Stanley Black & Decker (SWK) Beats On Q4 Earnings, '18 View Intact

Stanley Black & Decker, Inc. (NYSE:SWK) kept its earnings streak alive in the first quarter of 2018, pulling off a positive earnings surprise of 3%.

Earnings, excluding acquisition-related charges and other one-time impacts, were $1.39 per share, above the Zacks Consensus Estimate of $1.35. Also, the bottom line increased 6.9% from the year-ago tally of $1.30 on the back of healthy segmental results and synergistic gains. These positives offset the adverse impacts of commodity inflation.

Segmental Performance Drives Revenues

In the quarter, Stanley Black & Decker’s net sales were $3,209.3 million, reflecting year-over-year growth of 12.4%. The improvement was primarily driven by 4% volume gains, 4% positive-currency impact and 6% gain from acquired assets, partially offset by 2% adverse impact from divested assets (Mechanical Security business in February 2017).

Also, the top line surpassed the Zacks Consensus Estimate of $3.1 billion by 3.5%.

Stanley Black & Decker reports revenues under three market segments. A brief discussion of the quarterly results is provided below:

Tools & Storage’s revenues totaled $2,215.8 million, representing 69% of net revenues in the quarter. On a year-over-year basis, the segment’s revenues grew 16.9%, on the back of 6% gain from volume growth, 8% from acquired assets and 3% from currency movements.

Industrial generated revenues of $504.2 million, accounting for roughly 15.7% of net revenues in the quarter. Sales grew 5.1% year over year, primarily driven by 6% benefit from favorable currency movements, partially offset by 1% adverse impact from divestitures.

Revenues from Security, roughly 15.2% of net revenues, increased 1.6% year over year to $489.3 million. Favorable currency impact of 5%, price gain of 1% and acquisition gains of 3% were partially offset by 5% negative impact of divestitures and 2% from lower volumes.

Margin Profile Weak on Higher Costs and Expenses

Stanley Black & Decker’s cost of sales in the first quarter increased 14.5% year over year to $2,041.9 million. It was 63.6% of the quarter’s net sales versus 62.4% in the year-ago quarter. Gross margin slipped 120 basis points (bps) to 36.4% as commodity inflation of $50 million negated positive impacts of volume growth and improved productivity.

Selling, general and administrative expenses increased 13.2% year over year to $769.2 million. It represented 24% of net sales in the quarter versus 23.8% in the year-ago quarter. Operating margin decreased 140 bps year over year to 12.4%.

Tax rate in the quarter was 23%, down from 25% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the first quarter, Stanley Black & Decker had cash and cash equivalents of $405.6 million, lower than $637.5 million in the previous quarter. Long-term debt (net of current portions) edged down 0.5% sequentially to $2,827.6 million.

In the first quarter, the company used $349.4 million cash for its operating activities, roughly 11.2% higher than $314.1 million used in the year-ago quarter. Capital spending totaled $106.3 million versus $64.7 million in the year-ago quarter. Free cash outflow in the quarter was $455.7 million, higher than the outflow of $378.8 million in the year-ago quarter.

Shareholders-Friendly Initiatives

During the first quarter, Stanley Black & Decker paid cash dividends of approximately $94.9 million and repurchased shares worth $11.4 million.

Also, it secured the option to purchase roughly 3.2 million shares by March 2021 by executing a capped-call transaction.

Yesterday, Stanley Black & Decker announced that its board of directors approved a quarterly cash dividend of 63 cents per share to shareholders of record as of Jun 6, 2018. The dividend payment will be made on Jun 19.

Outlook

For 2018, Stanley Black & Decker anticipates gaining from growing recognition for its brands — Craftsman, Lenox, Irwin and DeWalt FlexVolt. Also, the buyout of Nelson Fastener Systems’ industrial business (completed on April 2) will strengthen the company’s Engineered Fastening business.

The company reaffirmed adjusted earnings guidance for the year of $8.30-$8.50 per share, reflecting year-over-year growth of 11-14%. Organic sales growth will be roughly 5%.

Commodity inflation of $180 million is predicted to lower earnings by 15 cents. This forecast includes adverse impacts of the imposition of import tariffs on steel and aluminum. Earlier, the company predicted commodity cost inflation of $150 million. Also, benefits from cost-savings actions and productivity enhancements initiatives, favorable pricing and synergistic gains from the buyout of Nelson Fastener Systems will increase earnings by 15 cents per share.

Free cash flow conversion is predicted to be roughly 100%.

Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise