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| SWK > SEC Filings for SWK > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion contains statements reflecting the Company's views
about its future performance that constitute "forward - looking statements"
under the Private Securities Litigation Act of 1995. There are a number of
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements Please read the information
under the caption entitled "Cautionary Statement Under The Private Securities
Litigation Reform Act Of 1995."
OVERVIEW
The Company is a diversified worldwide supplier of tools and engineered
solutions for professional, industrial, construction, and do-it-yourself ("DIY")
use, as well as engineered and security solutions for industrial and commercial
applications. Its operations are classified into three business segments:
Security, Industrial and Construction & DIY ("CDIY"). The Security segment is a
provider of access and security solutions primarily for retailers, educational,
financial and healthcare institutions, as well as commercial, governmental and
industrial customers. The Company provides an extensive suite of mechanical and
electronic security products and systems, and a variety of security services.
These include security integration systems, software, related installation,
maintenance, monitoring services, healthcare solutions, automatic doors, door
closers, exit devices, hardware and locking mechanisms. Security products are
sold primarily on a direct sales basis and in certain instances, through third
party distributors. The Industrial segment manufactures and markets:
professional industrial and automotive mechanics tools and storage systems;
assembly tools and systems; plumbing, heating and air conditioning tools;
hydraulic tools and accessories; and specialty tools. These products are sold to
industrial customers and distributed primarily through third party distributors
as well as direct sales forces. The CDIY segment manufactures and markets hand
tools, consumer mechanics tools, storage systems, pneumatic tools and fastener
products which are principally utilized in construction and do-it-yourself
projects. These products are sold primarily to professional end users as well as
consumers, and are distributed through retailers (including home centers, mass
merchants, hardware stores, and retail lumber yards).
Over the past several years, the Company has generated strong free cash flow and
received substantial proceeds from divestitures that enabled a transformation of
the business portfolio. Beginning with the first significant security
acquisitions in 2002, Stanley has consummated $2.8 billion in acquisitions and
pursued a diversification strategy to enable profitable growth. The strategy
involves industry, geographic and customer diversification, as exemplified by
the expansion of security solution product offerings and the growing proportion
of sales outside the U.S. Sales outside the U.S. represented 42% of the total in
the first nine months of 2009, up from 29% in 2002. The reallocation of capital
to higher growth businesses and related diversification of the revenue base
helped position Stanley to weather the current challenging economic times. In
the near term, management will concentrate primarily on debt reduction, driving
operating efficiencies through the Stanley Fulfillment System disciplines, and
the integration of acquisitions to achieve further synergies. Management
continues to monitor markets for attractive acquisition targets. In the medium
term the Company intends to pursue further growth opportunities in security
solutions, industrial tools, healthcare markets and emerging markets while
maintaining focus on the valuable branded tools and storage businesses. Refer to
the "Business Overview" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 2009 for additional strategic
discussion.
2009 Outlook
This outlook discussion is intended to provide broad insight into the Company's
near term earnings prospects to clarify current year results will be lower than
in prior periods, and not to discuss all factors affecting such projections.
The global economic downturn deepened during the first nine months of the year
as evidenced by a 21% decline in organic sales unit volumes versus the prior
year. Management elected to implement further cost reduction plans in March and
July of 2009 as projections indicate full year sales unit volume declines are
likely to be between 18-20%. Smaller volume declines are expected in the fourth
quarter as the prior year comparison is easier and customer inventory
corrections in the Industrial segment subside.
The cost reduction plan initiated in the first quarter of 2009 is expected to
generate annual savings of $100 million, an estimated $45 million of which will
be realized in 2009. The Company is reinvesting approximately $20 million in
current year savings to fund
investments in brand development and Security segment organic growth initiatives
including expansion of the sales force. The brand development entails expanded
advertising in ten major league U.S. baseball stadiums as well as NASCAR racing
sponsorships. In July 2009, management announced an additional $50 million in
annualized cost saving measures which were taken in further response to sales
volume declines, comprised of discretionary spending cuts as well as headcount
reductions primarily in general and administrative functions. The July 2009
actions will generate an estimated $25 million of savings in 2009. The 2009 cost
actions combined with those taken in 2008 are expected to provide a total
diluted earnings per share benefit of approximately $2.25 in 2009. The 2008
restructuring actions reflect necessary cost cutting to align with lower sales
and are supplemented by the 2009 actions which are also designed to improve the
effectiveness of the organization as well as promote efficiency. As reported in
the first quarter, the fastening systems business is undergoing consolidation
with the consumer tools and storage ("CT&S") business. These CDIY segment
businesses have significant channel and customer overlap so the combination is
leveraging resources and enabling more efficient operations. This integration of
fastening systems into CT&S is progressing well, exceeding targets, and
contributed positively to the overall CDIY segment profit rate in the third
quarter. Pre-tax restructuring and related charges for the above mentioned
programs are projected to total $40 - $45 million in 2009, of which
approximately one third will be incurred in the fourth quarter.
The diluted per share carryover savings from the cost reduction programs is
estimated at $1.00 in 2010. This will be partially offset by certain cost
pressures. Management believes the cost reduction and other strategic actions
taken position Stanley well to deliver favorable operating leverage when modest
economic growth resumes.
Subsequent Event
On November 2, 2009 the Company announced that it has entered into a definitive
merger agreement with The Black & Decker Corporation ("Black & Decker") in an
all-stock transaction. Under the terms of the agreement, which has been approved
by the Boards of Directors of the Company and Black & Decker, each outstanding
share of Black & Decker will be converted into the right to receive 1.275 shares
of the Company's common stock. Upon closing it is expected that the Company's
shareholders will own approximately 50.5% of the equity of the combined company
and Black and Decker shareholders will own approximately 49.5%. The Company
expects the transaction, which is subject to, among other things, the approval
of the merger by Black & Decker's shareholders, the approval of the issuance of
the Company's common stock and certain amendments to the Company's certificate
of incorporation by the Company's shareholders, as well as customary regulatory
approvals and closing conditions, to close in the first half of 2010.
In light of the execution of the above agreement, management estimates that full
year diluted earnings per share from continuing operations will be in the range
of $2.61 to $2.71, updated from previous guidance of $2.84 to $2.94 to reflect
approximately $18 million of transaction costs to be expensed in the fourth
quarter of 2009.
RESULTS OF OPERATIONS
Below is a summary of consolidated operating results for the three and nine
months ended October 3, 2009, followed by an overview of performance by business
segment. The terms "organic" and "core" are utilized to describe results aside
from the impact of acquisitions during their initial 12 months of ownership.
This ensures appropriate comparability to operating results in the prior period.
Net Sales: Net sales from continuing operations were $936 million in the third
quarter of 2009 as compared to $1.118 billion in the third quarter of 2008,
representing a decrease of $182 million or 16%. Acquisitions, primarily Générale
de Protection ("GdP") in the Security segment, contributed a 4% increase in net
sales. Organic sales unit volume declined 20% and unfavorable foreign currency
translation in all regions reduced sales by 2%, which was partially offset by 2%
of favorable customer pricing. All major regions continued to experience unit
volume declines amid continued weak global economic conditions. Unit volume
decreased 19% in the Americas, 23% in Europe and 15% in the Australia / Asia
region. The Industrial segment had the most significant decline of the three
segments with a 31% drop in sales unit volume which was exacerbated by inventory
corrections throughout the supply chain. The CDIY segment unit volume sales
declined 23% as the fastening systems and consumer tools and storage businesses
were impacted by the contraction in construction markets around the world. The
Security segment continued to perform relatively better with an organic sales
unit volume decrease of 8%, reflecting reduced equipment installations partially
offset by growth in recurring (monitoring and service) revenues.
Year to date net sales from continuing operations were $2.768 billion in 2009, a
$573 million or 17% decrease from the first nine months of 2008. Acquisitions
provided nearly 6% of sales growth, attributable mainly to Sonitrol (acquired in
July 2008) and GdP (acquired in October 2008). Foreign currency translation
reduced sales by 4%, which was partially offset by a 2% pricing increase, while
volume decreased 21% compared to the prior year. The organic sales unit volume
decline was 19% in the first quarter of 2009, deteriorated to 24% in the second
quarter and improved sequentially in the third quarter to 20% with the sharpest
declines occurring in Europe and the Industrial segment, which were adversely
impacted by customer inventory corrections. Management is encouraged by modest
sequential growth of revenues in the third quarter of 2009, up versus the second
quarter this year, and observed mild stabilization in certain end markets
particularly within CDIY. Macro-economic data indicate some stabilization. In
particular, it appears U.S. housing starts have bottomed out, and consumer
confidence is improving in both the U.S. and Europe in comparison to the second
quarter.
Additionally, industrial production is showing positive growth. The Company's
businesses tend to lag these macro indicators and management expects positive
effects on sales, assuming the trends continue, in early 2010.
Gross Profit: Gross profit from continuing operations was $386 million, or 41.3%
of net sales, in the third quarter of 2009, compared to $431 million, or 38.6%
of net sales, in the prior year. The lower gross profit amount stems from the
previously discussed widespread sales volume decline, and to a small extent
unfavorable foreign currency translation. The 41.3% gross margin rate represents
a record high for the Company. Acquisitions, primarily GdP, generated
$20 million in gross profit and contributed modestly to the strong gross margin
rate expansion. The 270 basis point improvement in the gross margin rate was
further enabled by customer pricing, continued execution of productivity
projects and improved sales mix due to the relatively stable performance in the
Security segment. The margin rate performance in Security was also aided by an
increase in recurring revenues relative to lower margin equipment sales.
Additionally, the cost actions taken throughout the company to adjust to soft
demand helped cushion margin rate pressure. The favorable effects of commodity
cost deflation were largely offset by under-absorption associated with lower
production volumes.
On a year to date basis, gross profit from continuing operations was
$1.114 billion, or 40.3% of net sales, in 2009, compared to $1.279 billion, or
38.3% of net sales, for the corresponding 2008 period. Acquisitions, primarily
Sonitrol and GdP, generated $99 million of gross profit and contributed
substantially to the year to date gross margin rate expansion. The other factors
affecting the year to date performance are primarily the same as those discussed
pertaining to the third quarter.
SG&A expenses: Selling, general and administrative expense ("SG&A") from
continuing operations, inclusive of the provision for doubtful accounts, was
$251 million, or 26.9% of net sales, in the third quarter of 2009, compared to
$275 million, or 24.6% of net sales, in the prior year. Acquisitions contributed
$16 million of incremental SG&A as core SG&A declined approximately $40 million,
or 14%, from the prior year due to cost actions taken to realign expenses with
lower sales volumes. The Company implemented headcount reductions and various
cost containment actions such as temporarily suspending certain U.S. retirement
benefits in 2009 and sharply curtailing travel and other discretionary spending.
There were also reductions in variable selling and other costs as well as
favorable currency translation. Partially offsetting these decreases was
$5 million in spending to expand the convergent security business sales force
and the major league baseball brand awareness campaign.
SG&A expense from continuing operations, inclusive of the provision for doubtful
accounts, totaled $759 million, or 27.4% of sales, for the first nine months of
2009 versus $832 million, or 24.9%, in 2008. Acquisitions increased SG&A by
$62 million. Aside from acquisitions, SG&A spending decreased $135 million, or
16%, from the prior year. The factors affecting year to date SG&A are consistent
with those discussed previously related to the third quarter.
Interest and Other-net: Net interest expense from continuing operations in the
third quarter of 2009 was $15 million compared to $21 million in the third
quarter of 2008. Year to date net interest expense from continuing operations
was $47 million in 2009 compared to $62 million in the first nine months of
2008. The decrease for both the three month and nine month periods pertains to
lower interest rates on short-term borrowings in the current year and the
repurchase of $137 million of the Company's junior subordinated debt securities
($103 million in May, 2009 and $34 million in October, 2008). Additionally,
during the first quarter of 2009 the Company entered into interest rate swaps on
certain term debt which reduced the effective interest rate. These factors were
partially offset by decreased interest income related to lower interest rates
earned on cash holdings.
Other, net expense from continuing operations amounted to $34 million in the
third quarter of 2009 versus $28 million in 2008. The higher expense in the
current quarter is primarily attributable to increased intangible asset
amortization expense and to a lesser extent higher environmental remediation
expense. On a year to date basis, Other, net expense was $51 million in 2009 as
compared with $69 million in 2008. The decrease in Other, net for the nine-month
period is due to the $44 million pre-tax gain from the repurchase of
$103 million junior subordinated debt securities on May 1, 2009, partially
offset by the factors mentioned with respect to the third quarter.
Income Taxes: The effective income tax rate from continuing operations was 22.2%
in the third quarter of this year, compared with 24.6% in the prior year's third
quarter. The lower effective tax rate in the current quarter is attributable to
a decrease in the tax effect associated with the geographic distribution of
earnings and reversal of certain tax reserves associated with statute of
limitation expirations. The year to date effective income tax rate from
continuing operations was 25.1% in 2009 versus 25.6% in 2008. The decrease in
the year to date effective tax rate pertains to the same items affecting the
quarterly comparison as well as a non-recurring tax planning matter in a
European jurisdiction. These favorable factors impacting the year to date
effective tax rate were largely offset by an increase in the tax effect
applicable to the $44 million pre-tax gain on extinguishment of debt recorded in
the second quarter of 2009.
Discontinued Operations: The net loss from discontinued operations amounted to
$1 million in the third quarter of 2009 and $3 million year to date primarily
related to the wind-down of one small divestiture and the purchase price
adjustment for CST/berger and other small businesses divested in 2008.
Discontinued operations provided $86 million and $92 million of net income in
the third quarter and first nine months of 2008, respectively, reflecting the
$84 million after-tax gain recognized on the sale of CST/berger as well as the
operating results of the businesses prior to divestiture.
Business Segment Results
The Company's reportable segments are aggregations of businesses that have
similar products, services and end markets, among other factors. The Company
utilizes segment profit (which is defined as net sales minus cost of sales, and
SG&A aside from corporate overhead expense), and segment profit as a percentage
of net sales to assess the profitability of each segment. Segment profit
excludes the corporate overhead expense element of SG&A, interest income,
interest expense, other-net (inclusive of intangible asset amortization
expense), restructuring and asset impairments, and income tax expense. Corporate
overhead is comprised of world headquarters facility expense, cost for the
executive management team and the expense pertaining to certain centralized
functions that benefit the entire Company but are not directly attributable to
the businesses, such as legal and corporate finance functions. Refer to the
Restructuring and Asset Impairments section of MD&A for the restructuring
charges attributable to each segment. As discussed previously, the Company's
operations are classified into three business segments: Security, Industrial,
and Construction and Do-It-Yourself ("CDIY").
Security: Security sales increased 3% to $403 million during the third quarter
of 2009 from $393 million in the corresponding 2008 period. GdP and several
smaller acquisitions collectively contributed a 10% increase in sales. There was
a nearly 2% unfavorable foreign currency impact primarily from Europe and
Canada. Organic unit volume declines of over 7% were partially offset by 2% in
favorable customer pricing. Organic sales, excluding foreign currency impact,
were down in the mid-single digits compared to the prior year in both convergent
security and mechanical access solutions. However, sales improved sequentially
from $391 million in the second quarter of 2009. The segment was affected by
commercial construction project and other capital spending delays associated
with weak economic conditions, although there were some signs of easing capital
spending constraints compared to the first half of 2009 particularly with
national accounts. Security was aided by a relatively strong performance by the
U.S. hardware business associated with a roll-out at a major North American
retailer, success of new product introductions, and its consistent focus on
customer service that fosters high retention. Lower organic unit volume in
convergent electronic security pertained to fewer system installations
especially in large project and national accounts, and to a much lesser extent
in smaller, core commercial accounts which possess higher profit margins. As a
result, there was a favorable mix shift in convergent security and the overall
segment sales to higher margin recurring monthly service revenue (including
security monitoring and maintenance) which grew organically by 5%. This improved
sales mix in convergent security is partially attributable to the recent
increase in the core commercial account sales force, a strategic emphasis on
recurring service revenue and away from installation-only jobs, and reduced
dependence on lower margin, more cyclical large construction projects.
Year to date segment sales were $1.167 billion in 2009 as compared to
$1.087 billion in 2008, an increase of 7%. Acquisitions, primarily Sonitrol and
GdP, generated over a 16% increase in sales. Pricing increased sales by 3%,
which was more than offset by a 9% organic unit volume decline and a 3%
reduction from foreign currency translation. The factors affecting the year to
date sales performance are largely consistent with those described in the
analysis of the third quarter, although the hardware business sales unit volume
was stronger in the third quarter than in the first half.
Security segment profit totaled $84 million, or 20.8% of net sales, for the
third quarter of 2009 up from $74 million, or 18.9% of net sales, in the prior
year. The segment profit rate in the third quarter represents a sequential
improvement from 19.0% in the second quarter of 2009 and is a record high for
Security. On a year to date basis, segment profit was $229 million, or 19.6% of
net sales, in 2009 compared to $193 million, or 17.8% of net sales, in the prior
year. The increase in segment profit amount for the third quarter and first nine
months of 2009 was primarily attributable to acquisitions, partially offset by
the impact of lower organic sales volumes. The robust segment profit rate
expansion in both periods was enabled by the ongoing successful integration of
accretive acquisitions, the previously mentioned mix shift to higher margin
recurring service revenues, the benefits of customer pricing and proactive cost
actions.
Industrial: Industrial sales of $205 million in the third quarter of 2009
decreased 31% from $298 million in the prior year. Unfavorable foreign currency
translation, primarily European, reduced sales by over 1%, which was offset by
1% of favorable pricing.
Unit volumes fell 31% due to ongoing weakness in the U.S. and Europe where unit
volume declined 34% and 29%, respectively. The decrease reflects broad-based
reduced end market demand stemming from recessionary economic conditions and
continued customer inventory corrections throughout the supply chain. Industrial
channels continued to be down more severely than the automotive channels. In
industrial storage, price gains and relatively stable government demand were
more than offset by sharply lower volumes due to reduced capital spending within
the commercial customer base.
Year to date net sales from continuing operations were $646 million in 2009,
down 33% compared to $969 million in 2008. Pricing provided a 2% increase in
sales. Foreign currency translation reduced sales by over 3% and organic unit
volume declined 32%. The Industrial segment's nine month performance was
affected by the same factors discussed pertaining to the third quarter results.
As previously mentioned, the industrial production economic statistics show
signs of improvement which, along with the abatement of customer inventory
liquidations, is expected to enable some sales volume recovery by the first
quarter of next year.
Industrial segment profit was $19 million, or 9.2% of net sales, for the third
quarter of 2009, compared with $40 million, or 13.5% of net sales, in 2008. Year
to date segment profit for the Industrial segment was $63 million, or 9.7% of
net sales, for 2009, versus $133 million, or 13.7% of net sales, in 2008.
Segment profit contracted substantially in both periods relative to the prior
year due to sales volume pressure. The segment profit rate was relatively
consistent sequentially with the second quarter of 2009. Customer price recovery
helped offset negative productivity stemming from low sales volumes. European
cost savings from headcount reduction actions take longer to achieve due to the
country-specific works council process but these actions will help alleviate
profit pressure as they are executed over the next several months. Consequently,
management believes the segment profit rate likely represents a trough and
should recover to some extent in the fourth quarter.
Construction & Do-It-Yourself ("CDIY"): CDIY sales were $328 million in the
third quarter of 2009, down 23% from $427 million in the prior year. Foreign
currency translation negatively impacted sales by over 2% which was largely
offset by 2% of favorable customer pricing. Segment unit volumes dropped 23%
overall, comprised of 24% in the Americas, 21% in Europe and 19% in Asia amid
the global economic downturn and sharply lower construction activity. The sales
volume declines were more pronounced in the fastening systems business, which
has higher commercial construction and industrial channel content, than in the
consumer tools and storage business. Overall, net sales were up slightly
sequentially from the second quarter of 2009. Point of sale data at key
customers is steady and inventories at these customers are currently stable.
Year to date net sales from continuing operations were $955 million in 2009 as
compared to $1.284 billion in 2008, a decrease of 26%. Unfavorable foreign
currency translation across all regions totaled 5% and was partially offset by a
3% pricing increase. Sales unit volume declined 24% with the reductions fairly
consistent geographically. The matters affecting the CDIY segment nine month
sales performance are the same as those discussed previously pertaining to the
third quarter results.
Segment profit was $48 million, or 14.8% of net sales, for the third quarter of
2009, compared to $54 million, or 12.7% of net sales, in the prior year. The
$6 million lower segment profit amount is attributable to the sales volume
declines, offset to a large extent by productivity projects as well as cost
actions to align with the lower sales. While the segment profit rate represents
a 210 basis point increase from the third quarter of 2008, it also continues a
significant sequential improvement from a trough of 6.4% in the fourth quarter
of 2008, to 9.5% in the first quarter of 2009 and 11.3% in the second quarter of
2009. This segment profit rate expansion was primarily enabled by the ongoing
successful integration of the fastening systems business into consumer tools and
storage that was announced in the first quarter of 2009, along with a sales mix
shift to higher margin hand tools sales. The segment profit rate was further
aided by productivity projects and the effects from cost actions taken. On a
year to date basis, segment profit was $114 million, or 11.9% of net sales,
compared to $167 million, or 13.0% of net sales, in 2008 reflecting the same
factors discussed pertaining to the third quarter.
Restructuring and Asset Impairments
At October 3, 2009, the Company's restructuring reserve balance was
$58.4 million. The Company expects to execute substantially all actions in 2009,
although severance and certain other payments will continue to some extent into
2010. A summary of the restructuring reserve activity from January 3, 2009 to
October 3, 2009 is as follows (in millions):
. . .
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