Home Improvement At Black & Decker
As Black & Decker Corp. Chief Executive Nolan D. Archibald tells it, the timing was perfect. In early 1998, he announced plans to unload a handful of underperforming and peripheral units. After nearly a decade of managing a hodgepodge of businesses, Black & Decker would focus on its strengths: power tools and home-improvement products. The businesses for sale had been improved, and a booming market made it a great moment to sell. With its best balance sheet in years, the company could absorb the cost of the makeover, including a $900 million write-off. "It all came together at the right time," says Archibald.
That may be so, but the CEO appears to have had plenty of other motivation. Franklin Mutual Advisors, run by activist investor Michael Price, began accumulating its 1.7 million Black & Decker shares in late 1996. Other investors also questioned Archibald's strategy. And last fall, Albert J. "Chainsaw Al" Dunlap, chairman of rival Sunbeam Corp., was rumored to be considering a takeover.
Whatever the cause, investors are thrilled that Archibald is moving to put Black & Decker's erratic performance behind it. After years of trailing the market, the stock is up 19%, to $51 a share, since the announcement. The Towson (Md.) company still faces intense competition, but the new focus on what it does best may finally position it for solid double-digit earnings growth. "There's a lot of work to get there," notes Lauriann C. Kloppenburg, director of equity research at Loomis, Sayles & Co., a large investor. "But now, they can actually be in the game to do it."
For shareholders, even such measured hope has been a long time coming. Through much of the 1990s, Black & Decker's performance has been disappointing. At the heart of its problems was the 1989 acquisition of Emhart Corp. for a steep $2.7 billion in cash. Archibald argued that Emhart's plumbing and locks businesses fit Black & Decker's home-improvement customer base and the retailers it already served.
Nevertheless, half of Emhart's businesses--including a golf-club-shaft maker and a manufacturer of glassmaking equipment--just didn't fit. Archibald planned to sell those, but after the acquisition, a global recession hit, the deal market dried up, and Black & Decker was forced to hold on to a number of unwanted businesses. That left the company staggering under a debt load that peaked in 1990 at $3.3 billion. Earnings quickly went into a tailspin, and the bottom came in 1992, when continuing operations generated a $95 million loss.
STUMBLES. Eventually, Archibald sold several revamped businesses. But just as results were ramping up, manufacturing problems caused Black & Decker to stumble again. The upshot: Operating income has risen only 7% since 1990, to $489 million in 1997. Sales have grown modestly, to $4.9 billion last year.
Now, Archibald promises, the bad news is over. Up for sale are the last unwanted vestiges of Emhart, and a small-appliance business. That should help Black & Decker's margins. But to grow, Archibald needs innovative products and strong marketing. Recent hits include the VersaPak system of interchangeable batteries--usable in Black & Decker's consumer cordless power tools--and DeWalt professional power tools.
The DeWalt line, launched in 1992, has been a tremendous success, growing to nearly $1 billion in sales in just six years. Combining high-quality products, bold yellow-and-black packaging, aggressive promotion, and free trials, DeWalt knocked competitor Makita Corp. out of the No.1 position in the U.S. in 1995. Prudential Securities Inc. analyst Nicholas P. Heymann says such success has helped make Black & Decker "the Michael Jordan of power tools."
To defend that title, Black & Decker has cut development time for new products from 36 months five years ago to 20 months today. It is also on a drive for manufacturing efficiency. Scheduled to cut $100 million in annual costs, the overhaul will consolidate production and close four plants outside the U.S. Archibald says this will help hike operating margins from 11% to 13% in two years, and ultimately to 15%.
Even with a history of strong new products and promising manufacturing improvements, Black & Decker faces plenty of challenges. The consumer power-tool market is crowded and will get even tougher if the economy cools and recent strong levels of homebuilding slow. Consultants Frost & Sullivan in Mountain View, Calif., figure that a slowdown will trim the current annual growth of 4% to 6% in electric power tools to a more moderate 3% to 4% in the next year or two.
"SWARM" TEAMS. While overseas markets seem promising, Europe is likely to be slower going than the U.S. At home, Black & Decker sells through giants such as Lowe's Cos. and Home Depot Inc. In Europe, however, retailing is fragmented. To boost European demand, the company is doubling its number of "swarm" teams, which visit construction sites to demonstrate and lend products directly to workers.
Oddly enough, no matter what happens on the operating front, Black & Decker's earnings will get a guaranteed boost in coming years from the first quarter's $900 million charge. Most will go to write off goodwill that's still on the books from the Emhart deal. (Goodwill is the difference between what is paid for an acquisition and the book value of what is bought.) Analysts such as Merrill Lynch & Co.'s Jonathan L. Goldfarb say Black & Decker overpaid for Emhart. Still, the company says this write-off reflects only an accounting change preferred by its outside auditors. The move will cut amortization charges by about $30 million annually for the next 30 years, almost completely offsetting the lost income from the businesses being sold.
That will lift the heavy shadow the deal has long cast over Black & Decker's balance sheet, but Archibald has a long way to go. "There is still some skepticism [about the company]," says Goldfarb. Surprisingly, one way Archibald plans to grow is through more acquisitions. This time, however, he promises the deals will be small, product-line purchases. It's a more conservative approach than he took with Emhart, and probably a wise one.