Stanley Works Q2 financials

This result included $48 million of pre-tax restructuring costs, impairment charges, other exit costs and certain one-time expenses related to its CEO's previously announced retirement. Aside from such costs, earnings per fully diluted share were 52 cents, at the upper end of the company's estimate of 48-52 cents.

Reported results for the second quarter and first six months of 2003 and 2002 are supplemented with related amounts and percentages that exclude restructuring costs, impairment charges, other exit costs, one-time executive retirement costs and a 2002 pension gain. Management believes these supplemental financial measures provide useful information by removing the effect of variances in reported results that are not indicative of fundamental changes in the company's earnings capacity.

Net sales were $700 million, up 8% over last year and slightly above expectations. Exclusive of the Best Access Systems acquisition, sales declined 2% with currency adding 4%. Sales in the consumer channel decreased due to continued customer inventory reductions and the carryover impact of a lost region of a major customer in entry doors that occurred in the fourth quarter of 2002. In addition, soft market conditions in the industrial channels continued, and the closure of the Mac Direct model began to be felt.

Operating cash flow was $64 million versus $84 million last year. On a year-to-date basis, operating cash flow was $116 million versus $105 million in 2002, and free cash flow (cash from operations less capital expenditures) of $101 million was 37% higher than the first half of last year.

The company recently repurchased 3.9 million shares of common stock and agreed to settle the remainder of its equity hedge via the repurchase of 4.1 million shares over the next four years. The effects of these second quarter actions plus a settlement resulting in the receipt of .4 million shares from the hedge banks, were increased debt of $213 million and a 9.5% reduction of outstanding shares. Using cash repatriated from foreign locations and operating cash flows, $55 million of debt was repaid and, thus, total debt increased by $158 million.

Second quarter 2003 gross margin was $231 million, or 33.0% of sales, versus $223 million in the prior year. This included $3 million of impairment charges and other exit costs related to the termination of Mac Direct. Aside from such costs, gross margin was 33.5% versus 34.4% last year.

Selling, general and administrative ('SG&A') expenses of $174 million were $39 million above second quarter 2002 levels. Included in 2003 costs are $12 million relating primarily to the exiting of Mac Direct and $8 million of compensation recorded in connection with the retirement of the company's CEO. Such retirement expenses were comprised of severance and pension as specified in an employment contract entered into in 2000.

Aside from the aforementioned Mac Direct exit and executive retirement costs, SG&A expenses were $154 million, or 22.0% of sales, versus $127 million, or 19.5% of sales (exclusive of certain non-recurring charges last year), reflecting the inclusion of Best Access Systems. On the same basis SG&A expenses were $8 million and 230 basis points lower than the first quarter of 2003, reflecting the benefits of Operation 15 actions.

Resulting operating income was $57 million versus $88 million last year. Operating margins, aside from the retirement, impairment and other exit costs referred to above, were 11.5% versus 14.9% last year and 9.0% in the first quarter of 2003 on volume leverage, the strength of Best Access Systems performance, and the early-stage benefits of Operation 15. Specifically, the

John M. Trani, chairman and CEO commented: 'Our people executed the second quarter Operation 15 actions very well. We came very close to our 12% operating margin objective. Operation 15 is on track to deliver $100 million of annual savings, and the 15% rate depends, to a large extent, on sales volume.'

Tools operating margins were 5.0% versus 13.2% last year. Excluding impairment and exit charges, Tools operating margins of 9.3% improved 60 basis points over the first quarter of 2003 due to the impact of Operation 15. Tools sales decreased 3% to $481 million due principally to weak consumer sales and the exit of Mac Direct. Lower volume, pricing pressures and commodity cost inflation were the principal causes of the lower margin versus 2002.

Doors operating margins were 15.1% versus 14.7% last year. Excluding impairment and exit charges, Doors margins of 16.1% improved 640 basis points over the 9.7% realized in the first quarter due to growth in Access Solutions and Operation 15 actions. Doors sales increased 43% to $219 million, but organic sales declined 4% as weakness in consumer doors more than offset growth in Access Technologies. Door Systems were adversely affected by the previously announced loss of one region of a major retail customer in addition to customer inventory reductions. Improved mix due to inclusion of Best Access Systems was primarily responsible for the margin gain versus the prior year.