SWK's 2Q Lags, Outlook Revised

Zacks

Stanley Black & Decker (SWK) reported its financial results for the second quarter of 2012 on July 18, 2012. Earnings per share from continuing operations were $1.32, down 14 cents from $1.46 reported in the year-ago quarter. Earnings results for the quarter also lagged behind the Zacks Consensus Estimate of $1.52.

GAAP EPS including 40 cents of merger related charges was 92 cents compared with $1.14 in the second quarter of 2011.

Revenue

Net revenue in the quarter jumped 8.1% year over year to roughly $2.8 billion. The increase reflects a 1% improvement from unit volume; a 1% positive price impact and a 10% positive impact from acquisitions. These were, however, offset by a 4% negative currency translation impact.

Revenue in the CDIY segment increased 1.7% year over year to $1,387.2 million, while the Security segment reported revenues of $792.3 million, reflecting a rise of 29.2%. Industrial segment sales increased 1.4% to $634.7 million.

Margins

In the second quarter 2012, normalized cost of sales, as a percentage of revenue was 63.4%, down as compared with 62.8% in the year-ago quarter. Gross margin fell 60 basis points to 36.6%.

Selling, general and administrative expenses registered an increase of 3.8% year over year, but as a percentage of revenue declined 90 basis points to 22.6%. Operating margin in the quarter was 14.1% versus 13.7% in the year-ago comparable quarter.

Balance Sheet

Exiting the second quarter, Stanley Black & Decker’s cash and cash equivalents decreased 34.6% sequentially to $577.8 million. Long-term debt, net of current portion was $2,924.5 million, up compared with $2,905.7 million in the previous quarter.

Cash Flow

Normalized net cash flow from operating activities was approximately $366.3 million in the second quarter of 2012, up from $213.2 million in the year-ago quarter. Capital spending increased 17.9% year over year to $63.8 million. Free cash flow in the quarter was $302.5 million versus $159.1 million in the comparable period last year.

In the second quarter, the company expended approximately $68.9 million in paying dividends to shareholders.

The company’s Board of Directors’ announcement of dividend increase and a share buyback program came in as a surprise. Quarterly dividend rate was increased 20% from 41 cents earlier to 49 cents, which will be paid on September 18, 2012 to shareholders of record as on September 7, 2012. This was the company’s 45th consecutive annual dividend increase.

A share buyback program of roughly 20 million common stock, or worth $1.2 billion at current share price was also announced.

Outlook

Management revised down its earnings per share guidance, excluding merger related charges, for 2012 from $5.75-$6.00 to $5.40-$5.65 range due to a negative impact from foreign currency weakness.

Organic net sales growth expectation was reiterated at 1%-2% year over year from the $11 billion base in 2011.

Total cost synergies from the Black & Decker acquisition is now expected to reach $500 million as compared with the prior estimate of $450 million. Of this, approximately $115 million is still expected to be realized in 2012, which, along with $45 million synergies from the Niscayah acquisition will be roughly 70 cents accretive to EPS. Also, the $150 million cost reduction program along with pre-tax benefits will add roughly 70 cents to EPS.

GAAP EPS for the year is expected to be roughly within the $3.98-$4.34 range versus its prior guidance of $4.71-$4.97. Free cash flow is expected to be roughly $1.2 billion.

Stanley Black & Decker manufactures tools and engineered security solutions across the globe. Prime competitors of the company are Danaher Corp. (DHR), Makita Corp. (MKTAY), and Snap-on Inc. (SNA).

We currently maintain a Neutral recommendation on the stock.

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