Stanley Black & Decker, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q1, but the supplied filing is for the three months ended March 31, 2018, compared with the three months ended April 1, 2017. Figures below summarize the filing’s actual period.
Business context and reporting period
Stanley Black & Decker is a global tools, industrial fastening and infrastructure, and security products and services company. Its reportable segments are Tools & Storage, Industrial, and Security. The 2017 comparison was retrospectively recast for newly adopted revenue and pension accounting standards. The company acquired Nelson Fastener Systems on April 2, 2018, after quarter-end, for approximately $435 million, net of cash acquired and an estimated working-capital adjustment.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $3.209 billion | $2.856 billion |
| Gross profit margin | 36.3% | 37.3% |
| Earnings before income taxes | $251.8 million | $473.4 million |
| Net earnings attributable to common shareowners | $170.6 million | $393.7 million |
| Diluted EPS | $1.11 | $2.60 |
| Cash used in operating activities | $349.4 million | $314.1 million |
| Free cash flow | Outflow of $455.7 million | Outflow of $378.8 million |
Sales increased 12%, including 4% organic growth, 6% from acquisitions, and 4% from foreign currency, partly offset by a 2% decline from businesses sold. Tools & Storage sales rose 17%; Industrial rose 5%; Security rose 2%. Segment profit margins declined in all three segments: Tools & Storage 13.6% versus 15.0%, Industrial 16.0% versus 17.7%, and Security 9.3% versus 10.5%.
Cash and cash equivalents were $405.6 million at March 31, down from $637.5 million at year-end. Total current assets were $5.078 billion and current liabilities were $4.810 billion. Debt comprised $978.2 million of current maturities, $2.828 billion of long-term debt, and $399.3 million of short-term borrowings. The company reported $392.6 million outstanding under its $3.0 billion commercial-paper program and no borrowings under its committed credit facilities. Quarterly common dividends were $0.63 per share, versus $0.58.
Material changes and unusual items
- The sharp year-over-year earnings decline chiefly reflects the absence of the prior-year $269.2 million pretax gain on business sales. Q1 2017 also included a $12.5 million pension settlement charge. Q1 2018 included no business-sale gain.
- Q1 2018 included $25 million of pretax acquisition-related charges and a $23.1 million provisional tax charge related to U.S. tax legislation. The company reported their combined after-tax impact as $43 million, or $0.28 per diluted share. Q1 2017 had $58 million of pretax acquisition-related charges.
- Commodity inflation reduced margins: management cited approximately $50 million of inflation in Q1. It also reported higher interest expense, primarily from higher rates on U.S. commercial-paper borrowings.
- Operating cash outflow reflected working-capital needs, including inventory purchases to support anticipated demand and higher receivables. Free cash flow outflow also reflected higher planned capital and software spending.
- The company recorded $22.9 million of restructuring charges, including severance associated with approximately 406 employee reductions. It expects approximately $19 million of annual net savings by the end of 2019.
Guidance, management commentary, and risks
Management lowered its 2018 diluted EPS outlook to $7.40–$7.60, citing Nelson-related acquisition charges and one-time tax charges. It maintained adjusted EPS guidance of $8.30–$8.50, excluding acquisition-related and tax charges, and projected free-cash-flow conversion of approximately 100%. Management assumed approximately $180 million of 2018 commodity inflation, including steel and aluminum tariffs, and anticipated approximately $0.15 per-share benefit from price, cost, productivity actions, and Nelson, offset by approximately $0.15 per share from inflation. The company also cited a goal of approximately 5% organic growth in 2018 and its longer-term $22 billion revenue ambition by 2022.
Key uncertainties include commodity and freight inflation, tariffs, pricing and competitive pressures, foreign exchange, customer and supplier conditions, execution and integration of acquisitions, working-capital management, and the ability to deliver growth and productivity improvements. The company’s environmental reserves were $173.3 million; reasonably possible environmental remediation costs were estimated at $140.5 million to $274.3 million. The Centredale site reserve was $68.1 million, with ultimate costs dependent on ongoing litigation and remedy selection. The company said it could not reasonably estimate its potential liability for certain Lower Passaic River remediation beyond specified investigation and interim work. Management did not expect the ultimate disposition of legal matters to materially adversely affect the company as a whole, but outcomes remain uncertain.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q1 2018, not Q1 2017.
- Assess underlying earnings and margins separately from the prior-year business-sale gain, acquisition costs, restructuring, and tax-related charges.
- Monitor commodity inflation and tariffs, pricing actions, and whether management’s EPS and free-cash-flow guidance is achieved.
- Track working capital, seasonal cash outflows, commercial-paper balances, and liquidity following the Nelson acquisition.
- Follow developments in the U.S. tax-law provisional accounting and major environmental matters, particularly Centredale and the Lower Passaic River.