Stanley Black & Decker, Inc. — Form 10-Q summary
Period clarification: The supplied filing covers the quarter ended June 30, 2018 (2018 Q2), not 2017 Q2 as stated in the request. It compares Q2 and first-half 2018 with the corresponding 2017 periods.
Business context and reporting period
Stanley Black & Decker is a global tools, engineered fastening, infrastructure, and security company, reporting Tools & Storage, Industrial, and Security segments. The company continued its acquisition-led growth strategy, acquiring Nelson Fastener Systems in April 2018. Its longer-term objective is $22 billion in revenue by 2022.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $3.644 billion | $3.287 billion | $6.853 billion | $6.143 billion |
| Net earnings attributable to common shareowners | $293.6 million | $277.6 million | $464.2 million | $671.3 million |
| Diluted EPS | $1.93 | $1.82 | $3.03 | $4.42 |
| Gross margin | 35.3% | 36.9% | 35.8% | 37.1% |
| Operating cash flow | $198.0 million | $151.8 million | $(151.4) million | $(162.3) million |
| Free cash flow | $86.3 million | $29.6 million | $(369.4) million | $(349.2) million |
Q2 sales rose 11%, including 7% organic growth; acquisitions and currency contributed 3% and 1%. First-half sales rose 12%, including 6% organic growth. Q2 common-shareowner earnings increased year over year, while first-half earnings and EPS declined, principally reflecting the absence of the $268.3 million pretax gain on 2017 business sales.
Q2 gross margin fell 1.6 percentage points. Management attributed the pressure to approximately $50 million of commodity inflation and $20 million of foreign-currency pressure, which more than offset volume leverage, productivity, and pricing. First-half gross margin was also pressured by approximately $100 million of commodity inflation and currency.
At June 30, 2018, cash and cash equivalents were $385.8 million; short-term borrowings were $1.102 billion; current maturities of long-term debt were $978.9 million; and long-term debt was $2.831 billion. Current assets were $5.323 billion and current liabilities $5.639 billion. The company had $1.1 billion outstanding under its $3.0 billion commercial-paper program and had not drawn on its committed credit facilities.
First-half operating cash flow remained negative, mainly because of working-capital outflows associated with growth, higher receivables and inventory, and product launches. Capital and software expenditures were $218.0 million. Q2 cash used in investing was $587.5 million, including $505.6 million for acquisitions. First-half cash provided by financing was $673.4 million, principally from net short-term borrowings.
Material changes versus the prior comparable period
- Tools & Storage Q2 sales increased 11%; segment margin declined to 15.5% from 16.1%. Industrial sales increased 14%, largely from acquisitions and currency, while segment margin fell to 14.9% from 18.8%. Security sales increased 6%, but segment margin declined to 9.6% from 10.9%.
- The $77.7 million Centredale environmental charge contributed to Q2 Other, net of $119.3 million, versus $55.3 million a year earlier. First-half Other, net was $177.3 million versus $155.8 million.
- Short-term borrowings increased from $5.3 million at year-end 2017 to $1.102 billion at June 30, 2018. Cash declined from $637.5 million to $385.8 million.
- Q2 2018 total comprehensive income attributable to common shareowners was $14.5 million, well below net earnings of $293.6 million, reflecting other comprehensive losses, including currency translation effects.
Outlook, commentary, and risks
Management revised 2018 diluted EPS guidance to $7.00–$7.20, citing the Centredale settlement. It reiterated adjusted EPS guidance of $8.30–$8.50, excluding acquisition-related charges, the environmental settlement, and tax charges related to U.S. tax legislation, and estimated free-cash-flow conversion of approximately 100%.
Management cited expected 2018 headwinds of approximately $205 million from commodity inflation, $80 million from foreign currency, and $35 million from tariffs, including Section 301 and steel and aluminum tariffs. The outlook also depends on pricing and productivity actions, organic growth, successful acquisitions and integration, and working-capital management. Restructuring actions affecting approximately 1,000 employees in the first half are expected to generate approximately $40 million of annual net savings by the end of 2019.
The company recorded a $77.7 million charge following a settlement with the U.S. government concerning the Centredale Superfund site; the lodged Consent Decree remained subject to public comment and court approval. The Centredale reserve rose to $145.8 million. Total environmental remediation reserves were $250.7 million, with a reasonably possible range of $218.1 million to $351.6 million. Other matters include continuing litigation involving other potentially responsible parties at Centredale and uncertain potential liability for the Lower Passaic River cleanup.
The company had not completed its accounting for the Tax Cuts and Jobs Act; further adjustments to provisional tax estimates could be material. Management reported no material changes to the risk factors from its 2017 Form 10-K and stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for 2018 Q2, not 2017 Q2.
- Track Centredale settlement approval, reserve adequacy, and environmental exposure at other sites, including the Lower Passaic River.
- Assess whether pricing and productivity can offset commodity, tariff, and foreign-exchange headwinds, and whether segment margins recover.
- Monitor working capital, first-half negative free cash flow, commercial-paper borrowings, and progress toward the 2018 cash-conversion outlook.
- Review the final Tax Cuts and Jobs Act accounting and the impact of any revisions to provisional estimates.
- Evaluate whether acquisitions, including Nelson, deliver expected integration benefits and whether restructuring achieves the projected savings.