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Wall Street lauds B&D; cutbacks


Black & Decker Corp.'s plan to eliminate 2,400 jobs and transfer more work overseas wasn't good news for the workers who are getting pink slips or the communities facing a significant loss of jobs. But Wall Street, always focused on the bottom line, said the toolmaker's restructuring was the right thing to do.

If anything, analysts said, it should have been done sooner.

The Towson-based toolmaker said last week that it is cutting 450 positions at its Eastern Shore plant in Easton and shifting much of that factory's output to a plant in Mexico. Three other U.S. plants will be closed outright.

When the dust settles in the next 12 to 18 months, Black & Decker will have eliminated about 2,400 jobs in the higher-paying United States and United Kingdom and hired 1,900 workers in Mexico, China and the Czech Republic, where labor is cheaper.

"These actions probably should have been taken quite a while ago," said analyst James Lucas of Janney Montgomery Scott LLC. "Drastic times call for drastic measures."

Were it not for the $100 million charge the company took in the fourth quarter to help pay for the restructuring, Black & Decker would have reported a profit of $57.6 million in the last three months of 2001 instead of posting its first loss in four years.

But the company's numbers have been deteriorating - both sales and profit have fallen in the past five quarters.

The company says the reorganization should save the toolmaker about $100 million a year.

Black & Decker did not make the move because it was in trouble, said Franklin L. Morton, director of research at Ariel Capital Management Inc. in Chicago, noting that the company had record earnings per share in 2000, excluding special charges.

"But they operate in industries that are competitive, and you've always got to be improving to remain competitive," he said. "It's a defensive, continuous-improvement kind of industry."

Excess inventory

With its new plan, Black & Decker has "come to grips" with most of the issues it had been facing, Morton said. However, he said, the company does have room for improvement in its management of inventory, although it has made headway recently by running its plants at lower capacity.

Black & Decker had $712 million in excess inventory at the end of the year, down nearly 16 percent from the end of 2000. Companies hate having excess inventory because it costs money to ship and takes up warehouse space. What's more, companies have usually taken on debt and interest charges to make the products and aren't collecting revenue on them.

"If you can take $100 million out of inventory, you can probably save $15 or $20 million," Morton said.

Eric Bosshard, an analyst at Midwest Research, agreed that Black & Decker's biggest challenge had been managing inventory, along with a high cost structure. Both issues are being addressed, he said.

"This was an important structural change, it's not just a Band-Aid to improve earnings in the near term," Bosshard explained. "A shift in capacity to lower-cost markets can allow Black & Decker to compete against lower-cost suppliers and enhance their margins."

The challenge for Black & Decker, analysts said, is to successfully implement the changes. The company is known for its excellent marketing capabilities, they said, but it is too soon to say whether operationally the plan will work.

"It conceptually makes sense, but it's an execution issue at this point," said analyst Joseph Sroka of Merrill Lynch Global Securities. "You can say you're going to shift capacity, but it's up to you to realize the benefits you think you're going to get."

Midstream changes

Noting an exodus of executives from Black & Decker in the past few years, he said that if the trend continues it could complicate the restructuring plan.

"Bringing in new people in the midst of execution makes things more difficult," Sroka said.

Joseph Galli, head of the power tools business, left the company in 1999. Since then, many high-level executives have quit - including the chief financial officer, the president of the accessory division, the head of building products, the vice president of North American consumer power tools and the vice president of worldwide power tools.(Many now work for Galli, who is president and chief executive of Newell Rubbermaid Inc.)

"If the same team that identified the issues and created the [restructuring] plan are the ones to see it through, obviously we have a much higher confidence level," Sroka said.

During a conference call last week, Black & Decker's chief executive officer, Nolan D. Archibald, was asked by an analyst if the move to more production in low-cost facilities would blur the line between his company's products and those of its less-expensive competitors, such as Japan's Ryobi line.

"We believe that our product is superior in quality to Ryobi," he said. "It's also better featured."

In addition to making more of its products in cheaper facilities, Black & Decker said, it plans to contract out about 20 percent of its manufacturing. Most of the outsourced work would be for component parts; final assembly would still be done largely inside Black & Decker's own facilities.

Morton, of Ariel Capital, acknowledged that it might be hard to explain to workers why they are being fired by a company that would have had a profit last year of nearly $180 million were it not for the restructuring charges.

"It's tough, but the risk is that if you don't ever do that, the [profit] goes away," he said. "I'm not saying Black & Decker was at death's doorstep, but you have to remain competitive to be viable in the long term."

An article in Sunday's Business section mischaracterized Black & Decker Corp.'s inventory. Black & Decker had $712 million in inventory at the end of the year, not $712 million in excess inventory. The Sun regrets the error.
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