New York--Last year, the laboratory at Black & Decker Corp cranked out more than 500 fresh models of power tools, faucets, irons and associated goods, but in the company's recently issued annual report new products ranked as only the No. 7 highlight for the year, behind debt repayment, cost cutting, and sales of businesses (not products).

Welcome to the hangover from a corporate merger that Chief Executive Nolan Archibald considers a coup -- but which the stock markets and credit rating agencies are having difficulty digesting.

Two years after the $2.65 billion acquisition of Emhart Corp., the initial pain of consolidation is over, but residual problems linger. The Towson-based manufacturer's balance sheet is bad, and its income statement is not much better: Earnings for 1990 were 84 cents a share, half of what they had been in 1988.

Some plants have been closed; others, according to a securities filing made last week, will close in the future. Layoffs have occurred throughout the company, with some as recently as last month, and cost-cutting continues. Whole divisions have been sold, but not as quickly as expected. A program to sell $1 billion worth of assets in a year has become $860 million in 18 months. The company said two major deals are pending. Money is needed to repay debt, the faster the better.

In an interview, Mr. Archibald asserts these problems are only temporary. "We did consciously take a step backward in earnings to go two steps forward in doing the kinds of things that would make the company a world competitor," he said.

Operating income continues to increase, opportunistic combinations in product distribution are ahead of schedule, and given a resurgence in either the economy or the market for some Black & Decker divisions, Mr. Archibald contends, Black & Decker will be in "great shape" in 12 to 24 months.

The company's share price suggests that outsiders remain skeptical. In the fall, Black & Decker's stock fell as low as $8 a share, a level not seen in decades. For most of the two years prior to the Emhart acquisition, it hovered around $20 per share.

The stock rebounded to $15 a share this year, then slid back to $13. Why the surge? Several analysts interviewed for this article suggest it may have been more a result of relief that Black & Decker made a critical debt payment than a material change in the company's underlying business prospects. Last month it repaid $247 million in principal on takeover-related debt. That was a significant hurdle for a company with 1990 pre-tax earnings of $123.5 million, and Black & Decker cleared it.

But meeting the repayment was not an unqualified success. More than $100 million of the repayment came from money previously kept outside of the United States in complicated financing arrangements that the company had not wanted to repatriate for tax reasons.

"They made the payment using what management has previously described as the least desirable source of funds," said Nicholas Heymann, an analyst with County NatWest Securities.

And the company's financial prospects remain clouded. Its total debt, at $3.3 billion, is almost seven times what it was before the acquisition . That has transformed its capital structure from 44 percent debt to about 80 percent debt. While revenues have more than doubled to $4.8 billion, interest expense has increased almost tenfold, to more than $350 million.

The credit-rating agencies have taken note. At the time of the acquisition, Standard & Poor's lowered Black & Decker's credit rating from A- ("strong capacity to pay interest and repay principle") to BB+ ("faces ongoing uncertainties or exposure to adverse business, financial or economic conditions that could lead toinadequate capacity to meeting timely interest and principle payment") in 1989. In December, Standard and Poor's lowered it once again, to BB, bringing its ratings in line with Moody's, the other major service.

MA In common language, the company's rating has gone from invest

ment grade in 1988 to "junk" today.

Bankers willing to finance the Emhart deal apparently had more faith. Mr. Archibald said the company borrows at just one-quarter point above prime. Other companies with similar bond ratings that have bonds trading on the public market pay

three, four or more points above prime.

But even with the low rates, the implications for the company are large. "Simply stated," Mr. Archibald said in the company's annual report, "our debt level is too high."

The change in how the company's dollars are now spent is striking. In 1988, payments on long-term debt comprised about 6 percent of what was spent for capital investment. Last year, the ratio was reversed. Payments for capital investment were only about 7 percent of payments on long-term debt, according to the company's statement of cash flow.

A stiff schedule of additional debt payments loom in the near future. In addition to last month's $247 million, the company must repay $31 million this month, $50 million in June, another $31 million in July, and on and on, in sporadic lumps, for the next six years. The total interest bill remains large, even if the rate is low.

Mr. Archibald at least implicitly acknowledges the widespread concern over his company's ability to meet obligations by asserting at the top of his letter to stockholders in the current annual report that all obligations under Black & Decker's credit agreements will be met through 1991.

Certainly the company is not without means. It has proved adept at squeezing costs and cash from operations while retaining the ability to churn out successful new products. It has property it has discussed selling and leasing back, divisions that can be sold, and, despite its declining credit rating, the interest on its loans is tied to prime (and LIBOR, the international equivalent) and therefore has recently declined with the broad trend in rates.

"For all these reasons, they should be able to make the repayments," concludes Sally H. Smith, an analyst with Alex. Brown.

But the converse is possible. Cost-cutting, after all, cannot go on indefinitely, and the financial markets are not as amenable as they once were for bailing a company out. Two divisions originally put up for sale, PRC (an information systems consulting service) and Dynapert (printed circuit board assembly equipment) are still with the company because of inadequate bids. Similarly, a sale-leaseback of property was not consummated because, according to a published report by Mr. Heymann of County NatWest Securities, investors lacked enthusiasm. (Black & Decker contends the transaction remains an option.)

Because of the company's favorable bank financing, meeting all repayments and conditions is important. But already the company has received two important waivers -- one permitting it to retain a higher ratio of debt to equity than initially agreed upon, another loosening demands for debt repayment through asset sales. Even its bankers have apparently agreed that shedding loans and selling businesses has been tough (though not impossible).

And other problems have emerged. Last year, net earnings of $51.1 million were depressed by more than $16 million of losses in Brazil. In response, some Brazilian operations have been closed and others are on the block. A worldwide recession is now also depressing results, and a higher U.S. dollar will take a toll because about half of Black & Decker's earnings come from abroad.

Recessions, of course, have always ended eventually, and a buoyant economy could heal a lot of problems. "Historically, this company's earnings pick up when transfers in existing homes increase, and that's happening now," said R. Bentley Offutt of Offutt Securities. "One would have to say the acquisition was miserable, but our point is, the earnings should show improvement."

Mr. Archibald is even more bullish. "Despite heavy debt load . . . and the recession," he said, "we have continued to improve. To me, those are the facts."