Form 10-Q
Table of Contents

 

 

LOGO

UNITED STATES

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 2, 2011.

OR

 

¨ 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

INCORPORATION OR ORGANIZATION)

    

(I.R.S. EMPLOYER

IDENTIFICATION NUMBER)

     \\nbc-prd-hypfs-01\K

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 ¨

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 ¨

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 ¨   Non-accelerated filer ¨   Smaller reporting company ¨
  (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 ¨ No þ

168,359,465 shares of the registrant’s common stock were outstanding as of July 22, 2011


Table of Contents

 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     34   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     45   

ITEM 4. CONTROLS AND PROCEDURES

     45   

PART II — OTHER INFORMATION

     47   

ITEM 1A. RISK FACTORS

     47   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     47   

ITEM 6. EXHIBITS

     49   

SIGNATURE

     50   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 2, 2011 AND JULY 3, 2010

(Unaudited, Millions of Dollars, Except Per Share Amounts)

 

     Second Quarter     Year to Date  
     2011     2010     2011     2010  

NET SALES

   $     2,623.2      $     2,365.6      $     5,003.9      $     3,627.6   

COSTS AND EXPENSES

        

Cost of sales

     1,655.8        1,596.6        3,154.0        2,402.7   

Selling, general and administrative

     628.5        581.1        1,231.4        959.6   

Provision for doubtful accounts

     6.0        3.1        8.8        7.1   

Other, net

     59.8        65.1        112.3        130.0   

Restructuring charges and asset impairments

     21.1        85.8        34.4        183.2   

Interest expense

     34.1        26.8        68.7        46.1   

Interest income

     (7.3     (2.2     (12.4     (3.4
                                
     2,398.0        2,356.3        4,597.2        3,725.3   
                                

Earnings (loss) from continuing operations before income taxes

     225.2        9.3        406.7        (97.7

Income taxes (benefit) on continuing operations

     27.9        (37.0     51.0        (35.5
                                

Net earnings (loss) from continuing operations

     197.3        46.3        355.7        (62.2
                                

Less: Net earnings (loss) attributable to non-controlling interests

     -        0.5        (0.3     0.6   
                                

NET EARNINGS (LOSS) ATTRIBUTABLE TO STANLEY BLACK & DECKER, INC.

   $ 197.3      $ 45.8      $ 356.0      $ (62.8
                                

BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK

Total basic earnings (loss) per share of common stock

   $ 1.17      $ 0.28      $ 2.12      $ (0.49
                                

DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK

Total diluted earnings (loss) per share of common stock

   $ 1.14      $ 0.28      $ 2.06      $ (0.49
                                

DIVIDENDS PER SHARE OF COMMON STOCK

   $ 0.41      $ 0.33      $ 0.82      $ 0.66   

AVERAGE SHARES OUTSTANDING (in thousands):

        

Basic

     168,119        162,847        167,679        129,163   
                                

Diluted

     173,075        166,084        172,429        129,163   
                                

See notes to condensed consolidated financial statements.

 

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STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JULY 2, 2011 AND JANUARY 1, 2011

(Unaudited, Millions of Dollars, Except Per Share Amounts)

 

$16,033.5 $16,033.5
     2011      2010  

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 1,915.0       $ 1,745.4   

Accounts and notes receivable, net

     1,624.6         1,417.1   

Inventories, net

     1,448.4         1,272.0   

Prepaid expenses

     199.2         224.0   

Other current assets

     151.8         157.1   
                 

Total Current Assets

     5,339.0         4,815.6   

Property, Plant and Equipment, net

     1,186.4         1,166.5   

Goodwill

     6,248.7         5,941.9   

Customer Relationships, net

     855.1         889.8   

Trade Names, net

     1,845.2         1,839.4   

Other Intangible Assets, net

     145.1         143.0   

Other Assets

     414.0         343.2   
                 

Total Assets

   $ 16,033.5       $ 15,139.4   
                 

LIABILITIES AND SHAREOWNERS’ EQUITY

     

Current Liabilities

     

Short-term borrowings

   $ 626.9       $ 1.6   

Current maturities of long-term debt

     317.0         416.1   

Accounts payable

     1,267.9         998.6   

Accrued expenses

     1,192.9         1,325.9   
                 

Total Current Liabilities

     3,404.7         2,742.2   

Long-Term Debt

     2,729.0         3,018.1   

Post-Retirement Benefits

     648.2         642.8   

Deferred Taxes

     925.6         901.1   

Other Liabilities

     742.2         765.5   

Commitments and Contingencies (Note Q)

               

Stanley Black & Decker, Inc. Shareowners’ Equity

     

Common stock, par value $2.50 per share

     440.7         440.7   

Authorized 300,000,000 shares

Issued 176,091,572 shares at July 2, 2011 and January 1, 2011

     

Additional paid in capital

     4,906.4         4,885.7   

Retained earnings

     2,521.4         2,301.8   

Accumulated other comprehensive income (loss)

     78.4         (116.3

ESOP

     (71.5)         (74.5
                 
     7,875.4         7,437.4   

Less: cost of common stock in treasury

     (344.0)         (420.4
                 

Stanley Black & Decker, Inc. Shareowners’ Equity

     7,531.4         7,017.0   

Non-controlling interests

     52.4         52.7   
                 

Total Shareowners’ Equity

     7,583.8         7,069.7   
                 

Total Liabilities and Shareowners’ Equity

   $ 16,033.5       $ 15,139.4   
                 

See notes to condensed consolidated financial statements.

 

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STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE AND SIX MONTHS ENDED JULY 2, 2011 AND JULY 3, 2010

(Unaudited, Millions of Dollars)

 

$1,915.0 $1,915.0 $1,915.0 $1,915.0
     Second Quarter     Year to Date  
OPERATING ACTIVITIES    2011     2010     2011     2010  

Net earnings (loss)

   $ 197.3      $ 46.3      $ 355.7      $ (62.2

Less: Net (loss) earnings attributable to non-controlling interest

            0.5        (0.3     0.6   
                                

Net earnings (loss) attributable to Stanley Black & Decker, Inc

     197.3        45.8        356.0        (62.8

Depreciation and amortization

     93.8        92.7        197.7        152.4   

Inventory step-up amortization

            117.7               159.3   

Stock-based compensation

     17.4        18.4        32.7        49.9   

Settlement of income tax contingencies

     (48.5     (35.7     (69.2     (35.7

Changes in working capital

     (5.4     (20.0     (75.7     (110.4

Changes in other assets and liabilities

     (77.3     2.1        (143.8     35.6   
                                

Cash provided by operating activities

     177.3        221.0        297.7        188.3   

INVESTING ACTIVITIES

        

Capital expenditures and capitalized software

     (67.9     (35.1     (138.0     (57.2

Business acquisitions and asset disposals

     (35.6     (10.9     (80.1     (18.1

Cash acquired from Black & Decker

                          949.4   

Interest rate swap terminations

                          30.0   

Purchases of short-term investments

     (42.5            (42.5       

Investment in Niscayah

     (58.5            (58.5       

(Payments on) proceeds from net investment hedge settlements

     (6.5     15.8        (29.2     (0.3
                                

Cash (used in) provided by investing activities

     (211.0     (30.2     (348.3     903.8   

FINANCING ACTIVITIES

        

Payments on long-term debt

     (400.9     (0.8     (401.4     (201.6

Proceeds from long-term debt

     20.5               20.5          

Net premium paid for equity option

     (19.6            (19.6       

Stock purchase contract fees

     (0.8     (3.9     (1.6     (7.7

Net short-term borrowings (repayments)

     483.4        (357.1     624.8        78.8   

Cash dividends on common stock

     (68.9     (54.6     (137.5     (88.9

Proceeds from the issuance of common stock

     30.0        346.9        85.4        360.9   

Purchase of common stock for treasury

     (5.4     (2.1     (6.1     (2.2
                                

Cash provided by (used in) financing activities

     38.3        (71.6     164.5        139.3   

Effect of exchange rate changes on cash and cash equivalents

     26.9        (26.2     55.7        (33.7
                                

Increase in cash and cash equivalents

     31.5        93.0        169.6        1,197.7   
                                

Cash and cash equivalents, beginning of period

     1,883.5        1,505.4        1,745.4        400.7   
                                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 1,915.0      $ 1,598.4      $ 1,915.0      $ 1,598.4   
                                

See notes to condensed consolidated financial statements.

 

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STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

PERIODS ENDED JULY 2, 2011 AND JULY 3, 2010

(Millions of Dollars, Except Per Share Amounts)

 

     Common
Stock
     Additional
Paid In
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
  ESOP      Treasury
Stock
     Non-controlling
Interests
  Shareowners’
Equity
 

Balance January 1, 2011

   $ 440.7       $ 4,885.7       $ 2,301.8       $(116.3)   $ (74.5)       $ (420.4)       $  52.7   $ 7,069.7   

Comprehensive income:

                     

Net earnings (loss)

           356.0                 (0.3)     355.7   

Currency translation adjustment and other

              206.1             206.1   

Cash flow hedge, net of tax

                (11.8)             (11.8)   

Change in pension, net of tax

                  0.4             0.4   
        

 

 

    

 

       

 

 

 

 

 

Total comprehensive income (loss)

           356.0       194.7           (0.3)     550.4   

Cash dividends declared — $0.82 per share

           (137.5)                   (137.5)   

Issuance of common stock

        (6.6)                 82.5           75.9   

Equity purchase contracts - stock issuance

        (0.4)                      (0.4)   

Net premium paid and settlement of equity option

        (19.6)                      (19.6)   

Repurchase of common stock (85,547 shares)

                   (6.1)           (6.1)   

Stock-based compensation related

        32.7                      32.7   

Tax benefit related to stock options exercised

        14.6                      14.6   

ESOP and related tax benefit

           1.1           3.0              4.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

 

 

 

Balance July 2, 2011

     $440.7         $4,906.4         $2,521.4       $    78.4   $ (71.5)       $ (344.0)       $  52.4   $ 7,583.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

 

 

 

 

     Common
Stock
     Additional
Paid In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    ESOP     Treasury
Stock
    Non-controlling
Interests
  Shareowners’
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, net of tax

            2.3              2.3   
       

 

 

   

 

 

       

 

 

 

 

 

Total comprehensive (loss) income

          (62.8     (307.9       0.6     (370.1

Cash dividends declared — $0.66 per share

          (81.2             (81.2

Issuance of common stock

        (18.6           56.1          37.5   

Equity purchase contracts - stock issuance

     12.9         307.1                  320.0   

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         

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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 2, 2011

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 2, 2011, 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 Black & Decker, Inc’s. (the “Company”) Form 10-K for the year ended January 1, 2011.

On March 12, 2010 (“merger date”) a wholly owned subsidiary of The Stanley Works (“Stanley”) was merged with and into The Black & Decker Corporation (“Black & Decker”), with the result that Black & Decker became a wholly owned subsidiary of Stanley (the “Merger”). In connection with the Merger, Stanley 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 the merger date (See Note F, Merger and Acquisitions).

Other comprehensive income (loss) for the six month periods ended July 2, 2011 and July 3, 2010 is presented in the Consolidated Statements of Changes in Shareowners’ Equity. Other comprehensive income (loss) for the three month periods ended July 2, 2011 and July 3, 2010 was $242.4 million and $(220.5) million, respectively.

Certain prior year amounts have been reclassified to conform to the current year presentation with respect to intercompany receivables and payables included in the Condensed Consolidated Balance Sheet at January 1, 2011 in Note S, Parent and Subsidiary Debt Guarantees. The Company has reclassified certain intercompany receivables to intercompany payables within each of The Black & Decker Corporation and Non-Guarantor Subsidiaries Balance Sheet. The effect of these reclassifications had no impact on the net assets of these subsidiaries.

B.         New Accounting Standards

Implemented:

In December 2010, the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350).” This ASU modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts. For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. This ASU is effective for fiscal years and interim periods beginning after December 15, 2010. Effective January 1, 2011, the Company adopted this ASU and will apply its guidance when annual goodwill impairment testing is performed although it is not expected to have a material impact on the consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805).” This ASU specifies that if a company presents comparative financial statements, the company should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro-forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro-forma adjustments directly attributable to the business combination included in the pro-forma revenue and earnings. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Effective January 1, 2011, the Company adopted this ASU but was not subject to the disclosure requirements in the first six months of 2011 due to the immateriality of the acquisitions made by the Company during the period.

 

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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. 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. The adoption of this ASU did not have any impact on the consolidated financial statements.

Not yet Implemented:

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820).” The ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. The amendments could change how the fair value measurement guidance in ASC 820 is applied. This ASU is effective for interim and annual periods beginning after December 15, 2011. The Company is in the process of assessing this new guidance but the adoption of this ASU is not expected to have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220).” This ASU revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Effective January 1, 2012, the Company will adopt the requirements of this ASU.

C.         Earnings (Loss) Per Share

The following table reconciles the weighted-average shares outstanding used to calculate basic and diluted earnings (loss) per share for the three and six months ended July 2, 2011 and July 3, 2010:

 

    Second Quarter     Year to Date  
    2011     2010     2011     2010  

Numerator (in millions):

       

Net Earnings (Loss) Attributable to Stanley Black & Decker, Inc.

  $ 197.3      $ 45.8      $ 356.0      $ (62.8)   

Less Earnings (Loss) Attributable to participating RSUs

    0.4        0.2        0.8        (0.1)   
                               

Net Earnings (Loss)— basic

  $ 196.9      $ 45.6      $ 355.2      $ (62.7)   
                               

Net Earnings (Loss) — dilutive

  $ 197.3      $ 45.8      $ 356.0      $ (62.8)   
                               

Denominator (in thousands):

       

Basic earnings per share — weighted-average shares

    168,119        162,847        167,679        129,163   

Dilutive effect of stock options and awards

    4,956        3,237        4,750          
                               

Diluted earnings per share — weighted-average shares

    173,075        166,084        172,429        129,163   
                               

Earnings (Loss) per share of common stock:

       

Basic

  $ 1.17      $ 0.28      $ 2.12      $ (0.49)   
                               

Diluted

  $ 1.14      $ 0.28      $ 2.06      $ (0.49)   
                               

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 included in the calculation of weighted-average shares outstanding from the period from the merger date.

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 2, 2011 and July 3, 2010, respectively, but were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):

 

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4,939 4,939 4,939 4,939
    Second Quarter     Year to Date  
            2011                     2010                     2011                     2010          

    Number of stock options

    1,146              3,473              1,518                3,804(a)       

    Number of restricted shares and awards

    —              —              —                671(a)       

    Number of other equity awards

    —              —              —                136(a)       

    Number of stock warrants

    4,939              4,939              4,939                4,939            

    Number of shares related to the May 2010 equity purchase contracts

    —              3,887              —                4,750            

 

  (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 ended July 3, 2010.

The Company has warrants outstanding which entitle the holder to purchase up to 4,938,624 shares of its common stock with a strike price of approximately $86.25. These warrants are anti-dilutive since the strike price is greater than the market price of the Company’s common stock.

As of July 2, 2011, the November 2010 issued Convertible Preferred Units and March 2007 issued Convertible Notes both had a minor impact on diluted shares outstanding. As of July 3, 2010, 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 Convertible Notes and Convertible Preferred Units are more fully discussed in Note H, Long-Term Debt and Financing Arrangements of the Company’s Form 10-K for the year ended January 1, 2011.

As more fully disclosed in Note H, Long-Term Debt and Financing Arrangements of the Company’s 2010 Annual Report on Form 10-K for the fiscal year ended January 1, 2011, 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. 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.

D.         Accounts and Financing Receivable

Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses. Long-term trade financing receivables are reported within Other assets in the Consolidated Balance Sheets. Financing receivables and long-term financing receivables are predominately related to certain security equipment leases with commercial businesses. Generally, the Company retains legal title to any equipment leases and bears the right to repossess such equipment in an event of default. All financing receivables are interest bearing and the Company has not classified any financing receivables as held-for-sale. Interest income earned from financing receivables that are not delinquent is recorded on the effective interest method. The Company considers any financing receivable that has not been collected within 90 days of original billing date as past-due or delinquent. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as nonperforming.

The Company has an accounts receivable sale program scheduled to expire on December 12, 2011. According to the terms of that program the Company is required to sell certain of its trade accounts receivables at fair value to a wholly owned, consolidated, 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 ASC 860 “Transfers and Servicing”. Receivables are derecognized from the Company’s consolidated balance sheet when the BRS sells those receivables to the Purchaser. 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 2, 2011, 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 2, 2011 and January 1, 2011, $37.8 million and $31.5 million, respectively, of net receivables were derecognized. Gross receivables sold amounted to $141.0 million ($129.2 million, net) and $265.1 million ($241.7 million, net) for the three and six months ended July 2, 2011, respectively. These sales resulted in a pre-tax loss of $0.3 million and $0.6 million for the three and six months ended July 2, 2011, respectively. Proceeds from transfers of receivables to the Purchaser totaled $143.7 million and $250.8 million for the three and six months ended July 2, 2011, respectively. Collections of previously sold receivables, including deferred

 

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purchase price receivables, and all fees, which are settled one month in arrears, resulted in payments to the Purchaser of $136.3 million and $244.8 million for the three and six months ended July 2, 2011, respectively. Servicing fees amounted to less than $0.1 million and $0.1 million for the three and six months ended July 2, 2011, respectively.

Gross receivables sold totaled $150.9 million ($136.0 million, net) and $276.3 million ($246.0 million, net) 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. Proceeds from transfers of receivables to the Purchaser totaled $195.7 million and $298.7 million for the three and six months ended July 3, 2010, respectively. Collections of previously sold receivables, including deferred purchase price receivables, and all fees, which are settled one month in arrears, resulted in payments to the Purchaser of $193.7 million and $300.3 million for the three and six months ended July 3, 2010, respectively. Servicing fees amounted to $0.1 million and $0.2 million for the three and six months ended July 3, 2010, respectively.

The Company’s risk of loss following the sale of the receivables is limited to the deferred purchase price, which was $19.7 million at July 2, 2011 and $13.8 million at January 1, 2011. 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 were $0.1 million and $0.2 million for the three and six months ended July 2, 2011, respectively, and $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 $32.1 million and $65.3 million for the three and six months ended July 2, 2011, respectively, and $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 accounts receivable within operating activities in the condensed consolidated statements 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, net at July 2, 2011 and January 1, 2011 are as follows (in millions):

 

$1,049.5 $1,049.5
     2011     2010  

Finished products

   $  1,049.5      $      915.1   

Work in process

     120.5        117.5   

Raw materials

     278.4        239.4   
                

Total inventories

   $  1,448.4      $   1,272.0   
                

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

2011 ACQUISITIONS

In January 2011, the Company acquired InfoLogix, Inc.(“Infologix”) for $60.0 million, net of cash acquired. Infologix is a leading provider of enterprise mobility solutions for the healthcare and commercial industries and will add an established provider of mobile workstations and asset tracking solutions to the Company’s Security segment. The total purchase price for the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values. Additionally, the Company completed five small acquisitions in the Industrial and Security segments for a combined purchase price of $45.7 million. The purchase accounting for these 2011 acquisitions is preliminary, principally with respect to finalization of intangible asset valuation and certain other minor items.

 

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2010 ACQUISITIONS

During 2010 the Company completed ten acquisitions for a total purchase price of $547.3 million, of which approximately $451.6 million related to CRC-Evans Pipeline International (“CRC-Evans”). The total purchase price for the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase price allocations for the acquisitions which are still within the measurement period are substantially complete, pending the completion of a few minor items. There were no significant changes to the purchase price allocations made during the first six months of 2011.

MERGER

As discussed in Note A, Basis of Presentation, the Merger occurred on March 12, 2010 and the total fair value of consideration transferred as part of the Merger was $4,656.5 million. Refer to Note E, Merger and Acquisitions, of the Company’s 2010 Annual Report on Form 10-K for the fiscal year ended January 1, 2011 for further discussion regarding the Merger.

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 purchase price allocation for Black & Decker was completed during the first quarter of 2011 within the measurement period. The measurement period adjustments recorded in the first quarter of 2011 did not have a significant impact on the Company’s consolidated statements of operations, balance sheet, or condensed statements of cash flows. The following table summarizes the fair values of major assets acquired and liabilities assumed as part of the Merger:

 

(Millions of Dollars)       

Cash

   $ 949.4   

Accounts and notes receivable

     907.2   

Inventory

     1,066.3   

Prepaid expenses and other current assets

     257.7   

Property, plant and equipment

     545.2   

Trade names

     1,505.5   

Customer relationships

     383.7   

Licenses, technology and patents

     112.3   

Other assets

     243.4   

Short-term borrowings

     (175.0

Accounts payable

     (479.1

Accrued expenses and other current liabilities

     (849.9

Long-term debt

     (1,657.1

Post-retirement benefits

     (775.8

Deferred taxes

     (808.5

Other liabilities

     (517.8
        

Total identifiable net assets

   $ 707.5   

Goodwill

     3,949.0   
        

Total consideration transferred

   $ 4,656.5   
        

ACTUAL AND PRO-FORMA IMPACT OF THE MERGER AND ACQUISITIONS

The following table presents supplemental pro-forma information as if the Merger, 2010 acquisitions and Infologix acquisition had occurred on January 3, 2010 for the six months ended July 3, 2010. This pro-forma information includes merger and acquisition-related charges for the period. 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 acquisitions on January 3, 2010. In addition, the pro-forma consolidated results do not reflect the expected realization of any cost savings associated with the Merger and acquisitions.

 

(Millions of Dollars, except per share amounts)   2010  

Net sales

    $ 4,759.9   

Net loss

    (55.2)   

Diluted loss per share

    $    (0.33)   

 

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2010 Pro-Forma Results

Pro-forma results for the 2011 year are not shown as the results of Black and Decker and acquisitions are already included in the three and six month period to date results. The pro-forma results are not shown for the three months ended July 3, 2010 because Black & Decker is already included in the three month period and the impact from the acquisitions is not significant.

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. The pre-acquisition results of the acquisitions were also combined for their respective pre-acquisition periods. The following adjustments were made to account for certain costs which would have been incurred during this pre-Merger period and pre-acquisition period.

 

   

Elimination of the historical pre-Merger and pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the Merger and acquisitions that would have been incurred from January 3, 2010 to the merger and/or acquisition dates.

 

   

Additional expense for the inventory step-up which would have been amortized as the corresponding inventory was sold.

 

   

Additional expense pertaining to Merger-related compensation for key executives which would have been incurred from January 3, 2010 to March 12, 2010.

 

   

Reduced interest expense for the Black & Decker 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 prior to the Merger and acquisition commencement dates.

 

   

The modifications above were adjusted for the applicable tax impact.

G.        Goodwill

Changes in the carrying amount of goodwill by segment are as follows (in millions):

 

           CDIY             Industrial           Security             Total        

Balance as of January 1, 2011

       $   2,924.0             $  1,234.6      $   1,783.3      $  5,941.9    

Addition from Merger

     77.0            24.4                18.6      120.0    

Addition from other acquisitions

     —            35.7                49.4      85.1    

Foreign currency translation and other

             39.1                    39.2                23.4             101.7    

Balance as of July 2, 2011

       $ 3,040.1             $ 1,333.9      $   1,874.7      $  6,248.7    

H.        Long-Term Debt and Financing Arrangements

At July 2, 2011 and January 1, 2011, long-term debt and financing arrangements are as follows (in millions):

 

    

Interest Rate

  2011      2010  

Notes payable due 2011

   7.13%   $         -          $      409.2   

Notes payable due 2012

   4.90%     206.8         208.4   

Convertible notes payable due in 2012

   3 month LIBOR less 3.50%     310.5         305.1   

Notes payable due 2013

   6.15%     260.8         260.8   

Notes payable due 2014

   4.75%     310.8         307.9   

Notes payable due 2014

   8.95%     397.0         405.3   

Notes payable due 2016

   5.75%     320.2         316.0   

Notes payable due 2028

   7.05%     168.0         168.5   

Notes payable due in 2018 (junior subordinated)

   4.25%     632.5         632.5   

Notes payable due 2040

   5.20%     399.7         399.7   

Other, payable in varying amounts through 2021

   0.00% – 6.62%     39.7         20.8   
    

 

 

    

 

 

 

Total long-term debt, including current maturities

     $ 3,046.0       $ 3,434.2   

Less: Current maturities of long-term debt

       (317.0)         (416.1)   
    

 

 

    

 

 

 

Long-term debt

     $   2,729.0       $ 3,018.1   
    

 

 

    

 

 

 

 

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In May 2011, the Company repaid its $400 million notes payable due 2011 with proceeds from additional borrowings of commercial paper. At July 2, 2011 the Company has $626.6 million outstanding against its $1.5 billion commercial paper program.

On March 11, 2011, the Company entered into a new four year $1.2 billion committed credit facility (the “Credit Agreement”). In connection with entering into the Credit Agreement the Company terminated the existing $800.0 million Amended and Restated Credit Agreement. Additionally, the $700.0 million 364-Day Credit Agreement dated as of March 12, 2010 expired in accordance with its terms on March 11, 2011. Borrowings under the Credit Agreement may include U.S. Dollars up to the $1.2 billion commitment or in Euro or Pounds Sterling subject to a foreign currency sublimit of $400.0 million and bear interest at a floating rate dependent upon the denomination of the borrowing. Repayments must be made on March 11, 2015 or upon an earlier termination date of the Credit Agreement, at the election of the Company. Under the terms of the Credit Agreement, the Company must maintain an interest coverage ratio, defined as earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense, subject to certain adjustments, of not less than 3.5 to 1.0 for any period of four consecutive quarters. The Company has not drawn on the commitments provided by the Credit Agreement. This credit facility is designed to be a liquidity back-stop for the Company’s $1.5 billion commercial paper program.

In January 2009, the Company entered into fixed-to-floating interest rate swaps on its $200.0 million notes payable due in 2012 and $250.0 million notes payable due in 2013. The Company previously had fixed-to-floating interest rate swaps on these notes outstanding that were terminated in 2008. The $6.8 million adjustment to the carrying value of the $200.0 million 2012 notes at July 2, 2011 pertains to the unamortized gain on the terminated swap as well as the fair value adjustment of the new swap. At July 2, 2011, the carrying value of the $250.0 million notes payable due 2013 includes $11.0 million pertaining to the unamortized gain on the terminated swap as well as the fair value adjustment of the new swap offset by $0.2 million unamortized discount on the notes.

In December 2010, the Company entered into a fixed-to-floating interest rate swap on its $300.0 million notes payable due in 2014. At July 2, 2011 the carrying value of the debt includes increases of $10.4 million associated with the fair value adjustment made in purchase accounting and $0.4 million pertaining to the fair value adjustment of the swap.

In December 2010, the Company entered into a fixed-to-floating interest rate swap on its $300.0 million notes payable due in 2016. At July 2, 2011 the carrying value of the debt includes a $22.1 million increase associated with the fair value adjustment made in purchase accounting partially offset by $1.9 million pertaining to the fair value adjustment of the swap.

Unamortized gains and fair value adjustments associated with interest rate swaps are more fully discussed in Note I, Derivative Financial Instruments.

The Company’s $320.0 million of Convertible Notes due 2012 and $632.5 million Convertible Preferred Units each contain conversion features allowing holders to convert to common shares at a predefined rate, which is subject to standard anti-dilution adjustments. As of July 2, 2011, the conversion rate on the Convertibles Notes due 2012 was 15.5886 (equivalent to a conversion price set at $64.15 per common share) and the conversion rate on the Convertible Preferred Units was 1.3358 (equivalent to a conversion price set at $74.86 per common share). Refer to Note H, Long-Term Debt and Financing Arrangements of the Company’s 2010 Annual Report on Form 10K for the fiscal year ended January 1, 2011 for further discussion of those terms.

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, and foreign exchange contracts, are used to mitigate interest rate exposure and foreign currency 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. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. 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 and terminated all outstanding interest rate swaps and foreign currency forwards hedging future purchases of

 

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inventory denominated in a foreign currency. For other foreign currency forwards, 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 at July 2, 2011 and January 1, 2011 is as follows (in millions):

 

    

Balance Sheet

Classification

  2011     2010    

Balance Sheet

Classification

  2011     2010  

Derivatives designated as hedging instruments:

            

Interest Rate Contracts Cash Flow

   LT other assets   $       —      $       —      LT other liabilities   $    29.5      $   17.3   

Interest Rate Contracts Fair Value

   Other current assets     18.9        5.5      Accrued expenses     3.5          
   LT other assets     9.4        10.7      LT other liabilities     8.2        11.9   

Foreign Exchange Contracts Cash Flow

   Other current assets            0.7      Accrued expenses     5.6        5.6   
  

LT other assets

                LT other liabilities     4.0          

Net Investment Hedge

   Other current assets     3.3        11.7      Accrued expenses     15.9        17.7   
    

 

 

   

 

 

     

 

 

   

 

 

 
     $   31.6      $   28.6        $   66.7      $   52.5   
    

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedging

    instruments:

            

Foreign Exchange Contracts

   Other current assets   $   22.5      $   26.4      Accrued expenses   $   51.7      $   59.1   
  

LT other assets

    0.9             LT other liabilities     3.3        4.1   
    

 

 

   

 

 

     

 

 

   

 

 

 
     $   23.4      $   26.4        $   55.0      $   63.2   
    

 

 

   

 

 

     

 

 

   

 

 

 

The counterparties to all of the above mentioned 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 nonperformance by any of its counterparties. Further, as more fully discussed in Note L, 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 2, 2011, significant cash flows related to derivatives including those that are separately discussed in Cash Flow Hedges, Net Investment Hedges and Undesignated Hedges below resulted in net cash paid of $82.1 million.

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 $30.0 million from the termination of $325.0 million notional of fixed-to-variable interest rate swaps that became undesignated at the merger date and as a result the cash inflow was reported within investing activities in the condensed consolidated statement of cash flows.

CASH FLOW HEDGES There was a $62.0 million after-tax loss and a $50.2 million after-tax loss reported for cash flow hedge effectiveness in Accumulated other comprehensive income as of July 2, 2011 and January 1, 2011, respectively. An after-tax loss of $13.9 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates 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 2, 2011 and July 3, 2010 (in millions):

 

(Ineffective Portion*) (Ineffective Portion*) (Ineffective Portion*) (Ineffective Portion*)
Year-to-date 2011    Gain (Loss)
Recorded in  OCI
 

Classification of

Gain (Loss)

Reclassified from

OCI to Income

   Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion)
  Gain (Loss)
Recognized in
Income
(Ineffective Portion*)

Interest Rate Contracts

   $    (12.2)   Interest expense    $    —     $—  

Foreign Exchange Contracts

   $    (17.0)   Cost of sales    $(10.3)   $—  

 

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Year-to-date 2010

   Gain (Loss)
Recorded in  OCI
  Classification of
Gain (Loss)
Reclassified from
OCI to Income
   Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion)
  Gain (Loss)
Recognized  in
Income
(Ineffective Portion*)

Interest Rate Contracts

     $ (61.3 )       Interest expense        $ (1.6 )     $ —    

Foreign Exchange Contracts

     $ (0.4 )       Cost of sales        $ 0.3       $ —    

Foreign Exchange Contracts

     $ 21.5         Other, net        $ 22.4       $ —    

 

*       Includes ineffective portion and amount excluded from effectiveness testing.

For the second quarter and first six months of 2011, the hedged items’ impact to the Consolidated Statement of Operations was a gain of $5.1 million and $10.3 million, respectively, in Cost of sales. For the second quarter and first six months of 2010, the hedged items’ impact to the Consolidated Statement of Operations was a loss of $12.6 million and $22.4 million, respectively, in Other, net and a loss of approximately $0.3 million, for both periods 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 all periods presented.

For the second quarter and first six months of 2011, an after-tax loss of $4.1 million and $8.3 million, respectively, was 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 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.

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 2, 2011 and January 1, 2011, the Company had $400 million of forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2012.

In May 2010, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400 million fixing interest at 3.95%. The objective of the hedge was to offset the expected variability on future payments associated with the interest rate on debt instruments. In connection with the August 31, 2010 issuance of the $400 million of senior unsecured 2040 Term Bonds, these forward-starting interest rate swaps were terminated. The terminations resulted in cash payments of $48.4 million. This loss ($30.0 million on an after-tax basis) was recorded in Accumulated other comprehensive income and will be amortized to earnings over the first ten years in which the interest expense related to the 2040 Term Bonds is recognized.

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 subsidiaries with non-U.S. dollar functional currencies 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. Gains and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive income, but are recorded directly to the Consolidated Statement of Operations in Other, net. At July 2, 2011, the notional value of the forward currency contracts outstanding was $280.4 million, of which $29.2 million had been de-designated, maturing at various dates through 2013. At January 1, 2011, the notional value of the forward currency contracts outstanding was $82.5 million, of which $13.8 million had been de-designated, maturing at various dates through 2011.

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. 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. Gains and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive income, but are recorded directly to the

 

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consolidated Statement of Operations in Other, net. At January 1, 2011, the notional value of option contracts outstanding was $54.7 million, $8.8 million of which had been de-designated. At July 2, 2011, there were no option contracts outstanding.

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. In December 2010, the Company entered into interest rate swaps with notional values which equaled the Company’s $300 million 4.75% notes due in 2014 and $300 million 5.75% notes due in 2016. In January 2009, the Company entered into interest rate swaps with notional values which equaled the Company’s $200 million 4.9% notes due in 2012 and $250 million 6.15% notes due in 2013. These interest rate swaps effectively converted the Company’s fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates. The changes in fair value of the interest rate swaps were recognized in earnings as well as the offsetting changes in fair value of the underlying notes. The notional value of open contracts was $1.050 billion as of July 2, 2011 and January 1, 2011. A summary of the fair value adjustments relating to these swaps for the second quarter and first six months of 2011 and 2010 is as follows (in millions):

 

    Second Quarter 2011   Year to Date 2011

Income Statement

Classification

  Gain/(Loss) on
Swaps
  Gain /(Loss)  on
Borrowings
  Gain/(Loss) on
Swaps
  Gain /(Loss)  on
Borrowings

Interest Expense

  $              15.9              $(15.9)   $  11.1   $    (11.1)
    Second Quarter 2010   Year to Date 2010

Income Statement

Classification

  Gain/(Loss) on
Swaps
  Gain /(Loss)  on
Borrowings
  Gain/(Loss) on
Swaps
  Gain /(Loss)  on
Borrowings

Interest Expense

  $                  6.4                     $  (6.4)   $    6.3   $    (6.3)

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 as a reduction of interest expense and totaled $5.0 million and $9.4 million for the second quarter and first six months of 2011, respectively, and $2.9 million and $5.9 million for the second quarter and first six months of 2010, respectively. Interest expense on the underlying debt was $14.1 million and $27.6 million for the second quarter and first six months of 2011, respectively, and $6.3 million and $12.6 million for the second quarter and first six months of 2010, respectively.

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 losses of $55.3 million and $32.7 million at July 2, 2011 and January 1, 2011, respectively. As of July 2, 2011, the Company had foreign exchange contracts that mature at various dates through April 2012 with notional values of $842.9 million outstanding hedging a portion of its pound sterling denominated net investment. As of January 1, 2011, the Company had foreign exchange contracts with notional values totaling $223.1 million outstanding hedging a portion of its euro denominated net investment and foreign exchange contracts with notional values of $800.9 million outstanding hedging a portion of its pound sterling denominated net investment. In the first six months of 2011, maturing foreign exchange contracts resulted in cash payments of $29.2 million. The Company had a foreign exchange contract mature in the first quarter of 2010 resulting in a cash payment 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 2011    Year-to-Date 2011

Income Statement

Classification

   Amount
Recorded
in OCI
    Gain (Loss)    
  Effective
Portion
Recorded in
Income
Statement
   Ineffective
Portion*
Recorded in
Income
Statement
   Amount
Recorded in
OCI
Gain (Loss)
  Effective
Portion
Recorded in
Income
Statement
   Ineffective
Portion*
Recorded in
Income
Statement

Other, net

   $    (1.9)   $—      $—      $(35.9)   $—      $—  

 

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     Second Quarter 2010    Year-to-Date 2010

Income Statement

Classification

   Amount
Recorded
in OCI
Gain (Loss)
   Effective
Portion
Recorded in
Income
Statement
   Ineffective
Portion*
Recorded in
Income
Statement
   Amount
Recorded in
OCI
Gain (Loss)
   Effective
Portion
Recorded in
Income
Statement
   Ineffective
Portion*
Recorded in
Income
Statement

Other, net

   $  35.7    $—      $—      $  54.3    $—      $—  

 

*       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 2, 2011 was $3.352 billion of forward contracts and $105.1 million in currency swaps, maturing at various dates primarily through May 2013 with one currency swap maturing in December 2014. The total notional amount of the contracts outstanding at January 1, 2011 was $2.273 billion of forward contracts and $219.4 million in currency swaps. In the first six months of 2011, a maturing currency swap resulted in a cash payment of $15.8 million. The income statement impacts related to derivatives not designated as hedging instruments for the second quarter and first six months of 2011 and 2010 are as follows (in millions):

 

Derivatives Not

Designated as

Hedging

Instruments under ASC 815

   Income  Statement
Classification
     Second Quarter 2011
Amount of  Gain (Loss)
Recorded in Income on
Derivative
  Year-to-Date 2011
Amount of Gain  (Loss)
Recorded in Income on
Derivative

Foreign Exchange Contracts

     Other, net       $(29.7)   $(39.6)

Derivatives Not

Designated as

Hedging

Instruments under ASC 815

   Income Statement
Classification
     Second Quarter 2010
Amount of  Gain (Loss)
Recorded in Income on
Derivative
  Year-to-Date 2010
Amount of Gain  (Loss)
Recorded in Income on
Derivative

Foreign Exchange Contracts

     Other, net       $ (29.1)     $ (32.9)  
     Cost of Sales       $    2.2      $     2.7   

J. Equity Option

In May 2011, the Company purchased from a financial institution over the counter 3 month “in-the-money” capped call options, subject to adjustments for standard anti-dilution provisions, on 2.4 million shares of its common stock for an aggregate premium of $19.6 million, or an average of $8.00 per option. The initial term of the capped call options was one month which was subsequently extended in an addendum to the agreement with the counterparty to a three month term. The purpose of the capped call options is to reduce share price volatility on potential future share repurchases by establishing the prices at which the Company may elect to repurchase 2.4 million shares in the three month term. In accordance with ASC 815-40 the premium paid was recorded as a reduction to Shareowners’ equity. The contracts for this series of options generally provide that the options may, at the Company’s election, be cash settled, physically settled or net-share settled (the default settlement method). This series of options has various expiration dates within the month of August 2011. The options will be automatically exercised if the market price of the Company’s common stock on the relevant expiration date is greater than the applicable lower strike price (i.e. the options are “in-the-money”). If the market price of the Company’s common stock at the expiration date is below the applicable lower strike price, the relevant options will expire with no value. If the market price of the Company’s common stock on the relevant expiration date is between the applicable lower and upper strike prices, the value per option to the Company will be the then-current market price less that lower strike price. If the market price of the Company’s common stock is above the applicable upper strike price, the value per option to the Company will be the difference between the applicable upper strike price and lower strike price. The aggregate fair value of the options at July 2, 2011 was $10.7 million.

 

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A summary of the capped call (equity options) issued is as follows:

 

               (Per Share)

Series

   Original Number
of Options
   Net Premium
Paid (In  millions)
   Adjusted Lower
Strike Price
   Adjusted Upper
Strike Price

Series I

   2,448,588    $  19.6    $  70.16    $  80.35

In November 2010, the Company purchased from financial institutions over the counter 5-year “in-the-money” capped call options on 8.43 million shares of its common stock for an aggregate premium of $50.3 million, or an average of $5.97 per option. The purpose of the capped call options is to reduce share price volatility on potential future share repurchases by establishing the prices at which the Company may elect to repurchase 8.43 million shares in the five year term. In accordance with ASC 815-40 the premium paid was recorded as a reduction to equity. The gain or loss on the options will depend on the actual market price of the Company’s stock on exercise dates which occur in December 2015. The contracts for each of the three series of options generally provide that the options may, at the Company’s election, be cash settled, physically settled or net-share settled (the default settlement method). Each series of options has various expiration dates within the month of December 2015. The options will be automatically exercised if the market price of the Company’s common stock on the relevant expiration date is greater than the applicable lower strike price (i.e. the options are “in-the-money”). If the market price of the Company’s common stock at the expiration date is below the applicable lower strike price, the relevant options will expire with no value. If the market price of the Company’s common stock on the relevant expiration date is between the applicable lower and upper strike prices, the value per option to the Company will be the then-current market price less that lower strike price. If the market price of the Company’s common stock is above the applicable upper strike price, the value per option to the Company will be the difference between the applicable upper strike price and lower strike price. The upper and lower strike prices have been adjusted in accordance with standard anti-dilution provisions, due to an increase in the Company’s common stock dividend rate since the November, 2010 contract inception. The aggregate fair value of the options at July 2, 2011 was $66.8 million.

A summary of the capped call (equity options) issued is as follows:

 

                (Per Share)    

Series

  Original Number
of Options
  Net Premium
Paid (In  millions)
  Adjusted Lower
Strike Price
  Adjusted Upper
Strike Price

Series I

  2,811,041   $16.8   $74.86   $97.81

Series II

  2,811,041   $16.8   $74.86   $97.81

Series III

  2,811,041   $16.7   $74.86   $97.81
  8,433,123   $ 50.3   $ 74.86   $ 97.81

K.         Net Periodic Benefit Cost — Defined Benefit Plans

Following are the components of net periodic benefit cost for the three and six months ended July 2, 2011 and July 3, 2010 (in millions):

 

    Second Quarter  
    Pension Benefits     Other Benefits  
    U.S. Plans     Non-U.S. Plans     U.S. Plans  
    2011     2010     2011     2010     2011     2010  

Service cost

  $ 1.4      $ 5.6      $ 3.1      $ 2.8      $ 0.3      $ 0.4   

Interest cost

    17.5        18.4        13.5        12.2        1.0        1.4   

Expected return on plan assets

    (17.3     (15.7     (12.9     (10.9              

Amortization of prior service cost (credit)

    0.2        0.2        0.1               (0.4     (0.1

Amortization of transition obligation

                  0.1                        

Amortization of net loss

    0.6        0.5        0.7        1.0                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 2.4      $ 9.0      $ 4.6      $ 5.1      $ 0.9      $ 1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Year to Date  
    Pension Benefits     Other Benefits  
    U.S. Plans     Non-U.S. Plans     U.S. Plans  
    2011     2010     2011     2010     2011     2010  

Service cost

  $ 3.2      $ 7.3      $ 6.1      $ 4.3      $ 0.5      $ 0.6   

Interest cost

    35.0        24.8        26.6        17.7        1.9        2.0   

Expected return on plan assets

    (35.0     (21.0     (25.5     (16.3              

Amortization of prior service cost (credit)

    0.5        0.4        0.2               (0.7     (0.1

Amortization of transition obligation

                  0.1                        

Amortization of net loss

    1.3        1.0        1.5        2.0                 

Curtailment loss

                         0.9                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 5.0      $ 12.5      $ 9.0      $ 8.6      $ 1.7      $ 2.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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L.         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 that are 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
Value
   Level 1    Level 2          Level 3            

July 2, 2011:

                   

Assets:

                   

Money market fund

     $   1,016.7        $   1,016.7        $ —            $—     

Investment in common stock of Niscayah

     $ 61.5        $ 61.5        $ —            $—     

Derivative assets

     $ 55.0        $ —          $ 55.0          $—     

Liabilities:

                   

Derivative liabilities

     $ 121.7        $ —          $   121.7          $—     

January 1, 2011:

                   

Assets:

                   

Money market fund

     $ 716.7        $ 716.7        $ —            $—     

Derivative assets

     $ 55.0        $  —          $ 55.0          $—     

Liabilities:

                   

Derivative liabilities

     $ 115.7        $  —          $ 115.7          $—     

A summary of the Company’s financial instruments carrying and fair values at July 2, 2011 and January 1, 2011 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.

 

Carrying Carrying Carrying Carrying
     July 2, 2011      January 1, 2011  

(millions of dollars)

   Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Assets:

           

Derivative assets

   $ 55.0       $ 55.0       $ 55.0       $ 55.0   

Liabilities:

           

Long-term debt, including current portion

   $ 3,046.0       $ 3,287.2       $ 3,434.2       $ 3,607.1   

Derivative liabilities

   $ 121.7       $ 121.7       $ 115.7       $ 115.7   

 

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The fair values of Long-term debt instruments are estimated using a discounted cash flow analysis, based on the Company’s marginal borrowing rates. The fair value of the Company’s variable rate short term borrowings approximate their carrying value at July 2, 2011. The fair values of foreign currency and interest rate swap agreements, comprising the derivative assets and liabilities in the table above, are based on current settlement values.

As discussed in Note D, Accounts and Financing 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.

There were no assets measured at fair value on a non-recurring basis during the six months ended July 2, 2011.

M.         Other Costs and Expenses

Other-net is primarily comprised of intangible asset amortization expense, currency impact, environmental expense and merger and acquisition-related charges primarily consisting of transaction costs. During the second quarter and six months ended July 2, 2011, $6.5 million and $9.8 million, respectively, was recorded to Other, net for certain investment banking fees, other transaction-related costs and advisory consulting fees (acquisition deal costs) that related to certain acquisitions. During the second quarter and six months ended July 3, 2010, $11.6 million and $43.7 million, respectively, was recorded to Other, net resulting from the costs described above primarily related to the Merger.

N.         Restructuring

At July 2, 2011, restructuring reserves totaled $96.0 million. A summary of the restructuring reserve activity from January 1, 2011 to July 2, 2011 is as follows (in millions):

 

       1/1/11       

Net

Additions

         Usage           Currency            7/2/11      

2011 Actions

             

Severance and related costs

     $      —         $    29.2         $    (4.8     $    0.7         $  25.1   

Facility closure

             2.0         (2.0               

Other

             1.0         (1.0               
                                           

Subtotal 2011 actions

             32.2         (7.8     0.7         25.1   
                                           

Pre-2011 Actions

             

Severance and related costs

     97.8         0.1         (31.9     2.3         68.3   

Facility closure

     2.3         1.8         (2.3             1.8   

Other

     1.1         0.3         (0.6             0.8   
                                           

    Subtotal Pre-2011 actions

     101.2         2.2         (34.8     2.3         70.9   
                                           

Total

     $  101.2         $    34.4         $  (42.6     $    3.0         $  96.0   
                                           

2011 Actions: In the first half of 2011, the Company continued to initiate restructuring activities associated with the Merger and other acquisitions, and recognized $29.3 million of restructuring charges related to activities initiated in the current year. Of those charges, $26.5 million relates to severance charges associated with the reduction of 633 employees, $1.8 million relates to facility closure costs, and $1.0 million represents other charges. For the three months ended July 2, 2011, the Company recognized $19.7 million of restructuring charges associated with the Merger and other acquisitions, of which $18.9 million relates to severance charges associated with the reduction of 358 employees, $0.3 million relates to facility closure costs, and $0.5 million represents other charges.

In addition, the Company has initiated cost reduction actions in the first half of 2011 that were not associated with the Merger or other acquisitions, resulting in severance and related charges of $2.7 million pertaining to the reduction of 83 employees, and facility closure costs of $0.2 million. Such restructuring actions initiated in the three months ended July 2, 2011 resulted in severance charges of $1.2 million associated with the reduction of 66 employees.

Of the $32.2 million recognized for these 2011 actions, $7.8 million has been utilized to date, with $25.1 million of reserves remaining as of July 2, 2011 with the majority expected to be utilized in 2011 and 2012.

 

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Pre-2011 Actions: As more fully disclosed in Note O of the Company’s Annual Report on Form 10-K for the year ended January 1, 2011 the Company initiated restructuring activities associated with the Merger and acquisition of Stanley Solutions de Sécurité (“SSDS”). Charges recognized in the first half of 2011 associated with these prior year initiatives amounted to $2.8 million. Additionally, in the first half of 2011 the Company released $0.6 million of the reserve related to residual liabilities for prior year initiatives that were not associated with the Merger. The charge in the second quarter of 2011 was $0.2 million for these actions.

As of January 1, 2011, the reserve balance related to these pre-2011 actions totaled $101.2 million. Utilization of the reserve balance related to pre-2011 actions was $34.8 million in the first half of 2011. The vast majority of the remaining reserve balance of $70.9 million is expected to be utilized in 2011 with the remainder in 2012.

Segments: The $34.4 million of charges recognized in the first half of 2011 includes: $14.5 million pertaining to the CDIY segment; $14.0 million pertaining to the Security segment; and $5.9 million pertaining to the Industrial segment. The $21.1 million of charges recognized in the three months ended July 2, 2011 includes: $8.2 million pertaining to the CDIY segment; $12.5 million pertaining to the Security segment; and $0.4 million pertaining to the Industrial segment.

In addition to the restructuring charges described in the preceding paragraphs, the Company recognized $11.1 million of restructuring-related costs in the first half of 2011 pertaining to the Merger. Those costs are classified in Cost of Sales and include accelerated depreciation and other charges associated with facility closures.

O.         Income Taxes

The Company recognized income tax expense of $27.9 million and $51.0 million for the three and six month periods ended July 2, 2011, respectively, resulting in an effective tax rate of 12.4% and 12.5%, respectively. The income tax expense for the three and six month periods include tax benefits of $48.5 million and $69.9 million, respectively, for the favorable settlement of certain tax contingencies. In addition, the effective tax rate differs from the statutory tax rate for the three and six month periods ended July 2, 2011 due to a portion of the Company’s earnings realized in lower-taxed foreign jurisdictions. Lastly, these benefits were partially offset by the inclusion of $17.5 million of uncertain tax positions in the current period related to ongoing operational and legal entity integrations. The effective tax rates for the three and six month periods ended July 3, 2010 were (397.8%) and 36.3%, respectively. The effective tax rates differed from the statutory tax rate for the three and six month periods ended July 3, 2010 primarily due to various non-deductible transaction costs and other restructuring costs associated with the Merger and the inclusion of a $35.7 million tax benefit attributable to the favorable settlement of certain tax contingencies.

Refer to note E, Merger and Acquisitions, of the Company’s 2010 Annual Report on Form 10-K for the fiscal year ended January 1, 2011 for further discussion of tax-related items arising from the Merger.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other taxing authorities both domestically and internationally. The final outcome of the future tax consequences of these examinations and legal proceedings, as well as the outcome of competent authority proceedings, changes and interpretation in regulatory tax laws, or expiration of statute of limitations could impact the Company’s financial statements. 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 which 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 reliably estimate the impact of any such change.

P.         Business Segments

The Company classifies its business into three reportable segments, which also represent its operating 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).

 

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The Security segment provides access and security solutions primarily for consumers, 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, exit devices, healthcare storage and supply chain solutions, patient protection products, hardware (including door and cabinet knobs and 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, and enterprise mobility solutions. Security products are sold primarily on a direct sales basis, and in certain instances, through third party distributors. As discussed in Note F, Merger and Acquisitions, in January 2011, the Company completed the acquisition of Infologix, which is a leading provider of enterprise mobility solutions for healthcare and commercial industries. Infologix’s operations are presented within the Security segment and reflect activity since the acquisition date.

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, and specialty tools. These products are sold to industrial customers including automotive, transportation, electronics, aerospace, machine tool and appliance industries and distributed through third party distributors as well as through direct sales forces. The industrial segment, through its CRC-Evans subsidiary, also provides services and specialized tools and equipment such as custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines.

The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A inclusive of the provision for doubtful accounts (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), restructuring, and income tax expense. Refer to Note N, Restructuring for the amount of restructuring charges by segment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and cost for certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Transactions between segments are not material. Segment assets primarily include accounts receivable, inventory, other current assets, property, plant and equipment, intangible assets and other miscellaneous assets.

 

     Second Quarter     Year to Date  
     2011     2010     2011     2010  

NET SALES

        

    CDIY

   $     1,364.4      $     1,300.0      $   2,575.2      $   1,849.0   

    Security

     622.4        571.4        1,179.8        985.3   

    Industrial

     636.4        494.2        1,248.9        793.3   
                                

    Total

   $ 2,623.2      $   2,365.6      $   5,003.9      $   3,627.6   
                                

SEGMENT PROFIT

        

    CDIY

   $ 190.6      $      112.8      $      347.1      $      160.3   

    Security

     102.6        67.7        175.3        131.8   

    Industrial

     97.5        57.1        204.4        94.4   
                                

    Segment profit

     390.7        237.6        726.8        386.5   

    Corporate overhead

     (57.8     (52.8     (117.1     (128.3

    Other, net

     (59.8     (65.1     (112.3     (130.0

    Restructuring charges and asset impairments

     (21.1     (85.8     (34.4     (183.2

    Interest expense

     (34.1     (26.8     (68.7     (46.1

    Interest income

     7.3        2.2        12.4        3.4   
                                

    Earnings (loss) from continuing operations before income taxes

   $ 225.2      $         9.3      $    406.7      $      (97.7
                                

The Company recast 2010 segment net sales and profit between the CDIY and Industrial segments to align reporting with the current management of certain industrial end customers to be comparable with the 2011 presentation. This recast had no material impact on previously reported 2010 net sales by geographic area.

The Company recorded $5.3 million and $11.3 million, respectively, in cost of sales associated with facility closures and an additional $1.3 million and $2.2 million, respectively, in SG&A primarily for integration costs associated with the Merger for the three and six months ended July 2, 2011. For the three and six months ended July 3, 2010, the Company recorded $123.7 million and $165.3 million, respectively, in cost of sales which primarily related to the inventory step-up amortization stemming from the turn of inventory acquired with the Merger which was recorded in purchase accounting at its fair value and facility closures within the Security segment. These charges reduced segment profit by $4.2 million in CDIY, $2.1 million in Security and $0.3 million in Industrial for the three months ended July 2, 2011, and $6.6 million in CDIY, $6.6 million in Security and $0.3 million in Industrial for the six months ended July 2, 2011. Segment profit for the three months ended July 3, 2010 was reduced for these charges by $88.4 million in CDIY, $21.7 million in Security and $13.6 million in Industrial. For the six months ended July 3, 2010, segment profit was reduced by $120.3 million in CDIY, $27.0 million in Security and $18.0 million in Industrial.

 

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Corporate overhead for the three and six months ended July 2, 2011, includes $16.4 million and $31.4 million, respectively, of charges pertaining primarily to certain merger and acquisition-related executive compensation and Black & Decker integration costs. For the three and six months ended July 3, 2010, such charges included in corporate overhead were $15.7 million and $64.7 million, respectively.

The following table is a summary of total assets by segment for the periods ended July 2, 2011 and January 1, 2011:

 

     2011     2010  

Segment Assets

    

    CDIY

   $ 7,912.2      $ 7,417.6   

    Security

     3,710.0        3,496.3   

    Industrial

     3,484.7        3,209.3   
                
     15,106.9        14,123.2   

    Corporate assets

     926.6        1,016.2   
                

    Consolidated

   $ 16,033.5      $ 15,139.4   
                

In connection with the previously discussed recast of 2010 segment net sales and profit, the Company correspondingly recast certain segment assets between the CDIY and Industrial segments.

Corporate assets are primarily cash and deferred taxes.

Q.         Commitments and Contingencies

The Company is involved in various legal proceedings relating to environmental issues, employment, product liability, workers’ compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside 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 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 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 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 perchlorate 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.

 

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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 a variety of contaminants at the site, including but not limited to, dioxins, polychlorinated biphenyls, and pesticides. The EPA alleged that an affiliate of Black & Decker is liable for site clean-up 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 released a draft Feasibility Study Report in May 2010, which identified and evaluated possible remedial alternatives for the site.

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 such as EPA’s oversight costs, less escrowed funds contributed by primary potentially responsible parties (PRPs) who have reached settlement agreements with the EPA), which the Company considers to be probable and reasonably estimable, range from approximately $68.3 million to $212.9 million, with no amount within that range representing a more likely outcome until such time as the EPA completes its remedy selection process for the site. The Company’s reserve for this environmental remediation matter of $68.3 million reflects the fact that the EPA considers Metro-Atlantic, Inc. to be a primary source of contamination at the site. The Company has determined that it is likely to contest the EPA’s claims with respect to this site. Further, to the extent that the Company agrees to perform or finance additional remedial activities at this site, it intends to 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 2, 2011.

In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. In the normal course of business, the Company is involved in various lawsuits and claims. In addition, the Company is a party to a number of proceedings before federal and state regulatory agencies relating to environmental remediation. Also, the Company, along with many other companies, has been named as a PRP in a number of administrative proceedings for the remediation of various waste sites, including 34 active Superfund sites. Current laws potentially impose joint and several liabilities upon each PRP. In assessing its potential liability at these sites, the Company has considered the following: whether responsibility is being disputed, the terms of existing agreements, experience at similar sites, and the Company’s volumetric contribution at these sites.

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. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual site and includes such factors as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. The liabilities recorded do not take into account any claims for recoveries from insurance or third parties. As assessments and remediation progress at individual sites, the amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. As of July 2, 2011 and January 1, 2011, the Company had reserves of $171.1 million and $173.0 million, respectively, for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable. Of the 2011 amount, $13.4 million is classified as current and $157.7 million as long-term which is expected to be paid over the estimated remediation period. The range of environmental remediation costs that is reasonably possible is $148.8 million to $364.2 million which is subject to change in the near term. The Company may be liable for environmental remediation of sites it no longer owns. Liabilities have been recorded on those sites in accordance with policy.

The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs, the Company does not expect that any sum it may have to pay in connection with these matters in excess of the amounts recorded will have a materially adverse effect on its financial position, results of operations or liquidity.

As discussed in Note T, Offer to Acquire Niscayah, the Company entered into a commitment to undertake a tender offer for shares of Niscayah.

 

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R.         Guarantees

The Company’s financial guarantees at July 2, 2011 are as follows (in millions):

 

(Millions of Dollars)   

Term

   Maximum
Potential
Payment
     Carrying
Amount of
Liability
 

Financial guarantees as of July 2, 2011:

        

Guarantees on the residual values of leased properties

   One to four years      $    32.8         $    —   

Guarantee on the residual value of aircraft

   Less than nine years      24.2           

Standby letters of credit

   Up to three years      71.9           

Commercial customer financing arrangements

   Up to six years      23.1         12.8   
                    

Total

        $  152.0         $  12.8   
                    

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 $32.8 million while the fair value of the underlying assets is estimated at $38.4 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 $71.9 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 $23.1 million and the $12.8 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 sometimes 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 2, 2011 and July 3, 2010 are as follows (in millions):

 

         2011             2010      

Balance beginning of period

     $  119.6         $    67.4    

Warranties and guarantees issued

     49.4         33.4    

Liability assumed in the Merger

     9.5         51.5    

Warranty payments

     (50.4)        (32.9)   

Foreign currency translation and other

             9.1                (6.1)   

Balance end of period

     $ 137.2         $  113.3    

 

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S.         Parent and Subsidiary Debt Guarantees

The following notes were issued by Stanley Black & Decker, Inc. (“Stanley”) and are fully and unconditionally guaranteed by The Black & Decker Corporation (“Black & Decker”), a 100% owned direct subsidiary of Stanley: 4.9% Notes due 2012; 6.15% Notes due 2013; and the 5.2% Notes due 2040 (collectively, the “Stanley Notes”).

The following notes were issued by Black & Decker and are fully and unconditionally guaranteed by Stanley: 4.75% Notes due 2014; 8.95% Notes due 2014 and 5.75% Notes due 2016 (collectively, the “Black & Decker Notes”).

The Stanley Notes and the Black & Decker Notes were issued under indentures attached as Exhibits to the Company’s Annual Report on Form 10-K for the year ended January 1, 2011 filed on February 18, 2011. Each of the Black & Decker Notes and Black & Decker’s guarantee of the Stanley Notes rank equally with all of Black & Decker’s other unsecured and unsubordinated indebtedness. The Stanley Guarantees of the Black and Decker notes are unsecured obligations of the Company, ranking equal in right of payment with all the Company’s existing and future unsecured and unsubordinated indebtedness.

The following tables, in accordance with Rule 3-10(e) of Regulation S-X for the Stanley Notes, and Rule 3-10(c) of Regulation S-X for the Black & Decker Notes, present the condensed consolidating balance sheets as of July 2, 2011 and January 1, 2011; the condensed consolidating statements of operations for the three and six months ended July 2, 2011 and July 3, 2010; and the condensed consolidating statements of cash flows for the six months ended July 2, 2011 and July 3, 2010. The condensed consolidated financial statements for the six months ended July 3, 2010 include the results of Black & Decker from the Merger date.

 

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Stanley Black & Decker, Inc.

Condensed Consolidating Statement of Operations

(Unaudited, Millions of Dollars)

Three Months Ended July 2, 2011

 

      Parent
Stanley  Black
& Decker, Inc.
    The Black  &
Decker
Corporation
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  
            
            

NET SALES

   $ 428.9      $ -        $ 2,321.6      $ (127.3   $ 2,623.2   

COSTS AND EXPENSES

          

Cost of sales

     290.7        -          1,470.2        (105.1     1,655.8   

Selling, general and administrative

     180.6        0.6        475.5        (22.2     634.5   

Other, net

     0.7        9.5        49.6        -          59.8   

Restructuring charges and asset impairments

     0.9        -          20.2        -          21.1   

Interest expense, net

     17.0        12.8        (3.0     -          26.8   
                                        
     489.9        22.9        2,012.5        (127.3     2,398.0   
                                        

(Loss) earnings from continuing operations before income taxes and equity in earnings of subsidiaries

     (61.0     (22.9     309.1        -          225.2   

Income taxes (benefit) on continuing operations before equity in earnings of subsidiaries

     (16.5     (8.3     52.7        -          27.9   

Equity in earnings of subsidiaries

     241.8        222.8        -          (464.6     -     
                                        

Net earnings from continuing operations

     197.3        208.2        256.4        (464.6     197.3   

Less: Net (loss) attributable to non-controlling interests

     -          -          -          -          -     
                                        

NET EARNINGS ATTRIBUTABLE TO STANLEY BLACK &

          

DECKER, INC.

   $ 197.3      $ 208.2      $ 256.4      $ (464.6   $ 197.3   
                                        

Stanley Black & Decker, Inc.

Condensed Consolidating Statement of Operations

(Unaudited, Millions of Dollars)

Six Months Ended July 2, 2011

 

     Parent
Stanley  Black
& Decker, Inc.
    The Black  &
Decker
Corporation
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET SALES

   $ 804.1      $ -        $ 4,435.3      $ (235.5   $ 5,003.9   

COSTS AND EXPENSES

          

Cost of sales

     544.5        -          2,802.8        (193.3     3,154.0   

Selling, general and administrative

     348.5        2.1        931.8        (42.2     1,240.2   

Other, net

     (13.6     (30.0     155.9        -          112.3   

Restructuring charges and asset impairments

     2.4        -          32.0        -          34.4   

Interest expense, net

     35.6        26.4        (5.7     -          56.3   
                                        
     917.4        (1.5     3,916.8        (235.5     4,597.2   
                                        

(Loss) earnings from continuing operations before income taxes and equity in earnings of subsidiaries

     (113.3     1.5        518.5        -          406.7   

Income taxes (benefit) on continuing operations before equity in earnings of subsidiaries

     (35.7     0.6        86.1        -          51.0   

Equity in earnings of subsidiaries

     433.3        345.8        -          (779.1     -     
                                        

Net earnings from continuing operations

     355.7        346.7        432.4        (779.1     355.7   

Less: Net (loss) attributable to non-controlling interests

     -          -          (0.3     -          (0.3
                                        

NET EARNINGS ATTRIBUTABLE TO STANLEY BLACK &

          

DECKER, INC.

   $ 355.7      $ 346.7      $ 432.7      $ (779.1   $ 356.0   
                                        

 

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Stanley Black & Decker, Inc.

Condensed Consolidating Statement of Operations

(Unaudited, Millions of Dollars)

Three Months Ended July 3, 2010

 

     Parent
Stanley Black

   & Decker, Inc.  
    The Black &
Decker
  Corporation  
    Non-
Guarantor
  Subsidiaries  
      Eliminations         Consolidated    

NET SALES

   $ 407.7      $ -        $ 2,060.2      $ (102.3   $ 2,365.6   

COSTS AND EXPENSES

          

Cost of sales

     268.8        -          1,410.8        (83.0     1,596.6   

Selling, general and administrative

     135.7        31.2        436.6        (19.3     584.2   

Other, net

     14.4        (39.8     90.5        -          65.1   

Restructuring charges and asset impairments

     54.8        2.7        28.3        -          85.8   

Interest expense, net

     10.8        11.4        2.4        -          24.6   
                                        
     484.5        5.5        1,968.6        (102.3     2,356.3   
                                        
(Loss) earnings from continuing operations before income taxes and equity in earnings of subsidiaries      (76.8     (5.5     91.6        -          9.3   
Income taxes (benefit) on continuing operations before equity in earnings of subsidiaries      (18.6     (0.9     (17.5     -          (37.0

Equity in earnings of subsidiaries

     104.5        52.6        -          (157.1     -     
                                        
Net earnings from continuing operations      46.3        48.0        109.1        (157.1     46.3   
Less: Net earnings attributable to non-controlling interests      -          -          0.5        -          0.5   
                                        
NET EARNINGS ATTRIBUTABLE TO STANLEY BLACK & DECKER, INC.    $ 46.3      $ 48.0      $ 108.6      $ (157.1   $ 45.8   
                                        

Stanley Black & Decker, Inc.

Condensed Consolidating Statement of Operations

(Unaudited, Millions of Dollars)

Six Months Ended July 3, 2010

 

     Parent
Stanley Black
  & Decker, Inc.  
    The Black &
Decker
  Corporation  
    Non-
Guarantor
  Subsidiaries  
       Eliminations         Consolidated    

NET SALES

   $ 765.1      $ -        $ 3,054.0       $ (191.5   $ 3,627.6   

COSTS AND EXPENSES

           

Cost of sales

     506.9        -          2,049.9         (154.1     2,402.7   

Selling, general and administrative

     285.9        44.9        673.3         (37.4     966.7   

Other, net

     45.0        (53.9     138.9         -          130.0   

Restructuring charges and asset impairments

     55.0        90.2        38.0         -          183.2   

Interest expense, net

     23.8        14.4        4.5         -          42.7   
                                         
     916.6        95.6        2,904.6         (191.5     3,725.3   
                                         
(Loss) earnings from continuing operations before income taxes and equity in earnings of subsidiaries      (151.5     (95.6     149.4         -          (97.7
Income taxes (benefit) on continuing operations before equity in earnings of subsidiaries      (38.4     (9.5     12.4         -          (35.5

Equity in earnings of subsidiaries

     50.9        41.5        -           (92.4     -     
                                         

Net earnings (loss) from continuing operations

     (62.2     (44.6     137.0         (92.4     (62.2
Less: Net earnings attributable to non-controlling interests      -          -          0.6         -          0.6   
                                         
NET EARNINGS (LOSS) ATTRIBUTABLE TO STANLEY BLACK & DECKER, INC.    $ (62.2   $ (44.6   $ 136.4       $ (92.4   $ (62.8
                                         

 

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Stanley Black & Decker, Inc.

Condensed Consolidating Balance Sheet

(Unaudited, Millions of Dollars)

July 2, 2011

 

    

Parent

Stanley Black &

Decker, Inc.

   

The Black &

Decker

Corporation

   

Non-

Guarantor

Subsidiaries

     Eliminations     Consolidated  

ASSETS

           

Current Assets

           

Cash and cash equivalents

     $ 31.6      $ 2.7      $ 1,880.7       $ -      $ 1,915.0   

Accounts and notes receivable, net

     191.5        -        1,433.1         -        1,624.6   

Inventories, net

     125.2        -        1,323.2         -        1,448.4   

Other current assets

     30.8        7.0        313.2         -        351.0   
        

Total Current Assets

     379.1        9.7        4,950.2         -        5,339.0   

Property, Plant and Equipment, net

     206.0        -        980.4         -        1,186.4   

Goodwill and intangible assets, net

     220.6        1,623.5        7,250.0         -        9,094.1   

Investment in Subsidiaries

     9,861.0        3,376.9        -         (13,237.9     -   

Intercompany Receivables

     -        10,388.2        10,291.9         (20,680.1     -   

Other Assets

     36.6        43.9        333.5         -        414.0   
        

Total Assets

     $       10,703.3      $         15,442.2      $         23,806.0       $         (33,918.0   $       16,033.5   
        

LIABILITIES AND SHAREOWNERS’ EQUITY

  

        

Current Liabilities

           

Short-term borrowings

     $ 626.7      $ -      $ 0.2       $ -      $ 626.9   

Current maturities of long-term debt

     314.6        -        2.4         -        317.0   

Accounts payable and accrued expenses

     212.6        166.9        2,081.3         -        2,460.8   
        

Total Current Liabilities

     1,153.9        166.9        2,083.9         -        3,404.7   

Intercompany Payables

     558.3        8,615.6        11,506.2         (20,680.1     -   

Long-Term Debt

     1,531.1        1,028.0        169.9         -        2,729.0   

Other Liabilities

     98.1        23.7        2,194.2         -        2,316.0   

Accumulated other comprehensive (loss) income

     (91.1     (78.7     248.2         -        78.4   

Other Shareowners’ Equity

     7,453.0        5,686.7        7,551.2         (13,237.9     7,453.0   

Non-controlling interests

     -        -        52.4         -        52.4   
        

Total Equity

     7,361.9        5,608.0        7,851.8         (13,237.9     7,583.8   
        

Total Liabilities and Shareowners’ Equity

     $ 10,703.3      $ 15,442.2      $ 23,806.0       $ (33,918.0   $ 16,033.5   
        

 

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Table of Contents

Stanley Black & Decker, Inc.

Condensed Consolidating Balance Sheet

(Unaudited, Millions of Dollars)

January 1, 2011

 

     Parent
Stanley Black  &
Decker, Inc.
    The Black  &
Decker
Corporation
    Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

           

Current Assets

           

Cash and cash equivalents

   $ (5.0   $ 3.5      $ 1,746.9       $ -      $ 1,745.4   

Accounts and notes receivable, net

     153.4        -        1,263.7         -        1,417.1   

Inventories, net

     120.8        -        1,151.2         -        1,272.0   

Other current assets

     24.8        13.0        343.3         -        381.1   
                                         

Total Current Assets

     294.0        16.5        4,505.1         -        4,815.6   

Property, Plant and Equipment, net

     172.0        5.0        989.5         -        1,166.5   

Goodwill and intangible assets, net

     186.7        1,620.5        7,006.9         -        8,814.1   

Investment in Subsidiaries

     9,367.5        3,034.1        -         (12,401.6     -   

Intercompany Receivables

     307.6        10,632.8        8,807.6         (19,748.0     -   

Other Assets

     40.2        45.9        257.1         -        343.2   
                                         

Total Assets

   $ 10,368.0      $ 15,354.8      $ 21,566.2       $ (32,149.6   $ 15,139.4   
                                         

LIABILITIES AND SHAREOWNERS’ EQUITY

           

Current Liabilities

           

Short-term borrowings

   $ -      $ -      $ 1.6       $ -      $ 1.6   

Current maturities of long-term debt

     4.2        409.2        2.7         -        416.1   

Accounts payable and accrued expenses

     288.5        90.1        1,945.9         -        2,324.5   
                                         

Total Current Liabilities

     292.7        499.3        1,950.2         -        2,742.2   

Intercompany Payables

     1,147.9        8,877.7        9,722.4         (19,748.0     -   

Long-Term Debt

     1,817.5        1,029.2        171.4         -        3,018.1   

Other Liabilities

     52.0        138.3        2,119.1         -        2,309.4   

Accumulated other comprehensive (loss) income

     (75.4     (96.8     55.9         -        (116.3

Other Shareowners’ Equity

     7,133.3        4,907.1        7,494.5         (12,401.6     7,133.3   

Non-controlling interests

     -        -        52.7         -        52.7   
                                         

Total Equity

     7,057.9        4,810.3        7,603.1         (12,401.6     7,069.7   
                                         

Total Liabilities and Shareowners’ Equity

   $ 10,368.0      $ 15,354.8      $ 21,566.2       $ (32,149.6   $ 15,139.4   
                                         

 

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Table of Contents

Stanley Black & Decker, Inc.

Condensed Consolidating Statements of Cash Flow

(Unaudited, Millions of Dollars)

Six Months Ended July 2, 2011

 

    Parent
Stanley Black
   & Decker, Inc.  
    The Black &
Decker
  Corporation  
    Non-
Guarantor
  Subsidiaries  
      Eliminations         Consolidated    
Cash (used in) provided by operating activities   $ (214.9   $ 377.2      $ 135.4      $ -        $ 297.7   

Investing Activities

         
Capital expenditures and capitalized software     (51.9     -          (86.1     -          (138.0
Business acquisitions and asset disposals     (75.2     -          (4.9     -          (80.1
Purchases of short-term investments     -          -          (42.5     -          (42.5
Investment in Niscayah     -          -          (58.5     -          (58.5
Intercompany payables and receivables     781.5        491.1        495.1        (1,767.7     -     
Other investing activities     (18.4     (10.8     -          -          (29.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Cash provided by (used in) investing activities     636.0        480.3        303.1        (1,767.7     (348.3

Financing Activities

         
Net proceeds (payments) on long-term debt     20.5        (400.0     (1.4     -          (380.9
Net premium paid for equity option     (19.6     -          -          -          (19.6
Stock purchase contract fees     (1.6     -          -          -          (1.6
Net short-term borrowings (repayments)     626.2        -          (1.4     -          624.8   
Cash dividends on common stock     (137.5     -          -          -          (137.5
Proceeds from the issuance of common stock     85.4        -          -          -          85.4   
Purchase of common stock for treasury     (6.1     -          -          -          (6.1
Intercompany payables and receivables     (951.8     (458.3     (357.6     1,767.7        -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Cash (used in) provided by financing activities     (384.5     (858.3     (360.4     1,767.7        164.5   
Effect of exchange rate changes on cash and cash equivalents     -          -          55.7        -          55.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

    36.6        (0.8     133.8        -          169.6   
Cash and cash equivalents, beginning of period     (5.0     3.5        1,746.9        -          1,745.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Cash and cash equivalents, end of period   $ 31.6      $ 2.7      $ 1,880.7      $ -        $ 1,915.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Stanley Black & Decker, Inc.

Condensed Consolidating Statements of Cash Flow

(Unaudited, Millions of Dollars)

Six Months Ended July 3, 2010

 

    Parent
Stanley Black  &
Decker, Inc.
    The Black  &
Decker
Corporation
    Non-Guarantor
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 for 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 and cash equivalents

              -                       -                 (33.7)                    -                 (33.7)     

Increase 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      

 

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T.         Offer to Acquire Niscayah

On June 27, 2011, the Company announced an offer to acquire Niscayah Group AB (“Niscayah”), a European commercial electronic security solutions provider based in Stockholm, Sweden in a cash transaction valued at approximately $1.2 billion, inclusive of assumed debt. The Company commenced a tender offer to purchase all of the outstanding shares of Niscayah’s common stock at a price of SEK 18.00 per share and all of the outstanding warrants at a price of SEK 0.05 per warrant. While the Company’s Board of Directors has approved the transaction, its offer is subject to customary conditions for a public offer in Sweden, including anti-trust approvals and the acceptance of the offer to such an extent that the Company becomes the owner of more than 90% of the total number of shares in Niscayah. The Company will integrate Niscayah into its Security segment and expects to close this transaction in September, 2011.

In the second quarter of 2011, the Company purchased approximately 5.8% of the outstanding shares of Niscayah for $58.5 million. At July 2, 2011, this investment was recorded in its Consolidated Balance Sheet at its fair value of approximately $61.5 million.

To facilitate the acquisition of Niscayah and provide additional liquidity, on July 22, 2011 the Company entered into a 364 day credit agreement whereby it initially will have a $1.25 billion credit line, decreasing to $1.0 billion at the date of acquisition and to $750 million 90 days after the acquisition.

 

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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.

BUSINESS OVERVIEW

Strategy

Stanley has pursued a diversification strategy to enable profitable growth which involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth. In addition, the Company’s desire to be a consolidator of the tool industry and to increase its relative weighting in emerging markets has been significantly enhanced by the Merger (as discussed below). The impact from this diversification strategy is evident in the performance of the Company. Sales outside the U.S. represented 48% of the total in the first half of 2011, up from 29% in 2002. On a pro-forma combined basis, Stanley and Black & Decker 2010 sales to U.S. home centers and mass merchants were approximately 31%, including nearly 21% in sales to the combined Company’s two largest customers. As acquisitions in the various growth platforms (electronic/convergent Security, mechanical security, engineered fastening, infrastructure solutions and healthcare solutions) 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 $3.5 billion of acquisitions since 2002 (aside from the Merger), various 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 Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2011 for additional strategic discussion.

Segments

The Company classifies its business into three reportable segments, which also represent its operating 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 consumers, 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, exit devices, healthcare storage and supply chain solutions, patient protection products, hardware (including door and cabinet knobs and 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 and enterprise mobility solutions. 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, and specialty tools. These products are sold to industrial customers including automotive, transportation, electronics, aerospace, machine tool, and appliance industries and are distributed through third party distributors as well as direct sales forces. The Industrial segment, through its CRC-Evans International (“CRC-Evans”) subsidiary, also provides services and specialized tools and equipment such as custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines.

 

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Offer to Acquire Niscayah

On June 27, 2011, the Company announced an offer to acquire Niscayah Group AB (“Niscayah”), a European commercial electronic security solutions provider based in Stockholm, Sweden in a cash transaction valued at approximately $1.2 billion, inclusive of assumed debt. The Company commenced a tender offer to purchase all of the outstanding shares of Niscayah’s common stock at a price of SEK 18.00 per share and all of the outstanding warrants at a price of SEK 0.05 per warrant. While the Company’s Board of Directors has approved the transaction, its offer is subject to customary conditions for a public offer in Sweden, including anti-trust approvals and the acceptance of the offer to such an extent that the Company becomes the owner of more than 90% of the total number of shares in Niscayah. The Company will integrate Niscayah into its Security segment and expects to close this transaction in September 2011.

In June 2011, the Company purchased approximately 5.8% of the outstanding shares of Niscayah for $59 million. At July 2, 2011, this investment was reported in its Consolidated Balance Sheet at its $62 million fair value.

To facilitate the acquisition of Niscayah and provide additional liquidity, on July 22, 2011 the Company entered into a 364 day credit agreement whereby it initially will have a $1.25 billion credit line, decreasing to $1.0 billion at the date of acquisition and to $750 million 90 days after the acquisition.

Acquisition of Infologix

In January 2011, the Company acquired InfoLogix, Inc. (“Infologix”) for $60 million, net of cash acquired. Infologix is a leading provider of enterprise mobility solutions for the healthcare and commercial industries and has added an established provider of mobile workstations and asset tracking solutions to Stanley’s existing Healthcare Solutions business.

Merger

As discussed in Note A, on March 12, 2010, The Stanley Works (“Stanley”) completed a Merger with the Black & Decker Corporation (“Black & Decker”). In connection with the Merger, Stanley changed its name to Stanley Black & Decker, Inc. Throughout this MD&A, references to the “Company” refer to Stanley Black & Decker, Inc. The Company’s condensed consolidated financial statements include Black & Decker’s results of operations and cash flows from March 13, 2010.

Management believes the Merger will result in approximately $450 million in cost synergies, increased during the second quarter from the previous estimate of $425 million, which are expected to be achieved by the end of 2012 and which will help fuel future growth and facilitate global cost leadership. The Company is ahead of plan on the integration of the two companies and realized $135 million of the cost synergies in 2010. An additional $200 million of cost synergies are anticipated in 2011, which is $35 million ahead of the cost synergies previously anticipated, and an incremental $115 million are anticipated in 2012 to achieve the total cumulative $450 million in cost synergies by the end of 2012, which represents $485 million on an annualized basis. Additionally, revenue synergies from the Merger are still projected to be in the range of $300 million to $400 million by 2013, which implies a benefit of approximately $0.35 — $0.50 of earnings per diluted share. Revenue synergies are expected to add an incremental 50 basis points (approximately $50 million) to 2011 revenue growth and have a modest earnings impact, with remaining revenue synergies to be achieved in 2012 and 2013.

Certain Items Impacting Earnings

Merger and Acquisition-Related Charges Impacting Second Quarter and Year-To-Date 2011 and 2010 Earnings

Second Quarter and Year-To-Date 2011

The Company reported $50 million and $87 million in pre-tax charges in the second quarter and year-to-date 2011 periods, respectively, pertaining to the Merger and acquisitions (the “merger and acquisition-related charges”) which were comprised of the following:

 

   

$5 million and $11 million for the second quarter and year-to-date 2011 periods, respectively, in Cost of sales pertaining to facility closure-related charges;

 

   

$18 million and $34 million for the second quarter and year-to-date 2011 periods, respectively, in Selling, general & administrative (“SG&A”) primarily for integration-related administrative costs and consulting fees;

 

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$7 million and $10 million for the second quarter and year-to-date 2011 periods, respectively, in Other, net for deal transaction costs; and

 

   

$20 million and $32 million for the second quarter and year-to-date 2011 periods, respectively, in Restructuring and asset impairment charges for severance and charges associated with the closure of facilities.

The tax effect on the above charges during the second quarter of 2011 was a $5 million provision, resulting in after-tax merger and acquisition-related charges of $55 million, or $0.32 per diluted share. The tax effect is comprised of tax benefits of $17 million associated with pre-tax charges which were more than offset by tax charges in the quarter of $22 million, related to ongoing operational and legal entity integrations. On a year-to-date basis, the tax effect on the above charges, some of which were not tax deductible, was a $4 million benefit, resulting in an after-tax charge of $83 million, or $0.49 per diluted share.

Second Quarter and Year-To-Date 2010

The Company reported $229 million and $442 million in pre-tax merger and acquisition-related charges in the second quarter and year-to-date 2010 periods, respectively, 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;

 

   

$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, or $0.97 per diluted share. 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, or $2.57 per diluted share.

Throughout this MD&A, the Company has provided a discussion of the outlook and results both inclusive and exclusive of the merger and acquisition-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 and acquisition-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.

Other

In the second quarter and year-to-date periods of 2011, the Company recognized income tax benefits attributable to the settlement of certain tax contingencies of $49 million, or $0.28 per diluted share and $70 million, or $0.41 per diluted share, respectively.

In the second quarter of 2010, the Company recognized income tax benefits attributable to the settlement of certain tax contingencies of $36 million, or $0.21 per diluted share.

2011 Outlook

This outlook discussion is intended to provide broad insight into the Company’s near-term earnings prospects, and not to discuss the various factors affecting such projections.

 

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Management expects earnings per diluted share (“EPS”) to be in the range of $4.50 to $4.75 in 2011. Excluding the effects of merger and acquisition-related charges, 2011 EPS is expected to be in the range of $5.15 to $5.40.

RESULTS OF OPERATIONS

Below is a summary of consolidated operating results for the three and six months ended July 2, 2011, followed by an overview of performance by each business segment.

Terminology: The terms “legacy Stanley”, “organic” and “core” are utilized to describe results aside from the impact of the Merger and acquisitions during their initial 12 months of ownership. This ensures appropriate comparability to operating results of prior periods. The first half of 2010 includes the results from the March 12, 2010 Merger date and accordingly the approximately one-half month period of Black & Decker performance in the first quarter of 2011 and the full second quarter of 2011 are part of the organic results.

The Company has included information as if the Merger had occurred on January 3, 2010 for the six months ended July 3, 2010 (“pro-forma” information). This “pro-forma” analysis is provided to aid understanding of the Black & Decker and combined company business trends.

Net Sales: Net sales were $2.623 billion in the second quarter of 2011 compared to $2.366 billion in the second quarter of 2010, representing an increase of $257 million or 11%. Organic sales volume provided a 3% increase in net sales, the impact of acquisitions (primarily CRC-Evans and Infologix), net of divestitures, provided an additional 3% increase in net sales while customer pricing remained flat for the quarter. The favorable effects of foreign currency translation in all regions, but most significantly in Europe, contributed an additional 5% to net sales. Despite unfavorable macroeconomic conditions, 3% volume growth was achieved driven primarily by new product introductions enabling share gains in established markets, and continued strong performance in emerging markets. On a geographic basis, organic sales volume increased 4% in both the Americas and Asia while Europe was flat with the second quarter of 2010. Asia represents approximately 5% of total sales; excluding Japan, where the engineered fastening business within the Industrial segment has been affected by the aftermath of the first quarter 2011 Japanese earthquake and tsunami, organic sales in the region were up 15% versus the prior year. By segment, CDIY unit volume increased 2% compared to the second quarter of 2010, Security increased 1%, and Industrial posted a 7% gain. The CDIY segment’s unit volume growth was primarily driven by strength in power tools and accessories which was partially offset by lower sales of outdoor products due to inclement weather in North America, the loss of certain Pfister stock-keeping-units (“skus”) at a major customer in the first quarter of 2011 as well as a soft European market. Within the Security segment, the convergent security business delivered 4% sales