Stanley Black & Decker, Inc. — Form 10-Q Summary
Period: Quarter ended April 1, 2017, compared with the quarter ended April 2, 2016. The request metadata says “2016 Q1,” but the filing is for 2017 Q1.
Business context and reporting period
The company sells tools and storage products, security systems and services, and industrial products. During the quarter it acquired Newell Brands’ Tools business and the Craftsman brand, and sold most of its mechanical security businesses. The acquisitions and divestitures affect year-over-year comparability; the disposed businesses remained in continuing operations through their sale dates.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $2,805.6 million | $2,672.1 million |
| Gross profit / margin | $1,065 million / 38.0% | $977.6 million / 36.6% |
| Earnings before income taxes | $472.6 million | $254.1 million |
| Net earnings attributable to common shareowners | $393.1 million | $189.4 million |
| Diluted EPS | $2.59 | $1.28 |
| Cash used in operating activities | $145.6 million | $93.1 million |
| Free cash flow | Outflow of $210.3 million | Outflow of $158.0 million |
Sales grew 5%, with 5% organic growth; acquisitions added 3%, while divestitures and foreign currency reduced sales by 2% and 1%, respectively. Gross margin improved, which management attributed to operating leverage, productivity and cost actions, partly offset by currency and commodity pressures. The 2017 effective tax rate was 16.8%, versus 25.8%; excluding the tax effects of divestitures and acquisition-related charges, the company reported a 25.0% rate.
Reported earnings included a $269.2 million pretax gain on business sales ($238.1 million after tax) and $58 million of pretax acquisition-related charges. A $12.5 million pension settlement charge and a $17 million environmental remediation charge also affected results.
At April 1, 2017, cash was $378.0 million, short-term borrowings were $1,159.3 million, and long-term debt including current maturities was $3,823.7 million. The company had $1.2 billion outstanding under its expanded $3.0 billion commercial paper program. Its $1.3 billion 364-day credit facility and $1.75 billion five-year facility were undrawn.
Material changes versus the prior comparable period
- Tools & Storage sales increased 9% to $1,854.5 million; segment profit rose to $287.3 million, or 15.5% of sales, from 15.3%.
- Security sales declined 5% to $478.5 million, reflecting the mechanical-security divestiture; segment margin decreased to 10.6% from 11.9%.
- Industrial sales grew 3% to $472.6 million; segment margin increased to 18.3% from 16.5%.
- Operating cash outflow worsened by $52.5 million, with working-capital outflows of $410.2 million versus $268.0 million, mainly from higher inventory purchases and receivables.
- Acquisitions drove a substantial balance-sheet expansion: goodwill increased to $8.36 billion from $6.69 billion. The company also reported $1.72 billion of cash used in investing activities, largely reflecting acquisitions, partly offset by divestiture proceeds.
Outlook, management commentary and risks
Management raised 2017 diluted EPS guidance to $7.95–$8.15, or $7.08–$7.28 excluding acquisition-related charges and gains on business sales, and reiterated expected free-cash-flow conversion of approximately 100%. Its longer-term objectives include reaching $22 billion in revenue by 2022 while expanding margins, and generating more than 20% of annual revenue from emerging markets over time. Management’s capital-allocation objective is to return approximately 50% of free cash flow to shareholders and deploy the remainder toward acquisitions.
The company expects approximately $12 million of annual savings from current restructuring actions by the end of 2018. Guidance depends on, among other factors, stronger Industrial results, successful acquisition integration and Craftsman commercialization, cost and productivity actions, and managing commodity inflation and foreign-exchange headwinds estimated at $100–$105 million for 2017. The filing also cites economic, competitive, currency, supply-chain, litigation and customer-credit risks.
Environmental matters remain significant. The company recorded a $68.1 million reserve for the Centredale site, with estimated costs ranging from $68.1 million to $139.7 million; the litigation was ongoing. Total environmental remediation reserves were $176.1 million. The company said it could not reasonably estimate its potential liability for the Lower Passaic River cleanup, apart from specified investigation and remediation work. Acquisition purchase-price allocations for Newell Tools and Craftsman were preliminary and subject to measurement-period adjustments.
Important facts for investors to verify
- Confirm the correct reporting period: this filing covers Q1 2017, notwithstanding the request metadata’s Q1 2016 label.
- Assess earnings excluding the divestiture gain, acquisition costs, pension settlement and environmental charge; reported EPS includes substantial unusual items.
- Track working-capital requirements, free cash flow, commercial-paper borrowings and the company’s ability to meet its full-year cash-conversion outlook.
- Monitor acquisition integration, final purchase-price allocations, Craftsman sales and royalty assumptions, and realization of expected synergies.
- Follow environmental litigation and remediation estimates, particularly Centredale and Lower Passaic, where final costs or allocations remain uncertain.