Stanley Black & Decker Inc. SWK kept its earnings streak alive in the second quarter of 2018, pulling off a positive earnings surprise of 26%.
Earnings, excluding acquisition-related charges and other one-time impacts, were $2.57 per share, surpassing the Zacks Consensus Estimate of $2.04. Also, the bottom line increased 27.25% from the year-ago tally of $2.02 on the back of healthy segmental results and synergistic gains. These positives offset the adverse impacts of commodity inflation. Revenues Improve on Segmental Strength
In the reported quarter, Stanley Black & Decker's net sales were $3,643.6 million, reflecting year-over-year growth of 10.9%. The improvement was primarily driven by 6% volume gains, 1% positive-currency impact, 1% positive-price impact and 3% gain from acquired assets.
Also, the top line surpassed the Zacks Consensus Estimate of $3,488 million by 4.5%.
Stanley Black & Decker reports revenues under three market segments. A brief discussion of the quarterly results is provided below:
Tools & Storage's revenues totaled $2,567.8 million, representing 70.5% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 11.3%, on the back of 9% gain from volume growth, 1% from favorable pricing and 1% from currency movements.
The Industrial segment generated revenues of $573.1 million, accounting for roughly 15.7% of net revenues in the reported quarter. Sales grew 13.8% year over year, primarily driven by 3% benefit from favorable currency movements and 11% gain from acquired assets.
Revenues from Security segment, roughly 13.8% of net revenues, increased 5.6% year over year to $502.7 million. Favorable currency impact of 3%, price gain of 1% and acquisition gains of 4% were partially offset by 2% negative impact of lower volumes. Commodity Inflation & Forex Woes Hurt Margins
Stanley Black & Decker's cost of sales in the second quarter increased 14.7% year over year to $2,347.7 million. Cost of sales was 64.4% of the quarter's net sales versus 62.2% in the year-ago quarter. Gross margin slipped 210 basis points (bps) to 35.6%, as commodity inflation of $50 million and adverse currency impact of $20 million negated positive impacts of volume growth, favorable pricing and improved productivity.
Selling, general and administrative expenses increased 6.1% year over year to $780.3 million. It represented 21.4% of net sales in the reported quarter versus 22.4% in the year-ago quarter. Operating margin decreased 110 bps year over year to 14.2%.
The tax rate in the quarter under review was 7%, down from 23.5% in the year-ago quarter. Balance Sheet & Cash Flow
Exiting the second quarter, Stanley Black & Decker had cash and cash equivalents of $385.8 million, down from $405.6 million in the previous quarter. Long-term debt (net of current portions) was roughly flat at $2,831.2 million.
In the second quarter, the company generated net cash of $198 million from its operating activities, roughly 30.4% higher than $151.8 million generated in the year-ago quarter. Capital spending totaled $111.7 million versus $122.2 million in the year-ago quarter. Shareholder-Friendly Initiatives
During the second quarter, Stanley Black & Decker paid cash dividends of approximately $94.2 million and repurchased shares worth $201.3 million.
A couple of days ago, the company announced roughly 4.8% increase in its quarterly dividend rate. The dividend hike, from 63 cents to 66 cents per share, was approved by the company's board of directors. On an annualized basis, the dividend increased to $2.64 from $2.52 per share. Outlook
For 2018, Stanley Black & Decker anticipates gaining from a growing recognition for its brands - Craftsman, Lenox, Irwin and DeWalt FlexVolt. Also, business expansion in emerging markets and favorable e-commerce trends will be beneficial. Also, the buyout of Nelson Fastener Systems' industrial business (completed on Apr 2) will strengthen the company's Engineered Fastening business.
The company reaffirmed adjusted earnings guidance of $8.30-$8.50 per share for the year, reflecting year-over-year growth of 11-14%. However, GAAP earnings forecast has been revised down from $7.40-$7.60 to $7.00-$7.20 per share, depending on the settlement that the company reached with Environmental Protection Agency.
Organic sales growth will be roughly 7%.
Benefits from cost-saving actions and productivity enhancement initiatives, as well as favorable pricing, are anticipated to be roughly 48 cents to earnings per share. Growth in organic volumes will be 12 cents (or 1% growth) while share buyback activities of $200 million will boost earnings by roughly 10 cents. However, these positive aspects will be offset by 40 cents per share of adverse impact from foreign currency translations and 30 cents of impact from the increase in commodity inflation (including the impact of section 304 tariffs).
Free cash flow conversion is predicted to be roughly 100%. Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise
Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise | Stanley Black & Decker, Inc. Quote
Zacks Rank & Key Picks
With a market capitalization of $21.5 billion, Stanley Black & Decker currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Industrial Products sector are Actuant Corp. ATU , Caterpillar Inc. CAT and Eaton Corp. ETN . While Actuant sports a Zacks Rank #1 (Strong Buy), both Caterpillar and Eaton carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
In the past 60 days, earnings estimates on these three stocks improved for the current year. Also, earnings surprise in the last quarter was a positive 8.33% for Actuant, 33.65% for Caterpillar and 3.77% for Eaton.
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