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Article by DailyStocks_admin    (09-04-08 05:40 AM)

The Daily Magic Formula Stock for 09/04/2008 is Stanley Works (The). According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.

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(i) General. The Stanley Works (‘‘Stanley’’ or the ‘‘Company’’) was founded in 1843 by Frederick T. Stanley and incorporated in 1852. Stanley is a diversified worldwide supplier of tools and engineered solutions for professional, industrial and construction and do-it-yourself use, and security solutions for commercial applications. Stanley ® is a brand recognized around the world for quality and value.

Net sales from continuing operations have increased from $2.5 billion in 2003 to $4.5 billion in 2007 reflecting execution of the Company’s profitable growth and diversification strategy. The growth in net sales from continuing operations predominantly relates to acquisitions, particularly in branded tools and security solutions, partially offset by the 2004 divestitures of the entry door and home décor businesses. Refer to Note F Acquisitions of the Notes to the Consolidated Financial Statements in Item 8 for a discussion of acquisitions over the past three years. In 2007, Stanley employed approximately 18,400 people worldwide. The Company’s principal executive office is located at 1000 Stanley Drive, New Britain, Connecticut 06053 and its telephone number is (860) 225-5111.

(ii) Restructuring Activities. Information regarding the Company’s restructuring activities is incorporated herein by reference to the material captioned ‘‘Restructuring Activities’’ in Item 7 and Note O Restructuring and Asset Impairments of the Notes to the Consolidated Financial Statements in Item 8.


Financial information regarding the Company’s business segments is incorporated herein by reference to the material captioned ‘‘Business Segment Results’’ in Item 7 and Note P Business Segments and Geographic Areas of the Notes to the Consolidated Financial Statements in Item 8.


The Company’s operations are classified into three business segments: Construction & Do-It-Yourself, Industrial and Security.

Construction & DIY

The Construction & Do-It-Yourself (‘‘CDIY’’) segment manufactures and markets hand tools, consumer mechanics tools, storage systems, pneumatic tools, fasteners, and electronic leveling and measuring tools. These products are sold primarily to professional end users and distributed through retailers (including home centers, mass merchants, hardware stores, and retail lumber yards). Hand tools include measuring and leveling tools, planes, hammers, demolition tools, knives and blades, screwdrivers, saws, chisels, consumer tackers and staples, as well as electronic leveling and measuring devices. Consumer mechanics tools include wrenches, sockets, metal tool boxes and cabinets. Storage units include plastic tool boxes and storage systems. Pneumatic tools and fasteners are used for construction, remodeling, furniture making, pallet manufacturing and other applications involving the attachment of wooden materials. Electronic leveling and measuring tools include laser and optical leveling and measuring devices and accessories utilized primarily by contractors, surveyors, engineers and other professionals and do-it-yourself individuals.


The Industrial segment manufactures and markets: professional mechanics tools and storage systems; plumbing, heating, air conditioning and roofing tools; hydraulic tools and accessories; assembly tools and systems; and specialty tools (Stanley supply and services). These products are sold to industrial customers and distributed primarily through third party distributors as well as through direct sales forces.

Professional mechanics tools and storage include wrenches, sockets, electronic diagnostic tools, tool boxes and high-density industrial storage and retrieval systems. Plumbing, heating, air conditioning and roofing tools include pipe wrenches, pliers, press fitting tools, and tubing cutters. Hydraulic tools and accessories include hand-held hydraulic tools and accessories used by contractors, utilities, railroads and public works as well as mounted demolition hammers and compactors designed to work on skid steer loaders, mini-excavators, backhoes and large excavators. Assembly tools and systems include electric and pneumatic assembly tools. These are high performance precision tools, controllers and systems for tightening threaded fasteners used chiefly by vehicle manufacturers. Stanley supply and services distributes specialty tools for assembling, repairing and testing electronic equipment.


The Security segment is a provider of access and security solutions primarily for retailers, educational, financial and healthcare institutions, as well as commercial, governmental and industrial customers. The Company provides an extensive suite of mechanical and electronic security products and systems, and a variety of security services including security integration systems, software, related installation, maintenance, monitoring services, automatic doors, door closers, exit devices, hardware (includes hinges, gate hardware, cabinet pulls, hooks, braces and shelf brackets) and locking mechanisms. Security products are sold primarily on a direct sales basis as well as, in certain instances, through third party distributors.


The Company competes on the basis of its reputation for product quality, its well-known brands, its commitment to customer service, strong customer relationships, the breadth of its product lines and its emphasis on product innovation.

The Company encounters active competition in all of its businesses from both larger and smaller companies that offer the same or similar products and services or that produce different products appropriate for the same uses. The Company has a large number of competitors; however, aside from a small number of competitors in the consumer hand tool and consumer hardware businesses who produce a range of products somewhat comparable to the Company’s, the majority of its competitors compete only with respect to one or more individual products or product lines in that segment. Certain large customers offer private label brands (‘‘house brands’’) that compete across a wider spectrum of the Company’s product offerings. The Company is one of the largest manufacturers of hand tools in the world, featuring a broader line of products than any other toolmaker. The Company is a significant manufacturer of pneumatic fastening tools and related fasteners for the construction, furniture and pallet industries as well as a leading manufacturer of hand-held hydraulic tools used for heavy construction, railroad, utilities and public works. The Company also believes that it is among the largest direct providers of access security integration and alarm monitoring services in North America.

Several of the Company’s largest retail customers have elected to compete with the Company by developing house brands and sourcing competing products (generally from low cost countries).


A substantial portion of the Company’s products are sold to home centers and mass merchants in the U.S. and Europe. A consolidation of retailers both in North America and abroad has occurred over time. While this consolidation and the domestic and international expansion of these large retailers provide the Company with opportunities for growth, the increasing size and importance of individual customers creates a certain degree of exposure to potential volume loss. The loss of certain of the larger home centers or mass merchants as customers could have a material adverse effect on the Company until either such customers were replaced or the Company made the necessary adjustments to compensate for the loss of business.

Despite the trend toward customer consolidation, the Company has been able to maintain a diversified customer base and has decreased customer concentration risk over the past years, as sales from continuing operations in markets outside of the home center and mass merchant distribution channels have grown at a greater rate through a combination of efforts to broaden the customer base, primarily in the Security and Industrial segments. In this regard, sales to the Company’s largest customer as a percentage of total sales have decreased from 22% in 2002 to 8% in 2007.

Raw Materials

The Company’s products are manufactured using both ferrous and non-ferrous metals including, but not limited to steel, aluminum, zinc, brass, copper and nickel, as well as resin. Additionally, the Company uses other commodity based materials for components and packaging including, but not limited to, plastics, wood, and other corrugated products. The raw materials required are procured globally and available from multiple sources at competitive prices. The Company has annual or quarterly spot contracts with many of its preferred suppliers of raw material and energy. Certain commodity prices, particularly energy related and non-ferrous metals, are expected to remain volatile in 2008. The Company does not anticipate difficulties in obtaining supplies for any raw materials or energy used in its production processes.


Due to short order cycles and rapid inventory turnover in most of the Company’s CDIY and Industrial businesses, backlog is generally not considered a significant indicator of future performance. At February 2, 2008, the Company had approximately $368 million in unfilled orders compared with $347 million in unfilled orders at February 3, 2007. All of these orders are reasonably expected to be filled within the current fiscal year. Most customers place orders for immediate shipment and as a result, the Company produces primarily for inventory, rather than to fill specific orders.

Patents and Trademarks

No business segment is dependent, to any significant degree, on patents, licenses, franchises or concessions and the loss of these patents, licenses, franchises or concessions would not have a material adverse effect on any of the business segments. The Company owns numerous patents, none of which individually is material to the Company’s operations as a whole. These patents expire at various times over the next 20 years. The Company holds licenses, franchises and concessions, none of which individually or in the aggregate are material to the Company’s operations as a whole. These licenses, franchises and concessions vary in duration, but generally run from one to 20 years.

The Company has numerous trademarks that are used in its businesses worldwide. The STANLEY ® and STANLEY in a notched rectangle design trademarks are material to all three business segments. These well-known trademarks enjoy a reputation for quality and value and are among the world’s most trusted brand names. The Company’s tagline, ‘‘Make Something Great ™ ’’ is the centerpiece of the brand strategy for all segments. The Bostitch ® , Atro ® , Besco ® , Powerlock ® , Tape Rule Case Design (Powerlock), FatMax ® , FatMax ® Xtreme ™ , FatMax ® XL ™ CST/Berger ™ , and Zag ® , are material to the CDIY segment. LaBounty ® , MAC ® , Proto ® , Jensen ® , Vidmar ® , Blackhawk ™ by Proto ® , National ® , Facom ® , Virax ® and USAG ® trademarks are material to the Industrial segment. In the Security segment, the BEST ® , HSM ® , Blick ® , Frisco Bay ® , Safemasters ® , and Sargent and Greenleaf ® trademarks are material. The terms of these trademarks vary, typically, from 10 to 20 years, with most trademarks being renewable indefinitely for like terms.

Environmental Regulations

The Company is subject to various environmental laws and regulations in the U.S. and foreign countries where it has operations. Future laws and regulations are expected to be increasingly stringent and will likely increase the Company’s expenditures related to environmental matters.

The Company is a party to a number of proceedings before federal and state regulatory agencies relating to environmental remediation. Additionally, the Company, along with many other companies, has been named as a potentially responsible party (‘‘PRP’’) in a number of administrative proceedings for the remediation of various waste sites, including sixteen active Superfund sites. Current laws potentially impose joint and several liabilities upon each PRP. In assessing its potential liability at these sites, the Company has considered the following: whether responsibility is being disputed, the terms of existing agreements, experience at similar sites, and the Company’s volumetric contribution at these sites.

The Company’s policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual site and includes such factors as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. The liabilities recorded do not take into account any claims for recoveries from insurance or third parties. As assessments and remediation progress at individual sites, the amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. As of December 29, 2007, the Company had reserves of $30 million for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable.

The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. Subject to the imprecision in estimating future environmental costs, the Company does not expect that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded will have a materially adverse effect on its consolidated financial position, results of operations or liquidity.


At December 29, 2007, the Company had approximately 18,400 employees, nearly 9,600 of whom were employed in the U.S. Approximately 800 U.S. employees are covered by collective bargaining agreements negotiated with 17 different local labor unions who are, in turn, affiliated with approximately 6 different international labor unions. The majority of the Company’s hourly-paid and weekly-paid employees outside the U.S. are not covered by collective bargaining agreements. The Company’s labor agreements in the U.S. expire in 2008, 2009, 2010 and 2011. There have been no significant interruptions or curtailments of the Company’s operations in recent years due to labor disputes. The Company believes that its relationship with its employees is good.


CARLOS M. CARDOSO, Chairman of the Board, President and Chief Executive Officer of Kennametal, Inc. Mr. Cardoso joined Kennametal in 2003 and served as Vice President and Chief Operating Officer prior to assuming his current position in 2005. Prior to his tenure with Kennametal, Mr. Cardoso was President of the Pump Division of Flowserve Corporation from 2001 to 2003.
Mr. Cardoso is 50 years old and has been a director since October 2007. He is a member of the Corporate Governance Committee and the Compensation and Organization Committee.
If elected, Mr. Cardoso’s term will expire at the 2011 Annual Meeting.

ROBERT B. COUTTS, retired effective March 31, 2008, as Executive Vice President of the Lockheed Martin Corporation. Mr. Coutts served as Executive Vice President, Electronic Systems of Lockheed Martin from 1999 until he assumed his current position in September 2007. Prior to his tenure with Lockheed Martin, Mr. Coutts held senior management positions over a 20-year period with the General Electric Company and Martin Marietta Company. In addition, he is a director of K Hovnanian Enterprises, Inc.
Mr. Coutts is 57 years old and has been a director since July 2007. He is a member of the Corporate Governance Committee and the Finance and Pension Committee.
If elected, Mr. Coutts’ term will expire at the 2011 Annual Meeting.

MARIANNE MILLER PARRS, retired, served as Executive Vice President and Chief Financial Office of International Paper Company from November 2005 until the end of 2007; Executive Vice President with responsibility for Information Technology, Global Sourcing, Global Supply Chain—Delivery from 1999 to 2005; and also held other executive and management positions at International Paper since 1974. Ms. Parrs also serves on the boards of CIT Group Inc.; the Rise Foundation in Memphis, Tennessee; and the Leadership Academy in Memphis, Tennessee.
Ms. Parrs is 64 years old and has not previously served as a member of the Board of Directors. A third party search firm recommended Ms. Parrs to the Corporate Governance Committee, which subsequently recommended her for election to the Board.
If elected, Ms Parrs’ term will expire at the 2011 Annual Meeting.

JOHN G. BREEN, retired, served as Chairman of The Sherwin-Williams Company from April 1980 to April 2000; he had been Chief Executive Officer from 1979 to 1999. He is a director of MTD Holdings Inc. and Goodyear Tire & Rubber Company. He also is a Trustee of John Carroll University and of University Hospitals Health Systems.
Mr. Breen is 73 years old and has been a director since July 2000. He is Chair of the Audit Committee and a member of the Executive Committee and the Finance and Pension Committee.
Mr. Breen’s term will expire at the 2010 Annual Meeting.

VIRGIS W. COLBERT, retired, served as Executive Vice President, Miller Brewing Company from 1997 to 2005; Senior Vice President-Worldwide Operations from 1995 to 1997; Vice President Operations from 1993 to 1995; and also held other key leadership positions at Miller Brewing from 1979. Mr. Colbert continues to serve as a Senior Advisor to Miller Brewing. In addition, he is a director of The Manitowoc Company, Inc., Sara Lee Corporation, and Merrill Lynch and Co. Inc.
Mr. Colbert is 68 years old and has been a director since July 2003. He is Chair of the Compensation and Organization Committee and a member of the Corporate Governance Committee and the Executive Committee.
Mr. Colbert’s term will expire at the 2010 Annual Meeting.

EILEEN S. KRAUS, retired, served as Chairman, Fleet Bank, Connecticut, a subsidiary of Fleet Boston Financial, from 1995 to 2000. She had been President, Shawmut Bank Connecticut, N.A., and Vice Chairman of Shawmut National Corporation since 1992; Vice Chairman, Connecticut National Bank and Shawmut Bank, N.A. since 1990; and Executive Vice President of those institutions since 1987. She is the lead director of Kaman Corporation, a director of Rogers Corporation, and chairman of the advisory board of Ironwood Mezzanine Fund I.
Mrs. Kraus is 69 years old and has been a director since October 1993. She is Chair of the Corporate Governance Committee and a member of the Audit Committee and the Executive Committee.
Mrs. Kraus’ term will expire at the 2009 Annual Meeting.

JOHN F. LUNDGREN, Chairman and Chief Executive Officer of The Stanley Works. Mr. Lundgren joined the Company March 1, 2004 after having served since 2000 as President—European Consumer Products, of Georgia Pacific Corporation. Formerly, he had held the same position with James River Corporation from 1995-1997 and Fort James Corporation from 1997-2000 until its acquisition by Georgia-Pacific.
Mr. Lundgren is 56 years old and has been a director since March of 2004. He is Chair of the Executive Committee.
Mr. Lundgren’s term will expire at the 2010 Annual Meeting.

LAWRENCE A. ZIMMERMAN, Executive Vice President and Chief Financial Officer of Xerox Corporation since June 2002. Prior to joining Xerox, Mr. Zimmerman held senior executive finance positions over a 31-year period with IBM. He is a director of Brunswick Corporation.
Mr. Zimmerman is 65 years old and has been a director since July 2005. He is a member of the Audit Committee and the Compensation and Organization Committee.
Mr. Zimmerman’s term will expire at the 2009 Annual Meeting.



The Company is a diversified worldwide supplier of tools and engineered solutions for professional, industrial, construction, and do-it-yourself (‘‘DIY’’) use, as well as engineered solutions and security solutions for industrial and commercial applications. Its operations are classified into three business segments: Construction & DIY (‘‘CDIY’’), Industrial and Security. The CDIY segment manufactures and markets hand tools, storage systems, fasteners, and electronic leveling and measuring tools, as these products are principally utilized in construction and do-it-yourself projects. These products are sold primarily to professional end users and distributed through retailers (including home centers, mass merchants, hardware stores, and retail lumber yards). The Industrial segment manufactures and markets: professional mechanics and storage systems, plumbing, heating, air conditioning and roofing tools, assembly tools and systems, hydraulic tools and specialty tools (Stanley supply and services). These products are sold to industrial customers and distributed primarily through third party distributors as well as direct sales forces. The Security segment is a provider of access and security solutions primarily for retailers, educational, financial and healthcare institutions, as well as commercial, governmental and industrial customers. The Company provides an extensive suite of mechanical and electronic security integration systems, software, related installation, maintenance, and a variety of security services including security monitoring services, electronic integration systems, software, related installation and maintenance services, automatic doors, door closers, exit devices, hardware and locking mechanisms.

For several years, the Company has pursued a diversification strategy to enable profitable growth. The strategy involves industry, geographic and customer diversification, as exemplified by the expansion of security solution product offerings, the growing proportion of sales outside the U.S., and the deliberate reduction of the Company’s dependence on sales to U.S. home centers and mass merchants. Execution of this strategy has entailed approximately $2.2 billion of acquisitions since the beginning of 2002, several divestitures, and increased brand investments. Additionally, the strategy reflects management’s vision to build a growth platform in security while expanding the valuable branded tools platform. Over the past several years, the Company has generated strong free cash flow and received substantial proceeds from divestitures that enabled a transformation of the business portfolio.

Free cash flow, as defined in the following table, was $457 million in 2007, $359 million in 2006, and $294 million in 2005, considerably exceeding net earnings. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide a dividend to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company’s common stock and business acquisitions, among other items.

The Company strives to reinvest its free cash flow in high return businesses in order to generate strong return on assets and improve working capital efficiency.

Significant areas of tactical emphasis related to execution of the Company’s diversification strategy, as well as events impacting the Company’s financial performance in 2007 and 2006, are discussed below.

Continued Growth of Security Business

During 2007, the Company further advanced its strategy of becoming a global market leader in the commercial security industry. Annual revenues of the Security segment have grown to $1.433 billion, or 32% of 2007 sales, up from $216 million, or 10% of 2001 sales. Key events pertaining to the growth of this segment in the past year include the following:

• HSM Electronic Protection Services, Inc. (‘‘HSM’’) was acquired in January 2007 for $546 million in cash. HSM, based near Chicago, Illinois, provides security alarm monitoring services and access control systems to commercial customers via a central monitoring hub station and a network of branch locations across the U.S. HSM combines world class service and installation capabilities with a broad customer base. It is the fourth largest electronic security company and second largest commercial monitoring company in North America. The acquisition is enabling more efficient utilization of our extensive network of field technicians thus enhancing overall profitability, as the Company is in the process of a reverse integration of the pre-existing electronic security business into HSM. The addition of monitoring enables longer-term customer relationships involving value-added services and recurring revenues, which aids the repositioning of electronic security as a higher profit and higher growth business for Stanley. HSM contributed approximately $220 million in sales and 4 cents of diluted earnings per share in 2007; the relatively low contribution to net earnings reflects $36 million of non-cash intangible asset amortization, primarily for acquired monitoring service contracts, as well as interest expense on borrowings necessary to fund the acquisition.

• Upon the January 16, 2007 acquisition of HSM, the Company realigned to report three new segments effective in the first quarter of 2007: CDIY, Industrial and Security. These new segments more clearly convey the Company’s growth strategies and reflect management’s view of its businesses with the inclusion of HSM. Also, the Company is now presenting segment results before corporate overhead expenses, which are not allocated to the segments.

• In June, 2007 Bed-Check Corporation (‘‘Bed Check’’) was acquired for $20 million in cash. Bed-Check is a leading U.S.-based manufacturer of non-restrictive patient fall-monitoring systems used by caregivers in hospitals and other facilities. It increases the scale and expands the distribution channels of the Company’s existing personal security business. A wireless key-lock manufacturer and various other small but strategic acquisitions in the security segment were completed throughout 2007 for $21 million in cash.

The above acquisitions complement the existing Security segment product offerings, increase its scale and strengthen the value proposition offered to customers as industry dynamics favor multi-solution providers that offer ‘‘one-stop shopping’’. The Company continues to focus on integrating the acquired businesses as it expands the suite of its security product and service offerings. Various process improvement initiatives were initiated including integration of overlapping field service organizations and implementation of certain common back office systems. These integration efforts will continue in 2008, particularly the reverse integration of the legacy electronic security business into HSM.


Below is a summary of the Company’s operating results at the consolidated level, followed by an overview of business segment performance. The terms ‘‘organic’’ and ‘‘core’’ are utilized to describe results aside from the impact of acquisitions during their initial 12 months of ownership. This ensures appropriate comparability to operating results of prior periods.

Net Sales: Net sales from continuing operations were $4.484 billion in 2007, as compared to $4.019 billion in 2006, a 12% increase. Acquisitions, principally HSM, contributed 7% in higher sales. Organic volume and pricing both increased 1%, while favorable foreign currency translation in all regions increased sales 3% versus the prior year. Strong performance in the Industrial segment, particularly by the hydraulic and mechanics tools businesses, was supplemented by more modest gains in the CDIY and Security segments. CDIY achieved robust growth internationally that was partially offset by weakness in the U.S. associated with housing market declines. In the Security segment, solid gains by the automatic door and mechanical lock businesses, as well as overall pricing actions, more than compensated for lower sales in the legacy electronic security integration business as it shed unprofitable equipment installations.

Net sales from continuing operations were $4.019 billion in 2006, as compared to $3.285 billion in 2005, a 22% increase. Acquisitions contributed 21% or $689 million of the sales increase. Organic sales increased 1% driven by a slight increase in volume and relatively consistent pricing levels and foreign currency impact compared to the prior year. The organic increase was generated by share gains achieved in the consumer hand tools and automatic doors businesses offset by price and volume declines experienced in the fastening systems business. Favorable foreign currency translation in the Americas and Europe was partially offset by a negative impact from Asia.

Gross Profit: The Company reported gross profit from continuing operations of $1.692 billion, or 38% of net sales, in 2007, compared to $1.459 billion, or 36% of net sales, in 2006. The acquired businesses increased gross profit by $136 million. Core gross profit for 2007 was $1.557 billion, or 37% of net sales, up $98 million from the prior year. The core gross margin rate expanded on strong performances from certain Industrial segment businesses, primarily Facom and mechanics tools, as well as the absence of $22 million of inventory step-up amortization from the initial turnover of acquired inventory in 2006. This was partially offset by a decline in the CDIY segment gross margin rate mainly from un-recovered cost inflation. In addition, the legacy security integration business had lower margins on certain equipment installations. Price and productivity actions in 2007 more than offset $67 million of material, energy and wage cost inflation. The Company expects such inflation to increase 2008 costs by $75 – $80 million, which management plans to mitigate through various customer pricing actions and continued cost reduction and productivity initiatives.

The Company reported gross profit from continuing operations of $1.459 billion in 2006, or 36% of net sales, compared to $1.181 billion, or 36% of net sales, in 2005. The acquired businesses increased gross profit by $265 million. Included in the 2006 gross profit is the unfavorable impact of $22 million in non-cash inventory step-up charges related to the initial turnover of acquired inventory. Gross profit for 2006 was 37% of net sales excluding this non-recurring item, primarily due to the positive impact of the Facom acquisition. Core gross profit as a percentage of net sales was 36% in 2006, which was consistent with the prior year. The benefits of prior cost reduction actions, productivity improvements from the Stanley Fulfillment System, and pricing actions offset continued margin pressure from commodity and other inflation which resulted in approximately $48 million of additional costs, and a decline in fastening systems. The fastening systems gross profit decline reflected lower sales volumes, a result of weakening housing markets, and price erosion, as well as a commitment to shed unprofitable business; gross profit in this business was further impacted by commodity cost inflation. Management launched an extensive cost reduction initiative in 2006 with the objective to return fastening systems to acceptable profitability levels.

SG&A expenses: Selling, general and administrative expenses were $1,058 million, or 24% of net sales, in 2007 consistent with the 24% of sales represented by $955 million of expense in 2006. Acquired companies contributed $70 million of the increase, and the remaining $33 million increase is largely attributable to foreign currency translation.

SG&A from continuing operations was $955 million, or 24% of net sales, in 2006 compared to $737 million, or 22% of net sales, in the prior year. The increase of $218 million primarily relates to acquired businesses that increased costs by $192 million, $11 million of increased non-cash stock compensation expense associated with the adoption of stock option expensing during 2006, and $11 million of increased brand support. Excluding acquisitions, SG&A as a percentage of sales increased slightly to 23% of net sales compared with 22% in 2005 due to the items described above, partially offset by benefits received from prior restructuring actions.

Interest and Other-net: Net interest expense from continuing operations in 2007 was $80 million, compared to $65 million in 2006. The higher interest expense stems from borrowings necessary to fund the January 2007 acquisition of HSM. Refer to the Financial Condition section for additional discussion of the HSM acquisition financing.

Net interest expense from continuing operations in 2006 was $65 million, compared to $34 million in 2005. The increase was mainly due to the November 2005 issuance of $450 million in junior subordinated debt securities to fund acquisitions, and to a lesser extent increased commercial paper borrowings resulting primarily from the execution of the $200 million share repurchase program in the first half of 2006, along with higher applicable short-term interest rates.

Other-net from continuing operations totaled $90 million of expense in 2007 compared to $57 million of expense in 2006. The increase pertained primarily to higher intangible asset amortization expense due to recent acquisitions.

Other-net from continuing operations represented $57 million of expense in 2006 compared to $48 million of expense in 2005. The increase was primarily driven by $9 million of higher intangible asset amortization expense associated with acquisition activity, a $4 million pension plan curtailment charge in the U.K., and a $5 million increase in foreign currency losses, partially offset by lower environmental expense and decreased losses on the sale of fixed assets.

Income Taxes: The Company’s effective income tax rate from continuing operations for 2007 was 25% as compared to 21% for 2006 and 24% for 2005.

The higher effective tax rate in 2007 versus 2006 mainly relates to benefits realized upon resolution of tax audits in 2006 that did not re-occur. The lower effective tax rate in 2006 compared to 2005 was driven by the realization of credits against U.S. taxes and the inclusion of the European-based Facom acquisition. Additionally, substantial costs were incurred in 2005 for the repatriation of foreign earnings under the American Jobs Creation Act and such costs were not incurred in 2006.

CDIY net sales from continuing operations increased 4% in 2007 from 2006. Foreign currency translation contributed 3% to the higher sales, pricing 1%, and organic volume remained flat. The U.S. was adversely impacted by the housing market contraction as repair and remodel activity declined along with new construction. Sales were very strong in Canada, Europe, Australia, and Asia, in particular for the consumer tools and storage business. This positive international performance was bolstered by new product introductions including the FatMax XL line, as well as favorable economic conditions outside the U.S. Fastening systems also experienced an overall decline in sales due to the U.S. housing down-turn, although its industrial channel and office product sales remained stable. During 2007, the Company took actions to improve the fastening systems cost structure including a Mexican plant closure, and the first wave of a pneumatic tool production shift to Asia, enabled by the 2006 Besco acquisition. As a result, fastening systems improved its margin rate slightly, despite the lower sales volume. The Company is on track to complete the migration of a second wave of fastening systems tool production to Asia during 2008, which should further help return this business to acceptable long term profitability. The segment profit rate decline of 70 basis points was mainly attributable to un-recovered cost inflation, a product mix shift to lower margin tools along with a channel mix shift in the U.S., and unfavorable absorption on inventory reductions. These factors were partially offset by the favorable impact of foreign currency translation and the previously mentioned improvement in the fastening systems business.

Net sales from continuing operations increased 3% in 2006 compared to 2005. Of this increase, acquisitions accounted for 3%, while organic volume decreased by 1% and price remained flat. Foreign currency increased sales by 1%. The consumer hand tool business continued to achieve share gains from the strong performance of the new FatMax ® Xtreme ™ and FatMax ® XL ™ product lines which launched in the U.S. and European markets, representing the largest new hand tools product introduction in the Company’s history. At the same time, the FatMax ® range of product offerings delivered growth though continued premium innovation, distribution point expansion and related brand support. This strong favorable performance was more than offset by lower volumes in the fastening, consumer storage and mechanics tools businesses. Fastening systems organic sales declined 7% compared to the prior year stemming from weakness in the U.S. construction market and management’s commitment to turn down unprofitable business. Sales in the consumer storage business in 2005 reflected higher volume from the initial launch of garage storage products. The 30 basis point decrease in segment profit in 2006 versus 2005 is primarily due to the sales volume decline and cost inefficiencies experienced by the U.S. fastening systems business, increased brand support, and commodity cost inflation, partially offset by savings derived from prior cost reduction actions and favorable mix in the consumer hand tools business. During 2007, progress was made on the two-year plan to restore the fastening systems profits to acceptable levels by continuing the migration of production to Asia, reducing overall SG&A and the manufacturing footprint, as well as SKU rationalization. In this regard, the acquisition of Asian-based Besco and the opening of a new manufacturing facility in China during 2006 strategically aided the long term vitality of fastening systems.

Industrial segment net sales increased 10% in 2007 from 2006, comprised of a 4% volume increase, a 4% favorable foreign currency impact, 1% favorable pricing, and 1% from the Innerspace acquisition.

Hydraulic tools and mechanics tools achieved robust sales increases, along with strong performance from the Facom and storage businesses. The hydraulic tools sales increase is attributable to sustained high demand for recent shear product offerings, strong international sales, and favorable steel scrap markets. Industrial mechanics tools benefited from strong demand in the U.S. oil and gas industry. The higher Facom sales pertain to new product introductions and improved European economic conditions. Intensified marketing efforts, including an expanded sales force, contributed to the Vidmar storage growth. Segment profit as a percentage of net sales improved 380 basis points. Excluding the effect of the one-time inventory step-up charge from the initial turn of Facom acquired inventory in 2006, segment profit increased 270 basis points. Customer price increases effectively offset the impact of cost inflation, while productivity initiatives further contributed to the segment profit rate expansion. Additionally, Facom’s contribution to the higher segment profit rate reflects favorable currency translation and the benefits of acquisition integration actions.

Industrial’s net sales increased 67% in 2006 compared to 2005, primarily due to the Facom acquisition which increased sales by $436 million or 64%. Favorable pricing actions contributed 2%, while volume increased sales 1% with foreign currency remaining flat compared to the prior year. Sales growth was delivered by the Mac Tools, Facom, hydraulic tools, industrial tools and storage businesses. Mac Tools benefited in 2006 from improved retention of its distributors based on management actions initiated early in the year. Industrial tools and storage and the hydraulic tools businesses obtained share gains from the success of new product introductions in the oil and mining industries as demand for such commodities remained strong during 2006. Segment profit as a percentage of net sales decreased by 90 basis points due to $13 million of non-cash inventory step-up amortization associated with the Facom acquisition and supply chain inefficiencies in certain businesses pertaining to increased backlog, partially offset by the accretive impact of Facom.



Below is a summary of consolidated operating results for the three and six months ending June 28, 2008, followed by an overview of performance by business segment. The terms “organic” and “core” are utilized to describe results aside from the impact of acquisitions during their initial 12 months of ownership. This ensures appropriate comparability to operating results in the prior period.

Net Sales: Net sales from continuing operations were $1.154 billion in the second quarter of 2008 as compared to $1.096 billion in the second quarter of 2007, representing an increase of $58 million or 5%. Acquisitions, primarily InnerSpace industrial storage, contributed 1% of net sales. Organic unit volume declined 3% which was largely offset by favorable pricing. Foreign currency translation generated a 4% increase in sales, as major currencies in all regions strengthened relative to the US dollar. The U.S. CDIY segment continues to be adversely impacted by the contraction in the residential construction market, and the U.S. economic downturn also affected the automotive repair tools business. The hardware business within the security segment had lower sales due to the loss of a major customer (this impact will anniversary in the fourth quarter of 2008). Partially offsetting these unit volume declines were healthy growth performances in convergent security and Europe.

Year-to-date net sales from continuing operations were $2.228 billion in 2008, a $94 million or 4% increase, versus $2.134 billion for the first half of 2007. Acquisition growth contributed 1% of the increase, attributable to the InnerSpace industrial storage business and several small security segment acquisitions. Foreign currency provided a 5% increase, pricing 2%, while volume decreased 4% compared to the prior year. The businesses contributing to the first half sales performance are mainly the same as those discussed above pertaining to the second quarter.

Gross Profit: Gross profit from continuing operations was $442 million, or 38.3% of net sales, in the second quarter of 2008, an increase of $20 million over $422 million of gross profit, or 38.6% of net sales, in the prior year. Acquisitions contributed $8 million of the increase. The favorable impacts of customer price increases, foreign currency translation, and productivity were partially offset by cost inflation and lower unit volumes. The pace of energy and commodity cost inflation, particularly steel, has accelerated dramatically in June and July to date. As a result, the Company’s estimate of the full year 2008 inflation is approximately $150 million, which management plans to partially mitigate through rapid deployment of various customer pricing actions that should recover approximately 90% of this impact.

On a year-to-date basis, gross profit from continuing operations was $848 million, or 38.1% of net sales, in 2008, compared to $809 million, or 37.9% of net sales, for the corresponding 2007 period. Acquisitions, primarily HSM and InnerSpace, contributed $17 million of the total $39 million gross profit improvement. The factors affecting the year-to-date performance are the same as those discussed pertaining to the second quarter. Successful execution of productivity projects and customer pricing increases collectively more than offset nearly $50 million of year-to-date cost inflation.

SG&A expenses: Selling, general and administrative (”SG&A”) expenses from continuing operations, inclusive of the provision for doubtful accounts were $283 million, or 24.5% of net sales, in the second quarter of 2008, compared to $263 million, or 24.0% of net sales, in the prior year. First half SG&A was $558 million, or 25.1% of net sales, compared to $518 million, or 24.3% of net sales, in 2007. The increase in SG&A primarily reflects the impact of unfavorable foreign currency, along with acquisitions which contributed $5 million and $10 million to the quarter, and year-to-date, respectively. The SG&A increase also reflects strategic investments in emerging markets and various Stanley Fulfillment System initiatives.

Interest and Other-net: Net interest expense from continuing operations in the second quarter of 2008 was $18 million compared to $20 million in 2007. Year-to-date net interest expense from continuing operations was $36 million in 2008 compared to $40 million over the first half of 2007. The reduction was mainly due to lower interest rates applicable to the Company’s commercial paper program, partially offset by increased borrowings in 2008, and increased interest income earned on higher foreign cash balances in the current year.

Other-net expenses from continuing operations were $21 million in the second quarter of 2008 versus $24 million in 2007. Lower 2008 intangible asset amortization and currency losses were the primary drivers of this decline. Year-to-date Other-net expenses from continuing operations were $41 million in 2008, relatively consistent with $43 million in 2007.

Income Taxes: The Company’s effective income tax rate from continuing operations was 26.4% in the second quarter of this year, compared with 26.0% in the prior year’s quarter. The year-to-date effective income tax rate from continuing operations was 26.4% in 2008 versus 26.1% in 2007. The slight increase in the effective tax rate is mainly attributable to increased earnings in certain more highly taxed jurisdictions.

Discontinued Operations: Net earnings from discontinued operations amounted to $4 million for the second quarter of 2008, up from $3 million in 2007, due to the gain realized in April, 2008 on the sale of a European business. Net earnings from discontinued operations for the first half of 2008 totaled $7 million versus $5 million in the prior year. As discussed more fully in Note P, discontinued operations primarily reflects the operating results of the CST/berger business which was classified as held for sale in June 2008.

Business Segment Results

The Company’s reportable segments are an aggregation of businesses that have similar products and services, among other factors. The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, interest income, interest expense, other-net (inclusive of intangible asset amortization expense), restructuring, and income tax expense. Corporate overhead is comprised of world headquarters facility expense, costs for the executive management team and for certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. The Company’s operations are classified into three business segments: Construction & DIY, Industrial, and Security.

Construction & Do-It-Yourself (“CDIY”): CDIY sales of $452 million during the second quarter of 2008 represented a 4% increase from $433 million in the second quarter of 2007. The increase was driven by strength in Europe, which grew 20% in total (7% aside from currency translation), with pervasive world-wide pricing actions to mitigate inflation largely offsetting the adverse impact of lower U.S. unit volumes due to continued weakness in the relevant North American end user markets.

Year-to-date net sales from continuing operations were $858 million in 2008 as compared to $837 million in 2007, an increase of 2%. Favorable foreign currency translation and pricing contributed 5% and 2% of the increase, respectively, while unit volume declined 5%. Aside from the deterioration in U.S. markets, the year-to-date unit volume performance also reflects lower first quarter unit volume in Europe pertaining to the timing of promotional sales that occurred earlier in 2007.

Segment profit was $66 million for the second quarter of 2008, compared to $63 million, representing 14.6% of net sales in both periods. Pervasive customer pricing actions partially offset significant cost inflation. In addition, the decline in U.S. unit volume further pressured the profit rate relative to lower absorption of fixed costs. However, strength in Europe as well as benefits from productivity initiatives enabled the achievement of a profit rate consistent with the second quarter of 2007. On a year-to-date basis, segment profit was $113 million, or 13.2% of net sales, compared to $122 million, or 14.6% of net sales in 2007. The year-to-date performance reflects the same factors discussed relating to the second quarter, but was affected by a more severe unit volume decline in the first quarter as well as spending to develop emerging markets.

Industrial: Industrial sales of $338 million in the second quarter of 2008 increased 12% from $302 million in the prior year. The InnerSpace storage acquisition generated 2% of the higher sales. Favorable foreign currency translation contributed 8%, and pricing amounted to 2%, while unit volume was flat. The North American automotive-related businesses were adversely affected by the deteriorating U.S. economy. North American automotive repair tool sales were impacted by higher gasoline prices and credit pressures dampening end user demand, especially for higher-priced products such as toolboxes. These volume declines were offset by robust sales growth in the U.S.-based engineered storage and hydraulic tools businesses, along with gains in European businesses. The sales growth in engineered storage was driven by government spending, particularly by army and navy bases, and also strength with commercial customers. Hydraulic tools achieved sales gains driven by demand for metal shear products related to robust growth in metal scrap markets. In Europe, assembly technologies had strong gains from European auto manufacturers and the Facom business also achieved unit volume increases.

Year-to-date net sales from continuing operations were $671 million in 2008, up 10% or $61 million as compared to 2007. The InnerSpace acquisition contributed nearly 3% of the sales increase. Foreign currency generated a 7% favorable impact, while a 2% price increase was largely offset by a decline in organic unit volume. The factors resulting in the Industrial segment’s six month performance are primarily the same items discussed pertaining to the second quarter results.

Industrial segment profit was $44 million, or 13.0% of net sales, for the second quarter of 2008, compared to $46 million, or 15.2% of net sales, in 2007. Year-to-date segment profit for the Industrial segment was $93 million, or 13.8% of net sales, for 2008, compared to $91 million, or 14.9% of net sales, for 2007. The segment profit rate decline pertained to: inflation, which has temporarily outpaced customer pricing increases but is dilutive to the rate even when recovered; unfavorable product mix in both the hydraulic tools and Mac Tools businesses; strategic investments in emerging markets for hydraulic tools, Proto and Facom; and consulting spending to drive complexity reduction pertaining to Stanley Fulfillment System initiatives.

Security: Security sales from continuing operations increased 1% to $364 million during the second quarter of 2008 from $361 million in the corresponding 2007 period. Acquisitions contributed 2% and favorable foreign currency provided 1% of the sales increase. Pricing increased nearly 3%, but was more than offset by a 5% unit volume decline primarily attributable to the previously disclosed loss of a major customer in the hardware business. Aside from the hardware business and acquisitions, sales increased 5% primarily due to pricing actions with customers and strength in convergent security (systems integration and monitoring), partially offset by softness in certain mechanical access large U.S. retail accounts as economic pressures slow the pace of new store openings. Convergent security benefited from strength in national accounts in the U.S., and robust sales growth in both Canada and Great Britain.

Year-to-date net sales from continuing operations were $699 million in 2008 as compared to $687 million in 2007, an increase of 2%. Acquisitions accounted for 3%; currency contributed almost 2%; pricing increased 2%; and volume declined 5%. The year-to-date sales performance is mainly related to the factors described in the analysis of the second quarter. Additionally, the access technologies business achieved unit volume growth in the first quarter driven by sales to hospitals, grocers and other non-national chain customers.

Security segment profit amounted to $66 million, or 18.1% of net sales, for the second quarter of 2008 as compared with $67 million, or 18.7% of net sales, in the prior year. On a year-to-date basis, segment profit was $119 million, or 17.0% of net sales, in 2008 compared to $113 million, or 16.5% of net sales, in the prior year period. The strong segment profit was enabled by the ongoing, successful reverse integration of the legacy systems integration business into HSM, yielding improved bidding and project management disciplines. In addition, productivity and customer pricing benefits offset surging cost inflation.


Greg Waybright - Interim Vice President of Investor Relations

Thanks, Carly. It is actually Greg, but I have been called worse, so, good morning to everyone. On the call in addition to myself is John Lundgren, our Chairman and CEO; Jim Loree, our Executive Vice President and CFO; and a special guest Tony Byerly who is the Chief Operating Officer of our North American Convergent Security business. Tony will talk to us about the Sonitrol acquisition during the presentation.

There are a few recent press releases that I would like to mention. One relates to our second quarter results, which was issued last night. The others relate to our second-quarter dividend increase which was our 41st consecutive annual increase. The other releases speak to the completion of the Sonitrol and Xmark acquisitions and the announcement naming Bret Bontrager, our Corporate Executive Officer. These releases are available on our website.

Today's presentation is also available on our site and we will refer to these charts during the call. John and Jim will review Stanley's second quarter results and Tony as I mentioned will speak to the Sonitrol acquisition, and then we will have a Q&A session. The entire call is expected to last approximately one hour. A replay of the call will be available beginning at 2:00 PM and the replaying number is 800-642-1687 and the access code which is in the press release is 45127121 and please feel free to call me with any questions at 860-827-3544.

Just a couple of quick announcements before we proceed. One is a reminder that we issue and update earnings guidance on an annual basis and our press release at the beginning of each quarter and we can not comment on such guidance thereafter. If our guidance changes materially we will issue a press release and conduct a conference call. And secondly another reminder that certain statements made during today's discussion by the various Stanley participants are forward-looking statements. They are based on the assumptions of future events that may not prove to be accurate and as such they involve risks and uncertainties. Actual results may differ materially from those that are expected or implied, so we direct you to the cautionary statements in our Form 8-K, which we filed with yesterday's press release and in our current or our recent 34-F filings.

I will now turn the call over to John Lundgren.

John F. Lundgren - Chairman and Chief Executive Officer

Thanks Greg, good morning everybody. First just a couple of highlights from a very busy second quarter at Stanley, earnings of a $1.05 were up 4%, excluding the portfolio charges and related business closures that amounted to about $0.10 that were detailed in the press release and set to walk between continued operations... continuing operations and discontinued operations is also contained within the press release.

Revenues grew 5% on the basis of currency and acquisitions. We did experience reasonably good organic growth in Europe and in our security business excluding hardware, and we'll come on to that. That was offset by continued weakness in U.S. markets in general and residential construction markets in particularly... in particular.

The gross margin was relatively flat consistent with the prior year. We have got good pricing and productivity to offset the inflation as well as the impact of the lower volume. Jim is going to give you a detailed walk, but right now we are estimating 2008 inflation at approximately $150 million for the year and prior to the year beginning that number was between 60 and 80 was our estimate. So that's the magnitude of the increase. We are doing better than in past years in recovering that inflation with price, we are estimating approximately 90% recovery, but that still does leave the gap that we need to fill with productivity improvements in order to ensure that margins don't suffer.

Cash flow slightly ahead of prior years excluding the impact of the receivable securitization, facility termination, that was about $17 million understandably unwinding net debt arrangement. CDIY revenue all in was up 4%, Europe was 7% organically. Profit rate was maintained operating margin at 14.6%, and that's despite the inflation and the volume pressure we are experiencing around the world. And within our industrial segment, strong sales growth 12%, if they say security up 7%, profit rated 18.7% excluding hardware, but still quite profitable even including the impact of the lost hardware business was 60 basis point less than 18.1.

Looking at the results on the next chart, specifically zeroing in on the earnings picture, virtually all of these number are contained in the press release on a continuing ops basis $0.98 to $0.95 on the basis on which we began the year and provided annual guidance growing a $1.01 up to a $1.05, so a 5% increase on top of a 6% increase in the first quarter.

Operating margin down slightly. Tax rate up about 40 basis points, so a little bit of a head wind there and the share count reflects approximately $200 million of buybacks that took place between the fourth quarter '07 and January '08. So all in a 4% improvement in earnings on an apples-to-apples basis, highlighted there in the box as well as outlined in detail in our press release.

Looking at revenue, 5% increase primarily in the benefit of acquisitions and foreign exchange. I see revenues that add $1.54 billion, up 58 million. The sources of growth in essence organic was flat as 3% volume declined on a global basis was offset by 3% price improvement; 4% from currency, 1% from acquisitions leading to the 5% that you see in two or three different places. Looking within the segments, organically you see CDI vied down 1% as 4% volume decline is almost fully mitigated by 3% price increase. The total 4% growth of course that's the difference between our organic and FX, which we do not include in our organic growth reporting.

Industrial was up 2% organically. Volume flat on a global basis and price 2%, the rest being currency and security down 2% on a comparative basis with volume down 5%, price up 3%. Again importantly we've talked to the hardware. You will recall we discontinued business with one of our larger retail customers that was announced in the second quarter of '07. It will not anniversary until the fourth quarter of '08 and that's about $12.5 million to $15 million a quarter of revenue, negative headwind if you will. Excluding that good solid growth in security totaled 7% of which 4% was organic. Given the magnitude of that number we do think it's important to point it out because it was a conscious decision and a mutual decision with us and the large customer.

So simply said, revenues were subdued by weak U.S. market conditions and we were flat in a down market. We think a pretty good accomplishment. Looking on a geographical basis, it's clear from the map that it's a busy chart but we think there is a lot of good important information on it that our diversification and the fact that it is significantly larger percentage of our revenues are out side the U.S. than as little as three years ago is having tremendous benefit.

That being said perhaps not the benefit as much benefit as is perceived based on some of the conversations we've had with both analysts and investors in the last several weeks or months. Zeroing on the U.S., middle of the left in total down 2%. This is global Stanley, all businesses and organically down 4%, and that's... represents 56% of Stanley Works total volume. Canada is up 7%; it... sorry it's up 11% in total, organically 1%, and that's all currency... overwhelmingly currency of course and that's represents about 7% of total Stanley revenue.

Latin America strong on an organic basis as well as the total basis, it represents only 3% as Stanley's volume, but good volume growth as well as volume growth price achievement in Latin America. Europe, very interesting and I am going to give you a little more granularity in a minute on Europe, but in total up 15%, organically 3%, and that represents about 30% of our total revenues; Asia up 40%, 32% of which is organic of a low base, but we are gaining tremendous traction in the Asian markets in general and Mainland China in particular; and Australia relatively flat on an organic basis down 1%, total up 12% and Australia represents 2% of Stanley's volume.

So Europe is about twice as big in terms of absolute terms as it was three years ago and it's growing nicely as well as Latin America and Asia up significantly from a lower base, which is really helping our results and in the sense validating the focus on geographic as well as business mix shift in our portfolio.

The next chart is something you haven't seen from us in the past, but recent dialogue that Jim and I and Greg, in fact have had with both analysts and investors is focused a lot on state of the European economy in general as well as our European business in particular. So, we thought it would be helpful to put together this chart or just some information all on one page, and it's virtually all available from public sources. But just starting at the top left, you see the last four quarters of European... Western European GDP growth, that between 2% and 3%. 2.9%, 2.9% falling to 2.5%, following to 2.3%. So not a mediocre decline, but certainly far from robust. The colored chart, if you will are just various geographies, what's shaded in green, call them emerging former Eastern European markets, where GDP growth is above 3%. Those markets in total represent only 3% of Stanley's revenues.

The yellow shaded areas are markets that are, I'll say traditional Western European markets with a few exceptions in red that are growing at 1-3% and those markets, as you see them primarily France, Spain, UK, Germany represent about 23% of Stanley's revenues. And they're growing at less than 3% per year in terms of GDP up until most recently. And then the areas in red Hungary, Italy, Ireland, Portugal and others, representing 4% of our revenues are growing at less than 1%.

Over on the right, those are not randomly selected. Germany of course is one of the larger economies in Europe but it is not a large contributor to Stanley revenues. Those are Stanley's four largest markets in Europe. Now just take a look at the state of those markets; housing in the UK structured down 27% year-to-date. It's the worst market since 1945. The DIY business, the large home centers varies not dissimilar to the home center businesses in the U.S. are down 3% to 4%. So a third to half the rate that U.S. home centers that are thus far reported are down and auto industrial in the UK are flat to slightly down.

In France the economy is holding up better than most western European countries. Construction's solid but it is slowing, DIY down about half the rate of the UK and about a fifth the rate of the U.S. Auto repair flat to down slightly. And industry at this stage remains positive that plus low single digit but its flattening. Italy less healthy with construction down, DIY flat; industrial is flat as well, automotive down about 10%, and I think no surprise that if there was a construction boom in Europe, most of it was in the south western part of Europe, particularly Spain. Construction permits are down 44% year-to-date in Spain. Automotives down as well GDP basically flat.

So simply said the thought of European markets being buoyant is anything but true. They have been relatively soft, although not as soft as the U.S. for the last six to nine months and we are faring fairly well in those conditions.

The next chart is a look at the Stanley business within Europe that we thought would be helpful to overlay one on the other. This is information we normally wouldn't provide on a call or wouldn't get into this level of detail but we think there is enough diversity of opinion out in the world in terms of how we are doing in Europe, relative to the rest of the world and how important Europe is. We put it on our two quarter rolling average basis just to take some of the lumpiness out of the numbers.

On the left is total Europe and if you go back to third quarter '06 or fourth quarter '06, you see high... mid-to-high single digit volume growth in the black and prices being relatively flat. Of late you see that the volume growth is flat and it hasn't gone negative, but it's basically zero or flat with price offsetting some of the volume declines or the volume flattening. So as an example, in the most recent quarter volume and total up to two-tenths of 1%, price up 1.3% that would translate on that basis to 1.5% growth.

A subset of total Europe is to the right, which is European construction, CDIY and you see the volatility. If you go back to the same time period, high single or low double digit volume growth, flat pricing has since turned to negative volume growth although low single digits mitigated by some price. So an obvious question is how and why have we held up in market conditions that I think are far less robust than perhaps is the perception. There were a lot of factors going on, first and foremost new product innovation continues to accelerate, simultaneous introduction of products on a global basis instead of Europe trailing the U.S. by six to nine months has had a tremendous is that a tremendous impact.

We continue to support our brand in all major markets. Facom had its new catalog in March '08, that has been very well received, celebrating the 90-year anniversary of the company. And there are revenue synergies from the Facom acquisition that are now fully embedded. We have had two and half years of collaboration among the legacy Stanley and Facom teams; they are all under one management team in one place. And that too is having an impact relative to the conditions out there. So our conclusion is continuing to operate well in a weakening market that may get weaker, that being said, we want to make it very, very clear, the European market relative to history has been anything but robust in the last six months.

Let's go back to a more traditional look if you will at our segments the way that we've typically talked to you about them on this call. Most of this has been said. Construction in DIY revenues are up 4% driven by Europe. You see the operating margins flat and our segment profit up $3 million or 4% in absolute terms. Sales up 4% outside the U.S.; you saw that on the maps on chart 5. U.S. is obviously impacted by the weak residential construction market although we're encouraged by the results given the volume softness within the U.S. retail channel. We are clearly gaining share as our volume is down about one-third or less the level of the market in general, and that's just simple arithmetic. We know we're gaining shares of consequence. And encourage that the segment profit rate is held at 14.6% despite the significant inflation and volume pressure.

Jim is going to show you some numbers and be a little more granular on what's in our press release. But that number has gone up to about 150 million annually. About two thirds of Stanley's inflation always is steel and about two-thirds of our inflation is in the... the steel inflation is in the construction in DIY segment. So this segment holding a 14.6 given the magnitude of inflation in general, steel inflation in particular, and the high steel content within the Bostitch business to consumer tools and storage business is a good achievement in terms of both product innovation mix upgrades and price recovery.

Moving on to industrial, double digit revenue growth would actively extend at the expense of 220 basis points of margin. Simply said industrial and automotive tools revenues did grow 10%, 1% of which was organic from a very large business there in Europe and a lot of currency effect. Facom continues to do extremely well; revenue is up 20% and 4% organically certainly inline with the market if not slightly ahead. So we continue to be pleased with the performance of that business and the Americas down.

Engineered solutions were up 20%, more than half of that is from the recent Innerspace acquisition that we have talked about. That's our intelligent part focused on healthcare channels. Solid organic growth and the remainder of the engineered storage business specifically Vidmar, the hydraulics business remains strong in terms of volume and Assembly Tech is holding pretty well given its focus in automotive.

Segment profit is down, steel inflation, product mix, as well strategic investments and just to give you a little more light on that proto and hydraulics in particular within these segment extraordinary high steel content. They will behind through the third quarter and we can catch up by the fourth quarter in terms of ability to recover via pricing the steel inflation that they've absorbed. And we continue to invest in emerging markets in our industrial channels both in the Mid-East as well as Asia. It's an engine on a platform for future growth. And we think this is... would be the worst time to take off the accelerator in those markets.

Last, but not... certainly not least is security. What it shows you on a total basis is revenue is up 1%. That being said, 7% without the hardware headwind that we talked about. Segment profits flat on a similar basis as well as the profit rate, flat without hardware, down 60 basis points including the loss of the hardware business.

We're very pleased with the performance of the Convergent Security business and just to refresh everyone's memory that's the legacy systems integration business at Stanley, it's HSM on international basis, it is the Blick business in the UK, the Frisco Bay business in Canada, and this is where Sonitrol will fit and Tony will talk to you about that a little later on in the presentation.

Net sales growth up 9%, 5% of which was organic. We're getting operating leverage that we'd hoped for with HSM. And a greater importance to this is our U.S. systems integration margins continue to expand from the successful reverse integration of the legacy Stanley SI business into HSM. Mechanical access which consist of our access technologies business, mechanical and electro-mechanical locking, personal security which is our senior technologies in Bedcheck [ph] business as well as builder's hardware up 6%, 2% organically excluding the hardware and this quarter was about 18 million down due primarily to the loss of the business and a large retailer that as I said early will anniversary in the fourth quarter. And if nothing else the comps will get easier but maintaining that business where it is in light of that orchestrated withdrawal from about $50 million on an annual basis piece of business is holding up pretty well.

Profit remains high at 18.7%, extra hardware but I don't think we need to apologize for 18.1% as stated and as reported. Now working capital management and cash generation remain a focus particularly in this environment and we're making progress in both areas. I'm going to turn it over to Jim who's going to take you through some of that as well as talk to you about our look going forward for the rest of the year.

James M. Loree - Executive Vice President and Chief Financial Officer

Okay, thank you John. First of all inventories were a great story with an 8 day decrease in light of the volume issues; the physical volume reductions that we are encountering which we will talk about in a few minutes. It's really difficult to bring inventories down like that and it can't be done in a haphazard way that's to be done through process and methodical process improvements and that's exactly what's going on with the Stanley fulfillment system as it relates to inventories. So we can look for more progress in inventories as the year goes on and I think that will continue to be a good story.

Receivables were up quite a bit and 12% to be specific. We are not terribly concerned about that because the vast majority of that was related to... in the administrative calendar, a calendar issue which had to do with where the month closed and that should take care of itself by the fourth quarter, may continue into the third quarter, but should be out of that by the fourth quarter. So receivables, we have no material delinquency creep that we have analyzed very carefully and haven't... don't have any real issue there, and payables continues to be a very good story. So we are able to improve the turns from 4.5 to 4.8, and we expect to close out the year well over five turn, so good progress there.

The cash flow and the company's cash generating capability continues to be an excellent story with good solid cash flow for the quarter. It would have been even better had it not been for the fact that we terminated a $17 million receivable, securitization facility, and no longer need that facility given that we have $800 million in liquidity outlines out there right now, so we decided... left to determinate that cost of $17 million in the quarter. But we continue to believe that receivables will generate cash in 2008. So on a year-to-date basis, we are at about $138 million of free cash flow compared with 152 last year, down 14. If you take way the effect of the terminated facility in effect, we are tracking to last year's levels, which is we are very high or highest ever.

Moving onto price and inflation; this has been a really incredible phenomenon in 2008 like nothing we have seen since John and I have been here. It's certainly probably hard to inspect the 70s, when we as a country experienced this kind of inflation. Our estimate started the year if you recall back at the February analyst meeting, we indicated that we thought inflation would be about $75 million. Today that number is 2X the 75, and basically at $150 million. We could have had a $0.70 per share negative impact from that inflation had we not responded in a very crisp, robust way.

So our price recovery continues to highlight the company's strong inflation forecasting and also just price recovery discipline. And you can see that we are expecting to recover 80% back in the initial timeframe. We upgraded that to 90% on last earnings call. And we still, despite the fact that we are going to have $150 million of inflation, we still believe that we will recover 90%. We've already taken most of the actions that are required to accomplish that.

And in this environment, you really need a robust price recovery mechanism in order to preserve the margins and the latest culprit in the inflationary trend area is not surprisingly steel, and the steel companies have gotten very aggressive with tearing up contracts and not honoring commitments and so forth, resin, purchased products also factors. But now steel is really the big culprit there.

Moving onto guidance, the 2008 guidance that we issued in January of 420-440 assumed organic sales of roughly flat to up 1% and price about $60 million which was near 80% of the 75 million inflation that I just talked about. So price would have been about a point of sales, 1.2% to be exact. So at the time in order to get to 0% to 1% organic sales, we were assuming that physical volume would be essentially down a point roughly and I will come back to that in a minute.

If we take now the effect of the discontinued operations which primarily involve the sale of CST, but also some smaller product lines totaling about $60 million which we announced in mid-June as well as the recently closed Sonitrol acquisition which has a $0.02 dilutive effect in 2008. On an adjusted basis that guidance would look more like 410 to 430.

Now as we indicated in the last call, we were suspecting that the second half economic environment could be difficult and it certainly has fulfilled that expectation. So we put in place a contingency plan which provided for $0.20 benefit in '08, net of $15 million of restructuring and as it turns out, the volume impact is now going to be about $0.50 a share which is what we suggested it might be last time, if the economic difficulties were to continue.

So we've implemented those contingency plans subsequent to the last conference call and as a result of that proactive action are able to preserve the earnings base. So the 3.90 that you see here relates to $3.88 continuing operations number for last year and we now believe that organic growth will be down 1%, but the fact that the price is now up about two points, really means that volume is down 3 to 4 points.

So the physical volume impact from the recessionary conditions in some of our markets is really severe and I would like to think in terms of the ability to draw down inventory with a 3% to 4% reduction and still preserve an earnings base. It means that there is a lot of good work going on in the productivity area in the company as well.

We'll move on now to significant 2Q events. Pleased to announce that the Brett Bontrager, our Vice President of Business development and our President of our Stanley Convergent Security Solutions was named an Executive Officer by our Board that press release as Greg mentioned had been issued and we congratulate Brett on that achievement.

We also agreed to sell our CST/Berger Laser leveling and measuring unit which was about 80 million in revenues. We announced that in mid-June, hope to close that shortly, next couple of weeks. We were able to achieve a selling price of $205 million and we also at that same time announced plans to divest about $60 million in revenue of some smaller non-strategic businesses during the year.

And worthy of note, the CST/Berger business have become non-strategic, because it was getting... it had a competitors from the high-end that were coming down and competitors from the low-end that were kind of coming up; it was in the middle. When we bought that company back in 2004, we were envisioning that it could become a growth platform if we were able to acquire some of the other companies on the higher-end.

As it turned out for various reasons, none of those were available for acquisition and we were really left with no degrees of freedom. So the decision to sell that business was made this year, and we were able to achieve a very healthy $205 million for something we paid about $64 million, four years ago. We also announced the acquisition of Xmark for approximately $50 million. It's located in Ottawa, Canada. It develops and markets RFID based systems to identify and protect people on assets in the healthcare market. Its principal products focus on infant protection in hospitals and wander protection for Alzheimer's patients and the like. As many of you know, we have a small kind of fledgling business, but extremely a high growth and profitable business in the security segment that specializes in healthcare type security like this.

And then we also announced the acquisition of Sonitrol for $276 million. A very exciting and meaningful acquisition, and as Greg mentioned, we have Tony Byerly, COO of the North American Convergent Security business here to share some highlights. Tony would you please talk about Sonitrol?

Tony Byerly - Chief Operating Officer, North American Convergent Security

Thanks Jim. As Jim mentioned, these are exciting times in electronic security industry. I have been in the security industry for nearly 20 years, and I have seen only a handful of industry defining moments. One such moment began roughly one and a half years ago with the acquisitions of HSM by the Stanley Works and then combining of it with the Stanley System's integration business creating Stanley Convergent Security Solutions. That moment really has fully evolved now with the Sonitrol acquisition. The combining of Stanley CSS with Sonitrol creates the third largest electronics security monitoring company in the U.S. based on total revenue.

Now Sonitrol will help both the direct and the franchise network go-to-market approach also about 125,000 customers and Sonitrol is best know for its industry leading audio verification technology; and as a result, reports the industry's highest apprehension rates and lowest dispatch and false alarm rates making it a law enforcement trend.

Sonitrol's revenue is broken down by 53% coming from monitoring and service, 34% from installation, 8% from equipment and product sales, and 5% franchise growth. The combining of Staley CSS and Sonitrol not only creates a third largest overall provider as I mentioned, but also solidifies Stanley CSS as the second largest commercial security monitoring provider.

Now the company reports $110 million in total revenues and through its audio verification technology reports one of the most stable customer bases in the industry with low attrition rates and an average customer life of 12 years.

There are numerous strategic benefits to the Sonitrol acquisition. First it increases the overall CSS global platform to over 700 million and the Stanley Security solutions platform to over 1.6 billion. As previously reported the acquisition will be $0.02 dilutive in 2008 as Jim mentioned, $0.04 accretive in 2009 increasing by an incremental $0.05 each year thereafter.

There are also numerous similarities between the two businesses. Both are commercially focused. Both drive an RMR, a reoccurring revenue business model, both are known for quality and high customer satisfaction and both have a solid national account program. The acquisition certainly brings increased skills of operations in national accounts towards the organization overall.

In addition this allows us to really focus in on specific vertical markets for example the education market. Sonitrol is a leader in the K through 12 market and Stanley Securities Solutions is well positioned in the higher education market.

Now in addition to Sonitrol's audio verification and intrusion alarms which they are very well known for, the company also offers a full range of suite of services as well as security systems including access control, video surveillance or CCTV, fire alarm detection and other security equipment products such as video monitoring and online access control management. Now with the close of Sonitrol behind us on Friday and as with previous D&A acquisitions, the integration is already in progress and has been carefully planned.

I am very pleased to have Todd Leggett, who is actually Sonitrol's former Senior Vice-President of operations to join our team as our Vice-President, General Manager of Sonitrol operation. Todd has a considerable amount of experience in the industry and specifically at Sonitrol. Now joining Todd and leading our integration efforts will be Jim Coplain, [ph] who is one of our most seasoned leaders and who has a considerable amount of acquisition simulation experience as well.

Of course Todd and Jim are joined by the entire team and we'll go through the many years of experience on this call. We don't have the time. But all integration activities will be carefully monitored and controlled and we're excited to have Sonitrol as part of the Stanley's CSS platform. I'm going to turn back to Jim. He's going to talk about transition.

James M. Loree - Executive Vice President and Chief Financial Officer

Thank you, Tony. We're pleased to have Tony and his team in-charge of integrating Sonitrol. They did a great job with the reverse integration of HSM. So the same team that led that. Now working the Sonitrol acquisition and we're looking forward to great results there.

As we look at the portfolio transition, this is truly remarkable metamorphosis over the last few years, from '02 to '08, where with $2.6 billion company with 65% of our revenues in construction and DIY in 2002, with the largest customer totaling 22% of our revenues.

By last year, we had built the security business up to about 31% of the total revenues, construction DIY was down to 40%, and industrial had grown to 29%, and we were $4.5 billion. So close to double in size. And then as we now adjust for the divestiture of CST and the acquisitions of Sonitrol and Xmark, you can see that the various portfolio moves that we announced in the last quarter have had a notable effect on the portfolio composition. So you can see the security business would now account for about 35% of the revenues, rapidly approaching the size of the construction and DIY business, which is 37%; and of course the industrial is roughly the same.

So in general, continued progress in the tough environment... tough operating environment, but some of the challenges in this environment are also creating opportunities for us, and we continue to take advantage of those. Just a very, very brief refresher on the growth platforms. We continue to allocate our capital into three... our three major growth platforms industrial and automotive tools, mechanical security, and convergent security. So here you've seen a number of acquisitions that are more focused on the convergent business in the last year or so, but would not be at all surprised to see some progress in one or two of these other growth platforms over the next coming months.

And I'll wrap it up now. We took a little bit longer than we usually do with the overview, where we had a lot of content. Needless to say, the inflationary conditions have accelerated. We've implemented the strong recovery actions, price management we talked about the rigorous process that we have enabling 90% recovery. Good news also is that we are able to recover price in CDIY much more effectively than we have in past years. We are looking to recover close to 80% this year of our inflation in construction and DIY. So, with the Chinese inflation and so forth have helped that out, and competitive dynamics are such that that we are able to do that.

We will encounter a lag in the price inflation recovery in the third quarter. So for those folks that are modeling, please factor that in. We've quantified that in the press release, so that should be easy to do. We're also going to provide a schedule for those of you, who are interested later today that will break out the quarters for '07 on a recast basis, which will reflect the discontinued operations. So, I will caveat that by saying that that will change from quarter-to-quarter here, and we will continue to provide that on an ongoing basis this year. It will change as some of the $60 million transactions that we talked about are close than they actually are removed from continuing operations. So it will be a challenge to keep up with it, but we'll will provide as much information as possible to make it easy.

The markets themselves are offering no sign of rebound, we talked the length about that. So the organic growth forecast is now down 1% to 2% for the year. The volume was even steeper volume decreased. John talked at length about Europe. Contingency cost actions have been implemented. We expect to be able to preserve our earnings and cash flow base amidst these weak markets and we absolutely should be well positioned for a successful '09 regardless of what the conditions might be with strong price momentum with carry over from the cost reduction actions coming into '09.

The hardware loss will anniversary in the middle of the fourth quarter and we will have a substantial amount of restructuring in the base... in the '08 base, and the Stanley fulfillment system is gaining traction. So, as I said a minute ago, we are taking advantage of the market conditions performing well, but also taking advantage of this opportunity to advance the portfolio.

And we will turn it over for Q&A at this point.

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