Stanley Black & Decker (NYSE: SWK) is a manufacturer and marketer of power tools, accessories, hardware, home improvement products, and advanced fastening systems. The company is a number one or two leader in each of its three reportable product segments, Power Tools & Accessories, Hardware & Home Improvement, and Fastening & Assembly Systems. It operates in over 100 countries, though the United States and Europe, particularly the UK, are its most significant markets.
On November 3, 2009, BDK and Stanley Works (SWK) agreed to a $4.5 billion all-stock deal that combines the two U.S. based hand-tool and power-tool makers. The deal holds a 22% premium for Black & Decker shareholders, who will own 49.5% of the company, while Stanley holders will have the rest. The merger represents a view that the housing market is bouncing back from the lows witnessed in 2008 and 2009, but also signifies that restoration of the do-it-yourself market and construction market seen in 2002-2005 is one marked with difficulty. The merger was completed on March 12, 2010 and now trades under the name Stanley Black & Decker, Inc (NYSE: SWK). The following article represents information on BDK prior to its acquisition.
The company has built several successful brands, specifically in its largest segment, Power Tools & Accessories (PTA), where it commands a market share of approximately 40% through brands such as Black & Decker, DeWalt, and others. Black & Decker has leveraged respected brand names and consumer relationships in recent years, continuing roll outs of improved products coupled with acquisitions which have expanded market share.
B&D’s largest and most profitable segment includes electric tools and equipment, garden tools, portable power products, and others. Products are wide-ranging and include drills, vacuums, hammers, wrenches, lawnmowers, saws, generators, etc. The company recognized a $11.9 million of pre-tax restructuring and exit costs in the Power Tools and Accessories business segment in FY2009 in relation to its merger with Stanley. Decreased sales is primarily due to slack in North American business, which faced weak housing and discretionary spending.
Products include security and decorative hardware, kitchen and bathroom accessories and replacement parts, and general hardware. The segment also manufactures products under numerous brand names, and no product accounts for over 10% of segment sales.
This segment sells an extensive line of fasteners and fastening systems, which include screws, nuts, bolts, metal and plastic fasteners, riveting systems, etc. As with PTA and HH, no product comprises over 10% of segment revenue and products are manufactured under a number of brand names.
B&D also groups products into several sub-divisions, including power tools, lawn and garden equipment, accessories, and others (see table below).
|Consumer and industrial power tools and product services||$3,481.1||$3,537.3||$3,236.1||$2,449.2|
|Lawn and garden products||$457.8||$430.6||$377.9||$312.1|
|Consumer and industrial accessories||$475.1||$479.2||$452.0||$392.6|
|Cleaning, automotive, lighting and household||$319.3||$345.3||$321.0||$266.7|
|Fastening and assembly systems||$666.3||$716.6||$740.0||$554.0|
Note: Figures in Millions USD Source: FY2008 10-K
BDK posted a profit of $55.4 million in the third quarter of FY2009, a 35% profit drop compared to the third reporting quarter of fiscal 2008. BDK's largest business segment "PowerTools and Accessories" posted sales decrease of 21% to $869.5 million compared to the 3rd quarter of fiscal 2008. Throughout the third quarter, BDK has been cutting operating costs while lowering prices for parts. For example, BDK stated it would cut 1,200 jobs, lower U.S. workers' base salaries by 2.5% to 5%, and lower base salaries of top executives, as well as end contributions to retirement programs due to economic weakness. As a result, Selling, General & Administrative Expenses (SG&A) expenses dropped 17 percent to $309.6 million for the quarter.
Due to declining sales and merger related costs, BDK's profit in the fourth reporting quarter fell 22% to $33.9 million. BDK's adjusted earnings, which do not take into consideration of merger costs, exceeded analysts' expectations. BDK's revenues dropped 5.6% to $1.3 billion, but exceeded analyst expectations of $1.2 billion in revenue, partly due to improved economic activity in Europe, Latin America, and Asia Pacific.
BDK's largest business segment, Power Tools and Accessories, dropped 11% in sales, but jumped 75% in bottom line growth. This was largely due to margin improvements and lower tax expenses, which led gross margins to rise to 36.4% in the fourth reporting quarter compared to 31.6% in the fourth quarter of last fiscal year. Looking forward, Black and Decker is sensitive to a weak housing industry, and will continue to cut costs to protect bottom line growth.
BDK's $5.4 billion all-stock merger with Stanley, agreed on November 3, 2009, will restructure the two companies' major business segments but will lead to an overall loss in jobs. While some BDK divisions will be combined with those at Stanley such as BDK's "Hardware and Home Improvement" with Stanley's "Mechanical Access Security Business", many current divisions will hold. One such is BDK's Emhart which makes rivets, screws, and studs. Besides several business segment merges, a new division called "Consumer Do It Yourself" will be created combining BDK's "power tools" segment and Stanley's "Do-it-yourself."
The nature of this merger was to consolidate sales and increase penetration in emerging markets. Both BDK and Stanley, for example, already has a strong presence in India and China, but it is BDK's strong presence in Latin America that seems especially appealing to Stanley for the merger. Most importantly, the merging of the two companies overlap minimally; the BDK and Stanley merger is described as a merger of industry players on different sides of the tool spectrum.
As such, areas with overlap will see a decline in employment. Although it is unknown how many workers at the Towson campus would lose jobs, most of the 250 corporate workers there in IT, legal, human resources, marketing, and R&D are likely to lose jobs once the merger is completed. BDK expects to lose less than 10% of combined company's work force; at a current combined 38,000 head count, this translates to an upper limit of 3,800 jobs lost in association with the merger.housing starts, existing home sales (which can fuel demand for remodeling), and general residential construction (and to a lesser extend commercial construction). Demand for housing drives demand for tools, accessories, and equipment to construct, furnish, and decorate homes.
The 33% decline in U.S. housing starts in 2008 and subsequent rapid deterioration of demand throughout Europe contributed to B&D's sales decrease of 7% for FY2008, which has continued through FY2009 through a stagnant market. In response, BDK cut SGA expense by 6%.
B&D sells approximately one-third of its products to retailers Home Depot (HD) ($0.8 billion of FY2009 sales) and Lowe's Companies (LOW) home improvement warehouse ($0.7 billion of FY2009 sales). This heavy reliance on two major customers exposes the company to greater risk of materially adverse results if one or both of the relationships deteriorate or if one of those two customers run into trouble and decrease purchases from B&D.
Changes in the operations of these two customers (for instance, tighter inventory controls of discontinuing the sale of B&D products) due to their own corporate policy or end-user demand can greatly effect sales. Furthermore, because both Lowe’s and HD benefit from economies of scale, they generally obtain lower pricing from suppliers like B&D. These suppliers, then, sacrifice profit margin for volume. If HD and Lowe’s continue to expand and capture market share, and, hence, further economies of scale, B&D’s results may suffer. However, B&D is a large and important supplier for both customers, and it is unlikely that dramatically adverse events will hamper the relationships or financial results.
Black & Decker seems far from a high-tech business with a need for heavy R&D, but the company does depend upon the successful rollout of new products with greater ease of use and generally utility to end customers. Tools, equipment, accessories, etc. tend to be durable, but can more easily become obsolete under heavy use and if better and more efficient competing products come to market. Improved products and new product lines tend to be a very important driver of revenue for the company, and staying ahead of the competition in terms of being first to market is vital to the continued success of the company. This is especially so as the company experiences declines in core product lines and must seek new streams of revenue to remain competitive.
The company has experienced pressure on gross margins due to increasing commodities prices in the last few years. Its major commodity inputs include steel, resins, copper, aluminum, and zinc which are used in the manufacture of its products. The company attempts to hedge against price fluctuations using derivative contracts, but the steady increase in the prices of these major inputs over time has led to unavoidable cost increases. B&D enters into forward contract on certain commodities, in particular zinc and copper, in which B&D has 13.7 million pounds of zinc and 3.3 million pounds of copper in commodity contracts outstanding.
B&D has no competitor which competes in all of the company’s segments, but it has several which compete in each segment individually. Major competitors include Snap-On (SNA), American Standard Companies (ASD) , Makita (MKTAY), and Danaher (DHR). The company also faces many small, private label competitors, especially overseas where its market penetration is not nearly what it is in the United States and Europe. Black & Decker is clearly the market leader in its bread and butter segment, Power Tools and Accessories, with the most broadly recognized brand name and approximate 40% market share.
Snap-On (SNA) makes and markets power tools (among other non-competing products), and competes with BDK via this division of its operations. Makita (MKTAY) offers general purpose tools and woodworking machinery. Its largest business is general purpose tools, which compete directly with BDK. Danaher (DHR) also offers tools and industrial equipment through one of its divisions. Generally, each company markets these competing products directly to industrial users as well as to do-it-yourself retailers like Home Depot (HD) and Lowe's Companies (LOW).
|Return on Average Assets||4.75%||4.63%||9.21%||6.21%|
|Return on Average Equity||12.75%||10.84%||11.10%||10.74%|
B&D tends to be more efficiently run in terms of margins, advantages of scale, and returns on capital. While some of its competitors are larger by revenue and market capitalization measures, most do not focus on the same core product-type offering as B&D. This confers several competitive advantages upon B&D.
While the company faces a number of formidable competitors, though it is arguably the most well-known and respected brand names in its major categories. For example, DeWalt, which comprises around 40% of the company’s top line, maintains a very strong and loyal customer base. The B&D/DeWalt faithful are arguably cult-like in their purchasing habits. Customers are also retained in part because of DeWalt’s interchangeable battery, since they are more likely to buy new products for which they already have the battery. The interchangeability also enables the company to leverage its diverse product offering, affording the company a unique cross-selling advantage. For instance, a customer is more likely to buy a drill from DeWalt if he/she already has a DeWalt nail gun with the same battery. In this way, then, the company has an additional economy of scale that more narrowly focused competitors do not enjoy.
The company also maintains advantages in its ability to deploy financial resources in order to innovate. For example, B&D products typically have better weight-to-power ratios thanks to the company’s production of lithium-ion batteries while competitors typically sport Nicad batteries.