Investors this week lauded diversified industrial tool manufacturer Stanley Black & Decker (SWK +0.83%) for eking out a revenue advance and chalking up double-digit earnings growth in a tough second quarter of 2019. In earnings released on Tuesday, the maker of both household and commercial tools exhibited resilience in the face of unfavorable currency effects, cost inflation, and tariff duties. Stanley also upheld its full-year bottom-line guidance.
As we discuss the quarter, note that all comparative numbers are presented against those of the prior-year quarter.
Stanley Black & Decker: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $3.76 billion | $3.64 billion | 3.3% |
| Net income (loss) | $356.3 million | $293.6 million | 21.4% |
| Diluted earnings per share | $2.37 | $1.93 | 22.8% |
Data source: Stanley Black & Decker.
What happened this quarter?
- Stanley's revenue advance consisted of 2% pricing power, 1% higher volume, and 3% contributed from acquisitions, offset by a 3% negative impact from foreign currency translation.
- Sales in the company's largest segment, tools and storage, improved 2% to $2.6 billion. Segment organic revenue growth of 5% was led by North America and Europe, which offset a slight revenue decline in emerging markets. Management cited growth of the Craftsman brand in North America and product innovation in Europe as key drivers of the segment's growth over the past three months.
- In the industrial segment, the prior-year acquisition of IES Attachments contributed 18% to revenue growth, which was offset by 2% of currency impacts and a 3% decline in volume, for a total of 13% expansion, to $650 million. Engineered fastening organic revenue slipped by 4% because of weak automotive and industrial markets. This was mitigated by a 2% increase in infrastructure organic revenue, which management attributed to robust onshore pipeline project and inspection activity.
- In Stanley's smallest segment, security, revenue dipped by 3% to $485 million. Pricing power of 1% and a contribution of 2% from acquisitions were undermined by a 2% volume decrease, foreign currency effects of 3%, and an impact from business divestitures of 1%. However, management observed that the segment's profitability is improving, and that recent investments in electronic security would begin to affect organic growth in this division in the second half of 2019.
- Stanley Black & Decker incurred $32.9 million in one-time charges this quarter, related to M&A (mergers and acquisitions) transaction and integration costs, investments in the transformation of the security business, and margin improvements. After adjusting for these charges, operating margin increased by 60 basis points to 14.8%. Management singled out this margin improvement, noting that its pricing actions and cost control efforts offset a $110 million headwind from foreign currency effects, commodity inflation, and tariffs during the quarter.
Image source: Getty Images.
Management's outlook
Stanley Black & Decker reiterated its full-year 2019 earnings per share (EPS) outlook on Tuesday, affirming its anticipated range of $7.50-$7.70. In Stanley's earnings press release, CEO James Loree provided some detail on the various factors -- both positive and negative -- that inform the earnings target:
Stanley Black & Decker's outlook for 2019 includes above-market organic growth of 4%, adjusted earnings-per-share growth of 4% -7% and strong free cash flow generation against an anticipated $390 million in external headwinds. The organization is focused on delivering earnings growth and margin expansion in 2019 and beyond by successfully leveraging our continued strong organic growth, pricing actions, $250 million cost reduction program and margin resiliency initiative to successfully navigate a dynamic operating environment. We believe the Company is well-positioned for sustained above-market organic growth with operating leverage, strong free cash flow conversion and top-quartile shareholder returns over the long-term.
While Stanley's revenue advance this quarter was modest, and the organization wasn't able to lift full-year guidance, shareholders nonetheless gave management points for a positive quarter within a rather weak environment for industrial manufacturers: Shares have advanced a total of 6% in the two trading sessions following the earnings release.
