Business context and reporting period
Stanley Black & Decker, Inc. is a global tools, industrial products and security company with Tools & Storage, Industrial, and Security segments. This filing covers the quarter ended September 26, 2020, and the nine months then ended, compared with periods ended September 28, 2019. The request metadata says “2019 Q3,” but the filing itself is for 2020 Q3.
Financial results and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $3,850.2 | $3,633.1 | $10,127.0 | $10,728.0 |
| Earnings attributable to common shareowners | $385.5 | $230.5 | $752.4 | $756.7 |
| Diluted EPS | $2.44 | $1.53 | $4.86 | $5.03 |
| Cash provided by operating activities | $677.2 | $192.7 | $600.2 | $262.4 |
| Free cash flow | $615.1 | $96.0 | $390.7 | $(21.1) |
Q3 gross margin was 35.7%, versus 34.1%; excluding acquisition-related and other charges, it was 35.9% versus 34.3%. Nine-month gross margin was 33.7% versus 34.0%, or 34.3% versus 34.2% excluding those charges. Q3 segment profit margin improved to 18.2% from 14.7%; nine-month segment profit margin declined to 13.7% from 13.8%.
At September 26, 2020, cash and cash equivalents were $683.0, current assets $5,787.0 and current liabilities $4,221.8. Long-term debt was $4,658.5, with current maturities of $3.1; total debt carrying value including current maturities was $4,661.6, up from $3,179.5 at year-end 2019. The company reported no commercial paper borrowings and had undrawn committed credit facilities totaling $3.0 billion. Inventories were $2,874.7, up from $2,255.0 at year-end.
Material changes versus the prior comparable period
- Q3 sales rose 6%, driven by 3% volume growth, 2% acquisition contribution (primarily CAM) and 1% price. Nine-month sales fell 6%, reflecting COVID-related volume pressure and unfavorable currency, partly offset by acquisitions and pricing.
- Tools & Storage led the Q3 recovery: sales rose 11% and segment profit was $597.1 versus $410.1. Industrial sales fell 7% and profit fell to $63.8 from $90.3; Security sales declined 1%, while profit increased to $39.3 from $33.1.
- Nine-month earnings attributable to common shareowners were broadly flat, while diluted EPS declined to $4.86 from $5.03. The 2020 period included a $118.8 one-time tax benefit; preferred dividends and increased weighted-average shares also affect per-share comparisons.
- Operating cash flow and free cash flow improved substantially year over year, principally from improved working capital and Q3 demand recovery in Tools & Storage. Nine-month capital and software spending was $209.5, down from $283.5.
- The company acquired CAM in February for estimated consideration of approximately $1.46 billion, including contingent payments; CAM contributed $162.9 of nine-month sales and a $69.8 net loss attributable to common shareowners, including acquisition-related and integration costs.
Outlook, commentary, risks and unusual items
- The company withdrew full-year 2020 guidance in April and continued not to provide guidance, citing macroeconomic uncertainty. Management reported a strong Q3 demand improvement, particularly in Tools & Storage, but said the pandemic’s ultimate effects on operations, results and liquidity remained uncertain.
- A comprehensive COVID-19 cost-reduction program targeted $500 million of savings in 2020 and approximately $125 million net in 2021; about $350 million of pretax savings had been realized through Q3. Separately, restructuring actions were expected to yield approximately $170 million of annual net savings by the end of 2021. Nine-month restructuring charges were $74.6, and remaining reserves were $132.4, mostly expected to be used within 12 months.
- CAM contingent consideration was valued at $155.3, with future payments of up to $200 million dependent on FAA authorization for the Boeing 737 MAX to return to service and Boeing meeting production milestones. The acquisition accounting remained preliminary.
- Environmental remediation reserves totaled $180.2; the reasonably possible range was $114.1–$251.5. The company said it could not reasonably estimate its liability for portions of the Lower Passaic River remediation and related litigation.
- Other notable items included $165.0 of first-nine-month charges related to the cost program, a $118.8 one-time tax benefit, and the February issuance of $1.5 billion of notes and junior subordinated debentures. S&P and Fitch had revised their outlooks to negative in Q2, although credit ratings were unchanged in Q3.
- COVID-related risks include further demand volatility, supply-chain and manufacturing disruption, customer payment or credit losses, inventory or asset impairments, and the possibility that cost measures could hinder a timely response to demand recovery. Management reported that annual goodwill impairment testing found reporting-unit fair values above carrying amounts; the Infrastructure unit’s estimated cushion was 16%.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is for Q3 2020, not Q3 2019.
- Assess how sustainable the Q3 Tools & Storage demand rebound and margin improvement are, and whether Industrial and Security recover from weaker nine-month performance.
- Reconcile reported earnings with the $118.8 tax benefit, acquisition and restructuring charges, preferred dividends, and higher share count.
- Review debt growth, financing terms and covenant amendments, including the temporary reduction in the minimum interest coverage ratio to 2.5 times through fiscal 2021.
- Monitor CAM integration, Boeing 737 MAX-related contingent payments, and the differing stated cost-savings targets and time frames.
- Track environmental remediation exposure, especially the Passaic River matter, and the sensitivity of goodwill and contingent-consideration estimates to future assumptions.