Stanley Black & Decker, Inc. — 10-K Summary
Period clarification: The filing is for the fiscal year ended December 29, 2012, not 2011 Q4. It includes quarterly comparisons for both Q4 2012 and Q4 2011, summarized below.
Business context and reporting period
Stanley Black & Decker is a diversified global manufacturer and provider of tools, security and access solutions, engineered fastening, infrastructure products and healthcare solutions. Its three reportable segments are Construction & Do-It-Yourself (CDIY), Security and Industrial. Fiscal 2012 comprised 52 weeks.
In December 2012, the company completed the main sale of its Hardware & Home Improvement (HHI) business for approximately $1.3 billion; the remaining Tong Lung residential-business closing, with approximately $100 million held in escrow, was expected by April 2013. HHI results are presented as discontinued operations. The company also announced a pending approximately $850 million acquisition of Infastech, expected to close in Q1 2013.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $10.191 billion | $9.436 billion |
| Gross profit / gross margin | $3.705 billion / 36.4% | $3.468 billion / 36.8% |
| Continuing-operations earnings attributable to common shareholders | $449.5 million | $598.4 million |
| Diluted EPS, continuing operations | $2.70 | $3.52 |
| Total net earnings attributable to common shareholders | $883.8 million | $674.6 million |
| Diluted EPS, including discontinued operations | $5.30 | $3.97 |
| Operating cash flow | $966.2 million | $998.9 million |
| Free cash flow (operating cash flow less capital expenditures) | $580 million | $697 million |
| Cash and cash equivalents at year-end | $716 million | $906.9 million |
| Long-term debt | $3.527 billion | $2.926 billion |
Total 2012 earnings include $434.3 million of discontinued-operations earnings, primarily the HHI sale gain; continuing-operations earnings declined despite higher sales. The company recorded $442 million in pretax merger, acquisition, restructuring and other charges, reducing continuing earnings by $329 million, or $1.97 per diluted share. The effective tax rate was 14.9%, including a $48.9 million benefit from favorable tax-contingency settlements.
Segment sales and reported segment profit were: CDIY $5.194 billion and $721 million; Security $2.429 billion and $306 million; Industrial $2.568 billion and $410 million. Segment profit is a company-defined measure that excludes several corporate and other costs.
Q4 2012 net sales were $2.669 billion versus $2.565 billion in Q4 2011. Continuing-operations earnings attributable to the company were $130.1 million versus $153.8 million; diluted continuing-operations EPS was $0.79 versus $0.92. Total Q4 net earnings were $492.1 million versus $164.0 million, chiefly reflecting the HHI sale gain; total diluted EPS was $2.99 versus $0.98.
Working-capital turns improved to 7.5 at year-end from 7.2 in 2011. Year-end current assets were $4.098 billion and current liabilities $3.073 billion. The company reported no commercial-paper borrowings and no drawings on its $1.2 billion revolving facility or $1.0 billion 364-day facility at year-end; the latter was due to mature in July 2013 unless its term-out option was exercised. The interest-coverage covenant required 3.5x; the company reported approximately 14x or higher during 2012.
Material changes versus the prior year
- Sales increased 8%: 2% organic growth and 8% acquisition contribution were partly offset by 2% unfavorable currency effects.
- Continuing-operations diluted EPS fell to $2.70 from $3.52, reflecting significant 2012 charges and higher other-net expense, among other items. Gross margin declined 0.4 percentage points, while SG&A improved as a share of sales.
- CDIY organic sales rose 5%; Industrial organic sales rose 1%; Security organic sales declined 4%, with weakness in Europe, U.S. commercial access and healthcare capital spending.
- Operating cash flow declined $33 million and reported free cash flow fell $117 million; the company attributed operating cash flow effects partly to higher merger-related charges and payments and lower working-capital inflows.
- Long-term debt increased approximately $601 million. The company issued $800 million of 2.90% senior notes and $750 million of 5.75% junior subordinated debentures, and repurchased $900 million of notes, recording a $45.5 million pretax extinguishment loss.
- HHI sale proceeds funded an $850 million accelerated share repurchase; total 2012 common-stock repurchases were approximately $1.074 billion. Annual dividends per share rose to $1.80 from $1.64.
Outlook, commentary and risks
Management forecast 2013 diluted EPS of $4.62–$4.87, including $125 million of after-tax merger and acquisition-related charges; excluding those charges, EPS guidance was $5.40–$5.65. It expected 2%–3% organic sales growth and approximately $1.0 billion of free cash flow excluding merger and acquisition-related charges and payments. Long-term objectives include 4%–6% organic revenue growth, mid-teens EPS growth, and free cash flow at least equal to net income. These are forward-looking targets, not guarantees.
Management expected final 2013 synergies of $50 million from the Black & Decker merger and $35 million from Niscayah, plus $0.20 EPS accretion from Infastech. It also cited anticipated share-repurchase benefits and cost-action carryover, partly offset by tax, interest and other expense headwinds. The company planned approximately $150 million of investment over three years in organic-growth initiatives, targeting about $850 million of incremental revenue.
- Principal risks include weak or volatile U.S. and European demand, customer concentration and retailer bargaining power, competitive pricing, customer inventory adjustments, commodity and freight inflation, foreign-exchange exposure, and dependence on successful product launches and cost savings.
- Acquisition integration and execution are material risks. The company reported $7.0 billion of goodwill and significant intangible assets; it found no goodwill impairment in its 2012 annual test, but adverse operating or market changes could trigger impairment.
- Environmental remediation reserves were $188 million, with reasonably possible costs estimated at $141 million–$283 million; the company reported a $163.7 million net cash obligation after specified trust funding. The Centredale site reserve was $68.1 million, with estimated costs of $68.1 million–$139.7 million. The WCLC settlement remained subject to public comment and court approval, and the City of Riverside case remained stayed.
- Defined-benefit obligations are sensitive to assumptions and investment performance. The company expected approximately $80 million of 2013 pension and other post-retirement contributions; the reported pension obligation exceeded plan assets by $850 million.
- Other exposures include tax audits and uncertain tax positions, product and professional liability, warranty claims, credit risk, information-system conversion and disruption, and ongoing restructuring. Management said ordinary-course legal matters were not expected to materially harm consolidated financial position, results or liquidity.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Confirm the applicable reporting period: this is the FY 2012 10-K, while the requested period was 2011 Q4; use the filing’s Q4 table for quarter-specific comparisons.
- Separate continuing results from discontinued operations and the HHI sale gain when assessing earnings and EPS quality.
- Reconcile reported versus adjusted earnings and cash flow, including the $442 million pretax 2012 charges and management’s exclusions from its 2013 free-cash-flow outlook.
- Track completion and final economics of the Tong Lung sale, the Infastech acquisition, and remaining accelerated-share-repurchase deliveries.
- Monitor debt, refinancing and liquidity, including the July 2013 facility maturity, cash held overseas, and the company’s capital-return commitments.
- Assess execution of synergy, organic-growth, restructuring and working-capital targets, alongside environmental liabilities and pension funding needs.