Stanley Black & Decker (SWK) had a mixed second quarter: earnings blew past expectations, revenue came up just short, and the stock dropped in premarket trading. It's one of those reports where the headline numbers look good, but the market focuses on the small miss.

The tool and fastener company reported adjusted earnings of $1.57 per share, crushing the analyst consensus of $1.22. Revenue totaled $3.961 billion, slightly below the $3.967 billion Street estimate. Shares fell about 2.2% to $92.09 in premarket trading Wednesday.

Earnings and Margins

Revenue was essentially flat year over year at $3.96 billion, but organic revenue grew 3% on higher volumes. Foreign exchange added about 1% to reported sales. GAAP diluted EPS jumped to $2.33 from 67 cents a year earlier, and net earnings rose to $351.3 million. Adjusted EPS improved from $1.08 to $1.57.

Results included an approximately 17-cent-per-share benefit from net tariff refunds. Earnings also got a boost from a $273.7 million gain on business sales, primarily related to the CAM divestiture. Gross margins expanded significantly: GAAP gross margin rose 600 basis points to 33%, while adjusted gross margin increased 620 basis points to 33.7%. Adjusted EBITDA climbed to $445.7 million, lifting the adjusted EBITDA margin to 11.3%.

Segment Performance

The Tools & Outdoor segment, the company's largest, saw revenue increase 3% to $3.564 billion, with organic sales also up 3%. Power tools and the U.S. retail business returned to year-over-year growth. Adjusted segment margin expanded 380 basis points to 11.8%, driven by productivity improvements, favorable product mix, and tariff refunds.

Engineered Fastening revenue declined 18% to $396.4 million, reflecting the CAM divestiture. But organic revenue increased 3%. Adjusted segment margin improved 220 basis points to 13%, supported by productivity initiatives and favorable automotive volume and mix.

Cash Flow and Capital Allocation

Cash flow was a bright spot. Operating cash flow surged to $763.1 million from $214.3 million a year earlier. Free cash flow rose to $698.2 million from $134.7 million. The company ended the quarter with $592.4 million in cash and about $4.76 billion in total debt. During the quarter, Stanley Black & Decker reduced debt by $1.7 billion and repurchased about 3.2 million shares for $250 million.

Outlook

For the full year, Stanley Black & Decker expects net sales to be roughly flat year over year, implying revenue of about $15.13 billion, compared with the Street estimate of $15.14 billion. The company raised its full-year GAAP EPS guidance to a range of $4.60 to $5.45 from $4.15 to $5.35, versus the consensus of $4.97. It also increased its adjusted EPS outlook to $5.20 to $5.80 from $4.90 to $5.70, above the Street estimate of $5.37.

Free cash flow guidance was raised to $600 million to $800 million. For the third quarter, the company expects revenue of about $3.7 billion and adjusted EPS of $1.50 to $1.60. Management expects adjusted gross margin in the second half to be between 34% and 35%, an improvement of about 200 basis points. The outlook does not include any additional tariff refunds because of uncertainty around their timing.

So, the story here is that tariff refunds and cost-cutting helped profits, but the top line is still struggling to grow. Investors seem to be focusing on the revenue miss and the cautious full-year sales outlook, sending the stock lower despite the earnings beat and raised guidance.