B&D hints more change

Toolmaker's sales, net shrank in 4Q

January 31, 2007|By Allison Connolly | Allison Connolly,Sun reporter

Black & Decker Corp. reported yesterday that the housing slump continued to cut into sales and earnings and said more restructuring could be on the way.

Sales at the Towson-based company, the world's largest maker of power tools, shrank 7 percent in the fourth quarter to $1.61 billion, from $1.73 billion a year earlier. The biggest chill was felt in the power tools and accessories business, which saw a 20 percent drop in U.S. sales, excluding products acquired in the past year.

Profit for the three-month period that ended Dec. 31 slid 3 percent to $95.7 million, from $98.6 million in the corresponding period a year earlier. On a per share basis, earnings were up, $1.38 compared with $1.24, because the company bought back stock during the year, resulting in fewer shares outstanding.

For the year, earnings fell nearly 9 percent, to $486.1 million from $532.1 million in 2005. Per share earnings were essentially flat, at $6.55 versus $6.54 in 2005.

Nolan D. Archibald, Black and Decker's chairman and chief executive officer, told analysts during a conference call that the housing slowdown resulted in fewer orders from key retailers, which forced the company to scale back production to keep inventories in check.

"As we had announced in December, we faced a very difficult market environment in the quarter, resulting in a significant decrease in sales and earnings," he said.

The results were largely in line with what analysts heard in mid-December, when Black & Decker lowered its forecast for the quarter and year for the third time in six months.

"They had a pretty good handle on where they were going to finish the year" at that point, said equity analyst John Kearney of Morningstar Inc. in Chicago. "There were no real surprises."

In response to the market slowdown, the company dismissed the head of manufacturing at its Industrial Products Group, which makes DeWalt power tools, and let go 70 salaried employees, mostly in Towson.

This month, the company laid off 160 employees at two manufacturing plants in Jackson, Tenn. The company also moved some manufacturing of outdoor products from Mexico to China, where costs are lower.

The moves cost Black & Decker $10 million during the fourth quarter, but should save the company that much in 2007, Archibald said.

While less than 20 percent of Black & Decker's sales are tied to homebuilding, the company also has been squeezed by a spike in the cost of raw materials such as copper, nickel and zinc used to make its tools. Those cost increases ate up about $95 million of 2006 profit, even after raising prices on some items to help offset the increases.

Costs are expected to be even higher this year, with the company forecasting increases of about $120 million, more than half of it coming during the first half of the year.

Archibald said the company would make further work force reductions or move some operations to cheaper places if needed.

"Our model is working, and we are weathering the demand slowdown," he told analysts.

Vector Products Inc., a key acquisition made in March that manufactures automotive and marine products, contributed 2 percent to earnings for both the quarter and year.

New products such as the Handisaw, Power Scissors and AutoWrench sold well, Archibald said. International sales were strong for the quarter and year.

Archibald said the company evaluated several potential purchases last year, but he believed the price was too high. Other candidates are in the pipeline, he said.

"We're not going to overpay for an acquisition," he told analysts.

The company generated record cash flow for the fifth-straight year, at $533 million.

Despite signs that cost pressures and the housing slowdown will continue, Archibald is optimistic about the latter half of this year. He said new products, including a new fingerprint lock technology and an expansion of the DeWalt 36-volt lithium ion cordless power tool line, should boost sales.

Retailers who cut orders during the fourth quarter are restocking, he said, though he doesn't expect a major lift. However, they have agreed to make room on their shelves for new products, Archibald said.

For the year, Black & Decker is forecasting earnings of between $6.25 and $6.55 per share with sales essentially flat. He said sales and earnings would likely decrease in the first two quarters, but the company should improve upon fourth-quarter results.

"Given the head winds they're facing, particularly in the first half of the year, there aren't too many surprises there," said Kearney, of Morningstar. "It sounds like they're prepared for tough sledding in 2007."

The outlook is "better than expected," wrote Merrill Lynch analyst Kenneth Zener.

He said Black & Decker is "better positioned to withstand the current cyclical slowdown compared to 2001," when a challenging market forced a worldwide restructuring that included the closure of a manufacturing plant in Easton.

Black & Decker stock closed up $3.09 yesterday at $86.23 per share in trading on the New York Stock Exchange.

allison.connolly@baltsun.com

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