Stanley Black & Decker, Inc. — Form 10-Q Summary
Period and scope: The supplied filing is for the quarter ended July 2, 2011, not 2010 Q2 as stated in the request metadata. It compares the second quarter and first six months of 2011 with the corresponding 2010 periods. The 2010 year-to-date comparison is not fully like-for-like: Black & Decker’s results were included only from the March 12, 2010 merger date.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $2,623.2 million | $2,365.6 million | $5,003.9 million | $3,627.6 million |
| Net earnings attributable to Stanley Black & Decker | $197.3 million | $45.8 million | $356.0 million | $(62.8) million |
| Diluted EPS | $1.14 | $0.28 | $2.06 | $(0.49) |
| Operating cash flow | $177.3 million | $221.0 million | $297.7 million | $188.3 million |
| Free cash flow | $109 million | $186 million | $160 million | $131 million |
Q2 sales rose 11% year over year: organic volume contributed 3%, acquisitions net of divestitures 3%, foreign exchange 5%, and pricing was flat. First-half sales rose 38%, reflecting the merger and acquisitions as well as 4% organic volume and 4% favorable currency effects. Management reported pro forma first-half sales growth of 10% versus 2010.
Q2 gross profit was $967 million, or 36.9% of sales, versus $769 million, or 32.5%. Excluding merger- and acquisition-related charges, gross margin was 37.1% versus 37.7%; commodity inflation outweighed synergies and volume leverage. First-half reported gross margin was 37.0% versus 33.8%; excluding those charges, it was 37.2% versus 38.3%.
Q2 SG&A, including doubtful-account provision, was $635 million, or 24.2% of sales, compared with $584 million, or 24.7%. Excluding merger- and acquisition-related charges, the rates were 23.5% and 24.0%. Net interest expense was $27 million for Q2 and $56 million for the first half, up from $25 million and $43 million, respectively.
Segments and material changes
- Construction & Do It Yourself (CDIY): Q2 sales were $1,364 million, up 5%; segment profit was $191 million (14.0% margin). Organic volume increased 2%, with strength in power tools offset by outdoor-product weakness, a lost major-customer Pfister business, and softer European markets.
- Security: Q2 sales were $622 million, up 9%; segment profit was $103 million (16.5% margin). Sales benefited from acquisitions and currency. Convergent security grew, while mechanical access was slightly lower.
- Industrial: Q2 sales were $636 million, up 29%; segment profit was $98 million (15.3% margin). Volume rose 7%, supported by industrial and automotive tools, engineered fastening, and hydraulic tools.
Growth and earnings comparisons are affected by the 2010 merger, acquisitions, and significant 2010 purchase-accounting inventory step-up amortization. Reported merger- and acquisition-related charges were $50 million in Q2 2011 and $229 million in Q2 2010; first-half charges were $87 million and $442 million, respectively. Q2 2011 net income also benefited from a $48.5 million favorable tax-contingency settlement; the first-half benefit was $69.9 million.
Cash, debt, and liquidity
At July 2, 2011, cash and cash equivalents were $1,915 million, total current assets $5,339 million, and current liabilities $3,405 million. Short-term borrowings were $627 million and long-term debt, including current maturities, totaled $3,046 million. The company had $626.6 million drawn under its $1.5 billion commercial-paper program and an undrawn $1.2 billion committed four-year credit facility, subject to a minimum adjusted interest-coverage ratio of 3.5 to 1.0.
Cash increased by $170 million from January 1. First-half operating cash flow was $298 million; capital and software expenditures were $138 million. Free cash flow is management-defined as operating cash flow less capital and software expenditures and excludes, among other items, debt service, dividends, and acquisitions. Management cited higher retirement-plan contributions and restructuring payments as factors reducing operating cash flow.
Outlook, risks, and unusual items
- Management forecast 2011 diluted EPS of $4.50–$4.75, or $5.15–$5.40 excluding merger- and acquisition-related charges.
- Management raised expected merger cost synergies to approximately $450 million cumulatively by the end of 2012 ($485 million annualized); it expected $200 million in 2011 and a further $115 million in 2012. Revenue synergies of $300–$400 million were projected by 2013.
- Management expected commodity inflation, net of pricing actions, to reduce full-year 2011 gross margin by about 100 basis points. Pricing actions were expected to take effect predominantly in the second half.
- The company announced a tender offer for Niscayah valued at approximately $1.2 billion, including assumed debt, subject to customary conditions, including approvals and acceptance sufficient to obtain more than 90% of shares. It held approximately 5.8% of Niscayah at quarter-end. A July 22, 2011 credit agreement provided a separate facility initially of $1.25 billion to support the transaction. Management expected the acquisition to close in September 2011; completion and financing were not assured.
- Environmental remediation reserves were $171.1 million at quarter-end. The reasonably possible range of environmental remediation costs was $148.8–$364.2 million. For the Centredale site specifically, the estimated range was $68.3–$212.9 million, with $68.3 million accrued; the company disputed the claims.
- Other risks highlighted include integration and synergy execution, commodity and freight costs, customer demand and pricing, foreign exchange and interest rates, working-capital performance, access to capital markets, tax examinations, litigation, and environmental matters. The filing said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the requested reporting period: this filing covers Q2 2011, not Q2 2010.
- Assess the effect of merger accounting, acquisitions, foreign exchange, tax settlements, and 2010 inventory step-up charges on reported growth and earnings.
- Track progress toward the EPS outlook and the announced cost- and revenue-synergy targets, including the effects of commodity inflation and pricing.
- Verify Niscayah tender-offer completion, financing, assumed debt, and post-acquisition liquidity.
- Monitor cash conversion, working capital, commercial-paper reliance, debt maturities, and environmental and other contingency exposures.