Stanley Black & Decker (SWK) reported its financial results for the second quarter of 2011 with earnings per share from continuing operations of $1.18, up from $1.03 in the year-ago comparable quarter. EPS was, however, below the Zacks Consensus Estimate of $1.27.
GAAP EPS, including 32 cents of merger related charges and 28 cents of favorable tax settlement impacts, was $1.14 compared with 28 cents in the second quarter of 2010.
Revenue
Net revenue for the second quarter jumped 10.9% year over year to $2.6 billion. The increase reflects a 3% growth from unit volume, 5% from currency translation and 3% impact from acquisitions. Pricing in the quarter was flat.
Revenue in the CDIY segment increased 5% year over year to $1,364.4 million, while the Security segment reported revenues of $622.4 million, reflecting a rise of 8.9%. Industrial segment sales increased 28.8% to $636.4 million.
Margins
In the second quarter of 2011, cost of sales, as a percentage of revenue soared to 62.9% from 62.3% in the year-ago quarter. Higher cost of sales led to lower gross margin in the quarter, which settled at 37.1% in the second quarter.
Selling, general and administrative expenses registered an increase of 8.4% year over year, but as a percentage of revenue declined from 24.0% to 23.5%. Operating margin in the quarter was 13.6% versus 13.7% in the year-ago comparable quarter.
Balance Sheet
Exiting the second quarter, Stanley Black & Decker’s cash and cash equivalents increased marginally by 1.7% sequentially to $1,915.0 million compared with $1,883.5 million in the first quarter of 2011. Long-term debt, net of current portion was $2,729.0 million, down from $3,008.5 million in the previous quarter.
Cash Flow
Normalized net cash flow from operating activities was approximately $211.1 million compared with $248.2 million in the comparable quarter of 2010. Capital expenditure increased to $54.1 million versus $35.1 million in the year-ago comparable quarter.
Lower operating cash flow combined with higher capital spending led to a free cash flow of $157.0 million in the quarter versus $213.1 million in the comparable period last year.
In the second quarter, the company expended approximately $68.9 million in paying dividends to shareholders. However, the company postponed its $250 million share repurchase program (announced in the first quarter) due to pending acquisition of Niscayah. The company expected to commence its buyback in the third quarter of 2011.
In addition, the company received US antitrust clearance for the acquisition of Niscayah. The company had previously offered to purchase all the class A and class B shares as well as warrants of Niscayah for SEK18.00 per share and SEK0.05 per warrant in cash.
Outlook
Management revised its fiscal year 2011 EPS guidance range to $5.15-$5.40 from the prior range of $5.00-$5.25, excluding the charges related to mergers and acquisitions and including the favorable tax benefits. GAAP EPS is likely to be in a range of $4.50-$4.75 versus the prior range of $4.35-$4.60. Tax rate would probably be within 19%-20% range versus the prior expectation of 20%-21%.
Fiscal year 2011 organic sales growth is expected to be within the 4%-5% range, down 1% from the prior expectation of 5%-6% range. Revenue synergies are expected to add an additional 50 basis point growth.
Management revised its realized cost synergies expectation to $200 million from its prior estimation of $165 million. Cost synergies from the Black & Decker integration are projected to be $450 million by 2012, up $25 million from the prior estimate of $425 million. Moreover, SWK’s management commented that the company remains on track to recover 80% of the expected commodity inflation in the second half of 2011 as pricing actions go into effect.
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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