SWK

Business Context and Reporting Period

Company: The Stanley Works (now Stanley Black & Decker, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 2009
Business Overview: A diversified worldwide supplier of tools and engineered solutions for professional, industrial, construction, and do-it-yourself (DIY) use, as well as security solutions. Operations are classified into three segments: Security, Industrial, and Construction & DIY (CDIY).

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($154.8M) + Current maturities of long-term debt ($208.7M) + Long-term debt ($1,086.6M) as of Oct 3, 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 16% in Q3 2009 and 17% year-to-date compared to 2008. This was driven by a 20% decline in organic sales unit volumes due to the global economic recession, partially offset by a 2% favorable pricing increase and 4% growth from acquisitions (notably Générale de Protection and Sonitrol).
• Margin Expansion: Despite lower sales, gross margin improved to a record 41.3% in Q3 2009 (up from 38.6% in 2008) due to cost reduction actions, favorable sales mix (higher recurring revenue in Security), and pricing.
• Profitability Impact: Net earnings from continuing operations dropped 20% in Q3 and 21% year-to-date. Total net earnings were significantly lower in 2009 due to the absence of the $85.9 million gain from discontinued operations (sale of CST/berger) recorded in Q3 2008.
• Restructuring: The company recorded $25.6 million in restructuring and asset impairment charges year-to-date 2009, primarily for severance related to the reduction of approximately 1,100 employees.

Guidance, Outlook, and Risks

• Merger Announcement: On November 2, 2009, the Company announced a definitive all-stock merger agreement with The Black & Decker Corporation. The transaction is expected to close in the first half of 2010.
• Updated Guidance: Following the merger announcement, management updated full-year 2009 diluted earnings per share from continuing operations guidance to a range of $2.61 to $2.71, down from the previous $2.84 to $2.94, to reflect approximately $18 million in transaction costs.
• Volume Outlook: Management projects full-year sales unit volume declines of 18-20%, with smaller declines expected in Q4 as inventory corrections subside.
• Cost Actions: Cost reduction plans initiated in 2009 are expected to generate $100 million in annual savings ($45 million in 2009). Total pre-tax restructuring charges for 2009 are projected to be $40-$45 million.
• Risks: Key risks include the success of the Black & Decker merger, continued global economic weakness, customer inventory corrections, and the ability to execute cost savings without impacting operational efficiency.

Investor Verification Checklist

• Merger Status: Verify the progress of regulatory approvals and shareholder votes for the Black & Decker merger, which is a material subsequent event.
• Debt Maturity: Confirm the repayment plan for the $200 million term debt maturing in March 2010, which the company intends to fund via short-term borrowings and proceeds from Equity Purchase Contracts in May 2010.
• Restructuring Execution: Monitor the utilization of the $58.4 million restructuring reserve and the realization of projected $100 million in annual cost savings.
• Segment Performance: Track the stabilization of the Industrial and CDIY segments, which faced the steepest volume declines (31% and 23% respectively in Q3), versus the more resilient Security segment.
• Goodwill Impairment: Review the annual goodwill impairment testing results, particularly for the Convergent Security and Fastening Systems reporting units, given the economic downturn.