New Britain, CT - Stanley Black & Decker announced third quarter 2013 financial results.
Stanley Black & Decker’s Chairman and CEO, John F. Lundgren, commented, “We continue to make significant progress driving organic growth throughout the organization. Our focused organic growth initiatives have resulted in a strong third quarter performance and maintained the momentum we achieved in the second quarter.
“Growth was robust across the portfolio with our CDIY and Industrial segments posting another strong organic growth quarter, and with the exception of Europe, Security also achieved solid, mid-single digit organic growth. Within Security, we are gaining further traction with our verticals initiative based on recent order activity and are encouraged by the sequential growth and margin improvements in this segment during the quarter. However, the achievement of high teen margins, which we believe represent the appropriate level given the characteristics of this business, is taking longer than anticipated.
“Progress from our organic growth initiatives combined with the overall strength and diversity of our portfolio and underlying strategic framework position us well to deliver on our previously stated long-term financial objectives.”
3Q’13 Segment Results
|($ in M)||3Q' 13 Segment Results|
|Sales||Profit||Charges1||ProfitEx-Charges1||Profit Rate||Profit RateEx-Charges1|
|1 M&A charges primarily pertaining to synergy attainment & facility closures|
In the CDIY segment, net sales increased 5% vs. 3Q’12 as a result of volume (+6%) and acquisitions (+1%), partially offset by price (-1%) and currency (-1%). Similar to the prior quarter, strong organic volumes were achieved in North America, primarily driven by new product introductions, retail promotions and continued strength in the residential construction market, as well as within the emerging markets which grew 10%. While the emerging markets continue to be a source of strength, current macroeconomic conditions have caused growth rates to decelerate somewhat. European volumes were solid; up 3% organically, with growth in all regions. In particular, the UK performed well reflecting share gains in the face of continued soft economic conditions. Excluding charges, overall segment profit was 14.9%, relatively consistent with the 2Q’13 rate but down from the 3Q’12 rate of 15.5% as investments in organic growth initiatives and currency pressures offset volume and productivity.
Net sales in the Industrial segment rose 25%. Unit volumes increased approximately 4%, currency was down 1% and acquisitions added 22%. Pricing was flat for the quarter. Oil & Gas posted another strong quarter of impressive organic growth (+32%) driven primarily by continued strength within its North American onshore operations. Organic sales for Industrial and Automotive Repair (IAR) increased 2% primarily as a result of volume increases in North America and the emerging markets. Similar to CDIY, although strong, IAR’s emerging markets growth fell short of expectations due to the weakening of these markets. Consistent with the prior quarter, volume growth in North America was driven by the MRO vending growth initiative as well as strength within Mac Tools mobile distribution, which more than offset the impact of spending cuts on IAR’s US Government business and the results of IAR’s European operations. Engineered Fastening organic growth was relatively flat in the face of a difficult equipment sales comparison, even as organic fastener volume was up 6%. The integration of Infastech continues to progress as planned and is on track to deliver its planned synergies.
Overall Industrial segment profit excluding charges was 14.5% down from the 3Q’12 rate of 15.4% due primarily to investments in organic growth initiatives and the mix impact of Infastech’s modestly below line average margins.
Net sales in Security increased 3% versus 3Q’12 due to pricing (+1%) acquisitions (+1%) and currency (+1%). Volume was relatively flat. Organic growth within the CSS North America business was up an encouraging 6% driven by higher installation and service volumes supported by early successes with the vertical markets organic growth initiative. CSS Europe declined 4% organically due primarily to continued softness in various regions, most notably France and the Nordics.
Mechanical Access organic sales were up 4% driven by strong growth within the automatic door business due to successful door conversion wins and new product introductions. The commercial mechanical lock business also experienced growth during the quarter driven by gains in emerging markets.
Security segment profit rate excluding charges was 12.2%, up 170 basis points from the 2Q’13 rate and 380 basis points lower than the 3Q’12 rate. The sequential improvement in the rate is primarily attributable to North America volume improvements due in part to organic growth investments, the elimination of costs associated with the commercial lock business model shift, and progress relating to field technician productivity. As previously communicated, the year over year decline in the rate resulted from field technician costs required to install and service the growing second half North American backlog, investments in organic growth initiatives, European volume declines and temporary negative rate pressure in the commercial lock business due to the business model shift.
President and Chief Operating Officer, James M. Loree, commented, “While the slower macro backdrop has created some challenges as global economic growth rates have notched downward, we are encouraged by the fact that most of our businesses continue to post solid organic performances aided by our substantial growth investments. As we move into 2014 we are entering the period in which these investments will become accretive to operating margin.
“As for Security, notable progress was made during the quarter outside of Europe on both organic growth (+4%) and operating margin rate (~15%) and we expect to see continued progress in 2014. European Security made less tangible progress on organic growth (down 4%) and rate (~7%); however, its management team made significant underlying headway on talent upgrades and basic business model fixes that will bear fruit as we enter 2014. Substantial improvements have been made in both North America and Europe with the latter being manifested about six months behind our expectations. Therefore, we fully expect Security to regain its appropriate position as a revenue and earnings growth driver in 2014 and beyond.”
Revision Of 2013 Outlook
As a result of a slower than expected margin rate recovery within our Security operations as well as overall lower than previously anticipated organic growth related to macro issues affecting emerging markets and the U.S. government budget impasse, the Company is revising its outlook for full year 2013 EPS and free cash flow to approximately $4.90 - $5.00 per share and $800 million, respectively, excluding charges and payments, based on the following:
- Approximately half of the full year EPS outlook reduction relates to the aforementioned slower than expected pace of the Security margin improvement.
- The balance of the reduction relates to lower organic growth expectations within our CDIY and Industrial segments. This is primarily attributable to growth pressure within the emerging markets due to the current volatile macroeconomic environment, and the uncertainty created by the U.S. government’s sequestration and shut-down, and its impact on business, consumer confidence and spending levels.
- Partially offsetting these items will be a lower tax rate of ~20% versus our prior estimated tax rate of ~23%.
- These factors combined with lower than expected working capital performance create a reduction to our free cash flow estimate for the year.
- FY’13 organic growth is now expected to approximate 3% versus the prior expectation range of 4%-5%.
- All other assumptions remain unchanged from our prior guidance
Including all charges, the Company expects GAAP EPS to be in the range of $3.75 - $3.95 in 2013. For the full year of 2013 the Company estimates one-time pre-tax charges to be approximately $225 - $250 million.
Donald Allan Jr., Senior Vice President and CFO commented, “As the year progresses, our strong organic growth performance within many of our businesses continues to be a bright spot for Stanley Black & Decker. However, the year-to-date performance of our Security business has created pressure on our results which has, along with lower organic growth expectations within certain businesses and geographies, caused us to revise our full year 2013 earnings and free cash flow outlook. The actions we have taken and are executing to address the Security segment’s margin performance will enable us to increase Security margins to levels that are more closely aligned to historical results. We remain focused and committed to attaining our long-term financial goals and 2016/2017 vision enabled by our disciplined focus on organic growth initiatives, our commitment to allocating capital in ways that provide excellent returns for our shareholders, and our proven capabilities of driving efficiencies and streamlining our operations via the Stanley Fulfillment System.
“Assuming that the level of volatility and current uncertainty in the markets we serve does not worsen in 2014 and based on our path to recovery in Security, we see conditions in 2014 that support our long-term 4%-6% organic growth expectations and 2014 EPS growth, excluding charges, ranging from 7% - 9%.”
Merger And Acquisition (M&A)One-Time Charges
Total one-time charges in 3Q’13 related to M&A were $67.2 million. Gross margin includes $5.3 million of these one-time charges, primarily for integration-related matters, and SG&A includes $31.9 million in one-time charges, primarily for integration-related administration costs and consulting fees, as well as employee-related matters. $17.3 million of these costs that impact the Company’s operating margin are included in segment results, with the remainder in corporate overhead. One-time charges of $1.5 million are included in Other, net, primarily related to deal costs, and $28.5 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.