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BusinessWeek: September 23, 1991 |
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The Corporation
THE SCREWS ARE TIGHTENING AT BLACK & DECKER Say this about Black & Decker Chief Executive Nolan D. Archibald: The man isn't short on ambition. During the mid-1960s, he picked up All-American basketball honors as a center for Utah's Dixie College and even won a tryout with the Chicago Bulls. Although his hoops career never panned out, the 6-foot, 5-inch Archibald has made a few nifty slam dunks at Black & Decker Corp. After rising to chief executive in 1986, he turned around the bloated, money-losing company by slashing overhead, eliminating 3,000 jobs--or 13% of the work force--and completely redesigning the company's various power-tool and appliance lines. After profits started rolling in again, Archibald in a bold move engineered the largest deal in Black & Decker's history. In 1989 the company plunked down $2.8 billion for Emhart Corp. Unfortunately, a deal that looked perfectly brilliant when times were good doesn't seem so deft in these colder economic climes. Though Archibald deserves credit for the comeback at Black & Decker, he has also put his company in something of a fix. Now, Black & Decker's impressive turnaround is now on shaky ground. Archibald borrowed heavily to land Emhart, a miniconglomerate with interests in everything from locks to plumbing gear. Indeed, the deal pushed up the company's long-term debt to $4.2 billion, a hefty 82% of total capital. The trick was to sell off about $1.8 billion of Emhart assets to pay down debt while dovetailing the company's line of Kwikset locks and Price Pfister Inc. plumbing fixtures with Black & Decker's offerings. Seemed sensible enough. But Archibald, 48, has had trouble fetching the prices he needs on some of the Emhart businesses set for sale. Says County Natwest Securities USA analyst Nicholas P. Heymann: "They just paid too much for Emhart, and then the market for asset sales changed on them." Worse, the economic downturn has savaged Black & Decker's earnings, creating a terrible cash squeeze. Profits during the first half plummeted a scary 56%, to $11.4 million, on $2.2 billion in sales. Analysts expect a stronger second half. But nobody is predicting that this year will be a stellar one. By yearend, Black & Decker profits are expected to fall 2%, to $50 million, on $4.67 billion in revenues, figures Dillon, Read & Co. IN A VISE. So is Archibald now having second thoughts about the wisdom of the Emhart deal? "Had I known it was going to be as tough an economy as it has been, I probably would have scratched my head a little more," he admits. Yet he hastily adds: "But I would have gone ahead." Whether or not Emhart turns out to be a savvy acquisition in the long term, it has put Archibald on the defensive for now. He is under pressure to turbocharge the company's earnings--and quickly. So Black & Decker is readying a new national TV ad campaign later this year, trumpeting its power-tool lines to the do-it-yourself crowd. And it has just rolled out new or redesigned cordless drills, screwdrivers, and hand vacuums. What's more, Archibald has eased some of Black & Decker's financial pressure by renegotiating loan terms and attracting new equity from a partnership with Newell Co., a Freeport (Ill.) housewares maker best known for such brand names as Wearever pans. All of this certainly helps. However, Archibald may face a tougher job working his magic at Black & Decker this time. For one thing, the severe downturn in the housing market--a crucial source of demand for tools and appliances--shows no signs of abating. Says John Sarley Sr., head of the nationwide wholesaler Southern Tool Supply: "It's just sluggish. Guys are having tools repaired instead of buying new." Adds an executive at a big Chicago-based national retailer: "The whole power-tool industry is struggling." While market leader Black & Decker has managed to pass along price hikes of 1% across the board so far this year, its operating margins have slipped a point, to 9%. And its primary rivals in the power tool business, such as Japanese toolmaker Makita Electric Works Ltd. and Skil Corp., a unit of Emerson Electric Co., have much stronger balance sheets. True, Archibald has been able to wind down Black & Decker's debt by $1 billion. He has sold $800 million worth of assets at Emhart, including such units as Bostik Inc., a chemical-adhesive maker. However, Black & Decker is still saddled with $3.2 billion in debt and roughly $300 million in annual net interest expense--a heavy burden that consumes approximately 60% of its operating income, before goodwill charges. Archibald would like to raise even more cash by selling off other Emhart businesses. Unfortunately for Black & Decker, the chief executive hasn't yet sold off two important divisions--True Temper, a maker of golf-club shafts, and PRC, a computer and software consultant. Archibald hoped to fetch as much as $525 million for both units. But since the economy is in a slump, he hasn't been able to command such lofty prices. "We didn't want to rush out and make a distress sale," he says. Meanwhile, Archibald has bought some time. For starters, Black & Decker has cut $100 million in annual expenses by closing down Emhart's headquarters in Farmington, Conn., and combining the company's manufacturing operations with its own. Archibald has also fashioned joint distribution and marketing efforts with his new charge. For instance, Black & Decker has tied Emhart's line of Kwikset locks into its network of retailers, including Home Depot Inc. What's more, Emhart's Molly bolts business is now marketed with Black & Decker's accessories group. Trouble is, the recession is pounding Emhart just as badly as Black & Decker. Fortunately, Archibald recently won more flexible terms from his team of banks, led by Citibank. Now, the company no longer must automatically route 80% of the cash it garners from equity placements or asset sales into principal payments. Black & Decker, in mid-August, also sold $150 million worth of preferred stock to Newell. That deal, together with other stock purchases, has given Newell a 15% stake in Black & Decker. Archibald will pay a 7 3/4% dividend--it's actually valued at approximately 11%, given the lenient tax treatment on corporate dividends--on the preferred stock. In addition, Black & Decker will grant Newell one board seat. In return, Archibald will have enough cash to meet some $60 million in principal payments that are due in October and January, as well as quarterly debt payments through mid-1992. That development has helped drive up Black & Decker's stock to roughly 18--a twofold increase from the beginning of the year. That, however, is still 33% less than the company's peak of 24 set in late 1989. What's in it for Newell? "We've been impressed with their product lines, their market share, and their management," says Newell Chief Financial Officer William T. Alldredge. Just to make sure these folks don't get too impressed, though, Archibald has negotiated a 10-year stand-still agreement that ensures Newell won't exceed its 15% stake. While Archibald's handiwork has improved the company's finances, Black & Decker could really use a smash-hit product. Competition is fierce, however. Its rival Skil caused quite a stir earlier this year by announcing that it would unveil a new line of cordless tools in 1992 featuring removable and recyclable battery packs. Black & Decker, which already has removable packs in its line of professional tools, is working on its own recyclable battery feature. CHRISTMAS CHEER? Black & Decker, of course, is no slouch when it comes to innovation. Over the past five years, it has rolled out some 300 new power tools and appliances and thousands of accessories. This year, Black & Decker launched its Ranger cordless drills and Deckgun screwdrivers designed not only for professionals but also for do-it-yourselfers. Later this fall, Black & Decker will roll out a national advertising campaign targeted at home fixer-uppers. Archibald is betting that the coming holiday season--the fourth quarter usually kicks in 30% of its total sales--will mark the beginning of a turnaround. He's lucky in this respect: A survey last year by marketing consultants Landor Associates found Black & Decker to be one of the top 10 most recognizable brand names in the U. S. Increasingly, the name is well known overseas. Black & Decker's international business, for example, representing about half of total revenues, is up 20% or so in such markets as Germany. Stateside, though, Archibald can hardly rest as long as Black & Decker is burdened with the enormous debt pressure from the Emhart deal. In the past, Archibald has proven himself a nimble-footed manager. Good thing, too. He's going to face one helluva balancing act in the months ahead. BLACK & DECKER: WHERE IT'S FEELING THE SQUEEZE DEBT PRESSURE Long-term debt is a hefty $3.2 billion, thanks to its 1989 acquisition of Emhart, a wide-ranging consumer and industrial products conglomerate; annual interest payments: more than $300 million SOFT MARKETS The funk in the housing industry has dampened demand among professional builders and do-it-yourselfers for company's array of power tools COMPETITION Financially stronger rivals such as Emerson Electric's Skil unit and Japan's Makita Electric Works are pumping out new products and challenging B&D's market-leading position in power tools DATA: BW | |
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