Stanley Black & Decker, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2009 Q3, this filing is for the quarter ended October 2, 2010, with comparisons to the quarter ended October 3, 2009. Figures are unaudited and in U.S. dollars; financial amounts below are in millions unless noted.
Business context and reporting period
The company reports three segments: Construction & Do It Yourself (CDIY), Security, and Industrial. Results include Black & Decker from its March 12, 2010 merger date, so reported year-over-year comparisons are substantially affected by the acquisition and are not like-for-like. The company also acquired CRC Evans in July and Stanley Solutions de Sécurité (SSDS) in March 2010.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $2,369.1 | $935.5 | $5,996.7 | $2,767.7 |
| Continuing-operations earnings before tax | $167.9 | $79.8 | $70.2 | $231.2 |
| Net earnings attributable to Stanley Black & Decker | $123.2 | $60.4 | $60.4 | $167.6 |
| Diluted EPS | $0.73 | $0.75 | $0.42 | $2.10 |
| Operating cash flow | $199.1 | $176.3 | $387.4 | $248.0 |
| Free cash flow, as defined by the company | $153 | $158 | $284 | $183 |
Q3 gross margin was $854 million, or 36.1% of sales, versus 41.3% a year earlier. Excluding $20 million of merger-related charges, gross margin was $874 million, or 36.9%. Nine-month gross margin was $2,079 million, or 34.7%, versus $1,114 million, or 40.3%. Acquisition-related inventory step-up amortization was $13 million in Q3 and $173 million year to date.
Q3 segment profit was $164 million for CDIY, $87 million for Security, and $76 million for Industrial. Sales growth was led by acquired businesses and organic volume: Q3 organic volume rose 7% overall; Security volume declined 3%, while Industrial volume increased 26%. Management cited new products, stronger industrial demand, emerging-market growth, and some customer restocking.
At October 2, 2010, cash and cash equivalents were $1,635.9 million, current assets $5,102.3 million, and current liabilities $3,157.1 million. Short-term borrowings were $305.7 million and long-term debt, including current maturities, was $3,141.0 million. Operating cash flow rose year to date, but working capital used $183.2 million. Cash was also affected by acquisition funding, merger-related payments, and the $949.4 million of cash acquired with Black & Decker.
Material changes versus the prior period
- Reported sales increased sharply, principally because Black & Decker and other acquisitions were included. On a pro forma basis, nine-month sales were $7,099.7 million for 2010 versus $6,563.5 million for 2009; management reported organic volume growth of 4% year to date.
- Reported year-to-date earnings and EPS declined, largely reflecting $500 million of pre-tax merger- and acquisition-related charges, including inventory step-up amortization, restructuring, integration and deal costs. The 2009 period also included a $43.8 million pre-tax gain on debt extinguishment.
- Total assets increased to $14,872.7 million from $4,769.1 million at January 2, 2010, substantially reflecting the merger and acquisitions. Goodwill was $5,366.8 million at quarter end.
- Debt increased following the merger. In August, the company issued $400 million of 5.20% senior unsecured bonds due 2040 and used net proceeds primarily to reduce commercial paper borrowings.
Outlook, management commentary, and risks
- Management forecast full-year 2010 diluted EPS of approximately $1.00, or $3.60–$3.70 excluding merger-related charges and the $36 million tax settlement benefit. Estimated full-year pre-tax merger-related charges were $555–$605 million.
- Management expected annual cost synergies of at least $350 million within three years, with approximately $125 million expected in 2010; estimated implementation costs were approximately $400 million over three years. It reported about $45 million of synergies realized in Q3 and said integration was ahead of plan.
- Management expected Black & Decker to remain dilutive to gross margin rate until the March 2011 merger anniversary. Commodity inflation, especially steel, was expected to pressure margins; planned customer price increases may not fully or immediately offset it. Industrial restocking was expected to abate in Q4.
- CRC Evans was expected to be slightly accretive to 2010 earnings and to add more than $0.10 to diluted EPS by year three. SSDS turned profitable in Q3, ahead of plan.
- Purchase accounting remained preliminary. The company was evaluating taxes on Black & Decker’s unremitted international earnings of approximately $2.1 billion and said a net tax-liability adjustment of up to approximately $600 million could ultimately be recorded; no liability had yet been provided.
- Environmental exposures include a Centredale, Rhode Island matter with estimated remediation costs of $50.5–$100 million; the company recorded a $50.5 million reserve. Total environmental reserves were $130.4 million, with reasonably possible remediation costs of $113–$222 million. The company contested claims in the Rialto, California groundwater matter.
- Other key risks include integration and synergy execution, customer concentration in U.S. home centers and mass merchants, weak commercial construction, commodity and currency movements, and access to capital. The company disclosed no material change to previously reported risk factors and stated its disclosure controls were effective.
Most important facts for investors to verify
- How much of reported growth and future profitability comes from acquired businesses versus sustainable organic growth, and whether Q4 restocking fades as management expected.
- Actual merger-related charges, cash restructuring payments, and realized synergies versus the stated $555–$605 million charge range and synergy targets.
- Final Black & Decker purchase accounting, particularly the potential tax liability of up to approximately $600 million and any resulting changes to goodwill or other valuations.
- Progress on debt reduction, working-capital conversion, and free cash flow after acquisition and integration outlays.
- Developments in environmental and other legal contingencies, including the Centredale reserve and the contested Rialto claims.