Stanley Black & Decker, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 29, 2019 (2019 Q2), not 2018 Q2. Figures below compare 2019 with the corresponding 2018 periods unless noted. Dollar amounts are in millions except per-share data.
Business context and reporting period
Stanley Black & Decker is a diversified manufacturer and service provider operating through Tools & Storage, Industrial, and Security. The filing covers the three and six months ended June 29, 2019. During the first half, the company acquired IES Attachments and a 20% interest in MTD, and sold its Sargent & Greenleaf mechanical locks business.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $3,761.3 | $3,643.6 | $7,094.9 | $6,852.9 |
| Net earnings attributable to common shareowners | $356.3 | $293.6 | $526.2 | $464.2 |
| Diluted EPS | $2.37 | $1.93 | $3.50 | $3.03 |
| Operating cash flow | $501.0 | $198.0 | $69.7 | $(151.4) |
| Free cash flow | $403.8 | $86.3 | $(117.1) | $(369.4) |
- Q2 sales increased 3%; organic growth was 3% (price +2%, volume +1%). First-half sales increased 4%, with 4% organic growth. Currency reduced sales by 3% in both periods; acquisitions also contributed to growth.
- Gross margin was 34.6% in Q2 versus 35.3%; first-half gross margin was 33.9% versus 35.8%. Management cited commodity inflation, foreign exchange and tariffs as pressures, partly offset by pricing, productivity and volume leverage.
- Q2 segment profit: Tools & Storage $440.0 (16.8% of sales), Industrial $95.1 (14.6%), and Security $38.0 (7.8%). Security sales and reported profit declined year over year; Industrial sales growth was primarily acquisition-driven.
- At June 29, cash and cash equivalents were $310.7; short-term borrowings were $1,461.6 and long-term debt was $3,909.1. The company also had $3.0 billion of commercial paper capacity and undrawn committed credit facilities of $2.0 billion and $1.0 billion. These facilities backstop commercial paper.
- First-half operating cash flow improved from the prior-year outflow, mainly due to higher earnings and improved working capital, although inventory increased. Capital and software expenditures were $186.8 in the first half.
- Quarterly dividends were $0.66 per share, up from $0.63. The company reported $491 million of lease liabilities and right-of-use assets following adoption of the new lease standard.
Material changes versus the prior comparable period
- Q2 and first-half earnings and diluted EPS rose, while gross margins declined. Lower SG&A as a percentage of sales helped earnings; net interest expense increased to $60.3 in Q2 from $53.4 and to $118.1 in the first half from $100.8.
- Q2 operating cash flow was $501.0 versus $198.0; first-half operating cash flow was $69.7 versus a $151.4 outflow. Despite improvement, first-half free cash flow remained negative at $117.1.
- Industrial sales grew 13% in Q2 and 12% in the first half, substantially reflecting IES Attachments and other acquisition contributions. Security sales declined 3% in Q2 and 2% in the first half.
- Reported results include acquisition-related and other items. Management cited net after-tax charges of $44 million, or $0.29 per diluted share, in Q2 2019 and $88 million, or $0.59 per diluted share, in the first half. The prior-year periods included an $77.7 million EPA settlement charge in Q2 2018 and a $23 million tax charge in Q1 2018.
Outlook, commentary, risks and unusual items
- Management reiterated 2019 diluted EPS guidance of $7.50–$7.70, or $8.50–$8.70 excluding charges, and free-cash-flow conversion of approximately 85%–90% of net income.
- The outlook incorporated an incremental $50 million of external headwinds, primarily from higher China List 3 tariffs, partly offset by lower expected commodity inflation. Management also cited a modestly weaker organic-volume outlook, particularly for industrial and emerging markets, with offsets from pricing, margin initiatives and Q2 operational outperformance.
- Restructuring charges were $17.2 in the first half; approximately 543 employees were reduced. The company expected about $21 million of annual net savings by the end of 2020.
- Environmental remediation reserves totaled $236.8, with a reasonably possible cost range of $204.1–$336.0. The company had reserved $136.0 for the Centredale site. Potential liability relating to further Lower Passaic River remediation could not be reasonably estimated.
- Other stated risks include global macroeconomic conditions, tariffs and trade controls, currency and commodity movements, weaker industrial or emerging-market demand, acquisition integration, litigation and environmental obligations. Management reported no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- Confirm the requested period: this filing reports 2019 Q2, not 2018 Q2.
- Review the assumptions behind 2019 EPS and free-cash-flow-conversion guidance, including tariff, volume and pricing expectations.
- Track inventory and working-capital trends, given the negative first-half free cash flow and reported inventory build.
- Assess debt and commercial-paper needs alongside acquisition spending, interest costs, and the timing of the $750 million equity-unit purchase contracts in 2020.
- Monitor Security segment performance, acquisition integration, and the uncertain scale and timing of environmental liabilities.