NEW BRITAIN, Conn.- Stanley Black & Decker (NYSE: SWK) today announced second quarter 2012 financial results.
2Q’12 Business & Regional Commentary:
CDIY grew 5% organically, reflective of successful new products and market share gains in almost every region of the world despite the nascent stage housing market recovery in North America and flat-to-contracting related markets throughout Europe. The operating margin rate, excluding Merger & Acquisitions (“M&A”) charges, of 15.7%, was achieved through volume leverage, improved price/inflation recovery, cost synergies and other reductions.
The Industrial segment grew 1% organically as strength in the Engineered Fastening business more than offset European weakness within Industrial & Automotive Repair (IAR) and a weak North American onshore pipeline market. The operating margin rate, excluding M&A charges, was 15.1%, suppressed by IAR volume and cost absorption issues.
Within Security both Convergent Security Solutions (CSS) and Mechanical Access Solutions businesses declined low-single digits organically, largely due to market-driven headwinds. The Niscayah integration continues to progress as planned and CSS revenues in Europe, as expected, fell low-single digits. As guided, the segment operating margin rate, excluding M&A related charges, improved significantly on a sequential basis to 15.3%, reflective of the successful achievement of Niscayah-related cost synergies and incremental cost containment actions. Excluding Niscayah and M&A charges, the operating margin rate was 18.0%.
Organic revenues in Europe across the entire company declined 2% for the quarter. This relatively modest decrease was in part due to share gains in CDIY which fueled 2% organic growth for the segment in the region and helped offset declines within Industrial & Automotive Repair and Security. Organic revenues in North America increased 2%, largely due to strength in CDIY, while organic revenues in the emerging markets increased 8%.
Dividend Increase And Share Repurchase Program
During the quarter, the company executed upon a $200 million share repurchase, equal to approximately 3 million shares of common stock.
Further, as announced in a separate press release today:
The Board of Directors approved a new share repurchase program of up to 20 million shares of the company’s common stock, or $1.2 billion, using the current stock price.
The Board of Directors also approved a 20% increase of the company’s quarterly cash dividend to $0.49 per common share. This marks the 45th consecutive annual dividend increase for the company.
Stanley Black & Decker’s President and CEO, John F. Lundgren, commented, “Returning cash to our shareholders continues to be a significant component of our capital allocation strategy. The 20% dividend increase and share repurchase program we announced today reflects our sensitivity to shareholder value creation and confidence in the cash generation potential of the company for both the near term and the future. These actions, partnered with our proven ability to operate, acquire, integrate and successfully grow businesses, are core to our shareholder value proposition. Our $5 billion CDIY franchise provided strong evidence with 5% organic growth, absent meaningful help from the global markets it serves, and a 15.7% operating margin, indicative of the ongoing achievement of cost and revenue synergies as well as a series of highly successful new product introductions in the post-merger era. I am also pleased to announce today that we have upgraded our cost synergy estimate for the Black & Decker integration to $500 million from $450 million, up $50 million and our third major upgrade from our original estimate of $350 million.”
Net sales for the period were $2.8 billion, up 8% versus prior year, attributable to price (+1%), volume (+1%) and acquisitions (+10%), which were partially offset by currency (-4%).
Diluted GAAP EPS, including M&A charges as well as the charges associated with the $150 million in cost actions implemented in 1Q’12 was $0.92. Excluding M&A charges, 2Q’12 diluted EPS was $1.32. The negative impact of foreign exchange in conjunction with the negative mix associated with CDIY volumes far outpacing those in the Security and Industrial segments resulted in lower-than-anticipated EPS performance.
The gross margin rate for the quarter was 36.3%. Excluding M&A charges, the gross margin rate was 36.6%, down from 37.2%, largely due to the negative mix associated with the significantly higher volumes in CDIY versus the Industrial and Security segments.
SG&A expenses were 23.8% of sales. Excluding M&A charges, SG&A expenses were 22.6% of sales, compared to a 2Q’11 level of 23.5%.
Operating margin was 12.5% of sales. Excluding M&A charges, operating margin was a post-merger record 14.1% of sales. Excluding Niscayah and M&A charges, operating margin was 14.3% up 60 bps from the 2Q’11 operating margin on a comparable basis of 13.7%, due to price, cost synergies and additional cost reduction actions.
The tax rate was 24.9%. Excluding M&A charges, the tax rate was 22.5%.
Working capital turns for the quarter were 7.1, up 1.0 turns, or 16% from 2Q’11. Free cash flow was $303 million, before the effect of $112 million of M&A related charges and payments.
|($ in M)||2Q' 12 Segment Results|
1 M&A charges primarily pertaining to synergy attainment & facility closures
Portfolio Transition & Capital Allocation:
Management also announced today that it is reviewing strategic alternatives for its Hardware & Home Improvement Group (“HHI”), which may include a divestiture of the business. With 2011 revenues of $940 million, HHI is a provider of residential locksets, hardware and plumbing fixtures marketed under the Kwikset, Weiser, Baldwin, Stanley, National and Pfister brands, among others and with the exception of Pfister, operates within the company’s Security segment. Goldman Sachs has been retained to assist with this evaluation and, although no decision has been made by the company as to whether to proceed with a divestiture, such a transaction would likely result in after tax cash proceeds significantly in excess of $1.0 billion. HHI is a healthy and profitable business; however, its geographic footprint and long term growth characteristics are inconsistent with the company’s strategic objectives.
The company also announced that it is currently evaluating the purchase of a strategically attractive engineered fastening franchise with revenues totaling approximately $500 million. This highly synergistic asset has favorable growth characteristics with a strong concentration in emerging markets; however, management only intends to proceed with the transaction if it can be obtained for a reasonable multiple that would imply a strong and rapid accretion profile while meeting the company’s stringent return thresholds.
If management elects to divest HHI, proceeds would be allocated first to the purchase of the aforementioned engineered fastening business and the excess cash would be allocated to share repurchases. If the engineered fastening purchase does not materialize, the company would intend to use all excess cash for share repurchases and modest deleveraging to protect senior debt ratings. None of these possible scenarios is expected to result in significant earnings per share dilution when viewed in the aggregate.
Executive Vice President and Chief Operating Officer, James M. Loree, commented, “Further, notwithstanding the outcome of these various potential transactions, we are announcing today that the company plans to curtail any other major bolt-on acquisition activity for a period of at least 12 to 18 months while it completes its ongoing integrations and turns its attention to ramping up organic growth in five major areas: (1) emerging markets (power tools, hand tools and commercial hardware), (2) offshore oil and gas pipeline services, (3) “smart” RFID/RTLS enabled tools and storage, (4) leveraging its newly acquired AeroScout RTLS capability into the electronic security market including a major thrust into the acute care facility vertical and (5) continuing to fully exploit revenue synergies associated with the Black & Decker merger. When considered in the aggregate, these organic growth initiatives have the potential to boost the company’s organic growth rate by two to three points annually in the coming years. The company intends to continue to pursue small complementary strategic transactions in emerging markets during this period.”
Weakness in foreign exchange rates created significant headwinds for the company in the second quarter and the situation is expected to continue in the second half. The negative mix impact associated with the significantly greater volumes in the CDIY segment versus the Security & Industrial segments is being offset by $50 million of new cost reduction actions. As a result of the significant foreign exchange headwinds, the company is adjusting its full year earnings per share (EPS) guidance to $5.40 - $5.65, excluding M&A charges, from the prior range of $5.75 - $6.00.
Key operating assumptions:
The company is reiterating its guidance that organic net sales should increase 1-2% from a 2011 pro forma (to include Niscayah) revenue base of $11 billion. This includes the impact of revenue synergies from the Black & Decker merger. Market weakness in Europe and to a lesser extent emerging markets was clearly and explicitly factored into our original 2012 organic growth outlook.
The company is announcing an incremental $100 million of annualized cost actions with $50 million impacting 2H’12. These actions are primarily a reduction of salaried workforce.
The incremental FY’12 headwind from foreign exchange and the negative mix associated with lower Security & Industrial volumes versus CDIY will approximate $105 million.
Interest/ ‘Other Net’ will likely approximate $400 million, up from $380 million due to the impact of foreign exchange.
As previously communicated, the company expects to realize $115 million in cost synergies related to the Black & Decker merger and $45 million due to the Niscayah acquisition in 2012, which together should drive ~$0.70 of EPS. The $50 million increase in Black & Decker cost synergies will favorably impact 2013.
The cost reduction actions announced in January with pre-tax benefits totaling approximately $150 million in 2012 should drive ~$0.70 of EPS.
The company is reiterating its estimate for 2012 free cash flow, excluding one-time charges and payments, of approximately $1.2 billion.
Donald Allan Jr., Senior Vice President and CFO commented, “While it is unfortunate to have to lower our full year EPS guidance on account of headwinds associated with foreign exchange, we remain comfortable with the prudent macroeconomic and related organic growth assumptions which provided the foundation for our original guidance. As the macroeconomic environment continues to stagnate, particularly in Europe, we remain focused on the items within our control: developing new products and investing in growth to take market share and build a wider footprint in the emerging markets, successfully integrating acquisitions, eliminating waste in our supply chain through the Stanley Fulfillment System and taking out costs to ensure we are as lean and agile as we can be.”
Including all acquisition, Black & Decker transaction-related one-time charges as well as the charges associated with the 2012 cost actions, the company expects EPS to approximate $3.98 to $4.34 in 2012. For the full year of 2012 the company estimates the one-time charges to be approximately $275 - $300 million consisting of restructuring and related costs associated with severance of employees and facility closures and certain compensation charges, advisory and consulting fees.
Merger And Acquisition (M&A) One-Time Charges and Credits
Total one-time charges in 2Q’12 related to M&A were $80.0 million. Gross margin includes $8.8 million of these one-time charges, primarily facility closure-related charges, and SG&A includes $34.5 million in one-time charges, primarily for integration-related administration costs and consulting fees, as well as employee-related matters. $25.6 million of these costs that impact the Company’s operating margin are included in segment results, with the remainder in corporate overhead. Lastly, one-time charges of $13.4 million are included in Other, net and $23.3 million are included in restructuring charges, the majority of which represent Niscayah-related restructuring charges and cost containment actions associated with the severance of employees.
Stanley Black & Decker, an S&P 500 company, is a diversified global provider of hand tools, power tools and related accessories, mechanical access solutions and electronic security solutions, engineered fastening systems, and more. Learn more at www.stanleyblackanddecker.com.
Organic sales growth is defined as total sales growth less the sales of companies acquired in the past twelve months and any foreign currency impacts. Operating margin is defined as sales less cost of sales and selling, general and administrative expenses. Management uses operating margin and its percentage of net sales as key measures to assess the performance of the Company as a whole, as well as the related measures at the segment level. The normalized statement of operations, cash flows and business segment information, as reconciled to GAAP on pages 14-19 for 2012 and 2011, is considered relevant to aid analysis of the Company’s operating performance, earnings results and cash flows aside from the material impact of the one-time charges and payments associated with the Black & Decker merger, Niscayah acquisition and other smaller acquisitions of the Company.
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