史丹利百得 (SWK) 2002 Q2 法說會逐字稿

Welcome to the Stanley Works second quarter conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions given at this time. If you should require assistance during the call, please press zero, then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, VP Investor Relations, Mr. Jerry Gould. Please go ahead.

This sounds like Jerry, but it's really not. Thank you very much and thanks everybody for joining us. Before we begin, I'd like to call your attention to this morning's press release in which we reported second quarter 2002 results in an increase in our cash dividend. If you need to reference these releases, they have posted to our website, stanleyworks.com. John Tranti will open the presentation in a moment with a short review of this morning's releases and a few brief comments. Following his reworks, Jim Loree from highlight several items to clarify motters disclosed in the earnings release. At that point we'll turn it over to the operator who will explain the Q and A procedure. We remind you that to comply with regulation FD our earnings guidance will be given at the outset of each quarter, as Jim Loree will do today as we did on May 13th and we will not be able to comment on it thereafter. If business conditions change our earnings guidance materially, for example, by more than 10% in either direction, we will issue a press release and conduct a conference call at such time. We've allotted 45 minutes for the call. We expect it to be concluded at approximately 2:45. For those of you who might have been wondering why my voice has changed, I do a good imitation of Jerry, but not that good. This is John Tranti. Good afternoon, everyone. Jerry had to just step out for a moment. He's back. Second quarter earnings per diluted share were 72 cents, an increase of 24% over last year and right on both the first call consensus and the guidance given in our May 13th earnings release. A small part of the that increase, a penny's share was from the goodwill accounting change. As stated in the press release, this was a landmark quarter in our development and maturation as both profitability and cash flow soared to new levels. First on the profit side, operating margin was just slightly less than 15%, an improvement of 180 basis points, the highest level since the early '50s. The 15% rate is a major milestone and a cent function change from the 11 to 12% a few years ago. That resulted in a SG and A reduction of $7 million sequentially, $19 million year-to-year and a 230 basis point improvement. Second, the strength and quality of that earnings performance were validated by operating cash flows that reached 133% of net income, and for the second consecutive quarter were the highest since 1996. On a year-to-date basis, free cash flow after dividends swung $73 million from a negative 41 million last year to a positive 32 million this year. These two accomplishments were achieved in a quarter when sales declined 3% to 649 million as weak industrial orders continued. On the consumer side, recent share gains are apparent in that PO assets are surpassing shipments. Customers cautiously reduced inventory levels throughout the quarter and just recently are showing signs of normalcy. In addition, recent share gains at Home Depot were retarded by slow sales of the replaced products. Overall, as I mentioned, sales declined 3%, all from lower volume with industrial revenues down a high single digit percent, while consumer was up a low single digit percent. We view this as a temporary blip on the path to top lying growth. Here's why. In the third quarter, our industrial business should partially emerge from its long near comatose state. For example, Mac has been engaged in a two-year repositioning of its business model to grow its independent distributor base and shed unprofitable employee routes. The third quarter should be the first quarter in some time that the overall truck count will grow. So revenues should be positive year over year. Overall, industrial should see a slight negative comparison year over year. Consumers should pick up as well as the inventory transition subsides. Given that some of our major customers are continuing their cautious inventory management, our expectation is for mid single digit growth here, and that result is a cautious one to two percent gain for the second half. There were a few other topics I'll cover briefly and then turn the call over to Jim. First, although inventories increased sequentially after the three second quarters of decline, DSI decreased by six days, and our commitment is still a $60 million reduction this year. Second, almost 1,000 people have been removed year-to-date from the payroll as the long-awaited economic recovery has not yet occurred. Production was again matched to lower customer demand and further reduced the control inventories. The result is a pre-tax charge of $8 million for severance associated with additional SG and A reductions. As sales softened during the quarter, a decision was made to implement a long-contemplated organizational streamlining around our strategic priorities, continued organic growth in the consumer markets and growth through acquisition on the industrial side. We also had a gain of $8 million upon the final settlement of a defined contribution pension plan. Jim will go through that and several other matters with you. With that, I'll turn it over to Jim for our financial overview.

Thank you, John. On May 13th, we provided second quarter guidance before EITF25 of flat sales and earnings in the 71 cent to 73 cent range. Despite lower sales, as John just discussed, we delivered a significant reduction in SG and A spending, and this helps us deliver 72 cents a share, consistent with that guidance. Employment levels were reduced by over 300 in the quarter. SG and A expenses aside from the $8 million severance related expense that John mentioned decreased by $19 million or 13% from the second quarter a year ago, and it's important to understand that the 127 million incurred in this quarter included 2 million of expenses related to the proposed Bermuda reincorporation. Going into the third quarter, we're operating each quarter somewhere between the 125 to 130 level, some 15 to 20 million below a year ago and the current rate is between 19 and 20%, so we're on our way towards that goal of 18% that we've talked about at the February analyst meeting. As we indicated in the press release, these SG and A numbers include $6 million in '02 and 5 million in '01, reclassifications into net sales as required by EITF25. As John mentioned, cash flow was a good story this quarter. Free cash flow after dividends of 51 million was up three times the 16 million a year ago and the main drivers were the $12 million net income increase and 8 million lower capital expenditures, so that decapitalization that we've been talking about is finally beginning to take hold. Working capital was basically cash neutral, as receivable sales of about $11 million accounted for most of the 13 million cash generation. Inventories used 4 million of cash and accounts payable generated 6 million. pension plan. It was settled midway through the quarter. We now have ceased recognizing pention income related to it. This is good news for those of you who see little merit in GAAP recognition of pension overfundings, as our income statement will now be much simpler. As mentioned in our February 8th analyst meeting, the nice part of this whole story, this pension story is the cash infusion that will occur in the third quarter. After payment of excise and income taxes, Stanley will receive over $60 million of operating cash flow from this pension reversion with 30 to 40 million of it coming in the third quarter. This caps a terrific story in connection with managing this pension situation as the funds will pay down pension assets accumulated during the last two plus years from income recognition and be available for redeployment for corporate purposes, and that would namely be growth. Those of you who value the importance of cash flow and asset efficiency as we do, I hope you will find the inconvenience created by these complexities over the last two years worth the hassle and the wait. In summary, we had another very solid quarter financially, $80 million of operating cash flow, 230 basis point SG and A improvement, and only 50 basis point decline from gross margin levels of a year ago, when higher industrial markets were fairly strong. All provide evidence of major progress and bode well for our future both short and long-term. Regarding earnings guidance, I will offer the following. We are re-affirming our prior 2002 estimate of 272 to 281 per diluted share, up 18 to 22% over the prior year with only nominal, say 1 to 2% sales growth in the second half, including the acquisitions announced today. This is what we told you we'd earn on February 8th and we intend to deliver it. That estimate includes 6 cents for the accounting change, eliminating the amortization of goodwill. It includes the cost but excludes any potential benefits of the proposed Bermuda reincorporation. We are also providing a third quarter estimate for the first time. We expect to be in the range of 71 to 73 cents per diluted share, up 15 to 18% over prior year, with expectations for flat sales in the third quarter. Our guidance for the third quarter with flat revenues in EPS, up 15 to 18% again, includes no LYPO benefit and no ongoing pension income. Since our defined benefit plan has been monotized, we will no longer be realizing that income or, for that matter, running the risk of an underfunded salary DB plan, as some companies are facing today. We realize the second quarter gain that we expected and look forward to collecting the cash. With that, I will turn it back over to John.

Thank you, Jim. I'd like to note a few items and then proceed to your questions. With the reduce skewed count in category cap. and seed, we're working with our customers to change the mix to enhance both our and their margin rates in everybody's inventory turns. For example, Wal-Mart's Gammarite is up very significantly in the new year and the new modular is just shipping. In summary, Jim has detailed the elements of our corporate governance and explained the relevant aspects and complexities of our off-balance sheet entities and our LYPO pension and restructuring items. He's often stressed the strength of our corporate audit and controlship programs as leading indicators of that governance. We've often and claimed honesty and thorough disclosure. Now the opportunity has been presented to act in backing up those claims. The SEC recently adopted an order, as you know, requiring CEOs and CFOs of certain public companies to file sworn statements attesting to the accuracy of SEC filings. Be assured that Jim, Larry and I will sign those sworn statements attesting to the accuracy of our filings and we'll do so without the slightest hesitation. Third, the dividend was increased 6.3% from 96 cents to $1.02. We recognize the importance of the dividend to many shareholders. Based upon yesterday's closing price, that's a 2.7% annual yield, and again, as you know, our dividend policy is to raise dividends at about half the rate of earnings growth, and that will happen for the next several years until we get to 25%. The two small acquisitions announced today met all our criteria. The acquisition of Senior Technologies provides a bolt on to our access technologies business. This personal security company has a full line of event detectors that help nursing homes reduce the risk of falls, manage wandering, respond to emergencies and maintain facility security. It's an area that we will grow upon and will grow over the next several years. Adnet PSAT we'll bolt onto our specialty tools together. Together, these two businesses will add about $40 million to annual sales. Next, hardware continues to stand out as the four-year transition of the operation from Connecticut to Virginia and then to China is really paying off. Operating margins in this business have soared from a low single digit in 2000 to high double digits in each quarter of 2002. Return on capital is approaching 20%, as the cost structure is lowered. Hardware sales have declined dramatically slow dramatically. Sales declines, excuse me, have slowed dramatically from a negative 16% in the first half of last year all the way to 6% growth this quarter, with over 1,000 traditional hardware outlets added over the past several quarters, and the recent Home Depot where hardware is very well-positioned to grow. On the other side, on the negative side, Home Depot recently informed us that Stanley entry doors will no longer be offered in their Florida and Arizona stores despite excellent service levels. At the same time, they've indicated their other doors business will make up the $30 million loss of sales. Until the substitute business materializes, we have considered the loss of this business offset by acquisition revenue in our guidance. Finally, we hope you'll all be able to join us August 28th and 29th for our analyst day in Minneapolis where Mac is sponsoring the world championships of drag racing. The agenda includes a review of our Mac tools business, our 2002 new product introductions from across the company and a racing experience. Jerry Gould will have an invitation out to you all shortly. Now I'll turn it over back to the operator for your questions.

Thank you, ladies and gentlemen if you wish to ask a question, please press one on your touch tone phone. You will hear a tone indicating that you've been placed in queue and you may remove yourself from the queue at any time by pressing the pound key and we ask that you only ask two questions per analyst, one question, one follow-up question. Margret Wayland with UBS. Please go ahead.

Good afternoon.

Good afternoon.

Would you talk a little bit about the sales trend into the quartER and into July and also why the inventory was up a little bit?

You're talking about sequentially?

Yes, just you know, June was better than July versus July.

June better than May. May worse than April, so there's no pattern.

And how is July so far?

Too early. The orders are no $60 million if it's going up?

Well, we had it go down in the first quarter. It went up in the second quarter. We should wind up with, now that we've got these sales levels we should start to see the, no impact we believe from sequential increases in volume. That's one. Two, we continue to work on the input/output models that we have and we should see the results of that in the handtools and hardware business.

Okay.

Which are the major areas that we have issues in.

Okay, thank you.

You're welcome.

Thank you, next we'll go to the line of Jason with Credit Suisse First Boston. Please go ahead.

Hi guys.

Hi.

I just wanted to I guess go into a little bit more detail on the sales front. I guess you explained some of the moving parts there now with the $30 million loss in doors with home depot but just putting together kind of your numbers for just the slight decline in industrial and you know, in the consumer side it's supposed to grow, I guess we have the acquisition also in there. It seems that the sales guidance is still a little bit lower than what I would expect.

Well, the Home Depot on the loan between the loss of Florida market and a non-repeat of a promotion is worth three points. that should help you.

Another thing from this quarter, you said that a little bit of an inventory reduction that major retailers have referred to you as well as some of the product rollouts not going as quickly as you expected. That would lead me to believe that that should fall into the second half and maybe improve your numbers, so it just doesn't seem, it seems like it should be a little higher.

Jason, we're not betting on any bounce, you know, in the inventory correction, so if the inventory correction were to stop and the shells were to be restopped, then we would probably see a better sales but if we put that out in the guidance and bet on it, we're going to miss the quarter if it doesn't happen.

I understand and just a follow-up on that point. Where would you characterize I guess current levels of inventory in the channel? I mean, we saw a little bit of a rebuild in the first quarter after a number of quarters where it came down. Are we kind of at the absolute lowest levels you've ever seen right now or do you think it's still -

No, they can go lower.

They could still go lower?

Absolutely. What we have, what you have in certain customers is transitions between, it's skew reductions in certain cases, supplier consolidations, and that is taking time to bleed the inventory of the discontinued stores in the skew? The store and not ordering the new ones until the old ones are discontinued, so are out of the inventory. So that is going on, and then there are changes going on in certain customers' operating methodology that might shrink the inventory on a systemic basis.

Okay, just really quickly, housekeeping question, what is your expectation for cap.ex. for the year now.

I think we told you at the, whatever we told you at the February 8th meeting, yorl it exactly.

65 million roughly, just a little bit lower than expected?

That's probably right.

Thanks a lot, guys.

Next we'll go to the line of Eric with RAD Research.

Good afternoon, SG and A and progress there has obviously been very impressive. Do you feel confident that you can sustain SG and A dollars at this level going forward? Can you reduce further from this level if revenues don't do what you expect in the second half, could you maintain them at this level if revenues improve in 2003?

What was the last part of your question, Eric?

If 203 goes up, can you sustain the inventory level, the SG and A level.

Well, we feel confident on the SG and A front, as you might expect, because we control our destiny with respect to SG and A. Even though we've made a lot of improvements, we're still not world class or even world class as it relates to the peer group. So we have opportunities in the peer group where companies are running 15, 16, 17% of SG and A and we're at 19 to 20 and when we look at the way we conduct our activities, we still see opportunities for more efficiency. So given the fact that we've taken, you know, the searchance expense here in the third quarter and we have taken some actions to go with it, we feel pretty good about the SG and A. Obviously the acquisition is layering a little, that will put a little upward pressure in it, the loss of the pension income which in this last quarter was about $3 million, that will go away, put a little upward pressure on it, the actions we took will put a little downward pressure on it and we expect setting aside the $8 million of severance, we expect it to be sustainable. When the volume increases our SGA is not particularly elastic so there's a portion of it, distribution, sales commissions, those types of things that is, but other than that, it's fairly inelastic so we expect the percent of sales to go down with or without major sales increases.

Second question, in the first quarter, receivables were higher than expected and the explaining was I think timing of how the sales rolled out in the first quarter. Receivables, if you exclude the $11 million you securized in the quarter are still up similar to what they were in the first quarter. Can you sort of explain what's going on with receivables and why and when we should see improvement?

We still have noise and the problem I talked to you about last quarter which I said was corrected and was corrected in one of the product lines with one of our major customers, you know, now has sprung up again in another major product line. So it's, there's a bit of an issue there in terms of getting the administrative part of this straight and the understanding between the parties completely straight. So there's a little bit of that. That's the main reason, and we still have about the same loading in the second quarter as far as the percentage, the pattern, you know, throughout the quarter, and so that's still an issue.

I mean, is that the point that again, more shipped in the last month of this quarter than had been previously; is that the -

I would say it was consistent with prior quarters and did not improve. Consistent with the first quarter, which is higher than normal historically.

When are we going to see receivables, you know, with sales flat? When are we going to see receivables flat year over year? the line of Jim with Janny Montgomery Scott.

Afternoon gents.

Hi gymy.

There has been a little bit of management turnover recently in the ranks is what we've heard. Can you give us an update on what management changes have been made year-to-date and what openings you currently have open?

We just consolidated the handtools and the mechanics tools groups into one overall group, mainly because the business had originally included Mac tools, no longer does. It starts to look a lot like the tools group and another product line within the tools group customer base operates that way, believes that to be the case. Competitors do the same. So we have changed that. That is a big job. Right now, it's an open position, which will be filled. The fastening systems position is open and we have a guy in an acting capacity in there who is the guy who spent 18 years at Bostitch and is running our hydraulics tools business. Those ever the big ones.

And could you give us an update on one of the focuses over the last year has been the focus on the nontraditional channel, the traditional and new industrial outlets. What is the update there?

The update is that we have, we are now able to add traditional, which as you know, we have not done, and this is a Mac, have not done for a period of time. We've now done it three quarters in a row, net of attrition. So the belief is that we will cross the number, as I mentioned in my remarks, at the end of, towards the end of this quarter. The number of outlets continues to grow. I mentioned hardware. We have, we're up to this year, we believe that we will get to 9,000 preview dealers, which is what I told you in February. We believe that over the next few years we'll grow that to 11,000. We've got 7600 outlets that we think we'll get this year in automotive retail up from 5500. In construction supply, we continue to add about 1200 outlets a year, so some events, you recall the Armagaedon events where people sign up new outlets for Bostitch so that will give you a flavor.

Okay and finally from a gross margin standpoint, how much of the decline, could you give us some flavor on, from a volume standpoint how quickly the gross margins come back or as you're moving to more low cost and there's some sourcing taking place, is there a systemic change and what kind of upside could there be to the gross margin number?

It all depends on what happens to the mix of the businesses. As the mix moves more towards industrial, which it was a year ago, we wind up with a difference in the portfolio. A year ago, the portfolio was 42%. 2001, it was 42%, excuse me, 2000 it was 42%. It went to 50%, 50/50 last year because of the industrial decline. So if the industrial markets come back and you know, we can all conjecture, someone says the second half of some year, then that mix will help the gross margins.

Okay, thanks.

You're welcome.

Thank you, we have a question from the line of Steven with Salomon Smith Barney. Please go ahead.

Thanks very much. Gentlemen, I was wondering if you could comment a little bit on your guidance range you gave. You basically reaffirmed the guidance range of 227 to 281, but in previous comments you had sort of indicated you expected to be at the high end of the range. Most recently you sort of said with a bias towards the upper end of the range. I think that verbiage was missing in this release. I was wondering if you could comment about that fact.

Steve, when we were expecting a flat quarter and the sales came down 3%, and then we had the doors thing, the loss, now luckily, fortunately, we had the acquisitions to offset that, but we didn't see the volume in the second quarter, and so we're just being cautious in the back half here, because we don't know whether the consumer, whether the home centers are going to be ordering enough, you know goods. So to put it on the shelves, so there's a lot of caution in the channel and if that changes, and it may, but it may not, so we're erring on the sides in terms of what we say it may not and if it happens, that's great, then we change the statement.

Right, exactly.

We'd change the statement based upon history now rather than forecast.

Right, that's fine. Second question I had related to your other income line, even after you sort of adjusted the pension. It still seemed, you know, like you had more pension income than or less, sorry, less other expense or actually some other income here that I really hadn't been anticipating. Could you talk a little bit about what happened on the other line other than the pension?

Yeah, I mean, we have all sorts of things that go into other every quarter and it typically runs anywhere from a slight credit to a couple million dollars of expense, and one of the big drivers of change in that line is how the Macportfolio performs, the financing receivable portfolio, because the entire P and L is included in there. That was more favorable. We had a sale of a facility or some land that we had out in California. That was a couple million bucks, I think it was $3 million. Of course, the amortization is gone from the prior year, and you know, there's always pluses and minuses from currency in there, so it's a mixed bag of stuff, but you know, it's probably - for modeling purposes, you know, it's probably good to think of that in terms of, you know, flat up, you know, maybe a million or two of expense, and then you know, your interest expense is probably in the $5 million kind of a range. So 6, $7 million.

Got it.

We model it at 7.

Okay.

And then it swings, you know, depending upon the quarter and what happens, but you generally model it at about at 7.

Jim, can you just be a little more specific about the Macissue and how big that was?

The Mac issue?

You said that there was the performance of the -

It's a couple million dollars. I'd have to dig it out for you if you want to give us a call. I know it's a couple.

It's only a million.

We just got it. The it's a million.

Thanks very much guys.

Thank you, next we go to the line of Joseph with Merrill Lynch. Please go ahead.

Good afternoon. I'm trying to get a sense of - I realize you're being cautious on the sales on the back half of the year, and I'm trying to figure out how you prepare for that. So for example, you know, farther downside, what gives? Do you wind up with extra inventory, do you have to lower capacity utilization and on the flipside, what if it's an upside surprise, because you've suppressed your supply chain in Asia, do you have you can't deliver, so we're trying to get a rhythm that says if we're supposed to have a level of goods for Thanksgiving, you know, the Christmas season or back-to-school, that we back that off and know exactly how many weeks it until it's supposed to arrive at the customer's DC. So it's all in the planning, as they say, and we look at POS data from Home Depot every week, so we know basically what the run rates are, and as you might imagine, the money run rates don't change dramatically. The only thing they change for is when you have a change in the modular, so that the new skews that replace or add to old skews, you have no history for. So that takes a little time to build up that history. Having said that, we don't anticipate there's much that we do not know about. Now, there's some noise in the street that we might be seeing some of the retailers, one or two of the retailers try to change the pattern of the business and so on. So if that happens, we will obviously respond in a rather quick way. Most of the response that they've got in what they promote is, frankly, not, since we're not a power tool company which has a relatively higher average bill, the stuff that we're involved in is mostly the doors business, and there, we are, as you know, a US-based business, make to order, and with reasonable lead time, we can be very, very responsive.

Okay, and then with regard to Europe, I mean, you were probably plus five on currency this quarter relative to a year ago. You didn't really mention anything about it. I mean, did you get any benefit of that or did it kind of go out the door with maybe some lower sales?

Well, what happens is on currency, we're basically neutral at the end of the day. Currency works both on the sales and the cost side, and fundamentally, it washes, so we don't see a big benefit from currency on the bottom line.

Okay, but as it impacted your revenue, did that -

It was worth a point.

It was worth a point?

Yeah.

Okay, fair enough. Thanks.

You're welcome.

Thank you, we have a question from the line of Howie with Flinker and Company.

Howie Flinker. I'm not Indonesian. I've got two names. I have two questions, and I think I spotted an arithemetic mistake in one of your tables so the questions first are, if the fair market in stocks continues, could you please tell us what your presumed rate of gain is in your pension plans so we might make our own assumptions in how we might have to reverse this.

I don't know what you mean, because we moved to a, we changed the pension plan. Our primary pension plan today is a defined contribution plan.

Oh, it's pure contribution. I forgot you said that and it didn't strike me.

No problem.

Strike that question.

Okay.

The second question is, are you using or do you plan to use your growing cash flow competitively, say in giving your customers longer terms or hiring more salesmen because you can and your competitors are a little budgetarily tight?

No, we are going to use that cash to grow the industrial side of the business, both on acquisitions, geographic expansion of acquisition of a strategic supplier and potentially a standalone business. So that money is going to expand the company inorganically if you will, not organically.

The arithemetic possible error, on Page 7 when you have your industrial segments broken out, where you have tools and doors sales and operating profit of tools anticipate doors.

Yes.

If you take the operating profit of tools and divide it by the sales of tools, you get a reduction in profit margins, but in your verbiage, you have an increase in operating profit margins. So I think there's an arithemetic mistake there, the 65.6 comes out to -

You know what that is, it's the segment information includes the effect of the $8 million severance charge, and that's primarily in the tools.

Oh, that explains it.

That backs the verbiage on it on a different basis.

It's around 14-9, if I remember.

Exactly, different base.

Okay, thanks.

Thank you, we have a question from Steve with Lehman Brothers. Please go ahead.

Hi, thank you. Quick question on the 20 million in SG and A savings. Can you give us an idea generally speaking where that came from or to the extent you can provide any kind of breakdown on that?

It was pretty much across the board but the biggest contributor was the Mac business and that was about 25% of it, and the reason being, we've had a big shift from the employee-owned trucks to the distributor trucks year over year, and that has driven the decrease. We also had about another 20% or so of the decrease was in IT, and we've had some major cost savings primarily from our service providers and other areas where we've taken out operating costs out of the IT department without, you know, shutting down applications or that type of thing, just mostly coming from the vendors. They've done a great job in that regard, so that's about half of that in there, Mac and IT and the rest of it's pretty much across the board, different functions and activities in the company.

Great, thanks, and secondly, have you guys given any thought to expensing your stock options?

No.

Is that no, you won't or no you haven't given a thought to it.

No, we haven't given any thought to it.

Okay, thank you.

You're welcome.

We have a question from the line of Wolfe with JLS Asset Management.

Hi it's Wolfe Jaffe. I am just a little confused. The gentleman before said the guidance for the year was 272 to 281?

Yup.

Okay and basically the implication is we should be at the lower end of the range given the sales guidance?

Yes.

Okay. Okay, one more question. I think - I forgot my other question. Thanks for your help.

Exdoe pee we are growing dramatically with Wal-Mart. We are up with Lowe's in most product segments. Menards, we have changed the pattern of sale, if you will. So they are down. That's about it. I mean, the co-ops we're doing fine with. We're actually up this year for a first time in a while pause of the dealer preview program and outlet expansion and we're up with V and Q overseas and home base in the UK. So if you kind of look at it, you know, the POS data would indicate exactly the opposite. Our POS data is in the, in hand tools, for example at Home Depot is fairly strong.

All righty, and in the release when you're saying that you're seeing, that you look to see flat industrial market conditions in the third quarter, I'm guessing you're measuring that sequentially or are you measuring it year over year?

Year over year, but what I said I think was a little bit lower year over year.

I'm just reading the release, John. "We expect flat and industrial market conditions to render comparisons to prior year results less difficult." "

Yeah, less difficult than the second quarter, but so sequentially flat, but not comparatively flat.

Okay, so you're measures it sequentially was my question.

Right, on that basis, before we get to the further quarter, we should start to see a bump, because the capacity utilization rates bottomed towards the beginning of the fourth quarter last year.

My question was that, you know, if you saw flat industrial market conditions year over year, yet you're seeing or you expect to yield only slightly negative year over year industrial sales, that imemployees you're losing share. That's why I wanted to clarify.

No, I understand what you're saying. No.

Okay, thank you very much.

Once again if you wish to ask a question, please press one at this time. We have a question from the line of Rick with John A. Levin. Please go ahead.

Yes, I have a question relating to the cash flow statement. I'm having a little bit of trouble footing sort of the current assets and the current liabilities with what you reported on the cash flow from operations. I think in particular, you had this large increase in the other current assets and I was sort of wondering what that was associated with and where that increase is reflected in the cash flow statements.

You know, for the last couple years, we've been recognizing this pension income, and it's been going into long-term assets, and now as the receipt of the cash is eminent in the third quarter, it was moved to short term assets.

So it was moved from long-term assets to short term assets.

Exactly, and then it will eliminate itself as the cash comes in.

Okay, so where was that moved from on the balance sheet, other assets; is that right?

Those are long-term assets, yup.

Which was 152 million at the end of June and now is 161 million - June '01 versus June '302, is that the right line I'm looking at?

Hold on. We're just looking at it.

In the June '01 balance sheet you show other assets of 152 million. In the June '02 you show other assets of 161.7 million.

I'll tell you what, why don't you give us a call in the next half hour after we get off the line, Jerry Gould, he and our controller will walk you through all of the movement there.

Can I ask you one more quick question. The life of reserve on a sequential basis, did that increase or decrease?

There's been no change.

Thank you, that's very helpful. I appreciate it.

You're quite welcome.

We have a question from the line of Marcus with Harsh Capital Management. Please go ahead.

Hi I just want to understand the Home Depot inventory situation a little bit better. You talked about how there is, that they're not doing any replenishment of their inventory. Is this because of their lessened outlook for the consumer spending in the second half of the year?

No, first of all I didn't say that we're not doing any replenishment. What I said was they are putting in some new skews and bleeding off and reluctant to do so until they bleed off the inventory of the old skews. So you got supplier A, who has skew A that has 100 in it, okay, it's down to 50. It's got to go to 0 or 10 before they'll start to order supplier B's B skew that will replace the A skew.

So you list this as one of your reasons for weakened demand but isn't that just a timing issue?

Yeah, it's a timing exactly, that's the exact issue. It's like produce, if it's not available for sale, you lose the sale while the produce is not on the shelf.

How long will it be before they start ordering?

That is the $64,000 question and why Jim said that he's being cautious in the third quarter. If they order, we get one answer. If they don't, we get another answer. We thought the pattern in the second quarter will be up a little bit better. That's why we gave you the sales guidance that we did and that didn't materialize, so once burned twice learned.

You said that there had been some inroads in share gains at the retailer.

Yes.

Who would be examples of players you'd be gaining share from?

Go take a look at a Wal-Mart store. Go take a look at a Home - the Home Depot hardware listing now, where we have, that is one area where we have seen the competitive product, the outof the stores either because they the competitor won't supply them any more or whatever and we are seeing a significant increase in orders, in POS and replenishments et cetera because of that. We are in the process of resetting about a 50 550 Home Depot stores right now with hardware, about 220 of which reset themselves this the second quarter.

Um-hum, and how much lead time does like a Home Depot, Lowe's or Wal-Mart have in terms of ordering for their Q2, Q3 and Q4 seasons.

Excuse me, repeat the question, I'm sorry.

For Home Depot sales in Q3, how much lead time do they need to give you guys in order to have product in the store?

Well it depends on whether the product is coming locally or not. If it's a big promotion, you generally needed it to go through their system about three weeks.

About three weeks, and so if the sales environment for them were to change in any way

Exactly. And that's why I'm very confident that we are in fact gaining share at the consumer level because I can see the pattern of the POS.

Right but your patterns are up, actually the current environment not necessarily sales for three months out or six months out.

No, obviously we don't see the future, but we do see the present, and the present gives a trend as to whether it's going up or down against, you know, week one versus the last four weeks versus the last 13, you can see a pattern.

Um-hum.

That's what we look at.

Okay, and what happened, the issue that happened last year where these guys cut back on inventory levels pretty significantly?

Yes.

Is that a scenario that could play itself out this year?

No, there's nothing fundamental about the industry. Anything's possible.

Got you. Thank you.

We have a question from Ryan Lewis with Cypress Funds. Please go ahead.

A couple of questions. You don't have any reserves for restructuring left on the balance sheet?

Yup, $19 million.

And does that appear in the other current assets line or where?

Where is the asset? It's a mix of both, depending on what the timing is expected to be. Generally, it would be more short term than long-term, and by the end of the year it should get very close to zero.

And it looks like you've done a tremendous boost from your working capital payables in inventory and the payables relative to inventory have gone up quite a bit. Can your vendors sustain the current level there or would you expect to see some sort of give-back?

We love our vendors. We have good relationships with our vendors and we're not putting them out of business and they seem to be, you know, relatively stable.

Frankly, we're looking at vehicles for them to be able to get paid quickly, for us to get longer terms and there are vehicles to do that that will finance their payments, and so we're offering those things to them as a good customer.

Stacey, we'll take one more question and then John has a closing statement.

Thank you, we will go to the line off Alan Lapenn of Capital Management.

Thanks for taking my question. I'm just trying to understand this other current asset line. Your explanation doesn't seem to sit with the balance sheet. Other assets sequentially fell 32.8 million, are long-term assets yet the current assets increased by 98 million.

Yeah, like I said before, there was a pre-paid pension in the long-term that's moved to the short term, and that's the explanation. If you want more details, again, you could call Jerry Gould in the next half hour and he and the controller will walk you through the exact specifics.

It looks like there's about a $60 million difference?

There's also a tax effect of the gain so if you look at the liabilities side you'll see something similar to that.

Okay. All right, thank you I'll place a call. Thank you.

All right, thank you. In summary, this was a very gratifying quarter for us, despite week end markets and the consequence of lower sales, the financial headlines, if you will say 15% operating margins, the best since the early '50s, 24% earnings growth on consensus and guide ants, and the highest operating cash flow since '96, not bad. These results validate our ability to foresee trends early, develop a plan in response and execute it. They also support something else. Several of you have mentioned lipo pensions et cetera as reasons not to believe that our quality of earnings is solid. Hopefully in a quarter with no low Poe and no ongoing pension income, that fear has been relayed. You will begin to see more acquisitions in the future. These will be relatively big and small but they will all one follow the criteria laid out in February for acquisition and two, be financially responsible. We will not chase. We will not chase. We will not over pay, and we don't have to. Finally, just a little growth will go a long way to show the true earning power of the cash generating April capability of this business model. Thanks everybody. Have a great summer. Talk to you in the fall. Goodbye.

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