Stanley Beats Estimate, Future Strong - Analyst Blog

Stanley Black & Decker (SWK) reported its financial results for the fourth quarter of 2010 with earnings per share from continuing operations of $1.05, up roughly 16.7% from 90 cents in the comparable quarter of 2009. EPS also surpassed the Zacks Consensus Estimate of 92 cents.

For full-year 2010, earnings per share were $4.12 versus $3.04 in 2009, surpassing the Zacks Consensus Estimate of $3.70. Excluding the one-time charges primarily related to the Black & Decker transaction as well as the positive second quarter tax-related benefit, earnings per share came in at $3.88, up 39% year over year. Earnings per share were above the management's guidance range of $3.60–$3.70 range.

GAAP EPS, including one-time charges was 81 cents in the fourth quarter and $1.32 for the fiscal year 2010.

Revenue

Net revenue for the fourth quarter jumped 149% year over year to $2.4 billion and was roughly in-line with the Zacks Consensus Estimate of $2,378 million. The increase reflects a 133% growth from the Black and Decker acquisition, 5% from unit volume, and 12% from other acquisitions. Currency translation had a negative impact of 1% on positive revenue growth.

On a pro forma basis, net revenue registered 10% growth, of which organic growth accounted for an increase of 5%.

Revenue in the CDIY segment increased 274% year over year to $1,273 million, while the Security segment reported revenues of $565 million, reflecting a rise of 44%. Industrial segment sales increased 144% to $575 million.

For full- year, net revenues were $8.4 billion, up 125% year over year. Sales in emerging markets were strong and grew 29% year over year, driven by strong growth in Latin America. Revenues in CDIY segment increased over 243% year over year, Security grew by 35% and Industrial registered growth of 110%.

Margins

In the fourth quarter of 2010, cost of sales, as a percentage of revenue soared to 63.5% from 59.3% in the year-ago quarter. Higher cost of sales led to 4.2% year-over-year decline in gross margin, which settled at 36.5% in the fourth quarter.

Selling, general and administrative expenses registered an increase of 130.6% year over year, but as a percentage of revenue declined from 27.3% to 25.3%. Operating margin in the quarter was 11.2% versus 13.4% in the fourth quarter of 2009.

Balance Sheet

Exiting the fourth quarter, Stanley Black & Decker's cash and cash equivalents increased 6.7% sequentially to $1,745.4 million compared with $1,635.9 million in the third quarter of 2010. Long-term debt, net of current portion was $3,018.1 million, up 11% from $2,719.2 million in the third quarter of 2010.

Cash Flow

Normalized net cash flow from operating activities was approximately $533.6 million compared with $291.4 million in the comparable quarter of 2009. Capital expenditure increased to $82.4 million versus $28.2 million in the comparable quarter of 2009.

Higher operating cash flow, slightly offset by higher capital expenditures led to a free cash flow of $451.2 million in the quarter versus $263.2 million in the comparable period last year.

For the fiscal year 2010, net cash from operating activities was $1,120.9 million and capital expenditures were $185.5 million. Free cash flow was approximately $935.4 million.

Outlook

Management expects fiscal year 2011 EPS to range within $4.75–$5.00, excluding charges related to mergers and acquisitions. GAAP EPS is anticipated to be within $4.29–$4.54 range.

Organic net sales are expected to increase by 5-6% from combined company pro-forma level of $9.3 billion. Acquisitions are anticipated to add 3% growth while revenue synergies will account for an additional 50 basis points increase.

Cost synergies from the Black & Decker will approximate $165 million in 2011. Operating margin is anticipated to increase by 150 basis points versus 2010, including 100 basis points negative price/inflation impact. Tax rate is expected to be approximately 25%-26%. Non-merger and acquisition related restructuring, impairment and related charges is anticipated to be relatively flat at $25 million (2010 level).

Free cash, excluding one-time charges, is expected to be approximately $1.1 billion. Capital expenditure is anticipated to remain inflated in the year.

Management increased its cost synergy expectation from the Black & Decker acquisition to $425 million by the end of 2012 versus the prior expectation of $350 million to be achieved within three year after the closing of the deal.

Management also anticipates achieving revenue synergies of approximately $300-$400 million by the end of 2013 due to brand expansion, increased access to global markets through established distribution channels and cross-selling opportunities. Two-third synergies are expected in CDIY segment while the remaining one-third in equal parts in Security and Industrial segments.

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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