B&D profit down but tops forecasts

Toolmaker's Mangan says housing slump, rising costs of raw materials hurt results

April 26, 2007|By Allison Connolly | Allison Connolly,Sun reporter

Black & Decker Corp.'s chief financial officer warned analysts yesterday that the continuing housing slump and soaring raw materials costs will dampen sales and profit this year.

The Towson-based manufacturer of power tools and hardware reported lower first-quarter earnings that nevertheless were better than expected, beating its own estimates as well as those of analysts. But CFO Michael Mangan said tough market conditions will likely persist through the end of the year.

"While we are encouraged by our first-quarter results, we remain cautious about the macro environment," Mangan told analysts during a conference call. "News related to housing and its potential impact on the overall U.S. economy has not improved since our January conference call."

Net income for the quarter was $108.1 million, or $1.61 per share, down from $113.1 million, or $1.45 per share, for the corresponding period a year ago. Earnings per share were higher for the first quarter because the company had bought back shares since the year-earlier period.

Analysts polled by Thomson Financial expected earnings of $1.49 per share. The company had raised its guidance last week to $1.60 per share.

Sales grew 3 percent to $1.58 billion from $1.53 billion a year ago. About 2 percent of the increase was attributed to foreign currency translation and 1 percent to sales from Vector Products Inc., a manufacturer of consumer portable power products such as car starters that Black & Decker acquired last year.

Free cash flow increased by more than $115 million to a record $137 million.

Mangan said the company continues to battle soaring prices for nickel and other raw materials used in manufacturing its products, and estimates commodities inflation will eat up $150 million of profit this year. The slowdown in residential housing construction has reduced demand for industrial power tools and Kwikset door locks, he said, and organic sales - sales of products not acquired by Black & Decker in the past year - would be flat or down slightly for the year.

Sales in its power tools and accessories segment rose 2 percent. However, sales on the industrial side declined by the mid single-digits while the consumer side saw a high single-digit increase.

Mangan said the company is maintaining a tight rein on discretionary spending and is continuing to reduce overhead, but there's not much more that can be cut. He said production will also be down.

In October, Black & Decker dismissed the head of manufacturing at its industrial products group as well as 70 salaried personnel, mostly in Towson. Also last year, the company shuttered a manufacturing plant in Fayetteville, N.C., which employed 675, and eliminated 160 jobs between two plants in Jackson, Tenn. Mangan said yesterday that the company is expanding in Mexico and China, where costs are cheaper.

For the year, Mangan raised earnings guidance to between $6.35 and $6.60 per share. For the second quarter, he said earnings should be in the range of $1.70 and $1.75 per share on flat revenue.

Equity analyst John Kearney of Morningstar Inc. in Chicago said Black & Decker could end the year "unscathed" despite the market, based on first-quarter results and Mangan's guidance.

"The restructuring initiatives have better positioned the company to withstand the pressures they're going to be facing this year," said Kearney, who does not own Black & Decker shares and whose firm does not do business with the manufacturer.

Analyst Ivy Zelman of Credit Suisse First Boston noted that competitors are aggressively discounting products, particularly overseas. Mangan said the company expects pricing to be flat.

"There's not an expectation for a boom in the market here, so we're all working hard for our piece of the market," he said.

Mangan told analysts that the company will aggressively use its free cash to pursue acquisitions or buy back shares. "We will put that cash to work," he said.

Black & Decker shares rose $2.58 yesterday to close at $92.34.

allison.connolly@baltsun.com

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