It seems that pressures from tariffs, foreign currency swings, and a weaker growth environment are catching up to tool manufacturer Stanley Black & Decker (NYSE: SWK). On Thursday, the large-cap industrial concern reduced its full-year earnings outlook alongside a release of relatively healthy third-quarter 2019 results. Let's check in on the company's financial highlights below; note that comparative numbers refer to those of the prior-year quarter.
A bird's-eye view of the quarter
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$3.63 billion||$3.49 billion||4%|
|Net income (loss)||$230.5 million||$247.8 million||(7%)|
|Diluted earnings per share||$1.53||$1.65||(7.3%)|
Essential highlights from Stanley's report
- Reported revenue of 4% was propelled by a 3% increase in volume, 1% of pricing power, and 3% in revenue acquired via acquisitions. These factors were partially offset by a 1% drag due to divestitures and a 2% headwind from foreign currency effects.
- Tools and storage sales improved by 4% to $2.54 billion and were characterized by strong organic growth in North America and Europe.
- Industrial net sales advanced by 13% to $633 million. Revenue from Stanley's acquisition of IES Attachments in 2018 contributed 16% to sales; this boost was offset by a drop of 2% in segment volume and foreign currency translation of negative 1%.
- In Stanley's smallest segment, security, net sales dipped 4% to $466 million. The security business enjoyed a 2% advantage in pricing power, but this was absorbed by 2% weaker volume, a foreign currency impact of negative 3%, and a 2% drag on sales following the divestiture of lock-manufacturing brand Sargent and Greenleaf in June.
- In an effort to manage what it terms "externally driven volatility," the company announced that it's accelerating its multiyear "margin resiliency" program, which is aimed at reducing annual costs by $300 million to $500 million.
- Additionally, Stanley announced a new, separate program targeted at reducing costs by $200 million annually. The initiative is expected to result in $150 million in restructuring charges in 2019, and the company recognized nearly $75 million of this total in the third quarter.
- After adjusting for the $75 million restructuring charge as well as other items, operating margin was flat against the prior year at 14.5%.
A revised estimate framework for 2019
The primary factors behind the external volatility mentioned by Stanley's management are tariff impacts, foreign currency effects, and cost inflation. In combating these headwinds and incurring restructuring charges in both this quarter and the upcoming fourth quarter, Stanley Black and Decker reduced its full-year earnings per share (EPS) outlook on Thursday.
The company now anticipates diluted EPS of $6.50 to $6.60, down from a prior range of $7.50 to $7.70. Adjusted EPS is slated to drop to $8.35 to $8.45 against the previous expectation of $8.50 to $8.70.
Management noted that the revisions incorporate an expected $55 million in incremental tariff and foreign currency cost pressure in 2019, as well as a reduction in Stanley's full-year targeted revenue growth rate from 4% to a band of between 3.5% and 4%.
Management's comments on the adjusted outlook
In Stanley Black & Decker's earnings press release, CFO Donald Allan provided some context to the earnings revisions, noting that the company has performed well so far this year despite the unfavorable environment. He also addressed the company's positioning as we head into 2020:
Our 2019 guidance now incorporates $445 million of externally generated input cost headwinds while continuing to reflect our delivery of above-market organic growth of 3.5%-4% and low-single digit adjusted earnings-per-share growth. This will be a strong end to the year, especially given the magnitude and timing of the input cost moves, as well as the current market demand environment.
As we shift to 2020, we believe we are taking the appropriate actions to protect our margins and our competitiveness while once again positioning the business for EPS expansion. We will continue to execute our playbook to take price, optimize our global supply chain and adjust our cost structure through the actions announced today and generate significant value with our margin resiliency program.
Investors are still absorbing the implications of the earnings tweak despite management's confident outlook. As of midday on Thursday, Stanley Black and Decker shares were trading down roughly 4% from Wednesday's close.
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