Business context and reporting period
Stanley Black & Decker, Inc. filed this Form 10-Q for the quarter ended September 29, 2018, and the nine months then ended. The supplied request metadata says “2017 Q3,” but the filing itself is for 2018 Q3. Comparatives for 2017 were recast for newly adopted revenue and pension accounting standards.
The company reports Tools & Storage, Industrial, and Security segments. Its strategy emphasizes organic growth, margin expansion, acquisitions, and returning approximately 50% of free cash flow to shareholders over time.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3,494.8 million | $3,359.4 million | $10,347.7 million | $9,502.4 million |
| Earnings before taxes | $304.9 million | $354.4 million | $851.1 million | $1,186.1 million |
| Net earnings attributable to common shareowners | $247.8 million | $274.5 million | $712.0 million | $945.8 million |
| Diluted EPS | $1.65 | $1.80 | $4.68 | $6.22 |
| Operating cash flow | $191.5 million | $115.6 million | $40.1 million | ($46.7) million |
| Free cash flow | $82.1 million | $24.6 million | ($287.3) million | ($324.6) million |
Q3 sales increased 4%; management attributed this to 4% organic growth, including a one-point price contribution, and 2% growth from acquisitions, partly offset by a 2% foreign-currency headwind. Nine-month sales rose 9%, including 5% organic growth. Q3 gross profit was $1,238 million, or 35.4% of sales, versus 37.3% a year earlier; the nine-month gross margin was 35.7% versus 37.2%. Management cited commodity inflation, foreign exchange, and tariffs as pressures that outweighed pricing, productivity, and volume benefits.
Q3 net interest expense was $53.4 million, compared with $46.9 million; nine-month net interest expense was $154.2 million, compared with $135.9 million. The effective tax rate was 18.6% for Q3 and 16.4% year to date, versus 22.5% and 20.3%, respectively, in 2017.
At September 29, 2018, cash and cash equivalents were $368.7 million, total current assets were $5,555.4 million, and current liabilities were $6,052.0 million. Short-term borrowings were $1,408.1 million; current maturities of long-term debt were $979.6 million; and long-term debt was $2,830.6 million. Commercial paper borrowings were $1.4 billion against a $3.0 billion program. The company had undrawn committed credit facilities of $2.0 billion for five years and $1.0 billion for 364 days.
Nine-month operating cash flow improved year over year, but remained modest at $40.1 million. Working-capital changes used $1,017.1 million of cash; capital and software expenditures were $327.4 million. Cash used in investing activities was $848.2 million, including $521.9 million for acquisitions. Financing activities provided $575.8 million, including $1,445.1 million of net short-term borrowings; the company repurchased $514.5 million of shares and paid $286.5 million in common dividends.
Material changes versus the prior comparable period
- Profit and diluted EPS declined in both the quarter and year to date, despite higher sales. Nine-month comparison is notably affected by the $265.1 million 2017 gain on business sales; 2017 also included a $12.8 million pension settlement charge.
- Segment profit rates weakened year to date: Tools & Storage was 14.6% versus 16.0%; Industrial was 15.5% versus 18.2%; and Security was 9.5% versus 10.9%.
- Reported Q3 and year-to-date results included substantial acquisition-related costs, restructuring charges, and an EPA environmental settlement charge. The company reported $85 million of specified pre-tax charges in Q3 and $237 million year to date, including the EPA charge and acquisition-related items.
- Short-term borrowings increased from $5.3 million at December 30, 2017 to $1,408.1 million at September 29, 2018. Total debt, including current maturities, was approximately $5.22 billion, compared with approximately $3.81 billion at year-end.
- Cash declined from $637.5 million at year-end to $368.7 million. Receivables and inventory also rose substantially; management attributed working-capital use partly to growth and preparation for product launches, including Craftsman.
Guidance, commentary, risks, and unusual items
Management lowered 2018 diluted EPS guidance to $5.90–$6.00 from $7.00–$7.20, citing restructuring charges and other factors. Excluding acquisition-related charges, the EPA settlement, and tax charges related to U.S. tax legislation, the company reduced its EPS outlook to $8.10–$8.20 from $8.30–$8.50 and forecast free-cash-flow conversion of approximately 90%. Revised assumptions included approximately $0.25 per share of dilution from higher input costs, tariffs, foreign currency, and commodity inflation; approximately $0.15 of dilution from lower expected organic growth; and approximately $0.15 of accretion from a lower anticipated tax rate and other below-operating-margin items.
The company recorded $77.7 million of additional environmental remediation expense in Q2 related to a proposed settlement at the Centredale Superfund site, increasing the reserve for that site to $145.8 million. Total environmental reserves were $247.7 million; the reasonably possible range of remediation costs was $216.8 million to $346.4 million. The EPA settlement remained subject to public comment and court approval, and litigation with other potentially responsible parties continued. The company could not reasonably estimate its exposure for the Lower Passaic River matters beyond amounts already reserved for specified investigation and remediation work.
Other notable items include $58.1 million of year-to-date restructuring charges tied to approximately 1,563 employee reductions, with management expecting about $78 million of annual net savings by the end of 2019. The company also continued provisional accounting for the U.S. Tax Cuts and Jobs Act and said its analysis was expected to be completed in Q4 2018. Pending transactions included a proposed $690 million acquisition of IES Attachments and a proposed $234 million purchase of a 20% interest in MTD Products, both subject to customary conditions.
Risks highlighted by management include tariffs and commodity inflation, foreign exchange, weaker organic growth, integration and synergy execution, working-capital management, customer and market conditions, and the ability to sustain pricing and generate free cash flow. Management reported no material change to the risk factors in its latest annual report and stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the filing period: the document is a 2018 Q3 Form 10-Q, notwithstanding the request metadata identifying 2017 Q3.
- Track delivery against lowered 2018 EPS guidance and the approximately 90% free-cash-flow-conversion outlook, including the treatment of excluded charges.
- Assess whether margin pressure from tariffs, commodities, currency, and segment-specific trends persists, and whether restructuring savings materialize.
- Monitor working capital, operating cash flow, capital spending, short-term borrowing, and debt levels as acquisitions and share repurchases continue.
- Follow court approval and final costs for the Centredale settlement, environmental reserve developments, and the unresolved Lower Passaic River exposure.
- Check closing, funding, integration, and expected returns for the announced IES Attachments and MTD transactions, and completion of the company’s Tax Act accounting.