Black & Decker's 3rd-quarter profit fell 9%

October 27, 2006|By Allison Connolly | Allison Connolly,sun reporter

Towson-based Black & Decker Corp. reported lower profit for the third quarter yesterday as margins continued to be squeezed by a slowing housing market and a spike in manufacturing costs.

With conditions likely to persist through the end of the year, the world's largest maker of power tools reduced its earnings forecast for the fourth quarter and year.

Net income fell to $125.1 million, or 1.74 per diluted share, down 9.2 percent from $137.8 million, or $1.70 per diluted share, a year ago. The company had 10.1 million fewer shares than the period a year ago due to a stock buyback and ended the quarter with 71.9 million diluted shares.

Sales grew 2 percent to $1.61 billion, from $1.58 billion a year ago. However, sales at businesses owned by Black & Decker for at least a year shrank.

The company said orders for generators were down significantly from last year because of the comparatively quiet hurricane season, as were sales of its pressure washers and lasers. The decline was largely offset by strong sales at Vector Products Inc., a manufacturer of automotive and marine products that Black & Decker purchased in March for $160 million.

Analysts polled by Thomson Financial First Call had forecast earnings of $1.73 per share and sales of $1.63 billion.

The company now expects earnings of between $1.85 and $1.90 a share for the fourth quarter and between $7 and $7.05 a share for the year. It was the second time this year that the company reduced earnings guidance for the year. Black & Decker's board has authorized the company to buy back another 5 million shares.

Despite the mixed results, investors sent Black & Decker shares up 4.8 percent, or $3.89 a share, to close at $84.99 yesterday.

While he is disappointed with the outlook for the fourth quarter, Merrill Lynch analyst Kenneth Zener in New York City said the company can weather the downturn. He pointed to Black & Decker's increased year-to-date cash flow, which was $200 million higher than the year before.

"We think investors continue to underestimate Black & Decker's ability to deliver positive earnings growth," he wrote in a research report. Merrill Lynch & Co. does or seeks to do business with the companies it covers.

Chief Financial Officer Michael D. Mangan insisted during a conference call with analysts yesterday morning that Black & Decker is not in the same straits as in 2001, when the company was caught off guard by slowing demand and was stuck with too much inventory. The company embarked on a major restructuring then, closing several factories, including one in Easton, and moved product assembly to Mexico and Eastern Europe.

The rising cost of copper and zinc used to make its power tools will eat up about $95 million of the year's profits, with nearly half of it being felt in the fourth quarter. This summer, the company announced it would raise prices on certain products to help offset higher manufacturing costs, but most of the increases won't take effect until 2007, Mangan said.

Bentley Offutt, principal of Cockeysville-based Offutt Securities Inc., an institutional research brokerage firm that does not own any shares in Black & Decker, said he is concerned that the adverse trends will continue into next year.

"I think the overall feeling is they pretty well performed to what they thought they could do," he said. "The big concern going into the fourth quarter is the rise in raw materials prices and that they're happening at the tail end of the year."

He said Black & Decker historically has been disciplined when it comes to cutting costs, and it appears the company is taking action. Last week, the company dismissed the head of manufacturing for its industrial products group, which includes the DeWalt, Porter Cable and Delta brands, and laid off 70 salaried employees across the power tools segment, mostly at its headquarters. The reduction should save the company between $7 million and $9 million in 2007, Mangan said. Other positions have been frozen in order to keep costs down, he said.

Zener, the Merrill Lynch analyst, said the company is in a much better position than it was in 2001, having outsourced supply to Asia and Eastern Europe and reduced inventory levels year-over-year despite several acquisitions.

"We think [Black & Decker's] past restructuring program should enable it to perform better in the current slowdown than in the past," he wrote.

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