SWK Ups Estimate, Outlook Impressive

StanleyBlack & Decker (SWK - Analyst Report) reported its financial results for the fourth quarter of 2011 with earnings per share from continuing operations of $1.36, up from $1.07 reported in the year-ago comparable quarter. Earnings also surpassed the Zacks Consensus Estimate of $1.28

GAAP EPS including 31 cents of merger related charges was $1.05 compared with 83 cents in the fourth quarter of 2010.

For the fiscal year 2011, EPS was $5.24 versus $4.15 reported in the previous year and the Zacks Consensus Estimate of 5.17. 

Revenue

Net revenue for the fourth quarter jumped 17% year over year to roughly $2.8 billion. The increase reflects a 5% growth from unit volume; 1% positive price impact and 11% positive impact from acquisitions.

Revenue in the CDIY segment increased 5.7% year over year to $1,323.7 million, while the Security segment reported revenues of $827.3 million, reflecting a rise of 48.8%. Industrial segment sales increased 9.3% to $640.9 million.

For the fiscal year 2011, total revenue was $10,376.4 million, reflecting an increase of 24.4% year over year.

Margins

In the fourth quarter of 2011, normalized cost of sales, as a percentage of revenue was 64.4% versus 63.4% in the year-ago quarter. Higher cost of sales led to lower gross margin in the quarter, which settled at 35.6% in the third quarter.

Selling, general and administrative expenses registered an increase of 5.1% year over year, but as a percentage of revenue declined from 25.3% to 22.8%. Operating margin in the quarter was 12.8% versus 11.3% in the year-ago comparable quarter.

Balance Sheet

Exiting the fourth quarter, Stanley Black & Decker’s cash and cash equivalents increased 6.5% sequentially to $906.9 million. Long-term debt, net of current portion was $2,925.8 million, up from $2,738.7 million in the previous quarter.           

Cash Flow

Normalized net cash flow from operating activities was approximately $615.8 million compared with $533.6 million in the comparable quarter of 2010. Capital expenditure increased to $53.4 million versus $82.4 million in the year-ago fourth quarter. Free cash flow in the quarter was $562.4 million versus $451.2 million in the comparable period last year.

In the fourth quarter, the company expended approximately $69.3 million in paying dividends to shareholders.

Outlook

Management hopes that full fiscal year 2012 earnings, excluding merger related charges, would be within the $5.75-$6.00 range. Organic net sales growth is expected to be up approximately 1%-2% from the $11 billion base in 2011. 

Cost synergies of approximately $115 million from the Black & Decker acquisition and $45 million from the Niscayah acquisition in 2012 are likely to be roughly 70 cents accretive to EPS. Also, the newly announced $150 million cost reduction program along with pre-tax benefits will add roughly 70 cents to EPS. Currency translation impact will be negative by 70 cents and lower share count will add 8 cents.            

Tax rate is expected to be roughly 22% -23%, creating headwind by 55 cents, while free cash flow is expected to be roughly $1.2 billion. Interest expense is expected to be approximately $130 million.

First quarter 2012 earnings are expected to be within the 18%-19% range of the full year earnings. GAAP EPS for the year is expected to be roughly within the $4.71-$4.97 range.

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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