STANLEY BLACK & DECKER, INC. quarterly report, Q3 FY2012

Business context and reporting period

Stanley Black & Decker, Inc. is a diversified global manufacturer and services provider spanning tools, security and industrial markets. This filing is a Form 10-Q for the quarter ended September 29, 2012, comparing the third quarter and first nine months of 2012 with the corresponding 2011 periods. The request metadata says “2011 Q3,” but the filing itself reports 2012 Q3.

The company reports Construction & Do It Yourself (CDIY), Security and Industrial segments. Its strategy emphasizes diversification and organic growth, including investment in Security, Engineered Fastening, Infrastructure and Healthcare Solutions.

Key financial results

Third-quarter gross margin was 36.2%, down from 37.0%; excluding merger and acquisition-related charges, it was 36.6% versus 37.5%. Year-to-date gross margin was 36.6% versus 37.0% (36.9% versus 37.4% excluding those charges). SG&A, including doubtful-account provision, was 23.5% of sales for the quarter and 24.3% year to date, compared with 24.4% and 24.7%, respectively. The filing attributes gross-margin pressure to inflation and sales mix, partly offset by productivity and synergies; SG&A rates benefited from volume leverage and cost controls.

At September 29, 2012, cash was $769.5 million, down from $906.9 million at year-end 2011. Short-term borrowings were $1.337 billion and long-term debt, including current maturities, was $2.938 billion. Total debt on that basis was about $4.274 billion. Current assets were $4.754 billion and current liabilities $4.670 billion. The company had $1.308 billion outstanding under its $2.0 billion commercial paper program and undrawn committed credit facilities, including a new $1.0 billion 364-day facility and a $1.2 billion four-year facility.

Material changes versus prior period

• Sales grew, led by acquisitions; organic sales were relatively flat in Q3 and up 2% year to date. Acquisitions contributed 9% of Q3 growth and 10% year-to-date; currency reduced sales by 3% in both periods.
• Reported earnings and cash generation declined year over year. Year-to-date operating cash flow fell to $418 million from $456 million and free cash flow to $158 million from $260 million, with working-capital outflows of $286 million versus $72 million.
• Segment performance diverged. Q3 CDIY sales rose 3% and segment profit rose to $200.3 million; Security sales rose 22%, primarily from Niscayah, while organic sales fell 3% and margin declined. Industrial Q3 sales fell 2% and segment profit fell to $95.1 million. Year-to-date organic growth was strongest in CDIY; Security organic sales declined 3%.
• Gross debt increased from approximately $3.452 billion at year-end 2011 to about $4.274 billion, alongside cash declining. The company issued $750 million of 5.75% junior subordinated debentures due 2052, repurchased $900 million of senior notes and recorded a $45.5 million pretax debt-extinguishment loss.
• Dividends rose to $0.49 per share for the quarter from $0.41. The company repurchased approximately 2.9 million shares for $200 million in May and authorized repurchases of up to 20 million shares.

Outlook, commentary and risks

Management’s 2012 outlook was diluted EPS of approximately $3.65 including about $350 million of merger-related and other charges, or approximately $5.25 excluding those charges. It expected full-year free cash flow of approximately $1.2 billion excluding merger-related charges and payments, and 1% pro forma organic sales growth. These are forward-looking estimates, not results.

The company planned roughly $150 million of investment over three years in six organic-growth priorities and expected those initiatives to generate $800 million to $900 million of incremental revenue over the same period. Management also cited expected synergies, including approximately $80 million from Niscayah by the end of 2013. Infastech, an approximately $850 million acquisition, was expected to close no earlier than Q4 2012; management projected EPS accretion of more than $0.15 in year one and more than $0.35 by year three.

After quarter-end, the company agreed to sell its Hardware & Home Improvement business, including part of Tong Lung, to Spectrum Brands for $1.4 billion cash, subject to customary conditions and regulatory approvals. Management planned to use proceeds partly to fund Infastech, repurchase shares and modestly reduce leverage.

Notable charges included $161 million pretax in Q3 and $324 million year to date for merger-related and other items, including restructuring, integration and advisory costs, and debt extinguishment. Restructuring charges were $114.1 million year to date; actions included workforce reductions and facility closures. Tax benefits included a $6.6 million favorable settlement of tax contingencies and a $7.0 million deferred-tax-asset benefit in Q3. The filing warns that actual results depend on economic conditions, foreign exchange, commodity and freight costs, pricing, working capital, integration and synergy execution, transaction approvals, and access to capital markets.

Environmental remediation reserves totaled $164.0 million. For the Centredale site, the company accrued $68.1 million while disclosing a reasonably possible cost range of $68.1 million to $139.7 million; it expects to contest the EPA’s claims. The company also reported exposure at approximately 31 active Superfund sites. Management stated that other legal matters were not expected to materially adversely affect the company, while noting estimation uncertainty. No material changes to previously disclosed risk factors or market-risk exposure were reported; disclosure controls were assessed as effective.

Important facts for investors to verify

• Whether reported and adjusted EPS and cash-flow guidance were achieved, and how management defines exclusions from adjusted results and free cash flow.
• Whether working capital, particularly receivables and payables, normalized after the reported outflows, and whether cash conversion improved.
• Commercial-paper refinancing plans, the resulting debt mix and interest costs, and the company’s capacity to meet debt maturities while maintaining investment-grade ratings.
• Closing, proceeds and use of proceeds for the HHI sale, and closing, integration costs and realized returns from Infastech and other acquisitions.
• Organic sales and margins by segment, especially continuing weakness in Security and Industrial markets, and progress toward restructuring savings and synergy targets.
• Potential changes in environmental remediation estimates, tax contingencies, and other legal or guarantee exposures.