Stanley Black & Decker, Inc. — Form 10-Q summary
Period: Quarter ended September 30, 2017, with year-to-date comparisons against the nine months ended October 1, 2016. The request metadata says 2016 Q3, but the supplied filing is for 2017 Q3.
Business context and reporting period
The company operates in Tools & Storage, Security, and Industrial. In 2017 it acquired Newell Tools and the Craftsman brand, expanding Tools & Storage, and sold most of its mechanical security businesses. The acquisitions’ results are included from their respective closing dates; divested businesses remain in continuing operations through their sale dates.
Financial performance
| Metric | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Net sales | $3,298.6 million | $2,882.0 million | $9,333.7 million | $8,486.5 million |
| Gross profit | $1,252 million; 38.0% margin | $1,084 million; 37.6% margin | $3,530 million; 37.8% margin | $3,191 million; 37.6% margin |
| Net earnings attributable to common shareowners | $274.2 million | $248.9 million | $944.5 million | $709.8 million |
| Diluted EPS | $1.80 | $1.68 | $6.21 | $4.81 |
| Operating cash flow | $356.9 million | $246.7 million | $467.8 million | $650.0 million |
| Free cash flow | $265.9 million | $168.6 million | $189.9 million | $428.3 million |
- Q3 sales increased 14%, with 7% organic growth; acquisitions added 9%, volume 7%, and foreign currency 1%, while divestitures reduced growth by 3%. YTD sales rose 10%, including 6% organic growth.
- Reported gross margin improved year over year. Excluding acquisition-related charges, it was 38.2% in Q3 and 38.3% YTD; management cited volume leverage and productivity, partly offset by commodity inflation and currency.
- Q3 net earnings rose about 10%; YTD net earnings rose about 33%. The YTD comparison includes a $265.1 million pretax gain, primarily from the mechanical security divestiture. The after-tax gain was $234.3 million, or $1.54 per diluted share.
- Segment results: Tools & Storage sales rose 22% in Q3 and segment margin was 17.1% (17.8% excluding acquisition charges); Security sales fell 9% and margin was 11.3%; Industrial sales rose 9% and margin was 18.6%.
- Cash and equivalents were $483.3 million at September 30, 2017, down from $1,131.8 million at year-end 2016. Current assets were $5,028.7 million and current liabilities $4,002.2 million.
- Long-term debt was $3,818.0 million, with $577.0 million of short-term borrowings and $8.7 million of current maturities. Commercial paper outstanding totaled approximately $573 million; committed credit facilities of $1.3 billion and $1.75 billion were undrawn.
- Common dividends were $0.63 per share in Q3, versus $0.58 a year earlier. The company issued $750 million of equity units in May, receiving approximately $727.5 million net of underwriting costs and commissions, before offering expenses.
Material changes and unusual items
- Newell Tools was acquired for approximately $1.84 billion; the Craftsman brand purchase had an estimated total cash purchase price of $887.4 million, including future and sales-based payments. Acquisition-related charges were $30 million pretax in Q3 and $130 million YTD.
- YTD investing cash outflow was $2,143.7 million, principally reflecting $2,582.1 million of acquisitions, partly offset by $745.3 million in divestiture proceeds. Working-capital changes used $784.2 million of operating cash YTD, contributing to lower free cash flow.
- YTD restructuring charges were $42.9 million, associated with reductions of approximately 1,463 employees and facility costs. Management expected approximately $34 million of annual net savings by the end of 2018.
- Other, net included $51.0 million of YTD acquisition transaction costs and a $17 million environmental remediation charge for a legacy site. A $12.8 million pension settlement charge was also recorded YTD.
Outlook, risks, and contingencies
- Management raised and narrowed 2017 diluted EPS guidance to $8.20–$8.30, or $7.33–$7.43 excluding acquisition-related charges and the net gain on business sales. It reiterated free-cash-flow conversion of approximately 100%, measured against net income excluding the divestiture gain.
- Longer-term objectives include reaching $22 billion in revenue by 2022 while expanding margins, generating more than 20% of annual revenue from emerging markets over time, and allocating approximately half of free cash flow to shareholder returns and half to acquisitions. These are forward-looking targets, not guarantees.
- Risks highlighted include successful integration of acquisitions, organic growth and innovation execution, commodity and freight costs, pricing, working-capital needs, currency and interest-rate movements, credit-market access, customer demand, and litigation and environmental liabilities.
- The company estimated Centredale remediation costs at $68.1–$139.7 million and recorded a $68.1 million reserve; the outcome remains subject to litigation and EPA remedy decisions. Total environmental remediation reserves were $175.0 million. The company stated that it could not reasonably estimate its liability for the broader Lower Passaic River remediation beyond specified investigation and interim work.
- Management reported effective disclosure controls as of September 30, 2017, with no material change in internal control over financial reporting during the quarter. The assessment excluded Newell Tools’ internal controls while integration work continued.
Important facts for investors to verify
- How much reported growth and earnings reflect acquired businesses, divestiture gains, and acquisition-related charges versus ongoing organic performance.
- Whether working-capital investment moderates and operating cash flow and free cash flow recover in subsequent periods.
- Progress integrating Newell Tools and commercializing Craftsman, including final purchase-price allocations, contingent payments, and expected synergies.
- Whether the 2017 EPS and free-cash-flow-conversion outlook is achieved, and how restructuring savings develop.
- Potential changes to environmental reserves and exposure from Centredale, Lower Passaic, and other remediation matters.