Stanley Black & Decker, Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 1, 2011, with nine-month results compared with the periods ended October 2, 2010. The filing is for 2011 Q3; the request metadata’s “2010 Q3” does not match the filing. Results are unaudited. The 2010 year-to-date comparison includes Black & Decker only from the March 12, 2010 merger date, so reported growth is affected by the merger and subsequent acquisitions.
Financial performance
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|
| Net sales | $2,636.4 million | $2,369.1 million | $7,640.3 million | $5,996.7 million |
| Net earnings attributable to Stanley Black & Decker | $154.6 million | $123.2 million | $510.6 million | $60.4 million |
| Diluted EPS | $0.92 | $0.73 | $2.99 | $0.42 |
| Gross profit margin | 37.0% | 36.1% | 37.0% | 34.7% |
| Cash from operating activities | $157 million | $199 million | $455 million | $387 million |
| Free cash flow, as defined by the company | $99 million | $153 million | $259 million | $284 million |
- Quarterly sales rose 11%; management attributed the increase to 4% organic volume growth, 4% from acquisitions net of divestitures, and 3% favorable currency translation. Year-to-date sales increased 27%, including merger and acquisition contributions.
- Quarterly gross margin increased year over year. Excluding merger and acquisition-related charges, it was 37.5% versus 36.9%. Management cited volume, productivity, synergies, pricing, and currency, partly offset by commodity inflation and promotional discounting.
- Nine-month gross margin excluding those charges was 37.3%, below 37.8% a year earlier; management said commodity inflation outweighed pricing, productivity, and synergies for the year-to-date period.
- Merger and acquisition-related pre-tax charges were $95 million in the quarter and $182 million year to date. The company reported adjusted 2011 EPS outlook separately from these charges.
Segments and material changes
| Segment | Q3 2011 sales | Q3 sales change | Q3 segment profit |
|---|
| Construction & Do It Yourself (CDIY) | $1,337.6 million | Up 6% | $169.9 million |
| Security | $656.4 million | Up 17% | $109.5 million |
| Industrial | $642.4 million | Up 19% | $105.8 million |
- Industrial organic sales increased 10% in the quarter; Security organic sales were flat, while acquisitions, principally Niscayah, drove much of reported growth. CDIY organic sales increased 3%.
- On September 9, the company obtained control of Niscayah and held approximately 99% by quarter-end. The acquisition expands its electronic security operations and international presence. Consideration was reported as $984 million in the purchase allocation, or $962.9 million net of cash acquired; the allocation remains preliminary.
- Other 2011 acquisitions included Infologix and AlarmCap. Goodwill rose to $6,978.8 million from $5,941.9 million at year-end, principally reflecting acquisitions.
- In the quarter, net earnings attributable to the company increased about 25%. Nine-month reported earnings were substantially higher than 2010, but the comparison is affected by the merger timing and significant 2010 merger-related charges.
Cash, debt, and liquidity
- At October 1, 2011, cash and equivalents were $851.9 million, down from $1,745.4 million at January 1, 2011. The company said most cash was held outside the United States.
- Short-term borrowings were $560.9 million, current maturities of long-term debt were $517.3 million, and long-term debt was $2,738.7 million. These balance-sheet amounts imply gross debt of approximately $3.82 billion; cash-adjusted debt was approximately $2.97 billion.
- Current assets were $4,737.3 million and current liabilities $3,810.3 million. Working capital was affected by higher receivables, inventories, and payables compared with year-end.
- Nine-month operating cash flow increased to $455 million, while free cash flow declined to $259 million, reflecting higher capital and software expenditures ($196.4 million) and other cash uses. The company cautions that its free cash flow measure excludes debt service, dividends, acquisitions, and other items.
- Investing activities used $1.401 billion year to date, primarily due to acquisitions. Financing activities provided $41.8 million, including $556 million of net short-term borrowings and $206.6 million of cash dividends.
- The company had $547.2 million outstanding under its $2.0 billion commercial paper program and reported $2.2 billion of committed credit facilities as liquidity backstops. It had not drawn on its $1.2 billion four-year facility. A separate Niscayah-related 364-day facility was scheduled to step down to $750 million in December 2011 and expire in July 2012.
- A $320 million convertible note matures in May 2012 and is repayable in cash at maturity. The company also entered a forward share purchase contract requiring a $350 million payment no later than August 2013.
Outlook, risks, and unusual items
- Management expected 2011 diluted EPS of $3.75–$3.98 including merger and acquisition-related charges; excluding those charges, it expected EPS at the low end of $5.15–$5.40.
- Management projected $450 million of cumulative merger cost synergies by the end of 2012, including $200 million expected in 2011 and a further $115 million in 2012. It projected $300–$400 million of merger revenue synergies by the end of 2013.
- For Niscayah, management projected approximately $80 million of cost synergies by the end of 2013 and about $0.45 of EPS benefit by the end of 2014, excluding expected acquisition-related charges of $60–$80 million. These are forward-looking estimates, not guaranteed results.
- Key operating risks include commodity and freight inflation, pricing acceptance, soft construction and remodeling markets, customer inventory and spending, foreign exchange and interest-rate movements, integration and synergy execution, and access to credit markets. Management reported no material change to the risk factors in its 2010 Form 10-K.
- Environmental reserves were $168.5 million, with a reasonably possible cost range of $140.8–$353.9 million. A specific Rhode Island remediation matter had a $68.3 million reserve and an estimated range of $68.3–$212.9 million. The company is also involved in other environmental proceedings and litigation, including 34 active Superfund sites.
- Nine-month tax expense included a $69.2 million benefit from favorable settlement of tax contingencies, partly offset by $17.5 million of uncertain tax positions. Future tax examinations and proceedings could affect results; the filing does not quantify a clear potential total exposure.
- Management stated disclosure controls were effective as of October 1, 2011. Its internal-control assessment did not include Niscayah, whose controls were being integrated.
Important facts for investors to verify
- Whether the company delivered its 2011 EPS outlook and achieved the projected merger and Niscayah synergies, after acquisition and restructuring costs.
- Whether organic growth and segment margins persisted, particularly given commodity inflation, soft end markets, and Security’s flat quarterly organic sales.
- Cash conversion and working-capital trends, capital spending, and the company’s ability to fund acquisitions, dividends, and the $350 million share purchase obligation while managing debt maturities.
- Final Niscayah purchase accounting, including the valuation of customer relationships and goodwill, and the results of integrating its operations and controls.
- Developments in environmental remediation, tax contingencies, and the May 2012 convertible-note repayment.
