Black & Decker

Power tool maker's shares drop 6.8% as gain disappoints, 2006 outlook is cut

Punishment from market

Housing slowdown, profit margin affect companies

July 27, 2006|By ALLISON CONNOLLY | ALLISON CONNOLLY,SUN REPORTER

Squeezed by a slowing housing market and the rising cost for raw materials, Towson-based Black & Decker Corp. posted second-quarter results yesterday that missed forecasts and said earnings for the rest of the year will be lower than expected.

Shares of Black & Decker fell to a 52-week low, shedding $5.22, or 6.8 percent, to $71.15. Earlier, shares were down nearly 10 percent.

The nation's largest power tools maker reported slightly higher profit for the three months that ended June 30, thanks to manufacturing efficiencies, on flat sales.

Net earnings from continuing operations were $152.2 million, or $1.98 per diluted share, compared with $150.9 million, or $1.84 per diluted share, in the corresponding period last year. Wall Street had expected earnings of $1.99 a share. Sales, at $1.7 billion, were lower than the $1.75 billion forecast by analysts polled by Thomson Financial.

For the year, Black & Decker said it now expects earnings of $7.20 to $7.30 per share, down from the $7.30 to $7.45 forecast in April.

Chief Financial Officer Michael D. Mangan blamed a weak housing market and fewer orders from key distributors.

"While less than 20 percent of our sales are tied to U.S. housing starts, these trends do affect our outlook," Mangan told analysts during a conference call yesterday morning. He also pointed out that it was a tough year-over-year comparison, given that the company posted record sales growth of 31 percent during the second quarter of 2005.

Revenue in the hardware and home improvement segment fell 6 percent, led by a double-digit decline in sales of Price Pfister faucets.

The power tools and accessories segment grew an anemic 1 percent over the comparable period a year ago.

Sales weighed down

Sales were weighed down by lower sales of pressure washers, which were off by as much as 40 percent, or about $30 million, in what is typically its strongest quarter, Mangan said. The segment did benefit from sales of the new 36-volt line of DeWalt cordless power tools, which hit store shelves in June and contributed $20 million in sales for the quarter, he said.

For the second half of the year, Mangan expects "modest" growth with new products coming on the market, including DeWalt's next-generation 18-volt XRP line of cordless drills and related hardware. New products tend to have better margins, he said. He also expects the March acquisition of Fort Lauderdale, Fla.-based Vector Products Inc., which makes vehicle battery chargers and rechargeable flashlights, to contribute to earnings in the second half.

However, the rising cost of commodities such as copper, zinc and steel will continue to eat away at the margins.

Mangan said some suppliers are passing the costs on to the company, and Black & Decker will spend an additional $95 million on raw materials this year, much more than the $65 million forecast in April.

`Increased pressure'

"We have some increased pressure from our supplier base, particularly in areas like HHI [hardware and home improvement], which are much more zinc- and copper-dependent," he said.

To offset those costs, Mangan said the company is raising prices on some products, but he declined to say which ones.

Analysts acknowledged yesterday that last year was tough to beat but also said they expect the second half of this year to be challenging. Merrill Lynch analyst Kenneth Zener said that Wall Street overreacted and that the stock is trading at a "discount" given the company's strong cash flow - $138 million year-to-date - and portfolio of new products.

Bob Goldsborough, vice president of research at Chicago-based Ariel Capital Management Inc., Black & Decker's third-largest shareholder as of March 31, said the company is well-managed and doing what it can to stay efficient. "They're in a position to weather whatever may come," he said.

Deutsche Bank analyst Gregg Schoenleber lowered his earnings guidance for 2006 to $7.16 per share from $7.40 but maintained his "buy" rating.

allison.connolly@baltsun.com

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