Business context and reporting period
Stanley Black & Decker, Inc. filed this Form 10-Q for the quarter ended July 3, 2010, with six-month results also presented. The request metadata identifies “2009 Q2,” but the filing itself is for 2010 Q2; its comparative quarter ended July 4, 2009. The company completed its merger with Black & Decker on March 12, 2010, and includes Black & Decker results from the merger date. Consequently, reported year-over-year comparisons are substantially affected by the merger.
Key financial metrics
| Metric | Three months ended July 3, 2010 | Six months ended July 3, 2010 |
|---|---|---|
| Net sales | $2,365.6 million | $3,627.6 million |
| Gross margin | $769 million; 32.5% of sales | $1,225 million; 33.8% of sales |
| Income (loss) before tax, continuing operations | $9.3 million | $(97.7) million |
| Net earnings (loss) attributable to Stanley Black & Decker | $45.8 million | $(62.8) million |
| Diluted earnings (loss) per share | $0.28 | $(0.49) |
| Cash from operating activities | $221.0 million | $188.3 million |
| Cash and cash equivalents, at July 3 | $1,598.4 million |
At July 3, total debt was $3,090.0 million, comprising $2,746.1 million of long-term debt including current maturities and $343.9 million of short-term borrowings. Current assets were $4,872.4 million and current liabilities $3,074.7 million. Capital expenditures and capitalized software were $35.1 million in Q2 and $57.2 million year to date. Q2 free cash flow, as defined by the company as operating cash flow less capital and software expenditures, was $186 million.
Material changes versus comparable periods
- Q2 sales rose 157% from $919.2 million; the merger and SSDS acquisition accounted for a 149% increase, while organic volume added 9%. For the first half, sales rose 98% from $1,832.2 million; acquisitions contributed 93% of the increase and organic volume grew 3%.
- Q2 gross margin rate fell from 39.9% to 32.5%, principally due to $117.7 million of non-cash acquired-inventory step-up amortization and other merger-related charges. Excluding merger-related charges, management reported a 41.0% gross margin rate for legacy Stanley in Q2.
- Q2 attributable earnings declined to $45.8 million from $69.5 million. First-half results moved from $107.2 million of attributable earnings to a $62.8 million loss. The 2010 first-half result includes substantial merger-related costs; the prior-year comparison included a $43.8 million gain on debt extinguishment.
- Operating cash flow increased to $221.0 million in Q2 from $68.1 million. First-half cash from operations was $188.3 million versus $71.7 million. The 2010 cash flow includes significant non-cash merger-related charges and was reduced by working-capital use and merger-related payments.
- Black & Decker added substantial assets, goodwill and debt. Goodwill was $5,039.2 million at July 3, compared with $1,818.4 million at year-end 2009; the acquisition purchase-price allocation remained preliminary.
Outlook, commentary, risks and unusual items
- Management projected 2010 diluted EPS of $0.60–$1.00 as reported, or $3.35–$3.55 excluding merger-related charges and the approximately $36 million Q2 tax-settlement benefit. Projected full-year free cash flow exceeded $300 million, including approximately $300 million of restructuring and other payments; excluding those payments, management expected more than $600 million.
- The company expected approximately $350 million in annual merger synergies within three years, with about $90 million expected in 2010, including approximately $30 million realized in Q2. Estimated total costs to achieve synergies were approximately $400 million over three years.
- Management anticipated more significant commodity inflation in the remainder of 2010 and said pricing actions might not fully or promptly offset it. It also expected customer inventory restocking, estimated to account for roughly half to two-thirds of Q2 volume growth, to ease in the second half.
- On July 29, 2010, after quarter-end, the company announced a $445 million cash acquisition of CRC Evans, expected to be slightly accretive to 2010 earnings and funded from existing liquidity.
- Restructuring and asset-impairment charges were $183.2 million for the first half; the company reported reductions of approximately 2,000 employees in merger-related and other cost actions. Restructuring reserves totaled $183.6 million at July 3.
- Environmental matters include the Centredale, Rhode Island site, for which the company accrued $50.5 million against estimated costs of $50.5–$100 million. Total environmental reserves were $130.3 million; the reasonably possible range of remediation costs was $113–$221 million. The company said the ultimate outcomes could differ from recorded amounts.
- Credit ratings were reaffirmed at A by S&P and lowered by Moody’s to Baa1 and Fitch to A- following the merger. S&P’s outlook was negative; the other agencies’ outlooks were stable. Management cited risks including integration execution, customer concentration, commodity and currency pressures, weak commercial construction, and access to capital markets.
Important facts for investors to verify
- Reconcile the 2010 reporting period with the “2009 Q2” metadata and use merger-adjusted or pro forma comparisons when assessing underlying performance.
- Track realization of the $350 million synergy target against the projected $400 million implementation cost, restructuring cash payments and remaining reserves.
- Assess earnings and margins after acquired-inventory step-up amortization and other merger charges, and distinguish these adjustments from reported GAAP results.
- Monitor debt maturities, investment-grade ratings, liquidity after the CRC Evans acquisition, and management’s free-cash-flow expectations.
- Follow the final Black & Decker purchase-price allocation, including goodwill, intangible valuations, tax exposures and assumed environmental and benefit obligations.
- Review the Centredale and other environmental contingencies, tax-audit exposures, customer concentration, and the extent to which pricing offsets inflation.