史丹利百得 (SWK) 2004 Q4 法說會逐字稿

Good morning. My name is Marcus and I will be your conference facilitator. At this time I would like to welcome everyone to the fourth-quarter results review 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. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Mr. Jerry Gould, Vice President of Investor Relations.

Thank you, Marcus. Thank you, everybody, for joining us on the call this morning with me are John Lundgren, our Chairman and CEO; James Loree, our EVP and CFO; and Don McIlnay, President of tools. We all have our press release that went out last night with earnings and ongoing guidance. It is up on our website if anybody needs to access it. John and Jim and Don will review the release and then we will go into a Q&A period.

In accordance with Regulation FD, we have given our earnings guidance at the outset of the quarter, so we won't be able to comment on it as the quarter evolves. And of course we would prerelease if business conditions were to change materially. We have allocated and hour for the call. We think it will end about noon. There will be a replay available 2 hours after the call ends. So 2:00 PM this afternoon Eastern time through next Friday. The number is 800-642-1687 and the code is 322-8652. And after that and during that time it will be on our website and you can call me with any questions.

We have the usual two reminders for you before the call starts. First, in this discussion and in our press release we refer to some prior year quarterly and year-to-date earnings that are supplemented with related amounts and percentages excluding restructuring costs, impairment charges, and other costs that were incurred in '03. These measures we believe provide useful information removing the effect of variances in those prior-year periods that are not indicative of changes in our earnings capacity though full reconciliations with reported amounts are both within the press release and posted to our website and in the current year, in '04 and '05, we report GAAP only.

Secondly, certain statements contained in the discussion by the various Stanley participants are forward-looking statements. As such they involve risk. Actual results may differ materially from those expected or implied, so we direct you to the cautionary statements that were in the press release and filed with Form 8-K and you should look those over at your leisure.

With that, I would like to turn the call over to John Lundgren.

Thanks, Jerry. Good morning, everybody. Last night we reported fourth-quarter earnings of 77 cents per share. Included in this number are $8 million of tax benefits realized in the quarter and $10 million pretax of unusual non-recurring charges we also incurred. These net to about 2 cents per share, meaning that earnings would have been 75 cents without them. This exceeded our guidance of approximately 70 cents per share as sales volumes were robust across all our business segments and momentum remains strong throughout the quarter.

These earnings compare with 35 cents last year from continuing operations including pretax restructuring asset impairment and other charges of $37 million or about 31 cents a share in the fourth quarter of 2003. The rest of our comments will exclude 2003 charges and all 2004 numbers are of course GAAP. So EPS of 77 cents was up 17 percent over 66 cents from continuing operations, exclusive of charges last year.

Sales grew 17 percent in total and 7 percent organically, comprised of 3 percent from volume, 2 percent from currency, and 2 percent from price. The pass through of material cost increases was reasonably successful in 2004 and cost inflation stabilized during last 2 quarters of the year. We continue to deliver very solid cash flow. In the fourth-quarter we generated $128 million in operating cash flow and $110 million in free cash flow. This brings this to full-year totals of $372 million of operating cash flow and 317 million in free cash flow. We are really pleased that our free cash flow topped the $300 million goal that we established for ourselves in 2004.

Working capital generated $40 million of our fourth-quarter cash flow with receivables and payables favorable by 50 million partially offset by a $10 million increase in inventories. The overall improvement was expected as fourth quarter is generally a strong working capital quarter.

Growth continues at Stanley and again this quarter we sustained it. The overwhelming majority of Stanley teams continue to execute at high levels, delivering strong marketing programs and innovative new products to our customers. This is enabling us to capitalize upon recent marketplace wins which John will discuss with you momentarily as well as the continued economic upturn.

In our Consumer Products segment, sales were up 7 percent. Excluding positive price and currency impact, sales volumes was up 3 percent. For the fifth consecutive quarter, we achieved double-digit percentage total sales growth in handtools and for the second quarter in a row, we also had double-digit growth in consumer mechanics tools. The strength was broad-based across all geographies. Sales in Europe were strong at constant exchange rates and incrementally benefited from favorable currency translation.

Again this quarter as in the third quarter of '04, we had the most significant year-over-year improvement in our Industrial Tools segment. Stronger markets contributed to higher volume level and we leveraged the lower cost base while our largest industrial businesses progressed with their turnarounds.

Sales increased 16 percent in total and 10 percent organically, both double-digit percentage increases for the fourth quarter in her row. Organic sales excluding price and excluding currency was up 4 percent in the fourth quarter despite having 1 less week of shipments in the fourth quarter this year, following 10 percent, 5 percent and 8 percent increases in the third, second, and first quarters respectively.

Proto industrial mechanics tools, which we described as a business in turnaround at our May analysts conference, had an exceptional performance in both sales, which were up 11 percent, and operating margin at 14 percent, which was up a lot versus fourth quarter of '03. This business, which posted low single digit operating profit last year, has now posted mid-teens operating margins in 3 consecutive quarters.

This was also another solid growth quarter for our largest industrial business, Stanley Fastening Systems and its Bostitch brand. For the fourth consecutive quarter, that business grew sales over 10 percent excluding currency. Strength was in the construction supply and industrial channels in both the U.S. and in Europe.

Our Mac Tools business faced a tougher comparison than any other Stanley business unit this quarter. It's fourth-quarter -- 2003 sales included some excess and obsolete inventory liquidation and the absence of the 14th week contributed to a tough comp. In addition, the phasing of the new Mac card financing program we announced last quarter has taken our distributor base some time to adjust to. Total Mac sales decreased due to these factors.

It is encouraging however, that traditional distributor route averages have increased or at a minimum have been sustained year-over-year now in 7 consecutive quarters. New start route averages continue to run 50 percent above prior year rates and Mac Tools was profitable for the sixth consecutive quarter.

We recruited and added another 50 distributors in the fourth quarter, bringing us to an increase of over 25 percent in year-to-date distributor adds versus last year. Our program to add, train, and retain capable and productive new distributors appears to be working. And our program to improve the performance of the lower tier distributors or replace them is also working. As a result, Mac was among the most significant elements contributing to our total improvement in earnings at Stanley.

Hydraulic Tools with continuing benefits from a strong steel recovery market and a successful mobile share new product launch delivered very strong double-digit percentage sales growth and significant margin improvement again this quarter. And CST/Berger, our newest commercial industrial business, delivered 16 million in sales at well over 20 percent operating margin and was accretive to earnings per share again for the quarter. It was a $50 million business when we acquired it in the first quarter of '04; it has now grown 30 percent to a $65 million annual organic run rate.

Looking at our Security Solutions segment, revenues increased 38 percent due to the inclusion of acquisitions. Aside from acquisition impacts, sales decreased 1 percent while orders increased 6 percent. We have lower shipments of high margin mechanical access product. It is important understand 2 things at this point. The extra week in the 2003 quarter accounted for approximately $7 million of sales. This impact alone causes Stanley Security Solutions to report minus 1 percent growth in what would otherwise have been otherwise have been approximately plus 5 percent.

Considering the prior year fourth-quarter sales of all our security businesses including Blick and Frisco Bay's fourth-quarter '03 sales, even though we did not own them, sales growth was 6 percent in the fourth-quarter and over 10 percent if the 14th week were also discounted. Security is an above average growth business and order trends continue to verify this with a building backlog in the longer cycle electronic access control portion of the business. We are confident and encouraged that this will translate into visible revenue growth.

We've also instituted some leadership and process changes in the last 6 months that we consider an investment in the long-term future of the security platform and we will continue to do.

Operating margin improved 170 basis points to 15.4 percent for the segment and Jim will elaborate on that and other segment details in just a few minutes. Blick, Frisco Bay and ISR Solutions contributed $49 million of revenue at 15.9 percent operating margin on a combined basis in the fourth quarter. These recent security acquisitions were accretive to earnings per share in the quarter, in each quarter of 2004.

So we achieved solid growth across the board again in the fourth quarter accompanied by great execution. We just completed a year at Stanley with 20 percent sales growth, 40 percent earnings growth, over $300 million of free cash flow, and a better balanced portfolio with 25 percent of our business now in the security platform. We are clearly on the right track.

With that, I would like to ask Don McIlnay to make a few comments about our performance in the tools business. After Don, Jim Loree will review in a little more detail some of the financial material in the release including our guidance for the first quarter as well as the total year 2005. Don, are you there?

Thank you, John. I would like to first express how proud I am of the Tools group performance across all businesses and all geographies. On the consumer side, our consumer handtools and mechanics tools business is achieved the healthy topline results that John outlined and it translated into a very healthy bottom line. The Home Center in Mass Retail markets remain strong and perhaps more importantly, we had some successes here at Stanley that enabled us to grow.

First, our operations teams achieved fill rates in the high 90s across the board. In doing so, we eliminated customer fill rate fines experienced in previous years and we demonstrated to our customers that Stanley is able to support them even during times of growth. Second, our merchandising teams continued to improve and develop their ability to support new product introductions.

We committed resources to double the capacity of our main distribution facility in North Carolina, which was completed during Q4 '04. Then we closed our Georgia industrial mechanics tools distribution center and relocated its functions and inventory to the expanded North Carolina facility. Those of you who recall past Stanley distribution facility closures know what an accomplishment it was to execute these two moves with no service disruption, maintaining high 90s fill rates during the fourth quarter, which experienced solid growth. Obviously the capability of our operating team has come an awfully long way.

The combined distribution operation now makes it easier for our customers to submit multidivision orders and deal with the total Stanley package. We made a significant investment in the brand. I'm sure many of you saw our efforts on the World Series, NFL football broadcasts, and across our multimedia program. Our customers responded by supporting promotions and advertising of their own and this team effort, us and our key customers, drove POS growth for our mutual benefit.

Finally, we are focusing in 2005 on merchandising in our business units. To make sure that the multitude of new products we plan to introduce are efficiently brought to market. We will support them with a continued commitment to the brand and he will not take our eyes off the fill rate ball. I look forward to a really solid growth year in 2005.

Now I'll turn it over to Jim Loree.

Thank you, Don. I'm going to cover several topics. I'm going to start with the transition of the portfolio. In the quarter, we completed the sale of the Home Decor business to Wellspring Capital for $65 million after-tax proceeds. That resulted in a net after-tax gain of 24 million or 29 cents a share. We also have a letter of intent now to sell our Friess business which is a high-end German paint roller company selling into the private-label market in Germany. Clearly not strategic for us. We expect to sell that early this year.

As for divestitures, we are pretty comfortable with the portfolio we currently have at this point. We also acquired ISR Solutions, and Security Group, two small but strategic companies for a total of about 100 million revenues annually, about 5 cents accretion, and as John mentioned, that takes our Security Solutions business now up to 25 percent of our total sales.

As far as our Blick Company goes, we ended up selling about $7 million of their receivables. They have a number of long-term receivables in that business in the fourth quarter and we contracted to sell and have executed a sale of $43 million more of that in the first quarter. Those receivables were sold without recourse. It will return to Stanley about $50 million of the 177 million that we paid to acquire Blick, bringing our basis down. And like the third-quarter '04 sale of the Mac Advantage receivables, it frees up capital for redeployment into debt reduction and strategic acquisitions.

As far as cash generation goes, very good quarter. Fourth quarter often is good. This was no exception. We generated 110 million free cash flow and that brings us to a total of 317 million for 2004, our second-best year ever. In 2005, we continue to expect strong free cash flow greater than net income. It should approach around 300 million again. And in the quarter, we repaid nearly $160 million of debt bringing our debt to cap ratio down to 32.5 percent, down from 44.6 percent just a year ago.

And then some additional items. Aside from the charges, our '03 EPS is $2.02 and our '04 was $2.85. Due to the exclusion of these discontinued operations that I talked about, Friess and Home Decor, these numbers are different from what we originally reported consist with GAAP. We restated them to remove Home Decor and Friess. Our first quarter and 2005 consensus I might add have not been adjusted, so you need to -- the analysts that have input into the consensus -- need to understand that the consensus for the first quarter is artificially high due to the inclusion of Home Decor, which was announced several months ago.

So our 2005 guidance is compared with $2.85, not the higher amount arrived at by adding back Home Decor for the four quarters. Similarly the first quarter '04 EPS from discontinued operations was 66 cents. So the guidance should be measured against the 66 cents and not 70 cents, which include the Decor and Friess activities that were originally reported in 2004.

Let's talk a little about the fourth quarter, some items of note in the numbers. The tax benefit was about 10 cents versus our year-to-date tax rate through 3 quarters. That equated to about $8 million of net and included a number of things, some arguably non-recurring, some recurring, and its difficult to sort through the recurring versus the non-recurring. It is my view that most of the $8 million of net or 10 cents was in fact a "recurring" kind of an activity and you'll see that I think as we go into 2005.

The elements of this tax benefit included the favorable impact of increased earnings and lower tax, foreign jurisdictions as we weighted our portfolio and our income more into Europe and other favorable tax jurisdictions. It also included some benefits of tax planning around some of the structures that we have with recent acquisitions. It included the favorable settlement of some tax audits in foreign countries and in -- for a small amount, the use of some NOLs that we had in Europe as well. So kind of a potpourri of items there but a significant benefit in the tax line, most of which we continue to see -- expect to see and to continue in 2005.

The '05 guidance, which I will share with you, reflects the continuation of those benefits, however, it is important to note that we think the rate will go down as the year goes on and this is largely due to some of the more precise and mechanistic accounting that is now required in the area of taxes and due to some recent literature in that area. So I think you'll see no only in our Company but in most companies more volatility in the tax rate and it is important I think that we begin to give you more direction as to where we think that's going. Because it can be up-and-down in any one quarter but tends to be a little but front-end loaded in terms of the tax rate being higher in the front end.

Charges in the quarter, we had some charges. We don't report 2 set of numbers or anything like but included in the GAAP earnings were charges totaling 8 cents. They arose from provisions for administrative cost reductions associated primarily with the sale of these businesses that we talked about, some asset impairments including significant software asset impairments, a provision for some litigation, and these are all clearly unusual and non-recurring items.

On the subject of security margins, first of all we're very pleased that the margins are up considerably on a year-over-year basis. At the lower end of the 15 to 20 percent range that we look for, the security segment is growing. It is attracting more of the corporate overhead burden and also in the quarter lower mechanical mix at best which is high margin, high gross margin and operating margin, and the impact of recent acquisitions which have not had the synergies executed yet also weighed down the operating margin.

These challenges I think are going to continue in the short-term and I expect to see operating margins in the 14 to 16 percent range for the security business over the next few quarters and then hopefully we will gets some increase from there.

As far as raw material inflation and commodity costs go, '04 was a significantly high year for that, not for Stanley alone but we certainly hurt quite significantly by the steel price increases. It cost us $73 million in those 2004 results. We recovered about 56 percent, which was about the range we expected. We were looking for 60, but we did get an additional 24 million of price realization throughout the year. Unrelated to the inflation but related instead to a price management initiative in place that has really started to pay some dividends as we go.

Let me turn to earnings guidance now. We're calling for 4 to 6 (ph) organic sales growth in the first quarter, another 3 points on top of that for acquisitions. The organic growth is approximately 1 point volume, 2 points currency, and 2 points price. The EPS is 70 to 74 cents a share is our guidance. That is again, 66 cents last from continuing operations. We expect inflation to come in at 20 to 25 million. Input prices are relatively stable right now. We have recovered we think about two-thirds of that from price increases directly associated with the commodity inflation. These increases are implemented as we sit here today, so we feel pretty good about that.

The income taxes are about 29 percent we think for the quarter and for the total year we're looking for organic sales growth of 4 to 6 percent, earnings of 315 to 330 from continuing ops, up 10 to 15 percent over the 285 last year. That is consisted with our October indication that '05 would be up we thought low to mid double digits over '04. And the total sales with the acquisitions that are already completed should be up 7 to 9 percent.

With only about 5 cents of our '05 earnings guidance from acquisitions, these already completed, virtually all our earnings growth in '05 is from the core consumer industrial and security businesses. We also have a pretty substantial cash balance right now of about 250 million or so and there is certainly an opportunity under the American Jobs Creation Act to pursue the repatriation of significant amounts of cash and we will likely finalize a plan in the second half of '05 to bring in a good bit of that home.

In summary, I do apologize for the apparent complexity of this quarter's results. It creates extra work for the analyst community versus a typical quarter. That said, when you acquire two companies, complete a divestiture, announce another one, enjoy a 10 cent tax benefit, and execute a program to cut administrative costs, etc., it is going to take a little extra effort to both communicate it and have it understood properly.

So to cut through it all, fourth quarter '04 was an outstanding quarter with enormous progress on the portfolio shift and an excellent operating performance. Organic sales were up 7 percent despite one less week in the quarter than last year. Our earnings per share adjusting for the unusuals was 75 cents, up 14 percent excluding the '03 charges. Our free cash flow finished very strong, giving us 317 million for the year, our second-best year ever. And as importantly, we're not just sitting on the cash but we're rather taking it and redeploying it for future value creation and growth. And that has enabled us to issue what we hope is relatively conservative guidance for '05 of 10 to 15 percent EPS growth. I say conservative because it does not include the potential accretive affect of any acquisitions we might make in the future.

And now I will turn it back over to John.

Thanks, Jim. I'd just like to close by mentioning or maybe better said, reinforcing a few of the fourth-quarter business developments which should help maintain the momentum through 2005 that Don and Jim talked about. From a geographical perspective, we saw healthy growth in both Europe and Asia. In Europe, organic sales excluding Blick grew 18 percent and aside from the favorable impacts of currency grew well above market rates.

Asia grew double-digit percentage ex currency impacts, so we were obviously quite pleased with the performance of these regions and the teams within them. Looking at our Mac Tools business, 35,000 end-user auto mechanics are now holders of Mac parts versus 25,000 Mac Advantage Program participants at the time of the September, 2004 conversion. While 1200 of the 1400 U.S. distributors have enlisted the Mac Card Program, only 900 of them have actually conducted business using the card in its first 3 months of existence, thus there remains ample growth opportunity within this program.

The program is attracting our end-user to our distributors and of equal or greater importance, our distributors no longer have to collect long-term receivables, freeing up time for them to sell.

Last but certainly not least, Don touched on the importance of our brands. For the third consecutive quarter we have reallocated resources within our tool business to fund brand building activities. We discussed our TV advertising on the last call and we've been working to launch our sponsorship agreement with Evernham Motor Sports for the 2005 NASCAR Nextel Cup series. Stanley will be the primary sponsor of the number 91 Dodge of Bill Elliott with 4 races in 2005 and will be an affiliate sponsor of the number 9 Dodge, Kasey Kahne, who was rookie of the year in 2004, and the number 19 Dodge driven by Jeremy Mayfield throughout the racing season.

The Company and its performance are strong and well-positioned for the future. Serving customers well while executing strategic moves are our day-to-day objective and what we show up to do every day. Momentum remains strong and establishing a winning culture continues to accelerate. I feel really fortunate to have inherited and to lead a management team and 15,400 associates who are performing so well for our customers as well as our shareowners. They are all to be complimented for pulling together and continuing to deliver such strong results.

With that, we'll turn it back over to Marcus and Jim, Don, and I will take your questions.

(OPERATOR INSTRUCTIONS) Mike Rehaut of J.P. Morgan.

Good morning. Question on the securities solutions business. You had flat sales there and you mentioned that is in part due to a lengthening order cycle. I was wondering if you could just go through which business, the percent of businesses that are related to that lengthening building cycle and build order cycle and what you expect '05 to -- how it should play out? Thanks.

Mike, it's Jim. The lengthening order cycle relates primarily to the electronic access business and that business is really going to be I think the growth engine for our Security Solutions as we go forward. It has a higher inherent market growth rate versus the mechanical part of the business; and frankly, when Stanley got into this business it was really best initially before Stanley owned it and they were a mechanical locking business at the time in the mid '90s and as electronic. And as the market started to shift a little bit to electronics, they by default, or necessity had to get into the electronic business. But they were kind of specializing in education and healthcare and general commercial and things like that.

And what is really driving the growth today is the government, especially the Homeland Security segment of the market and what is happening there -- and not to say education and healthcare is slow but in the government is really robust and that was the logic behind the acquisition of ISR Solutions. ISR Solutions is a $50 million -- approximately a $50 million company which over half its revenues come from the government segment. It really is right in the heartland of the government business located in Washington D.C. and brings to Stanley the expertise and resources to attack that market and leverage some of our strengths in terms of operations and national footprint and things like this to help execute and exploit some of this opportunity.

So yes, the orders are increasing in electronic because when we had some slowness in the middle of last year, we made some changes in process and people and so forth but the most significant thing that's going to drive the future revenue growth in the electronics segment is in fact I think the new expertise and market presence we have from the folks at ISR.

Great and I'm sorry if I missed this from earlier in the call but in terms of raw materials, what did that net of price, how did that affect you in the fourth quarter? What do you anticipate the full effect for '05?

For the total year it was $73 million and we recovered about 56 percent of that for the total year. And frankly the ratios in the fourth quarter are fairly consistent with that ratio. As we look forward to '05, we have a little bit less inflation because the inflation has stabilized and so we ended up with about, let's call it roughly 40 to $50 million of inflation in our guidance, and we expect to recover approximately 30 to 40 in terms of price.

Now the inflation I would say that I just described is pretty much already in the carryover if you will and so is the price. So what our guidance really assumes is stability going forward with no major dislocation in either the inflation or the price.

Just to add, Kevin, what Jim said, you'll recall the overwhelming majority of our inflation is steel, secondarily resin. And while we were talking about it this time last year it hit our P&L sometime mid-April to mid-May, so we have a first quarter that we are looking at with the comparison is very little raw material inflation last year. So to Jim's point, of the 40 million plus that we are looking at for the year, the majority of that is going to take place in the first quarter and that is reflected in our guidance.

We might as well talk about the -- the first quarter some people have said, well that's below consensus, etc. We have our concerns about consensus not including Home Decor. Notwithstanding that, why would we get a significant bump in the second, third, and fourth quarter? We have the inflation anniversarying in the first quarter and we have the price anniversarying in the second and third quarters, so as a consequence we should get margin expansion in the second and third quarters and beyond as a result.

Eric Bosshard with Midwest Research.

Two questions. First of all in security you talked about the margin expectation this year and then hope that it could improve beyond that and I respect you being conservative but of the dynamics of this business and therefore in the profit potential of this business, change from what we had once thought to be a perhaps 18 to 20 percent business with 10 percent type growth rates to now this mid-teens and mid single digit type growth? And if so, why?

Eric, this is John. I would say no and Jim can amplify it. First of all, this is still within our portfolio an extremely high margin business. Part of -- you're talking ranges 15 to 20. As Jim explained, part of the decline specifically about 200 basis points is simply restating the burden of corporate overhead and administrative charges excluding Home Decor over the same base, so they are absorbing a lot of that. We did decline quarter-to-quarter, third quarter to fourth quarter 150 or so basis points; again, we actually -- we're not happy with the decline. Jim explained why it took place.

On an ongoing basis to decline to that level which is still well above the Stanley portfolio average gives us a pretty good feeling and versus the same quarter year ago, as we said, we're up 170 basis points. So on a restated basis same business just absorbing more of the corporate overhead, we're still seeing it in the 15 to 20 percent range and for all the reasons we've discussed before, why we like this platform; fragmented competitive base, relatively fragmented customer base, higher (technical difficulty) end, us having a far more stronger position in a key vertical, specifically government, due to the increase -- the addition of ISR. We're really not changing our outlook on that.

Last but not least, remember as we've said, we've brought on $100 million worth of businesses which is say 15 percent of our new security platform at single digit operating margins. That short-term brings down the profitability of the segment. We have a history and we have a track record of acquiring businesses in this segment with high single digit operating margins that are now in the mid teens. We are I would say cautiously optimistic is maybe being too conservative. We're highly confident we'll take the new acquisitions, on board them, get the synergies that we have achieved in the past, get those businesses up to the mid-teens is well, and we're still just extremely bullish on the segment.

Just to follow up on the other part of your question related to growth rates and I thought I heard you say something about mid-teens growth rates. Just for clarification, we have always said about security organically that we would expect 5 to 10 percent organic growth, and that is what we are getting. Obviously the fourth quarter being an exception with the extra week and so forth but that is what we are getting in the segment. It's a little bit towards the lower end of the 5 to 10 percent but we think as the electronic business takes off, that we'll get back up into at least the middle of that 5 to 10 percent range.

The second question in terms of the 2004 comparison, you report 294, this 285 and I guess the same thing with the first quarter of 66 versus 70; basically what you're doing the dilution from the divestitures was 4 cents in the first quarter and 9 cents for the year. Is that the right way to think about how you're restating these numbers?

Yes, I think that is correct, Eric.

So you are just basically saying, compare the numbers, ignore the dilution, compare the numbers apples-to-apples to the businesses you've retained, excluding the impact of dilution from the --?

Correct.

Very good, thank you.

Margaret Whelan with UBS.

Good morning guys. I kind of have an observation as much as a question but I find this matching accounting a little convenient and I'm wondering this potpourri you referred to of charges and credits, when are they just going to end and you are going to give us some good clean numbers?

I consider the numbers very clean but the fact that we took some restructuring charges to take out costs I would view as a positive. The fact that we were able to fund that through some extra cash that we got from taxes helps us with our cash flow and so forth, and so I --

I agree, I just wonder about the timing.

Would you prefer that we wait a few quarters so that we would not match them in the same quarter? I really don't understand the concern, Margaret.

You have always had this GE style matching accounting. It's a little shady. I don't know how it always comes up you didn't guide us to expect to lower tax rate any time this year.

Like I said, the accounting is changing for taxes and it is becoming much more volatile and I think the analyst community is going to start to see that if they haven't already. We have seen a number of significant tax surprises in the fourth quarter. We're going to have to start getting better at forecasting it because it used to be that you would target a tax rate for the end of the year based on an estimate and then as the events occurred -- for instance if you had a reserve up and you thought you were going to get favorable outcome on an audit that you had a specific reserve for, by the second quarter 3 years had elapsed or whatever the statute of limitations was and the auditors hadn't even arrived yet. You could be pretty certain that you were going to be able to -- that reserve would be released into the tax rate.

Now under today's accounting, you cannot release the reserve until the statute of limitations expires. So -- and you cannot account for it earlier. The only thing you can do is forecast it earlier and it is probably more akin to how we would forecast gross margins or SG&A or anything else. But that is going to be our challenge as we go forward and it is going to be a learning process for both us and I think the analyst community.

Okay, the second growth I had purely, the growth (ph) is coming back which is super at Stanley finally to see that. I'm just wondering based on the assumptions that you have laid out in the guidance you've given us for '05, what percent of sales do you expect to each of the businesses to represent by the end of the year?

Excluding acquisitions, Margaret, it won't change. We've got them all growing organically at about the same rates, so on (technical difficulty) basis, excluding doors and Home Decor, including ISR and our security group going forward, it is roughly -- security is going to be 25 percent and consumer and industrial will pretty much evenly split the other two. 37 -- 38 --37 consumer/industrial, give or take and 25 for security. I hope that adds to 100.

It does.

That is why I'm the CEO.

Stephen Kim with Smith Barney.

Thanks. I was wondering if you could provide a little bit more color on what I think you said in the security business that you were looking for some -- you had implemented some process improvements. Could you be a little more specific on what those were and how they are going to play out over the rest of the year?

I will touch on that, Steve, and then Jim can obviously amplify that if he'd like to. It primarily relates to field operations and what we think we have done is absolutely right for the future growth of the business but any time you change a business model even if it's evolutionary not revolutionary it takes (technical difficulty). Specifically we have separated our mechanical and electronic access businesses, which is a good thing. Mechanical right now is a much larger percentage of our total than electronics, but as Jim said earlier, electronic of our engine for growth.

So by having key managers focused on each of those segments, we think it is absolutely the right way to go forward. In the short-term, there is a baton pass involved where these guys are quite accustomed to cross-selling each other's products. So if you've got a best mechanical doing an installation and he has the opportunity or he is just conditioned to cross-sell electronic and vice versa. That can, will, and must continue. It's one of our key advantages but when you have folks who have gone from wearing two hats to wearing one, there is a transition cost and a transition time.

We have changed a couple individuals in the field to better facilitate the continued cross-selling. We think we have a model that works now. It's absolutely better or best for the future and we are going to stick with it because we're happy with what we're seeing.

Okay, just to understand on a little bit better, in terms of the men in the field, there has always been a little bit of a disconnect -- not a disconnect, but a real difference in the way in which they have needed to conduct their business between the mechanical and the electronic. Are you indicating at this point that some of the things that we had heard you talking about in the past about cross-training, trying to get some of the guys that are actually in the installation side on the mechanicals, trying to learn the electronic -- if that's going to cease now and you're going to have sort of a wall between those two businesses? And does that mean you're going to need to invest in a whole new HR function on the electronic side? Can you walk through a little bit of that?

Absolutely not is the simple answer to your question. The men and women in the field are cross-trained. They all work for the same person who is Justin Boswell who is located in Indy, who reports to me. They are all trained with each other's systems. They are compensated for cross-selling each other's systems specifically. It's not as though we've got two separate -- I will call them technical organizations in field service operations spinning in their own orbits. If you are a mechanical focused person, you are incented to cross-sell electronic and vice versa. So none of that has changed.

It's just simply said the folks with the electronic focus have an opportunity to grow more in some different verticals from a lower installed base than mechanical. Short of that, not a lot has changed but I think if you take someone's -- I'll say primary focus, shift it modestly, there'll be a quarter to 2 quarters -- I will call it a transition or startup cost and we are experiencing, both on the mechanical and the electronic side but we are quite comfortable with the model and I didn't mean to suggest that we've blown up a business model or anything else. This is a rudder adjustment. This is not a change in course. We are highly confident it is going to work going forward and if it doesn't, we absolutely have the capability to change it or modify it.

Sam Darkatsch with Raymond James.

Good morning, gentlemen. A couple quick questions. Jim, if you covered this already and I missed it, I apologize. The 70 to 74 cents guidance for Q1, that is essentially somewhat by pennies but somewhat lower sequential earnings versus Q4 on what looks to be similar revenues and stable materials and I'm guessing you're going to get a little bit of accretion from the acquisitions in Q1 that you didn't get in Q4. So why would earnings be down sequentially even if it is just a little bit? Is that just you being conservative or is there going to be some inventory drawdown or how should I look at that?

There's a number of factors. First of all, our first quarter traditionally we have generally high SG&A because we do a lot of our sales meetings and management meetings and promotions and things like this, so --

Tradeshows.

Tradeshows, and it's just a fact of life if you study it over 5 years, you'll see it consistently in our company. The SG&A is higher sequentially. That's the first item. The second is, the tax rate for the first quarter is going to be -- we are guiding to 29 percent. That's considerably -- even if you adjust for the ins and out that we've talked about in the fourth quarter, it's considerably higher although for the year it will be I think roughly equivalent or even slightly better than '04. It will be higher in the first quarter.

And then on top of all that, the acquisitions that we made in the fourth quarter are not accretive until the second half because these acquisitions are from a timing perspective a little bit slower in terms of getting the cost out than our typical ones. And so we will look for accretion from those acquisitions in the second half of the year but nothing in the first half.

Got you. Second question and this is admittedly a high-class problem. We wish we had this problem every quarter and by the way, Q4 was terrific. It looks like you had roughly a 35, $40 million in additional revenues in Q4 over and above what you had previously guided for, yet if my math holds, it looks like those additional revenues contributed only about 15 percent incremental margin and then it also looks like your guidance for '05 kind of implies that same 15 percent contribution margin on incremental revenues. I'm just curious, first off, if my math holds? And secondly, does this seem to imply that the leverage in this business might be a little less than the 25 to 30 percent that you've talked about in the past?

I think that the fourth-quarter -- what you're saying is very, very true and it is a high-class problem but we did not achieve as much operating leverage as we would like to have achieved. We spent money on some things that made a lot of sense, long-term investment in the brand and Sarbanes-Oxley and things like this that were to some extent certainly the brand spending was discretionary.

If you recall Don talking, you probably saw some of the commercials on TV and so forth. That all has a price to it but it is all directed towards the overall future health of the top line in the Company. And I think from time we'll see periods where the operating leverage is not as high as we would like primarily due to discretionary factors. But having said that, the management team here at Stanley is committed to not growing its SG&A at a rate faster than 50 percent of its sales and we did not achieve that in the fourth quarter due to some of the things I mentioned.

We are going to attempt to achieve that in '05 and we have even factored into our compensation plans this year an element that reflects that but the guidance to your point does not exactly -- it's more conservative than that. It does not assume perfection in what I just said. So there is that opportunity for leverage going forward, it is not built into the guidance. When we get it, we will let it fall through obviously but it is not in the guidance.

Ivy Zellman with Credit Suisse First Boston.

If you look at your balance sheet and your improvements in cash flow, it looks like accounts payable had a significant increase which obviously helped cash flow. Wondering first, is that sustainable? Secondly, how are you achieving that? Secondly, on the inventory front, how much of that was due to the acquisitions that inventories were up? And what is the inventory situation right now and your opinion in your various channels? And I have a follow-up, please.

Let me take payables first. Payables over the last few years we have a concerted effort to increase the terms of our suppliers and even when we've had to give price increases this year to some of our suppliers, we have gone back and said okay, we will pay more but you will not get your money for 90 days. So our standard terms now are 90 days. And we do not hold invoices at all at the end of the quarter or end of any quarter. So it is all sustainable because it is what it is. It is a constant cash flow and that has worked out pretty well for us.

As far as the inventory -- what was your question? You want to know inventory levels in the channels, I think maybe Don --

How much were the -- the inventories were up 15 percent. Of that increase, how much of that is that due to acquisition as opposed to --?

Very little, Ivy, was due in fact to the acquisitions. If you think them being in the security business with a lot of that revenue associated with service as opposed to materials. Not a lot. Simply said, what may be the disconnect, at least on the surface is in a record sales quarter period, inventory grew. And that is a little bit of a disconnect. There's a lot of productivity there and there is the beginning of a build for what we expect to be a pretty good January. But the overwhelming majority of it was in our core consumer and industrial tools business.

Ivy, I'll break out working capital for you excluding acquisitions if that would help. Receivables excluding acquisitions in the fourth quarter of '03 were 463 million and the receivables at the end of '04 were 523. So the turns went from 5.9 to 5.6. The inventories were 362 million at the end of '03 and at the end of '04, 386 excluding acquisitions. So the turns on that basis stayed essentially flat at 7.6 turns.

The payables went from 222 to 281, so there is a huge leverage there going from 12.4 to 10.5 and obviously going down is favorable when you look at payables. And the total working capital turns went from -- the total working capital went from 602 million to 629 from the fourth quarter '03 to the fourth quarter '04, excluding acquisitions and that was a slight turns improvement.

Let me just shift gears if I can on the mechanical/electronic access business. Was I wrong to assume because you were outsourcing on the electronics side, a lot of the software -- that it was not as profitable as it could the assuming you were the OEM on all the pieces? So for you to talk about the lower margins in mechanical, I'm a little bit confused unless I am missing something.

And on top of that, in looking at the margins for the quarter, clearly you're at the low end of the range and yet year-over-year you showed a pretty nice increase, 170 basis points. Yet your sales were down 1.7 percent and I would like to understand how you can improve margins on a lower sales base yet having, as you indicated, a lower margin contribution. It sounds like your year-over-year improvement, significant as it was, it's hard to understand how you get there.

First of all, there is a little up confusion because I stated earlier that the mechanical business was a little week at best in the fourth quarter, particularly the last two weeks of the year and we fell about $3 million short of where we expected to be. That is very high percentage margin business that we are talking 60 percent kind of gross margins. So yes, the mechanical business is more profitable than the electronic when you look at it on a separate basis. But what is true about the electronic is A, it's the growth engine; and B, we are changing the business model in real-time here as we are trying to build a national footprint in the electronic business.

There's only one or two other competitors that have that and this national footprint, with it comes the ability to offer enormously high-value proposition to the customer and with that comes the ability to achieve higher gross margins and higher operating margins. Today the electronic business is less profitable than the mechanical business. We would like to get to a point where that is not true and some of these acquisitions that we're doing put the pieces in place for us in order to do that. And subsequent to just making the acquisition, we have to integrate the acquisition, develop the value of proposition, and then achieve the level of profitability that will be commensurate with the mechanical.

As you grow the national footprint, you get scale, purchasing scale. You get efficiencies in the branch offices and you get higher pricing from the customers because you can go to a large retail customer or you can go to a large defense contractor or the government and execute an enterprisewide solution where very few others can, and that is where you get the pricing. We're kind of modeling that theory of the case after our excess business which grew its operating margins from mid-single digits to high-double or mid-double digits over the course of the three years by implementing a similar model.

Jim Lucas of Janney Montgomery Scott.

Taking a different stand on the security side, could you talk a little bit about what you're seeing in the acquisition pipeline? Clearly the capital deployment is going to be an important part of the story going forward. Could you talk about what you're seeing in terms of both U.S. and internationally for your Security and Tool acquisition candidates and in terms of pipeline evaluation?

Jim, two things and then as I say obviously Jim can supplement it. We have never had a more full and more active VD pipeline than we do currently. And as is the case, it's a combination of public and private enterprises. On the Security side, as you know the business well, the overwhelming majority of what we're looking at are things like what we just bought, specifically they are privately held 25 to 50 or $75 million companies and it takes a lot of work to get them done. Fortunately we have a pretty efficient and effective VD team to do that, working closely with Justin Boswell's team. And we will continue to add these guys -- I think at a pretty rapid rate not dissimilar to the Tool side; again, VD pipeline is incredibly full.

Don't look as Jim has said in the past, for us to add large retail acquisitions in the U.S. or in North America because there aren't any. But look for us to participate in that space in outside North America and look for us in the industrial tool segment both in North America and elsewhere. So kind of a long answer but to a diverse question. We are full on both funnels if you will and Jim and I and Brett Bontrager, who you've met and othere are spending a not a disproportionately large but a very large percentage of our time on it because it is really important to our future growth.

To that point because so many of these companies are relatively small in size as you become more active acquirer, are you more of these properties coming to you now in terms of exploring the possible relationship with Stanley?

I think that is right, Jim. First of all the Giants, the $100 billion market cap guys -- I don't want to be cavalier -- can't be bothered to look at 15, 20, 30, 40, $50 million companies but that's what most of the integrators are. I think our activity in the space as well as our reputation as we grow and as we take on really well-respected companies like the security group and like ISR, we're not having to work quite as hard to get the calls, for lack of a better term. They are coming to us as opposed to we've got to go seek them out.

Even a year ago when I came on board, the team was spending a heck of a lot of it's time trying to get noticed and now simply said, we are getting called before we call them and that's a nice place to be and I think it does speak well for the team's -- for the strategy and the team's ability to execute thus far.

Brendan Hartman with Cramer Rosenthal.

Congrats on a great year. You have come a long way from the continual restructuring to a point where you're growing the top line, you're generating a lot of cash, you've cut the balance sheet down to what I guess I would call a ideal capital structure and you're going to do another $350 million roughly give or take in free cash flow this year. And Jim, I think you said you're going to repatriate roughly $150 million from Europe towards the back half of '05?

I said a significant. I didn't really put a number on it.

Not to get caught up in the minutiae, but my point is I look at the business now and again you have done a great job restructuring this thing. You've got some neat growth opportunities but you're still -- you're in a position now where you can buy back the stock, not only to offset some of the option creep that we've had, but you could have a meaningful share buyback program given the cash flow and the balance sheet and still do these kind of smaller bolt-on acquisitions. Is that something that is in the cards or are you waiting to do a big acquisition?

You know, we certainly are sensitive to the option creep and I guess it has been awhile since we have had stock price appreciation like we had last year, so we didn't really predict as much as we got and we had 2 or 3 million shares of creep. We certainly will try to deal with that from a buyback perspective.

As far as any kind of a large-scale buyback goes, we are continuing to work with the rating agencies to make sure that we retain our single A. We consider that very critical to our long-term future and that is just our bias here. If you look at the real quality multi-industry companies that have taken similar approaches to value creation that we're doing, virtually all of them are single A. So that for other reasons as well is kind of a nonnegotiable.

And then it just boils down to what kind of opportunities arise and what kind of capacity do we have and if the opportunity -- because we will maintain discipline when it comes to these acquisitions. We will not overpay for these acquisitions beyond our criteria and so if we can't fill -- if we cannot identify acquisitions to consume our cash and debt capacity up to Single-A, we will then evaluate other alternatives to redeploying the cash. Right now that is not the issue.

But we will monitor that as we go and we're not adverse to stock buybacks, but it just doesn't seem to be the best use of our cash when we can continue to buy security and tool growth companies that meet our criteria.

At this time, there are no further questions. Mr. Lundgren, are there any closing remarks?

No, we just thank everybody for their attention and interest. I want to thank the Stanley folks on the call for a terrific quarter and a terrific year. As always, Gerry Gould is available for follow-up questions and we will adjourn. Thank you.

That concludes today's fourth-quarter results review conference call. You may now disconnect.