
SEGMENT PROFIT
Construction & DIY $77.0 $80.6 $207.2 $203.1
Industrial 41.7 28.6 133.4 85.4
Security 68.8 51.4 182.1 129.7
Segment Profit 187.5 160.6 522.7 418.2
Corporate Overhead (12.9) (14.7) (47.9) (47.1)
Total $174.6 $145.9 $474.8 $371.1
Segment Profit as a Percentage
of Net Sales
Construction & DIY 16.8% 18.1% 15.5% 15.8%
Industrial 13.9% 10.7% 14.6% 10.1%
Security 18.4% 17.1% 17.1% 14.9%
Segment Profit 16.6% 15.9% 15.8% 13.9%
Corporate Overhead -1.2% -1.5% -1.5% -1.5%
Total 15.4% 14.4% 14.3% 12.4%
SOURCE The Stanley Works
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Related links:
http://www.StanleyWorks.com/
http://www.prnewswire.com/comp/874363.html /
CONTACT:
Gerry Gould, V. P. - Investor Relations, The
Stanley Works, +1-860-827-3833, ggould@stanleyworks.com
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