STANLEY BLACK & DECKER, INC.
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
July 3, 2010.
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File Number 001-05224
STANLEY BLACK & DECKER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| CONNECTICUT | 06-0548860 | |
| (STATE OR OTHER JURISDICTION OF | (I.R.S. EMPLOYER | |
| INCORPORATION OR ORGANIZATION) | IDENTIFICATION NUMBER) |
| 1000 STANLEY DRIVE | ||
| NEW BRITAIN, CONNECTICUT | 06053 | |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) | (ZIP CODE) |
(860) 225-5111
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
165,667,088
shares of the registrant’s common stock were outstanding as of
July 29, 2010
TABLE OF CONTENTS
2
Table of Contents
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009
(Unaudited, Millions of Dollars, Except Per Share Amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009
(Unaudited, Millions of Dollars, Except Per Share Amounts)
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
NET SALES
|
$ | 2,365.6 | $ | 919.2 | $ | 3,627.6 | $ | 1,832.2 | ||||||||
|
COSTS AND EXPENSES
|
||||||||||||||||
|
Cost of sales
|
1,596.6 | 552.6 | 2,402.7 | 1,104.5 | ||||||||||||
|
Selling, general and administrative
|
581.1 | 253.2 | 959.6 | 500.8 | ||||||||||||
|
Provision for doubtful accounts
|
3.1 | 2.1 | 7.1 | 7.2 | ||||||||||||
|
Other, net
|
65.1 | 31.2 | 130.0 | 61.5 | ||||||||||||
|
Restructuring charges and asset
impairments
|
85.8 | 9.9 | 183.2 | 19.0 | ||||||||||||
|
Gain on debt extinguishment
|
— | (43.8 | ) | — | (43.8 | ) | ||||||||||
|
Interest expense
|
26.8 | 16.2 | 46.1 | 33.2 | ||||||||||||
|
Interest income
|
(2.2 | ) | (0.9 | ) | (3.4 | ) | (1.6 | ) | ||||||||
|
|
||||||||||||||||
|
|
2,356.3 | 820.5 | 3,725.3 | 1,680.8 | ||||||||||||
|
|
||||||||||||||||
|
Earnings (loss) from continuing operations before income taxes
|
9.3 | 98.7 | (97.7 | ) | 151.4 | |||||||||||
|
Income taxes (benefit) on continuing operations
|
(37.0 | ) | 26.7 | (35.5 | ) | 40.4 | ||||||||||
|
|
||||||||||||||||
|
Net earnings (loss) from continuing operations
|
46.3 | 72.0 | (62.2 | ) | 111.0 | |||||||||||
|
|
||||||||||||||||
|
Less: Net earnings attributable to non-controlling interests
|
0.5 | 1.2 | 0.6 | 1.9 | ||||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
ATTRIBUTABLE TO STANLEY BLACK & DECKER, INC.
|
45.8 | 70.8 | (62.8 | ) | 109.1 | |||||||||||
|
|
||||||||||||||||
|
NET LOSS FROM DISCONTINUED
OPERATIONS (net of income tax benefit of $1.1 and $1.6 for
the three and six months ended July 4, 2009, respectively)
|
— | (1.3 | ) | — | (1.9 | ) | ||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) ATTRIBUTABLE TO STANLEY BLACK & DECKER,
INC.
|
$ | 45.8 | $ | 69.5 | $ | (62.8 | ) | $ | 107.2 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
|
||||||||||||||||
|
Continuing operations
|
$ | 0.28 | $ | 0.89 | $ | (0.49 | ) | $ | 1.38 | |||||||
|
Discontinued operations
|
— | (0.02 | ) | — | (0.02 | ) | ||||||||||
|
|
||||||||||||||||
|
Total basic earnings (loss) per share of common stock
|
$ | 0.28 | $ | 0.88 | $ | (0.49 | ) | $ | 1.35 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
|
||||||||||||||||
|
Continuing operations
|
$ | 0.28 | $ | 0.89 | $ | (0.49 | ) | $ | 1.37 | |||||||
|
Discontinued operations
|
— | (0.02 | ) | — | (0.02 | ) | ||||||||||
|
|
||||||||||||||||
|
Total diluted earnings (loss) per share of common stock
|
$ | 0.28 | $ | 0.87 | $ | (0.49 | ) | $ | 1.35 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
DIVIDENDS PER SHARE OF COMMON STOCK
|
$ | 0.33 | $ | 0.32 | $ | 0.66 | $ | 0.64 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
AVERAGE SHARES OUTSTANDING (in thousands):
|
||||||||||||||||
|
Basic
|
162,847 | 79,327 | 129,163 | 79,220 | ||||||||||||
|
|
||||||||||||||||
|
Diluted
|
166,084 | 79,744 | 129,163 | 79,591 | ||||||||||||
|
|
||||||||||||||||
See notes to condensed consolidated financial statements.
3
Table of Contents
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 3, 2010 AND JANUARY 2, 2010
CONSOLIDATED BALANCE SHEETS
JULY 3, 2010 AND JANUARY 2, 2010
(Unaudited, Millions of Dollars, Except Per Share Amounts)
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 1,598.4 | $ | 400.7 | ||||
|
Accounts and notes receivable, net
|
1,550.0 | 532.0 | ||||||
|
Inventories, net
|
1,295.2 | 366.2 | ||||||
|
Prepaid expenses
|
106.6 | 73.2 | ||||||
|
Other current assets
|
322.2 | 39.8 | ||||||
|
|
||||||||
|
Total Current Assets
|
4,872.4 | 1,411.9 | ||||||
|
Property, Plant and Equipment, net
|
1,067.0 | 575.9 | ||||||
|
Goodwill
|
5,039.2 | 1,818.4 | ||||||
|
Customer Relationships, net
|
735.5 | 413.4 | ||||||
|
Trade Names, net
|
1,799.2 | 331.1 | ||||||
|
Other Intangible Assets, net
|
137.3 | 31.9 | ||||||
|
Other Assets
|
345.0 | 186.5 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 13,995.6 | $ | 4,769.1 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND SHAREOWNERS’ EQUITY
|
||||||||
|
Current Liabilities
|
||||||||
|
Short-term borrowings
|
$ | 343.9 | $ | 90.4 | ||||
|
Current maturities of long-term debt
|
427.4 | 208.0 | ||||||
|
Accounts payable
|
979.5 | 410.1 | ||||||
|
Accrued expenses
|
1,323.9 | 483.5 | ||||||
|
|
||||||||
|
Total Current Liabilities
|
3,074.7 | 1,192.0 | ||||||
|
Long-Term Debt
|
2,318.7 | 1,084.7 | ||||||
|
Post-Retirement Benefits
|
901.5 | 136.7 | ||||||
|
Deferred Taxes
|
393.7 | 120.4 | ||||||
|
Other Liabilities
|
672.5 | 223.8 | ||||||
|
Commitments and Contingencies (Note R)
|
||||||||
|
Stanley Black & Decker, Inc. Shareowners’ Equity
|
||||||||
|
Common stock, par value $2.50 per share
|
440.7 | 230.9 | ||||||
|
Authorized 300,000,000 shares
Issued 176,335,572 and 92,343,410 at July 3, 2010 and January 2, 2010, respectively |
||||||||
|
Additional paid in capital
|
4,935.1 | 126.7 | ||||||
|
Retained earnings
|
2,152.5 | 2,295.5 | ||||||
|
Accumulated other comprehensive loss
|
(384.4 | ) | (76.5 | ) | ||||
|
ESOP
|
(77.6 | ) | (80.8 | ) | ||||
|
|
||||||||
|
|
7,066.3 | 2,495.8 | ||||||
|
Less: cost of common stock in treasury
|
457.1 | 509.7 | ||||||
|
|
||||||||
|
Stanley Black & Decker, Inc. Shareowners’ Equity
|
6,609.2 | 1,986.1 | ||||||
|
Non-controlling interests
|
25.3 | 25.4 | ||||||
|
|
||||||||
|
Total Equity
|
6,634.5 | 2,011.5 | ||||||
|
|
||||||||
|
Total Liabilities and Shareowners’ Equity
|
$ | 13,995.6 | $ | 4,769.1 | ||||
|
|
||||||||
See notes to condensed consolidated financial statements.
4
Table of Contents
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009
(Unaudited, Millions of Dollars)
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
OPERATING ACTIVITIES
|
||||||||||||||||
|
Net earnings (loss)
|
$ | 46.3 | $ | 70.7 | $ | (62.2 | ) | $ | 109.1 | |||||||
|
Less: Net earnings attributable to non-controlling interest
|
0.5 | 1.2 | 0.6 | 1.9 | ||||||||||||
|
|
||||||||||||||||
|
Net earnings (loss) attributable to Stanley Black & Decker,
Inc
|
45.8 | 69.5 | (62.8 | ) | 107.2 | |||||||||||
|
Depreciation and amortization
|
92.7 | 48.9 | 152.4 | 96.9 | ||||||||||||
|
Inventory step-up amortization
|
117.7 | — | 159.3 | — | ||||||||||||
|
Stock-based compensation
|
18.4 | 5.3 | 49.9 | 9.0 | ||||||||||||
|
Asset impairments
|
5.8 | 0.3 | 7.8 | 1.0 | ||||||||||||
|
Changes in working capital
|
(20.0 | ) | 29.7 | (110.4 | ) | (15.6 | ) | |||||||||
|
Changes in other assets and liabilities
|
(39.4 | ) | (85.6 | ) | (7.9 | ) | (126.8 | ) | ||||||||
|
|
||||||||||||||||
|
Cash provided by operating activities
|
221.0 | 68.1 | 188.3 | 71.7 | ||||||||||||
|
INVESTING ACTIVITIES
|
||||||||||||||||
|
Capital expenditures and capitalized software
|
(35.1 | ) | (25.1 | ) | (57.2 | ) | (46.8 | ) | ||||||||
|
Proceeds from sale of businesses
|
— | 0.1 | — | 0.9 | ||||||||||||
|
Business acquisitions and asset disposals
|
(10.9 | ) | 0.3 | (18.1 | ) | (5.7 | ) | |||||||||
|
Cash acquired from Black & Decker
|
— | — | 949.4 | — | ||||||||||||
|
Interest rate swap terminations
|
— | — | 30.0 | — | ||||||||||||
|
Proceeds from net investment hedge settlements
|
15.8 | — | 15.8 | — | ||||||||||||
|
Payments on net investment hedge settlements
|
— | — | (16.1 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Cash (used in)/provided by investing activities
|
(30.2 | ) | (24.7 | ) | 903.8 | (51.6 | ) | |||||||||
|
FINANCING ACTIVITIES
|
||||||||||||||||
|
Payments on long-term debt
|
(0.8 | ) | (60.5 | ) | (201.6 | ) | (61.6 | ) | ||||||||
|
Stock purchase contract fees
|
(3.9 | ) | (3.8 | ) | (7.7 | ) | (7.6 | ) | ||||||||
|
Net short-term borrowings (repayments)
|
(357.1 | ) | 54.8 | 78.8 | 47.4 | |||||||||||
|
Cash dividends on common stock
|
(54.6 | ) | (25.3 | ) | (88.9 | ) | (50.6 | ) | ||||||||
|
Proceeds from the issuance of common stock
|
346.9 | 7.6 | 360.9 | 7.6 | ||||||||||||
|
Purchase of common stock for treasury
|
(2.1 | ) | (0.1 | ) | (2.2 | ) | (0.7 | ) | ||||||||
|
Premium paid for share repurchase option
|
— | — | — | (16.4 | ) | |||||||||||
|
Other
|
— | 3.8 | — | 4.0 | ||||||||||||
|
|
||||||||||||||||
|
Cash (used in)/provided by financing activities
|
(71.6 | ) | (23.5 | ) | 139.3 | (77.9 | ) | |||||||||
|
Effect of exchange rate changes on cash
|
(26.2 | ) | 8.4 | (33.7 | ) | 2.5 | ||||||||||
|
|
||||||||||||||||
|
Change in cash and cash equivalents
|
93.0 | 28.3 | 1,197.7 | (55.3 | ) | |||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents, beginning of period
|
1,505.4 | 128.0 | 400.7 | 211.6 | ||||||||||||
|
|
||||||||||||||||
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
$ | 1,598.4 | $ | 156.3 | $ | 1,598.4 | $ | 156.3 | ||||||||
|
|
||||||||||||||||
See notes to condensed consolidated financial statements.
5
Table of Contents
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareowners’ Equity
Periods ended July 3, 2010 and July 4, 2009
Consolidated Statements of Changes in Shareowners’ Equity
Periods ended July 3, 2010 and July 4, 2009
(Millions of Dollars, Except Per Share Amounts)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common | Paid In | Retained | Comprehensive | Treasury | Non-controlling | Shareowners’ | ||||||||||||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | ESOP | Stock | Interests | Equity | |||||||||||||||||||||||||
|
Balance January 2, 2010
|
$ | 230.9 | $ | 126.7 | $ | 2,295.5 | $ | (76.5 | ) | $ | (80.8 | ) | $ | (509.7 | ) | $ | 25.4 | $ | 2,011.5 | |||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Net (loss)/earnings
|
(62.8 | ) | 0.6 | (62.2 | ) | |||||||||||||||||||||||||||
|
Currency translation
adjustment and other
|
(272.4 | ) | (272.4 | ) | ||||||||||||||||||||||||||||
|
Cash flow hedge, net of tax
|
(37.8 | ) | (37.8 | ) | ||||||||||||||||||||||||||||
|
Change in pension
|
2.3 | 2.3 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total comprehensive income
(loss)
|
(62.8 | ) | (307.9 | ) | 0.6 | (370.1 | ) | |||||||||||||||||||||||||
|
Cash dividends declared —
$0.66 per share
|
(81.2 | ) | (81.2 | ) | ||||||||||||||||||||||||||||
|
Equity purchase contracts -
stock issuance
|
12.9 | 307.1 | 320.0 | |||||||||||||||||||||||||||||
|
Issuance of common stock
|
(18.6 | ) | 56.1 | 37.5 | ||||||||||||||||||||||||||||
|
Black & Decker consideration
paid
|
196.9 | 4,458.9 | 0.4 | 4,656.2 | ||||||||||||||||||||||||||||
|
Repurchase of common stock
(36,931 shares)
|
(2.2 | ) | (2.2 | ) | ||||||||||||||||||||||||||||
|
Non-controlling interest
buyout
|
0.7 | (0.7 | ) | — | ||||||||||||||||||||||||||||
|
Settlement of equity option
|
1.7 | (1.7 | ) | — | ||||||||||||||||||||||||||||
|
Other, stock-based
compensation related
|
49.9 | 49.9 | ||||||||||||||||||||||||||||||
|
Tax benefit related to stock
options exercised
|
8.7 | 8.7 | ||||||||||||||||||||||||||||||
|
ESOP and related tax benefit
|
1.0 | 3.2 | 4.2 | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance July 3, 2010
|
$ | 440.7 | $ | 4,935.1 | $ | 2,152.5 | $ | (384.4 | ) | $ | (77.6 | ) | $ | (457.1 | ) | $ | 25.3 | $ | 6,634.5 | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common | Paid In | Retained | Comprehensive | Treasury | Non-controlling | Shareowners’ | ||||||||||||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | ESOP | Stock | Interests | Equity | |||||||||||||||||||||||||
|
Balance January 3, 2009
|
$ | 230.9 | $ | 91.5 | $ | 2,199.9 | $ | (152.0 | ) | $ | (87.2 | ) | $ | (576.8 | ) | $ | 18.5 | $ | 1,724.8 | |||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Net earnings
|
107.2 | 1.9 | 109.1 | |||||||||||||||||||||||||||||
|
Less: Redeemable interest
reclassified to
liabilities
|
(0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||
|
Currency translation
adjustment and other
|
38.4 | 38.4 | ||||||||||||||||||||||||||||||
|
Cash flow hedge, net of tax
|
(4.4 | ) | (4.4 | ) | ||||||||||||||||||||||||||||
|
Change in pension
|
(5.7 | ) | (5.7 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
107.2 | 28.3 | 1.7 | 137.2 | ||||||||||||||||||||||||||||
|
Cash dividends declared —
$0.64 per share
|
(50.6 | ) | (50.6 | ) | ||||||||||||||||||||||||||||
|
Issuance of common stock
|
(8.7 | ) | 16.3 | 7.6 | ||||||||||||||||||||||||||||
|
Repurchase of common stock
(23,344 shares)
|
(0.7 | ) | (0.7 | ) | ||||||||||||||||||||||||||||
|
Premium paid on equity option
|
(16.4 | ) | (16.4 | ) | ||||||||||||||||||||||||||||
|
Other, stock-based
compensation related
|
9.0 | 9.0 | ||||||||||||||||||||||||||||||
|
Formation of a joint venture
|
4.0 | 4.0 | ||||||||||||||||||||||||||||||
|
Tax effect related to stock
options exercised
|
0.8 | 0.8 | ||||||||||||||||||||||||||||||
|
ESOP and related tax benefit
|
1.0 | 3.2 | 4.2 | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance July 4, 2009
|
$ | 230.9 | $ | 84.9 | $ | 2,248.8 | $ | (123.7 | ) | $ | (84.0 | ) | $ | (561.2 | ) | $ | 24.2 | $ | 1,819.9 | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
6
Table of Contents
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2010
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2010
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(hereinafter referred to as “generally accepted accounting principles”) for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not
include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations for the interim periods have been
included and are of a normal, recurring nature. Operating results for the three and six months
ended July 3, 2010, are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the consolidated financial statements and footnotes
included in The Stanley Works and Subsidiaries’ (collectively, the “Company”) Form 10-K for the
year ended January 2, 2010.
On March 12, 2010 a wholly owned subsidiary of The Stanley Works was merged with and into The Black
& Decker Corporation (“Black & Decker”), with the result that The Black & Decker Corporation became
a wholly owned subsidiary of The Stanley Works (the “Merger”). In connection with the Merger, The
Stanley Works changed its name to Stanley Black & Decker, Inc. The results of the operations and
cash flows of Black & Decker have been included in the Company’s condensed consolidated financial
statements from the time of the consummation of the Merger on March 12, 2010 (See Note F, Merger
and Acquisitions).
Other comprehensive income (loss) for the six month periods ended July 3, 2010 and July 4, 2009 is
presented in the Consolidated Statements of Changes in Shareowners’ Equity. Other comprehensive
income (loss) for the three month periods ended July 3, 2010 and July 4, 2009 was $(220.5) million
and $119.6 million, respectively.
B. New Accounting Standards
Implemented:
In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, “Accounting for
Transfers of Financial Assets”. This ASU eliminates the concept of a “qualifying special-purpose
entity,” clarifies when a transferor of financial assets has surrendered control over the
transferred financial assets, defines specific conditions for reporting a transfer of a portion of
a financial asset as a sale, requires that a transferor recognize and initially measure at fair
value all assets obtained and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale, and requires enhanced disclosures to provide financial statement users
with greater transparency about a transferor’s continuing involvement with transferred financial
assets. The adoption of this ASU did not have any impact on the consolidated financial statements.
In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities.” This ASU eliminates the concept of a
“qualifying special-purpose entity,” replaces the quantitative approach for determining which
enterprise has a controlling financial interest in a variable interest entity with a qualitative
approach focused on identifying which enterprise has a controlling financial interest through the
power to direct the activities of a variable interest entity that most significantly impact the
entity’s economic performance. Additionally, this ASU requires enhanced disclosures that provide
users of financial statements with more information about an enterprise’s involvement in a variable
interest entity. The adoption of the ASU did not have a significant impact on the consolidated
financial statements.
Not Yet Implemented:
In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements.” This ASU eliminates the requirement that all
undelivered elements must have objective and reliable evidence of fair value before a company can
recognize the portion of the consideration that is attributable to items that already have been
delivered. This may allow some companies to recognize revenue on transactions that involve multiple
deliverables earlier than under the current
7
Table of Contents
requirements. Additionally, under the new guidance, the relative selling price method is required
to be used in allocating consideration between deliverables and the residual value method will no
longer be permitted. This ASU is effective prospectively for revenue arrangements entered into or
materially modified beginning in fiscal 2011. A company may elect, but will not be required, to
adopt the amendments in this ASU retrospectively for all prior periods. Management is currently
evaluating the requirements of this ASU and has not yet determined the impact, if any, that it will
have on the consolidated financial statements.
C. Earnings Per Share
The following table reconciles the weighted-average shares outstanding used to calculate basic and
diluted earnings per share for the three months and six months ended July 3, 2010 and July 4, 2009:
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Numerator (in millions):
|
||||||||||||||||
|
Net Earnings (Loss) Attributable to Stanley
Black & Decker, Inc.
|
$ | 45.8 | $ | 69.5 | $ | (62.8 | ) | $ | 107.2 | |||||||
|
Less earnings (loss) attributable to participating RSUs
|
0.2 | 0.1 | (0.1 | ) | 0.2 | |||||||||||
|
|
||||||||||||||||
|
Net Earnings (Loss)— basic
|
$ | 45.6 | $ | 69.4 | $ | (62.7 | ) | $ | 107.0 | |||||||
|
|
||||||||||||||||
|
Net Earnings (Loss) — dilutive
|
$ | 45.8 | $ | 69.5 | $ | (62.8 | ) | $ | 107.2 | |||||||
|
|
||||||||||||||||
|
Denominator (in thousands):
|
||||||||||||||||
|
Basic earnings per share — weighted
average shares
|
162,847 | 79,327 | 129,163 | 79,220 | ||||||||||||
|
Dilutive effect of stock options and
awards
|
3,237 | 417 | — | 371 | ||||||||||||
|
|
||||||||||||||||
|
Diluted earnings per share —
Weighted-average shares
|
166,084 | 79,744 | 129,163 | 79,591 | ||||||||||||
|
|
||||||||||||||||
|
Earnings per share of common stock:
|
||||||||||||||||
|
Basic
|
$ | 0.28 | $ | 0.88 | $ | (0.49 | ) | $ | 1.35 | |||||||
|
|
||||||||||||||||
|
Diluted
|
$ | 0.28 | $ | 0.87 | $ | (0.49 | ) | $ | 1.35 | |||||||
|
|
||||||||||||||||
In connection with the Merger, the Company issued 78.5 million shares, 5.8 million options and 0.4
million restricted stock awards and restricted stock units to former Black & Decker shareowners and
employees. These outstanding shares and equity awards were fully included in the calculation of
weighted-average shares outstanding for the three months ended July 3, 2010. The impact of the
outstanding shares and equity awards associated with the merger was included in the calculation of
weighted average shares outstanding from the merger date to July 3, 2010 in the year-to-date
calculation. The weighted average impact of these shares in future year-to-date periods during 2010
will result in an increase in the weighted average shares outstanding from those reported for the
six months ended July 3, 2010.
The following weighted-average stock options, restricted shares and awards, other equity awards,
and warrants were outstanding during the three and six months ended July 3, 2010 and July 4, 2009,
but were not included in the computation of diluted shares outstanding because the effect would be
anti-dilutive (in thousands):
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Number of stock options
|
3,473 | 4,627 | 3,804 | (a) | 4,726 | |||||||||||
|
Number of restricted shares and awards
|
— | — | 671 | (a) | — | |||||||||||
|
Number of equity awards
|
— | — | 136 | (a) | — | |||||||||||
|
Number of stock warrants
|
4,939 | 4,939 | 4,939 | 4,939 | ||||||||||||
|
Number of Equity Purchase
Contracts
|
3,887 | 5,889 | 4,750 | 5,887 | ||||||||||||
| a) | Of these excluded shares, 1.6 million stock options, 0.7 million restricted shares and awards, and 0.1 million of other equity awards were anti-dilutive because of the Company’s net loss for the year to date period. |
8
Table of Contents
As more fully disclosed in Note H, Long -Term Debt, on May 17, 2010, the Company issued 5.2 million
shares in conjunction with the Equity Purchase Contracts, whose holders were required to purchase
common stock for $320.0 million cash. Prior to the May 17, 2010 settlement date, these shares were
anti-dilutive as reported in the table above.
The Equity Purchase Contracts were not dilutive at any time prior to their maturity in May 2010
because the holders were required to pay the Company the higher of approximately $54.17 or then
market price. Additionally, the Company has Convertible Notes
outstanding which result in the
Company delivering shares of common stock in May 2012. As of July 3, 2010 and July 4, 2009, there
were no shares related to the Convertible Notes included in the calculation of diluted earnings per
share because the effect of these conversion options was not dilutive. The Company intends to net
share settle the conversion value, if any, of these Convertible Notes at their maturity in May
2012. Furthermore, there is a convertible notes hedge in place which would fully offset any such
shares that may be delivered pertaining to the Convertible Notes. These Convertible Notes as well
as the related Equity Purchase Contracts and convertible notes hedge are discussed more fully in
Note H, Long-Term Debt and Financing Arrangements of this Form 10-Q, as well as in Note H,
Long-Term Debt and Financing Arrangements of The Stanley Works Form 10-K for the year ended January 2,
2010.
D. Accounts and Notes Receivable
In December 2009, the Company entered into an accounts receivable sale program that is scheduled to
expire on December 28, 2010, whereby it is required to sell certain of its trade accounts
receivables at fair value to a wholly-owned, bankruptcy-remote special purpose subsidiary (“BRS”).
The BRS, in turn, must sell such receivables to a third-party financial institution (“Purchaser”)
for cash and a deferred purchase price receivable. The Purchaser’s maximum cash investment in the
receivables at any time is $100.0 million.
The purpose of the program is to provide liquidity to the Company. The Company accounts for these
transfers as sales under Accounting Standards Codification (“ASC”) 860 “Transfers and Servicing”.
The Company has no retained interests in the transferred receivables, other than collection and
administrative responsibilities and its right to the deferred purchase price receivable. At July 3,
2010, the Company did not record a servicing asset or liability related to its retained
responsibility, based on its assessment of the servicing fee, market values for similar
transactions and its cost of servicing the receivables sold.
As of July 3, 2010 and January 2, 2010, $33.5 million and $35.2
million of net receivables were derecognized.
Net receivables sold amounted to
$136.0 million and $246.0 million for the three and six months ended July 3, 2010, respectively.
These sales resulted in a pre-tax loss of $0.4 million and $0.7 million for the three and six
months ended July 3, 2010, respectively. Cash flows related to new transfers, collections of
previously sold receivables, including deferred purchase price receivables, and all fees are
settled one month in arrears, and netted to a $2.0 million payment from the Purchaser for the three
months ended July 3, 2010 and a $1.7 million payment to the Purchaser for the six months ended July
3, 2010. Servicing fees amounted to $0.1 million and $0.2 million for the three and six months
ended July 3, 2010. The Company’s risk of loss following the sale of the receivables is limited to
the deferred purchase price, which was $17.7 million at January 2, 2010 and $27.6 million at July
3, 2010. The deferred purchase price receivable will be repaid in cash as receivables are
collected, generally within 30 days, and as such the carrying value of the receivable recorded
approximates fair value. Delinquencies and credit losses on receivables sold in 2010 were $0.1
million and $0.2 million for the three and six months ended July 3, 2010, respectively. Cash
inflows related to the deferred purchase price receivable totaled $49.7 million and $85.7 million
for the three and six months ended July 3, 2010, respectively. All cash flows under the program are
reported as a component of changes in working capital within operating activities in the condensed
consolidated statement of cash flows since all the cash from the Purchaser is either: 1) received
upon the initial sale of the receivable; or 2) from the ultimate collection of the underlying
receivables and the underlying receivables are not subject to significant risks, other than credit
risk, given their short term nature.
E. Inventories
The components of inventories at July 3, 2010 and January 2, 2010 are as follows (in millions):
| 2010 | 2009 | |||||||
|
Finished products
|
$ | 968.2 | $ | 252.8 | ||||
|
Work in process
|
114.2 | 49.0 | ||||||
|
Raw materials
|
212.8 | 64.4 | ||||||
|
|
||||||||
|
Total inventories
|
$ | 1,295.2 | $ | 366.2 | ||||
|
|
||||||||
9
Table of Contents
As more fully disclosed in Note F, Merger and Acquisitions, in connection with the Merger, the
Company acquired inventory with a fair value of $1.068 billion which included a non-cash inventory
step-up of $170.5 million. For the three and six months ended July 3, 2010, $117.7 million and
$159.3 million, respectively, of this inventory step-up was amortized and recognized as cost of
sales in the consolidated statement of operations as the acquired inventory was sold.
F. Merger and Acquisitions
MERGER WITH BLACK & DECKER
On March 12, 2010 (the “merger date”), a wholly owned subsidiary of The Stanley Works was merged
with and into The Black & Decker Corporation (“Black & Decker”), with the result that Black &
Decker became a wholly owned subsidiary of The Stanley Works. As part of the Merger, Black & Decker
stockholders received 1.275 shares of Stanley stock for each share outstanding as of the merger
date. All of the outstanding Black & Decker shares and equity based awards were exchanged for
Stanley shares and equity awards as part of the Merger. Fractional shares generated by the
conversion ratio were cash settled for $0.3 million. After the exchange was completed, pre-merger
Stanley shareowners retained ownership of 50.5% of the combined Company. In conjunction with
consummating the Merger, the name of the combined Company was changed to “Stanley Black & Decker,
Inc”.
Black & Decker is a global manufacturer and marketer of power tools and accessories, hardware and
home improvement products, and technology-based fastening systems. The Merger creates a larger and
more globally diversified company with a broad array of products and services with significant
exposure to growing and profitable product areas. Stanley and Black & Decker’s product lines are
generally complementary, and do not present areas of significant overlap. By combining the two
companies, there will be significant cost saving opportunities through reductions in corporate
overhead, business unit and purchasing consolidation, and by combining elements of manufacturing
and distribution.
Based on the closing price of Stanley common stock on the merger date, the consideration received
by Black & Decker shareholders in the Merger had a value of
approximately $4.657 billion as
detailed below.
| Conversion | ||||||||
| (in millions) | Calculation | Fair Value | ||||||
|
Black & Decker common stock outstanding as of the merger date
|
61.571 | |||||||
|
Multiplied by Stanley’s stock price as of the merger date
multiplied by the exchange ratio of 1.275 ($57.86 * 1.275)
|
$ | 73.77 | $ | 4,542.2 | ||||
|
|
||||||||
|
Fair value of the vested and unvested stock options pertaining to
pre-merger service issued to replace existing grants at closing
(a)
|
91.7 | |||||||
|
Fair value of unvested restricted stock and restricted stock
units pertaining to pre-merger service issued to replace existing
grants at closing (a)
|
12.2 | |||||||
|
Other vested equity awards (a)
|
10.1 | |||||||
|
Cash paid to settle fractional shares
|
0.3 | |||||||
|
|
||||||||
|
Total fair value of consideration transferred
|
$ | 4,656.5 | ||||||
|
|
||||||||
| (a) | As part of the Merger the Company exchanged the pre-merger equity awards of Black & Decker for Stanley Black & Decker equity awards. Under ASC 805, the fair value of vested options and the earned portion of unvested options, restricted stock awards and restricted stock units are recognized as consideration paid. The remaining value relating to the unvested and unearned options, restricted stock awards and restricted stock units will be recognized as future stock-based compensation. The allocation of the pre-merger equity awards between consideration paid and future stock-based compensation is as follows (in millions): |
| Fair value | ||||||||||||
| Recognized as | Fair Value to be | |||||||||||
| Number of | Consideration | Recognized as Future | ||||||||||
| Award type | Awards | Paid | Compensation Cost | |||||||||
|
Stock options
|
5.8 | $ | 91.7 | $ | 14.1 | |||||||
|
Restricted stock units and awards
|
0.4 | 12.2 | 12.8 | |||||||||
|
Other vested equity awards
|
0.2 | 10.1 | — | |||||||||
|
|
||||||||||||
|
Total
|
6.4 | $ | 114.0 | $ | 26.9 | |||||||
|
|
||||||||||||
10
Table of Contents
The following assumptions were used for the Black-Scholes valuation of the pre-merger Black &
Decker stock options in the determination of consideration paid:
|
Stock price
|
$57.86 | |||
|
Post conversion strike price
|
$23.53 – $74.11 | |||
|
Average expected volatility
|
32% | |||
|
Dividend yield
|
0.7% | |||
|
Weighted-average risk-free interest rate
|
1.4% | |||
|
Weighted-average expected term
|
2.9 years | |||
|
Weighted-average fair value per option
|
$18.72 | |||
The expected volatility is based on two equally weighted components: the first component is the
average historical volatility which is based on daily observations and duration consistent with the
expected life assumption; the second component is the market implied volatility of traded options.
The average expected term of the option is based on historical employee stock option exercise
behavior as well as the remaining contractual exercise term. The risk-free interest rate is based
on U.S. treasury securities with maturities equal to the expected life of the option. The fair
value of restricted stock and restricted stock units and other vested equity awards was $57.86 per
share. Total compensation expense recognized during the three and six months ended July 3, 2010 for
the options, restricted stock, and restricted stock awards that were assumed as part of the Merger
was $2.8 million and $3.3 million, respectively.
The transaction has been accounted for using the acquisition method of accounting which requires,
among other things, the assets acquired and liabilities assumed be recognized at their fair values
as of the merger date. The following table summarizes the estimated fair values of major assets
acquired and liabilities assumed as part of the Merger:
| (Millions of Dollars) | 2010 | |||
|
Cash
|
$ | 949.4 | ||
|
Accounts and notes receivable
|
907.2 | |||
|
Inventory
|
1,068.5 | |||
|
Prepaid expenses and other current assets
|
305.5 | |||
|
Property, plant and equipment
|
552.1 | |||
|
Trade names
|
1,505.5 | |||
|
Customer relationships
|
387.7 | |||
|
Licenses, technology and patents
|
112.3 | |||
|
Other assets
|
197.1 | |||
|
Short-term borrowings
|
(175.0 | ) | ||
|
Accounts payable
|
(479.2 | ) | ||
|
Accrued expenses and other current liabilities
|
(877.6 | ) | ||
|
Long-term debt
|
(1,657.1 | ) | ||
|
Post-retirement benefits
|
(762.6 | ) | ||
|
Deferred taxes
|
(301.1 | ) | ||
|
Other liabilities
|
(424.1 | ) | ||
|
|
||||
|
Total identifiable net assets
|
$ | 1,308.6 | ||
|
Goodwill
|
3,347.9 | |||
|
|
||||
|
Total consideration transferred
|
$ | 4,656.5 | ||
|
|
||||
As of the merger date, the expected fair value of accounts receivable approximated the historical
cost. The gross contractual receivable was $951.7 million, of which $44.5 million is not expected
to be collectable.
The amount allocated to trade names includes $1.362 billion for indefinite-lived trade names. The
weighted average useful lives assigned to the finite-lived intangible assets are trade names — 14
years; customer relationships — 15 years; and licenses, technology and patents — 12 years.
Black & Decker has three primary areas of contingent liabilities: environmental, risk insurance
(predominantly product liability and workers compensation) and uncertain tax liabilities.
Additionally, Black & Decker is involved in various lawsuits in the ordinary course of business,
including litigation and administrative proceedings involving commercial disputes and employment
matters. Some
11
Table of Contents
of these lawsuits include claims for punitive as well as compensatory damages. The majority of the
contingent liabilities will ultimately be recorded at fair value in purchase accounting, aside from
those pertaining to uncertainty in income taxes which are an exception to the fair value basis of
accounting; however certain environmental matters that are inherently legal contingencies in nature
are recorded at the probable and estimable amount.
Goodwill is calculated as the excess of the consideration transferred over the net assets
recognized and represents the expected revenue and cost synergies of the combined business,
assembled workforce, and the going concern nature of Black & Decker. It is estimated that $167.7
million of goodwill, relating to Black & Decker’s pre-merger historical tax basis, will be
deductible for tax purposes.
The purchase price allocation for Black & Decker is preliminary and adjustments will continue to be
made during the measurement period. The measurement period adjustments recorded in the second
quarter of 2010 did not have a significant impact on the Company’s consolidated statements of
operations, balance sheet, or cash flows. The additional purchase price adjustments that are
anticipated pertain to the following, among other, items.
| • | Intangible assets – pending finalization of the valuation efforts for acquired intangible assets (principally relating to the corollary impact associated with the finalization of other purchase accounting adjustments). | ||
| • | Property, plant and equipment – completion of the physical observation of property, plant and equipment and valuation efforts to determine their fair value. | ||
| • | Environmental remediation liabilities – completion of the assessment of these matters. | ||
| • | Pension, postretirement and other post employment benefits — actuarial valuations have been completed for the most significant pension, postretirement and post-employment benefit plans. Actuarial valuations as of the merger date will be obtained for certain additional plans. | ||
| • | Tax liabilities relating to the repatriation of unremitted earnings — As of December 31, 2009 Black & Decker had not provided for income taxes on unremitted earnings of approximately $2.1 billion from its international subsidiaries. Concurrent with the Merger the Company has made a determination to repatriate certain of these funds, making such amounts subject to both U.S. income and foreign withholding taxes. The Company is in the process of determining the tax consequence of such repatriation in accordance with ASC 740-30 and therefore no tax liability has currently been provided. | ||
| • | Income tax contingencies and other income tax assets and liabilities – completion of the assessment of these matters. |
A single estimate of fair value results from a complex series of judgments about future events and
uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to
determine the estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact the Company’s results from operations. The
Company will finalize the Black & Decker purchase accounting for the various open items as soon as
reasonably possible during the measurement period. The finalization of the Company’s purchase
accounting assessment will result in changes in the valuation of assets and liabilities acquired
which could be material.
The
Company has performed a preliminary allocation of goodwill by
reportable segment, which will change
based upon both the finalization of goodwill and refinement of the allocation methodology.
OTHER 2010 ACQUISITIONS
In March 2010, the Company completed the acquisition of Stanley Solutions de Sécurité (“SSDS”)
(formerly known as ADT France) for $8.0 million, net of cash acquired. SSDS is a leading provider
of security services, primarily for commercial businesses located in France. SSDS has been
consolidated into the Company’s Security segment. This acquisition gives the Company the leading
market share in France and expands the Company’s security footprint in Europe. During the second
quarter of 2010, the Company completed three minor acquisitions, relating to the Company’s
Industrial segment and the Company’s convergent security solutions business, for a combined
purchase price of $16.5 million. The purchase accounting for these 2010 acquisitions is
preliminary, principally with respect to finalization of intangible asset valuations,
contingencies, deferred taxes, and certain other items.
12
Table of Contents
ACTUAL AND PRO FORMA IMPACT OF THE MERGER AND ACQUISITION OF SSDS
The following table presents information for Black & Decker and SSDS that is included in the
Company’s consolidated statement of operations from the merger and acquisition dates through July
3, 2010 (in millions):
| Second Quarter | Year to Date | |||||||
| 2010 | 2010 | |||||||
|
Net sales
|
$ | 1,373.0 | $ | 1,710.6 | ||||
|
Loss attributable to Black & Decker and SSDS
|
$ | (112.2 | )(A) | $ | (248.0 | )(A) | ||
| (A) | The net loss attributable to Black & Decker and SSDS includes amortization of inventory step-up, restructuring charges and other merger related items. |
The following table presents supplemental pro forma information as if the Merger and acquisition
had occurred on January 3, 2010 for the six months ended July 3, 2010. The comparative 2009 columns
were prepared as if the Merger and acquisition had occurred on January 2, 2009 for the three and six months ended
July 4, 2009. As such, both years presented include merger and acquisition related charges. The pro
forma consolidated results are not necessarily indicative of what the Company’s consolidated net
earnings would have been had the Company completed the Merger and
acquisition on January 3, 2010, or January 2,
2009. In addition the pro forma consolidated results do not purport to project the future results
of the combined Company nor do they reflect the expected realization of any cost savings associated
with the Merger and acquisition.
| Second Quarter | Year to Date | |||||||||||
| (Millions of Dollars, except per share amounts) | 2009 | 2010 | 2009 | |||||||||
|
Net Sales
|
$ | 2,156.3 | $ | 4,587.6 | $ | 4,188.6 | ||||||
|
Net loss
attributable to Stanley Black & Decker and SSDS
|
$ | (8.4 | ) | $ | (48.2 | ) | $ | (217.2 | ) | |||
|
Diluted loss per share
|
$ | (0.05 | ) | $ | (0.30 | ) | $ | (1.38 | ) | |||
2010 Pro Forma Results – Year to date
The 2010 pro forma results were calculated by combining the results of Stanley Black & Decker with
Black & Decker’s stand-alone results from January 3,
2010 through March 12, 2010 and SSDS results from January 3,
2010 through March 9, 2010. Additionally the
following adjustments were made to account for certain costs which would have been incurred during
this pre-acquisition period.
| • | Elimination of historical Black & Decker intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the Merger that would have been incurred from January 3, 2010 to March 12, 2010. | ||
| • | Additional expense for the inventory step-up which would have been amortized as the corresponding inventory was sold. | ||
| • | Reduced interest expense for the debt fair value adjustment which would have been amortized from January 3, 2010 to March 12, 2010. | ||
| • | Additional depreciation related to property, plant and equipment fair value adjustments that would have been expensed from January 3, 2010 to March 12, 2010. | ||
| • | The modifications above were adjusted for the applicable tax impact. |
2009 Pro Forma Results – Year to date and Second Quarter
The 2009
pro forma results were calculated by taking the historical financial
results of The Stanley Works and adding the historical results of Black & Decker and SSDS. Additionally the following
adjustments were made to account for certain costs that would have been incurred in 2009 had the
Merger and acquisition of SSDS occurred on January 2, 2009.
13
Table of Contents
| • | Elimination of historical Black & Decker and SSDS intangible asset amortization expense and addition of intangible asset amortization expense relating to intangibles valued as part of the Merger and acquisition of SSDS. | ||
| • | Added expense for the inventory step-up which would have been amortized as the corresponding inventory was sold. | ||
| • | Added the costs that were incurred to consummate the Merger and acquisition of SSDS during 2010. | ||
| • | Added the Merger and acquisition-related restructuring charges which were incurred during 2010. | ||
| • | Added compensation expense for Merger-related equity awards granted to key executives. | ||
| • | Added depreciation expense related to property, plant, and equipment fair value adjustments. | ||
| • | Reduced interest expense for the debt fair value adjustment which would have been amortized during 2009. | ||
| • | The modifications above were adjusted for the applicable tax impact. |
G. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by segment are as follows (in millions):
| Construction | ||||||||||||||||
| & DIY | Industrial | Security | Total | |||||||||||||
|
Balance as of January 2, 2010
|
$ | 206.6 | $ | 367.8 | $ | 1,244.0 | $ | 1,818.4 | ||||||||
|
Goodwill associated with Black & Decker merger
|
2,544.9 | 405.8 | 397.2 | 3,347.9 | ||||||||||||
|
Goodwill associated with other 2010 acquisitions
|
— | 5.6 | 14.1 | 19.7 | ||||||||||||
|
Foreign currency translation and other
|
(77.1 | ) | (42.0 | ) | (27.7 | ) | (146.8 | ) | ||||||||
|
|
||||||||||||||||
|
Balance as of July 3, 2010
|
$ | 2,674.4 | $ | 737.2 | $ | 1,627.6 | $ | 5,039.2 | ||||||||
|
|
||||||||||||||||
The amount of goodwill associated with the Merger is subject to change based upon the
allocation of the consideration transferred to the assets acquired and liabilities assumed from
Black & Decker (See Note F, Merger and Acquisitions). The
Company has performed a preliminary allocation of goodwill by
reportable segment which will change based upon both the
finalization of goodwill and refinement of the allocation
methodology.
Intangible Assets
Intangible assets with definite lives at July 3, 2010 and January 2, 2010 were as follows (in
millions):
| 2010 | 2009 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
|
Amortized Intangible Assets — Definite lives
|
||||||||||||||||
|
Patents and copyrights
|
$ | 54.0 | $ | (37.4 | ) | $ | 53.1 | $ | (38.7 | ) | ||||||
|
Trade names
|
203.7 | (43.5 | ) | 61.6 | (35.1 | ) | ||||||||||
|
Customer relationships
|
1,045.2 | (309.7 | ) | 680.5 | (267.1 | ) | ||||||||||
|
Other intangible assets
|
168.6 | (47.9 | ) | 58.0 | (40.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,471.5 | $ | (438.5 | ) | $ | 853.2 | $ | (381.4 | ) | ||||||
|
|
||||||||||||||||
Total indefinite-lived trade names are $1.639 billion at July 3, 2010 and $304.6 million at January
2, 2010. This increase is attributable to the Merger.
14
Table of Contents
Aggregate intangible assets amortization expense by segment is as follows (in millions):
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
CDIY
|
$ | 9.2 | $ | 0.7 | $ | 11.8 | $ | 1.2 | ||||||||
|
Industrial
|
4.8 | 1.2 | 7.2 | 2.3 | ||||||||||||
|
Security
|
24.8 | 23.6 | 47.1 | 47.7 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 38.8 | $ | 25.5 | $ | 66.1 | $ | 51.2 | ||||||||
|
|
||||||||||||||||
Future
amortization expense for the next five years amounts to $76.9 million for the second half of
2010, $136.9 million for 2011, $130.0 million for 2012, $118.3 million for 2013, and $106.8 million
for 2014.
H. Long-Term Debt and Financing Arrangements
At July 3, 2010 and January 2, 2010, short-term borrowings are as follows (in millions):
| 2010 | 2009 | |||||||
|
Commercial paper program
|
$ | 340.3 | $ | 87.0 | ||||
|
Other short-term borrowings
|
3.6 | 3.4 | ||||||
|
|
||||||||
|
Total
|
$ | 343.9 | $ | 90.4 | ||||
|
|
||||||||
On March 12, 2010, the Company amended its $800.0 million committed credit facility to include
adjustments to the interest coverage ratio covenant for restructuring and merger-related items
resulting from the Merger. The Company also entered into a $700.0 million, 364-day revolving credit
facility effective March 12, 2010. The credit facilities are designated as a liquidity back-stop
for the Company’s commercial paper program which was increased on March 12, 2010 to $1.5 billion.
These changes to the Company’s short-term borrowing capacity were related to the Merger.
At July 3, 2010 and January 2, 2010, long-term debt is as follows (in millions):
| Interest Rate | 2010 | 2009 | ||||||||||
|
Notes payable due 2010
|
5.00 | % | $ | — | $ | 200.0 | ||||||
|
Notes payable due 2011
|
7.13 | % | 420.1 | — | ||||||||
|
Notes payable due 2012
|
4.90 | % | 208.6 | 206.3 | ||||||||
|
Convertible notes payable due in 2012
|
3 month LIBOR less 3.50 | % | 299.8 | 294.5 | ||||||||
|
Notes payable due 2013
|
6.15 | % | 259.8 | 253.1 | ||||||||
|
Notes payable due 2014
|
4.75 | % | 313.5 | — | ||||||||
|
Notes payable due 2014
|
8.95 | % | 413.6 | — | ||||||||
|
Notes payable due 2016
|
5.75 | % | 326.2 | — | ||||||||
|
Notes payable due 2028
|
7.05 | % | 169.1 | — | ||||||||
|
Notes payable due 2045 (subordinated)
|
5.90 | % | 312.7 | 312.7 | ||||||||
|
Other loans through 2015
|
0.00% – 6.60 | % | 22.7 | 26.1 | ||||||||
|
|
||||||||||||
|
Total long-term debt, including current maturities
|
$ | 2,746.1 | $ | 1,292.7 | ||||||||
|
Current maturities of long-term debt
|
427.4 | 208.0 | ||||||||||
|
|
||||||||||||
|
Long-term debt
|
$ | 2,318.7 | $ | 1,084.7 | ||||||||
|
|
||||||||||||
The Company acquired $1.832 billion of total debt in
connection with the Merger which includes $157.1 million to increase the debt balance to its
estimated fair value. Principal amounts and maturities of the notes acquired in the Merger are:
$400.0 million due in 2011, $300.0 million due in 2014, $350.0 million due in 2014, $300.0 million
due in 2016 and $150.0 million due in 2028. The Company also assumed $175.0 million of other
short-term borrowings in the Merger. This $175.0 million of short-term borrowings was repaid in
April 2010 with the proceeds from additional commercial paper borrowings. The Company executed a
full and unconditional guarantee of the existing debt of The Black & Decker Corporation and Black &
Decker Holdings, LLC (this guarantee is applicable to all of the Black & Decker outstanding notes
payable), and Black & Decker executed a full and unconditional guarantee of the existing debt of
the Company, excluding the Company’s Junior Subordinated Debt, including for payments of principal
and interest and as such these notes rank equally in priority with the Company’s unsecured and
unsubordinated debt. Refer to Note U, Parent and Subsidiary Debt Guarantees, for additional
information pertaining to these debt guarantees. Aggregate annual principal maturities of
long-term debt for each of the years from 2010 to 2014 are
$6.4 million, $406.0 million, $523.7
million, $253.2 million, $653.4 million, respectively and $762.7 million thereafter.
15
Table of Contents
These debt
maturities represent the principal amounts to be paid and accordingly exclude the remaining $142.5
million of unamortized debt fair value adjustment as of July 3, 2010 which increased the Black &
Decker debt, as well as $18.4 million of fair value adjustments and unamortized interest rate swap
termination gains as described in Note I, Derivative Financial Instruments. These amounts are
partially offset by $20.2 million of remaining accretion on the Stanley Convertible Note as of July
3, 2010 that will gradually increase the debt to its $320.0 million principal amount due in May
2012 as discussed further in Note H, Long-Term Debt and Financing Arrangements of The Stanley Works
Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
On
May 6, 2009, the Company repurchased $103.0 million of its Junior Subordinated Debt Securities
for $58.7 million in cash. The pre-tax gain recorded associated with this extinguishment was $43.8
million, and the principal balance of the debt after this extinguishment at January 2, 2010 and
July 3, 2010 was $312.7 million.
Equity Units:
The terms of the Company’s Equity Units, including the Convertible Notes and Equity
Purchase Contracts are more fully described in Note H, Long-Term Debt and Financing
Arrangements, in The Stanley Works 2009 Annual Report on Form 10-K for further information.
Convertible
Notes
: In May 2010, the Company completed the contractually required remarketing of the
$320.0 million of Convertible Notes. Holders of $8.7 million of the Convertible Notes elected to
participate in the remarketing. Following the remarketing, the
Convertible Notes will bear interest at an annual rate of 3-month LIBOR minus 3.5%, reset quarterly (but not less than
zero).
Equity Purchase Contracts:
Pursuant to the terms of the Equity Purchase Contracts element of the
Equity Units, the Company received $320.0 million in cash proceeds on May 17, 2010 when the holders
of the Equity Units satisfied their obligation to purchase shares of Stanley Black & Decker common
stock. There were 5,180,776 common shares issued at $61.77 per share.
I. Derivative Financial Instruments
The Company is exposed to market risk from changes in foreign currency exchange rates, interest
rates, stock prices and commodity prices. As part of the Company’s risk management program, a
variety of financial instruments such as interest rate swaps, currency swaps, purchased currency
options, foreign exchange contracts and commodity contracts, are used to mitigate interest rate
exposure, foreign currency exposure and commodity price exposure.
Financial instruments are not utilized for speculative purposes. If the Company elects to do so and
if the instrument meets the criteria specified in ASC 815, management designates its derivative
instruments as cash flow hedges, fair value hedges or net investment hedges.
In the first quarter of 2010, the Company acquired a portfolio of derivative financial instruments
in conjunction with the Merger, which Black & Decker entered into in the ordinary course of
business. At the March 12, 2010 merger date, the Company established its intent for each
derivative. The Company terminated all outstanding interest rate swaps and foreign currency
forwards hedging future purchases of inventory denominated in a foreign currency. For other
foreign currency forwards and commodity derivatives, the Company elected to leave the instruments
in place as an economic hedge only and account for them as undesignated. Net investment hedges were
re-designated.
A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance
Sheets are as follows (in millions):
| Balance Sheet | Balance Sheet | |||||||||||||||||||
| Classification | 7/3/10 | 1/2/10 | Classification | 7/3/10 | 1/2/10 | |||||||||||||||
|
Derivatives designated as
hedging instruments:
|
||||||||||||||||||||
|
Interest Rate Contracts Cash Flow
|
Other current assets | $ | — | $ | — | Accrued expenses | $ | 24.2 | $ | 2.2 | ||||||||||
|
|
LT other assets | — | 7.3 | LT other liabilities | 29.7 | — | ||||||||||||||
|
Interest Rate Contracts Fair Value
|
Other current assets | 5.9 | 4.5 | Accrued expenses | — | — | ||||||||||||||
|
|
LT other assets | 8.1 | 0.1 | LT other liabilities | — | 2.7 | ||||||||||||||
|
Foreign Exchange Contracts Cash Flow
|
Other current assets | 6.1 | 0.1 | Accrued expenses | 9.1 | 31.2 | ||||||||||||||
|
|
LT other assets | 1.7 | — | LT other liabilities | 0.3 | — | ||||||||||||||
|
Net Investment Hedge
|
Other current assets | 94.9 | — | Accrued expenses | — | 29.1 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 116.7 | $ | 12.0 | $ | 63.3 | $ | 65.2 | ||||||||||||
|
|
||||||||||||||||||||
|
Derivatives not designated as
hedging instruments:
|
||||||||||||||||||||
|
Foreign Exchange Contracts
|
Other current assets | $ | 12.8 | $ | 18.5 | Accrued expenses | $ | 101.6 | $ | 19.5 | ||||||||||
|
|
LT other assets | — | 2.8 | LT other liabilities | 8.9 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 12.8 | $ | 21.3 | $ | 110.5 | $ | 19.5 | ||||||||||||
|
|
||||||||||||||||||||
16
Table of Contents
The counterparties to all of the Company’s derivative financial instruments are major international
financial institutions. The Company is exposed to credit risk for net exchanges under these
agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted
above. The Company limits its exposure and concentration of risk by contracting with diverse
financial institutions and does not anticipate non-performance by any of its counterparties.
Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers
non-performance risk of its counterparties at each reporting period and adjusts the carrying value
of these assets accordingly. The risk of default is considered remote.
During the six months ended July 3, 2010, significant cash flows related to derivatives included
net cash paid of $22.4 million on matured foreign exchange contracts and currency swaps. The
Company also received $30.2 million in March 2010 from the termination of $325.0 million notional
of fixed to variable interest rate swaps. In the first quarter of 2009, significant cash flows
related to derivatives included a cash payment of $10.5 million on a Great Britain pound currency
swap maturity.
CASH FLOW HEDGES
There was a $33.0 million after-tax loss and a $4.8 million after-tax gain
reported for cash flow hedge effectiveness in Accumulated other comprehensive income as of July 3,
2010 and January 2, 2010, respectively. A gain of $0.1 million is expected to be reclassified to
earnings as the hedged transactions occur or as amounts are amortized within the next 12 months.
The ultimate amount recognized will vary based on fluctuations of the hedged currencies through the
maturity dates. The tables below detail pre-tax amounts reclassified from Accumulated other
comprehensive income into earnings for active derivative financial instruments during the periods
in which the underlying hedged transactions affected earnings for the six months ended July 3, 2010
and July 4, 2009 (in millions).
| Classification of | Gain (Loss) | Gain (Loss) | ||||||||||||
| Gain (Loss) | Reclassified from | Recognized in | ||||||||||||
| Gain (Loss) | Reclassified from | OCI to Income | Income | |||||||||||
| Year to date 2010 | Recorded in OCI | OCI to Income | (Effective Portion) | (Ineffective Portion*) | ||||||||||
|
Interest Rate Contracts
|
$ | (61.3 | ) | Interest expense | $ | (1.6 | ) | $ | — | |||||
|
Foreign Exchange Contracts
|
$ | (0.4 | ) | Cost of sales | $ | 0.3 | $ | — | ||||||
|
|
$ | 21.5 | Other, net | $ | 22.4 | $ | — | |||||||
| Classification of | Gain (Loss) | Gain (Loss) | ||||||||||||
| Gain (Loss) | Reclassified from | Recognized in | ||||||||||||
| Gain (Loss) | Reclassified from | OCI to Income | Income | |||||||||||
| Year to date 2009 | Recorded in OCI | OCI to Income | (Effective Portion) | (Ineffective Portion*) | ||||||||||
|
Interest Rate Contracts
|
$ | (0.1 | ) | Interest expense | $ | (2.3 | ) | $ | — | |||||
|
Foreign Exchange Contracts
|
$ | — | Cost of sales | $ | 3.9 | $ | — | |||||||
|
|
$ | (4.3 | ) | Other, net | $ | (0.2 | ) | $ | — | |||||
| * | Includes ineffective portion and amount excluded from effectiveness testing. |
For the second quarter and first six months of 2010, the hedged items’ impact to the income
statement was a loss of $11.8 million and $21.2 million, respectively, in Other, net and a loss of
approximately $0.3 million, for both periods in Cost of sales. For the second quarter and first six
months of 2009, the hedged items’ impact to the income statement was a gain of $6.1 million and
$0.9 million, respectively, in Other, net and a loss of approximately $1.0 million and $3.9
million, respectively, in Cost of sales. There was no impact related to the interest rate
contracts’ hedged items for any period presented. The impact of de-designated hedges was immaterial
for the second quarter and first six months of 2010. The impact of de-designated hedges was a
pre-tax loss of $0.2 million and $0.8 million for the second quarter and first six months of 2009,
respectively.
For the second quarter and first six months of 2010, after-tax gains of $7.1 million and $12.6
million, respectively, were reclassified from Accumulated other comprehensive income into earnings
(inclusive of the gain/loss amortization on terminated derivative financial instruments) during the
periods in which the underlying hedged transactions affected earnings. For the second quarter and
17
Table of Contents
first six months of 2009, an after-tax loss of $5.4 million and an after-tax gain of $1.8 million,
respectively, were reclassified from Accumulated other comprehensive income into earnings during
the periods in which the underlying hedged transactions affected earnings.
Interest Rate Contracts
The Company enters into interest rate swap agreements in order to obtain the lowest cost source of
funds within a targeted range of variable to fixed-rate debt proportions. At July 3, 2010, the
Company had $800.0 million of forward starting swaps outstanding fixing the interest rate on the
expected refinancing of debt in 2011 and 2012. At January 2, 2010, the Company had outstanding
contracts fixing the interest rate on its $320.0 million floating rate convertible notes and $400.0
million of forward starting swaps outstanding fixing the interest rate on the expected refinancing
of debt in 2012.
Foreign Currency Contracts
Forward contracts:
Through its global businesses, the Company enters into transactions and makes
investments denominated in multiple currencies that give rise to foreign currency risk. The Company
and its subsidiaries regularly purchase inventory from non-United States dollar subsidiaries which
creates currency-related volatility in the Company’s results of operations. The Company utilizes
forward contracts to hedge these forecasted purchases of inventory. Gains and losses reclassified
from Accumulated other comprehensive income for the effective and ineffective portions of the hedge
as well as any amounts excluded from effectiveness testing are recorded in Cost of sales. At July
3, 2010, the notional value of the forward currency contracts outstanding was $107.0 million, of which $26.0
million has been de-designated, maturing at various dates through 2011. As of January 2, 2010,
there were no outstanding hedge contracts.
Currency swaps:
The Company and its subsidiaries have entered into various inter-company
transactions whereby the notional values are denominated in currencies other than the functional
currencies of the party executing the trade. In order to better match the cash flows of its
inter-company obligations with cash flows from operations, the Company enters into currency swaps.
The notional value of the currency swaps used to hedge the exposure was $150.0 million on both July 3, 2010 and January 2, 2010. These contracts mature in November 2010.
Purchased Option Contracts:
The Company and its subsidiaries have entered into various
inter-company transactions whereby the notional values are denominated in currencies other than the
functional currencies of the party executing the trade. In order to better match the cash flows of
its inter-company obligations with cash flows from operations, the Company enters into purchased
option contracts. The U.S. dollar equivalent notional value of option contracts outstanding as of July 3, 2010 was $109.4 million, maturing at various dates through
2010 and 2011. There were no outstanding purchase option contracts as of January 2, 2010.
FAIR VALUE HEDGES
Interest Rate Risk:
In an effort to optimize the mix of fixed versus floating rate debt in the
Company’s capital structure, the Company enters into interest rate swaps. The notional value of
open contracts for all periods presented was $450.0 million. A summary of the fair value
adjustments relating to these swaps is as follows (in millions):
| Second Quarter 2010 | Year to Date 2010 | |||||||||||||||
| Income Statement | Gain/(Loss) on | Gain /(Loss) on | Gain/(Loss) on | Gain /(Loss) on | ||||||||||||
| Classification | Swaps | Borrowings | Swaps | Borrowings | ||||||||||||
|
Interest Expense
|
$ | 6.4 | $ | (6.4 | ) | $ | 6.3 | $ | (6.3 | ) | ||||||
| Second Quarter 2009 | Year to Date 2009 | |||||||||||||||
| Income Statement | Gain/(Loss) on | Gain /(Loss) on | Gain/(Loss) on | Gain /(Loss) on | ||||||||||||
| Classification | Swaps | Borrowings | Swaps | Borrowings | ||||||||||||
|
Interest Expense
|
$ | (7.0 | ) | $ | 7.0 | $ | (5.9 | ) | $ | 5.9 | ||||||
In addition to the amounts in the table above, the net swap accruals for each period and
amortization of the gains on terminated swaps are also reported in interest expense and totaled
$2.9 million and $5.9 million reported as a reduction of interest expense for the second quarter
and first six months of 2010, respectively, and $2.8 million and $5.8 million reported as a
reduction of interest expense for the second quarter and first six months of 2009, respectively.
Interest expense on the underlying debt was $6.3 million and $12.6 million for the second quarter
and first six months of 2010, respectively, and $6.2 million and $12.6 million for the second
quarter and first six months of 2009, respectively.
18
Table of Contents
NET INVESTMENT HEDGES
Foreign Exchange Contracts:
The Company utilizes net investment hedges to offset the translation
adjustment arising from remeasurement of its investment in the assets and liabilities of its
foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive income were a
gain of $22.4 million at July 3, 2010 and a loss of $11.8 million at January 2, 2010. As of July 3,
2010, the Company had foreign exchange contracts with notional values totaling $237.9 million
outstanding hedging a portion of its euro denominated net investment that mature in September 2010,
and $1.049 billion outstanding hedging a portion of its pound sterling denominated net investment
that mature at various dates through January 2011. The Company had foreign exchange contracts
mature in the second quarter of 2010 resulting in cash receipts for a gain of $15.8 million. The
Company had a foreign exchange contract mature in the first quarter of 2010 resulting in a cash
payment for a loss of $16.1 million. Gains and losses on net investment hedges remain in
Accumulated other comprehensive income until disposal of the underlying assets. The details of the
pre-tax amounts are below (in millions):
| Second Quarter 2010 | Year to Date 2010 | |||||||||||||||||||||||
| Effective | Ineffective | Effective | Ineffective | |||||||||||||||||||||
| Amount | Portion | Portion* | Amount | Portion | Portion* | |||||||||||||||||||
| Recorded | Recorded in | Recorded in | Recorded in | Recorded in | Recorded in | |||||||||||||||||||
| Income Statement | in OCI | Income | Income | OCI | Income | Income | ||||||||||||||||||
| Classification | Gain (Loss) | Statement | Statement | Gain (Loss) | Statement | Statement | ||||||||||||||||||
|
Other, net
|
$ | 35.7 | $ | — | $ | — | $ | 54.3 | $ | — | $ | — | ||||||||||||
| Second Quarter 2009 | Year to Date 2009 | |||||||||||||||||||||||
| Effective | Ineffective | Effective | Ineffective | |||||||||||||||||||||
| Amount | Portion | Portion* | Amount | Portion | Portion* | |||||||||||||||||||
| Recorded | Recorded in | Recorded in | Recorded in | Recorded in | Recorded in | |||||||||||||||||||
| Income Statement | in OCI | Income | Income | OCI | Income | Income | ||||||||||||||||||
| Classification | Gain (Loss) | Statement | Statement | Gain (Loss) | Statement | Statement | ||||||||||||||||||
|
Other, net
|
$ | (9.8 | ) | $ | — | $ | — | $ | (3.0 | ) | $ | — | $ | — | ||||||||||
| * | Includes ineffective portion and amount excluded from effectiveness testing. |
UNDESIGNATED HEDGES
Foreign Exchange Contracts:
Currency swaps and foreign exchange forward contracts are used to
reduce risks arising from the change in fair value of certain foreign currency denominated assets
and liabilities (such as affiliate loans, payables and receivables). The objective of these
practices is to minimize the impact of foreign currency fluctuations on operating results. The
total notional amount of the contracts outstanding at July 3, 2010 was $2.356 billion of forward
contracts and $250.5 million in currency swaps, maturing at various dates primarily through June
2011 with one in December 2014. The income statement impacts related to derivatives not designated
as hedging instruments for 2010 and 2009 are as follows (in millions):
| Derivatives Not | Second Quarter 2010 | Year to Date 2010 | ||||||||||
| Designated as | Amount of Gain (Loss) | Amount of Gain (Loss) | ||||||||||
| Hedging | Income Statement | Recorded in Income on | Recorded in Income on | |||||||||
| Instruments under ASC 815 | Classification | Derivative | Derivative | |||||||||
|
Foreign Exchange Contracts
|
Other, net | $ | (29.1 | ) | $ | (32.9 | ) | |||||
|
|
Cost of Sales | $ | 2.2 | $ | 2.7 | |||||||
| Derivatives Not | Second Quarter 2009 | Year to Date 2009 | ||||||||||
| Designated as | Amount of Gain (Loss) | Amount of Gain (Loss) | ||||||||||
| Hedging | Income Statement | Recorded in Income on | Recorded in Income on | |||||||||
| Instruments under ASC 815 | Classification | Derivative | Derivative | |||||||||
|
Foreign Exchange Contracts
|
Other, net | $ | (7.0 | ) | $ | (4.8 | ) | |||||
19
Table of Contents
Commodity Contracts:
Commodity contracts are used to manage price risks related to material
purchases — primarily zinc and copper — used in the manufacturing process. The objective of the
contracts is to reduce the variability of cash flows associated with the forecasted purchase of
these commodities. In conjunction with the Merger, the Company assumed commodity contracts with a
total notional amount of 7.4 million pounds. During the second quarter of 2010, all
commodity contracts matured or were terminated. No notional amounts were outstanding as of July 3,
2010. The income statement impacts related to commodity contracts not designated as hedging
instruments are as follows (in millions):
| Derivatives Not | Second Quarter 2010 | Year to Date 2010 | ||||||||||
| Designated as | Amount of Gain (Loss) | Amount of Gain (Loss) | ||||||||||
| Hedging | Income Statement | Recorded in Income on | Recorded in Income on | |||||||||
| Instruments under ASC 815 | Classification | Derivative | Derivative | |||||||||
|
Commodity Contracts
|
Other, net | $ | (1.7 | ) | $ | (1.3 | ) | |||||
J. Stock-Based Compensation
In addition to the equity awards exchanged as part of the Merger, key executives were granted stock
options and restricted share units.
Stock Options:
One million options were granted in conjunction with the Merger. These options will
cliff vest on the third anniversary of the Merger. The fair value of each stock option was
estimated on the date of grant using the Black-Scholes option pricing model. Assumptions used for
the Black-Scholes valuation of these options were:
|
Stock price
|
$ | 57.50 | ||
|
Option price
|
$ | 57.50 | ||
|
Average expected volatility
|
30 | % | ||
|
Dividend yield
|
2.3 | % | ||
|
Risk-free interest rate
|
3.3 | % | ||
|
Expected term
|
7 years | |||
|
Fair value per option
|
$ | 16.34 | ||
The expected volatility is based on two equally weighted components: the first component is the
average historical volatility which is based on daily observations and duration consistent with the
expected life assumption; the second component is the market implied volatility of traded options.
The average expected term of the option is based on historical stock option exercise behavior as
well as the remaining contractual exercise term. The risk free interest rate is based on U.S.
treasury securities with maturities equal to the expected life of the option. Total compensation
expense incurred during the three and six months ended July 3, 2010 for this option grant was $1.4
million and $1.6 million, respectively. Total remaining unrecognized compensation expense relating
to this award is $14.7 million which will be expensed over the remaining vesting period.
Additionally, the Company expensed $1.4 million and $1.8 million, for the three and six months
ended July 3, 2010, in stock-based compensation related to the options that were exchanged as part
of the Merger. Refer to Note F, Merger and Acquisitions for further details.
Restricted Share Units:
During March 2010, grants of restricted share units (“RSUs”) were
made in connection with the Merger totaling 935,000 share units. During the second quarter of 2010, 148,478 RSUs were granted.
The vast majority of the RSUs granted in 2010 vest 50% at the end of the fourth year and 50% on the
fifth anniversary of the grant date. The weighted-average grant date fair value of the RSUs is
$57.71 resulting in total compensation expense to be recognized of $61.2 million over the service
period. During the three and six months ended July 3, 2010, $5.4 million and $27.8 million,
respectively, of expense was recognized for these RSUs. Certain employees are retirement-eligible,
such that under the terms of the grant they retain their awards even if they retire prior to the
end of the vesting period; and consequently, such awards are expensed immediately on the grant
date. Approximately $1.7 million and $23.7 million of the expense recognized during the three and
six month periods ended July 3, 2010, respectively, relates to employees who were either retirement
eligible at the grant date or became retirement eligible early in the vesting period. Additionally,
the Company
expensed $1.4 million and $1.7 million in stock-based compensation for the three and six months
ended July 3, 2010, respectively, related to the RSUs that were exchanged as part of the Merger.
20
Table of Contents
K. Equity Option
In January 2009, the Company purchased from financial institutions over the counter 15 month capped
call options, subject to adjustments for standard anti-dilution provisions, on 3.0 million shares
of its common stock for an aggregate premium of $16.4 million, or an average of $5.47 per option.
The purpose of the capped call options was to reduce share price volatility on potential future
share repurchases by establishing the prices at which the Company could elect to repurchase 3
million shares in the 15 month term. In accordance with ASC 815-40, the premium paid was recorded
as a reduction to Shareowners’ equity. The contracts for each of the three series of options
generally provided that the options could, at the Company’s election, be cash settled, physically
settled or net-share settled (the default settlement method). Each series of options had various
expiration dates within the month of March 2010. In August 2009, 886,629 options were terminated
and in December 2009, an additional 2,000,000 options were terminated as more fully described in
Note J of The Stanley Works Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
There were 113,371 options outstanding at January 2, 2010. Because the market price of the
Company’s common stock was above the applicable upper strike price, the value per option to the
Company was the difference between the applicable upper strike price and lower strike price. The
remaining options were automatically exercised and net share settled in March 2010 using an average
share price of $58.76 and a fair value of $1,673,265. The terminations occurred above the upper
strike price, maximizing the intrinsic value of the contracts. These terminations resulted in
28,477 shares being delivered to the Company which was recorded in Shareowners’ equity.
L. Net Periodic Benefit Cost — Defined Benefit Plans
Following are the components of net periodic benefit cost for the three and six months ended July
3, 2010 and July 4, 2009 (in millions):
| Second Quarter | ||||||||||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | U.S. Plans | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
|
Service cost
|
$ | 5.6 | $ | 0.6 | $ | 2.8 | $ | 1.0 | $ | 0.4 | $ | 0.2 | ||||||||||||
|
Interest cost
|
18.4 | 2.5 | 12.2 | 3.3 | 1.4 | 0.3 | ||||||||||||||||||
|
Expected return on plan assets
|
(15.7 | ) | (1.6 | ) | (10.9 | ) | (3.7 | ) | — | — | ||||||||||||||
|
Amortization of prior service
cost/(credit)
|
0.2 | 0.3 | — | — | (0.1 | ) | (0.1 | ) | ||||||||||||||||
|
Amortization of net loss
|
0.5 | 0.7 | 1.0 | 0.6 | — | 0.1 | ||||||||||||||||||
|
Curtailment loss
|
— | 0.5 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 9.0 | $ | 3.0 | $ | 5.1 | $ | 1.2 | $ | 1.7 | $ | 0.5 | ||||||||||||
|
|
||||||||||||||||||||||||
| Year to Date | ||||||||||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | U.S. Plans | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
|
Service cost
|
$ | 7.3 | $ | 1.5 | $ | 4.3 | $ | 1.7 | $ | 0.6 | $ | 0.5 | ||||||||||||
|
Interest cost
|
24.8 | 5.0 | 17.7 | 6.4 | 2.0 | 0.7 | ||||||||||||||||||
|
Expected return on plan assets
|
(21.0 | ) | (3.3 | ) | (16.3 | ) | (7.1 | ) | — | — | ||||||||||||||
|
Amortization of prior service
cost/(credit)
|
0.4 | 0.6 | — | — | (0.1 | ) | (0.1 | ) | ||||||||||||||||
|
Amortization of net loss
|
1.0 | 1.5 | 2.0 | 1.2 | — | — | ||||||||||||||||||
|
Curtailment loss
|
— | 0.5 | 0.9 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 12.5 | $ | 5.8 | $ | 8.6 | $ | 2.2 | $ | 2.5 | $ | 1.1 | ||||||||||||
|
|
||||||||||||||||||||||||
As discussed in Note F, Merger and Acquisitions, the Company assumed obligations for pension and
post-retirement benefits associated with the Merger. The preliminary estimate of the Black & Decker
plan assets and projected benefit obligations is $1.1
21
Table of Contents
billion and $1.9 billion, respectively. The
Black & Decker defined benefit plan assets are primarily invested in equity securities and fixed
income securities. The Company does not believe there is a significant concentration risk within
the plan assets given the diversification of asset types, fund strategies, and fund managers. The
Company is using a weighted-average long-term rate of return assumption of 8.0% for the U.S. plans
and 7.0% for the non-U.S. plans in the determination of fiscal 2010 net periodic benefit expense.
The Company expects to contribute approximately $100 million to its pension and post retirement
benefit plans in 2010.
M. Fair Value Measurements
ASC 820 defines, establishes a consistent framework for measuring, and expands disclosure
requirements about fair value. ASC 820 requires the Company to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations whose inputs and
significant value drivers are observable.
Level 3 — Instruments valued using unobservable inputs.
The Company holds various derivative financial instruments that are employed to manage risks,
including foreign currency and interest rate exposures. These financial instruments are carried at
fair value and are included within the scope of ASC 820. The Company determines the fair value of
derivatives through the use of matrix or model pricing, which utilizes verifiable inputs such as
market interest and currency rates. When determining the fair value of these financial instruments
for which Level 1 evidence does not exist, the Company considers various factors including the
following: exchange or market price quotations of similar instruments, time value and volatility
factors, the Company’s own credit rating and the credit rating of the counter-party.
The following table presents the Company’s financial assets and liabilities that are measured at
fair value on a recurring basis for each of the hierarchy levels (millions of dollars):
| Total Carrying | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
|
July 3, 2010:
|
||||||||||||||||
|
Money market funds
|
$ | 305.9 | $ | — | $ | — | $ | 305.9 | ||||||||
|
Derivative assets
|
$ | — | $ | 129.5 | $ | — | $ | 129.5 | ||||||||
|
Derivatives liabilities
|
$ | — | $ | 173.8 | $ | — | $ | 173.8 | ||||||||
|
January 2, 2010:
|
||||||||||||||||
|
Money market funds
|
$ | 210.8 | $ | — | $ | — | $ | 210.8 | ||||||||
|
Derivative assets
|
$ | — | $ | 33.3 | $ | — | $ | 33.3 | ||||||||
|
Derivatives liabilities
|
$ | — | $ | 84.7 | $ | — | $ | 84.7 | ||||||||
The following table presents the fair value and the hierarchy levels for assets and liabilities
that were measured at fair value on a non-recurring basis during 2010 (millions of dollars):
| Total Gains (Losses) | ||||||||||||||||||||||||
| July 3, 2010 | Level 1 | Level 2 | Level 3 | Second Quarter | Year to Date | |||||||||||||||||||
|
Long-lived assets held and used
|
$ | 24.7 | $ | 24.7 | $ | (5.6 | ) | $ | (7.8 | ) | ||||||||||||||
In accordance with the provisions of ASC 820, long-lived assets with a carrying amount of $32.5
million were written down to an expected fair value of $24.7 million during the six months ended
July 3, 2010. This was a result of restructuring-related asset impairments more fully described in
Note O, Restructuring and Asset Impairments. Fair value for these impaired production assets was
based on the present value of discounted cash flows. This included an estimate for future cash
flows as production activities are phased out as well as auction values (prices for similar assets)
for assets where use has been discontinued or future cash flows are minimal.
22
Table of Contents
A summary of the Company’s financial instruments carrying and fair values at July 3, 2010 and
January 2, 2010 follows. Refer to Note I, Derivative Financial Instruments for more details
regarding derivative financial instruments, and Note H, Long-Term Debt and Financing Arrangements,
for more information regarding carrying values of the Long-term debt shown below.
| 2010 | 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| (millions of dollars) | Value | Value | Value | Value | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Money market funds
|
$ | 305.9 | $ | 305.9 | $ | 210.8 | $ | 210.8 | ||||||||
|
Derivative assets
|
$ | 129.5 | $ | 129.5 | $ | 33.3 | $ | 33.3 | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | 173.8 | $ | 173.8 | $ | 84.7 | $ | 84.7 | ||||||||
|
Long-term debt, including current portion
|
$ | 2,746.1 | $ | 2,846.3 | $ | 1,292.7 | $ | 1,282.3 | ||||||||
The fair value of money market funds is based on quoted market prices for identical or similar
assets. The fair values of derivative assets and liabilities are based on current settlement values
for identical or similar assets and liabilities. The fair value of Long-term debt is based on
recent third party market transactions (ie, trades of the Company’s debt) and other observable
market inputs.
As discussed in Note D, Accounts and Notes Receivable, the Company has a deferred purchase price
receivable related to sales of trade receivables. The deferred purchase price receivable will be
repaid in cash as receivables are collected, generally within 30 days, and as such the carrying
value of the receivable approximates fair value.
N. Other Costs and Expenses
Other, net is primarily comprised of intangible asset amortization expense, gains and losses on
asset dispositions, certain foreign currency gains and losses, acquisition-related expenses, and
environmental expense. Refer to Note G, Goodwill and Intangible Assets, for information on
intangible asset amortization expense. During the three and six months ended July 3, 2010, $11.6
million and $43.7 million, respectively, was recorded to Other, net for certain investment banking
fees and other transaction-related advisory consulting fees that related primarily to the Merger.
O. Restructuring and Asset Impairments
At July 3, 2010, restructuring reserves totaled $183.6 million. A summary of the restructuring
reserve activity from January 2, 2010 to July 3, 2010 is as follows (in millions):
| Net | ||||||||||||||||||||||||
| 1/2/10 | Acquisitions | Additions | Usage | Currency | 7/3/10 | |||||||||||||||||||
|
2010 Actions
|
||||||||||||||||||||||||
|
Severance and related costs
|
$ | — | $ | — | $ | 167.2 | $ | (20.8 | ) | $ | 1.1 | $ | 147.5 | |||||||||||
|
Asset impairments
|
— | — | 8.0 | (8.0 | ) | — | — | |||||||||||||||||
|
Facility closure
|
— | — | 2.5 | — | — | 2.5 | ||||||||||||||||||
|
Other
|
— | — | 4.3 | (0.8 | ) | — | 3.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Subtotal 2010 actions
|
— | — | 182.0 | (29.6 | ) | 1.1 | 153.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Pre-2010 Actions
|
||||||||||||||||||||||||
|
Severance and related costs
|
44.3 | 9.1 | (0.6 | ) | (19.8 | ) | (4.8 | ) | 28.2 | |||||||||||||||
|
Asset impairments
|
(0.2 | ) | 0.2 | — | — | |||||||||||||||||||
|
Facility closure
|
1.9 | — | 2.0 | (2.5 | ) | — | 1.4 | |||||||||||||||||
|
Other
|
0.2 | 0.8 | — | (0.5 | ) | — | 0.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Subtotal Pre-2010 actions
|
46.4 | 9.9 | 1.2 | (22.6 | ) | (4.8 | ) | 30.1 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 46.4 | $ | 9.9 | $ | 183.2 | $ | (52.2 | ) | $ | (3.7 | ) | $ | 183.6 | ||||||||||
|
|
||||||||||||||||||||||||
23
Table of Contents
2010 Actions:
In the first half of 2010, the Company recognized $168.6 million of restructuring
charges and asset impairments associated with the Black & Decker merger and acquisition of SSDS.
Of those charges, $157.6 million relates to severance charges associated with the reduction of
1,700 employees, $4.2 million relates to asset impairments, $2.5 million relates to facility
closure costs, and $4.3 million represents other charges. For the three months ended July 3, 2010
the Company recognized $78.4 million of restructuring charges and asset impairments associated with
the Black & Decker merger and acquisition of SSDS, of which $67.4 million relates to severance
charges associated with the reduction of 1,600 employees, $4.2 million relates to asset
impairments, $2.5 million relates to facility closure costs, and $4.3 million represents other
charges.
In addition, the Company continued to initiate cost reduction actions in the first half of 2010
that were not associated with the Black & Decker merger and SSDS acquisition, resulting in
severance and related charges of $9.6 million pertaining to the reduction of approximately 300
employees and asset impairment charges of $3.8 million. Such restructuring actions initiated in
the three months ended July 3, 2010 resulted in severance charges of $5.3 million associated with
the reduction of approximately 200 employees and asset impairment charges of $1.5 million.
Of the $182.0 million recognized for these 2010 actions, $29.6 million has been utilized to date,
with $153.5 million of reserves remaining as of July 3, 2010, which are expected to be utilized in
2010 and 2011. Usage includes $15.0 million which ultimately will entail cash payment in a future
period as it relates to a defined benefit plan for severed Black & Decker executives which is
classified in Post-Retirement Benefits on the Consolidated Balance Sheet. The $182.0 million of
charges recognized in the first half of 2010 includes, $94.6 million pertaining to the CDIY
segment; $47.3 million pertaining to the Security segment; $2.2 million pertaining to the
Industrial segment; and $37.9 million pertaining to non-operating entities.
Pre-2010 Actions:
As more fully disclosed in Note O of The Stanley Works Annual Report on Form 10-K for
the year ended January 2, 2009, during 2009 and 2008 the Company initiated cost reduction actions
in various businesses in response to sales volume declines associated with the economic recession.
As of January 2, 2010, the reserve balance related to these pre-2010 actions totaled $46.4 million.
As a result of the Merger and the acquisition of SSDS, the Company has assumed $9.9 million of
restructuring reserves recorded by those companies prior to the Merger and acquisition.
Utilization of the reserve balance related to Pre-2010 actions, including usage of those reserves
acquired in purchase accounting, was $22.6 million in the first half of 2010. The remaining reserve
balance of $30.1 million is expected to be utilized predominantly in 2010.
P. Income Taxes
The reconciliation of the U.S. federal statutory income tax to the income taxes on continuing
operations for the three and six months ended July 3, 2010 and July 4, 2009 is as follows:
| Second Quarter | Year to Date | |||||||||||||||
| (Millions of Dollars) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Tax at statutory rate
|
$ | 3.2 | $ | 34.6 | ($34.2 | ) | $ | 53.0 | ||||||||
|
State income taxes, net of federal benefits
|
— | 2.3 | 1.6 | 3.1 | ||||||||||||
|
Difference between foreign and federal income tax
|
(32.2 | ) | (10.8 | ) | (52.0 | ) | (16.1 | ) | ||||||||
|
Tax accrual reserve
|
4.7 | 0.3 | 8.0 | 1.0 | ||||||||||||
|
Operating loss with no tax benefit
|
4.4 | — | 8.8 | — | ||||||||||||
|
Audit settlements
|
(35.7 | ) | — | (35.7 | ) | — | ||||||||||
|
Dividends
|
5.2 | — | 10.3 | — | ||||||||||||
|
Merger-related step-up amortization
|
5.9 | — | 8.4 | — | ||||||||||||
|
Merger-related — restructuring
|
( 0.4 | ) | — | 37.5 | — | |||||||||||
|
Other, net
|
7.9 | 0.3 | 11.8 | (0.6 | ) | |||||||||||
|
|
||||||||||||||||
|
Income taxes on continuing operations
|
$ | (37.0 | ) | $ | 26.7 | $ | (35.5 | ) | $ | 40.4 | ||||||
|
|
||||||||||||||||
The Company recognized an income tax benefit of $37.0 million and $35.5 million for the three and
six months ended July 3, 2010, respectively. The income tax benefit in both the second quarter of
2010 and year-to-date period includes a benefit attributable to a
24
Table of Contents
favorable settlement in June of
certain tax contingencies, due to a change in facts and circumstances that did not exist at the
acquisition date, related to the resolution of a legacy Black & Decker income tax audit. In
addition, the effective tax rate differs from the statutory rate primarily due to various
non-deductible transactions and other restructuring associated with the Merger. In particular,
various merger-related payments made, or to be made, were not eligible for tax benefit under IRC
Section 280G. Also, certain other merger-related compensation was not eligible for tax benefit due
to IRC Section 162(m) limits. Non-deductible transaction costs and other restructuring items also
contributed to the tax position for the second quarter and year-to- date periods.
Refer to Note F, Merger and Acquisitions for further discussion of tax-related items arising from
the Merger.
The Company is subject to
the examinations of its income tax returns by the Internal Revenue Service and other taxing
authorities. The final outcome of the future tax consequences of these examinations and legal
proceedings, as well as the outcome of competent authority proceedings, changes in regulatory tax
laws, or interpretation of those tax laws, or expiration of statutes of limitation, could impact
the Corporation’s financial statements. The Company is subject to the effects of these matters
occurring in various jurisdictions. Accordingly, the Company has tax reserves recorded for which it
is reasonably possible that the amount of the unrecognized tax benefit will increase or decrease
within the next twelve months. Any such increase or decrease could have a material effect on the
financial results for any particular fiscal quarter or year. However, based on the uncertainties
associated with litigation and the status of examinations, including the protocols of finalizing
audits by the relevant tax authorities, which could include formal legal proceedings, it is not
possible to estimate the impact of any such change.
Q. Business Segments
The Company classifies its business into three reportable segments: Construction & Do It Yourself
(“CDIY”), Security, and Industrial.
The CDIY segment manufactures and markets hand tools, corded and cordless electric power tools and
equipment, lawn and garden products, consumer portable power products, home products, accessories
and attachments for power tools, plumbing products, consumer mechanics tools, storage systems, and
pneumatic tools and fasteners. These products are sold to professional end users, distributors, and
consumers, and are distributed through retailers (including home centers, mass merchants, hardware
stores, and retail lumber yards).
The Security segment provides 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, automatic doors, door closers,
electronic keyless entry systems, exit devices, healthcare storage and supply chain solutions,
patient protection products, hardware (including door and cabinet hinges, door stops, kick plates,
house numbers, gate hardware, cabinet pulls, hooks, braces and shelf brackets), locking mechanisms,
electronic keyless entry systems, keying systems, tubular and mortise door locksets. 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, metal and plastic fasteners and engineered fastening systems, hydraulic
tools and accessories, plumbing, heating and air conditioning tools, assembly tools and systems;
and specialty tools. These products are sold to industrial customers including automotive,
transportation, electronics, aerospace, machine tool and appliance industries and distributed
primarily through third party distributors as well as direct sales forces.
As discussed in Note F, Merger and Acquisitions, the Company merged with Black & Decker at the
close of business on March 12, 2010. The Black & Decker businesses were assessed and integrated
into the Company’s existing reportable segments. The legacy Black & Decker segments, Power Tools
and Accessories, Hardware & Home Improvement (“HHI”) and Fastening and Assembly Systems, were
integrated into the Company’s CDIY, Security and Industrial segments, respectively, with the
PricePfister plumbing
products business which was formerly part of HHI included in the CDIY segment. The results of Black
& Decker’s operations are presented within each of these segments and reflect activity since the
merger date.
25
Table of Contents
| Second Quarter | Year to Date | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
NET SALES
|
||||||||||||||||
|
CDIY
|
$ | 1,322.3 | $ | 324.2 | $ | 1,883.7 | $ | 627.5 | ||||||||
|
Security
|
571.4 | 390.6 | 985.3 | 764.3 | ||||||||||||
|
Industrial
|
471.9 | 204.4 | 758.6 | 440.4 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 2,365.6 | $ | 919.2 | $ | 3,627.6 | $ | 1,832.2 | ||||||||
|
|
||||||||||||||||
|
SEGMENT PROFIT
|
||||||||||||||||
|
CDIY
|
$ | 118.1 | $ | 36.5 | $ | 169.6 | $ | 65.3 | ||||||||
|
Security
|
67.7 | 74.4 | 131.8 | 145.0 | ||||||||||||
|
Industrial
|
51.8 | 19.3 | 85.1 | 43.8 | ||||||||||||
|
|
||||||||||||||||
|
Segment profit
|
237.6 | 130.2 | 386.5 | 254.1 | ||||||||||||
|
Corporate overhead
|
(52.8 | ) | (18.9 | ) | (128.3 | ) | (34.4 | ) | ||||||||
|
Other, net
|
(65.1 | ) | (31.2 | ) | (130.0 | ) | (61.5 | ) | ||||||||
|
Restructuring charges and asset impairments
|
(85.8 | ) | (9.9 | ) | (183.2 | ) | (19.0 | ) | ||||||||
|
Gain on debt extinguishment
|
— | 43.8 | — | 43.8 | ||||||||||||
|
Interest expense
|
(26.8 | ) | (16.2 | ) | (46.1 | ) | (33.2 | ) | ||||||||
|
Interest income
|
2.2 | 0.9 | 3.4 | 1.6 | ||||||||||||
|
|
||||||||||||||||
|
Earnings (loss) from continuing operations
before income taxes
|
$ | 9.3 | $ | 98.7 | $ | (97.7 | ) | $ | 151.4 | |||||||
|
|
||||||||||||||||
The Company recorded $117.7 million and $159.3 million, respectively in cost of sales for the three
and six months ended July 3, 2010 associated with the inventory step-up amortization pertaining to
the sale of the Black & Decker acquired inventory which was recorded in purchase accounting at its
fair value. The non-cash inventory step-up amortization reduced 2010 segment profit by $88.4
million in CDIY, $15.7 million in Security and $13.6 million in Industrial for the three months
ended July 3, 2010, and $120.3 million in CDIY, $21.0 million in Security and $18.0 million in
Industrial for the six months ended July 3, 2010. Additionally, for the three months ended July 3,
2010, the Company recorded $6.0 million of facility closure-related charges within the Security
segment.
Corporate overhead for the three and six months ended July 3, 2010 includes $15.7 million and $64.7
million, respectively, of charges pertaining primarily to certain merger-related executive
compensation and Black & Decker integration costs.
The following table is a summary of total assets by segment for the periods ended July 3, 2010 and
January 2, 2010:
| 2010 | 2009 | |||||||
|
SEGMENT ASSETS
|
||||||||
|
CDIY
|
$ | 6,673.3 | $ | 819.5 | ||||
|
Security
|
3,355.3 | 2,430.9 | ||||||
|
Industrial
|
2,022.4 | 1,069.1 | ||||||
|
|
||||||||
|
|
12,051.0 | 4,319.5 | ||||||
|
Corporate assets
|
1,944.6 | 449.6 | ||||||
|
|
||||||||
|
Consolidated
|
$ | 13,995.6 | $ | 4,769.1 | ||||
|
|
||||||||
Corporate assets are primarily cash and deferred taxes.
R. Commitments and Contingencies
The Company is involved in various legal proceedings relating to environmental issues, employment,
product liability and workers’ compensation claims and other matters. The Company periodically
reviews the status of these proceedings with legal counsel, as well as an actuary for risk
insurance. Management believes that the ultimate disposition of these matters will not have a
material adverse effect on the Company’s operations or financial condition taken as a whole.
In connection with the Merger, the Company assumed certain commitments and contingent liabilities.
Black & Decker was involved in lawsuits in the ordinary course of business, which primarily involve
claims for damages arising out of the use of Black & Decker’s products and allegations of patent
and trademark infringement. Black & Decker also was involved in litigation and administrative
proceedings involving employment matters, commercial disputes and income tax matters. Some of these
lawsuits include claims for
26
Table of Contents
punitive as well as compensatory damages. Additionally, Black & Decker
is a party to litigation and administrative proceedings with respect to claims involving the
discharge of hazardous substances into the environment. Some of these assert claims for damages
and liability for remedial investigations and clean-up costs with respect to sites that have never
been owned or operated by Black & Decker but at which Black & Decker has been identified as a
potentially responsible party. Other matters involve current and former manufacturing facilities.
The Company is currently assessing the fair value of those acquired environmental and risk
insurance liabilities and as such the amounts reflected in the Consolidated Balance Sheet with
respect to purchase accounting is preliminary.
The Environmental Protection Agency (EPA) and the Santa Ana Regional Water Quality Control Board
have each initiated administrative proceedings against Black & Decker and certain of its current or
former affiliates alleging that Black & Decker and numerous other defendants are responsible to
investigate and remediate alleged groundwater contamination in and adjacent to a 160-acre property
located in Rialto, California. The cities of Colton and Rialto, as well as Goodrich Corporation,
also initiated lawsuits against Black & Decker and certain of its former or current affiliates in
the Federal District Court for California, Central District alleging similar claims that Black &
Decker is liable under the Comprehensive Environmental Response, Compensation and Liability Act of
1980 (“CERCLA”), the Resource Conservation and Recovery Act, and state law for the discharge or
release of hazardous substances into the environment and the contamination caused by those alleged
releases. The City of Colton also has a companion case in California State court, which is
currently stayed for all purposes. Certain defendants in that case have cross-claims against other
defendants and have asserted claims against the State of California. The administrative
proceedings and the lawsuits generally allege that West Coast Loading Corporation (“WCLC”), a
defunct company that operated in Rialto between 1952 and 1957, and an as yet undefined number of
other defendants are responsible for the release of per chlorate and solvents into the groundwater
basin, and that Black & Decker and certain of its current or former affiliates are liable as a
“successor” of WCLC. The Company believes that neither the facts nor the law support an allegation
that Black & Decker is responsible for the contamination and is vigorously contesting these claims.
The EPA has provided an affiliate of Black & Decker a “Notice of Potential Liability” related to
environmental contamination found at the Centredale Manor Restoration Project Superfund site,
located in North Providence, Rhode Island. The EPA has discovered dioxin, polychlorinated
biphenyls, and pesticide contamination at this site. The EPA alleged that an affiliate of Black &
Decker is liable for site cleanup costs under CERCLA as a successor to the liability of
Metro-Atlantic, Inc., a former operator at the site, and demanded reimbursement of the EPA’s costs
related to this site. The EPA, which considers Black & Decker to be the primary potentially
responsible party (PRP) at the site, is expected to release a draft Feasibility Study Report, which
will identify and evaluate remedial alternatives for the site, in 2010.
The estimated remediation costs related to this Centredale site (including the EPA’s past costs as
well as costs of additional investigation, remediation, and related costs, less escrowed funds
contributed by PRPs who have reached settlement agreements with the EPA), which the Company
considers to be probable and reasonably estimable, range from approximately $50.5 million to $100
million, with no amount within that range representing a more likely outcome. The Company’s reserve
for this environmental remediation matter of $50.5 million reflects the probability that the
Company will be identified as the principal financially viable PRP upon issuance of the EPA draft
Feasibility Study Report. The Company has not yet determined the extent to which it will contest
the EPA’s claims with respect to this site. Further, to the extent that the Company agrees to
perform or finance remedial activities at this site, it will seek participation or contribution
from additional PRPs and insurance carriers. As the specific nature of the environmental
remediation activities that may be mandated by the EPA at this site have not yet been determined,
the ultimate remedial costs associated with the site may vary from the amount accrued by the
Company at July 3, 2010.
The Company’s policy is to accrue environmental investigatory and remediation costs for identified
sites when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. As of July 3, 2010 and January 2, 2010, the Company had reserves of $130.3
million and $29.7 million, respectively, primarily for remediation activities associated with
Company-owned properties as well as for Superfund sites. The range of environmental remediation
costs that is reasonably possible is $113 million to $221 million which is subject to change in
the near term.
27
Table of Contents
S. Guarantees
The Company’s financial guarantees at July 3, 2010 are as follows (in millions):
| Maximum | Liability | |||||||||
| Term | Potential Payment | Carrying Amount | ||||||||
| Guarantees on the residual values of leased properties |
1 - 5 years
|
$ | 39.4 | $ | — | |||||
| Standby letters of credit |
Up to 3 years
|
$ | 54.4 | $ | — | |||||
| Commercial customer financing arrangements |
Up to 6 years
|
$ | 17.6 | $ | 14.1 | |||||
| Guarantee on the residual value of aircraft |
Less than 9 years
|
$ | 24.2 | $ | — | |||||
|
|
||||||||||
|
|
$ | 135.6 | $ | 14.1 | ||||||
|
|
||||||||||
The Company has guaranteed a portion of the residual value arising from its synthetic lease and
U.S. master personal property lease programs. The lease guarantees aggregate $39.4 million while
the fair value of the underlying assets is estimated at $46.0 million. The related assets would be
available to satisfy the guarantee obligations and therefore it is unlikely the Company will incur
any future loss associated with these lease guarantees.
The Company has issued $54.4 million in standby letters of credit that guarantee future payments
which may be required under certain insurance programs.
The Company provides various limited and full recourse guarantees to financial institutions that
provide financing to U.S. and Canadian Mac Tool distributors for their initial purchase of the
inventory and trucks necessary to function as a distributor. In addition, the Company provides
limited and full recourse guarantees to financial institutions that extend credit to certain end
retail customers of its U.S. Mac Tool distributors. The gross amount guaranteed in these
arrangements is $17.6 million and the $14.1 million carrying value of the guarantees issued is
recorded in debt and other liabilities as appropriate in the consolidated balance sheet.
The Company leases an aircraft under an operating lease that includes a $24.2 million residual
value guarantee. The fair value of that aircraft is estimated at $39.5 million.
The Company provides product and service warranties which vary across its businesses. The types of
warranties offered generally range from one year to limited lifetime, while certain products carry
no warranty. Further, the Company at times incurs discretionary costs to service its products in
connection with product performance issues. Historical warranty and service claim experience forms
the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability
as new information becomes available.
The changes in the carrying amount of product and service warranties for the six months ended July
3, 2010 and July 4, 2009 are as follows (in millions):
| 2010 | 2009 | |||||||
|
Balance beginning of period
|
$ | 67.4 | $ | 65.6 | ||||
|
Warranties and guarantees issued
|
33.4 | 9.0 | ||||||
|
Liability assumed in the Merger
|
51.5 | — | ||||||
|
Warranty payments
|
(32.9 | ) | (10.9 | ) | ||||
|
Currency and other
|
(6.1 | ) | 1.7 | |||||
|
|
||||||||
|
Balance end of period
|
$ | 113.3 | $ | 65.4 | ||||
|
|
||||||||
The purchase accounting fair value assessment for the assumed Black & Decker warranty reserve is
preliminary.
T. Discontinued Operations
The net loss from discontinued operations totaling $1.3 million and $1.9 million for the three and
six months ended July 4, 2009, respectively primarily related to the wind-down of one small
divestiture and purchase price adjustments for CST/berger and other small businesses divested in
2008. There were no discontinued operations in 2010.
28
Table of Contents
U. Parent and Subsidiary Debt Guarantees
The following information is presented in accordance with Rule 3-10 of Regulation S-X. In
connection with the Merger, on March 12, 2010, Stanley Black & Decker, Inc. (“Stanley”) and The
Black & Decker Corporation (“Black & Decker”) entered into supplemental indentures providing for
(i) senior unsubordinated guarantees by Black & Decker of Stanley’s existing notes (the “Black &
Decker Guarantees”) and (ii) senior unsubordinated guarantees by Stanley of Black & Decker’s
existing notes (the “Stanley Guarantees,” together with the Black & Decker Guarantees, the
“Guarantees”). The Guarantees are fully described in Stanley’s Current Report on Form 8-K filed on
March 12, 2010. The Black & Decker Guarantees do not cover Stanley’s $312.7 million of subordinated
notes due in 2045. Additionally, on April 29, 2010 the Black & Decker Guarantee of the $320.0
million of Stanley’s convertible notes due May, 2012 was released. The Stanley Guarantees are
unsecured obligations of Stanley ranking equal in right of payment with all of its existing and
future unsecured and unsubordinated indebtedness.
The following tables present the condensed consolidating balance sheets as of January 2, 2010 and
July 3, 2010; the condensed consolidating statements of operations for the three and six months
ended July 3, 2010 and July 4, 2009; and the condensed consolidating statements of cash flows for
the six months ended July 3, 2010 and July 4, 2009. The condensed consolidated financial
statements for the six months ended July 3, 2010 include the results of Black & Decker from the
Merger date. The 2009 comparative condensed consolidating financial statements reflect only the
historical Stanley business.
29
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Three Months Ended July 3, 2010
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Three Months Ended July 3, 2010
| Parent | The Black & | |||||||||||||||||||
| Stanley Black & | Decker | Non-Guarantor | ||||||||||||||||||
| Decker, Inc. | Corporation | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
NET SALES
|
$ | 404.6 | $ | — | $ | 1,994.4 | $ | (33.4 | ) | $ | 2,365.6 | |||||||||
|
COSTS AND EXPENSES
|
||||||||||||||||||||
|
Cost of sales
|
272.7 | — | 1,350.2 | (26.3 | ) | 1,596.6 | ||||||||||||||
|
Selling, general and administrative
|
185.2 | 35.5 | 373.7 | (10.2 | ) | 584.2 | ||||||||||||||
|
Other, net
|
53.1 | (39.5 | ) | 46.0 | 5.5 | 65.1 | ||||||||||||||
|
Restructuring charges and asset impairments
|
54.8 | 2.7 | 28.3 | — | 85.8 | |||||||||||||||
|
Interest expense, net
|
10.8 | 11.6 | 8.2 | (6.0 | ) | 24.6 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
576.6 | 10.3 | 1,806.4 | (37.0 | ) | 2,356.3 | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) earnings from continuing operations
before income taxes and equity in earnings
of subsidiaries
|
(172.0 | ) | (10.3 | ) | 188.0 | 3.6 | 9.3 | |||||||||||||
|
Income taxes (benefit) on continuing
operations before equity in earnings of
subsidiaries
|
(73.8 | ) | (35.5 | ) | 72.3 | — | (37.0 | ) | ||||||||||||
|
Equity in earnings of subsidiaries
|
146.5 | 20.8 | — | (167.3 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) earnings from continuing operations
|
48.3 | 46.0 | 115.7 | (163.7 | ) | 46.3 | ||||||||||||||
|
Less: Net earnings attributable to
non-controlling interests
|
— | — | 0.5 | — | 0.5 | |||||||||||||||
|
|
||||||||||||||||||||
|
NET (LOSS) EARNINGS ATTRIBUTABLE TO
STANLEY BLACK & DECKER, INC.
|
$ | 48.3 | $ | 46.0 | $ | 115.2 | $ | (163.7 | ) | $ | 45.8 | |||||||||
|
|
||||||||||||||||||||
Stanley Black & Decker, Inc.
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Six Months Ended July 3, 2010
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Six Months Ended July 3, 2010
| Parent | The Black & | |||||||||||||||||||
| Stanley Black & | Decker | Non-Guarantor | ||||||||||||||||||
| Decker, Inc. | Corporation | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
NET SALES
|
$ | 765.1 | $ | — | $ | 2,934.3 | $ | (71.8 | ) | $ | 3,627.6 | |||||||||
|
COSTS AND EXPENSES
|
||||||||||||||||||||
|
Cost of sales
|
512.9 | — | 1,944.4 | (54.6 | ) | 2,402.7 | ||||||||||||||
|
Selling, general and administrative
|
337.5 | 44.9 | 604.6 | (20.3 | ) | 966.7 | ||||||||||||||
|
Other, net
|
83.6 | (53.9 | ) | 91.3 | 9.0 | 130.0 | ||||||||||||||
|
Restructuring charges and asset impairments
|
55.0 | 90.2 | 38.0 | — | 183.2 | |||||||||||||||
|
Interest expense, net
|
23.8 | 14.4 | 8.4 | (3.9 | ) | 42.7 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
1,012.8 | 95.6 | 2,686.7 | (69.8 | ) | 3,725.3 | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) earnings from continuing operations
before income taxes and equity in earnings
of subsidiaries
|
(247.7 | ) | (95.6 | ) | 247.6 | (2.0 | ) | (97.7 | ) | |||||||||||
|
Income taxes (benefit) on continuing
operations before equity in earnings of
subsidiaries
|
(90.0 | ) | (45.5 | ) | 100.0 | — | (35.5 | ) | ||||||||||||
|
Equity in earnings of subsidiaries
|
97.5 | 2.5 | — | (100.0 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) earnings from continuing operations
|
(60.2 | ) | (47.6 | ) | 147.6 | (102.0 | ) | (62.2 | ) | |||||||||||
|
Less: Net earnings attributable to
non-controlling interests
|
— | — | 0.6 | — | 0.6 | |||||||||||||||
|
|
||||||||||||||||||||
|
NET (LOSS) EARNINGS ATTRIBUTABLE TO
STANLEY BLACK & DECKER, INC.
|
$ | (60.2 | ) | $ | (47.6 | ) | $ | 147.0 | $ | (102.0 | ) | $ | (62.8 | ) | ||||||
|
|
||||||||||||||||||||
30
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Three Months Ended July 4, 2009
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Three Months Ended July 4, 2009
| Parent | ||||||||||||||||
| Stanley Black & | Non-Guarantor | |||||||||||||||
| Decker, Inc. | Subsidiaries | Eliminations | Consolidated | |||||||||||||
|
NET SALES
|
$ | 365.2 | $ | 583.6 | $ | (29.6 | ) | $ | 919.2 | |||||||
|
COSTS AND EXPENSES
|
||||||||||||||||
|
Cost of sales
|
242.5 | 331.0 | (20.9 | ) | 552.6 | |||||||||||
|
Selling, general and administrative
|
114.2 | 153.9 | (12.8 | ) | 255.3 | |||||||||||
|
Other, net
|
(45.7 | ) | 27.8 | 5.3 | (12.6 | ) | ||||||||||
|
Restructuring charges and asset impairments
|
5.0 | 4.9 | — | 9.9 | ||||||||||||
|
Interest expense, net
|
13.9 | (0.7 | ) | 2.1 | 15.3 | |||||||||||
|
|
||||||||||||||||
|
|
329.9 | 516.9 | (26.3 | ) | 820.5 | |||||||||||
|
|
||||||||||||||||
|
Earnings (loss) from continuing operations before income
taxes and equity in earnings of subsidiaries
|
35.3 | 66.7 | (3.3 | ) | 98.7 | |||||||||||
|
Income taxes on continuing operations before equity in
earnings of subsidiaries
|
13.5 | 13.2 | — | 26.7 | ||||||||||||
|
Equity in earnings of subsidiaries
|
53.5 | — | (53.5 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
75.3 | 53.5 | (56.8 | ) | 72.0 | |||||||||||
|
Less: Net earnings attributable to non-controlling interests
|
— | 1.2 | — | 1.2 | ||||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
|
75.3 | 52.3 | (56.8 | ) | 70.8 | |||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS
|
— | (1.3 | ) | — | (1.3 | ) | ||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) ATTRIBUTABLE TO STANLEY BLACK & DECKER,
INC.
|
$ | 75.3 | $ | 51.0 | $ | (56.8 | ) | $ | 69.5 | |||||||
|
|
||||||||||||||||
Stanley Black & Decker, Inc.
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Six Months Ended July 4, 2009
Condensed Consolidating Statement of Operations
(Unaudited, Millions of Dollars)
Six Months Ended July 4, 2009
| Parent | ||||||||||||||||
| Stanley Black & | Non-Guarantor | |||||||||||||||
| Decker, Inc. | Subsidiaries | Eliminations | Consolidated | |||||||||||||
|
NET SALES
|
$ | 727.9 | $ | 1,166.7 | $ | (62.4 | ) | $ | 1,832.2 | |||||||
|
COSTS AND EXPENSES
|
||||||||||||||||
|
Cost of sales
|
484.3 | 666.4 | (46.2 | ) | 1,104.5 | |||||||||||
|
Selling, general and administrative
|
223.2 | 310.3 | (25.5 | ) | 508.0 | |||||||||||
|
Other, net
|
(37.2 | ) | 51.3 | 3.6 | 17.7 | |||||||||||
|
Restructuring charges and asset impairments
|
9.4 | 9.6 | — | 19.0 | ||||||||||||
|
Interest expense, net
|
28.9 | (1.5 | ) | 4.2 | 31.6 | |||||||||||
|
|
||||||||||||||||
|
|
708.6 | 1,036.1 | (63.9 | ) | 1,680.8 | |||||||||||
|
|
||||||||||||||||
|
Earnings from continuing operations before income taxes and
equity in earnings of subsidiaries
|
19.3 | 130.6 | 1.5 | 151.4 | ||||||||||||
|
Income taxes on continuing operations before equity in
earnings of subsidiaries
|
7.4 | 33.0 | — | 40.4 | ||||||||||||
|
Equity in earnings of subsidiaries
|
97.6 | — | (97.6 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
109.5 | 97.6 | (96.1 | ) | 111.0 | |||||||||||
|
Less: Net earnings attributable to non-controlling interests
|
— | 1.9 | — | 1.9 | ||||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
|
109.5 | 95.7 | (96.1 | ) | 109.1 | |||||||||||
|
|
||||||||||||||||
|
NET LOSS FROM DISCONTINUED OPERATIONS
|
— | (1.9 | ) | — | (1.9 | ) | ||||||||||
|
|
||||||||||||||||
|
NET EARNINGS (LOSS) ATTRIBUTABLE TO STANLEY BLACK & DECKER,
INC.
|
$ | 109.5 | $ | 93.8 | $ | (96.1 | ) | $ | 107.2 | |||||||
|
|
||||||||||||||||
31
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Balance Sheet
(Unaudited, Millions of Dollars)
July 3, 2010
Condensed Consolidating Balance Sheet
(Unaudited, Millions of Dollars)
July 3, 2010
| Parent | The Black & | Non- | ||||||||||||||||||
| Stanley Black & | Decker | Guarantor | ||||||||||||||||||
| Decker, Inc. | Corporation | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current Assets
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 22.1 | $ | 3.2 | $ | 1,573.1 | $ | — | $ | 1,598.4 | ||||||||||
|
Accounts and notes receivable, net
|
162.7 | — | 1,387.3 | — | 1,550.0 | |||||||||||||||
|
Inventories, net
|
128.4 | — | 1,166.8 | — | 1,295.2 | |||||||||||||||
|
Other current assets
|
45.0 | 77.8 | 306.0 | — | 428.8 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Current Assets
|
358.2 | 81.0 | 4,433.2 | — | 4,872.4 | |||||||||||||||
|
Property, Plant and Equipment, net
|
184.2 | 5.2 | 877.6 | — | 1,067.0 | |||||||||||||||
|
Goodwill
|
171.4 | — | 4,867.8 | — | 5,039.2 | |||||||||||||||
|
Other Intangible Assets, net
|
13.3 | — | 2,658.7 | — | 2,672.0 | |||||||||||||||
|
Investment in Subsidiary
|
17,032.5 | 10,077.0 | — | (27,109.5 | ) | — | ||||||||||||||
|
Intercompany Receivables
|
311.1 | 4,942.3 | 18,456.4 | (23,709.8 | ) | — | ||||||||||||||
|
Other Assets
|
33.5 | 28.2 | 283.3 | — | 345.0 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Assets
|
$ | 18,104.2 | $ | 15,133.7 | $ | 31,577.0 | $ | (50,819.3 | ) | $ | 13,995.6 | |||||||||
|
|
||||||||||||||||||||
|
LIABILITIES AND SHAREOWNERS’ EQUITY
|
||||||||||||||||||||
|
Current Liabilities
|
||||||||||||||||||||
|
Short-term borrowings
|
$ | 340.2 | $ | — | $ | 3.7 | $ | — | $ | 343.9 | ||||||||||
|
Current maturities on long-term debt
|
4.2 | 420.2 | 3.0 | — | 427.4 | |||||||||||||||
|
Accounts payable and accrued expenses
|
143.5 | 72.5 | 2,087.4 | — | 2,303.4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Current Liabilities
|
487.9 | 492.7 | 2,094.1 | — | 3,074.7 | |||||||||||||||
|
Intercompany Payables
|
9,465.0 | 8,999.6 | 5,245.2 | (23,709.8 | ) | — | ||||||||||||||
|
Long-Term Debt
|
1,092.4 | 1,053.3 | 173.0 | — | 2,318.7 | |||||||||||||||
|
Other Liabilities
|
122.2 | 160.3 | 1,685.2 | — | 1,967.7 | |||||||||||||||
|
Accumulated other comprehensive loss
|
(56.9 | ) | (181.1 | ) | (146.4 | ) | — | (384.4 | ) | |||||||||||
|
Other Shareowners’ Equity
|
6,993.6 | 4,608.9 | 22,500.6 | (27,109.5 | ) | 6,993.6 | ||||||||||||||
|
Non-controlling interests
|
— | — | 25.3 | — | 25.3 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total Equity
|
6,936.7 | 4,427.8 | 22,379.5 | (27,109.5 | ) | 6,634.5 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total Liabilities and Shareowners’ Equity
|
$ | 18,104.2 | $ | 15,133.7 | $ | 31,577.0 | $ | (50,819.3 | ) | $ | 13,995.6 | |||||||||
|
|
||||||||||||||||||||
32
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Balance Sheet
(Unaudited, Millions of Dollars)
January 2, 2010
Condensed Consolidating Balance Sheet
(Unaudited, Millions of Dollars)
January 2, 2010
| Parent | ||||||||||||||||
| Stanley Black & | Non-Guarantor | |||||||||||||||
| Decker, Inc. | Subsidiaries | Eliminations | Consolidated | |||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 9.2 | $ | 391.5 | $ | — | $ | 400.7 | ||||||||
|
Accounts and notes receivable, net
|
150.2 | 381.8 | — | 532.0 | ||||||||||||
|
Inventories, net
|
111.6 | 254.6 | — | 366.2 | ||||||||||||
|
Other current assets
|
12.4 | 100.6 | — | 113.0 | ||||||||||||
|
|
||||||||||||||||
|
Total Current Assets
|
283.4 | 1,128.5 | — | 1,411.9 | ||||||||||||
|
Property, Plant and Equipment, net
|
197.7 | 378.2 | — | 575.9 | ||||||||||||
|
Goodwill
|
171.7 | 1,646.7 | — | 1,818.4 | ||||||||||||
|
Other Intangible Assets, net
|
15.4 | 761.0 | — | 776.4 | ||||||||||||
|
Investment in Subsidiary
|
12,776.9 | — | (12,776.9 | ) | — | |||||||||||
|
Intercompany Receivable
|
346.6 | 10,075.3 | (10,421.9 | ) | — | |||||||||||
|
Other Assets
|
35.7 | 150.8 | — | 186.5 | ||||||||||||
|
|
||||||||||||||||
|
Total Assets
|
$ | 13,827.4 | $ | 14,140.5 | $ | (23,198.8 | ) | $ | 4,769.1 | |||||||
|
|
||||||||||||||||
|
LIABILITIES AND SHAREOWNERS’ EQUITY
|
||||||||||||||||
|
Current Liabilities
|
||||||||||||||||
|
Short-term borrowings
|
$ | 87.0 | $ | 3.4 | $ | — | $ | 90.4 | ||||||||
|
Current maturities on long-term debt
|
204.5 | 3.5 | — | 208.0 | ||||||||||||
|
Accounts payable and accrued expenses
|
241.2 | 652.4 | — | 893.6 | ||||||||||||
|
|
||||||||||||||||
|
Total Current Liabilities
|
532.7 | 659.3 | — | 1,192.0 | ||||||||||||
|
Intercompany Payables
|
10,075.3 | 346.6 | (10,421.9 | ) | — | |||||||||||
|
Long-Term Debt
|
1,079.1 | 5.6 | — | 1,084.7 | ||||||||||||
|
Other Liabilities
|
100.9 | 380.0 | — | 480.9 | ||||||||||||
|
Accumulated other comprehensive loss
|
(23.2 | ) | (53.3 | ) | (76.5 | ) | ||||||||||
|
Other Shareowners’ Equity
|
2,062.6 | 12,776.9 | (12,776.9 | ) | 2,062.6 | |||||||||||
|
Non-controlling interests
|
— | 25.4 | — | 25.4 | ||||||||||||
|
|
||||||||||||||||
|
Total Equity
|
2,039.4 | 12,749.0 | (12,776.9 | ) | 2,011.5 | |||||||||||
|
|
||||||||||||||||
|
Total Liabilities and Shareowners’ Equity
|
$ | 13,827.4 | $ | 14,140.5 | $ | (23,198.8 | ) | $ | 4,769.1 | |||||||
|
|
||||||||||||||||
33
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Statement of Cash Flow
(Unaudited, Millions of Dollars)
Six Months Ended July 3, 2010
Condensed Consolidating Statement of Cash Flow
(Unaudited, Millions of Dollars)
Six Months Ended July 3, 2010
| Parent | The Black & | |||||||||||||||||||
| Stanley Black & | Decker | Non-Guarantor | ||||||||||||||||||
| Decker, Inc. | Corporation | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
Cash (used in) provided by operating activities
|
$ | (283.4 | ) | $ | (299.4 | ) | $ | 771.1 | — | $ | 188.3 | |||||||||
|
Investing Activities
|
||||||||||||||||||||
|
Capital expenditures and capitalized software
|
(12.2 | ) | — | (45.0 | ) | — | (57.2 | ) | ||||||||||||
|
Business acquisitions and asset disposals
|
5.6 | (15.0 | ) | (8.7 | ) | — | (18.1 | ) | ||||||||||||
|
Cash acquired from Black & Decker
|
— | 1.8 | 947.6 | — | 949.4 | |||||||||||||||
|
Intercompany payables and receivables
|
(4.6 | ) | 171.3 | — | (166.7 | ) | — | |||||||||||||
|
Other investing activities
|
(16.1 | ) | 45.8 | — | — | 29.7 | ||||||||||||||
|
|
||||||||||||||||||||
|
Cash (used in) provided by investing activities
|
(27.3 | ) | 203.9 | 893.9 | (166.7 | ) | 903.8 | |||||||||||||
|
Financing Activities
|
||||||||||||||||||||
|
Payments on long-term debt
|
(200.0 | ) | — | (1.6 | ) | — | (201.6 | ) | ||||||||||||
|
Stock purchase contract fees
|
(7.7 | ) | — | — | — | (7.7 | ) | |||||||||||||
|
Net short-term borrowings
|
253.8 | (175.0 | ) | — | — | 78.8 | ||||||||||||||
|
Cash dividends on common stock
|
(81.2 | ) | (7.7 | ) | — | — | (88.9 | ) | ||||||||||||
|
Purchase of common stock from treasury
|
(2.2 | ) | — | — | — | (2.2 | ) | |||||||||||||
|
Proceeds from the issuance of common stock
|
360.9 | — | — | — | 360.9 | |||||||||||||||
|
Intercompany payables and receivables
|
— | 281.4 | (448.1 | ) | 166.7 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Cash provided by (used in) financing activities
|
323.6 | 98.7 | (449.7 | ) | 166.7 | 139.3 | ||||||||||||||
|
Effect of exchange rate changes on cash
|
— | — | (33.7 | ) | — | (33.7 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Change in cash and cash equivalents
|
12.9 | 3.2 | 1,181.6 | — | 1,197.7 | |||||||||||||||
|
Cash and cash equivalents, beginning of period
|
9.2 | — | 391.5 | — | 400.7 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and Cash Equivalents, End of Period
|
$ | 22.1 | $ | 3.2 | $ | 1,573.1 | — | $ | 1,598.4 | |||||||||||
|
|
||||||||||||||||||||
34
Table of Contents
Stanley Black & Decker, Inc.
Condensed Consolidating Statements of Cash Flow
(Unaudited, Millions of Dollars)
Six Months Ended July 4, 2009
Condensed Consolidating Statements of Cash Flow
(Unaudited, Millions of Dollars)
Six Months Ended July 4, 2009
| Parent | ||||||||||||||||
| Stanley Black & | Non-Guarantor | |||||||||||||||
| Decker, Inc. | Subsidiaries | Eliminations | Consolidated | |||||||||||||
|
Cash (used in) provided by operating activities
|
$ | (178.8 | ) | $ | 250.5 | $ | — | $ | 71.7 | |||||||
|
Investing Activities
|
||||||||||||||||
|
Capital expenditures and capitalized software
|
(20.0 | ) | (26.8 | ) | — | (46.8 | ) | |||||||||
|
Business acquisitions and asset disposals
|
(6.6 | ) | 1.8 | — | (4.8 | ) | ||||||||||
|
Intercompany payables and receivables
|
291.9 | — | (291.9 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Cash provided by (used in) investing activities
|
265.3 | (25.0 | ) | (291.9 | ) | (51.6 | ) | |||||||||
|
Financing Activities
|
||||||||||||||||
|
Payments on long-term debt
|
(59.3 | ) | (2.3 | ) | — | (61.6 | ) | |||||||||
|
Stock purchase contract fees
|
(7.6 | ) | — | — | (7.6 | ) | ||||||||||
|
Net short-term borrowings
|
50.5 | (3.1 | ) | — | 47.4 | |||||||||||
|
Proceeds from issuance of common stock
|
7.6 | 7.6 | ||||||||||||||
|
Cash dividends on common stock
|
(50.6 | ) | — | — | (50.6 | ) | ||||||||||
|
Purchase of common stock from treasury
|
(0.7 | ) | — | — | (0.7 | ) | ||||||||||
|
Option premium
|
(16.4 | ) | — | — | (16.4 | ) | ||||||||||
|
Other financing activities
|
— | 4.0 | — | 4.0 | ||||||||||||
|
Intercompany payables and receivables
|
— | (291.9 | ) | 291.9 | — | |||||||||||
|
|
||||||||||||||||
|
Cash (used in) provided by financing activities
|
(76.5 | ) | (293.3 | ) | 291.9 | (77.9 | ) | |||||||||
|
Effect of exchange rate changes on cash
|
— | 2.5 | — | 2.5 | ||||||||||||
|
|
||||||||||||||||
|
Change in cash and cash equivalents
|
10.0 | (65.3 | ) | — | (55.3 | ) | ||||||||||
|
Cash and cash equivalents, beginning of period
|
16.5 | 195.1 | — | 211.6 | ||||||||||||
|
|
||||||||||||||||
|
Cash and Cash Equivalents, End of Period
|
$ | 26.5 | $ | 129.8 | $ | — | $ | 156.3 | ||||||||
|
|
||||||||||||||||
V. Subsequent Event
On July
29, 2010, the Company announced the acquisition of CRC Evans Pipeline
International (“CRC Evans”) for a cash purchase price of
$445 million. CRC Evans is a leading global supplier of specialized
tools, equipment and services for the construction, maintenance and
repair of oil and gas transmission pipelines. CRC Evans, which had
annual revenues of $250 million for its latest fiscal year, will be
included in the Company’s industrial segment and represents an
expansion of the Company’s infrastructure solutions platform.
This acquisition provides the Company an entry into the oil and gas
transmission infrastructure market and continues the Company’s
goal of diversifying its revenue base.
The Company believes this acquisition will be slightly accretive to earnings in 2010.
35
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.”
Throughout this Management’s Discussion and Analysis (“MD&A”), references to Notes refer to the
notes to the (unaudited) condensed consolidated financial statements in Part 1 Item 1 of this Form
10-Q, unless otherwise indicated.
OVERVIEW
Black & Decker Merger
As discussed in Note A, on March 12, 2010, The Stanley Works completed the Merger with Black &
Decker. In connection with the Merger, The Stanley Works changed its name to Stanley Black &
Decker, Inc. Throughout this MD&A, references to the “Company” refer to Stanley Black & Decker,
Inc., formerly known as The Stanley Works. The Company’s condensed consolidated financial
statements include Black & Decker’s results of operations and cash flows from March 13, 2010.
As detailed in Item 1 Note F, Merger and Acquisitions, Black & Decker stockholders received 1.275
shares of Stanley common stock for each share of Black & Decker common stock outstanding as of the
merger date. Outstanding Black & Decker equity awards (primarily stock options) were similarly
exchanged for Stanley equity awards. After the exchange was completed, pre-merger Stanley
shareowners retained ownership of 50.5% of the newly combined company. Based on the $57.86 closing
price of Stanley common stock on March 12, 2010, the aggregate fair value of the consideration
transferred to consummate the Merger was $4.657 billion.
Management believes the Merger is a transformative event bringing together two highly complimentary
companies, with iconic brands and rich histories, yet with minimal market overlap. The Merger
enables a global offering in both hand and power tools, among other product offerings. Management
believes the value unlocked by the anticipated $350 million of annual cost synergies, expected to
be achieved within three years, will help fuel future growth and cement global cost leadership. The
cost synergy drivers are: business unit and regional consolidation (management, sales force and
shared services integration); corporate overhead; purchasing (materials and freight); and
manufacturing and distribution facility consolidation. Management expects that approximately $90
million of the cost synergies will be realized in 2010, primarily within SG&A, of which
approximately $30 million was realized in the second quarter. Management estimates there will be
approximately $400 million in total costs, incurred over a period of three years, to achieve the synergies.
Segments
The Company classifies its business into three reportable segments: Construction & Do It Yourself
(“CDIY”), Security, and Industrial.
The CDIY segment manufactures and markets hand tools, corded and cordless electric power tools and
equipment, lawn and garden products, consumer portable power products, home products, accessories
and attachments for power tools, plumbing products, consumer mechanics tools, storage systems, and
pneumatic tools and fasteners. These products are sold to professional end users, distributors, and
consumers, and are distributed through retailers (including home centers, mass merchants, hardware
stores, and retail lumber yards).
The Security segment provides 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, automatic doors, door closers,
electronic keyless entry systems, exit devices, healthcare storage and supply chain solutions,
patient protection products, hardware (including door and cabinet hinges, door stops, kick plates,
house numbers, gate hardware, cabinet pulls, hooks, braces and shelf brackets), locking mechanisms,
electronic keyless entry systems, keying systems, tubular and mortise door locksets. Security
products are sold primarily on a direct sales basis, and in certain instances, through third party
distributors.
36
Table of Contents
The Industrial segment manufactures and markets professional industrial and automotive mechanics
tools and storage systems, metal and plastic fasteners and engineered fastening systems, hydraulic
tools and accessories, plumbing, heating and air conditioning tools, assembly tools and systems,
and specialty tools. These products are sold to industrial customers including automotive,
transportation, electronics, aerospace, machine tool, and appliance industries and are distributed
primarily through third party distributors as well as direct sales forces.
After consummation of the Merger, the Black & Decker businesses were assessed and integrated into
the Company’s existing reportable segments. The legacy Black & Decker segments: Power Tools and
Accessories, Hardware & Home Improvement (“HHI”) and Fastening and Assembly Systems, were
integrated into the Company’s CDIY, Security and Industrial segments, respectively, with the
exception of the Price Pfister plumbing products business which was formerly part of HHI but is now
included in the CDIY segment. Additionally, a small portion of the world-wide power tools business
that sells to industrial channel customers is integrated within the Industrial segment. The
results of Black & Decker’s operations are presented within each of these segments and reflect
activity since the merger date.
Strategy
Beginning with the first significant security acquisitions in 2002, Stanley has pursued a
diversification strategy to enable profitable growth. This strategy involves industry, geographic
and customer diversification, as exemplified by the expansion of the security solution product
offerings, the growing proportion of sales outside the U.S., and the reduction of the Company’s
dependence on sales to U.S. home centers and mass merchants. In addition, the Company has indicated
a desire to be a consolidator of the tool industry and to increase its relative weighting in
emerging markets, objectives which are both achieved by the Merger.
The results of this diversification strategy are evident. Sales outside the U.S. represented 47% of
the total in the second quarter of 2010, up from 29% in 2002. Legacy Stanley sales to U.S. home
centers and mass merchants declined from a high of approximately 40% in 2002 to 15% in 2009. On a
pro-forma combined basis, Stanley and Black & Decker 2009 sales to U.S. home centers and mass
merchants were approximately 31%, including 12% in sales to the combined Company’s largest
customer, consistent with the level of concentration that legacy Stanley had in 2006. As
acquisitions in the various growth platforms (Security, Engineered Fastening, Infrastructure Solutions and HealthCare) are made in future years, the proportion of sales to
these valued U.S. home center and mass merchant customers is expected to decrease.
Execution of this strategy has entailed approximately $2.8 billion of acquisitions since 2002
(aside from the Merger), several divestitures and increased brand investment, enabled by strong
cash flow generation and proceeds from divestitures. Refer to the “Business Overview” section of
Management’s Discussion and Analysis of Financial Condition and Results of Operations in The
Stanley Works Annual Report on
Form 10-K
for the fiscal year ended January 2, 2010 for additional
strategic discussion.
Acquisition of CRC Evans Pipeline International
On July 29, 2010, the Company announced the acquisition of CRC Evans Pipeline International (“CRC Evans”) for a cash
purchase price of $445 million. CRC Evans is a leading global
supplier of specialized tools, equipment and services for the construction, maintenance and repair of oil and gas transmission pipelines.
CRC Evans, which had annual revenues of $250 million for its latest fiscal year, will be included in the Company’s industrial segment and represents an expansion of the Company’s infrastructure solutions
platform. This acquisition provides the Company an entry into the oil and gas transmission infrastructure market and continues the Company’s goal of diversifying its revenue base. The
Company funded the acquisition with its existing sources of liquidity. The Company believes this acquisition will be slightly accretive to earnings in 2010.
Acquisition of SSDS
The Company acquired Stanley Solutions de Sécurité (“SSDS”), formerly known as ADT France, on March
9, 2010 for $8 million, subject to certain adjustments. SSDS had approximately $175 million in 2009
sales. The acquisition is an indication of the Company’s continuing strategic intent to expand the
security segment internationally and is highly complementary to the Company’s existing French
security platform, Générale de Protection, acquired in 2008. The SSDS acquisition is expected to be
modestly dilutive to earnings in 2010, as the majority of the integration benefits will not occur
until early 2011.
Merger-Related Charges Impacting Second Quarter and Year-To-Date 2010 Earnings
The Company reported $229 million and $442 million in pre-tax charges in the second quarter and
year-to-date 2010 periods, respectively, pertaining primarily to the Merger (the “merger-related
charges”) which were comprised of the following:
| • | $123 million and $165 million for the second quarter and year-to-date 2010 periods, respectively, in Cost of sales. Inventory step-up amortization stemming from the initial turn of the Black & Decker acquired inventory, which was written-up in purchase accounting to its fair value, amounted to $117 million for the second quarter and $159 million year-to-date. Additionally, the second quarter includes $6 million of facility-closure related charges; | ||
| • | $16 million and $65 million for the second quarter and year-to-date 2010 periods, respectively, in Selling, general & administrative for certain executive and merger-related compensation costs and integration-related consulting fees; |
37
Table of Contents
| • | $12 million and $44 million for the second quarter and year-to-date 2010 periods, respectively, in Other-net for investment banking and other deal costs; and | ||
| • | $78 million and $168 million for the second quarter and year-to-date 2010 periods, respectively, in Restructuring and asset impairment charges primarily for severance, including, for the year-to-date period, costs for certain Black & Decker executives triggered by the change in control. |
The tax effect on the above charges during the second quarter of 2010 was $69 million, resulting in
an after-tax charge of $160 million. On a year-to-date basis, the tax effect on the above charges,
some of which were not tax deductible, was $103 million, resulting in an after-tax charge of $339
million.
Throughout this MD&A, the Company has provided a discussion of the outlook and results both
inclusive and exclusive of the merger-related charges. The amounts and measures, including gross
profit and segment profit, on a basis excluding such charges are considered relevant to aid
analysis and understanding of the Company’s results aside from the material impact of the
merger-related charges; the measures are utilized internally by management to understand business
trends, as once the aforementioned anticipated cost synergies from the Black & Decker integration
are realized such charges are expected to subside.
2010 Outlook
This outlook discussion is intended to provide broad insight into the Company’s near-term earnings
prospects, and does not purport to describe all of the various factors affecting such projections.
The Company expects full year 2010 diluted earnings per share (“EPS”) to be in the range of $0.60
to $1.00. Excluding the effects of merger-related charges and the $36 million second quarter
benefit attributable to settlement of tax contingencies, 2010 EPS is expected to be in the range of
$3.35 to $3.55. This estimate contemplates many factors including, but not limited to, the
following items associated with the Black & Decker merger and SSDS acquisition:
| • | Approximately $170 million of non-cash inventory step-up amortization in Cost of sales stemming from the initial turn of the Black & Decker acquired inventory. | ||
| • | Approximately $120 million in costs comprised of $75 million classified in SG&A for certain executive compensation and integration-related consulting fees, and $45 million classified in Other, net for investment banking and other deal costs. | ||
| • | Restructuring and asset impairment charges in the range of $245 million to $295 million. |
The Company expects the effective income tax rate for the full year 2010 will approximate 18% to
23% which includes the tax settlement in the second
quarter of 2010. The favorable effective income tax rate effect of that tax settlement will be
partially offset by the unfavorable tax rate impact from non-deductible merger-related severance
and compensation. Excluding the effects of merger-related charges and the
benefit attributable to favorable settlement of tax contingencies in the second quarter, the
effective tax rate for the full year 2010 is projected to be 26-27%.
2010 free cash flow (as defined in the Financial Condition section of this MD&A) is projected to
exceed $300 million. This estimate is premised upon modest working capital benefits and
approximately $300 million of restructuring and other payments associated with the first quarter
merger with Black & Decker and acquisition of SSDS. Excluding the $300 million of estimated
restructuring and other payments, 2010 free cash flow is expected to exceed $600 million.
RESULTS OF OPERATIONS
Below is a summary of consolidated operating results for the three and six months ended July 3,
2010, followed by an overview of performance by each business segment.
Terminology:
The terms “legacy Stanley” and “organic” are utilized to describe results aside from
the impact of mergers and acquisitions during the initial 12 months of ownership. This ensures
appropriate comparability to operating results in the prior period.
38
Table of Contents
The Company has included a “pro forma” discussion regarding legacy Black & Decker’s performance in
relation to the prior year on a basis reflecting the post-merger segment organization. This “pro
forma” analysis is provided to aid understanding of the Black & Decker business trends compared to
the prior year since the Merger occurred March 12, 2010, and accordingly the Company’s 2009
reported results solely reflect legacy Stanley.
Net Sales:
Net sales from continuing operations were $2.366 billion in the second quarter of 2010
compared to $919 million in the second quarter of 2009, representing an increase of $1.447 billion
or 157%. The Merger along with the acquisition of SSDS contributed a 149% increase in net sales,
and organic sales volume provided a 9% increase in net sales for the quarter. These benefits were
partially offset by the unfavorable effects of foreign currency translation which decreased net
sales by 1%. Customer pricing was flat for the quarter. Organic sales growth was driven by
inventory re-stocking by the Company’s customers along with growth in end market demand. On a
geographic basis, legacy Stanley unit volume sales increased 6% in the Americas, 14% in Europe, and
27% in the Asian region. By segment, legacy Stanley unit volume increased 6% in CDIY, remained flat
in Security, which was negatively impacted by weak U.S. commercial construction markets among other
factors, and increased 30% in Industrial which benefited from rebounding markets along with
re-stocking in certain distribution channels. On a pro forma basis, the legacy Black & Decker
business experienced unit volume growth of 14%, reflecting inventory re-stocking and improvement in
end market demand.
Approximately one-half to two-thirds of the volume growth for both Stanley and Black & Decker is
estimated to be attributable to supply chain restocking, which is not expected to continue in the
second half of 2010 at the same pace such that the sales volume improvement for the balance of the
year will be less pronounced than in the second quarter.
Net sales from continuing operations were $3.628 billion in the first half of 2010, a $1.796
billion or 98% increase, versus $1.832 billion in the first half of 2009. The Merger along with the
SSDS acquisition contributed 93% of the sales increase. Organic sales volume rose 3%. The favorable
effects of foreign currency translation increased net sales by 2%, and price remained flat for the
year-to-date period. The factors affecting the year-to-date organic unit volume performance are
primarily the same as those discussed previously related to the second quarter, except that the
favorable sales volume effects from supply chain restocking were more significant in the second
quarter.
Gross Margin:
Gross margin from continuing operations was $769 million, or 32.5% of net sales, in
the second quarter of 2010, compared to $367 million, or 39.9% of net sales, in the prior year. The
addition of the Black & Decker and SSDS results was the main driver of the $402 million increase in
gross margin for the quarter. Gross margin was negatively impacted by $123 million in
merger-related charges as previously discussed, primarily for the inventory step-up amortization
from the initial turn of Black & Decker inventory. Aside from merger-related charges, legacy
Stanley gross margin increased $40 million resulting in a record second quarter gross profit rate
of 41.0%. This strong performance by the legacy Stanley business was enabled by sales volume
leverage, along with benefits from prior year restructuring actions, and the continued execution of
productivity initiatives. These favorable factors were partially offset by modest commodity
inflation and unfavorable foreign currency translation. With respect to the gross profit rate,
aside from the previously discussed inventory step-up impact, Black & Decker was dilutive to the
rate. The Company expects the results of Black & Decker to continue to be dilutive to the legacy
Stanley gross profit rate in future periods due to the high proportion of CDIY sales in the Black &
Decker business, whereas the Stanley Industrial and Security segments typically achieve higher
gross profit rates than the CDIY segment.
On a year-to-date basis, gross margin from continuing operations was $1.225 billion, or 33.8% of
net sales, in 2010, compared to $728 million, or 39.7% of net sales, for the corresponding period
in 2009. The addition of Black & Decker and SSDS provided the majority of the increase in gross
margin. Excluding the acquired companies and the $165 million of previously discussed
merger-related charges, legacy Stanley gross margin was $784 million or 40.9% of sales. The
year-to-date performance primarily relates to the same factors discussed previously pertaining to
the second quarter, except that foreign currency translation had a favorable year-to-date impact on
gross margin.
The price and commodity cost environment was relatively stable throughout the quarter and
year-to-date periods with a modestly negative impact. However, the Company expects to experience
more significant commodity inflation for the remainder of the year based upon current market
trends, including steel market pricing. The Company will continue to be proactive in implementing
customer pricing increases to mitigate the anticipated unfavorable inflationary impacts, but there
is typically a time lag before such pricing actions take effect, particularly with large customers,
and these pricing actions likely would not fully offset the inflation. Management has considered
these inflationary pressures in the guidance provided in the 2010 Outlook section of this MD&A.
39
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SG&A expenses:
SG&A from continuing operations, inclusive of the provision for doubtful accounts,
was $584 million, or 24.7% of net sales, in the second quarter of 2010, compared to $255 million,
or 27.8% of net sales, in the prior year. Excluding the previously discussed $16 million of
merger-related charges, SG&A amounted to $568 million or 24.0% of net sales, reflecting favorable
operating leverage from sales volume growth as well as economies of scale from the Merger. Black &
Decker and the acquisition of SSDS (on a basis excluding merger-related costs) contributed $293
million of incremental SG&A. The remaining $20 million increase in SG&A pertains to brand / other
growth-oriented investments, and the reinstatement of certain U.S. retirement benefits in 2010 that
were suspended in 2009, partially offset by the benefits of prior year head-count reduction actions
and foreign currency translation.
SG&A expense totaled $967 million, or 26.6% of net sales, for the first half of 2010 versus $508
million, or 27.7% of net sales, in 2009. Excluding the previously discussed $65 million of
merger-related charges, SG&A amounted to $902 million, or 24.9% of net sales for the first half of
2010. The improvement in SG&A as a percentage of net sales is primarily attributable to the same
factors discussed in relation to the second quarter performance.
Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs)
are classified within SG&A. This classification may differ from other companies who may report such
expenses within cost of sales. Due to diversity in practice, to the extent the classification of
these distribution costs differs from other companies, the Company’s gross margins may not be
comparable. Such distribution costs classified in SG&A amounted to $64 million in the second
quarter of 2010 and $25 million in 2009, and $99 million for the year-to-date 2010 period as
compared to $49 million in the comparable 2009 period. The increase in the current year is
primarily attributable to the Merger.
Other,net:
Other,net expense from continuing operations amounted to $65 million in the second
quarter of 2010 versus $31 million in 2009. The increase is primarily due to $13 million higher
intangible amortization expense pertaining to Black & Decker and SSDS, acquisition deal costs, and
the addition of Black & Decker. On a year-to-date basis, other, net expense was $130 million in
2010 as compared with $62 million in 2009. This increase is mainly attributable to $15 million
higher intangible asset amortization expense, and $44 million of acquisition transaction costs,
such as investment banking and legal fees mainly for the Merger.
Gain on Debt Extinguishment
: In the second quarter of 2009, the Company repurchased $103 million
of its junior subordinated debt securities for $59 million in cash and recognized a $44 million
pre-tax gain on extinguishment.
Interest, net:
Net interest expense from continuing operations in the second quarter of 2010 was
$25 million compared to $15 million in the prior year. On a year-to-date basis, net interest
expense from continuing operations was $43 million compared to $32 million in the prior year. The
increase in interest expense primarily relates to the interest on the debt assumed in the Merger.
Income Taxes:
The Company recognized an income tax benefit from continuing operations of $37
million and $36 million for the three and six months ended July 3, 2010, respectively. The income
tax benefit in both the second quarter of 2010 and year-to-date periods reflects the benefit
attributable to a favorable settlement in June of certain tax contingencies related to the
resolution of a legacy Black & Decker income tax audit. In addition, the effective tax rate differs
from the statutory rate primarily due to various non-deductible transactions and other
restructuring associated with the Merger. The tax rate for the second
quarter 2010, excluding the impact of merger-related changes, as well
as the tax settlement benefit was 28%. The Company’s effective tax rate from continuing operations for the second
quarter and first half of 2010 was negative 398% and 36%, respectively, compared to the 27%
effective tax rate for legacy Stanley in both the prior year quarter and year-to-date periods. The
differences in the 2010 tax rates versus 2009 primarily relate to the previously discussed second
quarter tax benefit and merger-related items.
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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), gain on debt extinguishment,
restructuring and asset impairments, and income tax expense. Corporate overhead is comprised of
world headquarters facility expense, the 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 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:
Construction and Do-It-Yourself (“CDIY”), Security, and Industrial.
Construction & Do-It-Yourself (“CDIY”):
CDIY net sales were $1.322 billion in the second quarter
of 2010, up 308% from $324 million in the prior year. Black & Decker contributed 303% of the
increase. Organic sales volume increased sales by 6%, while price had a negative 1% impact. Foreign
currency translation was flat for the quarter. Organic sales growth was driven by the hand tools
and storage business in both the Americas and Europe with each region experiencing a
mid-single-digit sales growth rate in the quarter. Customer re-stocking and improvements in end
user markets contributed to the second quarter growth.
On a pro forma basis, the second quarter legacy Black & Decker power tools and accessories sales
rose approximately 9% with a 10% increase from unit volume, 2% of negative price and 1% from
favorable foreign currency translation. Consistent with the legacy Stanley hand tools business,
the Black & Decker unit volume gains in Europe outpaced those in the Americas. In professional
power tools and accessories, sales rose in the high teens percentages. The consumer products group
sales increased in mid-single digits, reflecting the continued success of the Tradesman product
line and new outdoor products offerings.
Year-to-date CDIY net sales were $1.884 billion in 2010 as compared to $628 million in 2009, an
increase of 200%. Black & Decker sales contributed 196% of the increase, and organic sales unit
volume provided 2% of growth. The effect of foreign currency translation increased net sales by 3%,
which was partially offset by 1% lower price. The factors contributing to the year-to-date
performance are mainly consistent with those discussed pertaining to the second quarter, although
customer re-stocking was more prevalent in the second quarter.
Segment profit was $118 million, or 8.9% of net sales, for the second quarter of 2010, compared to
$37 million or 11.3% of net sales in the prior year. Excluding the $88 million of Black & Decker
inventory step-up amortization, segment profit amounted to $206 million or 15.6% of net sales. This
strong expansion of the segment profit rate, excluding the inventory step-up amortization, was due
to operating leverage on higher sales and reflects the lower overhead cost structure from
restructuring actions as well as the accretive impact from Black & Decker. Additionally, ongoing
productivity initiatives and improved Bostitch profitability more than offset inflationary
pressures during the quarter. Year-to-date segment profit was $170 million or 9.0% of net sales in
the first half of 2010 compared to $65 million or 10.4% of net sales in the prior year. Excluding
the $120 million of Black & Decker inventory step-up amortization, segment profit amounted to $290
million or 15.4% of net sales. The year-to-date segment profit reflects the same factors discussed
previously pertaining to the second quarter, while the operating leverage was more pronounced in
the quarter than year-to-date.
Security:
Security sales increased 46% to $571 million during the second quarter of 2010 from $391
million in the corresponding 2009 period. The merger with Black & Decker provided 36% of the
increase and the acquisition of SSDS provided an additional 9%. Foreign currency translation and
organic unit volume remained flat compared to the prior year, while customer pricing increased 1%.
Within the convergent security solutions business, recurring monthly revenue grew at a
mid-single-digit rate. Installation volumes were flat during the quarter. Mechanical Access sales
volumes were flat as modest growth in builder’s hardware and automatic doors was offset by weakness
in commercial locking systems amid slow commercial construction markets. On a pro forma basis,
legacy Black & Decker hardware and home improvement sales rose approximately 5% from the prior year
due to volume growth, fueled partially by new product introductions, and to a lesser extent
favorable foreign currency translation.
Year-to-date net sales were $985 million in 2010 compared to $764 million in 2009, an increase of
29%. Black & Decker and SSDS contributed a 30% increase in sales. There was a 3% decrease in
organic sales volume, which was partially offset by a 2% increase from favorable foreign currency
translation. The convergent security business had stronger installation sales volumes in the
second
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quarter of 2010 than the first quarter, representing flat sales versus the prior year and showing
signs of stabilization. The other factors affecting the year-to-date period are largely consistent
with those discussed pertaining to the second quarter performance.
Security segment profit amounted to $68 million, or 11.8% of net sales, for the second quarter of
2010 as compared to $74 million, or 19.0% of net sales in the prior year. The Black & Decker
inventory step-up amortization decreased segment profit by $22 million. Excluding the inventory
step-up, the segment profit rate was 15.6% of net sales reflecting a 170 basis point dilutive
impact from acquisitions. The segment profit percentage was also affected by the slow-down in
commercial construction markets, SG&A investments to fund growth and mild inflation. Year-to-date
segment profit was $132 million or 13.4% of net sales in the first half of 2010 compared to $145
million, or 19.0% of net sales, in the prior year. The Black & Decker inventory step-up
amortization and facility closure merger-related charges decreased segment profit by $27 million
for the 2010 year-to-date period. Excluding these merger-related charges, the segment profit rate
was 16.1% reflecting an approximately 120 basis point unfavorable impact from the acquired
companies. Otherwise, the factors contributing to the year-to-date performance are primarily the
same as those discussed previously in relation to the second quarter.
Industrial:
Industrial sales of $472 million in the second quarter of 2010 increased 131% from $204
million in the prior year. The Black & Decker engineered fastening business sales volume
contributed 105% of the sales growth. Unfavorable foreign currency translation reduced sales by
approximately 4% while customer pricing was flat. Organic sales volume increased 30% driven by
global customer re-stocking in many regions as well as increasing global production levels fueling
strong end market demand. The Facom Europe and Proto Americas businesses both achieved very strong
growth due to these factors. The hydraulic business was further aided by favorable steel scrap
markets and growth in China. A strengthening economy in China as well as organic growth
initiatives fueled strong growth in Asia. This performance compares with a nearly 38% unit
volume decline experienced in the segment in the second quarter of 2009 due to pervasive customer
inventory corrections throughout the supply chain. On a pro forma basis, the Black & Decker engineered fastening business achieved approximately 45%
of sales growth associated with significantly higher light vehicle production in automotive
customer markets.
Year-to-date net sales in the Industrial segment were $759 million in 2010 compared to $440 million
in 2009, an increase of 72%. Black & Decker generated 57% of the increase, and organic volume
growth was a robust 15%. Pricing increased sales by 1%, which was offset by foreign currency
translation. The sales volume growth percentage was significantly higher in the second quarter as
compared with the first quarter.
Industrial segment profit was $52 million, or 11.0% of net sales, for the second quarter of 2010,
compared with $19 million, or 9.4% of net sales, in 2009. The Black & Decker inventory step-up
amortization reduced segment profit by $14 million. Excluding this impact, the segment profit rate
was 13.9% or 450 basis points above the prior year. Approximately two-thirds of this segment profit
rate expansion was provided by the Black & Decker engineered fastening business. The legacy Stanley
business achieved a strong segment profit performance due to favorable operating leverage fostered
by the sales growth combined with an improved cost structure and productivity projects.
Year-to-date segment profit was $85 million, or 11.2% of net sales, in the first half of 2010
compared to $44 million, or 9.9% of net sales, in the prior year. Year-to-date 2010 segment profit
includes $18 million of inventory step-up amortization related to the Merger, and the segment
profit rate was 13.6% aside from this impact. Approximately half of the improvement in the
year-to-date segment profit rate is attributable to the inclusion of the Black & Decker engineered
fastening business, and the remaining expansion in the profit rate stems from the factors discussed
in relation to the second quarter results.
The corporate overhead element of SG&A, which is not allocated to the business segments, amounted
to $53 million and $19 million in the second quarters of 2010 and 2009, respectively. The increase
in the second quarter expense reflects $16 million of merger-related charges for certain executive
and other compensation costs and integration consulting fees. The remaining increase is primarily
due to Black & Decker corporate overhead. The
corporate overhead element of SG&A totaled $128 million for the first half of 2010, an increase of
$94 million over the prior year. The increase in 2010 pertains to the previously discussed $65
million of merger-related charges and the addition of Black & Decker.
Restructuring and Asset Impairments
At July 3, 2010, restructuring reserves totaled $183.6 million. A summary of the restructuring
reserve activity from January 2, 2010 to July 3, 2010 is as follows (in millions):
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| Net | ||||||||||||||||||||||||
| 1/2/10 | Acquisitions | Additions | Usage | Currency | 7/3/10 | |||||||||||||||||||
|
2010 Actions
|
||||||||||||||||||||||||
|
Severance and related costs
|
$ | — | $ | — | $ | 167.2 | $ | (20.8 | ) | $ | 1.1 | $ | 147.5 | |||||||||||
|
Asset impairments
|
— | — | 8.0 | (8.0 | ) | — | — | |||||||||||||||||
|
Facility closure
|
— | — | 2.5 | — | — | 2.5 | ||||||||||||||||||
|
Other
|
— | — | 4.3 | (0.8 | ) | — | 3.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Subtotal 2010 actions
|
— | — | 182.0 | (29.6 | ) | 1.1 | 153.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Pre-2010 Actions
|
||||||||||||||||||||||||
|
Severance and related costs
|
44.3 | 9.1 | (0.6 | ) | (19.8 | ) | (4.8 | ) | 28.2 | |||||||||||||||
|
Asset impairments
|
(0.2 | ) | 0.2 | — | — | |||||||||||||||||||
|
Facility closure
|
1.9 | — | 2.0 | (2.5 | ) | — | 1.4 | |||||||||||||||||
|
Other
|
0.2 | 0.8 | — | (0.5 | ) | — | 0.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Subtotal Pre-2010 actions
|
46.4 | 9.9 | 1.2 | (22.6 | ) | (4.8 | ) | 30.1 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 46.4 | $ | 9.9 | $ | 183.2 | $ | (52.2 | ) | $ | (3.7 | ) | $ | 183.6 | ||||||||||
|
|
||||||||||||||||||||||||
2010 Actions:
In the first half of 2010, the Company recognized $168.6 million of restructuring
charges and asset impairments associated with the Black & Decker merger and acquisition of SSDS.
Of those charges, $157.6 million relates to severance charges associated with the reduction of
1,700 employees, $4.2 million relates to asset impairments, $2.5 million relates to facility
closure costs, and $4.3 million represents other charges. For the three months ended July 3, 2010
the Company recognized $78.4 million of restructuring charges and asset impairments associated
with the Black & Decker merger and acquisition of SSDS, of which $67.4 million relates to severance
charges associated with the reduction of 1,600 employees, $4.2 million relates to asset
impairments, $2.5 million relates to facility closure costs, and $4.3 million represents other
charges.
In addition, the Company continued to initiate cost reduction actions in the first half of 2010
that were not associated with the Black & Decker merger and SSDS acquisition, resulting in
severance and related charges of $9.6 million pertaining to the reduction of approximately 300
employees and asset impairment charges of $3.8 million. Such restructuring actions initiated in
the three months ended July 3, 2010 resulted in severance charges of $5.3 million associated with
the reduction of approximately 200 employees and asset impairment charges of $1.5 million.
Of the $182.0 million recognized for these 2010 actions, $29.6 million has been utilized to date,
with $153.5 million of reserves remaining as of July 3, 2010, which are expected to be utilized in
2010 and 2011. Usage includes $15.0 million which ultimately will entail cash payment in a future
period as it relates to a defined benefit plan for severed Black & Decker executives which is
classified in Post-Retirement Benefits on the Consolidated Balance Sheet. The $182.0 million of
charges recognized in the first half of 2010 includes, $94.6 million pertaining to the CDIY
segment; $47.3 million pertaining to the Security segment; $2.2 million pertaining to the
Industrial segment; and $37.9 million pertaining to non-operating entities.
Pre-2010 Actions:
As more fully disclosed in Note O of The Stanley Works Annual Report on Form 10-K for
the year ended January 2, 2009, during 2009 and 2008 the Company initiated cost reduction actions
in various businesses in response to sales volume declines associated with the economic recession.
As of January 2, 2010, the reserve balance related to these pre-2010 actions totaled $46.4 million.
As a result of the Merger and the acquisition of SSDS, the Company has assumed $9.9 million of
restructuring reserves recorded by those companies prior to the Merger and acquisition.
Utilization of the reserve balance related to Pre-2010 actions, including usage of those reserves
acquired in purchase accounting, was $22.6 million in the first half of 2010. The remaining reserve
balance of $30.1 million is expected to be utilized predominantly in 2010.
FINANCIAL CONDITION
Liquidity, Sources and Uses of Capital:
Operating Activities:
Cash flow from operations was $221 million in the second quarter of 2010
compared to $68 million in the second quarter of 2009. While the Company’s reported net earnings
were lower than 2009, the earnings converted to cash were higher
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in the current year as indicated by the significant increase in non-cash charges primarily
associated with the Merger. These include $118 million of inventory step-up amortization, a $44
million increase in depreciation and amortization, and $13 million in higher stock-based
compensation expense. Additionally, the prior year had a $44 million non-cash gain on debt
extinguishment. Cash flow from operations for the second quarter of 2010 was unfavorably impacted
by approximately $27 million in payments for merger-related items. Working capital usage was $20
million in the quarter, compared with proceeds of $30 million in the prior year’s quarter
associated with the increase in working capital due to the increase in sales volumes during the
2010 period. Working capital turns improved to 5.1 times for the second quarter of 2010 as
compared to 3.9 times for the second quarter of 2009 (pro forma with Black & Decker) due to
improvement in days outstanding accounts receivable, inventory and accounts payable, reflecting the
process-driven improvements from the Stanley Fulfillment System (“SFS”). Legacy Stanley working
capital turns in the second quarter 2010 was a record 8.6 turns, as compared with the previous
record of 7.9 turns in the fourth quarter of 2009. SFS will be
deployed in the Black & Decker operations to
improve its working capital efficiency over time. Other operating cash outflows were $42 million
in the second quarter of 2010 as compared with an $86 million outflow in the prior year, as the
prior year reflected the non-cash gain on debt extinguishment.
Year-to-date cash flow from operations was $188 million, compared with $72 million in the prior
year. While the Company’s net earnings were lower, cash flow from operations increased largely
pertaining to the significant increase in non-cash charges primarily associated with the Merger
including a $159 million of inventory step-up amortization, $56 million increase in depreciation
and amortization, and $41 million in higher stock-based compensation expense. Cash flow from
operations for the year-to-date 2010 period was unfavorably impacted by approximately $119 million
in payments for merger-related items. Working capital usage was $110 million during the year to
date 2010 period, compared with usage of $16 million in the prior year due to the increase in
working capital associated with higher sales volumes during the 2010 period. Year-to-date other
operating cash outflows were $8 million, compared with a $127 million outflow in the prior year, as
the prior year reflected the non-cash gain on debt extinguishment and unfavorable foreign currency
derivative impacts.
Free Cash Flow:
Free cash flow, as defined in the following table, was $186 million in the second
quarter of 2010 compared to $43 million in the corresponding 2009 period. The Company believes free
cash flow is an important measure of its liquidity, as well as its ability to fund future growth
and provide a dividend to shareowners. Free cash flow does not include deductions for mandatory
debt service, other borrowing activity, discretionary dividends on the Company’s common stock and
business acquisitions, among other items.
| (Millions of Dollars) | 2010 | 2009 | ||||||
|
Net cash provided by operating activities
|
$ | 221 | $ | 68 | ||||
|
Less: capital and software expenditures
|
(35 | ) | (25 | ) | ||||
|
|
||||||||
|
Free cash flow
|
$ | 186 | $ | 43 | ||||
|
|
||||||||
As previously discussed, the second quarter 2010 operating cash flow was affected by $27 million of
merger-related payments, and such payments will continue in the remainder of the year as Black &
Decker restructuring actions are implemented. Refer to the 2010 Outlook section for discussion of
projected free cash flow for the year (to exceed $300 million inclusive of approximately $300
million in merger-related payments). The 2010 free cash flow is expected to be more than adequate
to fund the discretionary dividends on the Company’s common stock and provide for debt service.
Investing Activities:
Capital and software expenditures were $35 million in the second quarter of
2010, compared to $25 million in 2009. On a year-to-date basis capital and software expenditures
were $57 million and $47 million in 2010 and 2009, respectively. The increase in both periods
principally related to the incremental capital and software expenditures associated with the
Merger. The Company will continue to make capital investments that are necessary to drive
productivity and cost structure improvements while ensuring that such investments provide a return
on capital employed.
There was a $949 million increase in cash in during the year to date 2010 period associated with
cash acquired in conjunction with the Black & Decker Merger. The Company realized $30 million of cash
proceeds from the termination of the Black & Decker interest rate swaps that had been entered into
prior to the Merger, and became undesignated at the merger date.
Financing Activities:
Cash proceeds from the issuance of common stock were $347 million and $361
million for the second quarter and year-to-date 2010 periods, respectively. As more fully
disclosed in Note H, Long-Term Debt and Financing Arrangements, the cash
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proceeds in both periods include $320 million associated with the Company’s Equity Purchase
Contracts. The remaining proceeds principally pertain to the exercise of stock options.
Cash dividends were $55 million for the second quarter of 2010 as compared to $25 million for the
comparable 2009 period. On a year-to-date basis cash dividends were $89 million as compared to $51
million in the year to date 2009 period. The increase in cash dividends in both periods was
primarily attributable to the additional shares outstanding associated with the Merger. In July,
2010 the Company announced the quarterly dividend rate will increase 3% to $0.34 per common share.
This represents the 43
rd
consecutive year of dividend increases.
Repayments on long-term debt were $202 million and $62 million for the year-to-date 2010 and 2009
periods, respectively. Net short-term repayments were $357 million in the second quarter of 2010
compared to borrowings of $55 million in 2009, as the Company utilized the $320 million of proceeds
received from the Equity Purchase Contracts to pay down commercial paper. Year-to-date inflows from
short term borrowings were $79 million in the current year compared to $47 million in the prior
year.
Credit Rating:
The Company’s stand-alone debt is currently rated by Standard & Poor’s (“S&P”),
Moody’s Investor Service (“Moody’s”) and Fitch Ratings (“Fitch”). As anticipated, as a result of
the merger with Black & Decker, on March 15, 2010 the Company’s senior unsecured debt was
reaffirmed at A by S&P and downgraded by Moody’s and Fitch to Baa1 and A-, respectively. Outlooks
vary and are currently negative, stable and stable by S&P, Moody’s and Fitch, respectively. The
Company’s stand-alone short-term debt, or commercial paper, ratings are A-2, P-2, and F2 by S&P,
Moody’s, and Fitch, respectively. Failure to maintain strong investment grade ratings level could
adversely affect the Company’s cost of funds, liquidity and access to capital markets, but would
not have an adverse effect on the Company’s ability to access the $1.5 billion committed credit
facilities.
Contractual Obligations:
Refer to the Company’s Form 10-Q filing for the period ended April 3, 2010
for disclosure of the contractual obligations following the Merger. The Company’s contractual
obligations have not changed materially since April 3, 2010.
Other Significant Commercial Commitments:
Amount of Commitment Expirations Per Period
| (Millions of Dollars) | Total | 2010 | 2011 – 2012 | 2013 – 2014 | Thereafter | |||||||||||||||
|
U.S. lines of credit
|
$ | 1,500 | $ | — | $ | 700 | $ | 800 | $ | — | ||||||||||
Long-term debt and lines of credit are explained in detail within Note H, Long-Term Debt and
Financing Arrangements, of the Notes to the Consolidated Financial Statements.
MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange rates, interest
rates, stock prices, and commodity prices.
As discussed in the gross profit section of the Results of Operations in this MD&A, the Company
anticipates there will be adverse effects from the Chinese RMB revaluation as well as building
inflationary pressures on commodities. While the nature of these risks has not changed, the 2010
outlook has changed such that management does not believe it will be able to fully recover
inflation through customer pricing in the current year due both to an increase in expected
inflation as well as the time lag in implementing price increases.
OTHER MATTERS
Customer-Related Risks
As discussed in the Strategy section of the Overview in this MD&A, the
Company has concentrations in sales with certain U.S. home centers and mass merchants, which have
increased from the legacy Stanley position as a result of the Merger. The loss or material
reduction of business from any such significant customer could have a material adverse impact on
the Company’s results of operations and cash flows until either such customers were replaced or the
Company made the necessary adjustments to compensate for the loss of business.
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Critical Accounting Estimates
Refer to the “Critical Accounting Estimates” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A) in The Stanley
Works Annual Report on Form 10-K for the fiscal year ended January 2, 2010, and to the “Critical
Accounting Policies” section of the Black & Decker MD&A on its Form 10-K for the fiscal year ended
December 31, 2009, for a discussion of the Company’s critical accounting estimates, aside from the
update provided below.
GOODWILL AND INTANGIBLE ASSETS — The Company acquires businesses in purchase transactions that
result in the recognition of goodwill and other intangible assets. The determination of the value
of intangible assets requires management to make estimates and assumptions. In accordance with
Accounting Standards Codification (“ASC”) 350-20 “Goodwill”, acquired goodwill and indefinite-lived
intangible assets are not amortized but are subject to impairment testing at least annually and
when an event occurs or circumstances change that indicates it is more likely than not impairment
exists. Other intangible assets are amortized and are tested for impairment when appropriate. The
Company completed the Merger and other acquisitions in 2010 with an aggregate consideration value
of $4.664 billion. The assets and liabilities of acquired businesses are recorded at fair value at
the date of acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired businesses. The Company reported $5.039 billion of goodwill and
$1.639 billion in indefinite-lived trade names at July 3, 2010.
The purchase accounting for the Merger is preliminary as is the allocation of goodwill arising from
the Merger to the Company’s segments and reporting units as of July 3, 2010. Furthermore, the
finalization of the Company’s purchase accounting will result in changes in the valuation of assets
and liabilities acquired, which could be material. The Company is not aware of any impairment
indicators and will conduct annual impairment testing in the third quarter of 2010. Management
continues to believe it is not reasonably likely that an impairment of goodwill or indefinite-lived
trade names will occur over the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the updating discussion under the caption “Market Risk” in Item 2 Management’s Discussion
and Analysis of Financial Condition and Results of Operations of this Form 10-Q. For further
discussion of the Company’s exposure to market risk, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, contained in the Company’s and The Black & Decker
Corporation’s Form 10-K’s for the years ended January 2, 2010 and December 31, 2009, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including the Company’s President
and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, the Company
has, pursuant to Rule 13a-15(b) of the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”), evaluated the effectiveness of the design and operation of its disclosure controls
and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the
Company’s Chief Executive Officer and its Senior Vice President and Chief Financial Officer have
concluded that, as of July 3, 2010, the Company’s disclosure controls and procedures are effective.
There has been no change in the Company’s internal controls over financial reporting that occurred
during the second quarter of 2010 that have materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
CAUTIONARY STATEMENT
Under the Private Securities Litigation Reform Act of 1995
Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical,
including, but not limited to, the statements regarding the Company’s ability to: (i) achieve
within three years $350 million of annual cost synergies in connection with the Black & Decker
merger; (ii) achieve future growth and global leadership as a result of achieving the $350 million
in cost synergies; (iii) realize $90 million of the cost synergies, primarily within SG&A, in 2010;
(iv) limit to $400 million the cost incurred over the three year period to achieve the synergies;
(v) decrease, as a result of acquisitions in its various growth platform, the proportion of sales
to U.S. home centers and mass merchant customers; (vi) achieve full year 2010 diluted earnings per
share in the range of $.60 to $1.00 or $3.35 to $3.55, excluding the effects of merger-related
charges and a $36 million second quarter benefit attributable to settlement of tax contingencies;
(vii) achieve free cash flow exceeding $300 million in 2010, or $600 million excluding the $300
million of
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estimated restructuring and other payments associated with the Black & Decker merger; (viii) fund
discretionary dividends and provide for debt service from free cash flow in 2010; (ix) continue to
make capital investments that are necessary to drive productivity and cost structure improvements
while insuring that such investments provide a return on capital employed ( collectively, the
“Results”); are “forward-looking statements” and are based on current expectations.
These statements are not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict. There are a number of risks, uncertainties and
important factors that could cause actual results to differ materially from those indicated by such
forward-looking statements. In addition to any such risks, uncertainties and other factors
discussed elsewhere herein, the risks, uncertainties and other factors that could cause or
contribute to actual results differing materially from those expressed or implied in the forward
looking statements include, without limitation, those set forth under Part II Item 1A Risk Factors
in the Company’s Quarterly Report on Form 10-Q for the period ended April 3, 2010 (together with
any material changes thereto contained in subsequent filed Quarterly Reports on Form 10-Q); those
contained in the Company’s other filings with the Securities and Exchange Commission; and those set
forth below.
The Company’s ability to deliver the Results is dependent upon: (i) approximately $170 million of
non-cash inventory step-up amortization stemming from the initial turn of Black & Decker acquired
inventory; (ii) incurring approximately $120 million in costs comprised of $75 million for certain
executive compensation and integration related consulting fees and $45 million for investment
banking and other acquisition transaction costs; (iii) restructuring and asset impairment charges
amounting to $245-$295 million; (iv) an effective tax rate for full year 2010 of 18-23% or 26-27% excluding
the effects of an estimated 60% unfavorable tax rate impact from non-deductible Black & Decker
merger-related severance and compensation and excluding an estimated 20% favorable tax benefit from
the settlement of tax contingencies; (v) the Company’s ability to limit restructuring and other
payments associated with the Black & Decker transaction and SSDS acquisition to $300 million; (vi)
the Company’s ability to successfully integrate recent acquisitions including Black & Decker and
SSDS, as well as any future acquisitions, while limiting associated costs; (vii) the success of the
Company’s efforts to expand its tools and security businesses; (viii) the success of the Company’s
efforts to build a growth platform and market leadership in Convergent Securities Solutions; (ix)
the Company’s success in developing and introducing new and high quality products, growing sales in
existing markets, identifying and developing new markets for its products and maintaining and
building the strength of its brands; (x) the continued acceptance of technologies used in the
Company’s products, including Convergent Security Solutions products; (xi) the Company’s ability to
manage existing Sonitrol franchisee and Mac Tools distributor relationships; (xii) the Company’s
ability to minimize costs associated with any sale or discontinuance of a business or product line,
including any severance, restructuring, legal or other costs; (xiii) the proceeds realized with
respect to any business or product line disposals; (xiv) the extent of any asset impairments with
respect to any businesses or product lines that are sold or discontinued; (xv) the success of the
Company’s efforts to manage freight costs, steel and other commodity costs; (xvi) the Company’s
ability to sustain or increase prices in order to, among other things, offset or mitigate the
impact of steel, freight, energy, non-ferrous commodity and other commodity costs and any inflation
increases; (xvii) the Company’s ability to generate free cash flow and maintain a strong debt to
capital ratio, including focusing on reduction of debt as determined by management; (xviii) the
Company’s ability to identify and effectively execute productivity improvements and cost
reductions, while minimizing any associated restructuring charges; (xix) the Company’s ability to
obtain favorable settlement of routine tax audits; (xx) the ability of the Company to generate
earnings sufficient to realize future income tax benefits during periods when temporary differences
become deductible; (xxi) the continued ability of the Company to access credit markets under
satisfactory terms; and (xxii) the Company’s ability to negotiate satisfactory payment terms under
which the Company buys and sells goods, services, materials and products.
The Company’s ability to deliver the Results is also dependent upon: (i) the success of the
Company’s marketing and sales efforts; (ii) the ability of the Company to maintain or improve
production rates in the Company’s manufacturing facilities, respond to significant changes in
product demand and fulfill demand for new and existing products; (iii) the Company’s ability to
continue improvements in working capital; (iv) the ability to continue successfully managing and
defending claims and litigation; (v) the success of the Company’s efforts to mitigate (such as
customer price increases) any cost increases generated by, for example, increases in the cost of
energy or significant Chinese Renminbi or other currency appreciation or revaluation; (vi) the
geographic distribution of the Company’s earnings; and (v) commitment to and success of the Stanley
Fulfillment System.
The Company’s ability to achieve the Results will also be affected by external factors. These
external factors include: pricing pressure and other changes within competitive markets; the
continued consolidation of customers particularly in consumer channels; inventory management
pressures on the Company’s customers; the impact the tightened credit markets may have on the
Company or its customers or suppliers; the extent to which the Company has to write-off accounts
receivable or assets or experiences supply chain disruptions in connection with bankruptcy filings
by customers or suppliers; increasing competition; changes in laws, regulations and
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policies that affect the Company, including, but not limited to trade, monetary, tax and fiscal
policies and laws; the timing and extent of any inflation or deflation; currency exchange
fluctuations; the impact of dollar/foreign currency exchange and interest rates on the
competitiveness of products and the Company’s debt program; the strength of the U.S. and European
economies; the extent to which world-wide markets associated with homebuilding and remodeling
continue to deteriorate; the impact of events that cause or may cause disruption in the Company’s
manufacturing, distribution and sales networks such as war, terrorist activities, and political
unrest; and recessionary or expansive trends in the economies of the world in which the Company
operates, including, but not limited to, the extent and duration of the current recession in the US
economy.
Unless required by applicable securities laws, the Company undertakes no obligation to publicly
update or revise any forward looking statements to reflect events or circumstances that may arise
after the date hereof. Readers are advised, however, to consult any further disclosures made on
related subjects in the Company’s reports filed with the Securities and Exchange Commission.
PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
The Company previously
disclosed, in its Quarterly Report on Form 10-Q for the period ended April 3, 2010, changes to the risk factors set forth in its Annual Report on Form 10-K for the fiscal year ended January 2, 2010. There have been no material changes to the risk factors disclosed in the Company’s Form 10-Q for
the quarter ended April 3, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about the Company’s purchases of equity securities that
are registered by the Company pursuant to Section 12 of the Exchange Act during the three months
ended July 3, 2010:
| (a) | Total Number | Maximum Number | ||||||||||||||
| Total | Of Shares | Of Shares That | ||||||||||||||
| Number Of | Average Price | Purchased As | May Yet Be | |||||||||||||
| Shares | Paid Per | Part Of A Publicly | Purchased Under | |||||||||||||
| 2010 | Purchased | Share | Announced Program | The Program | ||||||||||||
|
April 4 — May 8
|
34,585 | $ | 60.58 | — | — | |||||||||||
|
May 9 — June 5
|
554 | $ | 60.15 | — | — | |||||||||||
|
June 6 — July 3
|
140 | $ | 49.89 | — | — | |||||||||||
|
|
||||||||||||||||
|
|
— | — | ||||||||||||||
|
|
||||||||||||||||
As of July 3, 2010, 7.8 million shares of common stock remain authorized for repurchase. The
Company may repurchase shares in the open market or through privately negotiated transactions from
time to time pursuant to this prior authorization to the extent management deems warranted based on
a number of factors, including the level of acquisition activity, the market price of the Company’s
common stock and the current financial condition of the Company.
| (a) | The shares of common stock in this column were deemed surrendered to the Company by participants in various of the Company’s benefit plans to satisfy the taxes related to the vesting or delivery of a combination of restricted share units and long-term incentive shares under those plans. |
ITEM 6. EXHIBITS
|
(11)
|
Statement re-computation of per share earnings (the information required to be presented in this exhibit appears in Note C to the Company’s Condensed Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q). | |
|
|
||
|
(31)(i)(a)
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) |
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|
(i)(b)
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) | |
|
|
||
|
(32)(i)
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
(ii)
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
(101)
|
The following materials from Stanley Black & Decker Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2010, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations for the three and six months ended July 3, 2010 and July 4, 2010, (ii) Consolidated Balance Sheets at July 3, 2010 and January 2, 2010, (iii) Condensed Consolidated Statements of Cash Flows for the three and six months ended July 3, 2010 and July 4, 2009, (iv) Consolidated Statements of Changes in Shareowner’s Equity at July 3, 2010 and January 2, 2010, and (v) Notes to (Unauditied) Condensed Consolidated Financial Statements, tagged as block of text**. |
| ** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
STANLEY BLACK & DECKER, INC.
|
||||
| Date: July 30, 2010 | By: | /s/ Donald Allan Jr. | ||
| Donald Allan Jr. | ||||
| Senior Vice President and Chief Financial Officer | ||||
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Part I Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint