Stanley Black & Decker, Inc. — Form 10-K Summary
Period clarification: The filing is for the fiscal year ended December 29, 2018 (52 weeks), not 2017 Q4 as indicated in the request metadata. It also reports fourth-quarter results for 2018. The financial statements received an unqualified audit opinion.
Business context and reporting period
Stanley Black & Decker is a global tools, engineered fastening, infrastructure and security company. Fiscal 2018 revenue was $13.982 billion; Tools & Storage generated 70% of revenue, Industrial 16%, and Security 14%. Approximately 55% of revenue came from the U.S. The company continued its acquisition and organic-growth strategy, with a long-term target of $22 billion revenue by 2022.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $13.982 billion | $12.967 billion |
| Organic sales growth | 5% | 7% |
| Gross margin | 34.7% | 36.9% |
| Net earnings attributable to common shareholders | $605 million | $1.227 billion |
| Diluted EPS | $3.99 | $8.05 |
| Operating cash flow | $1.261 billion | $669 million, as recast |
| Free cash flow | $769 million | $226 million, as recast |
Revenue rose 8%, including 5% organic growth and acquisition contributions. Reported earnings fell sharply, chiefly reflecting $450 million of pre-tax acquisition-related and other charges and $181 million of net tax charges, including effects of U.S. tax reform. The disclosed combined impact reduced net earnings by $631 million, or $4.16 per diluted share. Excluding acquisition-related and other charges, gross margin was 35.2%, versus 37.2% in 2017; management cited commodity inflation, foreign exchange and tariffs as offsets to volume, productivity and pricing benefits.
Cash-flow comparisons are affected by retrospective adoption of cash-flow accounting standards. The filing states that 2017 free cash flow would have been $976 million excluding those presentation effects. Capital and software spending was $492 million in 2018. Cash and cash equivalents were $289 million at year-end, against $376 million of short-term borrowings and $3.822 billion of long-term debt, including current maturities. Total debt to total capital was 34.9%, versus 31.5% in 2017. Committed credit facilities were undrawn; the company reported an 8.5x interest-coverage covenant ratio against a 3.5x minimum.
| Segment | 2018 sales | Sales change | Segment margin |
|---|---|---|---|
| Tools & Storage | $9.814 billion | +9% | 14.2%, down from 15.9% |
| Industrial | $2.188 billion | +11% | 14.6%, down from 17.5% |
| Security | $1.981 billion | +2% | 8.5%, down from 10.9% |
Tools & Storage’s organic growth was 7%; Industrial’s reported increase was primarily acquisition-driven; Security faced lower volumes and transformation costs. The annual dividend per share increased to $2.58 from $2.42. The company repurchased $527 million of common stock.
Material changes versus the prior comparable period
- Sales grew, but consolidated gross margin and segment margins declined amid tariffs, commodity inflation and currency pressure.
- Net earnings attributable to common shareholders fell from $1.227 billion to $605 million, with major 2018 charges and tax items affecting comparability. In contrast, 2017 included a $264 million pre-tax gain on business sales, mainly the mechanical-security divestiture.
- Year-end cash declined from $638 million to $289 million; short-term borrowings rose from $5 million to $376 million. Long-term debt, including current maturities, was broadly similar year over year.
- Inventory increased to $2.374 billion from $2.018 billion. Working-capital turns were 8.8, slightly lower than 2017, reflecting Craftsman rollout inventory and acquisition integration.
Outlook, management commentary, risks and unusual items
For 2019, management forecast diluted EPS of $7.45–$7.65, or $8.45–$8.65 excluding acquisition-related and other charges, and free-cash-flow conversion of 85%–90%. The adjusted EPS outlook assumes organic-growth and cost-reduction benefits, partly offset by $0.90–$1.00 per share of dilution from tariffs, commodities and currency, and approximately $0.15 from an expected tax rate of 17.5%. Long-term objectives include 4%–6% organic revenue growth, 10%–12% total revenue growth, and free cash flow at least equal to net income.
- A fourth-quarter 2018 cost-reduction program included $160 million of restructuring charges and reductions affecting 4,184 employees; management expected approximately $230 million of annual net savings by the end of 2019.
- A third-party freight-payment provider filed for bankruptcy in January 2019. The company recorded a $50.8 million fourth-quarter 2018 charge for amounts still owed to freight carriers; potential recoveries were uncertain.
- Environmental remediation reserves were $246.6 million at year-end, with a reasonably possible cost range of $214.0 million–$344.3 million. A $77.7 million charge related to a settlement concerning the Centredale site was recorded in 2018; the settlement remained subject to court approval.
- Key risks include customer concentration and bargaining power, tariffs and trade retaliation, commodity and freight costs, foreign exchange, acquisition integration, cybersecurity and IT-system implementation, environmental claims, and pension funding. Lowe’s represented about 12% of consolidated sales.
- The company acquired Nelson Fastener Systems in 2018. Management excluded Nelson from its year-end internal-control assessment pending integration; Nelson represented 3% of assets and 1% of 2018 sales. The auditor also excluded Nelson’s controls from its internal-control audit.
- After year-end, the company acquired a 20% interest in MTD for $234 million and agreed to acquire IES Attachments, subject to approvals. The 10-K also reports the subsequent redemption of $405.7 million of junior subordinated debentures in February 2019.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, including the $450 million pre-tax charges, $181 million tax charge, and 2017 divestiture gain.
- Assess whether 2019 EPS and cash-conversion guidance remains achievable given the assumed tariff, commodity, currency and pricing impacts.
- Review cash generation and working-capital needs, especially rising inventory, acquisition spending and the comparability effects in prior-year cash-flow figures.
- Monitor debt, refinancing and capital allocation, including the 2020 equity-unit settlement obligations and planned acquisitions.
- Track environmental reserve adequacy, Centredale settlement approval, Lower Passaic River exposure and any recovery related to the freight-provider bankruptcy.
- Confirm Nelson control integration and whether the restructuring program delivers its targeted savings without impairing operations or growth.