After a day of watching the company stock rise on the strength of a recent strong earnings report, the head of Black & Decker Corp. is pumped up about the future of the giant power tool and appliance company.
"It's payoff time, OK," exulted Nolan D. Archibald, chairman and chief executive officer. "I think they have just seen the tip of the iceberg about what this company can do as far as profitability and cash flow."
What has Mr. Archibald so excited is a solid third quarter that saw net income soar 50.3 percent -- results promising enough to raise Wall Street's expectations that this time Black & Decker will finally deliver on the potential of its worldwide franchise.
After all, the Towson-based conglomerate holds one of the world's best known brand names. It's No. 1 worldwide in power tools and accessories, in electric outdoor products, in door locks, in specialty mechanical fasteners, in glassmaking machinery, even in golf club shafts. Its sales last year were nearly $5 billion. It employs 36,000 people worldwide, including 2,900 at its three Maryland facilities -- Towson, Easton and Hampstead.
But investors who plunked down $23 a decade ago for a share of stock have ridden a roller coaster and today are less than $2 ahead -- and that's without factoring in inflation or lost opportunity. On top of that, dividends were chopped in 1986 and and have been flat since then. Profits topped out in 1988 as the costly 1989 acquisition of Emhart Corp. and the global recession took their toll. Last year earnings did not quite match their 1984 level.
Now some analysts are confidently predicting that Black & Decker's share price could move beyond $30 a share in the next year as its debt load becomes more manageable and worldwide demand for its DustBusters, Spacemaker appliances and cordless drills picks up.
Mean earnings estimates compiled by the Institutional Brokers Earnings System look for 29 percent annual increases, to $1.29 a share this year and $1.66 next.
For its part, Black & Decker has set a goal of increasing its earnings per share 20 percent annually while improving manufacturing efficiency by 5 percent every year. In addition, it is in the midst of a $100 million cost-cutting campaign.
"You're going to have this company firing on all cylinders in '95 and '96 for the first time since probably, pre-Emhart," said Clifford F. Ransom III, director of special situation research for Raymond James & Associates Inc. in St. Petersburg, Fla.
"And I think there is a lot of earnings power," he said. "They own wonderful companies, with wonderful consumer and industrial brand names and chises."
With the possibility of earnings per share reaching $2.50 by 1996, Mr. Ransom said, stock prices may reach the mid to high $30s in the next 15 to 18 months.
Analysts also have been impressed by the company's renewed interest in manufacturing processes in the last few years. That has led to a complete change in the officers in charge of Black & Decker's 52 plants around the world, many recruited from General Electric Co., renowned for its cost-busting.
But other analysts are skeptical, saying much of the optimism is based on projections for 1996, which could be knocked in the head by a downturn in the housing or do-it-yourself market. Also, they warn, the stock price might fall victim to a general market downturn.
"That is too far out from here to buy," said Lawrence J. Horan, senior building analyst for Prudential Securities Research.
The current uptick in the company's performance is only natural since it is a cyclical company now in its up cycle, Mr. Horan said. Black & Decker's cost-cutting efforts will also bump up against increases in plastic and steel prices, he said.
Mr. Horan also points to the possibility of a downturn in the economy, which would hurt a company as dependent on consumer demand as Black & Decker. "My bet is we have a two-out-of-three chance in 1996 of a growth recession," Mr. Horan said.
Twice in the last decade, expectations for the company have been raised, only to be --ed by a combination of company actions and economic conditions. Those events were the acquisition of Emhart in 1989 and a stock offering in 1992.
Five years ago, Black & Decker was on a roll, having racked up record profits of $97.1 million in 1988 and on its way to another all-time high in 1989.
Mr. Archibald, who took over as chairman and CEO in 1986, had transformed the moribund company into a dynamo, with a program of "cut and build," reducing employees by 3,000 to 20,000 while beefing up the sales and marketing efforts.
Then, in a bid to broaden its earnings base, Black & Decker bought Emhart, a giant Connecticut-based conglomerate with businesses ranging from defense consulting to Kwikset locksets and Price Pfister faucets.
With the $2.7 billion purchase, plus the assumption of Emhart's debt, Black & Decker's debt ballooned from $492.6 million to more than $4.1 billion. Besides saddling its income statement with an initial interest expense of $353.6 million, the company also has taken an annual noncash deduction of about $70 million a year from revenues, as it amortizes goodwill -- the difference between the purchase price and the balance sheet value of Emhart.
The plan was to quickly sell off Emhart's disparate subsidiaries that did not fall into Black & Decker's niche of consumer products and pay off a huge chunk of the debt. The subsidiaries earmarked for sale ranged from those making equipment for the glass container industry and circuit boards to PRC Advanced Systems Inc., a McLean, Va.-based computer systems company that relies heavily on Pentagon contracts.
But events conspired against Black & Decker. "The timing, with the benefit of hindsight, wasn't terrific," Mr. Archibald said about the Emhart purchase.
The same year as the purchase, the Berlin Wall fell and threat of Communism receded -- severely hurting the value of a defense consultant like PRC.
At the same time, the junk bond market collapsed, handicapping other companies that might have been interested in buying the former Emhart subsidiaries.
Added to the mix was the worst recession and housing slump since the Depression, which cut into Black & Decker's core power tool and small appliance business. At the same time, Black & Decker's net interest expense consumed much more of its revenues -- rising from 1.6 percent in 1988 to 6.3 percent in 1989, 7.3 percent in 1990 and 6.2 percent in 1991.
Earnings plummeted by 69.1 percent in 1989 to $30 million and rose only to $51.1 million in 1990 and then $53 million in 1991.
Stock prices dropped to a low of $8 a share in late 1990.
"We didn't panic and dump a bunch of assets at below market value," said Mr. Archibald.
Instead, the company held out for good prices and thus far has sold nine Emhart subsidiaries for about $1 billion.
Black & Decker also continued its aggressive product development effort, trotting out its DeWalt line of professional power tools in 1992, which has since expanded to a $300 million annual market.
Gradually, the stock price moved back up to above $26 a share when the company launched a $465 million stock offering to further shore up its balance sheet.
While the money was used to pay off debt and increased earnings per share by cutting interest payments, it increased outstanding shares by a third and that hurt the stock's momentum, according to some analysts. Also, a decision to withdraw an initial public offering of PRC was seen as hurting the stock's price.
Mr. Archibald said the stock offering was necessary to pay down debt. "I didn't have too many shareholders criticize that move," said Mr. Archibald, who blamed economic conditions for the stock's doldrums.
With the money from the stock offering and the sale of the subsidiaries, Black & Decker has paid down $1.5 billion of its debt, which now stands at $2.6 billion, and last year interest payments shrunk to 3.5 percent of its revenues.
Analyst have recently taken heart, with company officials saying they do not plan any stock offering in the foreseeable future. Instead, the company will be relying on improved cash flow and the sale of more former Emhart subsidiaries to further reduce debt.
"If you want to talk about what is changing at Black & Decker today, I think one of the most important changes that is taking place is the focus we have on generating cash from our operations," said Thomas M. Schoewe, Black & Decker's vice president and chief financial officer.
That was evident last quarter, when the company had the first positive cash flow -- $15 million -- of any third quarter since the Emhart acquisition.
With its new emphasis on controlling inventories, stretching out payments to vendors and getting faster payments from customers, the company expects to have a $75 million positive cash flow by the end of the year -- all of which will be applied to debt, Mr. Schoewe said.
That would compare to a $95 million negative cash flow last year, excluding $110 million from the sale of two subsidiaries.
The other source for money to pay down debt is subsidiary sales, particularly PRC. But Mr. Schoewe said the company is not under any financial pressure to sell cheap.
"You need to understand, that if, in the unlikely event, we are still not in a position of strength to sell those businesses at the end of 1996 or during 1997, then we'll wait," Mr. Schoewe said.
He is confident that the company can keep its pledge of a 20 percent increase in earnings per share -- before the deduction for goodwill -- because there is a great deal of room between the current 8 percent return on sales and the company's goal of 12 percent.
And as it watches its dollars and cents closely, the company is keeping up its steady drumbeat of new products, which range from a new "snake light," which can be bent into different shapes, to a cordless 14-volt circular saw that's in such demand it can't be kept in stock.
"There is a story about a UPS driver who delivered two to a Home Depot and he wouldn't take the one off there; he just went in and bought it," Mr. Archibald said.