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WIKI ANALYSIS| This company has recently been acquired or received a credible acquisition offer. |
Black & Decker (NYSE: BDK) is a manufacturer and marketer of power tools, accessories, hardware, home improvement products, and advanced fastening systems. The company is a number one or two leader in each of its three reportable product segments, Power Tools & Accessories, Hardware & Home Improvement, and Fastening & Assembly Systems. It operates in over 100 countries, though the United States and Europe, particularly the UK, are its most significant markets.[1]
The company has built several successful brands, specifically in its largest segment, Power Tools & Accessories (PTA), where it commands a market share of approximately 40% through brands such as Black & Decker, DeWalt, and others. Black & Decker has leveraged respected brand names and consumer relationships in recent years, continuing roll outs of improved products coupled with acquisitions which have expanded market share.
After experiencing significant top and bottom line growth during 2002-2005, the company’s expansion has slowed as its markets continue to mature and the housing market slumps. In Q2 2009, for example, year over year net earnings fell 60%, to $38.3 million. [2]
Company Overview
Q3 FY2009 Summary
BDK posted a profit of $55.4 million in the third quarter of FY2009, a 35% profit drop compared to the third reporting quarter of fiscal 2008.[3] BDK's largest business segment "PowerTools and Accessories" posted sales decrease of 21% to $869.5 million compared to the 3rd quarter of fiscal 2008.[4] Throughout the third quarter, BDK has been cutting operating costs while lowering prices for parts. For example, BDK stated it would cut 1,200 jobs, lower U.S. workers' base salaries by 2.5% to 5%, and lower base salaries of top executives, as well as end contributions to retirement programs due to economic weakness.[5] As a result, Selling, General & Administrative Expenses (SG&A) expenses dropped 17 percent to $309.6 million for the quarter.[4]
Products & Segments
PowerTools and Accessories (73% of sales in FY2008)
B&D’s largest and most profitable segment includes electric tools and equipment, garden tools, portable power products, and others. Products are wide-ranging and include drills, vacuums, hammers, wrenches, lawnmowers, saws, generators, etc. Sales in PowerTools and Accessories (PTA) to unaffiliated customers decreased 10% in FY2008 compared to FY2007.[6] Decreased sales is primarily due to slack in North American business, which faced weak housing and discretionary spending.
Hardware and Home Improvement (15% of sales in FY2008)
Products include security and decorative hardware, kitchen and bathroom accessories and replacement parts, and general hardware. The segment also manufactures products under numerous brand names, and no product accounts for over 10% of segment sales.
Fastening and Assembly Systems (12% of sales in FY2008)
This segment sells an extensive line of fasteners and fastening systems, which include screws, nuts, bolts, metal and plastic fasteners, riveting systems, etc. As with PTA and HH, no product comprises over 10% of segment revenue and products are manufactured under a number of brand names.
B&D also groups products into several sub-divisions, including power tools, lawn and garden equipment, accessories, and others (see table below).
| 2006 | 2007 | 2008 | |
| Consumer and industrial power tools and product services | $3,481.1 | $3,537.3 | $3,236.1 |
| Lawn and garden products | $457.8 | $430.6 | $377.9 |
| Consumer and industrial accessories | $475.1 | $479.2 | $452.0 |
| Cleaning, automotive, lighting and household | $319.3 | $345.3 | $321.0 |
| Security hardware | $751.7 | $730.9 | $649.9 |
| Plumbing products | $296.0 | $323.3 | $309.2 |
| Fastening and assembly systems | $666.3 | $716.6 | $740.0 |
| Total | $6,447.3 | $6,563.2 | $6,086.1 |
Note: Figures in Millions USD Source: FY2008 10-K[7]
Key Trends and Forces
Housing Sector
The 33% decline in U.S. housing starts in 2008 and subsequent rapid deterioration of demand throughout Europe contributed to B&D's sales decrease of 7% for FY2008.[8] In response, BDK cut SGA expense by 6%.[8]
Dependence on Home Depot and Lowe’s
B&D sells approximately one-third of its products to retailers Home Depot (HD) ($1.0 billion of FY2008 sales) and Lowe's Companies (LOW) home improvement warehouse ($0.8 billion of 2006 sales). This heavy reliance on two major customers exposes the company to greater risk of materially adverse results if one or both of the relationships deteriorate or if one of those two customers run into trouble and decrease purchases from B&D.
Changes in the operations of these two customers (for instance, tighter inventory controls of discontinuing the sale of B&D products) due to their own corporate policy or end-user demand can greatly effect sales. Furthermore, because both Lowe’s and HD benefit from economies of scale, they generally obtain lower pricing from suppliers like B&D. These suppliers, then, sacrifice profit margin for volume. If HD and Lowe’s continue to expand and capture market share, and, hence, further economies of scale, B&D’s results may suffer. However, B&D is a large and important supplier for both customers, and it is unlikely that dramatically adverse events will hamper the relationships or financial results.
Innovation
Black & Decker seems far from a high-tech business with a need for heavy R&D, but the company does depend upon the successful rollout of new products with greater ease of use and generally utility to end customers. Tools, equipment, accessories, etc. tend to be durable, but can more easily become obsolete under heavy use and if better and more efficient competing products come to market. Improved products and new product lines tend to be a very important driver of revenue for the company, and staying ahead of the competition in terms of being first to market is vital to the continued success of the company. This is especially so as the company experiences declines in core product lines and must seek new streams of revenue to remain competitive.
Market Saturation and International Prospects
Acquisitions and Use of Cash
B&D has sought growth in large part from the acquisition of brands and whole companies. This strategy seeks to leverage the company’s relationships, reputability, and scale in order to achieve respectable returns on investment through top and bottom line growth. When the acquisition environment is competitive and the company cannot secure reasonable prices on target companies, it tends to return cash to shareholders through the form of dividends and share repurchases. During the past five years, the company has repurchased over $1.5 billion of its own shares, which represents nearly 10% of shares outstanding over this time. This practice tends normally enhances shareholder returns by decreasing the share base over which earnings per share is calculated. The company has found itself to be a good alternative investment when acquisitions are overpriced.
Use of cash is critical to the shareholders of the company, which generates free cash flow typically in excess of reported GAAP earnings. In order to achieve out-sized returns for shareholders, the company must carefully steward the cash it generates and invest it sensibly. With returns on equity in excess of 30% and growing cash flow, the management of B&D seems to be successful in its use of cash.
Raw Material Costs
The company has experienced pressure on gross margins due to increasing commodities prices in the last few years. Its major commodity inputs include steel, resins, copper, aluminum, and zinc which are used in the manufacture of its products. The company attempts to hedge against price fluctuations using derivative contracts, but the steady increase in the prices of these major inputs over time has led to unavoidable cost increases. B&D enters into forward contract on certain commodities, in particular zinc and copper, in which B&D has 13.7 million pounds of zinc and 3.3 million pounds of copper in commodity contracts outstanding.[9]
Competition
B&D has no competitor which competes in all of the company’s segments, but it has several which compete in each segment individually. Major competitors include Snap-On (SNA), American Standard Companies (ASD) , Makita (MKTAY), and Danaher (DHR). The company also faces many small, private label competitors, especially overseas where its market penetration is not nearly what it is in the United States and Europe. Black & Decker is clearly the market leader in its bread and butter segment, Power Tools and Accessories, with the most broadly recognized brand name and approximate 40% market share.
Comparison
Snap-On (SNA) makes and markets power tools (among other non-competing products), and competes with BDK via this division of its operations. Makita (MKTAY) offers general purpose tools and woodworking machinery. Its largest business is general purpose tools, which compete directly with BDK. Danaher (DHR) also offers tools and industrial equipment through one of its divisions. Generally, each company markets these competing products directly to industrial users as well as to do-it-yourself retailers like Home Depot (HD) and Lowe's Companies (LOW).
| Operating Metrics | BDK | SNA | MKTAY | DHR | |
|---|---|---|---|---|---|
| Operating Margin | 6.94% | 13.63% | 17.03% | 14.72% | |
| Return on Average Assets | 5.54% | 8.77% | 9.21% | 7.54% | |
| Return on Average Equity | 22.38% | 19.19% | 11.10% | 13.95% | |
B&D tends to be more efficiently run in terms of margins, advantages of scale, and returns on capital. While some of its competitors are larger by revenue and market capitalization measures, most do not focus on the same core product-type offering as B&D. This confers several competitive advantages upon B&D.
Advantages
While the company faces a number of formidable competitors, though it is arguably the most well-known and respected brand names in its major categories. For example, DeWalt, which comprises around 40% of the company’s top line, maintains a very strong and loyal customer base. The B&D/DeWalt faithful are arguably cult-like in their purchasing habits. Customers are also retained in part because of DeWalt’s interchangeable battery, since they are more likely to buy new products for which they already have the battery. The interchangeability also enables the company to leverage its diverse product offering, affording the company a unique cross-selling advantage. For instance, a customer is more likely to buy a drill from DeWalt if he/she already has a DeWalt nail gun with the same battery. In this way, then, the company has an additional economy of scale that more narrowly focused competitors do not enjoy.
The company also maintains advantages in its ability to deploy financial resources in order to innovate. For example, B&D products typically have better weight-to-power ratios thanks to the company’s production of lithium-ion batteries while competitors typically sport Nicad batteries.
References
- ↑ Black & Decker (BDK) Form 10-K, Fiscal Year 2008, "Item 7", p. 21
- ↑ BDK, Q2 2009 Earnings Announcement
- ↑ Black & Decker posts 35% profit drop
- ↑ 4.0 4.1 UPDATE 1-Black & Decker Q3 profit tops Street, sees better Q4
- ↑ Black & Decker 3Q profit falls, sees stabilization
- ↑ Black & Decker (BDK) Form 10-K, Fiscal Year 2008, "Item 7", p. 24
- ↑ Black & Decker (BDK) Form 10-K, Fiscal Year 2008, "Note 16", p. 65
- ↑ 8.0 8.1 BDK 2008 Annual Report
- ↑ Black & Decker (BDK) Form 10-K, Fiscal Year 2008, "Note 16", p. 47
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