Stanley Black & Decker (SWK) reported its financial results for the third quarter of 2010 with earnings per share from continuing operations of 97 cents, up roughly 26% from 77 cents in the comparable quarter of 2009. EPS also surpassed the Zacks Consensus Estimate of 89 cents.
Net income from continuing operations soared 166% year over year to $164.6 million, compared with $61.8 million in the third quarter of 2009. Increase in net income was due primarily to growth in revenue that more than offset higher expenses.
GAAP EPS, including one-time charges was 73 cents, down 2 pennies from 75 cents recorded in the third quarter of 2009.
Revenue
Net revenue in the third quarter 2010 was $2,369.1 million, up 153% year over year and above the Zacks Consensus Estimate of $2,267 million. The increase reflects a 139% growth from the Black and Decker acquisition, 7% from unit volume, and 9% from other acquisitions. The positive momentum was partially offset by 2% due to negative currency impact.
On a pro forma basis, net revenue registered an 11% growth, of which organic growth accounted for an 8% increase.
Revenue in the CDIY segment increased 294% year over year to $1,289 million, while the Security segment reported revenues of $563 million, reflecting a rise of 40% year over year. Revenue in the Industrial segment was $517 million, up 152% year over year.
Cost of sales, as a percentage of revenue soared to 63.1% from 58.7% in the year-ago quarter. Higher commodity costs, foreign exchange and unfavorable mix was partially offset by productivity projects and synergy realization, leading to a 4.4% year-over-year decline in gross margin to 36.9% in the third quarter of 2010.
Selling, general and administrative expenses registered an increase of 128.6% year over year, but as a percentage of revenue declined from 26.9% to 24.3%. Operating margin in the quarter was 12.6% versus 14.4% in the third quarter of 2009.
Balance Sheet
Exiting the third quarter, Stanley Black & Decker’s cash and cash equivalents increased 2.3% sequentially to $1,635.9 million compared with $1,598.4 million in the second quarter of 2010. Long-term debt, net of current portion was $2,719.2 million, up 17.3% from $2,318.7 million in the second quarter of 2010.
Net cash flow from operating activities was approximately $279.8 million compared with $176.3 million in the third quarter of 2009. Capital expenditure increased to $45.9 million versus $18.4 million in the comparable quarter of 2009. Higher operating cash flow, slightly offset by higher capital expenditures led to a free cash flow of $233.9 million in the quarter, versus $157.9 million in the comparable quarter a year-ago.
Outlook
Management revised its 2010 outlook and expects EPS to fall within the range of $3.60-$3.70 versus its prior guidance of $3.35-$3.55. The revised guidance excludes $0.21 tax-related benefit realized in the second quarter 2010 and one-time charges incurred. Including the tax-benefit the EPS guidance is roughly $3.81-$3.91.
The revised guidance is based on a net organic revenue growth assumption of 5% in the second half of 2010 from 2009. This implies a positive growth in the fourth quarter. Gross margin, due to lower absorption and currency, is expected to decrease by 50-80 basis points sequentially.
Free cash, excluding one-time charges, is expected to exceed $700 million from $600 million as projected earlier.
From the recently acquired Black & Decker, the company anticipates annual cost synergies of $350.0 million over three years of acquisition, with roughly $125 million (versus its prior expectation of $90 million) to be realized in 2010. Also, from the ADT France acquisition, synergistic benefits are anticipated in 2011.
The company is hopeful about exceeding the $350 million cost synergy target and intends to provide an updated estimate in January 2011, along with the fourth quarter results.
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, supported by Zacks #3 (Hold) Rank.
STANLEY B&D INC (SWK): Free Stock Analysis Report
Zacks Investment Research
