Value Investing Report
BUSINESS ANALYSTS TOSHI NAGASAWA DOMINIC LEUNG DAVID MA BEN YAU LOH WEI
Value Investing Report BLACK & DECKER CORP.
30 MAR 2009
Preliminary Screening Relative valuation – The Black & Decker Corporation (“BDK”) is trading at a trail‐ ing 12 month Price Earnings ratio (PE) of 6.43x. This compares favorably to both peers and S&P average PE of 11.70. Al‐ though its PB ratio of 1.7x is not ex‐ tremely depressed, its Price to Sales of 0.31x makes it a very interesting value candidate as compared to peers. Lastly, its EV/EBITDA of 7.71x is a reasonable mul‐ tiple as compared to peers (Exhibit 1) Headline risk and Lawsuits BDK suf‐ fers from the headline risks of dwindling home sales. The investment community could have over reacted to the bad news in the market and sold to stock down to a undervalued level. Over $2Bn in market
cap has been wiped off last year. It is possible that price has fallen far more than a decrease in intrinsic value over the last year. The Company is involved in various lawsuits out of allegations of trademark infringement and other com‐ mercial disputes.
outstanding, which makes it less likely to be under‐researched. Analysts who are focused more on the next 12 month EPS than the long term intrinsic value of the company may cause the stock mispriced. Amongst the top institutional owners are value funds such as Ariel Investment and Financial Performance For financial Pzena Investment. Holdings by such value funds could indicate that the stock could year 2008, sales declined by 7% and EPS decreased 9%. Such financial perform‐ be undervalued. ance was highly disappointing to inves‐ Overall, this stock looks like a value stock tors and may cause indiscriminate sell‐ compared to peers and it is likely that in‐ ing. vestors could have over‐reacted to bad news. We would need to investigate fur‐ Analyst Coverage and Institutional ownership 11 analysts cover the stock ther to establish the price vs. intrinsic value. and institutions own over 79% of stocks
B u s i n e s s a n d F i n a n c i a l R i s k A n a ly s i s Business Risk The household durable industry is affected by the general econ‐ omy environment. Housing trend and consumer’s job confidence affects end users purchase decision. We believe the industry has medium‐high business risk.
tive and aerospace industry. As sales of tent with the BBB rating from S&P BDK has fluctuated less than the indus‐ (Exhibit 6). try as a whole, we believe that the com‐ By adding a 407 bps BBB‐rated corporate pany has medium business risk. spread over 10‐year U.S. government Financial Risk With medium business bond yield of 2.86% as of March 2009, risk, the optimal debt/capitalization we arrived at cost of debt of 6.86%. The BDK’s strong brand name and diversity ratio is between 30%‐49%. The Com‐ equity risk premium is 5%, and WACC is in product offering reduces its reliance pany’s three years’ average debt/ 8.98%. First pass ROIC is 13.1%, which is on any one sector of buyers. Buyers in‐ capitalization ratio is 38.86%. There‐ higher than the Company’s WACC, we clude homeowners, contractors, and fore, we believe that the Company has therefore expect EPV to be higher than other manufacturer such as the automo‐ medium financial risk which is consis‐ NAV in the valuation. (Exhibit 7)
I n t r i n s i c Va l u e a n d R e c o m m e n d at i o n We arrived at an EPV/share of $45.87 (Exhibit 8) and NAV/share of $42.33 (Exhibit 9) for BDK. Final pass ROIC based on replacement value and adjusted NOPLATPA was 9.49%, which is higher than WACC. (Exhibit 10) Therefore, our EPV‐NAV relation is consistent with both of the first and final pass ROIC vs. WACC test. The valuation results give a franchise value of $3.55/share for BDK. We as‐ signed a high probability (80%) of sus‐ tainability of this franchise value. We concluded that BDK has an intrinsic value of $45.16/share, which is arrived
Recommendation ‐ Based on the Fri‐ day’s (27th March 2009) market closing price of $31.55, and compared to our suggested entry price is $30.11. There‐ fore, our recommendation is NOT TO Franchise Value ‐ We believe that BDK BUY. could earn higher return on capital than WACC because it has a market We choose not to compromise on our leading position, strong brand equity, MOS of 33% to seek downside protection from the vagaries of the market and the and a loyal customer base. uncertain economic outlook. As a disci‐ Inherent in the industry is high barriers plined value investor, we will only invest to entry from high start up cost for when the market price is below the entry R&D, and cost for creating sustainable price. relationship with end user and dis‐ tributors. by adding 80% of the franchise value to the NAV/share of $42.33. Using a mar‐ gin of safety of 33%, the entry price for BDK’s share will be $30.11. (Exhibit 11)
BUS 4443 – Value Investing Final Project The Black and Decker Corporation Professor George Athanassakos Date: March 30, 2009
Wei Loh Ben Yau David Ma Dominic Leung Toshiaki Nagasawa
Our recommendation to Black & Decker is NOT TO BUY based on our entry price of $30.11 against market price of $31.55. This recommendation is based on our assessment of business and financial risks, earnings power value, net asset value and franchise value.
1. Justification for choosing Black and Decker Relative Valuation The Black & Decker Corporation (“BDK” or “the Company”) is trading at a cheaper relative valuation compared to peers such as Stanley Works, Snap-on, Makita and to the S&P 500 Index. BDK is trading at a trailing 12 month Price Earnings ratio (PE) of 6.43x. This compares favorably to both peers and the S&P average PE of 11.70x. Although its PB ratio of 1.7x is not extremely depressed, its Price to Sales of 0.31x makes it a very interesting value candidate as compared to peers. Lastly, its EV/EBITDA of 7.71x is a reasonable multiple as compared to peers (Exhibit 1).
Headline risk and Lawsuits BDK suffers from headline risks such as the increasing foreclosure and dwindling home sales. The investment community could have over reacted to the bad news in the market and sold the stock down to an undervalued level. Over the last 12 months, stock price fell from $65.47 to $31.55. Over $2Bn of market capitalization has been wiped off. If the stock was not grossly overpriced a year ago, it is possible that price has fallen far more than a decrease in intrinsic value over the last year. At the current mid-market cap of $1.9Bn, some large cap fund may be forbidden to hold the stock due to fund mandate. The Company is involved in various lawsuits out of allegations of trademark infringement and other commercial disputes.
Financial Performance For financial year 2008, sales declined by 7% and EPS decreased by 9%. After almost a decade of increased sales and EPS (though there has been some decrease in-between), such financial performance was highly disappointing to investors. Furthermore, management expects 2009 to be even more challenging. Disappointing earnings and near term pressure on financial performance may cause the financial community to over-react causing mis-pricing.
2
Analyst Coverage and Institutional ownership Institutions own over 79% of stocks outstanding, which makes it less likely to be under-researched. Furthermore about 11 analysts cover the stock. In this instance, having analysts that are focused more on the next 12 month EPS than the long term intrinsic value of the company may cause the stock to be oversold. Amongst the top institutional owners are value funds such as Ariel Investment, Pzena Investment Management and Harris Associates. Holdings by such value funds could indicate that the stock may be undervalued.
Overall, this stock faced many short term risks, which could explain the depressed P/E, P/S and EV/EBITDA ratio. Furthermore, headline risk from the housing market coupled with disappointing financial performance in the last 12 months may cause investors to not want to hold this stock. Institutional factors add further pressure on the price of the stock. With so much bad news, it is likely that this market leader in Power tools and DIY products is undervalued due to the short term-ism of the market.
2. Industrial Goods Industry Analysis BDK is one of the world’s leading manufacturers and marketers of power tools and accessories, hardware and home improvement products, and technology-based fastening system. Historically, the power tools and accessories segment accounts for more than 70% of the Company’s revenue, with the remaining two segments accounting for the rest.
Power tools and accessories segment The U.S. power tools and accessories segment is dominated by a few big players with strong brand name and distribution network. BDK has 15% of the market share and it is the largest player in the segment (IBIS). The big four players accounted for 29.5% of the power tools and other general purpose machinery manufacturing market in the U.S. The next big player after BDK has only around 5.4% of the market (Exhibit 2). Hong Kong’s TTI has been expanding rapidly and is following closely to Black & Decker in the DIY power tools market (MintelOxygen). Power and hand tool demand in the U.S. is expected to increase 3 per cent annually through the next few years, according to the “Professional Power Tool Guide’. The power tools market generally are not seasonal in nature, but are influenced by trends in residential and commercial construction markets, as well as some other general economic trends such as number of housing starts.
3
Manufacturers and wholesalers tend to secure contracts with distributors such as Home Depot Inc. to sell their products. Customer relations is therefore one of the key success factors in the segment. Brand equity plays an important role in capturing customer loyalty as well as marketing and distributing products to customers. Overall, the segment is very competitive on the basis of price, quality and after-sale service such as warranty.
Hardware and Home improvement segment Raw material costs made up a quite significant portion of the total cost of the production of home improvement hardware such as door locksets and electronic keyless entry systems. Price fluctuations in commodity markets will affect the operations of companies in the segment. This segment is also influenced by economic trends such as housing starts and duration of remain in original homes. Strong brand name, high quality as well as good after-sale services are key success factors in the segment. The global home improvement market grew by 0.1% in 2008, achieving a CAGR of 4.0% between 2004 and 2008 and a market size of $1,170Bn in 2008 (Exhibit 3). In 2013, the market is forecast to have a value of $1,601Bn, an increase of 36.8% since 2008 (Datamonitor).
Fastening and assembly systems This segment targets mainly to commercial and industrial customers. Automotive, transportation appliance industries are a few principal markets for these products. Competition is high in this segment as many manufacturers from around the world are trying to gain market share in the segment. Companies compete on the basis of product quality, performance/reliability, price, delivery as well as technical and application engineering services. To remain competitive, customer relations as well as continuous innovation to meet customers’ needs are essential.
3. Company Analysis The Company operates its business in three reportable segments, namely Power Tools and Accessories (73% of 2008 sales); Hardware and Home Improvement (15%); and Fastening and Assembly Systems (12%).
The Power Tools and Accessories segment includes consumer and industrial power tools and accessories. In addition, the Company manufactures products that including lawn and garden products, electric cleaning and household products. At a profit margin of 7.35%, it is the segment with the lowest profit margin.
4
The Hardware and Home Improvement segment provides security hardware and plumbing products. It also produces decorative hardware such as cabinet hardware and push plates. The profit margin is 8.58%, which is slightly higher than the Power Tools and Accessories segment.
The profit margin of the Fastening and Assembly Systems segment is 14.75%, which is the highest among all three segments. The segment offers products related with metal and plastic fasteners and engineered fastening systems for commercial applications. These products are sold in markets such as electronics, automotive, transportation, aerospace, machine tool, and appliance industries.
Management Nolan D. Archibald is the Chairman, President and CEO of the Company and has served in his current capacity for 18 years. BDK’s sales have increased from $1.7Bn billion to over $6Bn in 2008 under his leadership. Archibald also owns 460,447 shares of BDK. As management ownership of shares helps align shareholders interests with management, we would have preferred greater management ownership of shares.
BDK’s senior management team has been with the Company for almost ten years, and most of them were promoted from within. Thus, we believe that the management team has good knowledge of the core business of the Company and has a keen understanding of the corporate culture.
Financial Performance: The Company’s net profit and Return on Assets increase between 2004 to 2007 and fell sharply in 2008. This is largely caused by the recent financial crisis and the declining in housing sales. The operating margin has been decreasing for the past fours years due to the increasing pressure from commodity price fluctuations. (Exhibit 4) However, the Company’s free cash flow is more than the net income over the last 5 years. This is due to greater asset utilization and prudent management of working capital position.
5
Business Risk Assessment: The household durable industry is highly affected by the general economy environment. Housing trend and consumer’s job confidence affects end-users’ decision to buy household durable products. Therefore, we believe that the household durable industry has a medium high business risk. However BDK has established a strong brand name by operating in this market for over 100 years. Furthermore, the Company’s investment in product innovations helps increase customers’ satisfaction. Thus we believe that BDK has built a large and diversified customer base with high loyalty. Remodeling efforts by homeowner is a key driver for power tools. Homeowners with houses valued at $100K – $749.9K in particular undertake significant home improvement work themselves (MintelOxygen). Declining sales to new house owner is partly mitigated by current homeowners who are able to remodel their current home. Thus BDK’s strong brand equity and diverse product portfolio reduces its business risk as compared to the household durable industry. Therefore, we believe that the Corporation has a medium business risk.
Financial Risk Assessment BDK has medium business risk, which means it should have an optimal debt/capitalization ratio between 30%49%. The Company’s three-year historical average debt/ capitalization ratio is 38.86%. Therefore, we believe that the Company has a medium financial risk, which is consistent with the BBB rating from Standard and Poor’s (see Exhibit 5).
4. Valuation of BDK WACC and First Pass ROIC Since BDK has a medium business risk and a medium financial risk, the expected equity risk premium is 5%. Cost of debt is 6.86% based on adding a 407 bps BBB-rated corporate spread over 10-year U.S. government bond yield of 2.86% as of March 2009. Using the Company’s historical debt/capitalization ratio of 38.66%, we arrived at a WACC of 8.98%. (Exhibit 6) First pass ROIC was 13.1%, which is higher than the Company’s WACC, we thus expect that EPV will be higher than NAV in the valuation. (Exhibit 7)
6
Valuation, Final Pass ROIC and Intrinsic Value We arrived at an EPV/share of $45.87 (Exhibit 8) and a NAV/share of $42.33 (Exhibit 9) for BDK. Final pass ROIC based on replacement value and adjusted NOPLATPA was 9.49%, which is higher than WACC. (Exhibit 10) Therefore, our EPV-NAV relation is consistent with both the first and final pass ROIC vs. WACC test. The valuation results give a franchise value of $3.55/share for BDK. We assigned a high probability (80%) of sustainability of this franchise value. The rationale behind will be further explained in the ‘strategic valuation’ section of the report. We concluded that BDK has an intrinsic value of $45.16/share, which is arrived by adding 80% of the franchise value to the NAV/share of $42.33. Using a margin of safety of 33%, the entry price for BDK’s share will be $30.11. (Exhibit 11)
5. Strategic Valuation To better respond to the toughening business environment, the Company’s recent overall strategy is to focus on continuous productivity improvement and evaluate opportunities to reduce fixed costs, simplify or improve processes, and eliminate excess capacity. In recent years the Company shifted manufacturing away from higher-cost locations in the US and UK to lower-cost locations in Europe, Asia and Latin America. One notable example is the Joint Venture with a Chinese firm to build a factory in Suzhou, China.
The Company’s continuous investment in R&D to produce high quality products creates a barrier of entry for new entrants. The relative high fixed cost structure of the industry also discourages new entry into the market. Lastly, it would take years of substantial investment on the part of potential entrants to create the same level of customer relationship with distributors and end-users.
In addition, the Company enjoys certain customer demand advantage. Its long-term approach to establish market leading brands by understanding the end-users need intimately has proven to be successful. The Company also increases its demand advantage by increasing search costs by providing superior after-sales service and warranty protection. Furthermore, the Company invests aggressively to build its brand equity through aggressive marketing and securing superior placement within major home improvement stores. End users associate the ‘Black and Decker’ brand to notions of ‘innovative solution’ and ‘high quality products’, and the Company has delivered on its promise by producing original tools that solve problems of the consumer.
7
In addition to in-house product development, the Company also looks for potential acquisition opportunities for new products or new categories. The tightening credit markets could provide potentially-undervalued targets. Therefore, the Company’s large cash or cash equivalents will help the firm grow strongly even in the tough time.
6. Value of Growth In 2008, sales fell by over 7%, operating income decreased by 28% and EPS declined by 49%. Accompanied by the fact that the housing market is not expected to recover in the near future; we have assigned no value of growth to the Company.
7. Risk Management Assessment Operational Risk Management Assessment Macro Risk The key operational risk BDK faces in the short term is the risk of declining sales due to the deepening economic recession in North America and Europe. In 2008, homes sales declined by over 33% year on year. Management has reacted swiftly by aggressively cutting costs and expenses. SG&A expense for instance was down 6% for 2008. Furthermore, management took initiative to further streamline the business to face continual pressure on sales volume decline and pricing pressure from competitors.
Geographical Risk There is another risk from highly relying on the US market. The Company generates 55.2% of the revenue from the US market. Geographic concentration increases the risk associated with adverse economic and political developments in the US. The emerging economies in Asia provides significant growth opportunities as the region already represents 36.4% of Global home improvement markets (Datamonitor).
Supplier Risk The global economic crises have affected some of BDK’s suppliers. Management believes that it is possible that a number of them will cease operation. Management manages such risk by diversifying its supplier relationship
8
and is not over dependent on any single supplier. However, changes in supplier relationship may increase the cost of manufactured and purchased product, thus increasing the pressure on the profit margin.
Threat of New entrants Some of the key consumers such as Home Depot and Lowe’s also sell their own private labels. Because these retailers have such a strong presence in markets such as the DIY market, they pose significant competitive pressures on price and promotional discount, creating a somewhat unusual market dynamic.
Customer Preference Lowe’s and Home Depot jointly account for over 30% of the Company’s consolidated sales. Over the past decade, BDK has maintained positive relationship with these volume purchasers. However, since BDK does not control the bulk of its own distribution network, changes in consumer preference may have adverse impact on BDK. BDK improves its end-user loyalty through superior after-sales service, warranty and advertisement and marketing to build up customer relationship.
Financial Risk Management Assessment The declining sales and earnings of BDK triggered downgrade on the company’s debt rating. Moody’s has downgraded BDK’s long term debt one notch from Baa2 to Baa3. Standard and Poor’s has also put BDK’s BBB rating on negative watch. Such downgrades will have a negative impact on the Company’s ability to access the commercial paper market and borrow at favorable interest rate.
To mitigate its financial risk, the Company postponed its stock repurchase program in mid 2008 and reduced its short term debt by $246 mil. With more than $277.8 mil of cash on the balance sheet and less than $83.4 mil in debt due within a year, the company has ample liquidity to tie over the next year.
Furthermore, BDK has managed to generate over 100% of net income into free cash flow over the past few years. In 2008, the Company generates $347 mil in free cash flow. The interest expense coverage is over 5.5x, thus BDK has the ability to meet its short term obligation. The Company also has $375 mil in uncommitted lines of credit which further enhances its financial flexibility.
9
A downside risk for BDK is that its post retirement benefit liability varies with the stock and bond market. In 2008, adverse development in the financial market doubled the Company’s post-retirement benefit liability to $669.4 mil.
As shown in the debt maturity profile (Exhibit 12), the first debt due is in about 2 years time. If the financial market stabilized by then, the Company could raise long term debt to retire the maturing debt. However, between 2009 and 2010, it is highly likely that the Company would have generated sufficient free cash flow to retire the debt wholly. Due to the strong balance sheet position, cash generating ability, and management’s prudent stance in financial management, BDK should have sufficient financial resources to meet future obligation.
Risk Management from a Value Investor Perspective The Company is exposed to the housing sector and relies on two main distributors. In an Armageddon scenario of continual depression in the housing market, increasing foreclosure and job loss, it is likely that sales and margin will continue to decline thus further decreasing the intrinsic value of the firm. Inventory built up in distributor would also imply that the Company would face challenges in selling more units to such home improvement stores. Falling sales and margin, accompanied by inventory built up will affect the Company’s ability to service its debt in 3 years time. In terms of valuation, we are conservative with our estimates of value and have not assigned a high value to franchise.
Although the Armageddon scenario is not the most likely outcome, a conservative Value Investors could seek some protection by diversifying their holdings and insisting on a sufficient Margin of Safety. From a portfolio perspective, this stock probably should not be too highly weighted due to the inherent uncertainty in the outcome of the economy. As we believe that this stock is of Medium Risk, we will not compromise on our 33% Margin of Safety and will only buy when it falls below our entry price.
We also believe that a Value Investor would have to monitor certain data such as foreclosure rate, new home starts, and performance of distributors such as Home Depot and Lowe’s to have a good grasp of the likely
10
performance and risks faced by the Company. Lastly, due to the tightened credit market, balance sheet strength and the Company’s ability to service its debt should be monitored closely.
7. Recommendation BDK is the leader in the household durable industry. The Company has established strong brand name recognition in all three segments it has engaged in. The industry has a medium high level of business risk, but due to BDK’s strong customer relation, product diversification and brand name equity, the Company is a medium business risk company. Based on the recent debt to capital ratio, its financial risk is also medium. BDK’s operating performance declined this year due to the recessionary economy. However, based on the past successful performance and the experienced management team, we still believe that the Company has the potential to create sufficient cash flow in the future.
From a conservative perspective, the Company is facing some operating risks such as geographical risk, supplier risk, threat of new entrants, and the possible changes in customers’ preference. Besides that, the Company has recently been downgraded to a BBB credit rating. There is a potential financial risk that the Company may have unfavorable cost of borrowing in the future. Thus we are not willing to compromise on our margin on safety of 33% and will only buy the stock when market price falls below entry price.
The market closing price as of Friday (27th March 2009) was $31.55, which is higher than our suggested entry price of $30.11. Therefore, our recommendation is NOT TO BUY.
11
Exhibits Exhibit 1 Relative Valuation Analysis Price to Earnings (TTM) Price to Sales Price to Book
BDK SWK 6.43 10.72 0.31 0.54 1.69 1.41
EV/EBITDA
7.71
BDK ‐ Black and Decker
SWK ‐ Stanley Works SNA ‐ Snap‐on Incorporated MKTAY ‐ Makita Corporation S&P ‐ Standard and Poor’s 500 Index
SNA 6.62 0.54 1.30
MKTAY
6.26 7.55
6.85
S&P 11.70
0.85 0.96
1.60
5.20
‐
‐
Source: Company financial reports, Bloomberg database, ThomsonOne database
Exhibit 2 Power Tools & Other General Purpose Machinery Manufacturing in the US Major Player The Black & Decker Corporation Stanley Works Illinois Tool Works Inc.
Market Share Range 15.00% 5.40% 5.10%
Snap‐on Incorporated
4.00%
Source: IBISWorld Company Operational Risk Rating Report
Exhibit 3 Global Home Improvement Retail Sector Value: $ billion, 2004‐2008 Year
2004 2005 2006 2007 2008 CAGR, 2004 ‐2008
$ Billion
% Growth
999.4 1,073.90 1,153.00 1,168.50 1,170.10
7.50% 7.40% 1.30% 0.10% 4.00%
Source: Datamonitor
12
Exhibit 4
Operating margin 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
2002
2003
2004
2005
2006
2007
2008
Operating margin 9.58% 10.27% 11.66% 12.46% 11.48% 9.16% 7.83%
Exhibit 5 Leverage Debt/Total capitalization ratio
Debt to EBITDA multiple
2007
2006
40.38%
36.56%
39.64%
3.850
2.665
2.486
9.91
9.02
12.10
Interest rate coverage EBIT Interest coverage
2008
FOCF to Total Debt
7.64
7.30
10.03
13.83%
30.72%
23.28%
Exhibit 6 WACC Business Risk Optimal Debt/Cap ratio Historical Debt/Cap ratio1 Financial Risk Expected Equity Risk‐Premium Cost of debt2 Cost of Equity Marginal Tax rate After‐tax Cost of Debt WACC
Medium 30%‐49% 38.86% Medium 5.00% 6.86% 11.86% 35.00% 4.46% 8.98%
1) 3‐year historical average, Total Debts = Current Portion of long‐ ‐term debts + LT debts + ST debts+Postretirement benefits + Op. lease 2) 10‐year U.S. government bond yield on Mar 2009, plus BBB rated corporate bond spread(2.78%+407bps)
13
Exhibit 7 First pass ROIC calculation 2008 NOPLATPA 410,965 Net Operating Fixed assets 2,579,700 Working Capital 925,300 Current Assets 2,325,800 Current Liability 1,400,500 ROIC 11.7% Average ROIC 13.1%
2007 521,830 2,571,400 1,033,900 2,584,800 1,550,900 14.5%
Exhibit 8 No growth Free Cash Flow & Earnings Power Value ($000's, except share figures) Recent Revenue Historical EBIT margin 1 EBIT Operating lease adjustments Stock‐based compensation One Time Adjustment2 Latest tax rate Adjusted NOPLAT Amortization of Goodwill3 Adjusted NOPLATPA Dep&Amo of fixed assets and other intangibles4 Adjusted NOPLATPA + D&A Zero growth Capex5 A/T non‐consolidated subsidiary Adjusted Earnings WACC Discounted earnings Plus Cash and cash equiv. Excesss Real Estate (A/T) Non‐operating assets6 Over(Under) funded pension7 Value of company Less Short‐term debt Long‐term debt8 Value of operating leases Preferred stock Minority interest Warrants & Employee stock options Equity Value Number of Shares outstanding9 EPV per Share
$6,086,100 10.35% $629,846 $11,241 $29,100 $5,298 35% $432,177 $0 $432,177 $136,600 $568,777 $140,183 $0 $428,594 8.98% $4,771,178 $277,800 ‐ $46,410 ‐$435,110 $4,660,278 $83,300 $1,601,220 $163,884 $0 $0 $55,160 $2,756,715 60,092,726 $45.87
1) 7‐year normalized historical average 2) Avg(one‐time adj./sales)*current sales*1/5, one‐time adj. = Restructuring and exit costs 3) No amortization of Goodwill would be recorded after 2001 4) D&A from Cash Flows Statement, Intangibles includes patents and other identifiable assets 5) Current Capex‐(Net PPE/Sales)*change In sales 6) Note 16, Investments in equity method investees, BV*P/B to get an approx. private MV 7) Postretirement benefits, after‐tax 8) Avg coupon/Kd*(BV of debt less fair value hedge adjustment) 9) Used the year‐end outstanding number
14
Exhibit 8 (cont’d) Zero Growth Capex ($000's) This year's capex1 PPE(net) Sales Change in sales
2008 98,800 527,900 6,086,100 ‐$477,100
Implied zero growth capex 140,183 1) Current capex from cash flow statement
Exhibit 9 Property, Property and equipments ($000's)
2008
Land and buildings
341,000
# of years
10
growth rate
3%
Projected Gross L&B
458,275
Total Land & buildings
458,275
($000's)
2008
Machinery and equipment Depreciation rate
1,288,900 50%
Projected Gross PPE
644,450
Total Machinery and equipment
644,450
($000's)
2008
Non‐Customer Relationship Intangible assets, Net1 Total Patents and rights
220,700 220,700
1) Exclude customer relationships
Product Portfolio ($000's) R&D costs1
2008 146,000
R&D/Sales
2.40%
Revenue generating years Value of Product Portfolio
2007
2006
2005
2004
2003
2002
150,900
139,400
133,800
118,600
100,400
94,300
2.30%
2.16%
2.05%
2.20%
2.24%
2.15%
5 years 673,557
1) Notes 1 ‐ Product Development Costs
15
Exhibit 9 (cont’d) Product Portfolio ($000's) R&D costs1
2008 146,000
R&D/Sales
2.40%
2007
Revenue generating years
2006
2005
2004
2003
2002
150,900
139,400
133,800
118,600
100,400
94,300
2.30%
2.16%
2.05%
2.20%
2.24%
2.15%
5 years
Value of Product Portfolio
673,557
1) Notes 1 ‐ Product Development Costs
Customer Relations ($000's) Selling, general and admin1
2008 530,250
% to Sales
8.71%
Differentiated industry
2007
2006
2005
2004
2003
2002
567,150 511,450 515,500 469,800 402,750 392,350 8.64%
7.93%
7.90%
8.70%
8.98%
8.93%
1.5x
Value of Customer Relations
779,954
1) Notes 1 ‐ SG&A‐Shipping and handling costs‐product development costs
Long‐Term debt 2008 Average Coupon
1
Long term debt (BV) MV
8% 2
3
1371.9 1,601
1) Int exp(LT)/avg debt 2) BV of long‐term debt less fair value hedge adjustment 3) Avg(Coupon rate)/Kd*(BV of long‐term debt less fair value hedge adjustment)
16
NAV per share calculation ($000's, except share figures) Book Value Adjustments
Assets Cash & equivalents Marketable securities Receivables1 Inventories ‐ FIFO2 Deferred tax assets, Gross3 Leased assets : Operating leases PPE4, Gross Identified Intangible assets5, Net Excess Real Estate Goodwill5, Net Subsidiaries (Non‐consolidated) ‐ I&A6 7
Other assets
277,800
Reproduction Value 277,800
0
0
963,700
963,700
1,047,700
1,047,700
484,600 0
‐48,460 163,884
436,140 163,884
1,629,900
‐527,175
1,102,725
220,700 0
220,700 0
1,223,200 0
1,223,200 ‐
0
66,400
66,400
Product Portfolio8
0
452,857
452,857
Customers relations9
0
779,954
779,954
Licenses10
0
Other curent Assets11 Total assets
377,000
0 ‐377,000
0 $6,735,061
Liabilities Short‐term borrowings Trade accounts payables Other current liabilities Operating leases Long‐term debt (MV)12
83,300 453,100 947,400 0
163,884
83,300 453,100 947,400 163,884
1,444,800
156,420
1,601,220
Deferred tax liabilities13
80,400
‐8,040
Other liabilities14
380,100 ‐
Employee stock options Postretirement benefits15 Total liabilities Net worth No. of shares outstanding16 NAV/share
669,400
72,360 380,100 55,160
‐234,290
435,110 $4,191,634 2,543,427 60,092,726 $42.33
1) Added back Allowance for Doubtful Accounts for 2008 2) Note 3 ‐ Inventories, page 49 3) Note 11 ‐ Income Tax, page 54, assumed all DTA are long term assets, 90% of BV 4) Land and buildings assumed to appreciate at a rate of 3% p.a. for 10 years, MV of machinery and equipment is assumed to be of 50% of BV, also included non‐customer‐relations intangibles 5) Note 5 ‐ Goodwill, used the net book value of 2008 6) Included in other assets 7) BV of Other assets minus Gross deferred tax assets and BV of identified intangible assets 8) Assumed to be a modestly R&D‐required industry, avg(R&D/Sales)*current sales* 5 years, excluded net BV of other identified intangibles (patents and trademarks) of $220 mil to avoid double counting 9) Assumed to be a differentiated industry, avg(adjusted SG&A/2/sales)*current sales*1.5 10) Included in "Identified intangible assets" 11) Includes deferred tax assets, which has already been accounted for, and certain types of hedges, which should not be accounted for in NAV 12) Avg coupon/K d *(BV of debt less fair value hedge adjustment) 13) Assumed all DTL to be long‐term, after 2000, 90% of BV 14) BV of other long‐term liabilities minus Gross deferred tax liabilities 15) Used Book value in 2008, after‐tax 16) Used the year‐end outstanding number
17
Exhibit 10 Final pass ROIC calculation 2008 Adjusted NOPLATPA
432,177 1
Net Operating Fixed assets
3,943,321
1
Working Capital Current Assets Current Liability Final pass ROIC 1) Replacement Value
610,900 2,011,400 1,400,500 9.49%
Exhibit 11 IV and EP Per Share EPV NAV
$45.87 $42.33
Franchise Value1 Probability of sustainability Intrinsic Value MOS
$3.55 80% $45.16 33%
Entry Price2
$30.11
Price as of 26 March 2009
$31.55
1) EPV ‐ NAV 2) Intrinsic value x (1‐MOS)
Exhibit 12 Long Term Debt Maturity Profile ($,Mil) 2009
2010
2011
2012
2013
Thereafter
0
0
512
100
0
750
18
References Black and Decker Corporation, Annual Report 2008, available at http://www.ir.bdk.com/phoenix.zhtml?c=100780&p=irol-IRHome Datamonitor (2009), Global Home Improvement Retail Industry Profile, Global Market Direct (2009), The Black & Decker Corporation- Financial and Strategic Analysis Review IBISWorld Company Operational Risk Rating Report (2009), Black and Decker Corporation, 25 February Michael Rehaut, Ray Huang (2009), J.P. Morgan Analyst Report, 29 January MintelOxygen (2008), “DIY Power Tool”, “Power Tool Ownership by Home Ownership and Remodeling Activity”, September 2008 Nishu Sood, Rob Hansen (2009), Deutsche Bank Analyst Report, 1 February Standard and Poor’s. (2009) Standard and Poor’s Company Report, 19 January. Standard and Poor’s (2008), Industry Survey – Household Durables, 9 October
19
Black & Decker Corp. ($000's) ‐ Income Statements Date Currency Sales Cost of goods sold Selling, general, & administrative expenses Restructuring & exit costs (One time adjustment ratio)
12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD USD $6,086,100 $6,563,200 $6,447,300 $6,523,700 $5,398,400 $4,482,700 $4,394,000 4,087,700 4,336,200 4,205,800 4,206,600 3,432,900 2,887,100 2,876,100 1,521,600 1,625,800 1,501,100 1,504,000 1,336,300 1,135,300 1,097,100 54,700 19,000 0 0 0 31,600 50,700 0.90% 0.29% 0.00% 0.00% 0.00% 0.70% 1.15%
Operating income (loss) Interest income (expense), net Other income (expense) Earnings before income taxes Total Current Income taxes (benefit) Deferred income taxes expense (benefit) ‐ United States Deferred income taxes expense (benefit) ‐ other countries Total deferred income taxes expense (benefit) Income taxes expense (benefit) Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations Net earnings (loss)
422,100 ‐62,400 5,000 364,700 63,700 3,200 4,200 7,400 71,100 293,600 0 $293,600
582,200 ‐82,300 ‐2,300 497,600 3,100 ‐16,300 ‐7,300 ‐23,600 ‐20,500 518,100 0 $518,100
740,400 ‐73,800 ‐2,200 664,400 196,500 ‐11,900 ‐6,300 ‐18,200 178,300 486,100 0 $486,100
813,100 ‐45,400 51,600 819,300 263,600 7,500 4,200 11,700 275,300 544,000 ‐100 $543,900
629,200 ‐22,100 ‐2,800 604,300 157,600 7,000 ‐1,400 5,600 163,200 441,100 14900 $456,000
428,700 ‐35,200 ‐2,600 390,900 92,600 ‐6,500 17,600 11,100 103,700 287,200 5800 $293,000
370,100 ‐57,800 ‐4,900 307,400 74,800 3,800 ‐900 2,900 77,700 229,700 0 $229,700
EPS Calculation: Weighted average shares outstanding ‐ basic Weighted average outstanding shares ‐ diluted Year end shares outstanding Earnings (loss) per common share ‐ continuing operations ‐ basic Earnings (loss) per common share ‐ discontinued operations ‐ basic Net earnings (loss) per common share ‐ basic Earnings (loss) per common share ‐ continuing operations ‐ diluted Earnings (loss) per common share ‐ discontinued operations ‐ diluted Net earnings (loss) per common share ‐ diluted Dividends per common share Total number of employees Number of common stockholders
59,800 60,900 60,092.73 4.91 0.00 $4.91 4.82 0.00 $4.82 1.68 22,100 10,647
64,300 66,000 62,923.72 8.06 0.00 $8.06 7.85 0.00 $7.85 1.68 25,000 10,891
72,100 74,200 66,734.84 6.74 0.00 $6.74 6.55 0.00 $6.55 1.52 25,500 11,369
79,200 81,300 77,357.37 6.87 0.00 $6.87 6.69 0.00 $6.69 1.12 27,200 11,884
79,800 81,600 82,095.16 5.53 0.19 $5.72 5.41 0.18 $5.59 0.84 26,200 12,493
77,900 78,200 77,933.46 3.69 0.07 $3.76 3.67 0.07 $3.75 0.57 22,100 13,497
80,400 80,900 79,604.79 2.86 0.00 $2.86 2.84 0.00 $2.84 0.48 22,300 14,233
Black & Decker Corp. ($000s)‐ Balance Sheets Date Currency
12/31/2008 USD
Assets: Cash & cash equivalents Trade receivables, gross Less allowances Trade receivables, net Raw materials & work‐in‐process Finished products Total inventory, FIFO Adjustment to arrive at LIFO inventory value Total inventories, LIFO Current assets of discontinued operations Other current assets Total current assets Property, Plant, and Equipment Land & improvements Buildings Machinery & equipment Property, plant & equipment, at cost Less: accumulated depreciation Property, plant & equipment, net Goodwill, net Other assets Total assets
$277,800 963,700 39,100 924,600 263,900 783,800 1,047,700 23,500 1,024,200 0 377,000 $2,603,600
12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD
$254,700 $233,300 $967,600 $514,400 $308,200 $517,100 1,153,600 1,194,100 1,175,700 1,098,700 856,000 776,600 44,200 44,500 45,100 52,100 47,400 47,600 1,109,400 1,149,600 1,130,600 1,046,600 808,600 729,000 275,400 284,400 257,500 267,800 186,300 186,100 885,200 769,600 774,000 692,800 510,300 553,900 1,160,600 1,054,000 1,031,500 960,600 696,600 740,000 14,800 ‐9,500 ‐17,600 ‐21,200 ‐13,300 ‐8,900 1,145,800 1,063,500 1,049,100 981,800 709,900 748,900 0 0 0 70,800 160,200 0 329,600 257,000 200,100 313,600 216,100 198,900 $2,839,500 $2,703,400 $3,347,400 $2,927,200 $2,203,000 $2,193,900
41,300 43,800 41,600 44,100 51,600 50,000 50,300 299,700 308,000 311,900 309,700 299,500 268,800 278,600 1,288,900 1,435,800 1,382,800 1,348,100 1,410,600 1,234,600 1,268,800 1,629,900 1,787,600 1,736,300 1,701,900 1,761,700 1,553,400 1,597,700 1,102,000 1,191,400 1,114,100 1,033,100 1,007,100 893,200 941,800 527,900 596,200 622,200 668,800 754,600 660,200 655,900 1,223,200 1,212,900 1,195,600 1,115,700 1,184,000 771,700 729,100 828,600 762,300 726,500 684,700 665,000 587,600 551,600 $5,183,300 $5,410,900 $5,247,700 $5,816,600 $5,530,800 $4,222,500 $4,130,500
Liabilities & Shareholders' Equity: Short‐term borrowings Current maturities of long‐term debt Trade accounts payable Other current liabilities Total current liabilities Long‐term debt Postretirement benefits Deferred income taxes Other long‐term liabilities Total Liabilities Common stock Capital in excess of par value Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total stockholders' equity Total Liab & Shareholders' Equity
$83,300 100 453,100 947,400 1,483,900 1,444,700 669,400
‐
$329,700 200 504,600 1,046,300 1,880,800 1,179,100 311,300
$258,900 $566,900 $1,100 $100 $4,600 150,200 155,300 500 400 312,000 458,500 466,800 466,900 379,800 343,200 912,000 1,075,000 1,294,200 893,800 793,600 1,779,600 2,264,000 1,792,600 1,312,100 1,453,400 1,170,300 1,030,300 1,200,600 915,600 927,600 482,400 419,000 423,400 451,900 409,000 ‐ 197,600 188,500 171,100 179,800 211,300 460,500 581,000 454,200 391,200 384,400 516,600 529,600 $4,058,500 $3,952,200 $4,084,100 $4,293,000 $3,972,100 $3,376,000 $3,530,900 30,000 31,500 33,400 38,700 41,000 39,000 39,800 14,300 27,000 0 273,800 699,600 486,700 550,100 1,536,800 1,498,500 1,473,000 1,616,800 1,161,500 773,000 524,300 ‐456,300 ‐98,300 ‐342,800 ‐385,700 ‐330,800 ‐452,200 ‐514,600 1,124,800 1,458,700 1,163,600 1,523,600 1,558,700 846,500 599,600 $5,183,300 $5,410,900 $5,247,700 $5,816,600 $5,530,800 $4,222,500 $4,130,500
Black & Decker Corp. (in $000s) ‐ Cashflow Statements Date Currency Operating Activities Net earnings (loss) Non‐cash changes and credits: Depreciation & amortization Stock‐based compensation Amortization of actuarial losses & prior service costs Settlement of income tax litigation Restructuring & exit costs Loss (earnings) of discontinued operations Loss (gain) on sale of discontinued operations Other non‐cash charges & credits Changes in working capital items (net of effects of businesses acquired) Trade receivables Inventories Trade accounts payable Other current liabilities Restructuring spending Other assets & liabilities Net cash flows from operating activities Investing Activities Capital expenditures Proceeds from disposal of assets Purchase of businesses, net of cash acquired Reduction in purchase price of previously acquired business Cash inflow from hedging activities Cash outflow from hedging activities Proceeds from sale of business, net of cash transferred Proceeds from sale of discont opers, net of cash transferred Investing activities of discontinued opers Other investing activities, net Net cash flows from investing activities Financing Activities Net increase (decrease) in short‐term borrowings Proceeds from issuance of long‐term debt Payments on long‐term debt Purchase of common stock Issuance of common stock Repayment of preferred stock of subsidiary Cash dividends Net cash flows from financing activities Effect of exchange rate changes on cash Increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year
12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD USD
$293,600
$518,100
136,600 29,100 14,800 ‐ 54,700 ‐ ‐
‐ ‐ 300
132,500 67,900 ‐47,900 ‐141,800 ‐25,300 ‐89,100 $425,400
‐
‐ ‐ ‐ ‐
‐98,800 20,400 ‐25,700 ‐ ‐ 72,400 ‐29,700 ‐ ‐ ‐ ‐$61,400
$486,100
143,400 25,900 25,700 ‐ ‐153,400 ‐ 19,000 ‐ ‐ ‐ 500
154,900 29,200 ‐ ‐ ‐ ‐ ‐
$543,900
$456,000
150,600
$293,000
142,500 ‐ ‐ ‐ ‐
$229,700
133,400
127,800
‐ ‐ ‐
‐ ‐ ‐
‐2,200 ‐12,700 ‐ ‐300
31,600 ‐5,800 ‐ ‐ ‐8,100
50,700
900
100 300
99,400 ‐32,000 32,600 33,300 ‐1,000 14,400 $725,900
36,100 57,500 ‐25,100 ‐180,800 ‐1,700 65,600 $622,700
‐128,500 ‐105,500 12,300 81,500 ‐13,600 82,200 $628,000
1,300 ‐6,400 16,400 ‐66,700 94,200 ‐8,200 ‐39,900 21,000 19,300 102,800 ‐ ‐ ‐25,000 ‐40,400 ‐37,800 60,200 49,400 62,300 $619,100 $570,600 $451,600
‐116,400 13,000
‐104,600 14,700 ‐158,500 16,100 ‐ 1,400 ‐14,800
‐111,100 12,700 10,400
‐117,800 26,000 ‐804,600
2,000 ‐47,400 ‐ ‐ ‐ ‐1,000 ‐$149,800
4,700 ‐$241,000
‐ 15,900 7,200 ‐13,400 ‐7,900 33,600 ‐ 17,200 77,500 ‐400 ‐1,200 500 1,200 ‐$34,600 ‐$819,600
‐ ‐ ‐ ‐ ‐
‐102,500 15,000 ‐277,600 ‐ ‐ ‐ ‐ ‐ ‐ ‐3,300 ‐ 300 ‐$368,100
‐8,600
‐96,600 4,600
1,400 ‐$90,600
‐246,000 68,800 ‐309,300 565,600 ‐3,400 ‐4,900 ‐7,200 224,700 ‐ 296,400 ‐ 295,400 ‐ ‐ ‐200 ‐150,300 ‐155,100 ‐500 ‐600 ‐310,600 ‐33,900 ‐202,300 ‐461,400 ‐896,000 ‐525,700 ‐3,600 ‐77,500 ‐43,100 8,600 83,300 48,200 56,000 171,600 11,600 20,800 ‐ ‐ ‐ ‐136,000 ‐ ‐ ‐ ‐101,800 ‐108,600 ‐109,100 ‐88,600 ‐67,500 ‐44,300 ‐38,600 ‐$317,000 ‐$568,200 ‐$1,124,900 ‐$129,200 $391,900 ‐$425,700 ‐$102,000 ‐23,900 13,500 8,900 ‐11,000 14,800 14,300 13,600 23,100 254,700 $277,800
21,400 233,300 $254,700
‐734,300 967,600 $233,300
453,200 514,400 $967,600
206,200 308,200 $514,400
‐208,900 517,100 $308,200
272,600 244,500 $517,100
Ratio Analysis Liquidity Current ratio Quick ratio Profitability Gross profit margin Normalized EBIT margin Net Income margin Normalized EBITDA margin Activities Asset turnover Inventory days AR days AP days Growth Profit growth Revenue growth Leverage Debt/Total capitilization ratio Debt to EBITDA multiple Interest rate coverage EBIT Interest coverage FOCF to Total Debt
2008
2007
2006
2005
2004
2003
2002
1.755 1.049
1.510 0.893
1.519 0.927
1.479 1.023
1.633 1.097
1.679 1.148
1.509 1.000
32.84% 7.83% 4.82% 10.08%
33.93% 9.16% 7.89% 11.35%
34.77% 11.48% 7.54% 13.89%
35.52% 12.46% 8.34% 14.77%
36.41% 11.66% 8.45% 14.29%
35.59% 10.27% 6.54% 13.24%
34.54% 9.58% 5.23% 12.49%
117.42% 93.6 57.8 40.5
121.30% 97.7 64.2 42.5
122.86% 91.5 67.6 39.8
112.16% 89.5 65.8 40.5
97.61% 102.1 74.3 49.6
106.16% 88.1 69.7 48.0
106.38% 93.9 64.5 43.6
‐43.3% ‐7.27%
6.6% 1.80%
‐10.6% ‐1.17%
19.3% 20.85%
55.6% 20.43%
27.6% 2.02%
2008 40.38% 3.850 9.91 7.64 13.83%
2007 36.56% 2.665 9.02 7.30 30.72%
2006 39.64% 2.486 12.10 10.03 23.28%
2005 37.70% 2.423 22.36 17.91 22.13%
2004 34.83% 2.319 34.79 28.47 28.01%
2003 39.18% 2.580 16.79 13.08 30.56%
2002 42.92% 3.312 9.41 7.28 19.54%
Value Investing Report BLACK & DECKER CORP.
30 MAR 2009
Preliminary Screening Relative valuation – The Black & Decker Corporation (“BDK”) is trading at a trail‐ ing 12 month Price Earnings ratio (PE) of 6.43x. This compares favorably to both peers and S&P average PE of 11.70. Al‐ though its PB ratio of 1.7x is not ex‐ tremely depressed, its Price to Sales of 0.31x makes it a very interesting value candidate as compared to peers. Lastly, its EV/EBITDA of 7.71x is a reasonable mul‐ tiple as compared to peers (Exhibit 1) Headline risk and Lawsuits BDK suf‐ fers from the headline risks of dwindling home sales. The investment community could have over reacted to the bad news in the market and sold to stock down to a undervalued level. Over $2Bn in market
cap has been wiped off last year. It is possible that price has fallen far more than a decrease in intrinsic value over the last year. The Company is involved in various lawsuits out of allegations of trademark infringement and other com‐ mercial disputes.
outstanding, which makes it less likely to be under‐researched. Analysts who are focused more on the next 12 month EPS than the long term intrinsic value of the company may cause the stock mispriced. Amongst the top institutional owners are value funds such as Ariel Investment and Financial Performance For financial Pzena Investment. Holdings by such value funds could indicate that the stock could year 2008, sales declined by 7% and EPS decreased 9%. Such financial perform‐ be undervalued. ance was highly disappointing to inves‐ Overall, this stock looks like a value stock tors and may cause indiscriminate sell‐ compared to peers and it is likely that in‐ ing. vestors could have over‐reacted to bad news. We would need to investigate fur‐ Analyst Coverage and Institutional ownership 11 analysts cover the stock ther to establish the price vs. intrinsic value. and institutions own over 79% of stocks
B u s i n e s s a n d F i n a n c i a l R i s k A n a ly s i s Business Risk The household durable industry is affected by the general econ‐ omy environment. Housing trend and consumer’s job confidence affects end users purchase decision. We believe the industry has medium‐high business risk.
tive and aerospace industry. As sales of tent with the BBB rating from S&P BDK has fluctuated less than the indus‐ (Exhibit 6). try as a whole, we believe that the com‐ By adding a 407 bps BBB‐rated corporate pany has medium business risk. spread over 10‐year U.S. government Financial Risk With medium business bond yield of 2.86% as of March 2009, risk, the optimal debt/capitalization we arrived at cost of debt of 6.86%. The BDK’s strong brand name and diversity ratio is between 30%‐49%. The Com‐ equity risk premium is 5%, and WACC is in product offering reduces its reliance pany’s three years’ average debt/ 8.98%. First pass ROIC is 13.1%, which is on any one sector of buyers. Buyers in‐ capitalization ratio is 38.86%. There‐ higher than the Company’s WACC, we clude homeowners, contractors, and fore, we believe that the Company has therefore expect EPV to be higher than other manufacturer such as the automo‐ medium financial risk which is consis‐ NAV in the valuation. (Exhibit 7)
I n t r i n s i c Va l u e a n d R e c o m m e n d at i o n We arrived at an EPV/share of $45.87 (Exhibit 8) and NAV/share of $42.33 (Exhibit 9) for BDK. Final pass ROIC based on replacement value and adjusted NOPLATPA was 9.49%, which is higher than WACC. (Exhibit 10) Therefore, our EPV‐NAV relation is consistent with both of the first and final pass ROIC vs. WACC test. The valuation results give a franchise value of $3.55/share for BDK. We as‐ signed a high probability (80%) of sus‐ tainability of this franchise value. We concluded that BDK has an intrinsic value of $45.16/share, which is arrived
Recommendation ‐ Based on the Fri‐ day’s (27th March 2009) market closing price of $31.55, and compared to our suggested entry price is $30.11. There‐ fore, our recommendation is NOT TO Franchise Value ‐ We believe that BDK BUY. could earn higher return on capital than WACC because it has a market We choose not to compromise on our leading position, strong brand equity, MOS of 33% to seek downside protection from the vagaries of the market and the and a loyal customer base. uncertain economic outlook. As a disci‐ Inherent in the industry is high barriers plined value investor, we will only invest to entry from high start up cost for when the market price is below the entry R&D, and cost for creating sustainable price. relationship with end user and dis‐ tributors. by adding 80% of the franchise value to the NAV/share of $42.33. Using a mar‐ gin of safety of 33%, the entry price for BDK’s share will be $30.11. (Exhibit 11)
BUS 4443 – Value Investing Final Project The Black and Decker Corporation Professor George Athanassakos Date: March 30, 2009
Wei Loh Ben Yau David Ma Dominic Leung Toshiaki Nagasawa
Our recommendation to Black & Decker is NOT TO BUY based on our entry price of $30.11 against market price of $31.55. This recommendation is based on our assessment of business and financial risks, earnings power value, net asset value and franchise value.
1. Justification for choosing Black and Decker Relative Valuation The Black & Decker Corporation (“BDK” or “the Company”) is trading at a cheaper relative valuation compared to peers such as Stanley Works, Snap-on, Makita and to the S&P 500 Index. BDK is trading at a trailing 12 month Price Earnings ratio (PE) of 6.43x. This compares favorably to both peers and the S&P average PE of 11.70x. Although its PB ratio of 1.7x is not extremely depressed, its Price to Sales of 0.31x makes it a very interesting value candidate as compared to peers. Lastly, its EV/EBITDA of 7.71x is a reasonable multiple as compared to peers (Exhibit 1).
Headline risk and Lawsuits BDK suffers from headline risks such as the increasing foreclosure and dwindling home sales. The investment community could have over reacted to the bad news in the market and sold the stock down to an undervalued level. Over the last 12 months, stock price fell from $65.47 to $31.55. Over $2Bn of market capitalization has been wiped off. If the stock was not grossly overpriced a year ago, it is possible that price has fallen far more than a decrease in intrinsic value over the last year. At the current mid-market cap of $1.9Bn, some large cap fund may be forbidden to hold the stock due to fund mandate. The Company is involved in various lawsuits out of allegations of trademark infringement and other commercial disputes.
Financial Performance For financial year 2008, sales declined by 7% and EPS decreased by 9%. After almost a decade of increased sales and EPS (though there has been some decrease in-between), such financial performance was highly disappointing to investors. Furthermore, management expects 2009 to be even more challenging. Disappointing earnings and near term pressure on financial performance may cause the financial community to over-react causing mis-pricing.
2
Analyst Coverage and Institutional ownership Institutions own over 79% of stocks outstanding, which makes it less likely to be under-researched. Furthermore about 11 analysts cover the stock. In this instance, having analysts that are focused more on the next 12 month EPS than the long term intrinsic value of the company may cause the stock to be oversold. Amongst the top institutional owners are value funds such as Ariel Investment, Pzena Investment Management and Harris Associates. Holdings by such value funds could indicate that the stock may be undervalued.
Overall, this stock faced many short term risks, which could explain the depressed P/E, P/S and EV/EBITDA ratio. Furthermore, headline risk from the housing market coupled with disappointing financial performance in the last 12 months may cause investors to not want to hold this stock. Institutional factors add further pressure on the price of the stock. With so much bad news, it is likely that this market leader in Power tools and DIY products is undervalued due to the short term-ism of the market.
2. Industrial Goods Industry Analysis BDK is one of the world’s leading manufacturers and marketers of power tools and accessories, hardware and home improvement products, and technology-based fastening system. Historically, the power tools and accessories segment accounts for more than 70% of the Company’s revenue, with the remaining two segments accounting for the rest.
Power tools and accessories segment The U.S. power tools and accessories segment is dominated by a few big players with strong brand name and distribution network. BDK has 15% of the market share and it is the largest player in the segment (IBIS). The big four players accounted for 29.5% of the power tools and other general purpose machinery manufacturing market in the U.S. The next big player after BDK has only around 5.4% of the market (Exhibit 2). Hong Kong’s TTI has been expanding rapidly and is following closely to Black & Decker in the DIY power tools market (MintelOxygen). Power and hand tool demand in the U.S. is expected to increase 3 per cent annually through the next few years, according to the “Professional Power Tool Guide’. The power tools market generally are not seasonal in nature, but are influenced by trends in residential and commercial construction markets, as well as some other general economic trends such as number of housing starts.
3
Manufacturers and wholesalers tend to secure contracts with distributors such as Home Depot Inc. to sell their products. Customer relations is therefore one of the key success factors in the segment. Brand equity plays an important role in capturing customer loyalty as well as marketing and distributing products to customers. Overall, the segment is very competitive on the basis of price, quality and after-sale service such as warranty.
Hardware and Home improvement segment Raw material costs made up a quite significant portion of the total cost of the production of home improvement hardware such as door locksets and electronic keyless entry systems. Price fluctuations in commodity markets will affect the operations of companies in the segment. This segment is also influenced by economic trends such as housing starts and duration of remain in original homes. Strong brand name, high quality as well as good after-sale services are key success factors in the segment. The global home improvement market grew by 0.1% in 2008, achieving a CAGR of 4.0% between 2004 and 2008 and a market size of $1,170Bn in 2008 (Exhibit 3). In 2013, the market is forecast to have a value of $1,601Bn, an increase of 36.8% since 2008 (Datamonitor).
Fastening and assembly systems This segment targets mainly to commercial and industrial customers. Automotive, transportation appliance industries are a few principal markets for these products. Competition is high in this segment as many manufacturers from around the world are trying to gain market share in the segment. Companies compete on the basis of product quality, performance/reliability, price, delivery as well as technical and application engineering services. To remain competitive, customer relations as well as continuous innovation to meet customers’ needs are essential.
3. Company Analysis The Company operates its business in three reportable segments, namely Power Tools and Accessories (73% of 2008 sales); Hardware and Home Improvement (15%); and Fastening and Assembly Systems (12%).
The Power Tools and Accessories segment includes consumer and industrial power tools and accessories. In addition, the Company manufactures products that including lawn and garden products, electric cleaning and household products. At a profit margin of 7.35%, it is the segment with the lowest profit margin.
4
The Hardware and Home Improvement segment provides security hardware and plumbing products. It also produces decorative hardware such as cabinet hardware and push plates. The profit margin is 8.58%, which is slightly higher than the Power Tools and Accessories segment.
The profit margin of the Fastening and Assembly Systems segment is 14.75%, which is the highest among all three segments. The segment offers products related with metal and plastic fasteners and engineered fastening systems for commercial applications. These products are sold in markets such as electronics, automotive, transportation, aerospace, machine tool, and appliance industries.
Management Nolan D. Archibald is the Chairman, President and CEO of the Company and has served in his current capacity for 18 years. BDK’s sales have increased from $1.7Bn billion to over $6Bn in 2008 under his leadership. Archibald also owns 460,447 shares of BDK. As management ownership of shares helps align shareholders interests with management, we would have preferred greater management ownership of shares.
BDK’s senior management team has been with the Company for almost ten years, and most of them were promoted from within. Thus, we believe that the management team has good knowledge of the core business of the Company and has a keen understanding of the corporate culture.
Financial Performance: The Company’s net profit and Return on Assets increase between 2004 to 2007 and fell sharply in 2008. This is largely caused by the recent financial crisis and the declining in housing sales. The operating margin has been decreasing for the past fours years due to the increasing pressure from commodity price fluctuations. (Exhibit 4) However, the Company’s free cash flow is more than the net income over the last 5 years. This is due to greater asset utilization and prudent management of working capital position.
5
Business Risk Assessment: The household durable industry is highly affected by the general economy environment. Housing trend and consumer’s job confidence affects end-users’ decision to buy household durable products. Therefore, we believe that the household durable industry has a medium high business risk. However BDK has established a strong brand name by operating in this market for over 100 years. Furthermore, the Company’s investment in product innovations helps increase customers’ satisfaction. Thus we believe that BDK has built a large and diversified customer base with high loyalty. Remodeling efforts by homeowner is a key driver for power tools. Homeowners with houses valued at $100K – $749.9K in particular undertake significant home improvement work themselves (MintelOxygen). Declining sales to new house owner is partly mitigated by current homeowners who are able to remodel their current home. Thus BDK’s strong brand equity and diverse product portfolio reduces its business risk as compared to the household durable industry. Therefore, we believe that the Corporation has a medium business risk.
Financial Risk Assessment BDK has medium business risk, which means it should have an optimal debt/capitalization ratio between 30%49%. The Company’s three-year historical average debt/ capitalization ratio is 38.86%. Therefore, we believe that the Company has a medium financial risk, which is consistent with the BBB rating from Standard and Poor’s (see Exhibit 5).
4. Valuation of BDK WACC and First Pass ROIC Since BDK has a medium business risk and a medium financial risk, the expected equity risk premium is 5%. Cost of debt is 6.86% based on adding a 407 bps BBB-rated corporate spread over 10-year U.S. government bond yield of 2.86% as of March 2009. Using the Company’s historical debt/capitalization ratio of 38.66%, we arrived at a WACC of 8.98%. (Exhibit 6) First pass ROIC was 13.1%, which is higher than the Company’s WACC, we thus expect that EPV will be higher than NAV in the valuation. (Exhibit 7)
6
Valuation, Final Pass ROIC and Intrinsic Value We arrived at an EPV/share of $45.87 (Exhibit 8) and a NAV/share of $42.33 (Exhibit 9) for BDK. Final pass ROIC based on replacement value and adjusted NOPLATPA was 9.49%, which is higher than WACC. (Exhibit 10) Therefore, our EPV-NAV relation is consistent with both the first and final pass ROIC vs. WACC test. The valuation results give a franchise value of $3.55/share for BDK. We assigned a high probability (80%) of sustainability of this franchise value. The rationale behind will be further explained in the ‘strategic valuation’ section of the report. We concluded that BDK has an intrinsic value of $45.16/share, which is arrived by adding 80% of the franchise value to the NAV/share of $42.33. Using a margin of safety of 33%, the entry price for BDK’s share will be $30.11. (Exhibit 11)
5. Strategic Valuation To better respond to the toughening business environment, the Company’s recent overall strategy is to focus on continuous productivity improvement and evaluate opportunities to reduce fixed costs, simplify or improve processes, and eliminate excess capacity. In recent years the Company shifted manufacturing away from higher-cost locations in the US and UK to lower-cost locations in Europe, Asia and Latin America. One notable example is the Joint Venture with a Chinese firm to build a factory in Suzhou, China.
The Company’s continuous investment in R&D to produce high quality products creates a barrier of entry for new entrants. The relative high fixed cost structure of the industry also discourages new entry into the market. Lastly, it would take years of substantial investment on the part of potential entrants to create the same level of customer relationship with distributors and end-users.
In addition, the Company enjoys certain customer demand advantage. Its long-term approach to establish market leading brands by understanding the end-users need intimately has proven to be successful. The Company also increases its demand advantage by increasing search costs by providing superior after-sales service and warranty protection. Furthermore, the Company invests aggressively to build its brand equity through aggressive marketing and securing superior placement within major home improvement stores. End users associate the ‘Black and Decker’ brand to notions of ‘innovative solution’ and ‘high quality products’, and the Company has delivered on its promise by producing original tools that solve problems of the consumer.
7
In addition to in-house product development, the Company also looks for potential acquisition opportunities for new products or new categories. The tightening credit markets could provide potentially-undervalued targets. Therefore, the Company’s large cash or cash equivalents will help the firm grow strongly even in the tough time.
6. Value of Growth In 2008, sales fell by over 7%, operating income decreased by 28% and EPS declined by 49%. Accompanied by the fact that the housing market is not expected to recover in the near future; we have assigned no value of growth to the Company.
7. Risk Management Assessment Operational Risk Management Assessment Macro Risk The key operational risk BDK faces in the short term is the risk of declining sales due to the deepening economic recession in North America and Europe. In 2008, homes sales declined by over 33% year on year. Management has reacted swiftly by aggressively cutting costs and expenses. SG&A expense for instance was down 6% for 2008. Furthermore, management took initiative to further streamline the business to face continual pressure on sales volume decline and pricing pressure from competitors.
Geographical Risk There is another risk from highly relying on the US market. The Company generates 55.2% of the revenue from the US market. Geographic concentration increases the risk associated with adverse economic and political developments in the US. The emerging economies in Asia provides significant growth opportunities as the region already represents 36.4% of Global home improvement markets (Datamonitor).
Supplier Risk The global economic crises have affected some of BDK’s suppliers. Management believes that it is possible that a number of them will cease operation. Management manages such risk by diversifying its supplier relationship
8
and is not over dependent on any single supplier. However, changes in supplier relationship may increase the cost of manufactured and purchased product, thus increasing the pressure on the profit margin.
Threat of New entrants Some of the key consumers such as Home Depot and Lowe’s also sell their own private labels. Because these retailers have such a strong presence in markets such as the DIY market, they pose significant competitive pressures on price and promotional discount, creating a somewhat unusual market dynamic.
Customer Preference Lowe’s and Home Depot jointly account for over 30% of the Company’s consolidated sales. Over the past decade, BDK has maintained positive relationship with these volume purchasers. However, since BDK does not control the bulk of its own distribution network, changes in consumer preference may have adverse impact on BDK. BDK improves its end-user loyalty through superior after-sales service, warranty and advertisement and marketing to build up customer relationship.
Financial Risk Management Assessment The declining sales and earnings of BDK triggered downgrade on the company’s debt rating. Moody’s has downgraded BDK’s long term debt one notch from Baa2 to Baa3. Standard and Poor’s has also put BDK’s BBB rating on negative watch. Such downgrades will have a negative impact on the Company’s ability to access the commercial paper market and borrow at favorable interest rate.
To mitigate its financial risk, the Company postponed its stock repurchase program in mid 2008 and reduced its short term debt by $246 mil. With more than $277.8 mil of cash on the balance sheet and less than $83.4 mil in debt due within a year, the company has ample liquidity to tie over the next year.
Furthermore, BDK has managed to generate over 100% of net income into free cash flow over the past few years. In 2008, the Company generates $347 mil in free cash flow. The interest expense coverage is over 5.5x, thus BDK has the ability to meet its short term obligation. The Company also has $375 mil in uncommitted lines of credit which further enhances its financial flexibility.
9
A downside risk for BDK is that its post retirement benefit liability varies with the stock and bond market. In 2008, adverse development in the financial market doubled the Company’s post-retirement benefit liability to $669.4 mil.
As shown in the debt maturity profile (Exhibit 12), the first debt due is in about 2 years time. If the financial market stabilized by then, the Company could raise long term debt to retire the maturing debt. However, between 2009 and 2010, it is highly likely that the Company would have generated sufficient free cash flow to retire the debt wholly. Due to the strong balance sheet position, cash generating ability, and management’s prudent stance in financial management, BDK should have sufficient financial resources to meet future obligation.
Risk Management from a Value Investor Perspective The Company is exposed to the housing sector and relies on two main distributors. In an Armageddon scenario of continual depression in the housing market, increasing foreclosure and job loss, it is likely that sales and margin will continue to decline thus further decreasing the intrinsic value of the firm. Inventory built up in distributor would also imply that the Company would face challenges in selling more units to such home improvement stores. Falling sales and margin, accompanied by inventory built up will affect the Company’s ability to service its debt in 3 years time. In terms of valuation, we are conservative with our estimates of value and have not assigned a high value to franchise.
Although the Armageddon scenario is not the most likely outcome, a conservative Value Investors could seek some protection by diversifying their holdings and insisting on a sufficient Margin of Safety. From a portfolio perspective, this stock probably should not be too highly weighted due to the inherent uncertainty in the outcome of the economy. As we believe that this stock is of Medium Risk, we will not compromise on our 33% Margin of Safety and will only buy when it falls below our entry price.
We also believe that a Value Investor would have to monitor certain data such as foreclosure rate, new home starts, and performance of distributors such as Home Depot and Lowe’s to have a good grasp of the likely
10
performance and risks faced by the Company. Lastly, due to the tightened credit market, balance sheet strength and the Company’s ability to service its debt should be monitored closely.
7. Recommendation BDK is the leader in the household durable industry. The Company has established strong brand name recognition in all three segments it has engaged in. The industry has a medium high level of business risk, but due to BDK’s strong customer relation, product diversification and brand name equity, the Company is a medium business risk company. Based on the recent debt to capital ratio, its financial risk is also medium. BDK’s operating performance declined this year due to the recessionary economy. However, based on the past successful performance and the experienced management team, we still believe that the Company has the potential to create sufficient cash flow in the future.
From a conservative perspective, the Company is facing some operating risks such as geographical risk, supplier risk, threat of new entrants, and the possible changes in customers’ preference. Besides that, the Company has recently been downgraded to a BBB credit rating. There is a potential financial risk that the Company may have unfavorable cost of borrowing in the future. Thus we are not willing to compromise on our margin on safety of 33% and will only buy the stock when market price falls below entry price.
The market closing price as of Friday (27th March 2009) was $31.55, which is higher than our suggested entry price of $30.11. Therefore, our recommendation is NOT TO BUY.
11
Exhibits Exhibit 1 Relative Valuation Analysis Price to Earnings (TTM) Price to Sales Price to Book
BDK SWK 6.43 10.72 0.31 0.54 1.69 1.41
EV/EBITDA
7.71
BDK ‐ Black and Decker
SWK ‐ Stanley Works SNA ‐ Snap‐on Incorporated MKTAY ‐ Makita Corporation S&P ‐ Standard and Poor’s 500 Index
SNA 6.62 0.54 1.30
MKTAY
6.26 7.55
6.85
S&P 11.70
0.85 0.96
1.60
5.20
‐
‐
Source: Company financial reports, Bloomberg database, ThomsonOne database
Exhibit 2 Power Tools & Other General Purpose Machinery Manufacturing in the US Major Player The Black & Decker Corporation Stanley Works Illinois Tool Works Inc.
Market Share Range 15.00% 5.40% 5.10%
Snap‐on Incorporated
4.00%
Source: IBISWorld Company Operational Risk Rating Report
Exhibit 3 Global Home Improvement Retail Sector Value: $ billion, 2004‐2008 Year
2004 2005 2006 2007 2008 CAGR, 2004 ‐2008
$ Billion
% Growth
999.4 1,073.90 1,153.00 1,168.50 1,170.10
7.50% 7.40% 1.30% 0.10% 4.00%
Source: Datamonitor
12
Exhibit 4
Operating margin 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
2002
2003
2004
2005
2006
2007
2008
Operating margin 9.58% 10.27% 11.66% 12.46% 11.48% 9.16% 7.83%
Exhibit 5 Leverage Debt/Total capitalization ratio
Debt to EBITDA multiple
2007
2006
40.38%
36.56%
39.64%
3.850
2.665
2.486
9.91
9.02
12.10
Interest rate coverage EBIT Interest coverage
2008
FOCF to Total Debt
7.64
7.30
10.03
13.83%
30.72%
23.28%
Exhibit 6 WACC Business Risk Optimal Debt/Cap ratio Historical Debt/Cap ratio1 Financial Risk Expected Equity Risk‐Premium Cost of debt2 Cost of Equity Marginal Tax rate After‐tax Cost of Debt WACC
Medium 30%‐49% 38.86% Medium 5.00% 6.86% 11.86% 35.00% 4.46% 8.98%
1) 3‐year historical average, Total Debts = Current Portion of long‐ ‐term debts + LT debts + ST debts+Postretirement benefits + Op. lease 2) 10‐year U.S. government bond yield on Mar 2009, plus BBB rated corporate bond spread(2.78%+407bps)
13
Exhibit 7 First pass ROIC calculation 2008 NOPLATPA 410,965 Net Operating Fixed assets 2,579,700 Working Capital 925,300 Current Assets 2,325,800 Current Liability 1,400,500 ROIC 11.7% Average ROIC 13.1%
2007 521,830 2,571,400 1,033,900 2,584,800 1,550,900 14.5%
Exhibit 8 No growth Free Cash Flow & Earnings Power Value ($000's, except share figures) Recent Revenue Historical EBIT margin 1 EBIT Operating lease adjustments Stock‐based compensation One Time Adjustment2 Latest tax rate Adjusted NOPLAT Amortization of Goodwill3 Adjusted NOPLATPA Dep&Amo of fixed assets and other intangibles4 Adjusted NOPLATPA + D&A Zero growth Capex5 A/T non‐consolidated subsidiary Adjusted Earnings WACC Discounted earnings Plus Cash and cash equiv. Excesss Real Estate (A/T) Non‐operating assets6 Over(Under) funded pension7 Value of company Less Short‐term debt Long‐term debt8 Value of operating leases Preferred stock Minority interest Warrants & Employee stock options Equity Value Number of Shares outstanding9 EPV per Share
$6,086,100 10.35% $629,846 $11,241 $29,100 $5,298 35% $432,177 $0 $432,177 $136,600 $568,777 $140,183 $0 $428,594 8.98% $4,771,178 $277,800 ‐ $46,410 ‐$435,110 $4,660,278 $83,300 $1,601,220 $163,884 $0 $0 $55,160 $2,756,715 60,092,726 $45.87
1) 7‐year normalized historical average 2) Avg(one‐time adj./sales)*current sales*1/5, one‐time adj. = Restructuring and exit costs 3) No amortization of Goodwill would be recorded after 2001 4) D&A from Cash Flows Statement, Intangibles includes patents and other identifiable assets 5) Current Capex‐(Net PPE/Sales)*change In sales 6) Note 16, Investments in equity method investees, BV*P/B to get an approx. private MV 7) Postretirement benefits, after‐tax 8) Avg coupon/Kd*(BV of debt less fair value hedge adjustment) 9) Used the year‐end outstanding number
14
Exhibit 8 (cont’d) Zero Growth Capex ($000's) This year's capex1 PPE(net) Sales Change in sales
2008 98,800 527,900 6,086,100 ‐$477,100
Implied zero growth capex 140,183 1) Current capex from cash flow statement
Exhibit 9 Property, Property and equipments ($000's)
2008
Land and buildings
341,000
# of years
10
growth rate
3%
Projected Gross L&B
458,275
Total Land & buildings
458,275
($000's)
2008
Machinery and equipment Depreciation rate
1,288,900 50%
Projected Gross PPE
644,450
Total Machinery and equipment
644,450
($000's)
2008
Non‐Customer Relationship Intangible assets, Net1 Total Patents and rights
220,700 220,700
1) Exclude customer relationships
Product Portfolio ($000's) R&D costs1
2008 146,000
R&D/Sales
2.40%
Revenue generating years Value of Product Portfolio
2007
2006
2005
2004
2003
2002
150,900
139,400
133,800
118,600
100,400
94,300
2.30%
2.16%
2.05%
2.20%
2.24%
2.15%
5 years 673,557
1) Notes 1 ‐ Product Development Costs
15
Exhibit 9 (cont’d) Product Portfolio ($000's) R&D costs1
2008 146,000
R&D/Sales
2.40%
2007
Revenue generating years
2006
2005
2004
2003
2002
150,900
139,400
133,800
118,600
100,400
94,300
2.30%
2.16%
2.05%
2.20%
2.24%
2.15%
5 years
Value of Product Portfolio
673,557
1) Notes 1 ‐ Product Development Costs
Customer Relations ($000's) Selling, general and admin1
2008 530,250
% to Sales
8.71%
Differentiated industry
2007
2006
2005
2004
2003
2002
567,150 511,450 515,500 469,800 402,750 392,350 8.64%
7.93%
7.90%
8.70%
8.98%
8.93%
1.5x
Value of Customer Relations
779,954
1) Notes 1 ‐ SG&A‐Shipping and handling costs‐product development costs
Long‐Term debt 2008 Average Coupon
1
Long term debt (BV) MV
8% 2
3
1371.9 1,601
1) Int exp(LT)/avg debt 2) BV of long‐term debt less fair value hedge adjustment 3) Avg(Coupon rate)/Kd*(BV of long‐term debt less fair value hedge adjustment)
16
NAV per share calculation ($000's, except share figures) Book Value Adjustments
Assets Cash & equivalents Marketable securities Receivables1 Inventories ‐ FIFO2 Deferred tax assets, Gross3 Leased assets : Operating leases PPE4, Gross Identified Intangible assets5, Net Excess Real Estate Goodwill5, Net Subsidiaries (Non‐consolidated) ‐ I&A6 7
Other assets
277,800
Reproduction Value 277,800
0
0
963,700
963,700
1,047,700
1,047,700
484,600 0
‐48,460 163,884
436,140 163,884
1,629,900
‐527,175
1,102,725
220,700 0
220,700 0
1,223,200 0
1,223,200 ‐
0
66,400
66,400
Product Portfolio8
0
452,857
452,857
Customers relations9
0
779,954
779,954
Licenses10
0
Other curent Assets11 Total assets
377,000
0 ‐377,000
0 $6,735,061
Liabilities Short‐term borrowings Trade accounts payables Other current liabilities Operating leases Long‐term debt (MV)12
83,300 453,100 947,400 0
163,884
83,300 453,100 947,400 163,884
1,444,800
156,420
1,601,220
Deferred tax liabilities13
80,400
‐8,040
Other liabilities14
380,100 ‐
Employee stock options Postretirement benefits15 Total liabilities Net worth No. of shares outstanding16 NAV/share
669,400
72,360 380,100 55,160
‐234,290
435,110 $4,191,634 2,543,427 60,092,726 $42.33
1) Added back Allowance for Doubtful Accounts for 2008 2) Note 3 ‐ Inventories, page 49 3) Note 11 ‐ Income Tax, page 54, assumed all DTA are long term assets, 90% of BV 4) Land and buildings assumed to appreciate at a rate of 3% p.a. for 10 years, MV of machinery and equipment is assumed to be of 50% of BV, also included non‐customer‐relations intangibles 5) Note 5 ‐ Goodwill, used the net book value of 2008 6) Included in other assets 7) BV of Other assets minus Gross deferred tax assets and BV of identified intangible assets 8) Assumed to be a modestly R&D‐required industry, avg(R&D/Sales)*current sales* 5 years, excluded net BV of other identified intangibles (patents and trademarks) of $220 mil to avoid double counting 9) Assumed to be a differentiated industry, avg(adjusted SG&A/2/sales)*current sales*1.5 10) Included in "Identified intangible assets" 11) Includes deferred tax assets, which has already been accounted for, and certain types of hedges, which should not be accounted for in NAV 12) Avg coupon/K d *(BV of debt less fair value hedge adjustment) 13) Assumed all DTL to be long‐term, after 2000, 90% of BV 14) BV of other long‐term liabilities minus Gross deferred tax liabilities 15) Used Book value in 2008, after‐tax 16) Used the year‐end outstanding number
17
Exhibit 10 Final pass ROIC calculation 2008 Adjusted NOPLATPA
432,177 1
Net Operating Fixed assets
3,943,321
1
Working Capital Current Assets Current Liability Final pass ROIC 1) Replacement Value
610,900 2,011,400 1,400,500 9.49%
Exhibit 11 IV and EP Per Share EPV NAV
$45.87 $42.33
Franchise Value1 Probability of sustainability Intrinsic Value MOS
$3.55 80% $45.16 33%
Entry Price2
$30.11
Price as of 26 March 2009
$31.55
1) EPV ‐ NAV 2) Intrinsic value x (1‐MOS)
Exhibit 12 Long Term Debt Maturity Profile ($,Mil) 2009
2010
2011
2012
2013
Thereafter
0
0
512
100
0
750
18
References Black and Decker Corporation, Annual Report 2008, available at http://www.ir.bdk.com/phoenix.zhtml?c=100780&p=irol-IRHome Datamonitor (2009), Global Home Improvement Retail Industry Profile, Global Market Direct (2009), The Black & Decker Corporation- Financial and Strategic Analysis Review IBISWorld Company Operational Risk Rating Report (2009), Black and Decker Corporation, 25 February Michael Rehaut, Ray Huang (2009), J.P. Morgan Analyst Report, 29 January MintelOxygen (2008), “DIY Power Tool”, “Power Tool Ownership by Home Ownership and Remodeling Activity”, September 2008 Nishu Sood, Rob Hansen (2009), Deutsche Bank Analyst Report, 1 February Standard and Poor’s. (2009) Standard and Poor’s Company Report, 19 January. Standard and Poor’s (2008), Industry Survey – Household Durables, 9 October
19
Black & Decker Corp. ($000's) ‐ Income Statements Date Currency Sales Cost of goods sold Selling, general, & administrative expenses Restructuring & exit costs (One time adjustment ratio)
12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD USD $6,086,100 $6,563,200 $6,447,300 $6,523,700 $5,398,400 $4,482,700 $4,394,000 4,087,700 4,336,200 4,205,800 4,206,600 3,432,900 2,887,100 2,876,100 1,521,600 1,625,800 1,501,100 1,504,000 1,336,300 1,135,300 1,097,100 54,700 19,000 0 0 0 31,600 50,700 0.90% 0.29% 0.00% 0.00% 0.00% 0.70% 1.15%
Operating income (loss) Interest income (expense), net Other income (expense) Earnings before income taxes Total Current Income taxes (benefit) Deferred income taxes expense (benefit) ‐ United States Deferred income taxes expense (benefit) ‐ other countries Total deferred income taxes expense (benefit) Income taxes expense (benefit) Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations Net earnings (loss)
422,100 ‐62,400 5,000 364,700 63,700 3,200 4,200 7,400 71,100 293,600 0 $293,600
582,200 ‐82,300 ‐2,300 497,600 3,100 ‐16,300 ‐7,300 ‐23,600 ‐20,500 518,100 0 $518,100
740,400 ‐73,800 ‐2,200 664,400 196,500 ‐11,900 ‐6,300 ‐18,200 178,300 486,100 0 $486,100
813,100 ‐45,400 51,600 819,300 263,600 7,500 4,200 11,700 275,300 544,000 ‐100 $543,900
629,200 ‐22,100 ‐2,800 604,300 157,600 7,000 ‐1,400 5,600 163,200 441,100 14900 $456,000
428,700 ‐35,200 ‐2,600 390,900 92,600 ‐6,500 17,600 11,100 103,700 287,200 5800 $293,000
370,100 ‐57,800 ‐4,900 307,400 74,800 3,800 ‐900 2,900 77,700 229,700 0 $229,700
EPS Calculation: Weighted average shares outstanding ‐ basic Weighted average outstanding shares ‐ diluted Year end shares outstanding Earnings (loss) per common share ‐ continuing operations ‐ basic Earnings (loss) per common share ‐ discontinued operations ‐ basic Net earnings (loss) per common share ‐ basic Earnings (loss) per common share ‐ continuing operations ‐ diluted Earnings (loss) per common share ‐ discontinued operations ‐ diluted Net earnings (loss) per common share ‐ diluted Dividends per common share Total number of employees Number of common stockholders
59,800 60,900 60,092.73 4.91 0.00 $4.91 4.82 0.00 $4.82 1.68 22,100 10,647
64,300 66,000 62,923.72 8.06 0.00 $8.06 7.85 0.00 $7.85 1.68 25,000 10,891
72,100 74,200 66,734.84 6.74 0.00 $6.74 6.55 0.00 $6.55 1.52 25,500 11,369
79,200 81,300 77,357.37 6.87 0.00 $6.87 6.69 0.00 $6.69 1.12 27,200 11,884
79,800 81,600 82,095.16 5.53 0.19 $5.72 5.41 0.18 $5.59 0.84 26,200 12,493
77,900 78,200 77,933.46 3.69 0.07 $3.76 3.67 0.07 $3.75 0.57 22,100 13,497
80,400 80,900 79,604.79 2.86 0.00 $2.86 2.84 0.00 $2.84 0.48 22,300 14,233
Black & Decker Corp. ($000s)‐ Balance Sheets Date Currency
12/31/2008 USD
Assets: Cash & cash equivalents Trade receivables, gross Less allowances Trade receivables, net Raw materials & work‐in‐process Finished products Total inventory, FIFO Adjustment to arrive at LIFO inventory value Total inventories, LIFO Current assets of discontinued operations Other current assets Total current assets Property, Plant, and Equipment Land & improvements Buildings Machinery & equipment Property, plant & equipment, at cost Less: accumulated depreciation Property, plant & equipment, net Goodwill, net Other assets Total assets
$277,800 963,700 39,100 924,600 263,900 783,800 1,047,700 23,500 1,024,200 0 377,000 $2,603,600
12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD
$254,700 $233,300 $967,600 $514,400 $308,200 $517,100 1,153,600 1,194,100 1,175,700 1,098,700 856,000 776,600 44,200 44,500 45,100 52,100 47,400 47,600 1,109,400 1,149,600 1,130,600 1,046,600 808,600 729,000 275,400 284,400 257,500 267,800 186,300 186,100 885,200 769,600 774,000 692,800 510,300 553,900 1,160,600 1,054,000 1,031,500 960,600 696,600 740,000 14,800 ‐9,500 ‐17,600 ‐21,200 ‐13,300 ‐8,900 1,145,800 1,063,500 1,049,100 981,800 709,900 748,900 0 0 0 70,800 160,200 0 329,600 257,000 200,100 313,600 216,100 198,900 $2,839,500 $2,703,400 $3,347,400 $2,927,200 $2,203,000 $2,193,900
41,300 43,800 41,600 44,100 51,600 50,000 50,300 299,700 308,000 311,900 309,700 299,500 268,800 278,600 1,288,900 1,435,800 1,382,800 1,348,100 1,410,600 1,234,600 1,268,800 1,629,900 1,787,600 1,736,300 1,701,900 1,761,700 1,553,400 1,597,700 1,102,000 1,191,400 1,114,100 1,033,100 1,007,100 893,200 941,800 527,900 596,200 622,200 668,800 754,600 660,200 655,900 1,223,200 1,212,900 1,195,600 1,115,700 1,184,000 771,700 729,100 828,600 762,300 726,500 684,700 665,000 587,600 551,600 $5,183,300 $5,410,900 $5,247,700 $5,816,600 $5,530,800 $4,222,500 $4,130,500
Liabilities & Shareholders' Equity: Short‐term borrowings Current maturities of long‐term debt Trade accounts payable Other current liabilities Total current liabilities Long‐term debt Postretirement benefits Deferred income taxes Other long‐term liabilities Total Liabilities Common stock Capital in excess of par value Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total stockholders' equity Total Liab & Shareholders' Equity
$83,300 100 453,100 947,400 1,483,900 1,444,700 669,400
‐
$329,700 200 504,600 1,046,300 1,880,800 1,179,100 311,300
$258,900 $566,900 $1,100 $100 $4,600 150,200 155,300 500 400 312,000 458,500 466,800 466,900 379,800 343,200 912,000 1,075,000 1,294,200 893,800 793,600 1,779,600 2,264,000 1,792,600 1,312,100 1,453,400 1,170,300 1,030,300 1,200,600 915,600 927,600 482,400 419,000 423,400 451,900 409,000 ‐ 197,600 188,500 171,100 179,800 211,300 460,500 581,000 454,200 391,200 384,400 516,600 529,600 $4,058,500 $3,952,200 $4,084,100 $4,293,000 $3,972,100 $3,376,000 $3,530,900 30,000 31,500 33,400 38,700 41,000 39,000 39,800 14,300 27,000 0 273,800 699,600 486,700 550,100 1,536,800 1,498,500 1,473,000 1,616,800 1,161,500 773,000 524,300 ‐456,300 ‐98,300 ‐342,800 ‐385,700 ‐330,800 ‐452,200 ‐514,600 1,124,800 1,458,700 1,163,600 1,523,600 1,558,700 846,500 599,600 $5,183,300 $5,410,900 $5,247,700 $5,816,600 $5,530,800 $4,222,500 $4,130,500
Black & Decker Corp. (in $000s) ‐ Cashflow Statements Date Currency Operating Activities Net earnings (loss) Non‐cash changes and credits: Depreciation & amortization Stock‐based compensation Amortization of actuarial losses & prior service costs Settlement of income tax litigation Restructuring & exit costs Loss (earnings) of discontinued operations Loss (gain) on sale of discontinued operations Other non‐cash charges & credits Changes in working capital items (net of effects of businesses acquired) Trade receivables Inventories Trade accounts payable Other current liabilities Restructuring spending Other assets & liabilities Net cash flows from operating activities Investing Activities Capital expenditures Proceeds from disposal of assets Purchase of businesses, net of cash acquired Reduction in purchase price of previously acquired business Cash inflow from hedging activities Cash outflow from hedging activities Proceeds from sale of business, net of cash transferred Proceeds from sale of discont opers, net of cash transferred Investing activities of discontinued opers Other investing activities, net Net cash flows from investing activities Financing Activities Net increase (decrease) in short‐term borrowings Proceeds from issuance of long‐term debt Payments on long‐term debt Purchase of common stock Issuance of common stock Repayment of preferred stock of subsidiary Cash dividends Net cash flows from financing activities Effect of exchange rate changes on cash Increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year
12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 USD USD USD USD USD USD USD
$293,600
$518,100
136,600 29,100 14,800 ‐ 54,700 ‐ ‐
‐ ‐ 300
132,500 67,900 ‐47,900 ‐141,800 ‐25,300 ‐89,100 $425,400
‐
‐ ‐ ‐ ‐
‐98,800 20,400 ‐25,700 ‐ ‐ 72,400 ‐29,700 ‐ ‐ ‐ ‐$61,400
$486,100
143,400 25,900 25,700 ‐ ‐153,400 ‐ 19,000 ‐ ‐ ‐ 500
154,900 29,200 ‐ ‐ ‐ ‐ ‐
$543,900
$456,000
150,600
$293,000
142,500 ‐ ‐ ‐ ‐
$229,700
133,400
127,800
‐ ‐ ‐
‐ ‐ ‐
‐2,200 ‐12,700 ‐ ‐300
31,600 ‐5,800 ‐ ‐ ‐8,100
50,700
900
100 300
99,400 ‐32,000 32,600 33,300 ‐1,000 14,400 $725,900
36,100 57,500 ‐25,100 ‐180,800 ‐1,700 65,600 $622,700
‐128,500 ‐105,500 12,300 81,500 ‐13,600 82,200 $628,000
1,300 ‐6,400 16,400 ‐66,700 94,200 ‐8,200 ‐39,900 21,000 19,300 102,800 ‐ ‐ ‐25,000 ‐40,400 ‐37,800 60,200 49,400 62,300 $619,100 $570,600 $451,600
‐116,400 13,000
‐104,600 14,700 ‐158,500 16,100 ‐ 1,400 ‐14,800
‐111,100 12,700 10,400
‐117,800 26,000 ‐804,600
2,000 ‐47,400 ‐ ‐ ‐ ‐1,000 ‐$149,800
4,700 ‐$241,000
‐ 15,900 7,200 ‐13,400 ‐7,900 33,600 ‐ 17,200 77,500 ‐400 ‐1,200 500 1,200 ‐$34,600 ‐$819,600
‐ ‐ ‐ ‐ ‐
‐102,500 15,000 ‐277,600 ‐ ‐ ‐ ‐ ‐ ‐ ‐3,300 ‐ 300 ‐$368,100
‐8,600
‐96,600 4,600
1,400 ‐$90,600
‐246,000 68,800 ‐309,300 565,600 ‐3,400 ‐4,900 ‐7,200 224,700 ‐ 296,400 ‐ 295,400 ‐ ‐ ‐200 ‐150,300 ‐155,100 ‐500 ‐600 ‐310,600 ‐33,900 ‐202,300 ‐461,400 ‐896,000 ‐525,700 ‐3,600 ‐77,500 ‐43,100 8,600 83,300 48,200 56,000 171,600 11,600 20,800 ‐ ‐ ‐ ‐136,000 ‐ ‐ ‐ ‐101,800 ‐108,600 ‐109,100 ‐88,600 ‐67,500 ‐44,300 ‐38,600 ‐$317,000 ‐$568,200 ‐$1,124,900 ‐$129,200 $391,900 ‐$425,700 ‐$102,000 ‐23,900 13,500 8,900 ‐11,000 14,800 14,300 13,600 23,100 254,700 $277,800
21,400 233,300 $254,700
‐734,300 967,600 $233,300
453,200 514,400 $967,600
206,200 308,200 $514,400
‐208,900 517,100 $308,200
272,600 244,500 $517,100
Ratio Analysis Liquidity Current ratio Quick ratio Profitability Gross profit margin Normalized EBIT margin Net Income margin Normalized EBITDA margin Activities Asset turnover Inventory days AR days AP days Growth Profit growth Revenue growth Leverage Debt/Total capitilization ratio Debt to EBITDA multiple Interest rate coverage EBIT Interest coverage FOCF to Total Debt
2008
2007
2006
2005
2004
2003
2002
1.755 1.049
1.510 0.893
1.519 0.927
1.479 1.023
1.633 1.097
1.679 1.148
1.509 1.000
32.84% 7.83% 4.82% 10.08%
33.93% 9.16% 7.89% 11.35%
34.77% 11.48% 7.54% 13.89%
35.52% 12.46% 8.34% 14.77%
36.41% 11.66% 8.45% 14.29%
35.59% 10.27% 6.54% 13.24%
34.54% 9.58% 5.23% 12.49%
117.42% 93.6 57.8 40.5
121.30% 97.7 64.2 42.5
122.86% 91.5 67.6 39.8
112.16% 89.5 65.8 40.5
97.61% 102.1 74.3 49.6
106.16% 88.1 69.7 48.0
106.38% 93.9 64.5 43.6
‐43.3% ‐7.27%
6.6% 1.80%
‐10.6% ‐1.17%
19.3% 20.85%
55.6% 20.43%
27.6% 2.02%
2008 40.38% 3.850 9.91 7.64 13.83%
2007 36.56% 2.665 9.02 7.30 30.72%
2006 39.64% 2.486 12.10 10.03 23.28%
2005 37.70% 2.423 22.36 17.91 22.13%
2004 34.83% 2.319 34.79 28.47 28.01%
2003 39.18% 2.580 16.79 13.08 30.56%
2002 42.92% 3.312 9.41 7.28 19.54%
