Stanley Black & Decker Inc. (NYSE:SWK) reported better-than-expected results for the second quarter of 2019, with earnings surpassing estimates by 4.3%. Notably, in the first quarter, it recorded earnings beat of 29.09%.
Earnings, excluding acquisition-related charges and other one-time impacts, were $2.66 per share, surpassing the Zacks Consensus Estimate of $2.55. Also, earnings grew 3.5% from the year-ago quarter’s figure of $2.57 per share, driven by healthy sales performance, solid operational performance (negating the adverse impacts of $110 million of external headwinds) and 1.4% fall in shares outstanding.
Tools & Storage and Industrial Segments Drive Revenues
In the quarter under review, the company’s net sales were $3,761.3 million, reflecting 3.2% year-over-year growth. This improvement was primarily driven by 1% rise in volume, 2% impact of positive price and 3% gain from acquired assets. These were partially offset by 3% adverse impact of unfavorable movements in foreign currencies.
However, the top line lagged the Zacks Consensus Estimate of $3,801 million.
Stanley Black reports revenues under three market segments. A brief discussion on the quarterly results is provided below:
Tools & Storage’s revenues totaled $2,626 million, representing 69.8% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues grew 2.3% on 3% gain from volume growth and 2% from favorable pricing, partially offset by 3% adverse impact of currency movements.
The Industrial segment generated revenues of $649.9 million, accounting for roughly 17.3% of net revenues in the reported quarter. Sales grew 13.4% year over year, primarily driven by 18% gain from buyouts of IES Attachments, partially offset by 2% negative impact of foreign currency woes and 3% from volume decline.
Revenues from the Security segment, representing roughly 12.9% of net revenues, decreased 3.4% year over year to $485.4 million. Gain of 2% from acquisitions (commercial electronic security) and 1% favorable impact of pricing actions were more than offset by 3% adverse impact of foreign currency woes, 2% volume decline and 1% adverse impact of the divestiture of Sargent & Greenleaf.
Commodity Inflation, Forex Woes & Tariffs Hurt Margins
In the reported quarter, Stanley Black’s cost of sales increased 4.4% year over year to $2,450.8 million. It represented 65.2% of the quarter’s net sales versus 64.4% in the year-ago quarter. Gross margin slipped 80 basis points (bps) to 34.8% as commodity inflation, adverse currency impact and tariffs negated positive impacts of volume growth, favorable pricing and improved productivity.
Selling, general and administrative expenses decreased 3.2% year over year to $755.7 million. It represented 20.1% of net sales in the reported quarter versus 21.4% in the year-ago quarter. Operating profits increased 7.6% year over year to $554.8 million, with year-over-year growth of 60 bps in the margin to 14.8%.
Adjusted tax rate in the reported quarter was 11.6% compared with the year-ago quarter figure of 7%.
Balance Sheet & Cash Flow
Exiting the second quarter of 2019, Stanley Black had cash and cash equivalents of $310.7 million, up 10.3% from $281.8 million recorded in the last reported quarter. Long-term debt (net of current portions) was stable sequentially at $3,909.1 million.
In the second quarter, the company generated net cash of $501 million from operating activities, higher than $198 million generated in the year-ago quarter. Capital spending totaled $97.2 million versus $111.7 million in the year-ago quarter. Free cash flow in the quarter was $403.8 million, higher than $86.3 in the year-ago quarter.
During the reported quarter, the company paid cash dividends of approximately $97.7 million while spent $1.1 million for purchasing treasury stocks.
Outlook
In the quarters ahead, Stanley Black anticipates gaining from a growing recognition for its brands — Craftsman, Lenox, Irwin and DeWalt FlexVolt. Further, business expansion in emerging markets, innovation (including Xtreme and Atomic) and favorable e-commerce trends will be beneficial.
Further, the company anticipates gaining from pricing actions and $250-million cost-reduction initiatives. It noted that it intends on starting multi-year initiatives aimed at margin expansion (three-year savings are predicted to be $300-$500 million). Also, transformational activities as well as efforts to develop electronic security solutions will be beneficial.
For 2019, the company maintained adjusted earnings projection of $8.50-$8.70 per share. This guidance suggests growth of 4-7% from the year-ago reported figure. Organic growth will be approximately 4%. Global factors have weakened outlook for emerging and industrial markets and this, in turn, will modestly impact organic volume.
External headwinds will have an adverse impact of $390 million (higher than the previously mentioned $340 million). Free cash flow conversion is predicted to be roughly 85-90%.
Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise
Roper Technologies, Inc. (ROP): Free Stock Analysis Report
Stanley Black & Decker, Inc. (SWK): Free Stock Analysis Report
Dover Corporation (DOV): Free Stock Analysis Report
DXP Enterprises, Inc. (DXPE): Free Stock Analysis Report
Original post
Zacks Investment Research