STANLEY BLACK & DECKER, INC. quarterly report, Q1 FY2011

Stanley Black & Decker, Inc. — Form 10-Q Summary

Period: Quarter ended April 2, 2011. The request metadata says “2010 Q1,” but the filing is for 2011 Q1; the comparable period is the three months ended April 3, 2010.

Business context and reporting period

The company reports three segments: Construction & Do It Yourself (CDIY), Security, and Industrial. Results include Black & Decker for the full quarter in 2011, but only from its March 12, 2010 merger date in the prior-year reported quarter. Therefore, reported year-over-year growth is not directly comparable. The company also completed the $60 million net acquisition of InfoLogix in January 2011.

Financial results and liquidity

Metric	Q1 2011	Q1 2010
Net sales	$2,380.7 million	$1,262.0 million
Operating earnings before tax	$181.5 million	Loss of $107.0 million
Net earnings attributable to Stanley Black & Decker	$158.7 million	Loss of $108.6 million
Diluted EPS	$0.92	Loss of $1.11
Gross margin	37.1%	36.1%
Operating cash flow	$120.4 million	Cash used of $32.7 million

• Reported sales rose 89%. Management attributed 71 percentage points of the increase to the merger, 9 points to other acquisitions, 7 points to organic volume, and 2 points to foreign currency; pricing was flat.
• Excluding merger and acquisition-related charges, gross margin was 37.3%, compared with 39.4% in the prior-year quarter. The decline reflected sales mix and commodity inflation, partly offset by volume leverage and productivity.
• Segment sales and profit: CDIY $1,210.8 million and $156.5 million; Security $557.4 million and $72.7 million; Industrial $612.5 million and $106.9 million. Organic volume grew 5% in CDIY, 1% in Security, and 18% in Industrial.
• Net interest expense was $29.5 million, compared with $18.1 million in the prior-year quarter. The increase mainly reflected a full quarter of interest on debt assumed in the merger.
• Income tax expense was $23.1 million, a 12.7% effective rate. A favorable $21.4 million tax-contingency settlement benefited the quarter; excluding that settlement, management reported a 24.3% effective rate.
• Cash from operations less capital and software expenditures produced free cash flow of approximately $50 million, versus a $55 million outflow in Q1 2010. Working-capital outflows were $70.3 million.
• At quarter-end, cash was $1,883.5 million; current assets were $5,174.5 million and current liabilities $2,992.1 million. Long-term debt, including current maturities, was $3,419.0 million, and short-term borrowings were $143.0 million. Cash was substantially held in foreign jurisdictions.
• The company entered a new, undrawn $1.2 billion four-year committed credit facility, serving as a backstop to its $1.5 billion commercial-paper program. The facility includes a minimum interest-coverage covenant of 3.5 to 1.0.
• The quarterly dividend was $0.41 per share, up from $0.33 a year earlier.

Material changes versus the prior comparable period

• Reported earnings shifted from a loss to profit, but the comparison is materially affected by the merger and the prior-year quarter’s $213 million of merger and acquisition-related pre-tax charges, including inventory step-up amortization and restructuring costs.
• Q1 2011 merger and acquisition-related pre-tax charges were $37 million, versus $213 million in Q1 2010. The 2011 charges reduced earnings by $0.16 per diluted share after tax; management said the 2010 charges reduced earnings by $1.80 per diluted share.
• On a pro forma basis, as if the merger and acquisitions had occurred at the start of 2010, Q1 2010 sales were $2,307.1 million and net loss was $170.1 million. The filing cautions that these figures are not necessarily indicative of actual results and exclude expected cost savings.
• Organic demand was strongest in Industrial and emerging markets. Security’s convergent security solutions grew, while mechanical access and legacy Black & Decker hardware sales were pressured by customer inventory corrections and softer demand.

Outlook, management commentary, risks and contingencies

• Management forecast 2011 diluted EPS of $4.35–$4.60, or $5.00–$5.25 excluding merger and acquisition-related charges.
• Management expected to achieve approximately $425 million in cumulative merger cost synergies by the end of 2012, including $165 million in 2011 and a further $125 million in 2012. It projected $300–$400 million in revenue synergies by 2013, with approximately $50 million expected to add to 2011 revenue growth.
• Commodity inflation was expected to reduce 2011 gross margin by about 100 basis points, net of anticipated recovery of 33%–50% through customer pricing, mostly in the second half of the year.
• Key risks cited include execution of merger integration and synergies, commodity and freight costs, ability to raise prices, customer inventory adjustments, economic and housing-market conditions, foreign exchange, and access to capital markets. Management said there were no material changes to the risk factors in its 2010 Form 10-K.
• Environmental remediation reserves totaled $171.4 million; the reasonably possible range of environmental costs was $149.2–$362.0 million. For the Centredale site, the recorded reserve was $68.3 million against an estimated cost range of $68.3–$212.9 million. The company is contesting claims and says ultimate costs may differ from estimates.
• Management stated that it did not expect the ultimate disposition of legal matters to materially adversely affect the company as a whole. The company also noted tax examinations and contingencies whose eventual effects could be material in a particular quarter or year, but could not be estimated clearly.

Important facts for investors to verify

• Confirm the applicable filing period: this is Q1 2011, not Q1 2010, and the merger makes reported year-over-year comparisons uneven.
• Track organic sales, segment margins, and customer inventory trends separately from acquisition-driven growth.
• Assess progress toward the $425 million cost-synergy target and the $300–$400 million revenue-synergy goal against the stated timelines.
• Monitor commodity inflation, pricing recovery, cash conversion, working capital, and the near-term debt maturities.
• Review environmental remediation estimates and tax-contingency outcomes, particularly because actual liabilities may differ from recorded reserves.