Black & Decker Corporation: Detailed Financial and Performance Analysis - Research Paper Example

03 May 2006 Black & Decker Corporation - Detailed Financial Performance Analysis The Black & Decker Corporation (NYSE:BDK), a leading manufacturer and marketer of power tools and accessories, hardware and home improvement products and technology based fastening systems was incorporated in Maryland in 1910. It enjoys its extensive market spread over 100 countries and a strong brand name in its three operating business segments namely, Power tools and accessories, Hardware and Home improvement and Fastening and assembly systems. The company has been into a large-scale acquisition and strategic sale propositions for some time now. These include acquisition of Emhart Corporation in 1989, Baldwin Hardware Corporation and Weiser Lock Corporation during 2003 and Porter-Cable and Delta Tools Group during 2004. Some of the strategic business sales include sale of two European security hardware business namely Corbin and NEMEF during January 2004 and sale of DOM security hardware in November 2005. The analysis of the performance of Black & Decker Corporation is split into two parts. Part One deals with the company's situation for 10 years post acquisition of Emhart Corporation for $2.8 billion in 1989. Part two would deal with the performance of the company during more recent times, including the year 2005 and first quarter of 2006. Financial and Performance Analysis (Part One - 1989 to 1999) The financial performance of Black & Decker post its acquisition of Emhart Corporation had been standard. A simple glance at the ten year consolidated financials would tell us that sales has grown only by an average of 42% ($1348 Million) during 1989 to 1999. A deeper analysis throws light on the fact that sales numbers have grown only from 1989 to 1994. Post 1994, though sales during 1996-1997 shot up to $4900 million mark, the rest of the period have only had a stable number revolving around the $4,500 Million mark. A quick glimpse at the 10year financials shocks the reader that the Operating Income has grown over 100% during 1989 - 1999 period. But analysis reveals that the average growth in Operating income over the 10 years has been very meager with negative growth being recorded in 3 out of the 10 years. Actual average stands at 9.4% growth as an average of 10 years. In the year 1998, the company recorded an earning (loss) from continuing operations at ($754.6) Million, but quickly took hold of the situation and revised its earnings from continuing operations to a profit of $300.3 Million the next year. A striking feature of the company is its large reduction in number of employees from 1989 to 1999. The company's employee strength stood at 38,600 during 1989, while it reported its employee strength at 22,106 during 1999. Ironic to a growing company, this gross reduction of 74.6% in 10 years is surprising. I believe the shareholder of the company would have been quite disappointed seeing the NIL or minimal growth in the dividends declared. The dividends declared stayed constantly at $0.40 per share from 1989 to 1995 and increase by a meager $0.08 to $0.48 from 1996 until 1999. Analysis of the ratios of the company for the period 1989 - 1999 reveals the following. The average of operating income ratio over the 10year period stood at 6.79% (CAGR 74%) with the highest recording at 11.86%(1999). Though this seems quite low, the company has posed a net profit record for the majority of the ten years. The net profit average stood at 0.48% (CAGR 5.30%). This had a positive impact of the stock prices, which is also evidenced by the growing prices of the company stocks during the period from $10 range (1989) to $60+ range during 1999. The average return on the total assets for the 10year period stood as low as average of 0.03%. This shows the in-effectiveness with which the company has deployed the capital though not a conclusive evidence. The average earnings per share (EPS) over the 10year period stood at 0.22 per share, which seems good for the average dividend of 0.40 to 0.48 per share. The return on equity of the company stands at an average of (4.59%) for the 10 year period. This is primarily due to the high negative return on equity during 1998 owing to the heavy loss of $754 Million. The company's 10year debt equity ratio average stood at 2.41. The lower debt equity ratio would have provided a comfortable cushion to the creditors over those 10 years. Black & Decker Corporation also reported business segment wise per SEC requirements. A quick look at the business segment wise report indicates that during 1997-1999, the company's larger share of sales came from the "Power Tools and accessories" segment. Indeed to support this the company had invested a larger proportion of its capital towards assets to promote this business segment. This was followed by the "Hardware and home improvement" segment, then by "Fastening and Assembly systems" segment. Only 7.3% of the total sales came from the other ancillary and smaller segments of Black & Decker Corporation. During 1997, the company enjoyed a market share of 43.1% in the Consumer tools market, 36.7% market share in the Professional tools market. The organization also enjoyed a competitive position in the global power tools market. Eve today, though the industry is swamped with competitive players, Black & Decker still enjoys a competitive edge in the US power tools market. Financial and Performance Analysis (Part two - 2000 to 2005) Analysis of the 5 years financials (2000-2005) shows that sales had a steady increase without any reduction unlike the previous ten years that some highs and a low in the sales numbers. The revenues for the period ended 31 December 2005 stood at $6,523.7 Million. This is an increase of 20.85% compared to the same period in 2004. The increase in revenues during 2004 and 2005 are extraordinarily high compared to its revenue growth in previous periods. Though revenues saw a steep increase during 2004 & 2005, the selling, general and administrative expenses have grown at an average of 15% for the period ended 2004 and 2005. This increase in the expense is attributable to the expansion in business volumes substantiated by the growth in revenues. Interest expense to the tune of $45.4 million has been incurred for the year ended 2005. Though this is 100% higher than the interest expense of 2004, there has been a steady reduction in the interest expense since 2001. This may be attributable to the repayment of term debt. The earnings before tax from continuing operations (EBIT) for the year ended 31 December 2005 stood at $801.1 Million recording an increase of 36%. This is no surprise looking at the performance of the company recording an average increase of 12.86% in EBIT of during the previous years. The net profit of the company was $532.1 million for the period ended 31 December 2005. This is an increase of 19.4% compared to the net profit recorded during same period of 2004. The trend also suggests that the net earnings of the company had been steadily growing over the last 5 years and the future looks bright. The earnings per share of has moved upward at 24% standing at $6.72% for the period ended 31 December 2005. The operating income ratio of the company stood at 12.18% for the year ended 31 December 2005 and has constantly proved an upward trend over the last five years indicating better management skills of the company. The net earnings margin for the period ended 31 December 2005 was 8.15% and has revolved around this number over the last two years indicating a stable profit generation ability of the company. The return on total assets as on 31 December 2005 stands at 9.10%, which indicates the efficiency with which the management has deployed its capital for business purposes. The total asset turnover of the company as at 31/12/2005 was 1.11. This shows how efficiently the assets of the company have been used. ROI and Asset turnover are a good indicator of the management's ability to utilize its capital and assets. As at 31 December 2005, the debt asset ratio of the company was 0.27, which indicates the extent to which the borrowed funds support the assets of the company. The debt equity ratio of the company stands at 1.02 as at 31 December 2005 indicating that debt is employed more than equity, a prudent way of financial management. Quarterly comparison 2005 (in-depth analysis) Quarterly revenues reported show an increase of 9.75 increase in revenues for quarter ended 31 December 2005. The increase between the quarters of 2005 has been steady but for the third quarter when the revenues fell by $123 million. This also indicates that the total increase in profits was not due to any extra-ordinary item like sale of division but through continued business operations. The December 2005 quarter recorded the highest interest expense at $219.6 million bringing down the EBIT to $204.5 million. The selling, general and administrative have been around the $380 million mark with small variations showing us that the company has managed its operating expenses well within the mark. The December 2005 quarter had recorded the least in terms of net earnings at $98.6 million while all other quarters of 2005 recorded over $135 million. This steep fall is due to the 100% increase in income tax paid during the December 2005 quarter. The company operates in three different segments. A comparative analysis shows that the primary focus area of the company remains unchanged as the "Power tools and accessories" segment contributing over $4800 million as revenues for the period ended 31 December 2005. This is indeed a steep increase of $980 million (25%) compared to the similar period of the previous year. This was followed by the Hardware and Home Improvement segment recording revenues of $1,019.8 million, a 5.1% increase from the similar period ended 2004. The Fastening and assembly systems segment recorded revenues of $662.2 million with a 6.8% increase compared to the year ended 2004. As always the company has been incurring significant capital expenditure and this has been the highest in the core business segment. The net earnings of the prime business segment stood at $635 million for the year ended 31 December 2005 recoding an increase of 30% compared to the previous year. Quarterly Financial Performance (Q1 2006) Black & Decker witnessed a marginal increase in revenues of first quarter 2006. The Q1'06 revenues stood at $1,528.9 million, a marginal increase of 4.1% compared to the similar period of 2005. Selling and administration expenses saw a small decrease of $2 million, a positive sign for the future. This has contributed to the increase in the operating income. Earnings before Income Tax (EBIT) stood at $154.5 million and the net earnings at $113.1 million. The operating income ratio for Q1'06 stood at 11%, while the net earnings margin was 7.3%. The return on total assets as on 31 March 2006 stands at 2.06%. Though this seems low, we need to remember that it is only for a quarter and the ROA is expected to be much higher during the year-end. The total asset turnover of the company as at 31 March 2006 was 0.27. The number seems grossly reduced because the sales number is for a quarter while the total asset value is at a particular point in time. This ratio if annualized stands at 1.11 and shows how efficiently the assets of the company have been used. As at 31 March 2006, the debt asset ratio of the company was 0.27, which indicates the extent to which the borrowed funds support the assets of the company. This ratio remains unchanged compared to the prior period of December 2005 indicating that there has been no increase in the debt to fund any assets. The debt equity ratio of the company for Q1'06 stands at 0.96 indicating that the proportion of debt and equity utilized by the company are almost on par with each other. Those these quarterly figures are subject to change during the year, it is expected that debt or equity numbers would no undergo a large change, thereby unaffecting the balance sheet ratios computed. Industry Analysis Black & Decker Corporation is a prime player in the global "Building Products" market. Being based in the United States, it is forecasted that they would be competing in $192.7 billion market by 2008. Though over the past few years this industry saw US share shrinking, with the relaxation of the WTO norms for foreign markets, it is expected to grow. The US market accounting for 28% of the global building product market and with the opening up of the Asia Pacific market, it is foreseen that Black & Decker would have a substantial growth in their revenues. Research reveals that metal products of this market account for over 20+% and with Black & Decker prime business segment being power metal tools, the company is expected to have a bright future. Recommendation Currently it seems as though the organization is in the right track. Revenue and profits have been steadily increasing and market share has been expanding. The share of United States in the global building products market is only 28%, while the rest of the world occupies the remaining 72%. The organization instead of its traditional expansion plans should focus more on its core and ancillary areas of business and tap more foreign markets available by capitalizing on its brand name and industry expertise and also sustain its growth rate in tapping a major market share of the US market. Sale of few of its not so profitable segments might be a good option though not a necessity at the moment. Reference Gamble J.E. & Thompson A.A. - Cases in Strategic Management. University of Alabama () Chandra .P - Financial Management - Theory and Practice. TataMcGrawHill (2002) Gibson. C.H - Financial Reporting and Analysis: Using Financial Accounting information. Thomson Analytics (2003) www.bdk.com - Investor relations - Financial Reports http://faculty.philau.edu/lermackh/financial_analysis.htm Read More