SWK Beats Estimate, Lowers Guidance

StanleyBlack & Decker (SWK - Analyst Report) reported its financial results for the third quarter of 2011 with earnings per share from continuing operations of $1.34, up from 97 cents reported in the year-ago comparable quarter. Earnings also surpassed the Zacks Consensus Estimate of $1.32.

GAAP EPS including 42 cents of merger related charges was 92 cents compared with 73 cents in the third quarter of 2010.

Revenue

Net revenue for the third quarter jumped 11.3% year over year to $2.6 billion. The increase reflects a 4% growth from unit volume; 3% from currency translation and a 4% impact from acquisitions.

Revenue in the CDIY segment increased 5.6% year over year to $1,337.6 million, while the Security segment reported revenues of $656.4 million, reflecting a rise of 16.6%. Industrial segment sales increased 19.1% to $642.4 million.

Margins

In the third quarter of 2011, normalized cost of sales, as a percentage of revenue was 62.5% versus 63.1% in the year-ago quarter. Lower cost of sales led to higher gross margin in the quarter, which settled at 37.5% in the third quarter.

Selling, general and administrative expenses registered an increase of 8.4% year over year, but as a percentage of revenue declined from 24.3% to 23.6%. Operating margin in the quarter was 13.9% versus 12.6% in the year-ago comparable quarter.

Balance Sheet

Exiting the third quarter, Stanley Black & Decker’s cash and cash equivalents decreased drastically from $1,915.0 million in the previous quarter to $851.9 million. Long-term debt, net of current portion was $2,738.7 million, up from $2,729.0 million in the previous quarter.

Cash Flow

Normalized net cash flow from operating activities was approximately $228.7 million compared with $279.8 million in the comparable quarter of 2010. Capital expenditure increased to $52.4 million versus $45.9 million in the year-ago third quarter. Free cash flow in the quarter was $176.3 million versus $233.9 million in the comparable period last year.

In the third quarter, the company expended approximately $69.1 million in paying dividends to shareholders and bought back shares worth $350 million.

Outlook

Management anticipates fourth quarter earnings, excluding merger related charges, of roughly $1.30 per share. The quarter’s estimate implies full fiscal year earnings per share on roughly the lower end of the previous range of $5.15-$5.40.

GAAP EPS is likely to be in a range of $3.75-$3.98 versus the prior expectation of $4.50-$4.75. Normalized tax rate is expected to be roughly 24%, down from 25% to 26% expected earlier. The core tax rate is expected to be within the 17% to 18% range. Free cash flow for the fiscal year is expected to be roughly $1.1 billion.

Fiscal year 2011 organic sales growth is expected to be approximately 3%-5% versus 4%-5% range expected earlier. The lowered guidance reflects softness in Europe and retraction in unit volumes within US hand tools. Total revenue growth is likely to be roughly 12.5% while currency translation and acquisition impact is expected to be 9%.

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

We currently maintain a Neutral recommendation on the stock.

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