Stanley Works tools sales drop

The Stanley Works, New Britain, CT, announced that first quarter 2003 net income was $19 million compared with $49 million last year. First quarter 2003 results included pre-tax restructuring costs, impairment charges and other exit costs totaling $17 million pre-tax.

Reported earnings are supplemented with related amounts and percentages that exclude restructuring costs, impairment charges and other exit costs. 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. A full reconciliation with reported amounts is included on page 7.

Net sales were $666 million, up 8% over last year. Exclusive of the Best Access Systems acquisition, sales declined 2%. Sales in the consumer channel declined for the first time in three years, due to unusually adverse weather in certain regions of the U.S. and mass merchant inventory reductions. Meanwhile, soft market conditions continued to be prevalent in the industrial channels.

Gross profit was $219 million, or 32.8% of sales, versus $216 million in the prior year. First quarter 2003 included $4 million of impairment charges and other exit costs related to the termination of the Mac Direct distribution model. Aside from such costs, gross margin was 33.3% versus 34.9% last year.

Selling, general and administrative ("SG&A") expenses of $172 million (25.9% of sales) were $37 million above first quarter 2002 levels. Aside from $10 million of costs relating primarily to the exiting of Mac Direct, SG&A was $162 million, or 24.3% of sales, versus 21.9% last year, reflecting the inclusion of Best Access Systems as well as the absence of pension income and stronger foreign currency.
Aside from the impairment charges and other exit costs referred to above, operating margins were 9.0% versus 13.0% last year.

Tools sales decreased 2% to $467 million due to weak demand for industrial and Mac tools. Exclusive of $14 million of impairment charges and exit costs, operating margin was 8.7% vs. 12.9% in 2002. Lower volume, inefficiencies in Mac Direct, pricing pressures and commodity cost inflation were the principal causes of the lower margin.

Doors sales increased 43% to $199 million, but organic sales declined 6% as weakness in consumer doors more than offset double-digit 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 weather-related softness. Operating margin decreased to 9.7% versus 13.4% last year from commodity cost increases and increased SG&A expenses.

Operation 15, an initiative to achieve a 15% operating margin run rate as the company exits 2003, was announced on April 9. Annual benefits of $105 million are expected to be partially offset by approximately $20 million of lost margin from the Mac Direct exit. The company indicated that it expects severance payments, certain asset impairments and other exit costs of approximately $60 million in connection with Operation 15, of which $10-$15 million are expected to be non-cash, exclusive of the Mac Direct exit.

Additionally, the exit of Mac Direct requires the liquidation of certain assets whose aggregate net book value was approximately $85 million. Management believes that a substantial portion of these assets are recoverable. Exit costs include the $14 million incurred in the first quarter, and the company believes that additional impairments and exit costs could be possible, however the amounts cannot be determined at this time, as they depend on future events and actions which have not been finalized.

As expected, plans to reduce outstanding shares by over 9% had no impact in the first quarter. On April 14, the company completed the settlement of the first $100 million of its equity hedge in early April.

Operating cash flow was $52 million versus $21 million in the first quarter a year ago. Free cash flow before dividends (cash from operations less capital expenditures) was $44 million versus $2 million in the first quarter a year ago, reflecting cash flow from operations and lower capital expenditures.