史丹利百得 (SWK) 2002 Q3 法說會逐字稿

Good afternoon. My name is Renee (ph), and I will be your conference operator. At this time I would like to welcome everyone to the Stanley Works quarter three earnings conference call. All lines have been placed on mute to prevents any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your touch-tone telephone. If you would like to withdraw your question, press star, then the number two on your telephone keypad.

I would now like to turn the call over to Mr. Gerry Gould, Vice President of Investor Relations. Sir, you may begin your conference

Thank you, Renee (ph). Thank all of you for joining us this afternoon. With me today are John Trani, Chairman and CEO, and Jim Loree, our Chief Financial Officer.

Before we begin, I'd like to call your attention to three press releases we've issued in the past week, a release on October 10 updating earnings guidance and announcing our acquisition of Best Assets, and two releases this morning, the first on third quarter earnings and the second on the fourth quarter cash dividend. We've posted these to our Web site, so if you need to access them, they're there.

John will open the presentation with a short remark - review of these releases and a few brief comments, and then after his remarks, Jim will talk about him several items to clarify financial matters disclosed in the release. And then we will turn it over to the operator for Q&A.

We remind you that, to comply with Reg FD, our earnings guidance will be given at the outset of each quarter, as Jim will do today and as we did a week ago, we will not comment on it. But if business conditions change materially, say by 10 percent in either direction, we'll issue a press release at that time, as we did last week. We've allotted an hour for the call, so we think it will end around 3:00, and it is being recorded for replay. The replay is available to anybody who wants to listen beginning at 5:00 today through Saturday, October 16th at 5:00 - October 19th, I'm sorry.

If you would like to listen to the replay, it will be at 800-642-1687. Then after Saturday it will be available through the Web site only. Go to stanleyworks.com, click on "investor relations," and then "events" and "Webcast." You will not need a pass code or password to get on.

If you have any questions, call me after the call at 860-827-3833.

Then finally, we remind you that certain statements contained in this discussion by the various Stanley participants are forward-looking statements. Actual results may differ materially from those expected or implied. We direct you to the cautionary language in Form 8-K, which we're filing with today's press releases.

With that, I'd like to turn the teleconference over to John.

Thank you, Gerry, and good afternoon, everyone.

Third quarter EPS was 62 cents, in line with our announcement a week ago, and flat with earnings a year ago. Included in the reported earnings was a six-cent one-time income tax benefit. This was clearly a disappointment, especially since it was essentially self-inflicted.

The difference is attributable primarily to the sales and earnings impacts of issues in our mechanics tools business, where we had a flawed execution of a facility consolidation project. That cost us $14 million of high margin sales which, along with higher inefficiency, was virtually the entire difference between the 56 cents earned by operations and the 72 cents forecast.

After many well-executed factory consolidations that have delivered a more efficient manufacturing base, this one was done poorly. Essentially the project involved the closure of our Wichita Falls, Texas plant and the transfer of mechanics tools production to our plants in Dallas and Taiwan. Due to poor planning and execution, there were production shortages, stock outs, and soaring backlogs.

It is important to note that these problems were dealt with swiftly, and the new team has restored production to levels consistent with incoming orders. The backlogs in mechanics tools and neck can nicks tools and Mac tools should be worked down over the course of the fourth quarter, albeit with continued excess costs. We obviously are not pleased with the problem that occurred in here; it tarnishes our recent record of consistent performance. But it's clearly a bump in the road, and not an indication of a change in course. We intend to return quickly to predictable performance.

Overall sales declined one percent, with industrial revenues down a mid single digit percent and consumer up a similar amount. Geographically, sales in the Americas were down four percent, while Europe posted strong gains, both including and without the benefits of currency.

Given our third quarter difficulties, perhaps some impact from the West Coast port shutdown and recent reports of slowing industrial markets, sales are forecasted to be flat versus last year. That may prove to be conservative, but in this environment, prudence is called for in heaping amounts.

The strength and quality of our earnings continues to be validated by operating cash flows that reached 190 percent of net income and for the third consecutive quarter were the highest since 1996. Free cash flow after dividends year to date swung $116 million from a negative 12 million last year to 104 million this year. These amounts included a $69 million net cash receipt after payment of excise taxes from the defined benefit pension plan we terminated. After paying related income taxes in the fourth quarter, approximately $40 million of net cash benefit will have been realized.

In addition, there was approximately $30 million remitted directly to our defined contribution plan, which will prepay our funding requirements for the next 2 to 3 years. So in total, approximately $70 million of cash was generated.

We know that the funding status of pension plans is a very big issue with investors today, so in a few minutes Jim Loree will review ours with you, and I think you'll agree ours are in great shape.

On the profit side, operating margin was 11.4 percent, a decline of 220 basis points from last year, reflecting the mechanics tools issue. Inventory before acquisition impacts was essentially flat, while DSI decreased four days following a six-day decline last quarter. It's very unlikely that our $60 million target will be achieved, as this would impact customer service.

With that I would like to turn it over to Jim for a financial overview.

Thank you, John. John summed up the financial performance in the third quarter with his comments about mechanics' tools impact on sales and earnings, the nice boost the pension gave to an already solid cash flow performance and the sales momentum we're building in the consumer retail half of the business.

I'll focus my comments on SG&A expenses, the status of our pension funding, funding for the best access systems acquisition, the strengths of our balance sheet, and guidance for the fourth quarter.

First, SG&A expense declined 9 million versus a year ago on a comparable basis, reflecting continued cost reduction programs. On a sequential basis, SG&A expenses of 133 million were seven million above second quarter, exclusive of $8 million severance recorded in that quarter. Nonrecurring mechanics tools issues added about 2 million. The companies acquired during the quarter, Avnet PSAT (ph) and Senior Technologies (ph), added 2 million, and the elimination of pension income added two million to SG&A.

Given the importance of pension funding status to today's investors, our situation is a good story as follows - as you know, we've terminated our U.S. salary-defined benefit plan, with $29 million of funds transferred to the U.S. defined contribution plan and seven million transferred to our U.S. hourly defined benefit plan. There will be no further funding liability for the terminated U.S. salary-defined benefit plan, and employer contributions for the DC plan have been pre-funded with a current year $6 million requirement and is $23 million advance-funded, which will cover the next couple of years. This represents a cash benefit, but not a reduction of booked (ph) expense.

So we now have four significant DB (ph) plans remaining, with total plan assets of about $127 million. Our U.S. hourly DB plan is currently overfunded by $7 million, our Australian plan is overfunded by $3 million, our UK plan is underfunded by two million, and our Canadian plan is overfunded by one million. Thus we are $9 million overfunded in total on these $127 million of plan assets.

After paying $31 million for acquisitions in the quarter, our debt is down 49 million from 264 million (ph) from the beginning the year. Correspondingly, our debt to cap is now under 31 percent, down from 34 percent in June and 37 percent at the beginning of the year. Our net debt, i.e. debt less cash on hand, is 298 million, down from 339 million in June and 379 million at the beginning the year.

We will pay $310 million for the Best Access Systems acquisition towards the end the fourth quarter. In order to do so, we'll issue a new term debt financing at that time. Our debt to capital currently under 31 percent will cross slightly over 40 percent with the acquisition financing; still a conservative ratio, and one that leaves us room to do further acquisitions once we digest Best Access Systems.

We recently met with the debt rating agencies S&P and Moody's. They both issued press releases last Friday, October 11th, indicating that our debt ratings after the Best Access Systems will remain unchanged at A S&P and A2 (ph) Moody's.

We continue to earn investment grade ratings because our balance sheet is solid, our earnings continue to grow, and our free cash flow generation continues to be strong.

Working capital consumed $32 million of cash in the quarter, mostly in accounts receivable due to our third quarter being a relatively high sales quarter sequentially in high levels of late quarter shipments, which are normal for the September month. DSI at 81 days is down 8 days from the beginning the year, and 10 days from a year ago. DSO at 78 days, down one day from year-end and up 6 days from a year ago. And DPO, at 52 days, continues to be strong.

In summary, although this quarter had its operational setbacks, we had another very solid quarter financially. As long as the cash keeps flowing, and it will, we will be able to take advantage of opportunities as they arise, while protecting the attributes of our company that make us such a great stock defensively, namely our strong balance sheet and longstanding record dividend. These are of vital importance in these times.

Regarding earnings guidance, we have provided the following - we are reaffirming October 10th's full year estimate, 247 per share, up seven percent for the year, with flat sales in the fourth quarter, including the Senior Technologies and Avnet PSAP acquisitions. We are also confirming our most recent fourth quarter estimate, namely that we expect earnings to approximate the 57-cent per fully diluted share level earned in '01, with expectations for flat sales in the quarter.

In the way of clarification, there are two elements changing our previously announced fourth quarter guidance to its current 57-cent level - first, the expectations for revenues have decreased from three to four percent growth to flat, as we discussed, and second, there will be ongoing financial impacts in the quarter from the efforts to bring mechanics tools and Mac Tools backlogs back in line, and these account for half of the change.

And with that, I'll turn it back over to John.

Thank you, Jim. I'd like to note just a few items and then proceed to your questions.

We continue to work with our customers to change the mix to enhance both our and their margins and inventory turns. Wal-Mart's (inaudible) is up very significantly this year, and the new modular is just shipping. The rollout at the Home Depot continues, although at a slower pace than we would like, because existing vendors' inventories must be - must move first. Nonetheless, our sales to them are up a double-digit percentage as well.

On August 13th Jim Loree and I signed sworn statements attesting to the accuracy of our company's filings, and we did so without the slightest hesitation. These were filed with the SEC on a timely basis. Frankly, we thought that's what we did every time we signed the SEC filings previously.

This morning our board of directors approved the fourth quarter cash dividend in the amount of 25.5 cents per share. We recognize, as Jim said, the importance of the dividend, as Jim said, to many share owners. That's why it's increased every year for the last 35 years. Based upon yesterday's closing price, it represents a solid 3.3 percent annual yield.

The acquisition of Best Access Systems represents a significant underlying step in repositioning our company's portfolio of businesses. The combination of Best Access with our own access technologies business positions Stanley with a service and technology platform in very large growth market. How large? The current U.S. market niche served by Best Access is almost $6 billion, and the larger worldwide overall security market is $125 billion. Both are growing at 7 to 10 percent annually. We will have a $400 million platform in these markets.

This deal met all our acquisition criteria. It adds to the commercial industrial half of our business, and will be accretive to earnings in year one. With assumed sales growth at just half the market rate, and below Best Access history, and with conservative cost reductions assumed, the rerun invested capital will be higher than our weighted average cost of capital - that is, eight to nine percent, as we calculated in the first year, and deliver over 15 percent return on capital within 5 years.

One obvious opportunity is inherent in the fact that 11 percent of Best Access sales, but only one percent of its margins comes from service. Having been through a similar situation 16 years ago, I can assure you that we will not give service away to sell our products. That dog doesn't hunt.

Even more exciting than our initial position is the opportunity to develop this platform going forward. We will pursue national service contracts and empower the Best Access sales and service forces to help us grow our commercial hardware business. Best Access has the only direct model in its industry. Competitors use independent distribution exclusively. When we combine Best Access' direct distribution with that in place within Access Technologies, we will have the industry's most extensive footprint.

Finally, Best Access' management team is excellent. They are both energetic and experienced.

During the quarter we implemented a long-contemplated organizational streamlining around our strategic priorities, continued organic growth in the consumer markets, and growth through acquisition on the industrial side. This yielded the combining of our hand tools and mechanics tools business, some realignments of our sales force, and the establishment of a 3 member corporate executive office. The three members are myself, the executive vice president of the hand tools group, to be named at a later date, and Jim Loree will assume the new position of executive vice president. In this new role, Jim will assume overall responsibilities for the doors (ph) hydraulic tools and assembly tools businesses, in addition to his CFO responsibilities.

This will afford us the opportunity to focus more on growth, both organically and through acquisition.

Now I would like to turn it back to the operator for your questions.

At this time, I would like to remind everyone, in order to ask a question, you may press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question is from Jim Lucas, Janney Montgomery Scott.

Thanks a lot. Good afternoon.

Good afternoon.

John, we've had a number of learning experiences over the years since you've come to Stanley. And with the - as you've said, you've had a number of successful consolidation opportunities. What was the learning experience from this failed execution?

Every once in awhile, Jim, you place faith in individuals to deliver that have delivered for you before, and in this case, it didn't happen. So I don't know what more to learn from - other than just, you're going to wind up with a problem every once in awhile and we got it in spades this time.

Okay. And with the Best acquisition, could you give a little more color on the competitive environment? Are there any other meaningful players, or is this a very fragmented market, as you discussed in the past?

The market is fragmented. The major players are Ingersoll-Rand and Asa Abloy (ph), neither of which are, if I recall correctly, has more than 20 percent share in the market. And so it is still very fragmented.

They both go to market through distribution. We prefer the direct model, mainly because we want to retain the service and installation business and believe that that will pull through the product, ultimately. And this platform has enormous legs to it, and I think, Jim, as you and I go through the years here together, you will ask a question three years from now regarding this call, and I will say to you what we learned is something that we learned a long time ago, and that is service can in fact change the complexion of the game, and it will in this business.

We are looking at this particular market and we're calling it the access controlled platform from an overall commercial standpoint where there's just an enormous market, very fragmented, very local, and in Best Access' case, has a very fragmented customer base. Extremely fragmented. It's a beautiful thing, as we talked about before, in my view. And so you will see the manifestation of benefits of that as we go forward.

And a growing market, too.

And a growing market. As opposed to - you got it right.

And besides the hand tool vacancy as you consolidated those two businesses, do you have any other openings at this point in time in the management ranks?

We have one opening that we hope to fill very quickly here, in the faceting (ph) systems business.

Okay. And on the hand tools side, how close are you in terms of - have you begun the discussion? Is that something you hope to fill by the end of the year?

Well, we would hope to fill it as rapidly as possible. The facts of the matter are, to be honest with you, as you start to wind the year down, you wind up with people with bonuses that they think are coming and so on and so on. It's so unlikely, frankly, to fill by the end the year. We are searching - we have a search going on, and we'll see if that search proves to be fruitful. But it's not imminent.

Your next question is from Erik Bosshard, Midwest Research.

Good afternoon. Two things. First of all, accounts receivable have been a sore spot in working capital throughout the year. You talked about the seasonality of the third quarter. But can you just give us a sense of what issues are that continue to keep receivables up and when we're likely to see some improvement in this area?

Well, there's three things that are driving it. First of all, we continue to have - the late quarter sales phenomenon certainly was exacerbated this quarter by the opening half of the quarter was very weak in mechanics tools and Mac. And so that cash doesn't get collected until after the quarter end. If you get it earlier, you collect some of it before the quarter end. That's an issue.

We've had - over the course of time, over the course of this year, we've had some increase in the European receivables. That's now trending in the right direction. And we continue to suffer from administrative problems with one of our larger customers and have worked through that, and we're expecting to have that completely cleaned up this quarter, but it will definitely be cleaned up by the end of the year.

So I would venture to predict that you'll see some significant improvement by year-end on the receivable side. And you look at it from a DSO point of view, it's not as traumatic as it is from a dollar point of view. However, I do recognize it as an issue.

Secondly, in terms of the defined benefit, the cash you got in the quarter, can you review that amount? It also sounded like you seemed to indicate that you had a tax bill that you'll have to pay on that that would push 20 million of cash out of the fourth quarter, so we're likely to see some cash drain from this on the fourth quarter. Am I looking at that right?

That's correct. Generally what we have in the fourth quarter is a very strong operating cash flow as the inventories and receivables come down. We will have about a $32 million tax payable in the fourth quarter associated with the - this pension cash that we receive. We received 69 million into the company's treasury in the third quarter. We will pay out 32 in the fourth quarter for a net of 37.

We also paid out - we actually received 86 and paid out 17 in the third quarter for excise tax, and now we have to pay the income in the fourth quarter. But as I mentioned, we also received another $36 million of cash into the plans, not the company's treasury; 7 into the hourly DB plan and 29 into the salaried DC plan. And those fundings will be - it's essentially similar to receiving cash into the treasury, but it's just earmarked for use in those plans and is locked in those plans for future funding.

So that cash does not show up in cash from operations or anywhere on your cash flow statement.

Correct.

It's the participants' money, so to speak.

Yeah.

And then, last question. In terms of Europe, I think John talked about Europe revenue trends better, which I'm assuming means Europe market share is getting better. Can you just quantify some of those and talk a little bit about what's going on in Europe?

Well, the sales were up 13 percent in Europe in the quarter, which is terrific. Obviously some of that was from exchange. So it's probably up 4 percent or so in local currency. The sound bite is basically they're doing an excellent job on the sales front in Europe. The market is not nearly as strong as the sales are. And it's pretty much across the board on almost all the product lines.

Erik, there is no - there is no industry association that reports sales for the European markets that we know of. If you know something, tell us about it. So our belief, based upon what customers are telling us, is that we're gaining share, particularly (inaudible), and in the UK especially.

Your next question comes from Joe Sroka, Merrill Lynch..

Good afternoon, everyone.

Hi, Joe.

Just above 400 million on inventories at the end the quarter. Are things worked out with you guys on the West Coast, and what more would have been a targeted inventory number that you probably could have closed the quarter at?

Well, we've got stuff hung up on the ships and so on. And frankly, Joe, we haven't looked at it that way. Now that the strike is hopefully going to abate here, we should see the stuff flowing through the port and into sales. And - but we don't really have an estimate of what that would - might have been.

But do you feel you had adequate inventory to serve your current flow rates now?

Yeah. I mean, what we have is, as you know, at retail, the supply chain is heavily dependent on goods coming through the West Coast. So now that it's opened up, it will take a while. But we anticipate that that will work out. The other thing, frankly - and it's an unknown as to what it is - is there are certain retailers who might be asking for a little bit more in the way of domestic goods near term here, given the fact that the flow from the ports is a little bit slower than they would like.

Okay. And a conference call or two ago, you had mentioned you thought Wal-Mart was going to open about 150 to 160 super centers in the next year and they actually recently announced they were going to probably open 200 to 210. So I was just curious, would that provide some additional upside to the door segment, as well as the tool segment, for stocking that higher increase of stores?

The - it will do something - it will do stuff in the doors segment, with more business going for Access Technologies. And it should improve the tools as well. We are now at a point at Wal-Mart in the fourth quarter where we think we will probably have 50 percent share of the SKUs. So we should see a continuing sequential increase here, and I think Wal-Mart probably has the largest upside of any account in the company.

Excellent. Just lastly, probably over the last year, you kind of transitioned cash flow priority away from share repurchase and more towards making acquisitions. Any thought with the stock now here under 30 of transitioning a little bit back toward share repurchase?

No, Joe, not really, because we just did this acquisition. I think it's, as we talked about, a very good strategic fit, and good financially as well. And we're going to give this several quarters for digestion and build up the capital base again and get the earnings accretion going on that, make sure we do that right, and then we'll see where we go from there.

So maybe debt pay down would be the priority after you close the acquisition.

That's the priority for now, yes.

Your next question comes from Larry Horan, Parker Hunter.

Just to get back to mechanic tools for a minute. My memory serves me well, your Texas plant was acquired a number of years ago and had a pretty good reputation for execution. So would it be fair to say that the execution problems were solely at the Wichita plant?

No.

No.

No, they were not. In fact, the Wichita Falls, the problem was that part of the part of the expertise in the Wichita Falls plant was not transferred to the Dallas plant.

Oh, okay.

That's part of the problem. And so, therefore, the equipment arrived and that all happened, but its utilization was at about half or less of the level that it should have been.

So they didn't have the people in place.

Yeah. They were not able to keep the people or have the expertise of the salaried workforce as well.

And the productivity collapsed in the Wichita Falls plant as well when the move started, and often don't see that in these ...

Usually goes the other way. Usually people try to increase productivity in - and do all they can because they think the company will reverse its decision. That didn't happen this time:

You might say there was a morale problem in the Wichita plant?

There's always a morale problem when a plant closes. It's just that the response to the morale problem sometimes is different - more positive than what we experienced this time.

Okay.

And as a consequence, we ended having to move faster, and that obviously further exacerbated the issue.

As a larger issue, the reason I'm drilling down on this, all the years that I've covered the company, which certainly were more than were run by other people than by yourself, mechanics tools has been kind of a periodic problem for lots of different reasons.

Generally, all of them so far, as I remember, Larry, associated with plant moves. The last one was something called Washington Circle - Courthouse, Washington Courthouse, where a couple - and that was the same kind of problem. This one, I think, recovered a lot faster.

So this is the end of your plant moves?

No. No. But we are - when we had 80 and now we're at 40, we have a kind of a different view of how many are left.

No, I mean, in terms of mechanics.

In terms of mechanics, it's probably - that is probably true. There might be a box plant that might consolidate, but in terms of the mechanics tools, the tools themselves, the answer domestically is surely it's over. We only have one plant.

Your next question is from Steven Kim, Salomon Smith Barney.

Thanks. First question I had related to some of the initiatives you announced earlier this year with Depot, and specifically I was curious as to whether or not there was anything new to report with respect to headway or tangible results from your relationship in the nail gun arena or the pneumatics arena and in the hand tools arena.

In the pneumatics arena we have seen them pick up some of the new products, and they're doing pretty well - up double-digit POS. The hand tools, as I mentioned, is in the transition process. And thus far, in the places where we've done some the transition, we're seeing a nice lift in POS, and perhaps the spectacular thing to report here is that the hardware business, where we, as you know, move from half the stores to all of them, we executed the transition to, I think it's 546 stores, were reset with 385 SKUs impeccably, and therefore we are up dramatically. And we took down their SKU count, at the same time, I by, I think, 58 percent.

So SKUs are down. Their GIMROY (ph) is up. Our POS is booming. The comps are higher than the predecessor - than the company that was in the half that we did not have. And so we are now looking at other categories, with Depot for next year and - in replicating the success that we've had thus far.

Thanks for that. and I think you also talked - about in the recent past, about perhaps slowing your rate of new product introductions in order to better, I guess, manage the life cycle of those products. You talked about that decision and, from a tangible standpoint, what can we expect next year in the way of new product introduction, and how has Depot reacted and some of your larger customers to this strategy?

Let me say this. First of all, when we meant - when we talked about new product development slowing, we meant in the categories that we are currently in. So the shift will take place - for example, there is a product that will hit Target stores pretty soon, a cordless screwdriver which we think is going to be a big winner, and Target has picked up as the first account. That will give you an example of new categories to be entered here. And what I said before about Depot, for example, in hardware, our attempts to enter new segments that we're not in today, plus put more emphasis into the industrial markets than we had before, so to get a little bit more balance.

Okay. Great. Do you have any specific targets you can share with us with respect to new product introductions in the industrial sector?

No. We do not have a percentage, Steve, laid out. But we will show you a few categories in February once we've solidified the intro dates.

Your next question comes from Steve Watkins, Lehman Brothers.

Hi. Good afternoon, guys. Two questions. One is if you were to step back and take a broader view of operating income margins for the company, where do you think as a realistic peak margin over the next couple of years. If you look at a ten, fifteen year history, I know the company changes a lot over time but looks like literally you peaked out last quarter at about 15 percent. If that's where you get back to or you get above that how do you do it.

It's very straightforward. First of all we will get above it. I don't know which quarter it will be but we certainly haven't peaked out. We had a little executional problem, what you see over the next couple of years, hopefully confined executional problems. The fundamentals go like this, we are entering markets where they have the following attributes. They are growing markets, they have high margins, higher than Stanley gross margins, they serve fragmented customer bases, they have service intensity associated with them which makes them less prone to price deficiencies, price decrements. So when you look at that kind of - industry portfolio characteristic, you can see yourself moving the operating margin up considerably. If you go to some of the companies that are in these markets in those segments, you will see very robust operating margins.

And that's what the positioning leg of the triangle means is to put us into markets that have those characteristics. So, when we're in a market that has higher than "Stanley average gross margins" that gives us a wonderful opportunity to do the things that we do well, rip out the SG&A, do the consolidation rationalization, combine the business entities' buying power, purchasing power with ours, and in that integration, generate an enormous economic value. That's what we're trying to do.

Okay. Is there a way to quantify that? Or is that something that's going to roll out over time.

We'll try to show you one element of that in February when we get together in terms of the - what we're calling the opening strategy. In the commercial side of the market. Describe the industry, and our position within it and the opportunity base that exists.

Okay. Thanks. One other quick question and you may have already answered this, I apologize.

No problem.

The 55 million in cash flow in the quarter from the changes in operating assets and liabilities, how much of that, am I even interpreting this right, how much is related to pension stuff or how much is really one time stuff.

69 million.

So otherwise that would have been a negative - was that 14 million, something like that?

Is that right?

Yeah. Yeah. You did it right.

Thanks very much.

You're welcome.

Your next question comes from Ted Pencetti (ph), UBS.

UBS Warburg, thanks. First I just wanted to - I was actually pretty focused on the margin question that was just asked. But, talking about operating margin improvement throughout this year in the door business, it's actually up substantially year over year each quarter sequentially. That due to new acquisitions and should we see it continue to grow in the 2003 same rate.

No. The answer to the latter question is I don't know. But, the answer to the former question is, that we have the hardware business where we have moved the sources of production offshore, where we have won the Home Depot business, and executed the line - resets, frankly impeccably. So we're seeing the margin manifestation of that success. In access technologies we have changed the technology base and we explained that to the crowd, to the gang in February of what was going on as we moved from video, from motion detection to video detection as we've moved to do more of our service business direct. And as we've won business at major retailers like Wal-Mart, and Home Depot and Lowe's, that all of that has combined into generating these margin rates and why we are so excited about the best access acquisition in the platform along with this business that we already have that it provides. You will see us making multiple, I hope, over time, entries into that segment and we will describe the level of volume and the earning power that, that segment should be generating but it will become a bigger and bigger part of the company.

Have you quantified what you think the accretion level would be next year for best access.

We've quantified it.

And its contribution to your double-digit earnings for next year?

We have an acquisition criteria which I think we even stated in the comments that we believe that the return on capital, in this case $310 million of invested capital will be greater than our weighted average cost to capital, and our return on capital is defined as tax-affected EBIT over invested capital, so you can come up with your own estimate. We're not going to share a point estimate, but I think that this will give you a ballpark feel for what it could be.

Okay, I guess then I'm kind of on a top line, how do you see sales trending in the fourth quarter going into the fourth quarter as we are right now?

How do we see sales trending in terms of the overall Stanley ...

Yes sir.

We see them basically flat.

Okay by division then? By doors and by tools?

We're not going to - we haven't gone into that level of detail. We've basically said here's where the run rate is, here's where we think we are in total and that's it.

If you wanted to extrapolate you'd say that the tools would be weaker and the other - the doors would be stronger as they were in the third quarter.

And consumer will be stronger and industrial will be weaker as it was in the third quarter. I think that is pretty much the writing is on the wall regarding both of those items.

Your next question comes from Sam Prakesh (ph), Raymond James.

Good afternoon gentlemen. Most of my questions have been answered, and I apologize if I fail to phrase this question appropriately. John, could you address the possible concern that the execution issues may have arisen due in some part perhaps to senior management perhaps being spread a little too thinly across multiple businesses at this point.

Well, I thought you were going to get a little more pointed and say you had Bermuda going on.

To be more pointed, I would say that exacerbated by Jim now taking on new duties, but I was going to be kind to Jim.

Oh, all right. We're hoping that Jim will be able to turn some of these things around, but anyway, the answer to your question is look, we have a relatively simple business here, it is national account dominated in much of its base, and we have people in the other parts of the business, for example in access technologies and so on that are doing just fine thank you if you know what I mean.

And so they're doing their thing, growing delivering and so on, and our attention is on the problems - is on both side - both ends. The enormous opportunities and the enormous problems, or at least relatively enormous, and so we focus on things like thefts and we focus on things like mechanics tools, and the stuff in the middle basically moves on the way it's moving on. That's the way the business operates basically.

Two more quick questions. Have you changed your stance of late regarding consumer promotional environment for Christmas in terms of you think it's a little more pessimistic regarding Christmas this year?

To be honest with you, from our standpoint we have so little - such a low relative share that we think it's all upside, so we don't see any, we have not had the impact of the demonstrable slowing, if there is any in the consumer side, and one to two points frankly at retail does not affect us at all. It may effect the retailers to a large extent because they are dealing with enormous denominators, if you will, but not - it does not and should not affect Stanley.

Last question. Any update on steel prices and steel price inflation impact for next year.

Still difficult, the belief and we're planning for continuation of the tariffs as they sit. Some of the changes and allowances that have been made by the government have allowed certain parts of the operation to not be affected by those tariffs, but still a significant part of the equation on a carry over basis.

OK, thank you sir.

You're welcome.

Your next question is from Steven East, AG Edwards.

Good afternoon guys. Just a couple of quick questions. First of all, on Target where do you stand on your rollout?

We are in the process - the rollout is going better than expected, meaning that while we had planned a significant increase in the tools arena, we're getting a higher number than we thought, but Target is still a relatively small part of the company, and what I just said could double and would not make a significant impact.

Okay, which leads to the next one on Wal-Mart. When you say you've got 50 percent of the SKUs, does that imply that you're already in 50 percent of the stores or where are you as far as the store count goes.

We are in all the stores.

Okay, and then on the tax reserve. You just reversed the interest and penalties. Two questions there. One, how much is still in the reserve and why did you only reverse part of it and not all of it?

Well, I'm going to be a little bit circumspect in answering this because anytime you answer questions on tax reserves you end up giving your hand to the authorities that you're dealing with, so it's a country in Europe that was a Supreme Court case that was basically something that we were litigating, that was 100 percent reserved, plus penalties were reserved, and the case was another company who had a similar litigation. The case was ruled by the Supreme Court in our favor, and therefore we had an event we had to respond to. It became clear after that that there would be no penalties in the event there was no tax assessment at all. But in this particular country precedent is not precedent like it is in the US legal system, and therefore it was considered appropriate to leave at least a portion of the exposure reserved.

Okay, I appreciate it.

Very good question.

Thank you.

Your next question is from Jim Lucas (ph).

Thanks, quick follow up question, just a housekeeping item. Aren't all screwdrivers cordless? I'm sorry, I couldn't resist.

We love you for a reason you know.

Thank you.

You're welcome.

We also have a follow up question from Ted Pencetti (ph), UBS Warburg.

Just a quick one. Where would you expect the tax rate to be for the third quarter?

32.

Okay, thank you very much.

You're welcome.

At this time there are no further questions.

John has a statement and then we'll be done.

We can deliver better performance that happened this quarter and we will. We still enjoy very strong operating and free cash flows, and the retail consumer businesses continue to benefit from recent share gains. Industrial markets simply need to stabilize, not even grow, so benefits from the Wal-Mart business, the five year Home Depot contract, the hardware resurgence that I mentioned, opportunities at Lowe's and the previewed dealer program can manifest themselves.

A recent Harrod's (ph) study that we did showed some interesting results that we'll share at our annual analyst conference on - next February 14th, but one that stuck out was that hand tools are purchased three times more frequently than power tools, and if Stanley and Craftsman are the preferred brands. With just a little bit of sales growth, our partnerships with these customers can lead us to more levels of performance. You will begin to see more acquisitions in the future from Stanley. These will be relatively big and small, but they will all one, follow the criteria laid out last February, and two, be financially responsible. We will not chase and overpay. Finally, just a little growth as I said will go a long way to showing the true earning power and cash generating capability of our business model, which we think is robust. Thanks, and it's a little early, but have a great holiday season. Bye-bye.

Thank you for participating in today's Stanley Works quarter three earnings conference call. You may now disconnect.