Stanley Works reports Q3 net earnings up 11% over prior year

The Stanley Works, New Britain, CT, announced that third quarter net income was $54 million, up 11% over last year. Net sales of $676 million were 1% lower than last year. On a segment basis, sales decreased 3% in Tools and increased 5% in Doors.

John M. Trani, chairman and CEO, commented: "Our U.S. hand tools business delivered sales growth for the second consecutive quarter due to new product sales and recent share gains, especially at Wal-Mart where the product line continues to be rolled out. Shipments of our entry door products to The Home Depot were very strong as the new product line enjoyed significant success with consumers."


"However," Mr. Trani added, "these positives were not enough to completely offset the very weak commercial and industrial markets served by the majority of our businesses. These market conditions are the weakest encountered by Stanley in at least a decade."

Gross margin was 35.4%, a decline of 40 basis points from 35.8% in the third quarter of 2000, principally from lower industrial sales. Continuing solid productivity improvements were insufficient to offset the mix shift to the retail channel.

Selling, general and administrative ("SG&A") expenses, exclusive of a one-time charge, were $147 million (21.8% of sales) and were 10% (or 190 basis points) below last year. Excluding both the one-time charge in the third quarter and the impact of the acquisition in the second quarter, SG&A expenses declined sequentially for the 7th consecutive quarter.


Mr. Trani commented: "Again this quarter we dealt with lower volume in continuing weak markets and adjusted employment levels accordingly." As a result and as previously announced, the company incurred a third-quarter charge of $5 million for new severance obligations, of which $3 million was paid out during the quarter. The after-tax effect of the charge was offset by certain non-recurring tax transactions.

Operating margin was 13.6%, up 150 basis points from 12.1% last year. The year-to-date operating margin of 13.3%, if sustained through year-end, would be the company's highest operating margin in the more than 35 years its stock has been listed on the New York Stock Exchange.

Net interest expense of $6.7 million was less than the $7.2 million in the prior year due to lower interest rates. Other net expenses increased to $3.9 million versus $1.8 million last year due to higher goodwill amortization and the absence of gains from asset sales.
Cash generated by operations was $69 million, and free cash flow (after dividend payments) was $29 million, both slightly less than year-ago levels. Inventory reductions were especially noteworthy given their tendency to rise in the third quarter on a seasonal basis.

Tools sales decreased 3% from the third quarter of 2000 to $514 million. Operating margin, exclusive of the one-time charge described above, was 14.3%, an increase of 140 basis points over last year. Doors sales increased 5% to $162 million. Operating margin increased 220 basis points to 11.4% of sales, compared with 9.2% last year. Benefits from the company's relocation of its hardware business to China drove the improvement. Despite lower volume and a continuing mix shift to retail channels, performance in both segments reflected continuing productivity gains and selling, general and administrative expense reductions.

Since the events of Sept. 11, orders have been somewhat below normal. Management's current estimate is that fourth quarter sales will be about 5% below last year. Industrial and commercial markets are likely to remain weak for the remainder of the year. In response, salaried employment reductions of 10% (about 475 positions) have been undertaken, most of which are already completed. These reductions are expected to lower SG&A expenses by $6-$8 million in the fourth quarter. Additional actions will be undertaken, including facility closures and

related workforce reductions. The company expects to complete these actions during the fourth quarter of 2001 and the year 2002.

These actions will require a restructuring charge to fourth quarter earnings of approximately $60 million, virtually all of which is severance-related. The cash outflow for these restructuring activities is likely to be offset by the reversion of cash proceeds from the pension-related gain recorded in the first quarter of 2001, as both are expected to occur principally during 2002.

Mr. Trani stated: "These actions should enable us to deliver fourth quarter earnings of approximately $.57 per fully-diluted share, up 5% over last year, despite an expected 5% sales decline. With a solid balance sheet, a rapidly declining cost structure and an inherent strong cash flow, we are very well positioned to outperform in this unfavorable economic environment."

For the full year 2002, these cost actions enable management to affirm its concurrence with current First Call consensus earnings estimates in the range of $2.64 per fully-diluted share, a double-digit %age increase over 2001. Expectations are for sales to be slightly higher than 2001, principally in the second half of the year. These estimates assume that global economic conditions remain lackluster but do not deteriorate further during 2002.