Black & Decker tries to hammer out debt problems

VIEW FROM WALL STREET

April 07, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK — New York--Last year, the laboratory at Black & Decker Corp cranked out more than 500 fresh models of power tools, faucets, irons and associated goods, but in the company's recently issued annual report new products ranked as only the No. 7 highlight for the year, behind debt repayment, cost cutting, and sales of businesses (not products).

Welcome to the hangover from a corporate merger that Chief Executive Nolan Archibald considers a coup -- but which the stock markets and credit rating agencies are having difficulty digesting.

Two years after the $2.65 billion acquisition of Emhart Corp., the initial pain of consolidation is over, but residual problems linger. The Towson-based manufacturer's balance sheet is bad, and its income statement is not much better: Earnings for 1990 were 84 cents a share, half of what they had been in 1988.

Some plants have been closed; others, according to a securities filing made last week, will close in the future. Layoffs have occurred throughout the company, with some as recently as last month, and cost-cutting continues. Whole divisions have been sold, but not as quickly as expected. A program to sell $1 billion worth of assets in a year has become $860 million in 18 months. The company said two major deals are pending. Money is needed to repay debt, the faster the better.

In an interview, Mr. Archibald asserts these problems are only temporary. "We did consciously take a step backward in earnings to go two steps forward in doing the kinds of things that would make the company a world competitor," he said.

Operating income continues to increase, opportunistic combinations in product distribution are ahead of schedule, and given a resurgence in either the economy or the market for some Black & Decker divisions, Mr. Archibald contends, Black & Decker will be in "great shape" in 12 to 24 months.

The company's share price suggests that outsiders remain skeptical. In the fall, Black & Decker's stock fell as low as $8 a share, a level not seen in decades. For most of the two years prior to the Emhart acquisition, it hovered around $20 per share.

The stock rebounded to $15 a share this year, then slid back to $13. Why the surge? Several analysts interviewed for this article suggest it may have been more a result of relief that Black & Decker made a critical debt payment than a material change in the company's underlying business prospects. Last month it repaid $247 million in principal on takeover-related debt. That was a significant hurdle for a company with 1990 pre-tax earnings of $123.5 million, and Black & Decker cleared it.

But meeting the repayment was not an unqualified success. More than $100 million of the repayment came from money previously kept outside of the United States in complicated financing arrangements that the company had not wanted to repatriate for tax reasons.

"They made the payment using what management has previously described as the least desirable source of funds," said Nicholas Heymann, an analyst with County NatWest Securities.

And the company's financial prospects remain clouded. Its total debt, at $3.3 billion, is almost seven times what it was before the acquisition . That has transformed its capital structure from 44 percent debt to about 80 percent debt. While revenues have more than doubled to $4.8 billion, interest expense has increased almost tenfold, to more than $350 million.

The credit-rating agencies have taken note. At the time of the acquisition, Standard & Poor's lowered Black & Decker's credit rating from A- ("strong capacity to pay interest and repay principle") to BB+ ("faces ongoing uncertainties or exposure to adverse business, financial or economic conditions that could lead toinadequate capacity to meeting timely interest and principle payment") in 1989. In December, Standard and Poor's lowered it once again, to BB, bringing its ratings in line with Moody's, the other major service.

MA In common language, the company's rating has gone from invest

ment grade in 1988 to "junk" today.

Bankers willing to finance the Emhart deal apparently had more faith. Mr. Archibald said the company borrows at just one-quarter point above prime. Other companies with similar bond ratings that have bonds trading on the public market pay

three, four or more points above prime.

But even with the low rates, the implications for the company are large. "Simply stated," Mr. Archibald said in the company's annual report, "our debt level is too high."

The change in how the company's dollars are now spent is striking. In 1988, payments on long-term debt comprised about 6 percent of what was spent for capital investment. Last year, the ratio was reversed. Payments for capital investment were only about 7 percent of payments on long-term debt, according to the company's statement of cash flow.

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