Stanley Black & Decker, Inc. (SWK)

Q2 2010 Earnings Call Transcript

July 21, 2010 10:00 am ET


Kate White – Director, IR

John Lundgren – President and CEO

Jim Loree – EVP and COO

Don Allan – SVP and CFO


Nicole [ph] – Deutsche Bank

Michael Rehaut – JPMorgan

Jim Lucas – Janney Montgomery

Sam Darkatsh – Raymond James

Dan Oppenheim – Credit Suisse

Eric Bosshard – Cleveland Research

Dennis McGill – Zelman & Associates

Peter Lisnic – Robert W. Baird

Michael Kim – Imperial Capital



Good morning my name Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Stanley Black & Decker second quarter 2010 result conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be question-and-answer session (Operator instructions).

Ms. White you may begin your conference.

Kate White

Thank you, Michelle, and good morning everybody. Thank you for joining us for the Stanley Black & Decker’s second quarter 2010 conference call. On the call, in addition to myself are John Lundgren, President and CEO, Jim Loree, Executive Vice President and COO; and Don Allan, Senior Vice President and CFO.

I would like to point out that our second quarter earnings release, which was issued this morning, and supplemental presentation, which we will refer during the call are available on the Investor Relations portion of our Web site,

This morning John, Jim and Don will review Stanley’s second quarter 2010 results and various other topical matters followed by a Q&A session. The entire call is expected to last approximately one hour.

A replay of the call will be available beginning at 2 p.m. today. The replay number and the access code are in our press release we put out this morning. As a reminder, you can download the earnings replay as a podcast from iTunes, and even setup a subscription for all future replays of the calls that we post, this will be ready this afternoon. As always please feel free to contact me with any follow-up questions after today’s call.

We will be making some forward-looking statements during the call. Such statements are based on assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It is therefore possible that actual results may differ materially from any forward-looking statements that we might make today. We direct you to the cautionary statements in the Form 8-K, which we filed with today’s press release and in our most recent 34 Act.

With that, I will now turn the call over to our CEO, John Lundgren.

John Lundgren

Thanks, Kate and good morning everybody. Let me first just touch on some second quarter highlights, in a quarter that we were quite pleased with our performance in general, as well as where we see the business going from here.

Revenues on a pro forma basis increased 13% to $2.4 billion and I’m going to give you a breakdown by geography and source in just a minute, and Jim Loree, when he reviews the segments, will give you even a little more granularity within the segments as to what we feel some of the indicators are.

Our second quarter diluted EPS of $1.24 excluding the onetime charges related primarily to the Black & Decker merger, the details of the special charges, which totaled $229 million, are included on page four of our press release. We provide quite a bit of granularity there, and we don’t intend to spend much time on this morning’s call, and that is there clearly if you do need in the press release.

That does include a $36 million benefit, the $1.24 or $0.21 a share attributable to favorable settlements of tax contingencies associated with the resolution of Black & Decker income tax audits from prior years.

On a GAAP basis $0.28 diluted EPS, including all the one-time charges, $213 million of free cash flow, excluding the one-time payments, and again that’s $27 million detailed in the press release.

So, legacy Stanley reached a record 8.6 working capital turns, and it’s nothing else, it’s indication that SFS, the Stanley Fulfillment System is alive and well in the legacy business and you’ll hear later that we are very rapidly expanding the Stanley Fulfillment System across the larger base and it’s beginning to gain traction.

The integration is proceeding quite smoothly, but the focus in the second half will be on the launch of SFS across the larger framework, as well as the beginning of the formulation of some revenue synergy plans.

Our CDIY segment, which is now the largest segment in the business, profitability improved 430 basis points to 15.6%, again, excluding the CDIY portion of the one-time charges that I alluded to earlier.

And the smaller but still very important integration of Stanley Solutions de Sècuritè, or SSDS, the former ADT France business is also progressing quite well. Margins improved significantly versus the prior year and it’s an important strategic add-on to our Continental European Convergent Security business.

Don is going to talk a little bit more about full year guidance, but excluding one-time charges we’ve increased it to $3.56 to $3.76 range or $3.35 to $3.55 if we exclude the $0.21 tax related benefit that we realized in the second quarter.

So, the bottom end of our guidance now exceeds the top end of the range previously presented in April. Don will talk a little bit more about that and the underlying assumptions towards the end of our presentations.

Lastly, free cash flow guidance for the year, where previously we said it would approximate $600 million, we’re thinking and guiding to the fact that it will exceed $600 million for the year.

Moving on just a snapshot of essentially the earnings picture, $0.89 same period year ago on our share base of roughly 79.7 million, and looking forward to 2010, due to the merger, the average share count for the quarter of 166.1 million, you see $0.28 on a GAAP basis, $1.03 without the one-time charges, but excluding the benefit, the $36 million benefit or $0.21 a share impact of the tax settlement, which would take it to $1.24.

I think of equal or greater importance, that’s obviously shown in the tax rate, ongoing or normalized tax rate would have been 28% without that benefit. I think that helps you in terms of your modeling. Without the charges operating margin increased to 13.7% very healthy performance across all three segments. Jim Loree is going to give you a little more granularity on the segments in just a minute.

Looking at worldwide revenues, we’ll go around the world very quickly, starting with our largest market in the left in the US So, revenues grew 6% and US continues to represent 56% of Stanley Black & Decker’s global revenues. Canada grew nicely, 28%, and it represents about 7% of global revenues, very strong growth in Latin America.

Mexico, we recognize it as part of North America, but we report it in our Latin American and manage it as part of our Latin American business, grew 39% and it represent 7% of our total. Europe, driven by strong industrial growth, showed 17% revenue growth, it’s 24% of our total.

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