STANLEY BLACK & DECKER, INC.
The following discussion contains statements reflecting the Company's views
about its future performance that constitute "forward-looking statements" under
the Private Securities Litigation Act of 1995. There are a number of important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements. Please read the information under
the caption entitled "Cautionary Statement under the Private Securities
Litigation Reform Act of 1995."
Throughout this Management's Discussion and Analysis ("MD&A"), references to
Notes refer to the "Notes To (Unaudited) Condensed Consolidated Financial
Statements" in Part 1, Item 1 of this Form 10-Q, unless otherwise indicated.
BUSINESS OVERVIEW
Strategy
The Company is a diversified global provider of hand tools, power tools and
related accessories, engineered fastening systems and products, services and
equipment for oil & gas and infrastructure applications, commercial electronic
security and monitoring systems, healthcare solutions, and automatic doors. The
Company continues to execute a growth and acquisition strategy over the
long-term that involves industry, geographic and customer diversification to
foster sustainable revenue, earnings and cash flow growth. The Company remains
focused on leveraging its SBD Operating Model to deliver success in the 2020s
and beyond. The latest evolution of the SBD Operating Model, formerly Stanley
Fulfillment System ("SFS") 2.0, builds on the strength of the Company's past
while embracing changes in the external environment to ensure the Company has
the right skillsets, incorporates technology advances in all areas, maintains
operational excellence, drives efficiency in business processes and resiliency
into its culture, delivers extreme innovation and ensures the customer
experience is world class. In addition, the Company continues to make strides
towards achieving its long-term vision, by becoming known as one of the world's
leading innovators, continuing to deliver top-quartile financial performance and
elevating its commitment to social responsibility.
In terms of capital allocation, the Company remains committed, over time, to
returning approximately 50% of free cash flow to shareholders through a strong
and growing dividend as well as opportunistically repurchasing shares. The
remaining free cash flow (approximately 50%) will be deployed towards
acquisitions.
COVID-19 Pandemic
The novel coronavirus (COVID-19) outbreak has adversely affected the Company's workforce and operations, as well as the operations of its customers, distributors, suppliers and contractors. The COVID-19 pandemic has also resulted in significant volatility and uncertainty in the markets in which the Company operates. To successfully navigate through this unprecedented period, the Company continues to focus on the following key priorities: •Ensuring the health and safety of its employees and supply chain partners; •Maintaining business continuity and financial strength and stability; •Serving its customers as they provide essential products and services to the world; and •Doing its part to mitigate the impact of the virus across the globe. To respond to the current environment, the Company is proceeding with its previously announced comprehensive cost reduction and efficiency program, which is expected to deliver annual cost savings of$1 billion with$500 million in 2020. Cost actions initiated under the program include headcount reductions, furloughs, reduced employee work schedules, a voluntary retirement program, and footprint rationalizations. During the second quarter of 2020, the Company realized pre-tax savings of approximately$175 million , representing a strong start to the program. Given the risks and uncertainties regarding the global economic outlook, the Company has taken steps to make some of the furloughs and reduced work weeks permanent while the remaining others will be returned to full-time status as of earlySeptember 2020 . This will ensure more sustainability of the cost reduction program while providing more employment stability for the Company's remaining associates. The program's primary focus is to: (a) adjust the Company's supply chain and manufacturing labor base to match the current demand environment; (b) substantially reduce indirect spending; (c) reduce staffing, compensation and benefits in a manner that ensures the Company is prepared for a demand recovery at the appropriate time; and (d) capture the significant raw material deflation opportunity that has recently emerged. In addition, the Company is reducing capital expenditures and temporarily suspending acquisition-related activity and share repurchases until the demand outlook is clearer. The near-term priority for capital deployment is focused on deleveraging in line with the Company's strong investment grade credit ratings. 39
--------------------------------------------------------------------------------
Table of Contents
The Company effectively managed through a multitude of challenges during the second quarter of 2020 and continues to believe it is in a strong financial position and has significant flexibility to continue navigating this volatile period. However, the overall impact of the COVID-19 pandemic on the Company's business, results of operations, or liquidity remains uncertain. Refer to Financial Condition below and Item 1A. Risk Factors in Part II of this Form 10-Q for further discussion.
Acquisitions and Investments
OnFebruary 24, 2020 , the Company acquiredConsolidated Aerospace Manufacturing, LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The acquisition further diversifies the Company's presence in the industrial markets and expands its portfolio of specialty fasteners in the aerospace and defense market. OnMarch 8, 2019 , the Company acquired theInternational Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"), manufacturers of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition further diversifies the Company's presence in the industrial markets, expands its portfolio of attachment solutions and provides a meaningful platform for growth. OnJanuary 2, 2019 , the Company acquired a 20 percent interest inMTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment. MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning onJuly 1, 2021 and ending onJanuary 2, 2029 . In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD's 2018 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth. The investment in MTD increases the Company's presence in the$20 billion global lawn and garden segment and allows the two companies to work together to pursue revenue and cost opportunities, improve operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands.
Refer to Note F, Acquisitions and Investments, for further discussion.
Divestiture
OnMay 30, 2019 , the Company sold itsSargent and Greenleaf mechanical locks business within the Security segment. The divestiture allowed the Company to invest in other areas of the Company that fit into its long-term growth strategy. Refer to Note T, Divestitures, for further discussion. Segments The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage The Tools & Storage segment is comprised of the Power Tools & Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. Annual revenues in the Tools & Storage segment were$10.1 billion in 2019, representing 70% of the Company's total revenues. The PTE business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER® brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, and home products such as hand-held vacuums, paint tools and cleaning appliances. 40
--------------------------------------------------------------------------------
Table of Contents
The HTAS business sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products. Industrial
The Industrial segment is comprised of the Engineered Fastening and
Infrastructure businesses. Annual revenues in the Industrial segment were
The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, high-strength structural fasteners, axel swage, separables, latches, heat shields, pins, and couplings. The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools, attachments and accessories. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines, and provides pipeline inspection services.
Security
The Security segment is comprised of the Convergent Security Solutions ("CSS")
and Mechanical Access Solutions ("MAS") businesses. Annual revenues in the
Security segment were $1.9 billion in 2019, representing 13% of the Company's
total revenues.
The CSS business designs, supplies and installs commercial electronic security
systems and provides electronic security services, including alarm monitoring,
video surveillance, fire alarm monitoring, systems integration and system
maintenance. Purchasers of these systems typically contract for ongoing security
systems monitoring and maintenance at the time of initial equipment
installation. The business also sells healthcare solutions, which include asset
tracking, infant protection, pediatric protection, patient protection, wander
management, fall management, and emergency call products. The MAS business
primarily sells automatic doors.
Certain Items Impacting Earnings
Throughout MD&A, the Company has provided a discussion of its results both
inclusive and exclusive of acquisition-related and other charges. The results
and measures, including gross profit and segment profit, on a basis excluding
these amounts are considered relevant to aid analysis and understanding of the
Company's results and business trends aside from the material impact of these
items. These amounts for the second quarter and year-to-date periods of 2020 and
2019 are as follows:
Second Quarter and Year-To-Date 2020
The Company reported approximately $169 million and $231 million in net pre-tax
charges in the second quarter and year-to-date 2020 periods, respectively, which
were comprised of the following:
•$43 million and $52 million for the second quarter and year-to-date 2020
periods, respectively, reducing Gross Profit pertaining to a cost reduction
program and inventory step-up charges;
•$79 million and $109 million for the second quarter and year-to-date 2020
periods, respectively, in SG&A primarily for a cost reduction program, Security
business transformation and margin resiliency initiatives;
•$19 million and $38 million for the second quarter and year-to-date 2020
periods, respectively, in Other, net primarily related to a cost reduction
program and deal transaction costs; and
•$28 million and $32 million for the second quarter and year-to-date 2020
periods, respectively, in Restructuring charges pertaining to severance and
facility closures.
The tax effect on the above charges during the second quarter and year-to-date
periods of 2020 was approximately $40 million and $53 million , respectively. The
Company also recorded a one-time tax benefit of $119 million in the second
quarter of 2020 associated with a supply chain reorganization. In addition, the
Company's share of MTD's net earnings included an after-tax charge during the
second quarter and year-to-date periods of 2020 of $3 million and $4 million ,
respectively, related primarily to restructuring charges.
41
--------------------------------------------------------------------------------
Table of Contents
The above items resulted in net after-tax charges of approximately $13 million ,
or $0.08 per diluted share, and $63 million , or $0.41 per diluted share,
respectively, for the second quarter and year-to-date 2020 periods.
Second Quarter and Year-To-Date 2019
The Company reported approximately $33 million and $86 million in net pre-tax
charges in the second quarter and year-to-date 2019 periods, respectively, which
were comprised of the following:
?$11 million and $17 million for the second quarter and year-to-date 2019
periods, respectively, reducing Gross Profit pertaining to facility-related and
inventory step-up charges;
?$27 million and $50 million for the second quarter and year-to-date 2019
periods, respectively, in SG&A primarily for integration-related costs and
Security business transformation and margin resiliency initiatives;
?$4 million and $21 million for the second quarter and year-to-date 2019
periods, respectively, in Other, net primarily related to deal transaction
costs;
?$17 million gain for the second quarter and year-to-date 2019 periods related
to the sale of its Sargent & Greenleaf business; and
?$8 million and $15 million for the second quarter and year-to-date 2019
periods, respectively, in Restructuring charges pertaining to facility closures
and severance.
The tax effect on the above net charges during the second quarter and
year-to-date periods of 2019 was approximately $1 million and $12 million ,
respectively. In addition, the Company's share of MTD's net earnings included an
after-tax charge related to an inventory step-up fair value adjustment during
the second quarter and year-to-date periods of 2019 of approximately $10 million
and $14 million , respectively.
The above items resulted in net after-tax charges of $44 million , or $0.29 per
diluted share, and $88 million , or $0.59 per diluted share, respectively, for
the second quarter and year-to-date 2019 periods.
2020 Outlook
The Company withdrew its full year guidance in April 2020 as a result of the
uncertain macro environment and will continue to refrain from providing such
guidance at this time. The Company continues to believe it is in a strong
financial position and has significant flexibility to continue navigating this
volatile period. Refer to Financial Condition below and Item 1A. Risk Factors in
Part II of this Form 10-Q for further discussion.
RESULTS OF OPERATIONS
Below is a summary of the Company's operating results at the consolidated level,
followed by an overview of business segment performance.
Terminology: The term "organic" is utilized to describe results aside from the
impacts of foreign currency fluctuations, acquisitions during their initial
12 months of ownership, and divestitures. This ensures appropriate comparability
to operating results of prior periods.
Net Sales : Net sales were $3.147 billion in the second quarter of 2020 compared
to $3.761 billion in the second quarter of 2019, representing a decrease of 16%,
primarily driven by a 17% decline in volume. Acquisitions, primarily CAM, and
price increased sales by 2% and 1%, respectively, while foreign currency
decreased sales by 2%. Tools & Storage net sales decreased 16% compared to the
second quarter of 2019 due to a 16% decrease in volume and unfavorable foreign
currency impacts of 1%, partially offset by a 1% increase in price. Industrial
net sales decreased 20% compared to the second quarter of 2019 primarily due to
lower volumes of 29% and unfavorable foreign currency impacts of 1%, partially
offset by acquisition growth of 10%. Net sales in the Security segment declined
11% compared to the second quarter of 2019 due to decreases of 9% in volume, 2%
from foreign currency, and 1% from the sale of the Sargent & Greenleaf business,
partially offset by a 1% increase in price.
42--------------------------------------------------------------------------------
Table of Contents
Net sales were$6.277 billion in the first half of 2020 compared to$7.095 billion in the first half of 2019, representing a decrease of 12%, with a 13% decrease in volume primarily related to impacts from COVID-19, partially offset by a 1% increase in price. Acquisitions increased sales by 2% while foreign currency decreased sales by 2%. Tools & Storage net sales decreased 13% compared to the first half of 2019 due to a 13% decrease in volume and unfavorable foreign currency impacts of 1%, partially offset by a 1% increase in price. Industrial net sales decreased 8% compared to the first half of 2019 primarily due to decreases of 20% from lower volumes and 1% from foreign currency, partially offset by an increase of 13% from acquisitions. Net sales in the Security segment declined 7% compared to the first half of 2019 driven by decreases of 5% in volume, 1% from foreign currency and 2% from the sale of theSargent & Greenleaf business, partially offset by a 1% increase in price. Gross Profit: Gross profit was$1.013 billion , or 32.2% of net sales, in the second quarter of 2020 compared to$1.300 billion , or 34.6% of net sales, in the second quarter of 2019. Acquisition-related and other charges, which reduced gross profit, were$42.6 million for the three months endedJune 27, 2020 and$10.7 million for the three months endedJune 29, 2019 . Excluding these charges, gross profit was 33.5% of net sales for the three months endedJune 27, 2020 , compared to 34.8% for the three months endedJune 29, 2019 , as the impacts from lower volume as well as currency and carryover tariff headwinds were partially offset by price, productivity and strong cost management. Gross profit was$2.036 billion , or 32.4% of net sales, in the first half of 2020 compared to$2.405 billion , or 33.9% of net sales, in the first half of 2019. Acquisition-related and other charges, which reduced gross profit, were$51.7 million for the six months endedJune 27, 2020 and$17.1 million for the six months endedJune 29, 2019 . Excluding these charges, gross profit was 33.3% of net sales for the six months endedJune 27, 2020 , compared to 34.1% for the six months endedJune 29, 2019 . The year-over-year change was primarily driven by the same factors that impacted the second quarter of 2020, as discussed above. SG&A Expenses: SG&A, inclusive of the provision for credit losses, was$732.0 million , or 23.3% of net sales, in the second quarter of 2020, compared to$782.3 million , or 20.8% of net sales, in the second quarter of 2019. Within SG&A, acquisition-related and other charges totaled$79.2 million for the three months endedJune 27, 2020 and$26.6 million for the three months endedJune 29, 2019 . Excluding these charges, SG&A was 20.7% of net sales for the three months endedJune 27, 2020 , compared to 20.1% for the three months endedJune 29, 2019 , reflecting previously announced cost controls partially offsetting the impact from lower volume. SG&A, inclusive of the provision for credit losses, was$1.481 billion , or 23.6% of net sales, in the first half of 2020, compared to$1.561 billion , or 22.0% of net sales, in the first half of 2019. Within SG&A, acquisition-related and other charges totaled$109.0 million for the six months endedJune 27, 2020 and$49.6 million for the six months endedJune 29, 2019 . Excluding these charges, SG&A was 21.9% of net sales for the six months endedJune 27, 2020 , compared to 21.3% for the six months endedJune 29, 2019 . The year-over-year change was primarily driven by the same factors that impacted the second quarter of 2020, as discussed above. Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs) are classified within SG&A. This classification may differ from other companies who may report such expenses within cost of sales. Due to diversity in practice, to the extent the classification of these distribution costs differs from other companies, the Company's gross margins may not be comparable. Corporate Overhead: The corporate overhead element of SG&A, which is not allocated to the business segments, amounted to$78.7 million and$55.6 million in the second quarter of 2020 and 2019, respectively, or 2.5% and 1.5% of net sales in each period. Excluding acquisition-related and other charges of$20.3 million for the three months endedJune 27, 2020 and$2.2 million for the three months endedJune 29, 2019 , the corporate overhead element of SG&A was 1.9% and 1.4% in the second quarter of 2020 and 2019, respectively. The year-over-year increase in the rate was primarily driven by lower sales. On a year-to-date basis, the corporate overhead element of SG&A, amounted to$127.6 million , or 2.0% of net sales, in 2020 compared to$105.2 million , or 1.5% of net sales, in 2019. Excluding acquisition-related and other charges of$31.8 million for the six months endedJune 27, 2020 and$2.2 million for the six months endedJune 29, 2019 , the corporate overhead element of SG&A was 1.5% in both the first half of 2020 and 2019. Other, net: Other, net amounted to$86.9 million and$62.2 million in the second quarter of 2020 and 2019, respectively. Excluding acquisition-related and other charges of$19.8 million and$4.5 million in the second quarter of 2020 and 2019, respectively, Other, net totaled$67.1 million and$57.7 million , respectively, during these periods. The year-over-year increase was primarily attributable to higher intangible amortization expense and negative impacts from foreign currency. 43 -------------------------------------------------------------------------------- Table of Contents Other, net amounted to$161.8 million and$127.6 million in the first half of 2020 and 2019, respectively. Excluding acquisition-related and other charges of$38.7 million and$20.6 million in the first half of 2020 and 2019, respectively, Other, net totaled$123.1 million and$107.0 million , respectively, during these periods. The year-over-year increase was primarily driven by the same factors that impacted the second quarter of 2020, as discussed above. Gain on Sale of Business: In the second quarter of 2019, the Company reported a pre-tax gain of$17.2 million related to the sale of itsSargent & Greenleaf business. Interest, net: Net interest expense was$54.8 million in the second quarter of 2020 compared to$60.3 million in the second quarter of 2019. On a year-to-date basis, net interest expense was$104.4 million in 2020 compared to$118.1 million in 2019. The year-over-year decrease for both periods was primarily driven by the redemption of the 2052 Junior Subordinated Debentures inDecember 2019 , as well as lowerU.S. interest rates and lower average balances relating to the Company's commercial paper borrowings, partially offset by lower interest income. Income Taxes: The Company recognized an income tax benefit of$117.3 million and$104.4 million for the three and six months endedJune 27, 2020 , respectively, resulting in effective tax rates of (105.6)% and (40.6)%. In the second quarter of 2020, as a result of initiating a supply chain reorganization, the Company recorded a one-time benefit of$118.8 million to reverse a deferred tax liability previously established related to certain unremitted earnings of foreign subsidiaries not permanently reinvested. Excluding the impacts of this one-time benefit and the aforementioned acquisition-related and other charges, the effective tax rates were 15.0% and 13.9% for the three and six months endedJune 27, 2020 , respectively. These effective tax rates differ from theU.S. statutory tax rate primarily due to tax on foreign earnings, the re-measurement of uncertain tax position reserves, an intra-entity transfer of certain intellectual property rights, and the tax benefit of equity compensation. The Company recognized income tax expense of$51.6 million and$76.3 million for the three and six months endedJune 29, 2019 , respectively, resulting in an effective tax rate of 12.8% for both periods. Excluding the impacts of the acquisition-related and other charges and theSargent & Greenleaf divestiture in the second quarter of 2019, the effective tax rates were 11.6% and 12.8% for the three and six months endedJune 29, 2019 , respectively. These effective tax rates differed from theU.S. statutory tax rate primarily due to tax on foreign earnings and the effective settlements of income tax audits. Business Segment Results The Company's reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A inclusive of the provision for credit losses (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), gain on sale of business, restructuring charges, interest expense, interest income, income taxes and share of net earnings or losses of equity method investment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Refer to Note O, Restructuring Charges, for the amount of restructuring charges attributable to each segment. The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage: Second Quarter Year-to-Date (Millions of Dollars) 2020 2019 2020 2019 Net sales$ 2,197.2 $ 2,626.0 $ 4,268.0 $ 4,918.3 Segment profit$ 345.1 $ 440.0 $ 579.9 $ 705.8 % of Net sales 15.7 % 16.8 % 13.6 % 14.4 % Tools & Storage net sales decreased$428.8 million , or 16%, in the second quarter of 2020 compared to the second quarter of 2019. Sales volume and foreign currency decreased sales by 16% and 1%, respectively, while price increased sales by 1%. Organic revenues across all regions were impacted by reduced business activity related to COVID-19 with declines inNorth America of 10%,Europe of 21% and emerging markets of 29%. TheNorth America organic decline was driven by channel inventory reductions and reduced construction activity. Exceptionally strong DIY demand emerged in the global e-commerce 44 -------------------------------------------------------------------------------- Table of Contents and North American retail channels during late April and continued throughout the quarter as well as the measured weeks in July, which significantly improved the overall result. Point-of-sale performance of products in these channels rose to all-time high levels in the May, June, and July period while customer stocks are currently at historically low levels.Europe and emerging markets were impacted by decreased economic activity caused by rolling COVID-19 geographic lockdowns, customer closures and diminished consumer confidence. As the quarter progressed,Europe experienced improving demand while emerging markets continued to be mixed. Net sales decreased$650.3 million , or 13%, in the first half of 2020 compared to the first half of 2019. Sales volume and foreign currency decreased sales by 13% and 1%, respectively, while price increased sales by 1%. Organic revenue declines in the first half of 2020 were 9% inNorth America , 14% inEurope and 22% in emerging markets, primarily due to reduced business activity related to COVID-19. Segment profit for the second quarter of 2020 was$345.1 million , or 15.7% of net sales, compared to$440.0 million , or 16.8% of net sales, in the second quarter of 2019. Excluding acquisition-related and other charges of$28.4 million and$7.5 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, segment profit was 17.0% of net sales in both periods, as the benefits from productivity, swift and effective cost controls and price offset the impacts from lower volume, tariffs and currency. Segment profit for the first half of 2020 was$579.9 million , or 13.6% of net sales, compared to$705.8 million , or 14.4% of net sales, in the first half of 2019. Excluding acquisition-related and other charges of$31.5 million and$20.1 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively, segment profit was 14.3% of net sales in the first half of 2020 and 14.8% in the first half of 2019, as the benefits from productivity, swift and effective cost controls and price were more than offset by lower volume, tariffs and currency. Industrial: Second Quarter Year-to-Date (Millions of Dollars) 2020 2019 2020 2019 Net sales$ 517.5 $ 649.9 $ 1,108.2 $ 1,204.9 Segment profit$ 5.1 $ 95.1 $ 72.9 $ 166.1 % of Net sales 1.0 % 14.6 % 6.6 % 13.8 % Industrial net sales declined$132.4 million , or 20%, in the second quarter of 2020 compared to the second quarter of 2019, due to decreases of 29% and 1% from volume and foreign currency, respectively, partially offset by an increase of 10% from acquisitions, primarily CAM. The trough of the organic volume decline occurred in April with modest sequential improvement each month since. Engineered Fastening organic revenues were down 35% due to lower global automotive light vehicle and general industrial production. Infrastructure organic revenues were down 19% from lower volumes in Attachment Tools and Oil & Gas. On a year-to-date basis, net sales decreased$96.7 million , or 8%, in the first half of 2020 compared to the first half of 2019, due to decreases of 20% and 1% from volume and foreign currency, partially offset by an increase of 13% from acquisitions. Engineered Fastening organic revenues decreased 22% and Infrastructure organic revenues decreased 14% primarily due to the same factors that impacted the second quarter of 2020, as discussed above. Industrial segment profit for the second quarter of 2020 totaled$5.1 million , or 1% of net sales, compared to$95.1 million , or 14.6% of net sales, in the corresponding 2019 period. Excluding acquisition-related and other charges of$40.6 million and$11.3 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, segment profit amounted to 8.8% of net sales in the second quarter of 2020 compared to 16.4% in the second quarter of 2019, as the significant impact from volume declines was partially mitigated by cost actions. Year-to-date segment profit for the first half of 2020 totaled$72.9 million , or 6.6% of net sales, compared to$166.1 million , or 13.8% of net sales, in the corresponding 2019 period. Excluding acquisition-related and other charges of$51.0 million and$17.3 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively, segment profit amounted to 11.2% of net sales in the first half of 2020 compared to 15.2% in the first half of 2019. The year-over-year change was primarily driven by the same factors that impacted the second quarter of 2020, as discussed above. 45 --------------------------------------------------------------------------------
Table of Contents
Security:
Second Quarter Year-to-Date
(Millions of Dollars) 2020 2019 2020 2019
Net sales $ 432.7 $ 485.4 $ 900.6 $ 971.7
Segment profit $ 9.2 $ 38.0 $ 30.1 $ 77.5
% of Net sales 2.1 % 7.8 % 3.3 % 8.0 %
Security net sales decreased $52.7 million , or 11%, in the second quarter of
2020 compared to the second quarter of 2019, due to decreases of 9% in volume,
2% from foreign currency, and 1% from the sale of the Sargent & Greenleaf
business, partially offset by a 1% increase in price. North America declined 7%
and Europe was down 10% organically. All businesses were impacted by customer
restrictions, which were most pronounced early in the second quarter of 2020.
The backlog in electronic security remains in a healthy position, up 16%,
supporting an anticipated improvement in installation revenues during the second
half of 2020.
On a year-to-date basis, net sales decreased $71.1 million , or 7%, in the first
half of 2020 compared to the first half of 2019, due to decreases of 5% from
volume, 2% from the Sargent & Greenleaf divestiture and 1% from foreign
currency, partially offset by an increase of 1% in price. North America declined
2% organically and Europe was down 6% organically, primarily due to the same
factors that impacted the second quarter of 2020, as discussed above.
Security segment profit for the second quarter of 2020 was $9.2 million , or 2.1%
of net sales, compared to $38.0 million , or 7.8% of net sales, in the
corresponding 2019 period. Excluding acquisition-related and other charges of
$32.5 million and $16.3 million for the three months ended June 27, 2020 and
June 29, 2019 , respectively, segment profit amounted to 9.6% of net sales in the
second quarter of 2020 compared to 11.2% in the second quarter of 2019, as price
and cost control were more than offset by lower volume.
Year-to-date segment profit for the first half of 2020 was $30.1 million , or
3.3% of net sales, compared to $77.5 million , or 8.0% of net sales, in the
corresponding 2019 period. Excluding acquisition-related and other charges of
$46.4 million and $27.1 million for the six months ended June 27, 2020 and
June 29, 2019 , respectively, segment profit amounted to 8.5% of net sales in the
first half of 2020 compared to 10.8% in the first half of 2019. The
year-over-year change was primarily driven by the same factors that impacted the
second quarter of 2020, as discussed above.
RESTRUCTURING ACTIVITIES
A summary of the restructuring reserve activity from
December 28, June 27,
(Millions of Dollars) 2019 Net Additions Usage Currency 2020
Severance and related costs $ 140.3 $ 28.9 $ (55.3) $ 0.5 $ 114.4
Facility closures and asset
impairments 7.5 2.9 (8.3) - 2.1
Total $ 147.8 $ 31.8 $ (63.6) $ 0.5 $ 116.5
For the three and six months ended June 27, 2020 , the Company recognized net
restructuring charges of $27.9 million and $31.8 million , respectively,
primarily related to severance costs associated with the recently implemented
cost reduction program. The Company expects to achieve annual net cost savings
of approximately $67 million by the end of 2021 related to the restructuring
costs incurred during the six months ended June 27, 2020 . The majority of the
$116.5 million of reserves remaining as of June 27, 2020 is expected to be
utilized within the next 12 months.
Segments: The $32 million of net restructuring charges for the six months ended
June 27, 2020 includes: $13 million pertaining to the Tools & Storage segment;
$10 million pertaining to the Industrial segment; and $9 million pertaining to
the Security segment.
The $28 million of net restructuring charges for the three months ended June 27,
2020 includes: $14 million pertaining to the Tools & Storage segment; $7 million
pertaining to the Industrial segment; and $7 million pertaining to the Security
segment.
The anticipated annual net cost savings of approximately $67 million by the end
of 2021 includes $19 million in the Tools & Storage segment; $23 million in the
Industrial segment; and $25 million in the Security segment.
46
--------------------------------------------------------------------------------
Table of Contents
FINANCIAL CONDITION
Liquidity, Sources and Uses of Capital: The Company's primary sources of liquidity are cash flows generated from operations and available lines of credit under various credit facilities.
Operating Activities: Cash flows provided by operations were$328.2 million in the second quarter of 2020 compared to$501.0 million in the corresponding period of 2019. Year-to-date cash flows used in operations were$77.0 million compared to cash flows provided by operations of$69.7 million in the corresponding period of 2019. The year-over-year decrease in both periods was mainly attributable to lower earnings as a result of the COVID-19 pandemic and higher inventory purchases to establish adequate levels to support a potential demand improvement in the second half of 2020. Free Cash Flow: Free cash flow, as defined in the table below, was$263.7 million in the second quarter of 2020 and$403.8 million in the second quarter of 2019. On a year-to-date basis, free cash flow was an outflow of$224.4 million in 2020 compared to$117.1 million in 2019. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company's common and preferred stock and business acquisitions, among other items. Second Quarter Year-to-Date (Millions of Dollars) 2020 2019 2020 2019 Net cash provided by (used in) operating activities$ 328.2
(64.5) (97.2) (147.4) (186.8)
Free cash flow $ 263.7 $ 403.8 $ (224.4) $ (117.1)
As previously discussed, the COVID-19 pandemic continues to adversely affect the
Company's operations, as well as the operations of its customers, distributors,
suppliers and contractors, and has resulted in significant volatility and
uncertainty in the markets in which the Company operates. Although the Company
effectively managed through a multitude of challenges during the second quarter
of 2020, the overall impact of the COVID-19 pandemic on the Company's business,
results of operations, and liquidity remains uncertain. However, the Company
continues to believe it is in a strong financial position as of June 27, 2020
and has significant flexibility to navigate this volatile period as the Company:
(a) continues to maintain strong investment grade credit ratings; (b) possesses
approximately $900 million of cash on-hand as of June 27, 2020 ; (c) manages a
robust and highly-rated commercial paper program ($3.0 billion program with
approximately $700 million outstanding as of June 27, 2020 ); and (d) carries
$3.0 billion of revolving credit facilities backed by a well-capitalized and
diverse bank group. In addition, the Company is reducing its capital
expenditures and temporarily suspending acquisition-related activity and share
repurchases until the demand outlook is clearer. The near-term priority for
capital deployment is focused on deleveraging in line with the Company's strong
investment grade credit ratings. Refer to Item 1A. Risk Factors in Part II of
this Form 10-Q for further discussion of the COVID-19 pandemic.
Investing Activities: Cash flows used in investing activities totaled $56.8
million in the second quarter of 2020 primarily due to capital and software
expenditures of $64.5 million . Cash flows used in investing activities totaled
$32.2 million in the second quarter of 2019, driven by capital and software
expenditures of $97.2 million , partially offset by $76.7 million of net proceeds
primarily from the sale of the Company's Sargent & Greenleaf business.
Year-to-date cash flows used in investing activities totaled $1.421 billion in
2020 primarily due to the CAM acquisition of $1.302 billion , net of cash
acquired, and capital and software expenditures of $147.4 million . Cash flows
used in investing activities totaled $1.040 billion in the first half of 2019,
mainly due to business acquisitions of $676.0 million , primarily related to IES
Attachments, purchases of long-term investments of $253.7 million , which mainly
related to the 20 percent investment in MTD Holdings Inc. , and capital and
software expenditures of $186.8 million .
Financing Activities: Cash flows used in financing activities totaled $391.5
million in the second quarter of 2020 primarily driven by net payments on
short-term borrowings under the Company's commercial paper program of $980.8
million and cash dividend payments of $105.8 million , partially offset by
proceeds from issuances of common stock of $756.7 million . Cash flows used in
financing activities totaled $429.9 million in the second quarter of 2019
primarily driven by $330.6 million of net payments on short-term borrowings
under the Company's commercial paper program and cash dividend payments of $97.7
million .
Year-to-date cash flows provided by financing activities totaled $2.084 billion
in 2020 primarily driven by net proceeds from debt issuances of $1.483 billion ,
proceeds from issuances of common stock of $801.3 million and net short-term
borrowings under the Company's commercial paper program of $371.1 million ,
partially offset by the Craftsman deferred purchase price
47
--------------------------------------------------------------------------------
Table of Contents
payment of $250.0 million and cash dividend payments of $211.4 million . Cash
flows provided by financing activities totaled $978.3 million in the first half
of 2019 primarily driven by $1.089 billion of net proceeds from short-term
borrowings under the Company's commercial paper program due to 2019 acquisition
activity, partially offset by cash dividend payments of $195.3 million .
Credit Ratings & Liquidity:
The Company maintains strong investment grade credit ratings from the major
U.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's
Baa1), and its commercial paper program (S&P A-1, Fitch F1, Moody's P-2). There
have been no changes to any of the Company's credit ratings during the second
quarter of 2020. In the second quarter of 2020, S&P and Fitch revised their
outlooks to 'negative' from 'stable' in response to the potential negative
economic effects stemming from the COVID-19 pandemic. Refer to Item 1A. Risk
Factors in Part II of this Form 10-Q for further discussion of the risks
associated with the COVID-19 pandemic. Failure to maintain strong investment
grade credit rating levels could adversely affect the Company's cost of funds,
liquidity and access to capital markets, but would not have an adverse effect on
the Company's ability to access its existing committed credit facilities.
Cash and cash equivalents totaled $860 million as of June 27, 2020 , comprised of
$576 million in the U.S. and $284 million in foreign jurisdictions. As of
December 28, 2019 , cash and cash equivalents totaled $298 million , comprised of
$57 million in the U.S. and $241 million in foreign jurisdictions.
As a result of the Tax Cuts and Jobs Act (the "Act"), the Company's tax
liability related to the one-time transition tax associated with unremitted
foreign earnings and profits totaled $344 million at June 27, 2020 . The Act
permits a U.S. company to elect to pay the net tax liability interest-free over
a period of up to eight years. The Company has considered the implications of
paying the required one-time transition tax and believes it will not have a
material impact on its liquidity.
The Company has a $3.0 billion commercial paper program which includes Euro
denominated borrowings in addition to U.S. Dollars. As of June 27, 2020 , the
Company had approximately $698 million of borrowings outstanding of which
approximately $300 million in Euro denominated commercial paper was designated
as a net investment hedge. As of December 28, 2019 , the Company had
approximately $336 million of borrowings outstanding representing Euro
denominated commercial paper, which was designated as a net investment hedge.
Refer to Note I, Financial Instruments, for further discussion.
The Company has a five-year $2.0 billion committed credit facility (the "5-Year
Credit Agreement"). Borrowings under the 5-Year Credit Agreement may be made in
U.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of $653.3 million is
designated for swing line advances which may be drawn in Euros pursuant to the
terms of the 5-Year Credit Agreement. Borrowings bear interest at a floating
rate plus an applicable margin dependent upon the denomination of the borrowing
and specific terms of the 5-Year Credit Agreement. The Company must repay all
advances under the 5-Year Credit Agreement by the earlier of September 12, 2023
or upon termination. The 5-Year Credit Agreement is designated to be a liquidity
back-stop for the Company's $3.0 billion U.S. Dollar and Euro commercial paper
program. As of June 27, 2020 , and December 28, 2019 , the Company had not drawn
on its five-year committed credit facility.
The Company has a 364-Day $1.0 billion committed credit facility (the "364-Day
Credit Agreement"). Borrowings under the 364-Day Credit Agreement may be made in
U.S. Dollars or Euros and bear interest at a floating rate plus an applicable
margin dependent upon the denomination of the borrowing and pursuant to the
terms of the 364-Day Credit Agreement. The Company must repay all advances under
the 364-Day Credit Agreement by the earlier of September 9, 2020 or upon
termination. The Company may, however, convert all advances outstanding upon
termination into a term loan that shall be repaid in full no later than the
first anniversary of the termination date provided that the Company, among other
things, pays a fee to the administrative agent for the account of each lender.
The 364-Day Credit Agreement serves as part of the liquidity back-stop for the
Company's $3.0 billion U.S. Dollar and Euro commercial paper program previously
discussed. As of June 27, 2020 , and December 28, 2019 , the Company had not drawn
on its 364-Day committed credit facility.
The Company has an interest coverage covenant that must be maintained to permit
continued access to its committed credit facilities described above. The
interest coverage ratio tested for covenant compliance compares adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted
Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense"). In April 2020 ,
the Company entered into amendments to its 5-Year Credit Agreement and 364-Day
Credit Agreement to: (a) amend the definition of Adjusted EBITDA to allow for
additional adjustment addbacks, which primarily relate to anticipated
incremental charges related to the COVID-19 pandemic, for amounts incurred
beginning in the second quarter of 2020 through the second quarter of 2021, and
(b) lower the minimum interest coverage ratio from 3.5 to 2.5 times for the
period from and including the second quarter of 2020 through the end of fiscal
year 2021.
48
--------------------------------------------------------------------------------
Table of Contents
In February 2020 , the Company issued $750 million of senior unsecured term notes
maturing March 15, 2030 ("2030 Term Notes") and $750 million of fixed-to-fixed
reset rate junior subordinated debentures maturing March 15, 2060 ("2060 Junior
Subordinated Debentures"). The 2030 Term Notes accrue interest at a fixed rate
of 2.3% per annum, with interest payable semi-annually in arrears, and rank
equally in right of payment with all of the Company's existing and future
unsecured and unsubordinated debt. The 2060 Junior Subordinated Debentures bear
interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears, up
to but excluding March 15, 2025 . From and including March 15, 2025 , the interest
rate will be reset for each subsequent five-year reset period equal to the
Five-Year Treasury Rate plus 2.657%. The Five-Year Treasury Rate is based on the
average yields on actively traded U.S. treasury securities adjusted to constant
maturity, for five-year maturities. On each five-year reset date, the 2060
Junior Subordinated Debentures can be called at par value. The 2060 Junior
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all of the Company's existing and future senior debt. The Company
received total net proceeds from these offerings of approximately $1.483
billion , net of underwriting expenses and other fees associated with the
transactions. The net proceeds from the offerings were used for general
corporate purposes, including acquisition funding.
In November 2019 , the Company issued 7,500,000 Equity Units with a total
notional value of $750 million ("2019 Equity Units"). Each unit has a stated
amount of $100 and initially consisted of a three-year forward stock purchase
contract ("2022 Purchase Contracts") for the purchase of a variable number of
shares of common stock, on November 15, 2022 , for a price of $100 , and a 10%
beneficial ownership interest in one share of 0% Series D Cumulative Perpetual
Convertible Preferred Stock, without par, with a liquidation preference of
$1,000 per share ("Series D Preferred Stock"). The Company received
approximately $735 million in cash proceeds from the 2019 Equity Units, net of
offering expenses and underwriting costs and commissions, and issued 750,000
shares of Series D Preferred Stock, recording $750 million in preferred stock.
The proceeds were used, together with cash on hand, to redeem the 2052 Junior
Subordinated Debentures in December 2019 . The Company also used $19 million of
the proceeds to enter into capped call transactions utilized to hedge potential
economic dilution. On and after November 15, 2022 , the Series D Preferred Stock
may be converted into common stock at the option of the holder. At the election
of the Company, upon conversion, the Company may deliver cash, common stock, or
a combination thereof. On or after December 22, 2022 , the Company may elect to
redeem for cash, all or any portion of the outstanding shares of the Series D
Preferred Stock at a redemption price equal to 100% of the liquidation
preference, plus any accumulated and unpaid dividends. If the Company calls the
Series D Preferred Stock for redemption, holders may convert their shares
immediately preceding the redemption date. Upon settlement of the 2022 Purchase
Contracts, the Company will receive additional cash proceeds of $750 million .
The Company pays the holders of the 2022 Purchase Contracts quarterly contract
adjustment payments, which commenced February 15, 2020 . As of June 27, 2020 , the
present value of the contract adjustment payments was approximately $95 million .
In March 2018 , the Company purchased from a financial institution "at-the-money"
capped call options with an approximate term of three years, on 3.2 million
shares of its common stock (subject to customary anti-dilution adjustments) for
an aggregate premium of $57 million . In February 2020 , the Company net-share
settled 0.6 million of the 3.2 million capped call options on its common stock
and received 61,767 shares using an average reference price of $162.26 per
common share. On June 9, 2020 , the Company amended the 2018 capped call options
to align with and offset the potential economic dilution associated with the
common shares issuable upon conversion of the remarketed Series C Preferred
Stock, as further discussed below. Subsequent to the amendment, the capped call
options had an initial lower strike price of $148.34 and an upper strike price
of $165.00 , which was approximately 30% higher than the closing price of the
Company's common stock on June 9, 2020 . As of June 27, 2020 , the lower and upper
strike prices remained $148.34 and $165.00 . The aggregate fair value of the
options at June 27, 2020 was $25.4 million .
In May 2017 , the Company issued 7,500,000 Equity Units with a total notional
value of $750 million ("2017 Equity Units"). Each unit had a stated amount of
$100 and initially consisted of a three-year forward stock purchase contract
("2020 Purchase Contracts") for the purchase of a variable number of shares of
common stock, on May 15, 2020 , for a price of $100 , and a 10% beneficial
ownership interest in one share of 0% Series C Cumulative Perpetual Convertible
Preferred Stock, without par, with a liquidation preference of $1,000 per share
("Series C Preferred Stock"). The Company received approximately $726 million in
cash proceeds from the 2017 Equity Units, net of offering expenses and
underwriting costs and commissions, and issued 750,000 shares of Series C
Preferred Stock, recording $750 million in preferred stock. The proceeds were
used for general corporate purposes, including repayment of short-term
borrowings. The Company also used $25 million of the proceeds to enter into
capped call transactions utilized to hedge potential economic dilution.
In May 2020 , the Company successfully remarketed the Series C Preferred Stock,
as described more fully in Note J, Equity Arrangements. The remarketing
generated cash proceeds of $750.0 million which were applied to settle the
holders' stock purchase contract obligations, resulting in the Company issuing
5,463,750 common shares. Holders of the remarketed Series C Preferred Stock are
entitled to receive cumulative dividends, if declared by the Board of Directors,
at an initial fixed rate equal to 5.0% per annum of the $1,000 per share
liquidation preference (equivalent to $50.00 per annum per share). In connection
49
--------------------------------------------------------------------------------
Table of Contents
with the remarketing, the conversion rate was reset to 6.7352 shares of the
Company's common stock, which is equivalent to a conversion price of
approximately $148.47 per share. As of June 27, 2020 , due to customary
anti-dilution provisions, the conversion rate was 6.7411, equivalent to a
conversion price of approximately $148.34 per share of common stock. On and
after May 15, 2020 , the Series C Preferred Stock may be converted into common
stock at the option of the holder. At the election of the Company, upon
conversion, the Company may deliver cash, common stock, or a combination
thereof. The Company does not have the right to redeem the Series C Preferred
Stock prior to May 15, 2021 . At the election of the Company, on or after May 15,
2021 , the Company may redeem for cash, all or any portion of the outstanding
shares of the Series C Preferred Stock at a redemption price equal to 100% of
the liquidation preference, plus any accumulated and unpaid dividends. If the
Company calls the Series C Preferred Stock for redemption, holders may convert
their shares immediately preceding the redemption date.
Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Equity Arrangements, for further discussion of the Company's financing arrangements.
50--------------------------------------------------------------------------------
Table of Contents OTHER MATTERS Critical Accounting Estimates: There have been no significant changes in the Company's critical accounting estimates during the second quarter of 2020. Refer to the "Other Matters" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the year endedDecember 28, 2019 for a discussion of the Company's critical accounting estimates.
© Edgar Online, source
