Donald Allan
President and Chief Executive Officer at Stanley Black & Decker
Thank you, Dennis, and good morning, everyone. As you saw from today's release, we made tangible progress during the third quarter towards our strategy around focusing our business and transforming our supply chain. We are building positive momentum as we deliver improved customer fill rates, deployed a new organizational structure, implemented cost controls and actively reduced our inventories. In addition, we made significant progress reducing debt, utilizing $3.3 billion in proceeds from our strategic divestitures. All key priorities, we set out heading into the third quarter. All of this is not yet apparent in the financials, but we are encouraged by a few items. One, our headcount reductions are largely complete. Two, inventory is coming down. Three, cash generation was positive in September, and we believe this can continue in the fourth quarter and next year.
And four, gross margin will be the last to turn as we face the high cost of destocking, but we expect to be through that and pivot to better performance by the middle of next year. While the macroeconomic environment remains challenging, notably softer North America consumer and European markets, combined with stubborn cost inflation, there were relative bright spots with continued strength in professional construction and industrial customer demand as well as incremental progress unlocking global supply chain constraints. Our actions to alleviate semiconductor constraints are progressing as expected and are contributing to results through our improved fill rates as well as slightly better organic revenue performance in Q3. Third quarter revenue was $4.1 billion, up 9%, driven by our Outdoor Equipment acquisitions.
Organic revenue declined 2%, which was an improvement over what we delivered in the first half, due to increased professional power tool supply and a solid performance by the Industrial business as organic growth was up 14%. Price realization sequentially improved to 8% versus the prior year. U.S. retail point of sale was relatively consistent with the levels we saw exiting 2Q, supported by price and professional demand, even as softer DIY consumer demand persisted. Europe continues to operate in a challenging environment as a result of the broader macro, the war in the Ukraine as well as the continued impacts from customer destocking due to elevated channel inventories.
Our improved supply position has set us up for strong merchandising support for the holidays across all major brands and categories, with much of the product already shipped to our customers in September and October. We have gained back some key isle end caps and off-shelf promotion areas after 12 months of limited promotional activity. During the third quarter, we successfully delivered $65 million in pretax savings from our global cost initiatives and reduced our inventory by approximately $300 million. In a few moments, I will dive deeper into our progress related to the company's transformation plan announced in Q2. Operating margin was 6.2% in the third quarter pressured by input cost inflation, which was partially offset by customer price increases. Additionally, our margins were impacted from our inventory destock as we began the process of significantly reducing manufacturing production levels in June and during the third quarter.
This resulted in third quarter adjusted EPS of $0.76. The divestitures of Electronic Security, Access Technologies and Oil & Gas businesses were successfully completed in the third quarter, which further focuses Stanley Black & Decker's portfolio on our leading Tools & Outdoor and Industrial businesses. Proceeds from the transaction supported $3.3 billion of sequential debt reduction. These deals also conclude the strategic portfolio moves we've been executing over the last 12 months and further intensifies the operational execution focus of our company as we move forward. In terms of financial guidance, because of the ongoing changes to the demand environment, the impact related to foreign exchange and incremental costs due to our more aggressive pullback on production to accelerate inventory destocking in the first half of 2023.
We are revising our 2022 adjusted diluted EPS range down to $4.15 up to $4.65 and updating our free cash flow estimate to approximate $0.3 billion up to $0.6 billion for the fourth quarter, which includes a substantial tax payment related to the gains on the business sales I previously mentioned. Our near-term priority is cash generation, and September marked a turning point with planned production curtailments beginning to meaningfully contribute to inventory reductions, supporting positive cash generation in the month. The decision to escalate and continue production curtailments in Q4 will clearly carry a negative P&L implication as we incur the impact of our underabsorption of fixed plant costs, while concurrently liquidating higher cost inventory from the balance sheet.
Although the immediate P&L impacts are significant and will be incurred in Q4 and likely in the early stages of 2023, we believe proactively reducing inventory in a disciplined yet swift manner is the right strategy and will put our business in a position to optimize growth and margin expansion going forward. Now I'd like to review how we are moving forward to accelerate organic growth. We have optimized the corporate structure, focused our operating model and are transforming our supply chain to drive efficiency and fuel reinvestment. As we deploy our new organization structure and operating model, we are elevating three key priorities to sharpen our focus: one, end user obsession and innovation; two, customer focus; and three, delivering operational and functional excellence.
These are built upon the nonnegotiable priorities and values that make up our culture, such as people focus and talent management, health and safety, integrity, compliance, DE&I and ESG. In the next three years, we expect to redeploy $300 million to $500 million to advance innovation across our iconic brands, accelerate electrification in our Outdoor and Engineered Fastening businesses, rapidly accelerate our end-user market activation and create the supply chain of the future. These investments will position the company for strong, sustainable, long-term growth, profitability, consistent free cash flow generation and shareholder return. We have a strong track record as the industry leader in breakthrough, world's first innovations in our businesses. From FLEXVOLT to ATOMIC and XTREME to POWERSTACK, we will build upon this strength to deliver an even higher quality of core and breakthrough innovations with shorter development cycles and new technologies. Electrification is a key growth driver across our Tools & Outdoor and Engineered Fastening businesses.
We plan to make incremental investments to accelerate our efforts, capitalize on share gain opportunities and fortify our market leadership position as the technology continues to shift and adoption accelerates. Market leadership includes more user activation at the front end of our businesses. As we introduce our new products and innovation, we will bring more digital tools and capabilities as well as additional commercial resources to engage directly with our customers, enhance interactions with our end users and drive market share gains. Lastly, to fully leverage these investments, we need to have a world-class and more agile supply chain that brings us closer to our customers, increases our flexibility in response to demand and enhances our customer service levels, all to drive greater growth for us and for our customers.
Aligned with these growth investments and as we execute this strategy, we will be focused on a few key success criteria. One, our powerful innovation engine will position us to grow organic revenue two to three times the market over the long term. Two, our supply chain transformation is a key enabler to improve our customer service levels and operational efficiency to return gross margins back to the 35% plus level with customer fill rates greater than 95%. Three, we have a long track record of generating strong free cash flow, and we'll continue to target 100% free cash flow conversion to net income over the long term while ensuring consistent annual performance. We are now a more focused company, executing a clear strategy with both immediate and near-term tactical actions to deliver strong value for our shareholders over the long term. Key to our success is and will continue to be market-leading innovation, and I will now highlight a few exciting new launches on the next slide.
As the world's largest tool and outdoor company, we are continuing to push the bounds of our category offerings to serve the full spectrum of our makers and creators, from the DIY consumer to trade users and up to the most demanding pro. We are expanding DEWALT POWERSTACK with the launch of a new 5-amp hour battery. This is the most powerful, longest-lasting 20-volt MAX battery in its class and is compatible with our 300-tool strong DEWALT 20-volt system. POWERSTACK is the first pouch cell technology battery of its kind designed to deliver unparalleled bower density to best serve our most demanding professional customers, and is expected to deliver over $100 million of revenue in its first 12 months since launch. Today, the five-amp hour product is already in the European market and has received great reviews by our customers.
We're also continuing to advance our high-power DEWALT FLEXVOLT line. By the end of this year, the portfolio will reach 60 products across power tools and outdoor power equipment, generating approximately $500 million of annual revenue and continuing to grow, approaching nearly 70 products by the end of 2023. The DEWALT FLEXVOLT 15 Amp-hour battery was introduced last year as a world's first innovation. DEWALT FLEXVOLT converts users who are using corded, small-gas engine or pneumatic tools due to a high power need, and they convert them over to battery power. And it is one reason why 3/4 of the DEWALT power tool revenue is cordless today. Our FLEXVOLT technology is also advancing innovation and sustainability across our industrial business, where customers desire to replace existing hydraulic tools with cordless solutions to increase portability and efficiency.
To that end, the Stanley infrastructure team recently launched the first cordless automatic rail maintenance tool, the RD 60 rail drill, which is powered by DEWALT FLEXVOLT. These are just a few subset of examples where we are continuing to deliver industry-leading innovations to push the bounds of our categories and accelerate our success. Another key enabler to our strategy is generating cost savings by taking the complexity out of our businesses while investing to accelerate our organic growth, recovering gross margins and generating consistent strong free cash flow. From an SG&A perspective, we are executing on our plan to rapidly optimize our organizational structure to become flatter and more agile. The new structure is largely complete, including a leaner corporate team. These actions will generate the $300 million of annualized cost savings as targeted.
Rigor around indirect spend is in place. Initial savings of $40 million were realized in Q3, and we are on pace to deliver approximately $200 million by the end of next year. As we shared with many of you, we moved quickly to deploy this new structure, so the organization can focus on its priorities and execution. We remain on track to deliver the cumulative savings of $500 million we set out to achieve last quarter, covering the simplification of the corporate structure, the reduction of indirect spend and the streamlining of spans and layers, all by the end of 2023. Pivoting to supply chain, we also activated this transformation with a sense of urgency. Detailed planning and, in some cases, project execution is underway across all four pillars of the strategy. I will now cover some noteworthy progress in the quarter. Regarding the SKU rationalization, we have approved and initiated action on approximately 50,000 SKUs, which represents roughly half of the targeted reduction.
We expect the remaining SKU reductions to occur from now through the end of 2023. Second, within the strategic sourcing initiatives, we are activating quick wins that are already generating savings. In tandem, we are defining the wave one implementation plan for 2023, which covers about 1/3 of the addressable spend. Lastly, we are being thoughtful as we progress the facility consolidation and distribution optimization to ensure we plan effectively for successful execution with our teams and for our customers, even as we work with speed. We have completed the feasibility analysis and are now finalizing detailed planning, with implementation targeted to begin in 2023. Additionally, we expect to take initial actions to begin the optimization of our distribution network in the fourth quarter. We have gained some significant early traction and are on pace to deliver the savings targeted for 2022, and we'll continue to build momentum as we enter 2023.
I will now pass it to Corbin, who will take you through more detailed commentary on the third quarter performance, including gross margin and inventory levels as well as the latest guidance on how we expect to close out 2022.