Black & Decker 2012 Annual Report Download - page 39

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lagging results in the onshore pipeline business. Organic net sales in the Security segment declined 4% compared to 2011,
which was attributable to a difficult European market impacting the CSS business and weakness within the MAS business in
the U.S. tied to slow commercial construction as well as soft National Account spending.
Net sales were $9.436 billion in 2011, as compared to $7.497 billion in 2010, a 26% increase. Organic sales volume provided a
6% increase in net sales, the impact of a full year of results from the Black & Decker merger provided an 10% increase to sales,
the impact of other acquisitions (primarily Niscayah and CRC-Evans), provided an additional 8% increase in net sales while the
favorable effects of foreign currency translations in all regions, but most significantly in Europe and Asia, contributed an
additional 2% to net sales. The primary drivers of the organic volume growth continue to be new product introductions
resulting in market share gains and continued high growth rates in emerging markets, inclusive of continued revenue synergy
realizations from the Black & Decker merger. Organic sales volume increased 5% in CDIY, 10% in Industrial and 2% in
Security. CDIY's organic volume growth was primarily driven by strength in professional power tools via new product
introductions and increased promotional activity on older generation products. This growth was offset by lower sales volume in
hand tools and fastening largely due to soft end markets in the retail channels and lower sales of outdoor products in the first
half of the year due to inclement weather in North America. Organic sales volume growth in the Industrial segment was strong
in each major business component and in most geographic regions due primarily to the success of new products and increased
market share gains. Within the Security segment, limited overall organic sales growth reflects 6% organic sales growth from
healthcare solutions due to strong sales in the patient security and radio frequency identification (“RFID”)-enabled systems,
offset by lower CSS installation revenues. On a pro forma basis, net sales increased 14%, with acquisitions accounting for 7%
of the increase, organic growth providing 5% of the increase and 2% reflecting the benefit of foreign currency translation.
Gross Profit: The Company reported gross profit of $3.705 billion, or 36.4% of net sales, in 2012 compared to $3.468 billion,
or 36.8% of net sales, in 2011. Merger and acquisition-related charges, which reduced gross profit, were approximately $30
million in 2012 compared to $21 million in 2011. Excluding these charges, gross profit was 36.6% of net sales in 2012 and
37.0% of net sales in 2011. The decrease in the profit rate year over year was primarily due to negative mix driven by higher
revenues in CDIY, which has lower profit margins than Security and Industrial. These factors outweighed the positive impacts
from productivity projects and margin improvement initiatives.
The Company reported gross profit of $3.468 billion, or 36.8% of net sales, in 2011 compared to $2.690 billion, or 35.9% of
net sales, in 2010. The inclusion of a full year of Black & Decker as well as acquisition activity (specifically Niscayah and
CRC-Evans) were the main drivers behind the overall increase in gross profit. Further, gross profit was negatively impacted by
$21 million of merger and acquisition-related charges in 2011 related largely to facility closures and $146 million in 2010,
pertaining to the inventory step-up amortization from the initial turn of Black & Decker and CRC-Evan's inventories and
facility closure costs. The gross profit rates excluding these charges were 37.0% in 2011 as compared to 37.8% of net sales in
2010. The lower gross profit margin rate in 2011, excluding merger and acquisition-related charges, is primarily due to the
effect of commodity inflation, and CDIY promotional discounting on older generation products, all of which combined,
outweighed the positive impacts of organic volume-related increases, price increases in response to commodity inflation, cost
synergies and productivity initiatives.
SG&A Expense: Selling, general and administrative expenses, inclusive of the provision for doubtful accounts (“SG&A”), were
$2.520 billion, or 24.7% of net sales, in 2012 as compared $2.381 billion, or 25.2% of net sales, in 2011. Within SG&A,
merger and acquisition-related compensation costs and integration-related expenses totaled $138.4 million and $98.3 million in
2012 and 2011, respectively. Excluding these charges, SG&A was 23.4% of net sales in 2012 compared to 24.2% of net sales
in 2011. The favorable SG&A rate is mainly driven by sales volume leverage, cost synergies and continued cost containment
efforts.
SG&A expenses were $2.381 billion, or 25.2% of net sales, in 2011 as compared with $2.004 billion, or 26.6% of net sales in
2010. Merger and acquisition-related charges totaled $98.3 million in 2011 and $82.2 million in 2010 for certain executive and
merger-related compensation costs and integration-related consulting fees. Excluding merger and acquisition-related charges,
SG&A was 24.2% of net sales in 2011 compared with 25.6% of net sales in the prior year. The favorable SG&A rate primarily
reflects sales volume leverage and cost synergies partially offset by the impact of acquisitions. On a pro forma basis, including
merger and acquisition-related charges, SG&A expense was $2.136 billion, or 26.5% of net sales, in 2010.
Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs) are classified within SG&A. This
classification may differ from other companies who may report such expenses within cost of sales. Due to diversity in practice,
to the extent the classification of these distribution costs differs from other companies, the Company’s gross margins may not
be comparable. Such distribution costs classified in SG&A amounted to $205 million in 2012 and 2011 and $188 million in
2010. The increase from 2010 to 2011 is primarily attributable to the inclusion of the full year of Black & Decker results, as
well as higher sales volume.