Stanley Black & Decker, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended March 30, 2019, compared with the three months ended March 31, 2018. Although the request metadata says 2018 Q1, the supplied filing is for 2019 Q1. Amounts are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $3,333.6 | $3,209.3 |
| Gross profit / margin | $1,106.0 / 33.2% | $1,165.7 / 36.3% |
| Earnings before taxes | $194.8 | $251.8 |
| Net earnings attributable to common shareowners | $169.9 | $170.6 |
| Diluted EPS | $1.13 | $1.11 |
| Operating cash flow | $(431.3) | $(349.4) |
| Free cash flow | $(520.9) | $(455.7) |
- Sales rose 4%; organic growth was 5%, acquisition contributions were 3%, and foreign currency reduced sales by 4%.
- Gross margin fell 3.1 percentage points. Management cited commodity inflation, currency and tariffs as more than offsetting volume leverage, productivity and pricing.
- Interest expense was $74.4, versus $63.2; net interest expense rose to $57.8 from $47.4, primarily due to higher rates and higher average commercial-paper borrowings.
- Income tax expense was $24.7, with a 12.7% effective tax rate, compared with $81.7 and 32.4%. The 2018 rate included a $23.1 tax charge related to the Tax Cuts and Jobs Act.
Segments and notable changes
- Tools & Storage: Sales increased 3% to $2,292.3, but segment profit declined to $265.8 from $301.4; margin fell to 11.6% from 13.6%. Organic sales growth was strong, particularly in North America, but currency, commodities and tariffs pressured profit.
- Industrial: Sales increased 10% to $555.0, mainly from acquisitions; segment profit declined to $71.0 from $80.5 and margin fell to 12.8% from 16.0%. Lower automotive-system volumes and commodity inflation offset productivity gains.
- Security: Sales decreased 1% to $486.3; segment profit declined to $39.5 from $45.5, with margin down to 8.1% from 9.3%. Foreign currency more than offset price and bolt-on acquisition contributions.
Cash, debt and liquidity
- Cash and cash equivalents were $281.8 at quarter-end, versus $288.7 at December 29, 2018. Operating cash outflow increased year over year, reflecting working-capital needs, including inventory purchases and higher receivables.
- Investing cash outflow was $1,007.3, including $676.2 for acquisitions and $245.4 for investments, mainly the MTD investment. Financing cash inflow was $1,408.2, principally from short-term borrowing.
- Short-term borrowings were $1,780.7, compared with $376.1 at year-end; long-term debt was $3,909.4, compared with $3,819.8. The company had $1,776.5 of commercial paper outstanding and undrawn committed credit facilities of $2.0 billion and $1.0 billion.
- In March, the company issued $500.0 of 3.40% notes due 2026. In February, it redeemed its 2053 junior subordinated debentures for $405.7 and recorded a $3.2 pretax loss.
Acquisitions, unusual items and outlook
- The company acquired IES Attachments for $653.0 net of cash acquired and an estimated working-capital adjustment, and acquired a 20% interest in MTD for $234.0. It may exercise an option to acquire the remaining MTD interest beginning in 2021. Acquisition accounting for IES Attachments remained preliminary.
- First-quarter acquisition-related and other charges were approximately $53 pretax, or $0.29 per diluted share after tax. They included integration and transaction costs, restructuring, Security transformation costs and inventory step-up charges. The 2018 quarter included approximately $25 of acquisition-related charges and the $23.1 tax charge noted above.
- Management raised 2019 diluted EPS guidance to $7.50–$7.70 and adjusted diluted EPS guidance, excluding charges, to $8.50–$8.70. It reiterated expected free-cash-flow conversion of approximately 85%–90% of net income. Management said first-quarter organic growth and cost control more than offset an additional $20 foreign-currency headwind.
- Restructuring charges were $8.7; approximately 259 employees were reduced. The company expects about $11 of annual net savings by the end of 2020, primarily in Security.
- Environmental remediation reserves were $246.2. The filing describes material uncertainties around environmental matters, including the Lower Passaic River; the company stated it could not reasonably estimate its liability for certain related litigation and remediation work.
- Other disclosed risks include tariffs and trade controls, currency and commodity movements, macroeconomic conditions, acquisition integration, supply-chain disruption, litigation and environmental liabilities. Management reported no material change in risk factors from its latest Form 10-K.
Investor facts to verify
- Whether organic growth, pricing and productivity can offset persistent currency, tariff and commodity pressures on margins.
- Whether working-capital needs and acquisition spending allow the company to meet its annual free-cash-flow conversion outlook.
- Commercial-paper levels, refinancing needs and liquidity headroom as acquisition-related borrowing remains elevated.
- Final purchase accounting, integration performance and expected returns for IES Attachments and the MTD investment, including the future MTD purchase option.
- Developments in environmental matters, especially the Lower Passaic River allocation process and the Centredale settlement and remediation obligations.
- Progress against 2019 EPS guidance and the stated restructuring savings target.