Stanley Black & Decker, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 28, 2020. Although the request metadata says 2019 Q1, the supplied filing is for 2020 Q1, compared with the quarter ended March 30, 2019. Figures are in U.S. dollars.
Business context and results
The company operates in Tools & Storage, Industrial, and Security. The quarter unfolded during the COVID-19 outbreak, which management said began disrupting demand, operations, and supply chains. The company acquired Consolidated Aerospace Manufacturing (CAM) on February 24, 2020, expanding its aerospace and defense fasteners business.
- Revenue: $3.129 billion, down 6% year over year; organic sales declined 7%, primarily due to COVID-19. Acquisitions added 2%, while currency reduced sales by 1%.
- Gross profit and margin: $1.023 billion and 32.7%, versus $1.106 billion and 33.2%. Excluding acquisition-related and other charges, margin was 33.0% versus 33.4%.
- Net earnings attributable to common shareowners: $133.2 million, versus $169.9 million. Diluted EPS was $0.88, versus $1.13. Reported net earnings included approximately $50 million, or $0.32 per diluted share, of after-tax acquisition-related and other charges.
- Comprehensive income: Common-shareowner comprehensive loss was $125.6 million, versus income of $170.9 million, reflecting a substantial quarter-on-quarter-period other comprehensive loss, including currency translation and hedge effects.
- Segment performance: Tools & Storage sales fell 10% and segment margin was 11.3% (11.5% excluding specified charges); Industrial sales rose 6%, largely from acquisitions, and margin was 11.5% (13.2% excluding charges); Security sales fell 4% and margin was 4.5% (7.4% excluding charges).
- Cash flow: Operating cash flow was a $405.2 million outflow, versus a $431.3 million outflow. Free cash flow was a $488.1 million outflow, versus a $520.9 million outflow; management cited normal seasonality.
- Liquidity and debt: Cash and cash equivalents were $987.1 million at quarter-end, up from $297.7 million at year-end. Short-term borrowings were $1.674 billion and long-term debt was $4.663 billion, compared with $337.3 million and $3.176 billion, respectively, at year-end. The company issued $1.5 billion of debt in February and had approximately $1.7 billion of commercial paper outstanding. Its $2.0 billion five-year and $1.0 billion 364-day committed facilities were undrawn.
- Dividend: $0.69 per share declared, versus $0.66 in the prior-year quarter.
Material changes and unusual items
- CAM’s estimated purchase price was approximately $1.46 billion, including an initial cash payment of approximately $1.30 billion and contingent payments of up to $200 million tied to Boeing 737 MAX return-to-service and production milestones. CAM contributed $33.1 million of sales and a $20.8 million net loss after acquisition during the quarter. Purchase accounting remained preliminary.
- Investing cash outflow was $1.364 billion, primarily reflecting the $1.302 billion net cash cost of CAM and $82.9 million of capital and software expenditures. Financing cash inflow was $2.475 billion, mainly from debt issuance and short-term borrowings.
- The company recorded $3.9 million of restructuring charges in the quarter. Separately, management announced a COVID-19 cost-reduction program expected to deliver $1 billion in annualized savings, with approximately $160 million of pre-tax charges expected, primarily in Q2 2020.
- Environmental remediation reserves were $208.6 million, including $110.4 million for the Centredale site. The disclosed reasonably possible range of environmental remediation costs was $142.8 million to $280.8 million. The company said it could not reasonably estimate its liability for certain Lower Passaic River remediation and litigation matters.
Outlook, commentary, and risks
- The company withdrew its previously issued 2020 guidance on April 2, 2020. Management expected COVID-19 demand disruption to negatively affect 2020 results and identified Q2 as the expected trough for the year’s revenue decline; it said the full effect on business, results, and liquidity could not then be determined.
- Management planned to reduce capital expenditures and temporarily suspend acquisition activity and share repurchases while the outlook remained unclear, prioritizing debt reduction. The company described its liquidity position as flexible, citing cash, commercial-paper access, committed credit facilities, and a potential $750 million cash receipt upon successful settlement/remarketing of Series C equity units.
- In April 2020, after quarter-end, the company amended its committed credit agreements to permit specified COVID-related addbacks to covenant EBITDA and temporarily lower the minimum interest coverage ratio from 3.5 to 2.5 times through fiscal 2021.
- Key risks include the duration and severity of COVID-19, demand and supply-chain disruption, customer payment and credit losses, cost-reduction execution and ability to ramp up for recovery, acquisition integration and CAM’s exposure to Boeing 737 MAX milestones, environmental liabilities, and access to capital. S&P and Fitch had revised their outlooks to negative, though ratings were unchanged during Q1.
Important facts for investors to verify
- Confirm the supplied filing is the quarter ended March 28, 2020, rather than 2019 Q1, and compare reported with organic sales trends by segment.
- Track actual COVID-19 demand, margin, cash-flow, and cost-reduction outcomes against management’s stated expectations; no 2020 earnings guidance remained in place.
- Monitor debt, commercial-paper balances, covenant headroom, and the terms and completion of the Series C settlement/remarketing and related expected proceeds.
- Review final CAM purchase accounting, contingent consideration assumptions, integration costs, and exposure to Boeing 737 MAX production milestones.
- Assess the range, timing, and potential variability of environmental obligations, particularly the Passaic River matters for which the filing says exposure is not reasonably estimable.