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SWK's 3Q Misses Est., Outlook Lowered

Zacks Equity Research

Industrial tool maker, Stanley Black & Decker (SWK) reported earnings per share from continuing operations of $1.40 in the third quarter of 2012, up from $1.33 in the year-ago comparable quarter. However, the quarter’s earnings were below the Zacks Consensus Estimate of $1.45.

GAAP EPS which included 71 cents of merger & acquisition related charges and other charges was 69 cents compared with 96 cents in the third quarter of 2011.


Net revenue in the quarter jumped 6% year over year to roughly $2,786.7 million. The increase can be attributed to a 9% contribution from acquisitions, which were partially offset by a 3% negative currency translation impact. Price and volume impact was relatively flat in the quarter. Results, however, lagged behind the Zacks Consensus Estimate of $2,837 million.

Revenue in the CDIY segment increased 2.9% year over year to $1,376.1 million, while the Security segment reported revenues of $789.7 million, reflecting a rise of 21.8%. Industrial segment sales decreased 2.1% to $620.9 million.


In the third quarter 2012, normalized cost of sales, as a percentage of revenue, was 63.4%, up from 62.5% in the year-ago quarter. Gross margin fell 90 basis points to 36.6%.

Selling, general and administrative expenses registered a year-over-year decline of 0.2% and as a percentage of revenue declined 150 basis points to 22.1%. Operating margin in the quarter was 14.5% versus 14.0% in the year-ago comparable quarter.

Balance Sheet

Exiting the third quarter, Stanley Black & Decker’s cash and cash equivalents stood at $769.5 million, an increase of 33.2% from $577.8 million in the previous quarter. Roughly $901 million long-term debt repayment during the quarter slashed the company’s long-term debt (net of current portion) balance by 6.7% sequentially to $2,728.9 million.
Cash Flow

Normalized net cash flow from operating activities was $234.7 million in the third quarter, up slightly from $228.7 million in the year-ago quarter. Capital spending increased 25.6% year over year to $65.8 million. Free cash flow in the quarter moved down to $168.9 million from $176.3 million in the comparable period last year.

In the third quarter, the company expended approximately $82.5 million in paying dividends to shareholders.


Management revised down its earnings per share guidance excluding merger related charges for 2012 from $5.40-$5.65 to roughly $5.25 due to organic volume pressures and increased investments in organic growth.

Organic net sales growth expectation was lowered to 1%; the lower end of the company’s previously provided year-over-year growth guidance of 1%-2% from the $11 billion base in 2011.
Cost synergies of approximately $115 million are still expected to be realized in 2012, along with roughly $45 million synergies from the Niscayah acquisition.

GAAP EPS for the year is expected to be roughly $3.65 versus $3.98-$4.34 expected earlier. Free cash flow is projected 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).

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