Stanley Black & Decker, Inc. (SWK)

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Stanley Black & Decker (SWK)

Q2 2011 Earnings Call

July 19, 2011 10:00 am ET

Executives

Donald Allan - Chief Financial Officer and Senior Vice President

James Loree - Chief Operating Officer and Executive Vice President

Kate White Vanek -

John Lundgren - Chief Executive Officer, President, Director and Chairman of Executive Committee

Kathryn White - Director of Investor Relations

Analysts

William Wong - JP Morgan Chase & Co

Daniel Oppenheim - Crédit Suisse AG

Peter Lisnic - Robert W. Baird & Co. Incorporated

Jason Feldman - UBS Investment Bank

Eric Bosshard - Cleveland Research Company

Sam Darkatsh - Raymond James & Associates, Inc.

Nicole DeBlase - Deutsche Bank AG

Michael Kim - Imperial Capital, LLC

Michael Wherley - Janney Montgomery Scott LLC

Kenneth Zener - Merrill Lynch

Presentation

Operator

Welcome to the Q2 2011 Stanley Black & Decker, Inc. Earnings Conference Call. My name is John and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Kate White Vanek, Vice President, Investor Relations. Ms. Vanek, you may begin.

Kate White Vanek

Thanks so much, John and good morning, all and thank you for joining us for the Stanley Black & Decker Second Quarter 2011 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'd like to point out that our earnings release, which was issued after yesterday's close and a supplemental presentation, which we'll refer to during the call are available on the IR portion of our website, stanleyblackanddecker.com. This morning, John, Jim and Don will review Stanley's second quarter results and various other topical matters, followed by a Q&A session. There is also some very helpful information in the appendix of the slide deck as it relates to your models in particular. If you have any sort of questions, please contact me. Replay of the call will be available beginning at 2:00 p.m. today. Replay number and the access codes are in our press release. And as a reminder, you can download the earnings replay as a podcast from iTunes. As always, please feel free to contact me with any sort of follow-up questions after today's call.

We will be making some forward-looking statements during this call. Such statements are based on assumptions of future events that may not prove to be accurate and as such, may involve risks and uncertainties. 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 and Form 8-K, which we filed with the press release and our most recent '34 Act. With that, I will now turn the call over to our CEO, John Lundgren.

John Lundgren

Thanks, Kate. Good morning, everybody. Just -- I'm going to touch on some highlights before Jim gets into some more detail on the segments but as we look back on the second quarter, we remain on a steady course of organic growth despite an unfavorable macroeconomic backdrop. We did get some better news this morning that Jim and Don will touch on as it relates to the macroeconomic environment. But nonetheless, our performance and the organic growth we were able to achieve were driven primarily by new products that we introduced to the market, where we gained share in established markets and continued strong performance in the emerging markets. Again, that -- I'll touch on it a little later.

Second quarter revenues were up 11% to $2.6 billion, organically plus 3%. And that, of course, excludes the favorable impact of foreign exchange. Organic growth in Power Tools and Accessories, Industrial and our Convergent Security Solutions was somewhat muted by weakness in Hand Tools, Outdoor Products and ongoing Pfister impact. Don talked about the Pfister impact in the first quarter, but just to shed a little more light on Outdoor, which we referenced in the press release, particularly for those of you who are less familiar with that business, Outdoor is a $550 million to $600 million business, and it is one of the few businesses that's quite seasonal. It's split roughly 60/40 first half, second half historically, with the second quarter almost every year being the largest quarter. We all know there was -- across the country the weather was terrible in the second quarter regardless of where we were.

But just in round numbers, it's just math, the 20% decline in the second quarter unrecovered on an annual basis is almost 70 basis points of organic growth across the entire company. So just take that in mind as Don is doing his outlook and the fact that we lowered organic growth estimates for the year, 100 basis points. The overwhelming majority of that is the result of Pfister business that we did -- excuse me, of Outdoor business that we didn't achieve in the second quarter, much of which, based on history, is gone and won't be recovered.

Our EPS was $1.46, excludes M&A charges and does reflect the $0.28 benefit attributable to the favorable tax settlement of the outstanding tax contingencies. GAAP EPS of $1.14 includes the M&A related charges and the $1.18 excludes the charges and as well as the favorable settlement. And that was in line with management's expectations and the direction that Don gave on our first quarter call, that approximately 45% of our core earnings would be achieved in the first half of the year and 55% in the second half, based on the way the year was rolling forward for us.

13.6% operating margin, again, that excludes the charges. 120 basis point sequential increase in CDIY. Security, profitability to total segment increased 300 basis points sequentially and 120 basis points VPY or versus second quarter 2010. And Industrial increased 110 basis points versus the second quarter of 2010.

Our integration remains on track. In fact, it remains ahead of plan. Good progress there and we -- as the year progresses, we were able to shed some more light on that. We've been able to accelerate some of the 2011 cost synergy realization, specifically by $35 million. So our total synergy target, we've been able to raise from -- to $450 million by the end of 2012, that's up from $425 million. And for clarity, that means the annualized impact at the end of 2012 goes from $460 million to $485 million.

Last but not least, as it relates to the integration, you won't see this in the numbers directly but we just completed a global employee survey, and it yielded very positive results as it relates to the cultural integration of these 2 companies. As we said at the time of the merger, there were many similarities but there were also some differences in these 2 companies, and we were very, very encouraged that 12 to 15 months later, that we received the kind of results that we did from this survey that in general suggests everyone's on the same page, everyone's focused on the same objectives, everyone's motivated, and while that won't show up directly in the numbers, I think we all know it will show up long term in the numbers and we took a lot of comfort from that survey, and it validated -- further validated the success thus far of the integration, both on a qualitative as well as quantitative perspective.

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