史丹利百得 (SWK) 2002 Q4 法說會逐字稿

Please stand by for realtime transcript. Good afternoon. My name is Anissa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to The Stanley Works conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 1 on your telephone keypad. If you would like to withdraw your question, please press star then the number 2. In order to allow everyone an opportunity to ask questions, we're going to accept one question and one follow-up. If you have additional questions, please requeue by pressing star 1 again. At this time, I would like to turn the call over to Mr. Gerald Gould, vice president of investor relations. Sir, please go ahead.

Thank you, Anissa. Thank you all for joining us this afternoon. With me today are John Trani, chairman and CEO, and Jim Lori Loree, chief financial officer. We'd like to call your attention to the press release. The first on fourth quarter earnings and the second announcing our first quarter, '03 dividends. These are posted at our website, Stanley Works.com if you need to refer to them. John will open the presentation with a short review of the earnings release and a few brief comments. Jim will highlight several items in the financial matters in the release, an at that point, we'll turn it back over to the operator, Anissa, who will explain the Q&A procedure. We remind you to comply with regulatory FD, it will be given the outside. We won't comment on it further thereafter, and if conditions change, and the earnings guidance changes materially, for example more than 10%, either way, we would issue a press release and conduct the call. We've allotted an hour for the call.

The call is being recorded for replay. It will be available beginning 4:00 today, eastern time, through the end of the day next Thursday, by telephone. The replay number is 800-642-1687, and you do need a code for the replay, and that code is 7028841. After Thursday, the call will be still available by replay, by going to Stanley Works.com and clicking on investor relations. If you have any questions, give me a call afterward at 860-827-3833. Finally, we'll remind you that certain statements contained in this discussion are forward-looking statements. Actual results may differ materially from those expected or implied. So we direct you to the cautionary statements in Form 10K -- form 8K we are filing with today's press release. With that, I'd like to turn the conference over to John Trani.

Thank you, Jerry. Good afternoon, everyone. Fourth quarter EPS before special charges was 42 cents, including about 22 million, or 17 cents a share of non-cash charges, earnings were 25 cents a share. Both of these were in line with our announcement a week ago. As we indicated, this is clearly a disappointment and a surprise, but it does not change the fundamentals of our business, or its cash-generating ability. We intend to return quickly to a predictable, surprise-free environment performance, so let's proceed with a discussion of the quarter's results. Sales of 662 million were up 3% with Best Access Systems included, excluding that entity, sales declined 1%. Consumer side of the business was up 3% while the industrial/commercial side was down 3%.

Europe delivers low, single-digit percentage sales growth, and adding in currency impact, low double-digit increase, while the Americas was up below single digit percentage. In the fourth quarter, weak industrial orders continued, and our large retail customers simply stopped buying, particularly in December, despite double-digit growth in our sales through their cash register. By the latter measurement, our products are doing very well. Our customers are gaining share, and we are gaining share at those retail customers. Despite a sales decline in our entry door business, the result of our previously announced loss of the Florida region and Phoenix and Las Vegas at Home Depot, our consumer businesses were up this quarter. That gain is not being fully felt due to lackluster and market demand. In some cases depression-like conditions, and the continued inventory draw-down from retailers. But our hardware offering was hauled out of Home Depot without a hiccup and the new tools at WalMart is meeting with success. Stanley carried the tools department to double-digit growth. Although much of the sales decline were in Mack tools and, therefore, a high margin, a fourth quarter issue was cross productivity one. Our annualized rate of productivity savings as we mentioned previously dropped from $80 million a year, in 2000 and 2001 to about 70 million in the first half of 2002, and to $40 million a year in the second half of 2002.

In the third quarter, the flawed Dallas-Wichita falls plant consolidation was the issue. In the fourth quarter, that situation improved partially, as expected, however, we had to deal with excess freight costs from the aftermath of the west coast stock strike, a large supplier rebate that fell through in the 11th hour, and higher than expected inventory loss provisions. The question on everyone's mind is regarding productivity is whether the gains that we've had, in fact, are over, and we need to go on to a different venue. We believe that our operations, frankly, are in the fourth inning, and I'll tell you why. In 2002, 31% of our sales were derived from manufacturing and sourcing in low-cost countries, up from 26% in 2001. We anticipate that will increase to 38% this year. Overall, the percentage of material from these countries should reach 50% this year. Moreover, we still have a quarter of our plants with no productivity realized in the fourth quarter and have implemented a program to transfer best practices of the high-performing plants to the nonperforming ones. Also, commodity pressures on some of our input material, including steel, are already abating.

The good news is that the Dallas-Wichita falls productivity problems are essentially behind us and the nonrepeat of the fourth quarter issues will almost certainly provide us with the ability to get back to our healthier first half of '02 productivity levels. Any improvements in fastens would provide further improvement momentum. Our earnings guidance anticipates the business, X Best Access, will grow earnings nominally above $2.30 per share in 2002, from productivity improvements, more normal flow of product, and shipping levels matching retail sales more closely. In addition, a benefit is expected from unwinding the Mack Direct segment. It's interesting from the continued unwinding of that segment. It's interesting to note that we've added 39% to our traditional distributor base over the last two years and eliminated 191 Mack Directs, 32% of the base, if you will, last year alone.

Today, traditionals, as we call them, are solidly profitable, while Mack Direct incurs a loss. Margins should show sequential improvements in the -- sequential improvement in the first quarter based on our run rate going out of the fourth quarter, and beyond that based on the productivity benefits, as I described. In addition, early returns from Best Access are positive regarding our return on capital objective for that business. As indicated in the release today, 2002 free cash flow, before dividends, increased about 58% from 149 million to 235 million dollars in 2002. This is a step-function change for our company, and most importantly, we believe this new level is sustainable. I'd like to ask Jim Loree to provide details on the financial matters discussed in today's release, then I'll wrap it up, and we'll take your questions.

Thanks, John. We've summed up the operating performance with John's comments about the impact on earnings of lower than anticipated productivity savings, and with the discussions about margins and costs in the press release itself. Instead of going through those in great detail, I will do two things today. First, provide more information on the fourth quarter margin mis and secondly provide greater detail as to the segments underlying our first quarter and full-year 2003 earnings guidance. We do now know a lot more about the fourth quarter operations miss than we did a week ago. We know the 15 cents per share difference between guidance and earnings, before special charges is comprised of the following. Four cents is sales related, a combination of lower Mack tool sales, and year-end settlement of customer co-op and volume rebates. Two cents of it was excess freight costs incurred after the west coast work stoppage, that we didn't catch until the month in December. Three cents of productivity execution issues, primarily in fastening, of which we thought we had offset, with two cents of supplier rebates that fell through in the 11th hour in December, because they were linked to future business, and we decided we could not record them. And six cents of year-end loss provisions, and lower than expected revaluations that did not materialize until, again, late in the quarter.

Through extensive analysis, we also now know that the real run rate gross margin exiting at year end was approximately 33%, and we've used that in our first quarter guidance, that I'll discuss in a moment. And finally, we know there is not an internal control problem at Stanley. It was our internal controls that identified the items, albeit late in the quarter. The issue is one of timeliness within the quarter, and it is unacceptable to surprise you and to be surprised ourselves one to two weeks before the earnings release. The past two quarters come in the wake of several years of predictability, and I can assure you that I'm personally addressing the root causes of this problem, and the corporate controller and I will be visiting the businesses monthly to review their results and help surface any issues early, so that we do not have a repeat of the fourth quarter. In retrospect, also, we had some new CFOs in a couple of our larger businesses, the tools group and fastening, and they're just becoming assimilated, and not fully familiar with the process for raising issues in a timely basis, within the quarter. We do -- we are pleased with our ability to recognize the issues, and we're also proud of their high-integrity level in raising the unpleasant news.

Now lets move to earnings guidance. Regarding the earnings guidance we provided in the release, our first quarter expectations of earnings, 44 to 46 cents per share, is based on continued soft markets providing sales at levels flat with last year. We expect gross margins to approximate the run rate exiting the fourth quarter of around 33%, that I referred to earlier. SG&A, and this is all excluding Best at this point, and the SG&A expenses are likely to approximate the levels they were in the fourth quarter. For the year 2003, under reasonable but cautious sales assumptions, such as sustained good retail performance offset by industrial weakness, gross margins, excluding Best, should approximate the level achieved in '02, besides special charges with SG&A, running 20% to 21% of sales. We expect nominal growth over 2002 earnings, excluding the Best Access acquisition, and including Best low double-digit earnings increase over 2002, and please be clear, since we've had several questions about it this week, the erosion of the base business earnings for -- in '03 is not expected.

In this year's third quarter, we expect to see operating margins returning to the 14%-plus range, and as John mentioned, we expect productivity will quickly return to normal levels and we will achieve very nominal sales growth this year based on share gains only, and not from economic rebound in the second through fourth quarters. And finally, aided by normally strong fourth quarter cash collections and favorable change in customer payment term arrangements across several businesses, we had a very strong finish to a great cash year. Our 235 million of free cash flow was by far the strongest than the past 20 years, and this enabled us to pay done 154 million of debt in '02, over 80 million of that in the fourth quarter. We see very strong cash flow again, likely in 2003. We enter the year with CAPEX running at a rate approximating 60% of depreciation and amortization and we anticipate as much as 40 million dollars less restructuring spending in '03 than in '01, '02 time frame. And we expect a positive cash contribution as well from Best Access. With our strong cash flow, we will be able to take advantage of opportunities as they arise while protecting the attributes of our company that make a great stock defensively, namely our strong balance sheet and long-standing dividend record, and with that, I'll turn it back over to John.

Thanks, Jim. I'd like to note a few items and then proceed to your questions. First, as we said in the release, it's disappointing to us that we did not deliver this quarter, and last,, and are taking the actions needed to restore our performance. There were some bright spots amidst all the gloom. For example, the cash flow, and a few other notable developments. First, our Access Solutions Group had double-digit organic sales growth and has won significant business at WalMart recently with service for all its existing stores as well as recording multi-year wins at Kroger, CVS and WalGreen's. Second -- or third, rather, we completed the acquisition of Best Access and commenced this integration. This gives us a $450 million growth platform, solid profitable and growing markets. And the treasury team, successfully sold $450 million of five-year and ten-year bonds at 4.5% interest, to fund acquisitions. Over the last several years, there has been significant retail consolidation, just to name a few. Hechingers, Builders Square, Payless, Kmart, Scottie's, and so on. Now the world looks like a bar bell. Home Depot, Lowe's, WalMart, Menard's, maybe on one side, and the traditional hardware stores, the co-ops, and the independents on the other. We have, with very strong share positions at U.S. retail and a solid European base, our tools group can grow substantially, we believe, over the next several years. These two platforms, tools and access solutions, provide a solid base for growth while generating great cash flow for reinvestment. We're blessed with a large and successful customer base, strong cash flow, a great dividend yield and cost position that is vastly improved from just a few years ago. We will get beyond these recent problems and return to the kind of performance you have expected from us rightfully and that heretofore we have delivered. And with that, I'll open it up for questions.

Once again, in order to ask questions, you'll need to press 1 and to allow everyone an opportunity, we ask that you please ask one question and one follow-up. If you have additional questions, please requeue. Margaret Whelan with UBS Warburg.

Hi, folks.

Hi, Margaret.

The first question is on the supplier rebate you mentioned, John. Will you just give us some details on that and then if any of the terms -- (unintelligible).

I'll let Jim handle the issue, because really revolves around accounting.

Yeah, basically, Margaret, we had an agreement with a supplier, an Asian supplier, who does a lot of business with us, to give us a volume rebate for '02, very sizable amount, and when we got into really understanding what the expectation was, the expectation was it was linked to future business, and that made it impossible to record the benefit from that, although that was not the understanding going in, and so, we decided to defer that until this year.

Do you know what time -- the timing on it?

Well, it's being negotiated as we speak, but it should be spread out throughout the year.

Okay. And then, the second question is, then, we were told some of our contacts after the miss last week, specifically about Mack tools and Snap-on said their drivers were down 2%, some of our contacts suggested that your drivers, new drivers were down double digits, even though -- much lower base, whatever, 1,300 (unintelligible) and they also said that part of it was problems with delivery of the product, not getting it out on time. Can you just address that and maybe why wouldn't have known about this earlier in the quarter?

Yeah, there's two things. We basically changed, we had two issues. Number one, the back-order situation that was created by the Wichita Falls mechanics -- Wichita Falls/Dallas affected Mack in areas that are relatively high profit margins, what they term hard lines in the trade, so to speak. So that caused one problem. At the same time, we instituted and tightened up, frankly, a policy that we had on returns which was, to be honest with you, over the top, particularly with respect to Snap-On and Mack, so we tightened that up. The drivers didn't like it very much. For a period of time, they went on strike, so to speak, and then after that, we wound up with a -- a different view of the world, and as we kind of come out of the year and go into the next year, it should get better. One of the interesting statistics that I'll share with you is that almost 45% of the current, traditional distributor base was recruited over the last two years. So we have a recent vintage group, and we -- we think, frankly, we've cracked the code now on recruiting traditionals to a significant level going forward, and we'll share that with you when we all get together.

Your next question comes from Steven Kim with Solomon Smith Barney.

Thanks. I was wondering if you could address, Jim, the issue of the SG&A, more specifically in your guidance? You felt comfortable with that given the fact we've seen some pretty powerful margin strengths from a pretty dramatic drop in SG&A the beginning of '01, and after sort of bottoming in the second quarter, you've had two quarters where that migrated up, and this quarter, it's top-line issues, but could you give us an idea of where we expect the SG&A number to be on a margin basis for the next couple of quarters?

Steve, the only in -- the only significant increase we've had in SG&A has come from acquisitions, so if you -- if you kind of adjust for the acquisitions, even from going to the third to the fourth quarterer we might have had a million or $2 million increase. That was about it. And, you know, the exchange over in Europe really drove that. So the spending levels are the same. You know, you've got a month, at best in the financials, and that's really what's driving the bulk of the increase.

Okay. And then the second question I had related to your guidance about the gross margin and your comfort with sort of -- I think you said a 33 level, because that's your run rate at the end -- exiting the fourth quarter, was wondering if you could sort of talk about whether or not there's any seasonality issues that, you know, we should expect. Historically, has that been a very good indicator, where your margins will wind up for the first quarter?

Not historically, because part of the reason the run rate is higher has to do with the fact that there was substantial quantity of what I'll call, "year-end provisions" and, you know, revaluations that had a negative impact in the fourth quarter, but, also, there is a normal seasonal depression of about 50 basis points from, say the third quarter to the fourth quarter, due to the holiday in both November and December, holiday period, and the lack of absorption during that time. So we would expect to get 50-basis points down from the quarter. The rest of it really comes from the absence of the events in the fourth quarter, like, you know, the freight issue, the west coast thing, as well as some of the provisions I mentioned.

Your next question comes from Jim Lucas with Jenny Montgomery Scott.

thanks. Two questions, first on the housekeeping, could you address the increase in the share count and also comment on the tax rate of what you're looking for next year? And secondly, John, could you expand on the best practice transfer of how you're looking to accomplish that?

Mm-hmm. Well, Jim, it will take a minute on the share count.

Let me answer the second question, then. Jim, there is a -- we have a scorecard which we'll also share with you, but we have a scorecard of the varying plants and the folks doing it and the folks who aren't, and Paul Isabella who runs the operations for us, we'll be traveling with a couple of the best plant managers and a few of the best lean folks, and visiting the underperforming plants for a little guidance session on how to do planning, and what to look for in, taking a look at some of the accounts -- basically doing a review, but belly to belly, up close and personal, as opposed to, mearly through the businesses, so that's what were going to do. His role as part of the central part of the business, is in fact, to do that, to spread, to share best practices, we have several of them, that we will talk about when we are with you -- with the folks -- we know what they are, we know what works and what doesn't work -- and we know how to deploy this stuff, certainly, some people know how to deploy it extremely well, and others don't. And the others, that don't, are represent up to about 40% of the labor costs in the company, so these -- it is a significant amount, it's not a nip, it's why I believe we're in the fourth inning. And Jim will try to answer the --

well, the answer to the share count is, you know, as many of you know, we have an equity hedge outstanding, which is in place to -- when the stock price goes up, it tries to offset the dilutive impact of options going into the money, and when the stock price goes down, it works the other way, but tries to keep it as flat as possible, regardless of the share price, and it's not a perfect hedge, and with a significant decline in the stock price between the third quarter and the fourth quarter, that -- the difference in the hedge effect and the stock option effect accounts for the difference. There really was no other change.

Your next question comes from Eric Bouchard with Midwest Research. Mr. Bouchard, your line is open, sir.

It's Bosshard .

Pardon me. Please go ahead.

No, I guess you lost him.

That question has been withdrawn. We'll proceed to the next question, from Joseph Sroka with Merrill Lynch.

Good afternoon, everyone.

Hi, Joe.

John, not to bring up maybe, like, bad memories, but I guess in general, 2002, you sort of went back to the drawing board, you had the whole Bermuda issue, and the issue in the third quarter maybe we thought went away and totally didn't, and some other issues. 2003, I mean, is it going to be a back-to-basics blocking and tackling year, or are there significant things you need to do to get to where you want to be?

Well, right now, Joe, from where we are, it's -- it's fundamental blocking and tackling, but there are -- we are generating significant cash flow. We have a relatively robust deal pool here that -- that attaches itself fundamentally to some of the -- I'm not talking about large, large things, but fundamentally attaches itself to this Access Solutions Group which has very strong operating margins and fragmented customer bases, and so, in all of the right stuff so to speak, and so, as those opportunities arise in this operation, we will bolt them on over time, but other than that, as I say, I think the fundamental here is that we are in a different plane now in cash generation, and that cash generation, absent the fact that we -- you know, the restructuring that Jim mentioned, will start -- will ebb dramatically here, and so, you know, we don't have 40 more plants to close and 50 more warehouses, and you'll see that money will be put to use in places that it looks like there's significant leverage.

Okay. And that is the best you see capital now relative to -- you raise your dividend every year, but also relative to your own stock?

Well, we will raise the dividend every year. We anticipate, you know, a returning a good chuck of the cash flow in the form of a dividend payment as we do every year. We will increase the dividend again next year, and the remainder, we believe, is best utilized in expanding the business, and a whole bunch of opportunities that appear to be coming our way.

Your next question comes from Jason Putnam with CFSB.

Hi, good afternoon, guys.

Hi, Jason.

Hi.

First question really relates just a little bit more specifics on the forecast. Looking at 2003 and how the -- the year lays out, you did mention you were looking for flat sales in the first quarter, but I'm kind of wondering how that will play out for the rest of the year, what kind of improvement that you're building in, and, also, if you could talk about the difference between the consumer and industrial side.

Very little improvement, point or two. That's it for the sales. Excluding Best, of course, Best changes the whole frame, but adds -- gets us to double-digit sales growth base, but the core business, if you will, would be a point or two.

Your next question comes from Larry Horan with Parker Hunter.

Yes, in your release, looking at this little differently in terms of segment profits, you had a 390-basis point deterioration and operating margin in the door segment. And you cite two things. Lower sales, which is obvious, in terms of the organic lower sales, but you also mention impact of a legal settlement. Can you quantify that? Because that's something we should back out to try to get a sense --

basically a penny a share.

Yeah, but what was it in millions of dollars or base es points so we can look at the segment?

Well, you know, a penny a share is 1.3 million.

Okay, thanks. The other thing is, I presume that the Best Access margins are higher than the average for that segment, so they actually would have been accretive to the margin as a percent?

Yeah, slightly. Very slightly. They will be when we blend in, you know, three months of performance, they'll be -- very accretive.

One of the things that happened here, is that because we provided for the acquisition a month early, we wound up a little more interest expense, than we would have thought had it all kind of -- all the stars lined up exactly. So what Jim is reflecting and you should reflect is, yes, this will have an -- the higher operating margin, higher gross margins than the -- than the overall business.

Your next question comes from Ken Zaner with Deutsche Banc.

Good afternoon. Just have a housekeeping and a follow-up question. The interest expense for the year I'm looking for, and also for the fourth quarter dollar value, the Texas, conversion there, the dollar figure was cited in the third quarter.

What conversion?

The plant conversion, said it was 14 million hit in the third quarter and you thought it would be half that in the fourth quarter?

Yeah, it was -- our expectation, the 14 million included both the volume effect and the rate effect. Okay? The rate effect, we expect it to be about halfway better. We had a dramatic decline in the gross margins in both mechanics tools and Mack business in the third quarter. The Mack business made it all -- made it all the way back to where we thought it would, halfway back and the mechanics tools business made it a couple points back, and in total, about a third back, and, you know, the volume issue in Mack did not cure in the fourth quarter, and so, that is one of the open questions here in the first quarter.

Right. So that was a 14 million hit, in the third quarter, saying it was closer to eight or nine, in addition to the charges?

Yeah, you know, if you call us up afterwards, we can give you some more granular information. I wouldn't want to make a guess. I'd like to take a minute and map it out on a sheet of paper. But it's probably in that neighborhood.

Your next question comes from Steve Falkens with Lehman Brothers.

Oh, hi. Two questions. One, about a week ago, you guys had certainly talked about productivity being the big cause of the loss, but if I look at Jim's breakdown of the 15-cent miss, its 3 of 15 cents, or only 20%, so did it turn out the productivity was less of an issue than you initially thought? And along with that, could you provide more color on the six cents and year end loss provisions? What exactly is that?

Well, you know, firstly, the productivity would include great costs on the inbound and that's where most of the expediting occurred, so the freight issue is productivity. The productivity, the three cents is productivity, and, frankly, the bulk of the loss provisions, et cetera, which are generally inventory-related, would go to cost of sales and, therefore, represent productivity, so most of it is productivity. It's only the four cents that is what I would call sales related. As far as the six cents, I can't go into a tremendous amount of detail, but basically what we have, the end of the year, we calculate an inventory revaluation. We expect a certain number, and the number we got was quite a bit lower, and then we also evaluated our excess and obsolete situation and, you know, made some provisions for that. We had a few surplus deficit adjustments, items of that nature just a laundry list of things, small list of things that added up to a bigger number.

Your next question comes from Sam Darkatsh with Raymond James.

Good afternoon. Two questions. First, John, I think earlier in the year, you mentioned you were hoping to trim as much as $60 million in inventory year over year. Now, in the fourth quarter, you acquired extra inventory from Best Access, but can you give us the status of your inventories going forward? And then my second question, regarding WalMart, I'm guessing that your total sales through WalMart in the year was 4%, 5% of your total sales. What are you pegging as your growth target through that channel in '03?

The growth rate that we're targeting for WalMart next year is 20%. The comment on the inventory, what Jim is telling me here, is that it appears to be flat with a year-ago, once we eliminate all of the changes to the accounts that happened at the end of the year.

As well as currency.

Currency --

as well as adjusting for the acquisitions. It comes out to be almost exactly flat with the prior year, which was 410 million net inventories, and the other side of it, the receivables, when we make the same adjustments, 551 at the end -- at the end of '01. At the end of '02, after all of the adjustments, down to 479, so the working capital we expected, to get on the inventories did not materialize, and we got it on the receivables side instead.

Your next question comes from Steve McNeil with State Street Research.

Hi. You spoke about how some of your large retail customers have stopped buying, but you expect to gain share going forward. Who specifically do you mean when you --

Home Depot and WalMart.

Okay. So, I'm just wondering how the -- you know, how your view on the Home -- I guess you had said you expect WalMart sales in '03 to be up 20% --

we expect Home Depot to be up, too.

Well --

the reason for that is their POS data is still double digit on our goods.

Okay, yeah. I think we talked about that.

Mm-hmm.

Your next question comes from Frank Denal with Adage Capital.

I have a question. I'm having trouble reconciling, just being nominally in the access business next year. I mean, if you add back the -- shooting yourself in the foot in the third and fourth quarter, which as far as I can tell, 20 million pretax, and you've got guys for Mack tools being more seasoned and being able to sell better, so they should be doing better, and you have some industrial business, which hopefully does better this year, what is dragging the rest -- what's causing the drag to get back to nominal?

Look, I don't know how long you've been following us and been with us, okay?

Longer than you have.

As long as I have.

Longer.

Longer than I have. Okay. Well, you know by now that we used to be predictable, and until we get predictable again, we are giving you the best guidance that we know. You can create multiple scenarios, but the facts are that we're entering the business, entering the year at a different rate than we exited last year, and it will take time to get back up to that rate again. That slope is the question, some people will have one view of the slope, and other people will articulate what you did and have a different view of the slope. We're giving you what do you think is a -- is a best rational case of solidity that we will achieve.

But you're talking -- your question related more to sales than margins, and what John --

no, he's talking about margins.

I thought you said earnings.

Talking about earnings, driven by margins.

Right.

Well, in that case --

yeah, yeah. That's where we are.

You know, you may have a slope at the beginning of the year, but you have a serious ditch --

the back half of the year -- right, exactly. So the question is, you know, we got the mountain in the front half and hopefully we'll have a nice slide down in the back half. And then come out of the year, a hell of a lot better than we entered the year, and have a different situation than we have going on now.

Your next question comes from David Gerow with T. Roe price.

Just a --

welcome back, David.

Welcome back? I haven't gone anywhere.

All right. Okay. I haven't talked to you in a while.

Just a couple of quick -- a couple of quick questions. If you guys could talk a little bit about pricing for the year 2000, the basis, given the precash flow basis, you talk about CAPEX going down one more step, and you make more progress on the inventory, free cash for the target next year, a housekeeping item, it looks like to me that the depreciation and amortization was up by 29% sequentially, which may have impacted Q4 as well. If you could help -- probably a small piece of that -- depreciation went from 15-8 to 23.

I'll take your last question and I'll let John answer your other questions. It was about a $4 million sequential increase in D&A. The amortization substantially higher due to the two acquisitions, STI and Best, that have really high intangible assets and relatively short lives, so at least $2 million of the differences associated with acquisitions, and then there's another, close to a million that's associated with the Mack business where we have an information system that went online and now depreciating the new Mack system or amortizing it, as well as accelerating the amortization of the existing system which will be in service for six months or so. So there's a big increase, sequential increase from that, and it will be effective for at least, you know, two quarters next year, and the final piece of it is, we are on a half-life convention, so every fourth quarter we typically have a little upward -- it's normal to have an upward blip in the fourth quarter, because when something goes into service in the fourth quarter you have a full six months of depreciation, as opposed to when it goes into depreciation earlier in the year, you get a six-month depreciation, but you don't -- you spread it out over a whole year. It's a half-year convention phenomenon, and that really is the other remaining million or so. John, you want to take --

yeah, in terms of the free cash flow for the year, we don't anticipate it's going to be much less if any than this year, so if I were modeling, I'd put the same number in.

But if you have less restructuring and you'll have higher earnings, and make the progress inventory, it would seem you should have --

we don't have a pension gain, you know, there's other things that are in the cash flow calculation.

We have $40 million of cash this year --

good point.

So it goes the other way. If I was modeling -- but, David, if you model that number and take it out, just blow it out either against the balance sheet, or whatever assumption you want to make on reinvestment, you'll get a different answer on the company going forward than you will if you just assume that -- the debt drops to zero ultimately. You get a totally different answer.

Your next question is a follow-up question from Steve McNeil with State Streets Research.

Hi. I guess we haven't spoken for a couple of minutes, I guess I got cut off again.

I'm sorry.

Okay. I swear we're long investors. Back to this Home Depot thing, you know, I'm just wondering if you can help us get our arms around, you know, okay, POS data is up. In fact, they've made public announcements regarding The Stanley Works relationship and how they want to strengthen it, and I just want to make if you can help triangulate that.

Let me granulate that. We had 10% skewed share of Home Depot pre the new -- what I'll call the new modular change. We now have 30%-plus shares of the skews. As we lever that position and get in the flyers, as opposed to not being in the flyers, and so on, and we are collectively working on how to do that, we believe there's enormous opportunity for Home Depot to grow, opening price point items.

Okay.

We believe that there is -- we can show them over time that that is the way to go, and frankly, the frequency of purchase of a hand tool is three times what it is of a power tool, and one of the things they might want to evaluate is advertising more hand tools, since that is the traffic-building item.

I mean, have you got a sense for them about some of their mis-steps in '02, and how that would potentially impact your relationship with them going forward?

We had a situation where our buyer, if you will, changed a stream here recently. He left the company and new individual is in, and, as you might imagine, everyone has their own ideas, it takes people to get up to speed. And so, between that, the private label, tying up the open to buy, those two items, plus the fact that we believe that some of the west coast dock strike resulted in late delivery of products that they had already made commits to, when add all of that together, alone with the weak retail environment out the door, generally, in the fourth quarter, in the December season, retailers will be a little more inventory of slower-moving goods and, therefore, as I say, tying off the open to buy, but ultimately, they've got -- they should follow the POS levels, an that's what we will try to explain and show to them as we go forward.

Okay. So, in total, in '03, how much do you expect the retail tool business to be up?

Well, you know, it all depends on what they decide to do and how they decide to do it. We thought it would be up much stronger than it is here, but as Jim says, overall, we've put in a relatively sanguine number, relatively, you could say, realistic on the one hand, given the environment we're in, and could be a little bit better but it could be a little bit worse, too.

Could you give us a flavor for that? Is it --

basically, I guess he explained that we have an overall organic sales number that's up a couple of points towards the back half of the year in total. So, maybe we'll get pleasantly surprised, the consumer side was up 3%, and the fourth quarter, it's been up a little bit stronger than that, previous to that, I think, and I don't think there's any reason to raise it to that level, what was it, four to five. So, if we got 5%, which we got at the beginning part of the year, we don't see any reason it shouldn't go back there, frankly.

Okay.

We aren't putting that into the model overall, if you will, because -- or we are, and offsetting it with the continued weakness in industrial.

I mean, do we have any flavor for how January has played out on the retail side at this point?

The early numbers from -- I haven't seen the Home Depot numbers, but WalMart is up strong double digit.

The next question comes from Rich Cloth with Banc of America Securities.

Hi, guys, I wanted to go back to the SG&A real quick. You guys said the run rate is going to be about 20%, 21% for the year end how should we look at that throughout the year in terms of quarters? Is it trending downward from current levels with the integration of Best Access, or is it going to be more or less closer to current levels right now?

Well, I've only got it in my -- in my sheet here with -- without that at the moment here, and when I said -- when we said that we -- the indication was that we made was excluding Best, and Best, as we said earlier, has a substantially higher gross margin than Stanley's line average and a commensurately high SG&A rate to go with it. So, we've been tracking, you know, excluding Best, the core business for years here, the SG&A, watching it go down as a percent to sales for quite a while and stabilizing near the -- in the most recent period.

So, assuming that sales that we have very little sales growth next year, you know, just taking a conservative view, and assuming that Best Access has higher SG&A levels, the run rate sounds like it should be close to what it was this quarter, 21.7?

Well, just outboard Best. If you outboard Best, I would expect the run rate to be slightly down from this year as a percent to sales. The first quarter will be higher, because the first quarter sales are much lower than the remainder of the year due to the seasonality of our business, for instance, in '02, we saw the opening quarter, the SG&A rate was in the mid-22s in the middle of the year, between 20, 21, a big decrease just because of the seasonality of the business, because a little bit of -- well it was slightly flat -- slightly down in the second and third quarters.

Your next question comes from Michael Cominski with Newberger Burman.

Michael?

Mr. Cominski, your line is open, sir.

Guess not.

Your next question will come from Jillis Van Prong with Dellisfield Asset Management.

Just a couple of quick clarifications for the cash flow. The cash restructuring charges in '03 will be $40 million less in '02, what was the number for '02?

Well, the cash out the door for severance, forget the charges, the cash we paid out the door was 50 -- 53 million. Just checking it. But I think it was 53.

So something like 13 million for this year for cash --

yeah, something in that range. We'll confirm that number, slightly lower than 53, just checking it now, but it's in that ballpark.

And second, in terms of the -- the total D&A for '03, with the acquisitions in there, figure out what cap Ex is, 6% of the D&A rate.

The CAPEX was, 53 in '01 and 42 in '02.

I'm just trying to -- what should your D&A and cap Ex be in '03?

We'll have to get back to you on that. We don't have this number in front of us.

The next question comes from Jim Lucas.

Thanks. On the tax rate, could you give us a little guidance for the year, because it looks like the effective rate has special charges, somewhere around 30% for '02?

Try 32, Jim. That's where we're modeling.

And from an integration standpoint, can you walk us through the early steps of what it is doing from an integration standpoint at Best, since this is new territory for Stanley?

Yeah, we -- we're doing the following. We have -- we're moving the individual who runs the Access -- ran the Access Technologies business for us to Indianapolis, along with his head sales guy, his head national accounts guy, who will now run all of the national accounts out there. They have a very young, vibrant group of people that have been with the company for a long period of time, and where the top people have been 17 or 18 years, and have significant experience in the sales force, and thankfully, under 40 years old at the same time. Very unusual group of people dedicated to the business, knowledgeable of the business, and so on. We've already taken a restructuring in the business on December 5th. We took out about 23% of the factory people, as we went in and basically looked at, what they should, and could be doing on ratio basis, and so on. We have sent in a team of people, to integrate the supply base, we had suppliers (inaudible) them for a week where we brought in, I think, 40 suppliers for a little chat, shall we say, and so, we have consolidated seven branches already. Now it's time to pause, and to integrate and get Best on a right track. We have an integration team headed by a -- actually the ex-treasurer of Best has a couple of people, and they are tracking a whole plethora of projects, we would let that individual, the head of the business take you through the integration program is extensive. They've got decks, they review them every week. Every two weeks, I have a review with the team for the first quarter, and then I'll do it monthly thereafter, and then for the rest of this year, we'll go to the normal quarterly routine. So we are step by step integrating the operating mechanisms. For example, Jim, they did not do, and still don't, do daily sales or weekly orders or anything like that, or quotations in a robust way, so we can track them and so on, and the Access Technologies group has done a terrific job in developing operating mechanisms around activity-based sales systems, activity-based sales systems that tells them what it takes to win and what the best guy is doing and the worst guy is doing in the field, and what the differences are and how to -- how to move those people up or out, so that's the -- the integration stuff that's going on. It's granular, and it's so far, they seem to be well on track. The issue that we have is the volume -- assuring that the volume happens, and stabilizing the field, so to speak.

Your next question comes from Steve Falkens with Lehman Brothers.

Hi, one quick follow-up. Historically speaking, if the tools margin has been somewhere in the 11 to 13 range, can you give us the magnitude of what industrials is above consumer? IE., help relatively profitable industrial is versus consumer?

Well, well, we don't -- we don't really have that in front of us. We'll take a look at it and show it to you, I think we showed that the last time we were together, but I don't recall what the numbers are. But I believe there's a -- there was a chart that we had in our last year's presentation that will show you some of that, and Gerry will send that to you if you don't have it already.

Thank you.

You're welcome.

The next question comes from David Lerow of T Rowe Price.

Hi, just a quick question on price. Could you discuss that in term terms of the change in price as well as -- what is the headwind, sort of in '03 for -- less tension coming -- if you could help us out on that as well? Thank you.

Last -- last --

Less pension income in '02.

Pension. $11 million in '02 and it was all in the first half. And what was the other --

which is OPEB slash pension, as well as the pricing change on a year-over-year basis.

We don't have any head wind, David, because we -- we changed -- you can call it -- you could either say we're either the greatest, smartest guys in the world, or it's Serendipity, but we wound up converting from the defined benefit plan to a defined contribution plan right at the peak and converted it over, that just got manifested this past year, but we took the portfolio, at that time and basically solidified it so we could do the work that we had to do on a per-person basis and got the change through the IRS and so on, which took quite a bit of time, and now we have that managed station up. What that means is there is no charge, no change of assumptions, because we don't have any to make. It's over.

I apologize. I'm referring more to the OPEB, or post-retirement health care liability, and a lot are taking their discount rate down on those liabilities, which increases the expense. Is that not different from the pension, but is it going to be an issue for you at all next year, even eliminate the OPEB liability?

The impact of that, David, would be less than a million dollars.

And on the pricing --

the pricing, we model generally about two points in our thinking, between price mix. Price slash mix.

Okay. Thanks a lot.

You're welcome.

We've reached the end of the allotted time for questions. Mr. Trani, you have any closing remarks?

Thank you. I'd like to make one last point here. Share owners, sometimes you wonder how committed the executive team is, especially when you wind up with circumstances like this. First, let me tell you that neither Jim, nor I have exercised a single option thus far, but that some people may say that's options, what about stock? Our collective executive team is number 18 on the institutional list, if you will, and I'm number 31, all by my lonesome here. So we are committed. We have a lot of our potential wealth tied up in the company, and we'll continue to do so. So we say our shares rightfully have been battered, very recently, and there obviously those people who have lost faith in the team here and in the company. To those that remain on board, including the executive team, and to new owners, welcome, and we look forward to seeing everyone in Indianapolis when, hopefully, we'll be three to four months into this thing and be able to tell you a lot more about what's going on. So thank you, and we look forward to seeing you all. Bye-bye.

Thank you, ladies and gentlemen. This concludes Stanley Works fourth quarter earnings conference call. You may now disconnect.