STANLEY BLACK & DECKER, INC. quarterly report, Q3 FY2019

Business context and reporting period

This filing is Stanley Black & Decker, Inc.’s Form 10-Q for the quarter ended September 28, 2019, covering the third quarter and first nine months of 2019. This differs from the request metadata, which says 2018 Q3; the filing’s comparisons are against the corresponding 2018 periods. The company operates Tools & Storage, Industrial, and Security segments.

Financial performance and position

Metric	Q3 2019	Q3 2018	First nine months 2019	First nine months 2018
Net sales	$3.633 billion	$3.495 billion	$10.728 billion	$10.348 billion
Net earnings attributable to common shareowners	$230.5 million	$247.8 million	$756.7 million	$712.0 million
Diluted EPS	$1.53	$1.65	$5.03	$4.68
Operating cash flow	$192.7 million	$191.5 million	$262.4 million	$40.1 million
Free cash flow	$96.0 million	$82.1 million	$(21.1) million	$(287.3) million

Q3 revenue increased 4%, with organic growth of 4% (price +1%, volume +3%); acquisitions added 3%, while foreign currency and divestitures reduced sales by 2% and 1%, respectively. Nine-month revenue also rose 4%.
Q3 gross margin was 34.1%, down from 35.4%; excluding acquisition-related and other charges, it was 34.3% versus 35.5%. Management cited tariffs and foreign exchange as outweighing volume leverage, productivity, and pricing. Nine-month reported gross margin was 34.0%, versus 35.7%.
Q3 net earnings and diluted EPS declined year over year despite higher sales. Nine-month earnings and diluted EPS increased. Q3 results included $90 million of net after-tax charges, or $0.60 per diluted share; the nine-month total was $178 million, or $1.19 per diluted share.
At September 28, cash and cash equivalents were $311.7 million. Current assets were $5.328 billion and current liabilities $5.442 billion. Short-term borrowings were $1.455 billion and long-term debt $3.909 billion; total reported borrowings, including current debt maturities, were approximately $5.367 billion. Short-term borrowings had risen from $376.1 million at December 29, 2018.
Q3 dividends were $0.69 per share, compared with $0.66 in Q3 2018. Nine-month capital and software expenditures were $283.5 million.

Changes versus the prior comparable period

Tools & Storage Q3 sales rose 4% and segment profit rose to $410.1 million from $356.2 million; reported segment margin increased to 16.2% from 14.6%. Excluding specified charges, the margin was 16.6% in both periods.
Industrial Q3 sales rose 13%, mainly due to acquisitions, while segment profit increased slightly to $90.3 million from $88.4 million. Reported segment margin declined to 14.3% from 15.7%, reflecting lower Engineered Fastening volume and cost inflation.
Security Q3 sales declined 4% to $466.4 million and segment profit fell to $33.1 million from $47.4 million. Reported margin declined to 7.1% from 9.8%; management cited divestiture effects and investment in commercial security transformation.
Year-to-date operating cash flow improved to $262.4 million from $40.1 million, which management attributed mainly to higher earnings and improved working capital. Free cash flow remained negative, but improved from $(287.3) million.

Outlook, management commentary, risks and unusual items

Management cut 2019 diluted EPS guidance to $6.50–$6.60 from $7.50–$7.70, primarily due to restructuring charges and other factors. EPS excluding charges was revised to $8.35–$8.45 from $8.50–$8.70.
The company reiterated expected free-cash-flow conversion of approximately 85%–90%. Its outlook assumes organic growth of 3.5%–4%, lower than the prior 4% assumption, and includes an additional $55 million of tariff- and currency-related cost pressure, partly offset by cost actions and a lower expected tax rate of approximately 16.5%.
A cost-reduction program is expected to generate approximately $200 million of annual savings, primarily in 2020, with approximately $150 million of pre-tax restructuring charges expected primarily in 2019. Separately, management estimated about $125 million of annual net savings by the end of 2020 from restructuring costs incurred through the first nine months of 2019.
Q3 restructuring charges were $74.0 million; nine-month charges were $91.2 million. The remaining restructuring reserve was $128.4 million, most of which management expected to use within 12 months.
2019 acquisitions included IES Attachments for $653.5 million net of cash acquired and a 20% interest in MTD for $234 million. The company may exercise an option to acquire the remaining MTD interest beginning July 2021. It sold the Sargent & Greenleaf business for $79.1 million net proceeds and recorded a $17.2 million pre-tax gain.
Environmental remediation reserves were $216.6 million. The filing describes significant uncertainties in several environmental matters, including the Lower Passaic River, for which the company said it could not reasonably estimate its liability beyond specified ongoing work. Management did not expect known contingencies to materially adversely affect financial position, results, or liquidity.
Other risks identified include tariffs, foreign exchange, commodity and freight costs, slower industrial and emerging-market conditions, acquisition integration, litigation and environmental liabilities, and access to debt markets. The filing reported no material changes to the risk factors in the 2018 Form 10-K.

Important facts for investors to verify

Confirm the intended reporting period: the supplied filing is for Q3 2019, not Q3 2018.
Track delivery of revised EPS guidance, organic-growth assumptions, and the distinction between reported EPS and EPS excluding charges.
Assess whether cost savings from restructuring materialize as planned and how much of the expected savings are offset by tariffs, currency, and cost inflation.
Monitor working-capital needs, negative year-to-date free cash flow, and the increase in commercial-paper and short-term borrowing balances.
Review acquisition integration and the potential future MTD purchase option, as well as environmental reserve developments and unestimable exposures.