Stanley Black & Decker, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (52 weeks). The request metadata refers to “2010 Q4,” but the supplied filing is the company’s 2011 annual report; figures below summarize fiscal 2011 and compare with fiscal 2010 where useful. The comparison is affected by Black & Decker being included only from March 12, 2010.
Business context
The company sells power and hand tools, security and mechanical access solutions, engineered fastening products, and infrastructure and healthcare solutions. Its three reporting segments are Construction & Do-It-Yourself (CDIY), Security, and Industrial. In September 2011, it acquired Niscayah, a European security provider, for $984.5 million. About 49% of 2011 revenue came from outside the U.S.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $10.376 billion | $8.344 billion |
| Gross profit / margin | $3.794 billion / 36.6% | $2.935 billion / 35.2% |
| Pre-tax earnings from continuing operations | $779.8 million | $239.8 million |
| Net earnings attributable to common shareholders | $674.6 million | $198.2 million |
| Diluted EPS, including discontinued operations | $3.97 | $1.32 |
| Diluted EPS from continuing operations | $4.06 | $1.35 |
| Cash from operating activities | $998.9 million | $739.3 million |
| Free cash flow (operating cash flow less capital expenditures) | $696.8 million | $553.8 million |
- Sales rose 24%: organic volume contributed 5%, a full year of Black & Decker contributed 11%, acquisitions 7%, and foreign exchange 1%. Pro forma sales growth was 12%.
- Reported gross margin improved, but excluding merger and acquisition charges it was 36.9%, versus 37.5% in 2010. Commodity inflation and promotional discounting outweighed price increases, synergies, and productivity gains.
- Segment results: CDIY sales were $5.237 billion and segment profit was $681.6 million (13.0% margin); Security sales were $2.639 billion and profit $399.0 million (15.1%); Industrial sales were $2.501 billion and profit $406.3 million (16.2%).
- The 2011 effective tax rate was 11.4%, including a $73.4 million benefit from tax-contingency settlements. The 2010 rate was 15.7%.
Balance sheet, liquidity, and capital
- At year-end, cash and cash equivalents were $906.9 million; total debt, including current maturities, was $3.452 billion; and long-term debt was $2.926 billion. Cash less total debt implies net debt of approximately $2.545 billion.
- The current ratio was 1.3, down from 1.8 in 2010; total debt to total capital was 33.0%, versus 32.9%.
- Cash declined from $1.743 billion, primarily reflecting acquisition spending. Investing cash outflow was $1.464 billion, including $1.180 billion for acquisitions. Capital expenditures were $302.1 million.
- The company reported $697 million of free cash flow; management’s adjusted figure was $1.004 billion after adding back specified merger/acquisition charges, payments, and related capital spending. The filing’s 2012 free-cash-flow outlook excludes merger and acquisition-related charges and payments.
- Committed revolving facilities of $1.2 billion and $750 million were undrawn at year-end. The company also reported investment-grade ratings averaging A- and compliance with its 3.5x minimum interest-coverage covenant; its ratio was approximately 14x or higher during 2011.
- Cash dividends paid were $275.9 million; the annual dividend per share was $1.64, up from $1.34. A forward share purchase contract requires a $350 million payment by August 2013, or earlier at the company’s option.
Material changes and unusual items
- Net sales increased 24%, but the acquisition of Black & Decker and subsequent acquisitions make year-over-year comparisons less direct. Organic sales volume increased 4% in CDIY, 1% in Security, and 10% in Industrial.
- 2011 included $256 million of pre-tax merger and acquisition-related charges, reducing earnings by $200 million after tax, or $1.18 per diluted share. 2010 included $538 million of such pre-tax charges, reducing earnings by $421 million, or $2.80 per diluted share.
- Commodity inflation was approximately $236 million in 2011; cumulative unfavorable effects of inflation and price erosion exceeded $320 million in 2010 and 2011.
- The company acquired Niscayah and made nine smaller acquisitions; it also sold three small businesses, recording an $18.8 million after-tax discontinued-operations loss.
- Environmental remediation reserves were $164.8 million; the reasonably possible cost range was approximately $140 million to $355 million. The filing discusses significant site-specific matters, including the Centredale Superfund site, for which the company recorded a $67.5 million reserve.
Outlook, management commentary, and risks
- For 2012, management forecast diluted EPS of $4.71–$4.97, including $242 million of merger/acquisition and newly announced cost-action charges; excluding those charges, it forecast $5.75–$6.00. Expected organic sales growth was 1–2% on a pro forma basis, and adjusted free cash flow was approximately $1.2 billion.
- Management expected 2012 tax rate of approximately 22–23%, interest expense of about $130 million, and continued cost and revenue synergy realization. It targeted $450 million of merger cost synergies by the end of 2012 and $80 million of Niscayah cost synergies by the end of 2013.
- Key risks include retailer concentration and customer inventory reductions, competitive pricing, commodity and foreign-exchange volatility, European economic and sovereign-debt stress, acquisition integration and synergy execution, and disruption from information-technology conversions. The two largest customers represented nearly 16% of sales; U.S. and international home centers and mass merchants together represented about 23%.
- Goodwill was $6.920 billion and indefinite-lived trade names were $1.633 billion. No significant goodwill or intangible-asset impairment was recorded in 2011; future impairment remains dependent on business performance and valuation assumptions.
- Management and the auditor reported effective internal control over financial reporting, but Niscayah was excluded from the 2011 control assessment while integration continued. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile the reported EPS figures with the substantial one-time charges and the $73.4 million tax-contingency benefit; assess the sustainability of earnings excluding these items.
- Track organic sales, segment margins, commodity-cost recovery, and customer inventory trends separately from acquisition-driven growth.
- Test the 2012 EPS and free-cash-flow outlook against the stated sales, tax-rate, synergy, and cost-action assumptions.
- Monitor acquisition integration, particularly Niscayah’s contribution and the realization of projected synergies, as well as the integration of its financial controls.
- Review debt maturities, the $350 million forward share purchase obligation, cash availability across jurisdictions, pension funding needs, and environmental liabilities.