UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
December 31, 2002 1-1553
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THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State of Incorporation) (I.R.S. Employer
Identification Number)
Towson, Maryland 21286
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 410-716-3900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, New York Stock Exchange
par value $.50 per share Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No ___
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 28, 2002, was $3,858,726,337.
The number of shares of Common Stock outstanding as of January 24, 2003, was
78,598,839.
The exhibit index as required by Item 601(a) of Regulation S-K is included in
Item 15 of Part IV of this report.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Report.
Part I
ITEM 1. BUSINESS
(a) General Development of Business
The Black & Decker Corporation (collectively with its subsidiaries, the
Corporation), incorporated in Maryland in 1910, is a leading global manufacturer
and marketer of power tools and accessories, hardware and home improvement
products, and technology-based fastening systems. With products and services
marketed in over 100 countries, the Corporation enjoys worldwide recognition of
strong brand names and a superior reputation for quality, design, innovation,
and value.
The Corporation is one of the world's leading producers of power tools, power
tool accessories, and residential security hardware, and the Corporation's
product lines hold leading market share positions in these industries. The
Corporation is a major global supplier of engineered fastening and assembly
systems. The Corporation is one of the leading producers of faucets in North
America. These assertions are based on total volume of sales of products
compared to the total market for those products and are supported by market
research studies sponsored by the Corporation as well as independent industry
statistics available through various trade organizations and periodicals,
internally generated market data, and other sources.
(b) Financial Information About Business Segments
The Corporation operates in three reportable business segments: Power Tools and
Accessories, including consumer and professional power tools and accessories,
electric lawn and garden tools, electric cleaning and lighting products, and
product service; Hardware and Home Improvement, including security hardware and
plumbing products; and Fastening and Assembly Systems. For additional
information about these segments, see Note 15 of Notes to Consolidated Financial
Statements included in Item 8 of Part II, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of
Part II of this report.
(c) Narrative Description of the Business
The following is a brief description of each of the Corporation's reportable
business segments.
POWER TOOLS AND ACCESSORIES
The Power Tools and Accessories segment has worldwide responsibility for the
manufacture and sale of consumer (home use) and professional corded and cordless
electric power tools, lawn and garden tools, home products, accessories and
attachments for power tools, and product service. In addition, the Power Tools
and Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside of the United States and Canada;
and for sales of household products, principally in Europe and Brazil.
Power tools include drills, screwdrivers, saws, sanders, grinders, pneumatic
nailers, bench and stationary machinery, air compressors, generators, laser
products, and WORKMATE(R) project centers and related products. Lawn and garden
tools include hedge trimmers, string trimmers, lawn mowers, edgers,
blower/vacuums, power sprayers, and related accessories. Home products include
upright and hand-held vacuums, flexible flashlights, and wet scrubbers. Power
tool accessories include drill bits, circular saw blades, jig and reciprocating
saw blades, screwdriver bits and quick-change systems, bonded abrasives, and
worksite tool belts and bags. Product service provides replacement parts and
repair and maintenance of power tools and electric lawn and garden tools.
Power tools, lawn and garden tools, home products, and accessories are
marketed around the world under the BLACK & DECKER name as well as other
trademarks and trade names, including, without limitation, ORANGE AND BLACK
COLOR SCHEME; DEWALT; YELLOW AND BLACK COLOR SCHEME; VERSAPAK; NAVIGATOR; PIVOT
DRIVER; SANDSTORM; WORKMATE; FIRESTORM; MOUSE; MEGA MOUSE; RTX; SWIVEL; QUANTUM
PRO; ZIPSAW MULTI PROJECT TOOL; ALLIGATOR; QUATTRO; PRODUCT FINDER; GIFT FINDER;
TOOL SCHOOL; GUARANTEED TOUGH; XRP; SCRUGUN; HOLGUN; BULLS EYE; WILDCAT; EMGLO;
MOMENTUM; ELU; GROOM `N' EDGE; VAC `N' MULCH; AFS AUTOMATIC FEED SPOOL;
STRIMMER; REFLEX; HEDGE HOG; GRASS HOG; LEAF HOG; EDGE HOG; LAWN HOG; FLEX TUBE;
DUSTBUSTER; DIRTBUSTER; STEAMBUSTER; SCUMBUSTER; FLOORBUSTER; SNAKELIGHT;
SPOTLITER; SAFELITER; B&D; PIRANHA; BULLET; SCORPION; SERIES 20; SERIES 40;
SERIES 60; ROCK CARBIDE; PILOT POINT; RAPID LOAD; TOUGH CASE; and ACCESSORIES
FINDER.
The composition of the Corporation's sales by product groups for 2002, 2001,
and 2000 is included in Note 15 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation's consolidated sales for 2002, 2001, or 2000.
The Corporation's product service program supports its power tools and
electric lawn and garden tools. Replacement parts and product repair services
are available through a network of company-operated service centers, which are
identified and listed in product information material generally included in
product packaging. At December 31, 2002, there were approximately 130 such
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service centers, of which roughly two-thirds were located in the United States.
The remainder was located around the world, primarily in Canada, Asia, and
Europe. These company-operated service centers are supplemented by several
hundred authorized service centers operated by independent local owners. The
Corporation also operates reconditioning centers in which power tools, electric
lawn and garden tools, and electric cleaning and lighting products are
reconditioned and then re-sold through numerous company-operated factory outlets
and service centers.
Most of the Corporation's consumer power tools, electric lawn and garden
tools, and electric cleaning and lighting products sold in the United States
carry a two-year warranty, pursuant to which the consumer can return defective
products during the two years following the purchase in exchange for a
replacement product or repair at no cost to the consumer. Most of the
Corporation's professional power tools sold in the United States carry a
one-year warranty with similar provisions. Products sold outside of the United
States generally have similar warranty arrangements. Such arrangements vary,
however, depending upon local market conditions and laws and regulations.
The Corporation's product offerings in the Power Tools and Accessories
segment are sold primarily to retailers, wholesalers, distributors, and jobbers,
although some discontinued or reconditioned power tools, electric lawn and
garden tools, and electric cleaning and lighting products are sold through
company-operated service centers and factory outlets directly to end users.
Sales to The Home Depot, one of the segment's customers, accounted for greater
than 10% of the Corporation's consolidated sales for 2002, 2001, and 2000. Sales
to Lowe's Home Improvement Warehouse, one of the segment's customers, accounted
for greater than 10% of the Corporation's consolidated sales for 2002. For
additional information regarding sales to The Home Depot and Lowe's Home
Improvement Warehouse, see Note 15 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report.
The principal materials used in the manufacturing of products in the Power
Tools and Accessories segment are plastics, aluminum, copper, steel, certain
electronic components, and batteries. These materials are used in various forms.
For example, aluminum or steel may be used in the form of wire, sheet, bar, and
strip stock.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority are available through multiple sources and are
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations.
Principal manufacturing and assembly facilities of the power tools, electric
lawn and garden tools, electric cleaning and lighting products, and accessories
businesses in the United States are located in Fayetteville, North Carolina;
Easton, Maryland; and Tampa, Florida. The principal distribution facilities in
the United States, other than those located at the manufacturing and assembly
facilities listed above, are located in Fort Mill, South Carolina, and Rancho
Cucamonga, California.
Principal manufacturing and assembly facilities of the power tools, electric
lawn and garden tools, electric cleaning and lighting products, and accessories
businesses outside of the United States are located in Buchlberg, Germany;
Perugia, Italy; Spennymoor and Maltby, England; Reynosa, Mexico; Uberaba,
Brazil; Suzhou, China; and Usti nad Labem, Czech Republic. In addition to the
principal facilities described above, the manufacture and assembly of products
for the Power Tools and Accessories segment also occurs at the facility of its
50%-owned joint venture located in Shen Zhen, China. The principal distribution
facilities outside of the United States, other than those located at the
manufacturing facilities listed above, consist of a central-European
distribution center in Tongeren, Belgium, and a facility in Northampton,
England.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Power Tools and Accessories segment. Although these patents
and licenses are important, the Corporation is not materially dependent on such
patents or licenses with respect to its operations.
The Corporation holds various trademarks that are employed in its businesses
and operates under various trade names, some of which are stated previously. The
Corporation believes that these trademarks and trade names are important to the
marketing and distribution of its products.
A significant portion of the Corporation's sales in the Power Tools and
Accessories segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature. However, sales of certain
consumer and professional power tools tend to be higher during the period
immediately preceding the Christmas gift-giving season, while the sales of most
electric lawn and garden tools are at their peak during the winter and early
spring period. Most of the Corporation's other product lines within this segment
generally are not seasonal in nature, but may be influenced by other general
economic trends.
The Corporation is one of the world's leaders in the manufacturing and
marketing of portable power tools, electric lawn and garden tools, and
accessories. Worldwide, the markets in which the Corporation sells these
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong, well-
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established manufacturers that compete on a global basis. Some of these
companies manufacture products that are competitive with a number of the
Corporation's product lines. Other competitors restrict their operations to
fewer categories, and some offer only a narrow range of competitive products.
Competition from certain of these manufacturers has been intense in recent years
and is expected to continue.
HARDWARE AND HOME IMPROVEMENT
The Hardware and Home Improvement segment has worldwide responsibility for the
manufacture and sale of security hardware products (except for the sale of
security hardware in Mexico, Central America, the Caribbean, and South America).
It also has responsibility for the manufacture of plumbing products, and for the
sale of plumbing products to customers in the United States and Canada. Security
hardware products consist of residential and commercial door locksets,
electronic keyless entry systems, exit devices, and master keying systems.
Plumbing products consist of a variety of conventional and decorative lavatory,
kitchen, and tub and shower faucets, bath and kitchen accessories, and
replacement parts.
Security hardware products are marketed under a variety of trademarks and
trade names, including, without limitation, KWIKSET SECURITY; KWIKSET MAXIMUM
SECURITY; KWIKSET ULTRAMAX SECURITY; SOCIETY BRASS COLLECTION; KWIKSET; KWIKSET
PLUS; TITAN; BLACK & DECKER; PROTECTO LOCK; TYLO; POLO; KWIK INSTALL; EZ
INSTALL; DOM; DIAMANT; ELS; NEMEF; CORBIN CO.; and GEO. Plumbing products are
marketed under the trademarks and trade names PRICE PFISTER; CLASSIC SERIES BY
PRICE PFISTER; PRICE PFISTER PROFESSIONAL SERIES; BACH; SOLO; CONTEMPRA;
MARIELLE; TWISTPFIT; MATCHMAKERS; CARMEL; PARISA; SAVANNAH; ARIETTA; ALLEMANDE;
GRAZIA; MORCEAU; CATALINA; and GEORGETOWN.
The composition of the Corporation's sales by product groups for 2002, 2001,
and 2000 is included in Note 15 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation's consolidated sales for 2002, 2001, or 2000.
Most of the Corporation's security hardware products sold in the United
States carry a warranty, pursuant to which the consumer can return defective
product during the warranty term in exchange for a replacement product at no
cost to the consumer. Warranty terms vary by product and range from a 10-year to
a lifetime warranty with respect to mechanical operations and from a 5-year to a
lifetime warranty with respect to finish. Products sold outside of the United
States for residential use generally have similar warranty arrangements. Such
arrangements vary, however, depending upon local market conditions and laws and
regulations. Most of the Corporation's plumbing products sold in the United
States carry a lifetime warranty with respect to function and finish, pursuant
to which the consumer can return defective product in exchange for a replacement
product or repair at no cost to the consumer.
The Corporation's product offerings in the Hardware and Home Improvement
segment are sold primarily to retailers, wholesalers, distributors, and jobbers.
Certain security hardware products are sold to commercial, institutional, and
industrial customers. Sales to The Home Depot, one of the segment's customers,
accounted for greater than 10% of the Corporation's consolidated sales for 2002,
2001, and 2000. Sales to Lowe's Home Improvement Warehouse, one of the segment's
customers, accounted for greater than 10% of the Corporation's consolidated
sales for 2002. For additional information regarding sales to The Home Depot and
Lowe's Home Improvement Warehouse, see Note 15 of Notes to Consolidated
Financial Statements included in Item 8 of Part II of this report.
The principal materials used in the manufacturing of products in the Hardware
and Home Improvement segment are plastics, aluminum, steel, brass, zamak, and
ceramics.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority is available through multiple sources and is
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations. From time to
time, the Corporation enters into commodity hedges on certain raw materials used
in the manufacturing process to reduce the risk of market price fluctuations. As
of December 31, 2002, the amount of product under commodity hedges was not
material to the Corporation.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment in the United States are located in Denison, Texas;
Waynesboro, Georgia; and Bristow, Oklahoma.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment outside of the United States are located in Bruhl, Germany;
Mexicali, Mexico; and Apeldoorn, Netherlands.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Hardware and Home Improvement segment. Although these
patents and licenses are important, the Corporation is not materially dependent
on such patents or licenses with respect to its operations.
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The Corporation holds various trademarks that are employed in its businesses
and operates under various trade names, some of which are stated above. The
Corporation believes that these trademarks and trade names are important to the
marketing and distribution of its products.
A significant portion of the Corporation's sales in the Hardware and Home
Improvement segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature, but may be influenced by
trends in the residential and commercial construction markets and other general
economic trends.
The Corporation is one of the world's leading producers of residential
security hardware and is one of the leading producers of faucets in North
America. Worldwide, the markets in which the Corporation sells these products
are highly competitive on the basis of price, quality, and after-sale service. A
number of competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies
manufacture products that are competitive with a number of the Corporation's
product lines. Other competitors restrict their operations to fewer categories,
and some offer only a narrow range of competitive products. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
FASTENING AND ASSEMBLY SYSTEMS
The Corporation's Fastening and Assembly Systems segment has worldwide
responsibility for the manufacture and sale of an extensive line of metal and
plastic fasteners and engineered fastening systems for commercial applications,
including blind riveting, stud welding, assembly systems, specialty screws,
prevailing torque nuts and assemblies, insert systems, metal and plastic
fasteners, and self-piercing riveting systems. The fastening and assembly
systems products are marketed under a variety of trademarks and trade names,
including, without limitation, EMHART TEKNOLOGIES; EMHART FASTENING TEKNOLOGIES;
EMHART; DODGE; GRIPCO; GRIPCO ASSEMBLIES; HELI-COIL; NPR; PARKER-KALON; POP;
POP-LOK; POWERLINK; T-RIVET; ULTRA-GRIP; TUCKER; WARREN; DRIL-KWICK; JACK NUT;
KALEI; PLASTIFAST; PLASTI-KWICK; POPMATIC; POPNUT; POP-SERT; SWAGEFORM;
WELDFAST; SWS; SPLITFAST; NUT-FAST; WELL-NUT; F-SERIES; MENTOR; POINT & SET; and
ULTRASERT. The Fastening and Assembly Systems segment provides
platform-management services in addition to the manufacture and sale of the
products previously described.
The composition of the Corporation's sales by product groups for 2002, 2001,
and 2000 is included in Note 15 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation's consolidated sales for 2002, 2001, or 2000.
The principal markets for these products include the automotive,
transportation, construction, electronics, aerospace, machine tool, and
appliance industries. Substantial sales are made to automotive manufacturers
worldwide.
Products are marketed directly to customers and also through distributors and
representatives. These products face competition from many manufacturers in
several countries. Product quality, performance, reliability, price, delivery,
and technical and application engineering services are the primary competitive
factors. There is little seasonal variation in sales.
The Corporation owns a number of United States and foreign patents,
trademarks, and license rights relating to the fastening and assembly systems
business. While the Corporation considers those patents, trademarks, and license
rights to be valuable, it is not materially dependent upon such patents or
license rights with respect to its operations.
Principal manufacturing facilities of the Fastening and Assembly Systems
segment in the United States are located in Danbury, Connecticut; Montpelier,
Indiana; Campbellsville and Hopkinsville, Kentucky; and Chesterfield, Michigan.
Principal facilities outside of the United States are located in Birmingham,
England; Giessen, Germany; and Toyohashi, Japan. For additional information with
respect to these and other properties owned or leased by the Corporation, see
Item 2, "Properties."
The raw materials used in the fastening and assembly systems business consist
primarily of ferrous and nonferrous metals in the form of wire, bar stock, and
strip and sheet metals; plastics; and rubber. These materials are readily
available from a number of suppliers.
OTHER INFORMATION
The Corporation's product development program for the Power Tools and
Accessories segment is coordinated from the Corporation's headquarters in
Towson, Maryland. Additionally, product development activities are performed at
facilities in Hampstead, Maryland, in the United States; Maltby and Spennymoor,
England; Brockville, Canada; Perugia, Italy; Suzhou, China; and Buchlberg and
Idstein, Germany.
Product development activities for the Hardware and Home Improvement segment
are performed at facilities in Lake Forest, California; Bruhl, Germany; and
Apeldoorn, Netherlands.
Product development activities for the Fastening and Assembly Systems segment
are currently performed at facilities in Danbury and Shelton, Connecticut;
Montpelier, Indiana; Campbellsville, Kentucky; Chesterfield and Farmington
Hills, Michigan; Birmingham, England; Geissen, Germany; and Toyohashi, Japan.
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Costs associated with development of new products and changes to existing
products are charged to operations as incurred. See Note 1 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report
for amounts of expenditures for product development activities.
As of December 31, 2002, the Corporation employed approximately 22,300
persons in its operations worldwide. Approximately 1,200 employees in the United
States are covered by collective bargaining agreements. During 2002, two
collective bargaining agreements in the United States were negotiated without
material disruption to operations. Four agreements are scheduled for negotiation
during 2003. Also, the Corporation has government-mandated collective bargaining
arrangements or union contracts with employees in other countries. The
Corporation's operations have not been affected significantly by work stoppages
and, in the opinion of management, employee relations are good. As more fully
described under the caption "Restructuring Actions" in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Item
7, and in Note 17 of Notes to Consolidated Financial Statements included in Item
8 of Part II of this report, in 2002, the Corporation announced the closure of a
security hardware facility in Waynesboro, Georgia, and the closure of power
tools and accessories facilities in Easton, Maryland, and Meadowfield, England.
Additional restructuring actions taken by the Corporation will also result in
the transfer of production from the United States and England to low-cost
facilities in Mexico, China, and the Czech Republic. Such closures and/or
production transfers may result in a deterioration of employee relations at the
impacted locations or elsewhere in the Corporation.
The Corporation's operations are subject to foreign, federal, state, and
local environmental laws and regulations. Many foreign, federal, state, and
local governments also have enacted laws and regulations that govern the
labeling and packaging of products and limit the sale of products containing
certain materials deemed to be environmentally sensitive. These laws and
regulations not only limit the acceptable methods for the discharge of
pollutants and the disposal of products and components that contain certain
substances, but also require that products be designed in a manner to permit
easy recycling or proper disposal of environmentally sensitive components such
as nickel cadmium batteries. The Corporation seeks to comply fully with these
laws and regulations. Although compliance involves continuing costs, the ongoing
costs of compliance with existing environmental laws and regulations have not
had, nor are they expected to have, a material adverse effect upon the
Corporation's capital expenditures or financial position.
Pursuant to authority granted under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA), the United States Environmental
Protection Agency (EPA) has issued a National Priority List (NPL) of sites at
which action is to be taken to mitigate the risk of release of hazardous
substances into the environment. The Corporation is engaged in continuing
activities with regard to various sites on the NPL and other sites covered under
analogous state environmental laws. As of December 31, 2002, the Corporation had
been identified as a potentially responsible party (PRP) in connection with
approximately 27 sites being investigated by federal or state agencies under
CERCLA or analogous state environmental laws. The Corporation also is engaged in
site investigations and remedial activities to address environmental
contamination from past operations at current and former manufacturing
facilities in the United States and abroad.
To minimize the Corporation's potential liability with respect to these
sites, management has undertaken, when appropriate, active participation in
steering committees established at the sites and has agreed to remediation
through consent orders with the appropriate government agencies. Due to
uncertainty as to the Corporation's involvement in some of the sites,
uncertainty over the remedial measures to be adopted, and the fact that
imposition of joint and several liability with the right of contribution is
possible under CERCLA and other laws and regulations, the liability of the
Corporation with respect to any site at which remedial measures have not been
completed cannot be established with certainty. On the basis of periodic reviews
conducted with respect to these sites, however, the Corporation has established
appropriate liability accruals. The Corporation's estimate of the costs
associated with environmental exposures is accrued if, in management's judgment,
the likelihood of a loss is probable and the amount of the loss can be
reasonably estimated. As of December 31, 2002, the Corporation's aggregate
probable exposure with respect to environmental liabilities, for which accruals
have been established in the consolidated financial statements, was $46.8
million. In the opinion of management, the amount accrued for probable exposure
for aggregate environmental liabilities is adequate and, accordingly, the
ultimate resolution of these matters is not expected to have a material adverse
effect on the Corporation's consolidated financial statements. As of December
31, 2002, the Corporation had no known probable but inestimable exposures
relating to environmental matters that are expected to have a material adverse
effect on the Corporation. There can be no assurance, however, that
unanticipated events will not require the Corporation to increase the amount it
has accrued for any environmental matter or accrue for an environmental matter
that has not been previously accrued because it was not considered probable.
(d) Financial Information About Geographic Areas
Reference is made to Note 15 of Notes to Consolidated Financial Statements,
entitled "Business Segments and Geographic Information", included in Item 8 of
Part II of this report.
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(e) Available Information
The Corporation files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The public may read and copy
any materials that the Corporation files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the Corporation, that file electronically with the SEC. The
public can obtain any documents that the Corporation files with the SEC at
http://www.sec.gov.
The Corporation also makes available free of charge on or through its
Internet website (http://www.bdk.com) the Corporation's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the
Corporation electronically files such material with, or furnishes it to, the
SEC.
(f) Executive Officers and Other Senior Officers of the Corporation
The current Executive Officers and Other Senior Officers of the Corporation,
their ages, current offices or positions, and their business experience during
the past five years are set forth below.
o Nolan D. Archibald - 59
Chairman, President, and Chief Executive Officer,
January 1990 - present.
o Paul A. Gustafson - 60
Executive Vice President of the Corporation and
President - Fastening and Assembly Systems Group,
December 1996 - present.
o Paul F. McBride - 46
Executive Vice President of the Corporation and
President - Power Tools and Accessories Group,
April 1999 - present;
Vice President - General Electric Company,
GE Silicones,
January 1998 - April 1999;
President - GE Plastics Asia Pacific,
August 1997 - January 1998.
o Charles E. Fenton - 54
Senior Vice President and General Counsel,
December 1996 - present.
o Barbara B. Lucas - 57
Senior Vice President - Public Affairs and
Corporate Secretary,
December 1996 - present.
o Michael D. Mangan - 46
Senior Vice President and Chief Financial Officer,
January 2000 - present;
Vice President - Investor Relations,
November 1999 - January 2000;
Executive Vice President and Chief Financial Officer -
The Ryland Group, Inc.,
November 1994 - September 1999.
o Leonard A. Strom - 57
Senior Vice President - Human Resources,
December 1996 - present.
o Ian R. Carter - 41
Vice President of the Corporation and President -
Europe, Power Tools and Accessories Group,
July 2000 - present;
Vice President and General Manager -
European Professional Power Tools,
Power Tools and Accessories Group,
December 1999 - June 2000;
Director - Low & Bonar PLC,
August 1998 - December 1999;
President - General Electric Company,
Specialty Chemicals,
July 1995 - July 1998.
o Les H. Ireland - 38
Vice President of the Corporation and
Managing Director - Commercial Operations,
Europe, Power Tools and Accessories Group,
November 2001 - present;
Vice President of the Corporation and Vice President
and General Manager - DEWALT Professional Power
Tools, North America, Power Tools and
Accessories Group,
January 2001 - November 2001;
Vice President of the Corporation and President -
Accessories, Power Tools and Accessories Group,
September 2000 - January 2001;
President - Price Pfister,
Hardware and Home Improvement Group,
March 1999 - September 2000;
Vice President - Sales, Price Pfister,
Hardware and Home Improvement Group,
November 1998 - March 1999;
Vice President - Sales, Industrial Construction Division,
North American Power Tools,
Power Tools and Accessories Group,
October 1996 - November 1998.
-6-
o Thomas D. Koos - 39
Vice President of the Corporation and President -
Black & Decker Consumer Products,
Power Tools and Accessories Group,
January 2001 - present;
Vice President of the Corporation and President -
North American Consumer Power Tools,
Power Tools and Accessories Group,
December 2000 - January 2001;
President - North American Consumer Power Tools,
Power Tools and Accessories Group,
April 2000 - December 2000;
Vice President - Business Development,
Power Tools and Accessories Group,
August 1999 - April 2000;
President - Goody Products, Division of
Newell Rubbermaid Corporation,
January 1998 - August 1999;
President - Bernzomatic, Division of
Newell Rubbermaid Corporation,
January 1997 - January 1998.
o Carl C. Liebert - 55
Vice President of the Corporation and Vice President -
Six Sigma and Transportation,
Power Tools and Accessories Group,
December 2002 - present;
Vice President of the Corporation and Vice President -
Supply Chain, Power Tools and Accessories Group,
October 2001 - December 2002;
Vice President - Supply Chain, Power Tools
and Accessories Group,
November 1999 - October 2001;
Vice President - Six Sigma,
October 1998 - November 1999;
General Manager - Manufacturing, GE Plastics,
General Electric Company,
August 1995 - October 1998.
o Christina M. McMullen - 47
Vice President and Controller,
April 2000 - present;
Controller,
January 2000 - April 2000;
Assistant Controller,
April 1993 - January 2000.
o Christopher T. Metz - 37
Vice President of the Corporation and President -
North American Hardware and Home Improvement,
Hardware and Home Improvement Group,
January 2001 - present;
Vice President of the Corporation and President -
Kwikset, Hardware and Home Improvement Group,
July 1999 - January 2001;
President - Kwikset, Hardware and
Home Improvement Group,
June 1999 - July 1999;
Vice President and General Manager - European
Professional Power Tools and Accessories,
Power Tools and Accessories Group,
August 1996 - May 1999.
o Stephen F. Reeves - 43
Vice President of the Corporation and Vice President -
Finance, Power Tools and Accessories Group,
April 2000 - present;
Vice President - Finance and Strategic Planning,
January 2000 - April 2000;
Vice President and Controller,
September 1996 - January 2000.
o Mark M. Rothleitner - 44
Vice President - Investor Relations and Treasurer,
January 2000 - present;
Vice President and Treasurer,
March 1997 - January 2000.
o Edward J. Scanlon - 48
Vice President of the Corporation and President -
Commercial Operations, North America,
Power Tools and Accessories Group,
May 1999 - present;
Vice President of the Corporation and Vice President
and General Manager - The Home Depot Division,
Power Tools and Accessories Group,
December 1997 - May 1999.
o John W. Schiech - 44
Vice President of the Corporation and President -
DEWALT Professional Products, Power Tools
and Accessories Group,
January 2001 - present;
Vice President of the Corporation and President -
North American Professional Power Tools,
Power Tools and Accessories Group,
May 1999 - January 2001;
Vice President of the Corporation and Vice President
and General Manager - North American Professional
Power Tools, Power Tools and Accessories Group,
December 1997 - May 1999.
o Robert B. Schwarz - 54
Vice President of the Corporation and Vice President -
Manufacturing, DEWALT Professional Products,
Power Tools and Accessories Group,
October 2001 - present;
Vice President - Manufacturing, DEWALT Professional
Products, Power Tools and Accessories Group,
December 1995 - October 2001.
-7-
(g) Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating
to sales growth, earnings or earnings per share growth, and market share, as
well as statements expressing optimism or pessimism about future operating
results, are forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements for a number of reasons, including but not
limited to:
o The strength of the retail economies in various parts of the world, primarily
in the United States and Europe and, to a lesser extent, in Mexico, Central
America, the Caribbean, South America, Canada, Asia, and Australia. The
Corporation's business is subject to economic conditions in its major markets,
including recession, inflation, deflation, general weakness in retail,
automotive, and housing markets, and changes in consumer purchasing power.
o The Corporation's ability to maintain mutually beneficial relationships with
key customers and to penetrate new channels of distribution. The Corporation has
a number of significant customers, including two customers that, in the
aggregate, constituted approximately 30% of its consolidated sales for 2002. The
loss of either of these significant customers or a material negative change in
the Corporation's relationships with these significant customers could have an
adverse effect on its business. The Corporation's inability to continue
penetrating new channels of distribution may have a negative impact on its
future sales and business.
o Unforeseen inventory adjustments or changes in purchasing patterns by major
customers and the resultant impact on manufacturing volumes and inventory
levels.
o Market acceptance of the new products introduced in 2002 and scheduled for
introduction in 2003, as well as the level of sales generated from these new
products relative to expectations, based on existing investments in productive
capacity and commitments of the Corporation to fund advertising and product
promotions in connections with the introduction of these new products.
o The Corporation's ability to develop and introduce new products at favorable
margins. Numerous uncertainties are inherent in successfully developing and
introducing new products on a consistent basis.
o Adverse changes in currency exchange rates or raw material commodity prices,
both in absolute terms and relative to competitors' risk profiles. The
Corporation has a number of manufacturing sites throughout the world and sells
its products in more than 100 countries. As a result, the Corporation is exposed
to movements in the exchange rates of various currencies against the United
States dollar and against the currencies of countries in which it manufactures.
The Corporation believes its most significant foreign currency exposures are the
euro and pound sterling.
o Increased competition. Worldwide, the markets in which the Corporation sells
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong,
well-established manufacturers that compete on a global basis. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
o Changes in consumer preference or loyalties.
o Price reductions taken by the Corporation in response to customer and
competitive pressures, as well as price reductions or promotional actions taken
in order to drive demand that may not result in anticipated sales levels.
o The Corporation's ability to achieve projected levels of efficiencies and cost
reduction measures and to avoid delays in or unanticipated inefficiencies
resulting from manufacturing and administrative reorganization actions in
progress or contemplated.
o Foreign operations may be affected by factors such as tariffs,
nationalization, exchange controls, interest rate fluctuations, civil unrest,
governmental changes, limitations on foreign investment in local business and
other political, economic, and regulatory risks and difficulties.
o The effects of litigation, environmental remediation matters, and product
liability exposures, as well as other risks and uncertainties detailed from time
to time in the Corporation's filings with the Securities and Exchange
Commission.
o The Corporation's ability to generate sufficient cash flows to support capital
expansion, business acquisition plans, share repurchase program, and general
operating activities, and the Corporation's ability to obtain necessary
financing at favorable interest rates.
o The ability of certain subsidiaries of the Corporation to generate future cash
flows sufficient to support the recorded amounts of goodwill related to those
subsidiaries.
-8-
o Changes in laws and regulations, including changes in accounting standards,
taxation requirements, including tax rate changes, new tax laws and revised tax
law interpretations, and environmental laws, in both domestic and foreign
jurisdictions.
o The impact of unforeseen events, including war or terrorist activities, on
economic conditions and consumer confidence.
o Interest rate fluctuations and other capital market conditions.
o Adverse weather conditions which could reduce demand for the Corporation's
products.
The foregoing list is not exhaustive. There can be no assurance that the
Corporation has correctly identified and appropriately assessed all factors
affecting its business or that the publicly available and other information with
respect to these matters is complete and correct. Additional risks and
uncertainties not presently known to the Corporation or that it currently
believes to be immaterial also may adversely impact the Corporation. Should any
risks and uncertainties develop into actual events, these developments could
have material adverse effects on the Corporation's business, financial
condition, and results of operations. For these reasons, you are cautioned not
to place undue reliance on the Corporation's forward-looking statements.
ITEM 2. PROPERTIES
The Corporation operates 39 manufacturing facilities around the world, including
20 located outside of the United States in 10 foreign countries. The major
properties associated with each business segment are listed in "Narrative
Description of the Business" in Item 1(c) of Part I of this report.
The Corporation owns most of its facilities with the exception of the
following major leased facilities:
In the United States: Tampa, Florida; Chesterfield, Michigan; and Towson,
Maryland.
Outside of the United States: Maltby, England; Tongeren, Belgium; Reynosa and
Mexicali, Mexico; and Usti nad Labem, Czech Republic.
Additional property both owned and leased by the Corporation in Towson,
Maryland, is used for administrative offices. Subsidiaries of the Corporation
lease certain locations primarily for smaller manufacturing and/or assembly
operations, service operations, sales and administrative offices, and for
warehousing and distribution centers. The Corporation also owns a manufacturing
plant that is located on leased land in Suzhou, China.
As more fully described in Item 7 of Part II of this report under the caption
"Restructuring Actions", during the fourth quarter of 2001, the Corporation
commenced actions on a restructuring plan that will, among other matters, reduce
its manufacturing footprint. Additional actions under that restructuring plan
were initiated during the second half of 2002. The Corporation continues to
evaluate its worldwide manufacturing cost structure to identify opportunities to
improve capacity utilization and lower product costs and will take appropriate
action as deemed necessary.
Management believes that its owned and leased facilities are suitable and
adequate to meet the Corporation's anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings involving employment matters and commercial disputes. Some of these
lawsuits include claims for punitive as well as compensatory damages. The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability as described above up to the
limits of the deductibles. All other claims and lawsuits are handled on a
case-by-case basis.
As previously noted under Item 1(c) of Part I of this report, the Corporation
also is party to litigation and administrative proceedings with respect to
claims involving the discharge of hazardous substances into the environment.
Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a PRP. Others involve current and former manufacturing facilities.
The Corporation's estimate of costs associated with product liability claims,
environmental matters, and other legal proceedings is accrued if, in
management's judgment, the likelihood of a loss is probable and the amount of
the loss can be reasonably estimated. These accrued liabilities are not
discounted.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, and other legal proceedings are
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation's consolidated
financial statements. As of December 31, 2002, the Corporation had no known
probable but inestimable exposures relating to product liability claims,
environmental matters, or other legal proceedings that are expected to have a
material adverse effect on the Corporation. There can be no assurance, however,
that unanticipated events will not require the Corporation to increase the
amount it has accrued for any matter or accrue for a matter that has not been
previously accrued because it was not considered probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-9-
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Corporation's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock as reported in the consolidated reporting system
for the New York Stock Exchange Composite Transactions:
- --------------------------------------------------------------------------------
Quarter 2002 2001
- --------------------------------------------------------------------------------
January to March $49.950 to $35.000 $46.950 to $34.500
April to June $50.500 to $45.320 $42.500 to $36.310
July to September $49.060 to $35.660 $43.150 to $28.260
October to December $48.210 to $37.000 $39.880 to $29.740
- --------------------------------------------------------------------------------
(b) Holders of the Corporation's Capital Stock
As of January 24, 2003, there were 14,233 holders of record of the Corporation's
Common Stock.
(c) Dividends
The Corporation has paid consecutive quarterly dividends on its Common Stock
since 1937. Future dividends will depend upon the Corporation's earnings,
financial condition, and other factors. The Credit Facilities, as more fully
described in Note 5 of Notes to Consolidated Financial Statements included in
Item 8 of Part II of this report, do not restrict the Corporation's ability to
pay regular dividends in the ordinary course of business on the Common Stock.
Quarterly dividends per common share for the most recent two years are as
follows:
- --------------------------------------------------------------------------------
Quarter 2002 2001
- --------------------------------------------------------------------------------
January to March $.12 $.12
April to June .12 .12
July to September .12 .12
October to December .12 .12
- --------------------------------------------------------------------------------
$.48 $.48
================================================================================
Common Stock:
150,000,000 shares authorized, $.50 par value, 79,604,786 and 79,829,641 shares
outstanding as of December 31, 2002 and 2001, respectively.
Preferred Stock:
5,000,000 shares authorized, without par value, no shares outstanding as of
December 31, 2002 and 2001.
(d) Annual Meeting of Stockholders
The 2003 Annual Meeting of Stockholders of the Corporation is scheduled to be
held on April 29, 2003, at 9:30 a.m. at the Sheraton Baltimore North Hotel, 903
Dulaney Valley Road, Towson, Maryland 21204.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars Except Per Share Data) 2002 (b)(e) 2001 (b) 2000 (c) 1999 1998 (d)
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (a) $4,394.0 $4,245.6 $4,474.9 $4,448.8 $4,494.3
Net earnings (loss) 229.7 108.0 282.0 300.3 (754.8)
Net earnings (loss) per common share - basic 2.86 1.34 3.37 3.45 (8.22)
Net earnings (loss) per common share - assuming dilution 2.84 1.33 3.34 3.40 (8.22)
Total assets 4,130.5 4,014.2 4,089.7 4,012.7 3,852.5
Long-term debt 927.6 1,191.4 798.5 847.1 1,148.9
Redeemable preferred stock of subsidiary (f) 208.4 196.5 188.0 -- --
Cash dividends per common share .48 .48 .48 .48 .48
- ------------------------------------------------------------------------------------------------------------------------------------
(a) As more fully disclosed in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, sales for the years
ended December 31, 1998 through 2001, have been restated to reflect the
adoption, effective January 1, 2002, of Emerging Issues Task Force Issue No.
01-9, Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products.
(b) As more fully disclosed in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, under a
restructuring program developed by the Corporation in the fourth quarter of
2001, earnings for 2002 and 2001 include a restructuring charge of $50.7
million and $99.8 million before taxes, respectively ($31.7 million and
$70.6 million after taxes, respectively).
(c) Earnings for 2000 include a restructuring charge of $39.1 million before
taxes ($27.6 million after taxes) and a gain on sale of business of $20.1
million before taxes ($13.1 million after taxes).
(d) Earnings for 1998 include a restructuring charge of $164.7 million before
taxes ($117.3 million after taxes), a gain on the sale of businesses of
$114.5 million before taxes ($16.5 million after taxes), and a write-off of
goodwill of $900.0 million.
(e) As more fully disclosed in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, effective January
1, 2002, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. Effective January 1,
2002, goodwill is no longer amortized by the Corporation.
(f) Included in other long-term liabilities.
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Corporation reported net earnings of $229.7 million, or $2.84 per share on a
diluted basis, for the year ended December 31, 2002, compared to net earnings of
$108.0 million, or $1.33 per share on a diluted basis, for the year ended
December 31, 2001. Net earnings for the year ended December 31, 2001, would have
been $134.4 million, or $1.66 per share on a diluted basis, using the new
accounting standard for goodwill.
Net earnings for the year ended December 31, 2002, included a pre-tax
restructuring charge of $50.7 million ($31.7 million net of tax). Net earnings
for the year ended December 31, 2001, included a pre-tax restructuring charge of
$99.8 million ($70.6 million net of tax). Excluding the impact of the 2002 and
2001 restructuring charges, and, for 2001, goodwill amortization, net earnings
for the year ended December 31, 2002, would have been $261.4 million, or $3.23
per share on a diluted basis, compared to net earnings of $205.0 million, or
$2.53 per share on a diluted basis, for the year ended December 31, 2001.
In the discussion and analysis of financial condition and results of
operations that follows, the Corporation generally attempts to list contributing
factors in order of significance to the point being addressed.
Sales
The following chart provides an analysis of the consolidated changes in sales
for the years ended December 31, 2002, 2001, and 2000.
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
(Dollars in millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Total sales $4,394.0 $4,245.6 $4,474.9
- --------------------------------------------------------------------------------
Unit volume 4% (1)% 6%
Price (2)% (2)% (2)%
Currency 1% (2)% (3)%
- --------------------------------------------------------------------------------
Change in total sales 3% (5)% 1%
================================================================================
Total consolidated sales for the year ended December 31, 2002, were $4,394.0
million, which represented a 3% increase over 2001 sales of $4,245.6 million.
Total unit volume had a 4% positive impact on sales during 2002 compared to
2001. The increase in unit volume was primarily attributable to higher unit
volume in both the power tools and accessories and security hardware businesses
in North America as well as unit volume increases in sales to automotive
customers by the Fastening and Assembly Systems segment. These increases were
partially offset by unit volume declines in the plumbing products and European
security hardware businesses. Pricing actions, taken as a result of customer and
competitive pressure, had a 2% negative effect on sales for 2002 as compared to
2001. The effect of a weaker U.S. dollar compared to certain other foreign
currencies, particularly the euro and the pound sterling, caused a 1% increase
in the Corporation's consolidated sales during 2002 over the prior year level.
Total consolidated sales for the year ended December 31, 2001, were $4,245.6
million, which represented a 5% decrease from 2000 sales of $4,474.9 million.
Total unit volume had a 1% negative impact on sales during 2001 compared to the
prior year. Unit volume was negatively affected by weak economic conditions and
inventory reductions by retailers in the United States. The impact of these
negative factors was partially offset by incremental sales of businesses
acquired by the Corporation. Pricing actions taken in response to customer and
competitive pressures, as well as to reduce the Corporation's inventory levels,
had a 2% negative effect on sales for 2001 as compared to 2000. The negative
effects of a stronger dollar compared to other foreign currencies, particularly
the euro, pound sterling, and Brazilian real, caused a 2% decrease in the
Corporation's consolidated sales during 2001 from the prior year level.
Earnings
The Corporation reported consolidated operating income of $370.1 million on
sales of $4,394.0 million in 2002, compared to operating income of $247.8
million on sales of $4,245.6 million in 2001 and to operating income of $503.3
million on sales of $4,474.9 million in 2000.
Consolidated operating income for 2002 included a pre-tax restructuring
charge of $50.7 million. Consolidated operating income for 2001 included a
pre-tax restructuring charge of $99.8 million. Consolidated operating income for
2000 included a pre-tax restructuring charge of $39.1 million and a pre-tax gain
on sale of business of $20.1 million. That gain was recognized in connection
with the sale during 2000 of a $25.0 million senior increasing rate discount
note, payable by True Temper Corporation, received in connection with the
September 1998 recapitalization of the Corporation's recreational products
business, True Temper Sports, as well as the Corporation's remaining interest in
True Temper Corporation. Operating income for the years ended December 31, 2001
and 2000, included goodwill amortization of $26.4 million and $25.4 million,
respectively. No goodwill amortization is included in the 2002 results due to a
change in accounting standards. Excluding these unusual items and the
amortization of goodwill in 2001 and 2000, consolidated operating income as a
percentage of sales would have been 9.6% in 2002, 8.8% in 2001, and 12.2% in
2000.
Consolidated gross margin as a percentage of sales for 2002 was 34.5% as
compared to 33.0% for 2001. The increase in gross margin in 2002 was
attributable to several positive factors that included: (i) higher productivity,
including Six Sigma productivity initiatives; (ii) higher production levels as
the Corporation returned to more normal production levels in its power tools and
accessories
-11-
business in 2002, after lowering production levels in 2001 to reduce
inventories; (iii) more favorable product mix; and (iv) savings associated with
restructuring actions. These positive factors more than offset the cost of
end-user promotional programs as well as pricing actions taken by the
Corporation as a result of customer and competitive pressure.
Consolidated gross margin as a percentage of sales for 2001 was 33.0%
compared to 35.4% for 2000. While the results of the Corporation's Six Sigma and
other productivity initiatives positively impacted gross margin in 2001, other
negative factors offset that favorability. Those negative factors included: (i)
pricing actions taken by the Corporation in response to both customer and
competitive pressures, as well as price reductions to increase sales of certain
inventories; and (ii) lower manufacturing volumes, as the Corporation took
actions to reduce its inventory levels, which resulted in unfavorable
manufacturing overhead absorption as well as reduced productivity.
Consolidated selling, general, and administrative expenses as a percentage of
sales were 25.0% in 2002, compared to 24.8% in 2001 and 23.8% in 2000. Selling,
general, and administrative expenses as a percentage of sales for the years
ended December 31, 2001 and 2000, would have been 24.1% and 23.2%, respectively,
using the new accounting standard for goodwill. Excluding goodwill amortization
recognized in 2001, selling, general, and administrative expenses for 2002 rose,
as compared to 2001, as the Corporation increased its reserves for certain
environmental remediation matters and recognized greater employee-related
expenses. The increase in selling, general, and administrative expenses as a
percentage of sales from 2000 to 2001 was primarily due to lower sales in 2001,
partially offset by the favorable impact of cost containment initiatives and
certain variable expenses.
Consolidated net interest expense (interest expense less interest income) was
$57.8 million in 2002, compared to $84.3 million in 2001 and $104.2 million in
2000. The lower net interest expense in 2002, as compared to 2001, resulted from
both lower borrowing levels and lower interest rates. The lower net interest
expense for 2001 compared to 2000 was primarily the result of lower interest
rates.
Other expense (income) was $4.9 million in 2002 compared to $8.2 million in
2001 and $(5.5) million in 2000. The increase in other expense in 2001 was
primarily the result of dividends on a subsidiary's preferred shares as more
fully described in Note 11 of Notes to Consolidated Financial Statements.
Consolidated income tax expense of $77.7 million, $47.3 million, and $122.6
million was recognized on the Corporation's pre-tax income of $307.4 million,
$155.3 million, and $404.6 million for 2002, 2001 and 2000, respectively.
Excluding, for 2002, the income tax benefit of $19.0 million relating to the
pre-tax restructuring charge of $50.7 million and, for 2001, the income tax
benefit of $29.2 million relating to the pre-tax restructuring charge of $99.8
million, and, for 2000, the income tax benefits of $11.5 million related to the
pre-tax restructuring charge of $39.1 million and the income tax expense of $7.0
million related to the pre-tax gain on sale of business of $20.1 million, the
Corporation's reported tax rate would have been 27% in 2002 and 30% in 2001 and
2000. The reduction in the effective tax rate during 2002, excluding the income
tax benefit associated with the 2002 restructuring charge, is attributable to
the amortization of non-deductible goodwill in 2001. A further analysis of taxes
on earnings is included in Note 9 of Notes to Consolidated Financial Statements.
The Corporation reported net earnings of $229.7 million, $108.0 million, and
$282.0 million, or $2.84, $1.33, and $3.34 per share on a diluted basis, for the
years ended December 31, 2002, 2001, and 2000, respectively. Net earnings
include the effects of after-tax restructuring charge of $31.7 million, $70.6
million, and $27.6 million in 2002, 2001, and 2000, respectively, and the
after-tax gain on sale of business of $13.1 million in 2000. Net earnings for
the years ended December 31, 2001 and 2000, included $26.4 million and $25.4
million, respectively, of goodwill amortization. No goodwill amortization is
included in the 2002 results due to a change in accounting standards. Excluding
the restructuring charges for 2002, 2001, and 2000, goodwill amortization for
2001 and 2000, and the gain on sale of business in 2000, net earnings for the
year ended December 31, 2002, would have been $261.4 million, or $3.23 per share
on a diluted basis, compared to $205.0 million, or $2.53 per share on a diluted
basis, and $321.9 million, or $3.81 per share on a diluted basis, for the years
ended December 31, 2001 and 2000, respectively. In addition to the impact of the
operational matters previously described, earnings per share for 2001, as
compared to 2000, also benefited from lower shares outstanding as a result of a
stock repurchase program.
Business Segments
As more fully described in Note 15 of Notes to Consolidated Financial
Statements, the Corporation operates in three reportable business segments:
Power Tools and Accessories, Hardware and Home Improvement, and Fastening and
Assembly Systems.
POWER TOOLS AND ACCESSORIES
Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 15 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
- --------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $3,108.3 $3,008.9 $3,072.4
Segment profit 352.1 250.0 349.4
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2002 increased 3% over the 2001 level. In North America, sales of
consumer power
-12-
tools and accessories and sales of professional power tools and accessories grew
at a mid-single-digit rate. The consumer business experienced double-digit rates
of growth in sales of both its outdoor and home products lines and a
low single-digit rate of growth in sales of consumer power tools. Both the
consumer and professional businesses in North America benefited from promotional
activities during 2002.
Sales of power tools and accessories in Europe during 2002 decreased at a low
single-digit rate from the 2001 level. That decrease resulted as a
mid-single-digit rate of increase in sales of professional power tools and
accessories was offset by a mid-single-digit rate of decline in sales of
consumer products. Lower sales in Germany and the United Kingdom were partially
offset by higher sales in most other European countries. The sales declines in
Germany and the United Kingdom were mainly driven by lower sales of consumer
products, due to the exit of the lawnmower product line in the United Kingdom
and to the high level of private label Asian-sourced inventory held by retailers
early in 2002.
Sales in other geographic areas increased at a mid-single-digit rate in 2002
over the 2001 levels as sales of professional power tools and accessories and
consumer power tools and accessories increased at a mid-single-digit rate.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 11.3% for 2002 compared to 8.3% in 2001. The increase in segment
profit as a percentage of sales during 2002 was driven by higher gross margins
and by slightly lower selling, general, and administrative expenses as a
percentage of sales. The higher gross margins principally resulted from higher
production levels in 2002 as compared to the lower levels experienced in the
corresponding period in 2001 when the business took actions to reduce inventory
levels, savings gained through Six Sigma initiatives and restructuring actions,
more favorable product mix, and a decrease in warranty costs. Gross margins in
2001 were also depressed by price reductions taken by the business in order to
reduce inventory levels. Segment profit as a percentage of sales during 2002
also increased due to the leverage of selling, general, and administrative
expenses over the higher sales volume. Selling, general, and administrative
expenses increased in 2002 from the 2001 levels due to increased marketing and
promotional expenses and higher employee-related costs, which were partially
offset by restructuring savings and other cost reduction initiatives.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2001 decreased 2% from the 2000 level. In North America, sales of power
tools and accessories during 2001 decreased at a low single-digit rate from the
2000 level, with sales declines experienced in both professional and consumer
power tools and accessories. Those declines were mainly driven by unfavorable
economic conditions in the United States and actions taken by certain major
customers to reduce inventory levels. These negative factors were partially
offset by incremental sales of professional power tools associated with two
businesses acquired in June and December of 2000.
Sales in Europe during 2001 decreased at a mid-single-digit rate from the
2000 level, driven by a double-digit rate of decline in sales of both outdoor
products and consumer power tools. These declines were partially offset by a
mid-single-digit rate of growth in sales of professional power tools. Sales of
outdoor products and consumer power tools were negatively impacted during 2001
by slowing economic conditions, particularly in Germany and the United Kingdom,
coupled with inventory actions by retailers with high levels of private label
Asian products. The growth in professional power tools during 2001 resulted, in
part, from the transition from the ELU(R) to the DEWALT(R) brand in Europe.
Sales in other geographic areas increased at a high single-digit rate in 2001
from the 2000 level, as higher sales were achieved in professional power tools,
consumer power tools and outdoor products.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 8.3% for 2001 compared to 11.4% in 2000. The declines in segment
profit during 2001 were driven by lower gross margins as a percentage of sales
resulting from the Corporation's actions to reduce inventory, including price
reductions and lower production levels, which resulted in unfavorable
manufacturing absorption and slightly higher selling, general, and
administrative expenses as a percentage of sales. The higher expenses as a
percentage of sales reflected decreased promotional spending offset by higher
distribution, transportation, and information systems expenses.
HARDWARE AND HOME IMPROVEMENT
Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 15 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- --------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $758.0 $766.2 $831.5
Segment profit 53.0 59.1 113.5
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement segment
for 2002 decreased 1% from the 2001 level. Sales of security hardware in North
America grew at a high single-digit rate over the 2001 level due primarily to
the success of the brand and product repositioning introduced in North American
home centers in late 2001 and to other customers in 2002. That increase was
offset by a double-digit rate of decline in sales of plumbing products, due
primarily to the effects of a loss of shelf space at The Home Depot, lower sales
in non-home center channels, and a high single-digit rate of decline in sales of
European security hardware.
-13-
As a result of a line review in 2002, the Corporation's plumbing products
business lost significant shelf space at The Home Depot. After the transition,
which was substantially complete by the end of 2002, the plumbing products
business retained shelf space at The Home Depot stores in the western United
States but lost shelf space at The Home Depot stores in the central and eastern
United States. That loss of shelf space negatively impacted plumbing product
sales by approximately $22 million in 2002. The Corporation expects that the
loss of shelf space at The Home Depot will negatively impact plumbing product
sales by approximately $60 million on an annual basis. While the plumbing
products business is taking action to mitigate the impact of this sales loss,
the Corporation believes that profitability of its plumbing products business
will be adversely affected. Because the Corporation has goodwill associated with
the plumbing products business, a sustained reduction in the future cash flows
of that business beyond that currently anticipated could result in a non-cash
write-down of goodwill.
Segment profit as a percentage of sales for the Hardware and Home Improvement
segment declined to 7.0% in 2002 from 7.7% in 2001. That decrease in segment
profit as a percentage of sales was principally due to declines in gross margins
which were only partially offset by lower selling, general, and administrative
expenses as a percentage of sales. Those declines in gross margins resulted from
lower production levels at North American security hardware and plumbing product
plants, as those businesses took action to reduce inventory levels, and from
lower production volumes in European security hardware plants in response to
lower sales. In addition, gross margins were negatively impacted by costs
related to restructuring activities in the plumbing products business. Lower
selling, general, and administrative expenses as a percentage of sales for 2002
principally resulted from restructuring actions that were taken in 2001 to
reduce headcount and reduced promotional spending.
Sales to unaffiliated customers in the Hardware and Home Improvement segment
decreased by 8% for 2001 from the 2000 level. Sales of security hardware in
North America decreased at a high single-digit rate, with sales decreasing in
both the retail and construction channels. Sales of plumbing products decreased
at a low double-digit rate, with sales decreasing more significantly in the
retail channels. Sales in the retail channels were impacted by the weak retail
environment and inventory correction actions taken by retailers, and the
continuing effects of a line review conducted in 2000 by a major customer. Sales
of security hardware in Europe were flat as compared to the prior year level.
Segment profit as a percentage of sales for the Hardware and Home Improvement
segment was 7.7% for 2001 compared to 13.7% for 2000. Segment profit as a
percentage of sales in 2001 was negatively impacted by a mid-single-digit
decline in gross margins and a slight increase in selling, general, and
administrative expenses as a percentage of sales. The decrease in gross margins
for 2001, was primarily a result of manufacturing inefficiencies and costs
associated with manufacturing transition issues in the North American security
hardware business and with lower production volumes of North American security
hardware and plumbing products. Selling, general, and administrative expenses in
the Hardware and Home Improvement segment decreased slightly in 2001; however,
these expenses increased as a percentage of sales given the reduced sales in
2001.
FASTENING AND ASSEMBLY SYSTEMS
Segment sales and profit for the Fastening and Assembly Systems segment,
determined on the basis described in Note 15 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- --------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $502.4 $478.4 $489.3
Segment profit 72.1 68.4 80.4
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems segment
increased 5% in 2002 over 2001. Incremental sales associated with a distribution
business acquired in April 2001 accounted for 2 percentage points of the 5%
sales growth realized. A double-digit rate of increase in sales to automotive
customers, including the effect of the business acquired in April 2001, was
partially offset by a mid-single-digit rate of decline in sales to industrial
customers, particularly in Europe.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment of 14.4% in 2002 approximated the 2001 level.
Sales to unaffiliated customers in the Fastening and Assembly Systems segment
for 2001 declined 2%, as compared to 2000, due to a double-digit rate decrease
in sales to industrial customers offset by a high single-digit rate of growth in
automotive product sales, including incremental sales associated with a business
acquired in April 2001, and a mid-single-digit rate of growth of sales in Asia.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment was 14.3% for 2001 compared to 16.4% for 2000. The decline in
segment profit as a percentage of sales for 2001 was principally due to declines
in gross margin as a percentage of sales resulting from unfavorable mix, due to
lower margins in the distribution business acquired in April 2001, and pricing
pressure.
-14-
OTHER SEGMENT-RELATED MATTERS
Expenses directly related to reportable business segments booked in
consolidation and, thus, excluded from segment profit for the reportable
business segments were $8.6 million, $.6 million, and $14.1 million for the
years ended December 31, 2002, 2001, and 2000, respectively. The $8.6 million of
segment-related expenses excluded from segment profit in 2002 principally
related to reserves for employee-related matters associated with the Power Tools
and Accessories and Hardware and Home Improvement segments. The $14.1 million of
segment-related expenses excluded from segment profit in 2000 principally
related to reserves for certain legal matters associated with the Power Tools
and Accessories and Hardware and Home Improvement segments and for the
elimination of the Power Tools and Accessories segment's recognition of profit
from a joint venture until such time as inventory purchased from that joint
venture has been sold to external customers.
Amounts allocated to reportable business segments in arriving at segment
profit were less than Corporate center operating expenses, eliminations, and
other amounts, as identified in the second table included in Note 15 of Notes to
Consolidated Financial Statements, by $85.3 million, $45.2 million, and $25.3
million for the years ended December 31, 2002, 2001, and 2000, respectively. The
increase in these unallocated Corporate center operating expenses for 2002 as
compared to 2001 was primarily due to an increase in reserves for certain
environmental remediation matters and to higher employee-related expenses,
including certain centrally managed expenses not allocated directly to the
Corporation's business segments. The increase in these unallocated Corporate
center operating expenses for 2001 as compared to 2000 was primarily due to
higher employee-related expenses, including certain centrally managed expenses
not allocated directly to the Corporation's business segments.
As indicated above and in Note 15 of Notes to Consolidated Financial
Statements, the determination of segment profit excludes restructuring and exit
costs. Of the $50.7 million pre-tax restructuring charge recognized in 2002,
$26.3 million related to the businesses in the Power Tools and Accessories
segment, and $24.4 million related to the businesses in the Hardware and Home
Improvement segment. Of the $99.8 million pre-tax restructuring charge
recognized in 2001, $81.4 million related to the businesses in the Power Tools
and Accessories segment, $17.5 million related to businesses in the Hardware and
Home Improvement segment, and $.9 million related to businesses in the Fastening
and Assembly Systems segment. Of the $39.1 million pre-tax restructuring charge
recognized in 2000, $29.6 million related to businesses in the Power Tools and
Accessories segment and $9.5 million related to businesses in the Hardware and
Home Improvement segment.
Restructuring Actions
The Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve
processes, and eliminate excess capacity. A tabular summary of restructuring
activity during the three years ended December 31, 2002, is included in Note 17
of Notes to Consolidated Financial Statements.
During the fourth quarter of 2001, the Corporation formulated a restructuring
plan designed to reduce its manufacturing footprint, variable production costs,
and selling, general, and administrative expenses. The Corporation initially
anticipated that the cost of the total restructuring plan - expected to be
completed over a two- to three-year period - would be $190 million. During 2001
and 2002, the Corporation has recognized pre-tax restructuring charges that
total $150.5 million. The Corporation currently anticipates that the cost of the
total restructuring plan will approximate $170 million and is expected to be
completed during 2004.
During 2001, the Corporation commenced the first phase of that restructuring
plan and recorded a pre-tax restructuring charge of $99.8 million. That $99.8
million charge was net of $4.2 million of reversals of previously provided
restructuring reserves that were no longer required. During 2002, the
Corporation continued to execute its restructuring plans and recorded a pre-tax
restructuring charge of $50.7 million. That $50.7 million charge was net of
$11.0 million of reversals of previously provided restructuring reserves that
were no longer required.
The $50.7 million pre-tax restructuring charge recognized in 2002 reflects
actions to reduce the Corporation's manufacturing cost base in its Power Tools
and Accessories and Hardware and Home Improvement segments, as well as actions
to reduce selling, general, and administrative expenses through the elimination
of administrative positions, principally in Europe. Actions to reduce the
Corporation's manufacturing cost base in the Power Tools and Accessories segment
include the closure of one facility in the United States, the closure of an
accessories packaging facility in England, and the transfer of certain
additional power tool production from a facility in England to a low-cost
facility in the Czech Republic. Actions to reduce the Corporation's
manufacturing cost base in the Hardware and Home Improvement segment include the
closure of a security hardware facility in the United States. The 2002
restructuring charge also includes pension curtailment losses stemming from
headcount reductions associated with the restructuring actions.
-15-
The $99.8 million pre-tax restructuring charge recognized in 2001 reflected
actions to reduce the Corporation's manufacturing cost base in its Power Tools
and Accessories and Hardware and Home Improvement segments, as well as actions
to reduce selling, general, and administrative expenses throughout all of its
businesses. Actions to reduce the Corporation's manufacturing cost base included
the closure of two facilities in the Power Tools and Accessories segment in the
United States as well as the closure by the Hardware and Home Improvement
segment of a plumbing products facility in the United States. In addition,
actions associated with the 2001 restructuring charge included the transfer of
certain production and service operations in the Power Tools and Accessories and
Hardware and Home Improvement segments from facilities in the United States and
England to low-cost facilities in Mexico and China and to a new low-cost
facility in the Czech Republic. In addition to these changes to the
Corporation's manufacturing footprint, the 2001 restructuring plan also provided
for the outsourcing of certain manufactured items. The 2001 restructuring charge
provided for actions to reduce selling, general, and administrative expenses,
principally in the United States and Europe, including consolidation of certain
distribution locations and other administrative functions, as well as reductions
in selling and administrative headcount.
As indicated in Note 17 of Notes to Consolidated Financial Statements, the
severance benefits accrual, included in the $50.7 million and $99.8 million
pre-tax restructuring charges taken in 2002 and 2001, respectively, related to
the elimination of approximately 3,500 positions in high-cost manufacturing
locations and in certain administrative positions. The Corporation estimates
that, as a result of increases in manufacturing employee headcount in low-cost
locations, approximately 3,200 replacement positions will be filled, yielding a
net total of 300 positions eliminated as a result of the 2002 and 2001
restructuring actions.
As described above, the overall restructuring plan will be completed during
2004. Accordingly, the remainder of that overall restructuring plan, as
currently envisioned, will be implemented in 2003 and 2004. Restructuring
charges of approximately $20 million are expected to be recognized in those
years - in addition to the $150.5 million recognized in 2001 and 2002. Given the
nature and duration of this restructuring plan, charges to be incurred in future
years are subject to varying degrees of estimation associated with key
assumptions, such as actual timing of execution, currency impacts, general
economic conditions, and other variables.
In addition to the recognition of restructuring and exit costs, the
Corporation also recognizes related expenses, incremental to the cost of the
underlying restructuring actions, that do not qualify as restructuring or exit
costs under generally accepted accounting principles (restructuring-related
expenses). Those restructuring-related expenses include items - directly related
to the underlying restructuring actions - that benefit ongoing operations, such
as costs associated with the transfer of equipment. Operating results for the
year ended December 31, 2002, included $17.0 million of restructuring-related
expenses.
The Corporation realized benefits of approximately $25.0 million in 2002, net
of restructuring-related expenses. The Corporation expects that incremental
pre-tax savings associated with the restructuring plan will benefit 2003 and
2004 results, by $35 million and $40 million, respectively, net of
restructuring-related expenses. Ultimate savings realized from restructuring
actions may be mitigated by such factors as continued economic weakness and
competitive pressures, as well as decisions to increase costs in areas such as
promotion or research and development above levels that were otherwise assumed.
During 2000, the Corporation recognized pre-tax restructuring and exit costs
of $39.1 million. That restructuring charge provided for the transfer of certain
power tool production in England to low-cost manufacturing facilities in China,
including the facility of the Corporation's 50%-owned joint venture, and for
manufacturing rationalization in the Hardware and Home Improvement segment. In
addition, the 2000 restructuring charge provided for reductions in
administrative functions, principally in the Power Tools and Accessories segment
in Europe, and for the integration of the accessories business in North America,
which previously operated on a stand-alone basis, into the professional and
consumer power tools business in North America.
As previously indicated, the pre-tax restructuring charges recognized in 2002
and 2001 of $50.7 million and $99.8 million, respectively, were net of reversals
in 2002 and 2001 of previously provided restructuring reserves that were no
longer required of $11.0 million and $4.2 million, respectively. Adjustments to
the severance component of restructuring reserves previously established related
to: (i) actual attrition factors that differed from those initially estimated;
(ii) more cost-effective methods of severing employment that became probable,
typically based on negotiations with trade unions or local government
institutions; and (iii) amendments to the initial plan that were approved by the
appropriate level of management, based primarily on changes in market conditions
that dictated a modification to the intended course of action. During 2002 and
2001, none of the adjustments to
-16-
the severance obligations recorded in connection with restructuring actions was
individually significant. Adjustments to the asset write-down component of
restructuring reserves previously established related to the receipt of proceeds
in excess of carrying values of fixed assets that were disposed of in connection
with the restructuring actions. Adjustments to the other charge component of
restructuring reserves previously established principally related to settlement
of operating lease commitments at amounts less than initially estimated or the
Corporation's ability to sublease certain facilities exited as part of the
restructuring actions.
Asset write-downs taken as part of the 2002 restructuring charge included
land, buildings, and manufacturing equipment. Asset write-downs taken as part of
the 2001 and 2000 restructuring charges principally related to manufacturing
equipment. The carrying values of land and buildings to be sold were written
down to their estimated fair values, generally based upon third party offers,
less disposal costs. The carrying values of manufacturing equipment and
furniture and fixtures were written down to their fair value based upon
estimated salvage values, which generally were negligible, less disposal cost.
Hedging Activities
The Corporation has a number of manufacturing sites throughout the world and
sells its products in more than 100 countries. As a result, it is exposed to
movements in the exchange rates of various currencies against the United States
dollar and against the currencies of countries in which it manufactures. The
major foreign currencies in which foreign currency risks exist are the euro,
pound sterling, Canadian dollar, Swedish krona, Japanese yen, Chinese renminbi,
Australian dollar, Mexican peso, Czech koruna, and Brazilian real. Through its
foreign currency activities, the Corporation seeks to reduce the risk that cash
flows resulting from the sales of products manufactured in a currency different
from that of the selling subsidiary will be affected by changes in exchange
rates.
On January 1, 2002, the twelve participating member countries of the European
Monetary Union canceled their respective legacy currencies which were replaced
by the euro as legal tender. The Corporation believes that the introduction of
the euro has resulted in increased competitive pressures in continental Europe
due to the heightened transparency of intra-European pricing structures.
From time to time, currency devaluations may occur in countries in which the
Corporation sells or manufactures its product. While the Corporation will take
actions to mitigate the impacts of any future currency devaluations, there is no
assurance that such devaluations will not adversely affect the Corporation.
Assets and liabilities of subsidiaries located outside of the United States
are translated at rates of exchange at the balance sheet date as more fully
explained in Note 1 of Notes to Consolidated Financial Statements. The resulting
translation adjustments are included in the accumulated other comprehensive
income (loss) component of stockholders' equity. During 2002, translation
adjustments, recorded in the accumulated other comprehensive income (loss)
component of stockholders' equity, increased stockholders' equity by $60.2
million compared to a decrease of $17.7 million in 2001.
As more fully explained in Note 7 of Notes to Consolidated Financial
Statements, the Corporation seeks to issue debt opportunistically, whether at
fixed or variable rates, at the lowest possible costs. Based upon its assessment
of the future interest rate environment and its desired variable rate debt to
total debt ratio, the Corporation may elect to manage its interest rate risk
associated with changes in the fair value of its indebtedness, or the cash flows
of its indebtedness, through the use of interest rate swap agreements.
In order to meet its goal of fixing or limiting interest costs, the
Corporation maintains a portfolio of interest rate hedge instruments. The
variable rate debt to total debt ratio, after taking interest rate hedges into
account, was 52% at December 31, 2002, compared to 51% at December 31, 2001, and
65% at December 31, 2000. At December 31, 2002, average debt maturity was 7.2
years compared to 7.9 years at December 31, 2001, and 5.4 years at December 31,
2000.
INTEREST RATE SENSITIVITY
The following table provides information as of December 31, 2002, about the
Corporation's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related average interest rates by contractual maturity dates. For
interest rate swaps, the table presents notional principal amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged under the
interest rate swaps. Weighted-average variable rates are generally based on the
London Interbank Offered Rate (LIBOR) as of the reset dates. The cash flows of
these instruments are denominated in a variety of currencies. Unless otherwise
indicated, the information is presented in U.S. dollar equivalents, which is the
Corporation's reporting currency, as of December 31, 2002.
-17-
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Value
(Assets)/
(U.S. Dollars in Millions) 2003 2004 2005 2006 2007 Thereafter Total Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings
Variable rate (other currencies) $ 4.6 $ -- $ -- $ -- $ -- $ -- $ 4.6 $ 4.6
Average interest rate 3.37% 3.37%
Long-term debt
Fixed rate (U.S. dollars) $309.9 $ .4 $ .4 $154.8 $150.0 $550.0 $1,165.5 $1,277.0
Average interest rate 7.50% 7.00% 7.00% 7.00% 6.55% 7.11% 7.13%
Fixed rate (other currencies) $ .8 $ -- $ -- $ -- $ -- $ -- $ .8 $ .8
Average interest rate 1.52% 1.52%
Other long-term liabilities
Fixed rate (U.S. dollars) $ -- $ -- $188.0 $ -- $ -- $ -- $ 188.0 $ 208.4
Average interest rate 5.69% 5.69%
INTEREST RATE DERIVATIVES
Fixed to Variable Rate Interest
Rate Swaps (U.S. dollars) $125.0 $ -- $188.0 $125.0 $ 75.0 $275.0 $ 788.0 $ (85.0)
Average pay rate (a)
Average receive rate 6.02% 6.49% 6.03% 5.93% 5.70% 6.01%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The average pay rate is based upon 6-month forward LIBOR, except for $350.0
million in notional principal amount which matures in 2007 and thereafter
and is based upon 3-month forward LIBOR.
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
As discussed above, the Corporation is exposed to market risks arising from
changes in foreign exchange rates. As of December 31, 2002, the Corporation has
hedged a portion of its 2003 estimated foreign currency transactions using
forward exchange contracts. The Corporation estimated the effect on 2003 gross
profits, based upon a recent estimate of foreign exchange exposures, of a
uniform 10% strengthening in the value of the United States dollar and a uniform
10% weakening in the value of the United States dollar. The larger loss computed
was that under an assumed uniform 10% strengthening of the United States dollar,
which the Corporation estimated would have the effect of reducing gross profits
for 2003 by approximately $7 million.
As previously indicated, the sensitivity analysis of the effects of changes
in foreign currency exchange rates on the Corporation's gross profits for 2003
were estimated based upon the larger loss computed in the event of an assumed
uniform 10% strengthening or weakening in the value of the United States dollar.
That analysis assumes that certain currencies, particularly the Chinese
renminbi, that have been pegged in relation to the United States dollar in
recent years, move against the United States dollar in the case of an assumed
10% strengthening or weakening. Were those currencies to continue to be pegged
against the value of the United States dollar, the estimated reduction of gross
profits for 2003 of $7 million, described in the preceding paragraph, would
increase.
In addition to their direct effects, changes in exchange rates also affect
sales volumes and foreign currency sales prices as competitors' products become
more or less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates previously described does not reflect a
potential change in sales levels or local currency prices nor does it reflect
the changes in exchange rates, compared to those experienced during 2002,
inherent in the foreign exchange hedging portfolio at December 31, 2002.
Critical Accounting Policies
The Corporation's accounting policies are more fully described in Note 1 of
Notes to Consolidated Financial Statements. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The Corporation believes that of its significant accounting policies, the
following may involve a higher degree of judgment, estimation, or complexity
than other accounting policies.
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, the Corporation performs goodwill impairment tests on at least an
annual basis and more frequently in certain circumstances. The Corporation
cannot predict the occurrence of certain events that might adversely affect the
reported value of goodwill that totaled $729.1 million at December 31, 2002.
Such events may include, but are not limited to, strategic decisions made in
response to economic and competitive conditions, the impact of the economic
environment on the
-18-
Corporation's customer base, or a material negative change in its relationships
with significant customers.
Pension and other postretirement benefits costs and obligations are dependent
on assumptions used in calculating such amounts. These assumptions include
discount rates, expected return on plan assets, rate of salary increases, health
care cost trend rates, mortality rates, and other factors. In accordance with
accounting principles generally accepted in the United States, actual results
that differ from the actuarial assumptions are accumulated and, if in excess of
a specified corridor, amortized over future periods and, therefore, generally
affect recognized expense and the recorded obligation in future periods. While
the Corporation believes that the assumptions used are appropriate, differences
in actual experience or changes in the assumptions may materially affect the
Corporation's financial position or results of operations. For 2003, the
Corporation will lower the expected long-term rate of return assumption from
9.5% to 9.0% and from 8.0% to 7.75% for United States and non-United States
defined benefit pension plans, respectively. The Corporation expects that its
pension and other postretirement benefits costs in 2003 will exceed the costs
recognized in 2002 by approximately $30 million. This increase is principally
attributable to the change in various assumptions including the expected
long-term rate of return, discount rate, and health care cost trend rate, and
the effect of the amortization of certain actuarial losses.
As more fully described in Note 17 of Notes to Consolidated Financial
Statements, the Corporation recognized pre-tax restructuring charges of $50.7
million and $99.8 million during 2002 and 2001, respectively. Those pre-tax
restructuring charges in 2002 and 2001 were net of reversals of previously
established pre-tax restructuring reserves of $11.0 million and $4.2 million,
respectively. The related restructuring reserves reflect estimates, including
those pertaining to separation costs, settlements of contractual obligations,
and asset valuations. The Corporation reassesses the reserve requirements to
complete each individual plan within the restructuring program at the end of
each reporting period. Actual experience has been and may continue to be
different from the estimates used to establish the restructuring reserves. At
December 31, 2002, the Corporation had liabilities established in conjunction
with its restructuring activities that totaled $59.9 million.
As more fully described in Item 3 of this report, the Corporation is subject
to various legal proceedings and claims, including those with respect to
environmental matters, the outcomes of which are subject to significant
uncertainty. The Corporation evaluates, among other factors, the degree of
probability of an unfavorable outcome, the ability to make a reasonable estimate
of the amount of loss, and in certain instances, the ability of other parties to
share costs. Also, in accordance with accounting principles generally accepted
in the United States when a range of probable loss exists, the Corporation
accrues at the low end of the range when no other more likely amount exists.
Unanticipated events or changes in these factors may require the Corporation to
increase the amount it has accrued for any matter or accrue for a matter that
has not been previously accrued because it was not considered probable. Selling,
general, and administrative expenses in 2002 increased by approximately $23.8
million over the 2001 level due to increased environmental and legal expenses
associated with changes in various factors related to matters for which reserves
had previously been established as well as to matters which arose during 2002.
Further, as indicated in Note 18 of Notes to Consolidated Financial
Statements, insurance recoveries for environmental and certain general liability
claims have not been recognized until realized. Any insurance recoveries, if
realized in future periods, could have a favorable impact on the Corporation's
financial condition or results of operations in the periods realized.
The Corporation is also subject to income tax laws in many countries.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the Corporation's financial statements or tax returns.
During 2003, the Corporation expects that taxing authorities may complete tax
audits currently underway in three significant countries. The final outcome of
these future tax consequences, tax audits, and changes in regulatory tax laws
and rates could materially impact the Corporation's financial statements.
Impact of New Accounting Standards
As more fully described in Note 1 of Notes to Consolidated Financial Statements,
on January 1, 2003, the Corporation is required to adopt two new accounting
standards. For a discussion of the impact of those new accounting standards upon
the Corporation, see Note 1.
Financial Condition
Operating activities generated cash of $451.6 million for the year ended
December 31, 2002, compared to $379.6 million of cash generated for the year
ended December 31, 2001. The increase in cash provided by operating activities
in 2002 over the 2001 levels was primarily the result of higher net earnings and
lower cash taxes and interest. This increase was partially offset by higher cash
spending on restructuring actions, including restructuring-related expenses.
As part of its capital management, the Corporation reviews certain working
capital metrics. For example, the Corporation evaluates its accounts receivable
and inventory levels through the computation of days sales outstanding and
inventory turnover ratio, respectively. The number of days sales outstanding as
of December 31, 2002, improved slightly as compared to the number of days sales
outstanding as of December 31, 2001. Average inventory turns during 2002
improved from the 2001 level due to lower average inventory levels in 2002 as
compared to the corresponding periods in 2001. At December 31, 2002, the
Corporation's inventory levels reflect planned
-19-
safety stock related to production transfers that will occur in 2003 under the
Corporation's restructuring program. The Corporation anticipates that this
safety stock will be eliminated from inventory during 2003.
Investing activities for the year ended December 31, 2002, used cash of $90.6
million compared to $153.0 million of cash used in 2001. Cash flow from
investing activities benefited from lower capital expenditures during 2002 as
compared to 2001. The Corporation anticipates that its capital spending in 2003
will approximate $125 million. Investing activities for the year ended December
31, 2001, included a payment of $30.5 million in connection with the April 30,
2001, acquisition of the automotive division of Bamal Corporation (Bamal) for
$34.0 million. The results of Bamal, a component of the Fastening and Assembly
Systems segment, were included in the consolidated financial statements from the
date of acquisition and were not material.
Investing activities for the year ended December 31, 2000, included an
aggregate payment of $35.5 million related to the purchases of two businesses by
the Power Tools and Accessories segment in the United States. The businesses
acquired were Emglo Products (Emglo), purchased in mid-December 2000, and
Momentum Laser (Momentum), purchased in June 2000. The results of Emglo and
Momentum, included in the consolidated financial statements from the date of
acquisition, were not material.
Financing activities used cash of $102.0 million in 2002, compared to cash
used of $114.7 million in 2001. The decrease in cash used in financing
activities was primarily the result of lower cash expended for stock
repurchases.
During 2002, the Corporation repurchased 1,008,101 shares of its common stock
at an aggregate cost of $43.1 million. During 2001, the Corporation repurchased
525,050 shares of its common stock at an aggregate cost of $25.5 million upon
the termination of its equity forward purchase agreements, as more fully
described in Note 12 of Notes to Consolidated Financial Statements, and also
repurchased 1,085,000 shares of its common stock at an aggregate cost of $33.5
million.
During January 2003, the Corporation repurchased an additional 1,000,000
shares of its common stock at an aggregate cost of $41.3 million. After those
share repurchases, the Corporation had remaining authorization from its Board of
Directors to repurchase an additional 1,911,595 shares of its common stock.
As discussed further in Note 6 of Notes to Consolidated Financial Statements,
the Corporation has long-term debt of $310.7 million that matures in 2003. Also,
as discussed further in Note 5 of Notes to Consolidated Financial Statements,
the Corporation's $250 million 364-day unsecured revolving credit facility
expires in April 2003. The 364-day facility provides for annual renewals upon
request by the Corporation and approval by the lending banks. The Corporation
anticipates that it will repay the maturing term debt, when due, with its
existing cash and, if necessary, with proceeds from available credit facilities.
As discussed further in Note 10 of Notes to Consolidated Financial
Statements, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 87, Employers' Accounting for Pensions, the Corporation recorded a
minimum pension liability adjustment at December 31, 2002 that resulted in a
charge to stockholders' equity of $369.7 million, net of tax. That charge to
stockholders' equity did not impact the Corporation's compliance with covenants
under its borrowing agreements, net earnings in 2002, or cash flow in 2002. The
Corporation anticipates that the expense recognized relating to its pension and
other postretirement benefit plans in 2003 will increase by approximately $30
million from the 2002 levels. The Corporation does not anticipate that the
funding requirements relating to the pension benefit plans in 2003 will be
material.
In addition to measuring its cash flow generation and usage based upon the
operating, investing, and financing classifications included in the Consolidated
Statement of Cash Flows, the Corporation also measures its free cash flow. Free
cash flow, a measure commonly employed by credit providers, is defined by the
Corporation as cash flow from operating activities, less capital expenditures,
plus proceeds from the disposal of assets (excluding proceeds from business
sales). During the year ended December 31, 2002, the Corporation generated free
cash flow of $359.6 million compared to free cash flow of $257.1 million
generated in 2001.
The ongoing costs of compliance with existing environmental laws and
regulations have not had, and are not expected to have, a material adverse
effect on the Corporation's capital expenditures or financial position.
The Corporation will continue to have cash requirements to support seasonal
working capital needs and capital expenditures, to pay interest, to service
debt, and to complete the restructuring actions previously described. For
amounts available at December 31, 2002, under the Corporation's revolving credit
facilities and under short-term borrowing facilities, see Note 5 of Notes to
Consolidated Financial Statements. In order to meet its cash requirements, the
Corporation intends to use internally generated funds and to borrow under its
existing and future unsecured revolving credit facilities or under short-term
borrowing facilities. The Corporation believes that cash provided from these
sources will be adequate to meet its cash requirements over the next 12 months.
The following table provides a summary of the Corporation's contractual
obligations by due date (in millions of dollars). The Corporation's short-term
borrowings, long-term debt, other long-term obligations, and lease commitments
are more fully described in Notes 5, 6, 11, and 16, respectively, of Notes to
Consolidated Financial Statements.
-20-
- --------------------------------------------------------------------------------
Payments Due by Period
------------------------------------------------
Less than 1 to 2 3 to 5 After
1 Year Years Years 5 Years Total
- --------------------------------------------------------------------------------
Short-term borrowings (a)(b)(c) $ 4.6 $ -- $ -- $ -- $ 4.6
Long-term debt 310.7 .8 304.8 550.0 1,166.3
Operating leases 54.5 66.3 32.5 15.5 168.8
Other long-term obligations -- 188.0 -- -- 188.0
- --------------------------------------------------------------------------------
Total contractual
cash obligations $369.8 $255.1 $337.3 $565.5 $1,527.7
================================================================================
(a) As more fully described in Note 5 of Notes to Consolidated Financial
Statements, the Corporation has credit facilities of $250.0 million and $1.0
billion that mature in April 2003 and April 2006, respectively. While no
borrowings were outstanding under these facilities at December 31, 2002, the
Corporation had borrowings outstanding under these facilities during 2002
and anticipates that borrowings will occur in 2003. The Corporation's
average borrowing outstanding under these facilities during 2002 was $429.9
million.
(b) As more fully described in Note 5 of Notes to Consolidated Financial
Statements, the Corporation has a $500.0 million commercial paper program.
While no borrowings were outstanding under this commercial paper program at
December 31, 2002, the Corporation had borrowings outstanding under this
commercial paper program during 2002 and anticipates that borrowings will
occur in 2003.
(c) As described in Note 5 of Notes to Consolidated Financial Statements,
certain subsidiaries of the Corporation outside of the United States have
uncommitted lines of credit of $306.5 million at December 31, 2002. These
uncommitted lines of credit do not have termination dates and are reviewed
periodically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained in Item 7 of this report under
the caption "Hedging Activities" and in Item 8 of this report in Notes 1 and 7
of Notes to Consolidated Financial Statements, and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Corporation and its
subsidiaries are included herein as indicated below:
Consolidated Financial Statements
Consolidated Statement of Earnings - years ended December 31, 2002, 2001, and
2000.
Consolidated Balance Sheet - December 31, 2002 and 2001.
Consolidated Statement of Stockholders' Equity - years ended December 31, 2002,
2001, and 2000.
Consolidated Statement of Cash Flows - years ended December 31, 2002, 2001, and
2000.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
-21-
CONSOLIDATED STATEMENT OF EARNINGS
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Data)
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
SALES $4,394.0 $4,245.6 $4,474.9
Cost of goods sold 2,876.1 2,846.6 2,889.0
Selling, general, and administrative expenses 1,097.1 1,051.4 1,063.6
Restructuring and exit costs 50.7 99.8 39.1
Gain on sale of business -- -- 20.1
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 370.1 247.8 503.3
Interest expense (net of interest income of
$26.5 for 2002, $34.7 for 2001, and $44.1 for 2000) 57.8 84.3 104.2
Other expense (income) 4.9 8.2 (5.5)
- -------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 307.4 155.3 404.6
Income taxes 77.7 47.3 122.6
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 229.7 $ 108.0 $ 282.0
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE -- BASIC $ 2.86 $ 1.34 $ 3.37
===================================================================================================================
NET EARNINGS PER COMMON SHARE --
ASSUMING DILUTION $ 2.84 $ 1.33 $ 3.34
===================================================================================================================
See Notes to Consolidated Financial Statements.
-22-
CONSOLIDATED BALANCE SHEET
The Black & Decker Corporation and Subsidiaries
(Millions of Dollars)
- --------------------------------------------------------------------------------------------------
December 31, 2002 2001
- --------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 517.1 $ 244.5
Trade receivables, less allowances of
$47.6 for 2002 and $51.9 for 2001 729.0 708.6
Inventories 748.9 712.2
Other current assets 198.9 227.0
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,193.9 1,892.3
- --------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT 655.9 687.5
GOODWILL 729.1 710.4
OTHER ASSETS 551.6 724.0
- --------------------------------------------------------------------------------------------------
$4,130.5 $4,014.2
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 4.6 $ 12.3
Current maturities of long-term debt 312.0 33.7
Trade accounts payable 343.2 312.7
Other accrued liabilities 793.6 711.9
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,453.4 1,070.6
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT 927.6 1,191.4
DEFERRED INCOME TAXES 211.3 261.1
POSTRETIREMENT BENEFITS 409.0 238.0
OTHER LONG-TERM LIABILITIES 529.6 502.1
STOCKHOLDERS' EQUITY
Common stock (outstanding:
December 31, 2002 -- 79,604,786 shares;
December 31, 2001 -- 79,829,641 shares) 39.8 39.9
Capital in excess of par value 550.1 566.6
Retained earnings 524.3 333.2
Accumulated other comprehensive income (loss) (514.6) (188.7)
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 599.6 751.0
- --------------------------------------------------------------------------------------------------
$4,130.5 $4,014.2
==================================================================================================
See Notes to Consolidated Financial Statements.
-23-
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Outstanding Capital in Other Total
Common Par Excess of Retained Comprehensive Stockholders'
Shares Value Par Value Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 87,190,240 $43.6 $ 843.3 $ 21.9 $(107.7) $ 801.1
Comprehensive income:
Net earnings -- -- -- 282.0 -- 282.0
Minimum pension liability adjustment (net of tax) -- -- -- -- (1.2) (1.2)
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- (62.9) (62.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- 282.0 (64.1) 217.9
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.48 per share) -- -- -- (39.9) -- (39.9)
Purchase and retirement of common stock
(net of 350,928 shares issued under
forward purchase contracts) (7,103,072) (3.5) (266.3) -- -- (269.8)
Common stock under equity forwards -- -- (25.1) -- -- (25.1)
Common stock issued under employee benefit plans 255,926 .1 8.1 -- -- 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 80,343,094 40.2 560.0 264.0 (171.8) 692.4
Comprehensive income:
Net earnings -- -- -- 108.0 -- 108.0
Cumulative effect of accounting change (net of tax) -- -- -- -- (.7) (.7)
Net loss on derivative instruments (net of tax) -- -- -- -- (.2) (.2)
Minimum pension liability adjustment (net of tax) -- -- -- -- 1.7 1.7
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- (17.7) (17.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- 108.0 (16.9) 91.1
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.48 per share) -- -- -- (38.8) -- (38.8)
Purchase and retirement of common stock (1,085,000) (.6) (32.9) -- -- (33.5)
Common stock retired under equity forwards (765,326) (.4) -- -- -- (.4)
Common stock issued under employee benefit plans 1,336,873 .7 39.5 -- -- 40.2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 79,829,641 39.9 566.6 333.2 (188.7) 751.0
Comprehensive income (loss):
Net earnings -- -- -- 229.7 -- 229.7
Net loss on derivative instruments (net of tax) -- -- -- -- (16.4) (16.4)
Minimum pension liability adjustment (net of tax) -- -- -- -- (369.7) (369.7)
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- 60.2 60.2
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- 229.7 (325.9) (96.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.48 per share) -- -- -- (38.6) -- (38.6)
Purchase and retirement of common stock (1,008,101) (.5) (42.6) -- -- (43.1)
Common stock issued under employee benefit plans 783,246 .4 26.1 -- -- 26.5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 79,604,786 $39.8 $ 550.1 $524.3 $(514.6) $ 599.6
====================================================================================================================================
See Notes to Consolidated Financial Statements.
-24-
CONSOLIDATED STATEMENT OF CASH FLOWS
The Black & Decker Corporation and Subsidiaries
(Millions of Dollars)
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 229.7 $ 108.0 $ 282.0
Adjustments to reconcile net earnings to cash flow
from operating activities:
Gain on sale of business -- -- (20.1)
Non-cash charges and credits:
Depreciation and amortization 127.8 159.4 163.4
Restructuring and exit costs 50.7 99.8 39.1
Other (8.6) (4.4) (9.2)
Changes in selected working capital items
(excluding the effects of acquired businesses):
Trade receivables 16.4 68.6 12.7
Inventories (8.2) 126.8 (123.1)
Trade accounts payable 19.3 (54.6) 13.6
Restructuring spending (37.8) (24.9) (12.6)
Other assets and liabilities 62.3 (99.1) 4.1
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES 451.6 379.6 349.9
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposal of assets 4.6 12.3 4.8
Capital expenditures (96.6) (134.8) (200.2)
Proceeds from sale of business -- -- 25.0
Purchase of businesses -- (30.5) (35.5)
Cash inflow from hedging activities -- -- 193.6
Cash outflow from hedging activities -- -- (189.9)
Cash inflow from other investing activities 1.4 -- --
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES (90.6) (153.0) (202.2)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW BEFORE FINANCING ACTIVITIES 361.0 226.6 147.7
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings (7.2) (390.0) 225.6
Proceeds from long-term debt
(net of debt issue cost of $3.1 in 2001) -- 393.8 --
Payments on long-term debt (33.9) (48.6) (213.8)
Issuance of preferred stock of subsidiary -- -- 188.0
Increase in long-term deposit -- -- (50.0)
Purchase of common stock (43.1) (59.0) (269.8)
Issuance of common stock 20.8 27.9 9.9
Cash dividends (38.6) (38.8) (39.9)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES (102.0) (114.7) (150.0)
Effect of exchange rate changes on cash 13.6 (2.4) (10.0)
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 272.6 109.5 (12.3)
Cash and cash equivalents at beginning of year 244.5 135.0 147.3
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 517.1 $ 244.5 $ 135.0
===================================================================================================================
See Notes to Consolidated Financial Statements.
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Black & Decker Corporation and Subsidiaries
NOTE 1: SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include the
accounts of the Corporation and its subsidiaries. Intercompany transactions have
been eliminated.
Reclassifications: Certain prior years' amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used in 2002.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Revenue Recognition: Revenue from sales of product is recognized when title
passes, which generally occurs upon shipment.
Foreign Currency Translation: The financial statements of subsidiaries located
outside of the United States, except those subsidiaries operating in highly
inflationary economies, generally are measured using the local currency as the
functional currency. Assets, including goodwill, and liabilities of these
subsidiaries are translated at the rates of exchange at the balance sheet date.
The resultant translation adjustments are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Income and expense items are translated at average monthly rates of exchange.
Gains and losses from foreign currency transactions of these subsidiaries are
included in net earnings. For subsidiaries operating in highly inflationary
economies, gains and losses from balance sheet translation adjustments are
included in net earnings.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
demand deposits, and short-term investments with maturities of three months or
less from the date of acquisition.
Concentration of Credit: The Corporation sells products and services to
customers in diversified industries and geographic regions and, therefore, has
no significant concentrations of credit risk other than with two major
customers. As of December 31, 2002, approximately 24% of the Corporation's trade
receivables were due from two large home improvement retailers.
The Corporation continuously evaluates the creditworthiness of its customers
and generally does not require collateral.
Inventories: Inventories are stated at the lower of cost or market. The cost of
United States inventories is based primarily on the last-in, first-out (LIFO)
method; all other inventories are based on the first-in, first-out (FIFO)
method.
Property and Depreciation: Property, plant, and equipment is stated at cost.
Depreciation is computed generally on the straight-line method for financial
reporting purposes.
Goodwill and Other Intangible Assets: Effective January 1, 2002, the Corporation
adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but are subject to an
annual impairment test. Other intangible assets continue to be amortized over
their useful lives. As of January 1, 2002, the Corporation performed the first
of the required impairment tests of goodwill. Additionally, the Corporation
performed its annual impairment test in the fourth quarter of 2002. No
impairment was present upon performing either of the 2002 impairment tests. At
December 31, 2002, goodwill associated with the Corporation's reportable
business segments was $25.8 million for Power Tools and Accessories, $434.6
million for Hardware and Home Improvement, and $268.7 million for Fastening and
Assembly Systems. The Corporation cannot predict the occurrence of certain
events that might adversely affect the reported value of goodwill. Such events
may include, but are not limited to, strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on
the Corporation's customer base, or a material negative change in its
relationships with significant customers.
The Corporation recognized goodwill amortization of $26.4 million in 2001 and
$25.4 million in 2000. Net earnings for the years ended December 31, 2001 and
2000, excluding goodwill amortization, would have been $134.4 million and $307.4
million, respectively. Basic earnings per share for the years ended December 31,
2001 and 2000, would have been $1.67 and $3.67, respectively, excluding goodwill
amortization. Diluted earnings per share for the years ended December 31, 2001
and 2000, would have been $1.66 and $3.64, respectively, excluding goodwill
amortization.
Accounting Policy Prior to January 1, 2002: Goodwill and other intangible assets
were amortized on the straight-line method. Goodwill was amortized principally
over a 40-year period. On a periodic basis, the Corporation estimated the future
discounted cash flows of the businesses to which goodwill related. If such
estimates of the future discounted cash flows, net of the carrying amount of the
tangible net assets, were less than the carrying amount of goodwill, the
difference would have been charged to operations. The projected discounted cash
flows were discounted at a rate corresponding to the Corporation's estimated
cost of capital, which also was the hurdle rate used by the Corporation in
making investment decisions.
-26-
Product Development Costs: Costs associated with the development of new products
and changes to existing products are charged to operations as incurred. Product
development costs were $96.9 million in 2002, $98.9 million in 2001, and $95.3
million in 2000.
Shipping and Handling Costs: Shipping and handling costs represent costs
associated with shipping products to customers and handling finished goods.
Included in selling, general, and administrative expenses are shipping and
handling costs of $222.2 million in 2002, $214.0 million in 2001, and $205.6
million in 2000.
Advertising and Promotion: Effective January 1, 2002, the Corporation adopted
Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Products (EITF 01-9). Upon
adoption of EITF 01-9, the Corporation was required to classify certain payments
to its customers as a reduction of sales. The Corporation previously classified
certain of these payments as promotion expense, a component of selling, general,
and administrative expenses in the Consolidated Statement of Earnings. Upon the
adoption of EITF 01-9, prior period amounts were restated and resulted in a
reduction of sales (and an offsetting reduction of selling expenses) of $87.5
million in 2001 and $85.9 million in 2000.
Advertising and promotion expense, which is expensed as incurred, was $136.4
million in 2002, $134.7 million in 2001, and $151.9 million in 2000.
Product Warranties: Most of the Corporation's products in the Power Tools and
Accessories segment and Hardware and Home Improvement segment carry a product
warranty. That product warranty, in the United States, generally provides that
customers can return a defective product during the specified warranty period
following purchase in exchange for a replacement product or repair at no cost to
the consumer. Product warranty arrangements outside the United States vary
depending upon local market conditions and laws and regulations. The Corporation
accrues an estimate of its exposure to warranty claims based upon both current
and historical product sales data and warranty costs incurred.
Postretirement Benefits: Pension plans, which cover substantially all of the
Corporation's employees, consist primarily of non-contributory defined benefit
plans. The defined benefit plans are funded in conformity with the funding
requirements of applicable government regulations. Generally, benefits are based
on age, years of service, and the level of compensation during the final years
of employment. Prior service costs for defined benefit plans generally are
amortized over the estimated remaining service periods of employees.
Certain employees are covered by defined contribution plans. The
Corporation's contributions to these plans are based on a percentage of employee
compensation or employee contributions. These plans are funded on a current
basis.
In addition to pension benefits, certain postretirement medical, dental, and
life insurance benefits are provided, principally to most United States
employees. Retirees in other countries generally are covered by
government-sponsored programs.
The Corporation uses the corridor approach in the valuation of defined
benefit plans and other postretirement benefits. The corridor approach defers
all actuarial gains and losses resulting from variances between actual results
and economic estimates or actuarial assumptions. For defined benefit pension
plans, these unrecognized gains and losses are amortized when the net gains and
losses exceed 10% of the greater of the market-related value of plan assets or
the projected benefit obligation at the beginning of the year. For other
postretirement benefits, amortization occurs when the net gains and losses
exceed 10% of the accumulated postretirement benefit obligation at the beginning
of the year. The amount in excess of the corridor is amortized over the average
remaining service period to retirement date of active plan participants or, for
retired participants, the average remaining life expectancy.
Derivative Financial Instruments: Effective January 1, 2001, the Corporation
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS No. 133 requires that the Corporation recognize all
derivatives on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. At the time of its
adoption of SFAS No. 133 on January 1, 2001, the Corporation recognized an
after-tax reduction of $.7 million to other comprehensive income (loss), a
component of stockholders' equity, as a cumulative effect adjustment.
The Corporation is exposed to market risks arising from changes in interest
rates. With products and services marketed in over 100 countries and with
manufacturing sites in 11 countries, the Corporation also is exposed to risks
arising from changes in foreign currency rates. The Corporation uses derivatives
principally in the management of interest rate and foreign currency exposure. It
does not utilize derivatives that contain leverage features. On the date on
which the Corporation enters into a derivative, the derivative is designated as
a hedge of the identified exposure. The Corporation formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Corporation specifically identifies the
asset, liability, firm commitment, forecasted transaction, or net investment
that has been designated as the hedged item and states how the hedging
instrument is expected to reduce the risks related to the hedged item. The
Corporation measures effectiveness of its hedging relationships both at hedge
inception and on an ongoing basis.
-27-
For each derivative instrument that is designated and qualifies as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
For each derivative instrument that is designated and qualifies as a cash flow
hedge, the effective portion of the gain or loss on the derivative instrument is
reported as a component of accumulated other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during
the period of change. For hedged forecasted transactions, hedge accounting is
discontinued if the forecasted transaction is no longer probable of occurring,
in which case previously deferred hedging gains or losses would be recorded to
earnings immediately. For derivatives that are designated and qualify as hedges
of net investments in subsidiaries located outside the United States, the gain
or loss is reported in accumulated other comprehensive income (loss) as part of
the cumulative translation adjustment to the extent the derivative is effective.
For derivative instruments not designated as hedging instruments, the gain or
loss is recognized in current earnings during the period of change.
Interest Rate Risk Management: The Corporation has designated each of its
outstanding interest rate swap agreements as fair value hedges of the underlying
fixed rate obligation. The fair value of the interest rate swap agreements is
recorded in other assets or other long-term liabilities with a corresponding
increase or decrease in the fixed rate obligation. The changes in the fair value
of the interest rate swap agreements and the underlying fixed rate obligations
are recorded as equal and offsetting unrealized gains and losses in interest
expense and other expense (income) in the Consolidated Statement of Earnings.
The Corporation has structured all existing interest rate swap agreements to be
100% effective. As a result, there is no current impact to earnings resulting
from hedge ineffectiveness. Gains or losses resulting from the early termination
of interest rate swaps are deferred as an increase or decrease to the carrying
value of the related debt and amortized as an adjustment to the yield of the
related debt instrument over the remaining period originally covered by the
swap.
Foreign Currency Management: The fair value of foreign currency-related
derivatives are generally included in the Consolidated Balance Sheet in other
current assets and other accrued liabilities. The earnings impact of cash flow
hedges relating to forecasted purchases of inventory is generally reported in
cost of goods sold to match the underlying transaction being hedged. Realized
and unrealized gains and losses on these instruments are deferred in accumulated
other comprehensive income (loss) until the underlying transaction is recognized
in earnings.
The earnings impact of cash flow hedges relating to the variability in cash
flows associated with foreign currency-denominated assets and liabilities is
reported in cost of goods sold or other expense (income), depending on the
nature of the assets or liabilities being hedged. The amounts deferred in
accumulated other comprehensive income (loss) associated with these instruments
generally relate to foreign currency spot-rate to forward-rate differentials and
are recognized in earnings over the term of the hedge. The discount or premium
relating to cash flow hedges associated with foreign currency-denominated assets
and liabilities is recognized in net interest expense over the life of the
hedge.
Accounting Policy Prior to January 1, 2001: The Corporation's interest rate
derivatives were afforded hedge accounting treatment and were designated as
hedges as they were effective in changing the tenor of outstanding indebtedness
(e.g., from fixed to variable rate debt or from variable rate to fixed rate
debt). The amounts to be paid or received under interest rate swap agreements
were accrued as interest rates changed and were recognized over the life of the
swap agreements as an adjustment of interest expense. Gains or losses resulting
from the early termination of interest rate swaps were deferred and amortized as
an adjustment to the yield of the related debt instrument over the remaining
period originally covered by the terminated swaps.
The Corporation's derivative financial instruments relating to managing
foreign exchange risks were appropriately designated to the underlying exposures
and were afforded hedge accounting treatment. Gains and losses on foreign
currency transaction hedges were recognized in earnings and offset the foreign
exchange gains and losses on the underlying transactions. Deferred gains on
options that hedged forecasted transactions generally related to inventory
purchases, and were recognized in cost of goods sold when the related inventory
was sold or when a hedged purchase was no longer expected to occur.
Stock-Based Compensation: As described in Note 14, the Corporation has elected
to follow the accounting provisions of Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, for stock-based
compensation and to furnish the pro forma disclosures required under SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure.
New Accounting Pronouncements: In June 2001, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 143, Accounting for Asset Retirement
Obligations, effective January 2003. SFAS No. 143 requires legal obligations
associated with the retirement of long-lived assets to be recognized at their
fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost should be capitalized as part of the
related long-lived asset and allocated to expense over the estimated useful life
of the asset. The Corporation will adopt SFAS No. 143 on January 1, 2003, and
does not
-28-
believe that the impact of adoption will have a material impact on the
Corporation's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 addresses the financial
accounting and reporting for certain costs associated with exit or disposal
activities, including restructuring actions. SFAS No. 146 excludes from its
scope severance benefits that are subject to an on-going benefit arrangement
governed by SFAS No. 112, Employer's Accounting for Postemployment Benefits, and
asset impairments governed by SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
The Corporation believes that the impact of SFAS No. 146 will likely be
mitigated as restructuring charges recognized by the Corporation to date have
principally consisted of severance benefits that are subject to an on-going
benefit arrangement and asset impairments. Accordingly, the Corporation does not
believe that the impact of adoption will have a material impact on the
Corporation's financial position or results of operations.
NOTE 2: INVENTORIES
The classification of inventories at the end of each year, in millions of
dollars, was as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
FIFO cost
Raw materials and work-in-process $186.1 $192.9
Finished products 553.9 527.0
- --------------------------------------------------------------------------------
740.0 719.9
FIFO cost less than/(in excess of)
LIFO inventory value 8.9 (7.7)
- --------------------------------------------------------------------------------
$748.9 $712.2
================================================================================
The cost of United States inventories stated under the LIFO method was
approximately 50% and 54% of the value of total inventories at December 31, 2002
and 2001, respectively.
NOTE 3: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at the end of each year, in millions of dollars,
consisted of the following:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Property, plant, and equipment at cost:
Land and improvements $ 50.3 $ 48.4
Buildings 278.6 279.1
Machinery and equipment 1,268.8 1,137.1
- --------------------------------------------------------------------------------
1,597.7 1,464.6
Less accumulated depreciation 941.8 777.1
- --------------------------------------------------------------------------------
$ 655.9 $ 687.5
================================================================================
NOTE 4: OTHER ACCRUED LIABILITIES
Other accrued liabilities at the end of each year, in millions of dollars,
included the following:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Salaries and wages $ 86.0 $ 52.6
Employee benefits 88.3 78.2
Trade discounts and allowances 121.9 143.8
Advertising and promotion 63.0 65.6
Income taxes, including deferred taxes 21.7 12.7
Accruals related to restructuring actions 59.9 67.4
Warranty 42.5 39.4
All other 310.3 252.2
- --------------------------------------------------------------------------------
$793.6 $711.9
================================================================================
All other at December 31, 2002 and 2001, consisted primarily of accruals for
interest, insurance, and taxes other than income taxes.
NOTE 5: SHORT-TERM BORROWINGS
Short-term borrowings in the amounts of $4.6 million and $12.3 million at
December 31, 2002 and 2001, respectively, consisted primarily of borrowings
under the terms of uncommitted lines of credit or other short-term borrowing
arrangements. The weighted-average interest rate on short-term borrowings
outstanding was 3.4% and 4.8% at December 31, 2002 and 2001, respectively.
In November 2002, the Corporation entered into a $500 million agreement under
which it may issue commercial paper at market rates with maturities of up to 365
days from the date of issue. No commercial paper was outstanding under this
agreement at December 31, 2002.
In April 2001, the Corporation replaced an expiring $1.0 billion former
unsecured revolving credit facility, which consisted of two individual
facilities (the Former Credit Facility), with a $1.0 billion unsecured revolving
credit facility that expires in April 2006 and a $400.0 million 364-day
unsecured revolving credit facility. In April 2002, the Corporation entered into
a $250 million 364-day unsecured revolving credit facility (the Credit Facility)
replacing its expiring $400 million 364-day unsecured revolving credit facility.
The Corporation reduced the borrowing availability under the Credit Facility
based upon its anticipated short-term financing needs. The 364-day unsecured
revolving credit facility provides for annual renewals upon request by the
Corporation and approval by the lending banks. The amount available for
borrowing under the two individual facilities (the Credit Facilities) at
December 31, 2002, was $1.25 billion. While no amounts were outstanding under
the Credit Facilities at December 31, 2002 or 2001, average borrowings
outstanding under these facilities during 2002 and 2001 were $429.9 million and
$769.5 million, respectively.
-29-
Under the Credit Facilities, the Corporation has the option of borrowing at
the London Interbank Offered Rate (LIBOR) plus a specified percentage, or at
other variable rates set forth therein. The Credit Facilities provide that the
interest rate margin over LIBOR, initially set at .475% and .500%, respectively,
for each of the two individual facilities, will increase or decrease based upon
changes in the ratings of the Corporation's long-term senior unsecured debt. In
addition to the interest payable on the principal amount of indebtedness
outstanding from time to time under the Credit Facilities, the Corporation is
required to pay an annual facility fee to each bank, initially equal to .150%
and .125%, respectively, of the amount of each bank's commitment, whether used
or unused. The Corporation is also required to pay a utilization fee under each
facility, initially equal to .125%, applied to the outstanding balance when
borrowings under the respective facility exceeds 50% of the facility. The Credit
Facilities provide that both the facility fee and the utilization fee will
increase or decrease based upon changes in the ratings of the Corporation's
senior unsecured debt.
The Credit Facilities include various customary covenants. Some of the
covenants limit the ability of the Corporation or its subsidiaries to pledge
assets or incur liens on assets. Other covenants require the Corporation to
maintain a specified interest coverage ratio and certain cash flow to fixed
expense coverage ratios. As of December 31, 2002, the Corporation was in
compliance with all terms and conditions of the Credit Facilities.
Under the terms of uncommitted lines of credit at December 31, 2002, certain
subsidiaries outside of the United States may borrow up to an additional $306.5
million on such terms as may be mutually agreed. These arrangements do not have
termination dates and are reviewed periodically. No material compensating
balances are required or maintained.
Under the Former Credit Facility, the Corporation had the option of borrowing
at LIBOR plus a specified percentage, or at other variable rates set forth
therein. The Former Credit Facility provided that the interest rate margin over
LIBOR, initially set at .15% and .25%, respectively, for each of the two
individual facilities, would increase or decrease based upon changes in the
ratings of the Corporation's long-term senior unsecured debt. The Corporation
was also able to borrow under the Former Credit Facility by means of competitive
bid rate loans made through an auction process at then-current market rates.
NOTE 6: LONG-TERM DEBT
The composition of long-term debt at the end of each year, in millions of
dollars, was as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Medium Term Notes due through 2002 $ -- $ 32.3
7.50% notes due 2003 309.5 309.5
7.0% notes due 2006 154.6 154.6
6.55% notes due 2007 150.0 150.0
7.125% notes due 2011
(including discount of
$2.6 in 2002 and $2.9 in 2001) 397.4 397.1
7.05% notes due 2028 150.0 150.0
Other loans due through 2007 2.2 2.0
Fair value hedging adjustment 75.9 29.6
Less current maturities of long-term debt (312.0) (33.7)
- --------------------------------------------------------------------------------
$ 927.6 $1,191.4
================================================================================
As more fully described in Note 7, at December 31, 2002 and 2001, the
carrying amount of long-term debt and current maturities thereof includes $75.9
million and $29.6 million, respectively, relating to outstanding or terminated
fixed-to-variable rate interest rate swaps agreements.
Indebtedness of subsidiaries in the aggregate principal amounts of $306.9
million and $314.4 million were included in the Consolidated Balance Sheet at
December 31, 2002 and 2001, respectively, in short-term borrowings, current
maturities of long-term debt, and long-term debt.
Principal payments on long-term debt obligations due over the next five years
are as follows: $310.7 million in 2003, $.4 million in 2004, $.4 million in
2005, $154.8 million in 2006, and $150.0 million in 2007. Interest payments on
all indebtedness were $100.8 million in 2002, $122.2 million in 2001, and $145.1
million in 2000.
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation is exposed to market risks arising from changes in interest
rates. With products and services marketed in over 100 countries and with
manufacturing sites in 11 countries, the Corporation also is exposed to risks
arising from changes in foreign exchange rates.
Credit Exposure: The Corporation is exposed to credit-related losses in the
event of non-performance by counterparties to certain derivative financial
instruments. The Corporation monitors the creditworthiness of the counterparties
and presently does not expect default by any of the counterparties. The
Corporation does not obtain collateral in connection with its derivative
financial instruments.
The credit exposure that results from interest rate and foreign exchange
contracts is the fair value of contracts with a positive fair value as of the
reporting date. Some derivatives are not subject to credit exposures. The fair
value of all financial instruments is summarized in Note 8.
Interest Rate Risk Management: The Corporation manages its interest rate risk,
primarily through the use of interest rate swap agreements, in order to achieve
a cost-
-30-
effective mix of fixed and variable rate indebtedness. It seeks to issue debt
opportunistically, whether at fixed or variable rates, at the lowest possible
costs. The Corporation may, based upon its assessment of the future interest
rate environment, elect to manage its interest rate risk associated with changes
in the fair value of its indebtedness, or the future cash flows associated with
its indebtedness, through the use of interest rate swaps.
The amounts exchanged by the counterparties to interest rate swap agreements
normally are based upon the notional amounts and other terms, generally related
to interest rates, of the derivatives. While notional amounts of interest rate
swaps form part of the basis for the amounts exchanged by the counterparties,
the notional amounts are not themselves exchanged and, therefore, do not
represent a measure of the Corporation's exposure as an end user of derivative
financial instruments.
The Corporation's portfolio of interest rate swap instruments at December 31,
2002 and 2001, consisted of $788.0 million notional amounts of fixed-to-variable
rate swaps with a weighted-average fixed rate receipt of 6.01%. The basis of the
variable rate paid is LIBOR.
Credit exposure on the Corporation's interest rate derivatives at December
31, 2002 and 2001, was $85.0 million and $28.6 million, respectively. During
2001, the Corporation terminated interest rate swap instruments with an
aggregate notional amount of $300.0 million. Deferred gains on the early
termination of interest rate swaps were $19.2 million and $21.5 million at
December 31, 2002 and 2001.
Foreign Currency Management: The Corporation enters into various foreign
currency contracts in managing its foreign currency exchange risk. Generally,
the foreign currency contracts have maturity dates of less than eighteen months.
The contractual amounts of foreign currency derivatives, principally forward
exchange contracts and purchased options, generally are exchanged by the
counterparties. The Corporation's foreign currency derivatives are designated
to, and generally are denominated in the currencies of, the underlying
exposures. To minimize the volatility of reported equity, the Corporation may
hedge, on a limited basis, a portion of its net investment in subsidiaries
located outside the United States through the use of foreign currency forward
contracts and purchased foreign currency options.
Through its foreign currency hedging activities, the Corporation seeks to
minimize the risk that cash flows resulting from the sales of products
manufactured in a currency different from that of the selling subsidiary will be
affected by changes in exchange rates. The Corporation responds to foreign
exchange movements through various means, such as pricing actions, changes in
cost structure, and changes in hedging strategies.
The Corporation hedges its foreign currency transaction exposures, as well as
certain forecasted transactions, based on management's judgment, generally
through forward exchange contracts and options. Some of the contracts involve
the exchange of two foreign currencies according to the local needs of the
subsidiaries. Some natural hedges also are used to mitigate transaction and
forecasted exposures.
The following table summarizes the contractual amounts of forward exchange
contracts as of December 31, 2002 and 2001, in millions of dollars, including
details by major currency as of December 31, 2002. Foreign currency amounts were
translated at current rates as of the reporting date. The "Buy" amounts
represent the United States dollar equivalent of commitments to purchase
currencies, and the "Sell" amounts represent the United States dollar equivalent
of commitments to sell currencies.
- --------------------------------------------------------------------------------
As of December 31, 2002 Buy Sell
- --------------------------------------------------------------------------------
United States dollar $ 967.5 $ (744.5)
Pound sterling 690.2 (199.6)
Canadian dollar -- (53.6)
Euro 392.2 (872.5)
Australian dollar 14.1 (39.1)
Japanese yen 6.5 (52.4)
Swedish krona 24.0 (63.0)
Other 33.9 (120.2)
- --------------------------------------------------------------------------------
Total $2,128.4 $(2,144.9)
================================================================================
As of December 31, 2001
- --------------------------------------------------------------------------------
Total $1,818.5 $(1,803.5)
================================================================================
No purchased options to buy or sell currencies were outstanding at December
31, 2002. The contractual amounts of purchased options to buy currencies,
predominantly the euro, pound sterling, and United States dollar, were $47.1
million at December 31, 2001. The contractual amounts of purchased options to
sell various currencies were $46.0 million at December 31, 2001.
Credit exposure on foreign currency derivatives as of December 31, 2002 and
2001, was $6.6 million and $16.4 million, respectively.
Hedge ineffectiveness and the portion of derivative gains and losses excluded
from the assessment of hedge effectiveness related to the Corporation's cash
flow hedges that were recorded to earnings during 2002 and 2001 were not
significant. The amounts of gains and losses, reclassified from accumulated
other comprehensive income (loss) to earnings during 2001, that related to the
January 1, 2001 transition adjustment were not significant.
Amounts deferred in accumulated other comprehensive income (loss) at December
31, 2002, that are expected to be reclassified into earnings during 2003
represent an after-tax loss of $13.6 million. The amount expected to be
reclassified into earnings in the next twelve months includes unrealized gains
and losses related to open foreign currency contracts. Accordingly, the amount
that is ultimately reclassified into earnings may differ materially.
NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.
-31-
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
o Cash and cash equivalents, trade receivables, certain other current assets,
short-term borrowings, and current maturities of long-term debt: The amounts
reported in the Consolidated Balance Sheet approximate fair value.
o Long-term debt: Publicly traded debt is valued based on quoted market values.
The fair value of other long-term debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Corporation for debt of the same remaining maturities.
o Other long-term liabilities: The fair value of a subsidiary's redeemable
preferred shares is based on the present value of the cash flows associated with
these preferred shares, discounted at current market yields.
o Interest rate hedges: The fair value of interest rate hedges reflects the
estimated amounts that the Corporation would receive or pay to terminate the
contracts at the reporting date.
o Foreign currency contracts: The fair value of forward exchange contracts and
options is estimated using prices established by financial institutions for
comparable instruments.
The following table sets forth, in millions of dollars, the carrying amounts
and fair values of the Corporation's financial instruments, except for those
noted above for which carrying amounts approximate fair values:
- --------------------------------------------------------------------------------
Assets (Liabilities) Carrying Fair
As of December 31, 2002 Amount Value
- --------------------------------------------------------------------------------
Non-derivatives:
Long-term debt $(927.6) $(965.8)
Other long-term liabilities (208.4) (208.4)
- --------------------------------------------------------------------------------
Derivatives relating to:
Debt
Assets 63.8 63.8
Other long-term liabilities
Assets 21.2 21.2
Foreign currency
Assets 6.6 6.6
Liabilities (21.1) (21.1)
- --------------------------------------------------------------------------------
Assets (Liabilities) Carrying Fair
As of December 31, 2001 Amount Value
- --------------------------------------------------------------------------------
Non-derivatives:
Long-term debt $(1,191.4) $(1,192.8)
Other long-term liabilities (196.5) (196.5)
- --------------------------------------------------------------------------------
Derivatives relating to:
Debt
Assets 19.7 19.7
Liabilities (6.8) (6.8)
Other long-term liabilities
Assets 8.9 8.9
Foreign currency
Assets 16.4 16.4
Liabilities (1.4) (1.4)
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES
Earnings before income taxes for each year, in millions of dollars, were as
follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
United States $186.2 $ 93.0 $209.3
Other countries 121.2 62.3 195.3
- --------------------------------------------------------------------------------
$307.4 $155.3 $404.6
================================================================================
Significant components of income taxes (benefits) for each year, in millions
of dollars, were as follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Current:
United States $58.7 $ 26.8 $ 93.7
Other countries 16.1 18.7 29.3
- --------------------------------------------------------------------------------
74.8 45.5 123.0
- --------------------------------------------------------------------------------
Deferred:
United States 3.8 16.1 3.5
Other countries (.9) (14.3) (3.9)
- --------------------------------------------------------------------------------
2.9 1.8 (.4)
- --------------------------------------------------------------------------------
$77.7 $ 47.3 $122.6
================================================================================
Income tax expense recorded directly as an adjustment to equity as a result
of hedging activities was not significant in 2002, 2001, and 2000. Income tax
benefits recorded directly as an adjustment to equity as a result of employee
stock options were $5.4 million, $8.8 million, and $.9 million in 2002, 2001,
and 2000, respectively.
Income tax payments were $47.0 million in 2002, $74.3 million in 2001, and
$98.8 million in 2000.
Deferred tax (liabilities) assets at the end of each year, in millions of
dollars, were composed of the following:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ (8.1) $ (8.2)
Employee and postretirement benefits (189.8) (232.7)
Other (18.2) (24.2)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (216.1) (265.1)
- --------------------------------------------------------------------------------
Deferred tax assets:
Tax loss carryforwards 110.2 77.1
Tax credit and capital loss
carryforwards 82.4 82.8
Postretirement benefits 123.8 --
Other 109.1 102.3
- --------------------------------------------------------------------------------
Gross deferred tax assets 425.5 262.2
- --------------------------------------------------------------------------------
Deferred tax asset valuation allowance (86.8) (60.0)
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 122.6 $ (62.9)
================================================================================
Deferred income taxes are included in the Consolidated Balance Sheet in other
current assets, other assets, other accrued liabilities, and deferred income
taxes.
During the year ended December 31, 2002, the deferred tax asset valuation
allowance increased by $26.8 million. The increase was principally the result of
tax losses generated by a subsidiary that cannot be utilized in the consolidated
United States tax return.
Tax basis carryforwards at December 31, 2002, consisted of net operating
losses expiring from 2003 to 2008.
At December 31, 2002, unremitted earnings of subsidiaries outside of the
United States were approximately
-32-
$1.2 billion, on which no United States taxes had been provided. The
Corporation's intention is to reinvest these earnings permanently or to
repatriate the earnings only when tax effective to do so. It is not practicable
to estimate the amount of additional taxes that might be payable upon
repatriation of foreign earnings.
A reconciliation of income taxes at the federal statutory rate to the
Corporation's income taxes for each year, in millions of dollars, is as follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Income taxes at federal
statutory rate $107.6 $ 54.4 $141.6
Lower effective taxes on
earnings in other countries (31.8) (17.2) (28.7)
Amortization of goodwill -- 8.9 9.0
Other -- net 1.9 1.2 .7
- --------------------------------------------------------------------------------
Income taxes $ 77.7 $ 47.3 $122.6
================================================================================
NOTE 10: POSTRETIREMENT BENEFITS
The following table sets forth the funded status of the defined benefit pension
and postretirement plans, and amounts recognized in the Consolidated Balance
Sheet, in millions of dollars. Assets of the defined benefit pension plans
consist principally of investments in equity securities, debt securities, and
cash equivalents. Defined postretirement benefits consist of several unfunded
health care plans that provide certain postretirement medical, dental, and life
insurance benefits for most United States employees. The postretirement medical
benefits are contributory and include certain cost-sharing features, such as
deductibles and co-payments.
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Pension Benefits Other Postretirement
Plans in the Plans outside of the Benefits
United States United States All Plans
------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 810.7 $ 762.8 $ 410.0 $401.5 $ 158.2 $ 150.5
Service cost 15.0 14.1 11.3 11.0 1.2 1.1
Interest cost 56.7 54.4 24.9 23.4 10.8 10.5
Plan participants' contributions -- -- 1.9 2.0 4.3 4.6
Actuarial (gains) losses 72.1 49.4 34.3 (8.0) 10.1 20.6
Foreign currency exchange rate changes -- -- 52.9 (1.9) .1 (.2)
Benefits paid (60.3) (61.1) (22.4) (20.9) (22.6) (29.8)
Plan amendments 1.3 -- 1.4 2.9 -- .9
Divestitures -- (8.9) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 895.5 810.7 514.3 410.0 162.1 158.2
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 836.7 1,027.3 340.5 420.7 -- --
Actual return on plan assets (54.1) (112.3) (36.6) (61.9) -- --
Expenses (7.4) (5.9) (.7) (.6) -- --
Benefits paid (60.3) (61.1) (21.7) (20.3) (22.6) (29.8)
Employer contributions 2.9 3.0 3.2 2.3 18.3 25.2
Contributions by plan participants -- -- 1.9 2.0 4.3 4.6
Divestitures -- (14.3) -- -- -- --
Effects of currency exchange rates -- -- 32.5 (1.7) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 717.8 836.7 319.1 340.5 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (177.7) 26.0 (195.2) (69.5) (162.1) (158.2)
Unrecognized net actuarial loss 456.2 230.6 207.4 89.5 43.1 34.5
Unrecognized prior service cost 6.0 6.2 9.7 17.2 (9.2) (17.7)
Unrecognized net obligation (asset)
at date of adoption -- -- .3 (.8) -- --
Contributions subsequent to measurement date -- -- .8 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 284.5 $ 262.8 $ 23.0 $ 36.4 $(128.2) $(141.4)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
Prepaid benefit cost $ 36.7 $ 300.4 $ -- $101.9 $ -- $ --
Accrued benefit cost (140.9) (46.9) (165.4) (65.7) (128.2) (141.4)
Intangible asset 5.8 3.5 10.0 -- -- --
Accumulated other comprehensive income 382.9 5.8 178.4 .2 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 284.5 $ 262.8 $ 23.0 $ 36.4 $(128.2) $(141.4)
====================================================================================================================================
-33-
The funded status of the Corporation's defined benefit pension plans at
December 31, 2002, reflects the effects of negative returns experienced in the
global capital markets and a decline in the discount rate used to estimate the
pension liability. As a result, the accumulated benefit obligation of certain
plans in the United States and outside of the United States exceeded the fair
value of plan assets. As required by accounting principles generally accepted in
the United States, the Corporation reflected a minimum pension liability of
approximately $563.5 million in the Consolidated Balance Sheet at December 31,
2002. The effect of the funded status of the plan also resulted in a decrease in
prepaid benefit costs by $391.5 million, increase in accrued benefit costs by
$172.0 million, increase in intangible assets by $12.6 million, and increase in
accumulated other comprehensive income (loss) by $(369.7) million, net of tax.
The total accumulated benefit obligation for unfunded defined benefit pension
plans as of December 31, 2002 and 2001, was $52.0 million and $45.4 million,
respectively, for plans in the United States and $77.0 million and $60.3
million, respectively, for plans outside of the United States. The total
projected benefit obligation for unfunded defined benefit pension plans as of
December 31, 2002 and 2001, was $56.3 million and $52.1 million, respectively,
for plans in the United States and $86.4 million and $66.5 million,
respectively, for plans outside of the United States.
The net periodic (benefit) cost related to the defined benefit pension plans
included the following components, in millions of dollars:
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Pension Benefits
Plans in the United States Plans outside of the United States
-----------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 15.8 $ 15.3 $ 14.2 $ 11.3 $ 11.0 $ 10.9
Interest cost 56.7 54.4 53.4 24.9 23.4 23.0
Expected return on plan assets (94.3) (91.1) (85.9) (30.8) (29.0) (28.5)
Amortization of the unrecognized
transition obligation or asset -- .3 (.1) (1.2) (1.5) (1.7)
Amortization of prior service cost 1.1 1.1 1.1 2.3 2.2 2.2
Curtailment loss 1.1 -- -- 7.6 1.6 .2
Amortization of net actuarial loss .8 .9 1.1 .7 1.2 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic (benefit) cost $(18.8) $(19.1) $(16.2) $ 14.8 $ 8.9 $ 8.0
====================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate 6.75% 7.25% 7.50% 5.50% 6.00% 6.00%
Expected return on plan assets 9.50% 9.50% 9.50% 8.00% 8.00% 8.00%
Rate of compensation increase 4.50% 5.00% 5.00% 3.90% 3.90% 3.90%
====================================================================================================================================
The net periodic cost (benefit) related to the defined benefit postretirement
plans included the following components, in millions of dollars:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Service cost $ 1.2 $ 1.1 $ .8
Interest cost 10.8 10.5 9.1
Amortization of
prior service cost (8.3) (8.3) (8.3)
Amortization of
net actuarial gain 1.4 -- --
- --------------------------------------------------------------------------------
Net periodic cost (benefit) $ 5.1 $ 3.3 $ 1.6
================================================================================
Weighted-average discount
rate as of December 31 7.00% 7.50% 7.25%
================================================================================
The health care cost trend rate used to determine the postretirement benefit
obligation was 12.0% for 2002. This rate decreases gradually to an ultimate rate
of 5.0% in 2009, and remains at that level thereafter. The trend rate is a
significant factor in determining the amounts reported. A one-percentage-point
change in these assumed health care cost trend rates would have the following
effects, in millions of dollars:
- --------------------------------------------------------------------------------
One-Percentage-Point Increase (Decrease)
- --------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ .6 $ (.5)
Effect on postretirement
benefit obligation 8.9 (8.0)
- --------------------------------------------------------------------------------
Expense for defined contribution plans amounted to $9.6 million, $8.9
million, and $10.1 million in 2002, 2001, and 2000, respectively.
NOTE 11: OTHER LONG-TERM LIABILITIES
In December 2000, a subsidiary of the Corporation issued preferred shares to
private investors. The preferred shares are redeemable in five years, although
redemption may be accelerated under certain conditions, principally related to
changes in tax laws. Holders of the subsidiary's preferred shares are entitled
to annual cash dividends of $10.7 million. Included in other long-term
liabilities in the Consolidated Balance Sheet at December 31, 2002 and 2001, is
$208.4 million and $196.5 million, respectively, related to those preferred
shares. The carrying value of the subsidiary's preferred shares at December 31,
2002 and 2001 includes the effect of the fair value of the interest rate swap
agreement related to this obligation.
-34-
Other expense (income) in the Consolidated Statement of Earnings for the
years ended December 31, 2002 and 2001, included $10.7 million of dividends
related to those preferred shares.
At December 31, 2002 and 2001, other long-term liabilities included a reserve
of $235.9 million and $231.3 million, respectively, associated with various tax
matters in a number of jurisdictions.
NOTE 12: STOCKHOLDERS' EQUITY
During 1999, the Corporation executed two agreements (the Agreements) under
which the Corporation could enter into forward purchase contracts on its common
stock. The Agreements provided the Corporation with two purchase alternatives: a
standard forward purchase contract and a forward purchase contract subject to a
cap (a capped forward contract).
The settlement methods generally available under the Agreements, at the
Corporation's option, were net settlement, either in cash or in shares, or
physical settlement.
During 2000, the Corporation elected net share settlements, resulting in a
net issuance of 350,928 shares of its common stock. During 2001, the Corporation
terminated the capped forward contracts and standard forward purchase contracts,
electing full physical settlement through its purchase of the final 525,050
shares subject to the Agreements for $25.5 million. Previously during 2001, the
Corporation had received 240,276 shares of its common stock through net share
settlements under the Agreements.
The Corporation repurchased 1,008,101, 1,085,000 and 7,103,072 shares of its
common stock (net of 350,928 shares issued under forward purchase contracts in
2000) during 2002, 2001, and 2000 at an aggregate cost of $43.1 million, $33.5
million, and $269.8 million, respectively.
SFAS No. 130, Reporting Comprehensive Income, defines comprehensive income as
non-stockholder changes in equity. Accumulated other comprehensive income (loss)
at the end of each year, in millions of dollars, included the following:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Foreign currency translation adjustments $(123.7) $(183.9)
Net loss on derivative instruments,
net of tax (17.3) (.9)
Minimum pension liability adjustment,
net of tax (373.6) (3.9)
- --------------------------------------------------------------------------------
$(514.6) $(188.7)
================================================================================
Foreign currency translation adjustments are not generally adjusted for
income taxes as they relate to indefinite investments in foreign subsidiaries.
The minimum pension liability adjustment as of December 31, 2002, is net of
taxes of $187.7 million.
NOTE 13: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were as
follows:
- --------------------------------------------------------------------------------
(Amounts in Millions
Except Per Share Data) 2002 2001 2000
- --------------------------------------------------------------------------------
Numerator:
Net earnings $229.7 $108.0 $282.0
================================================================================
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 80.4 80.7 83.7
Employee stock options and
stock issuable under
employee benefit plans .5 .4 .7
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share --
adjusted weighted-
average shares and
assumed conversions 80.9 81.1 84.4
================================================================================
Basic earnings per share $ 2.86 $ 1.34 $ 3.37
Diluted earnings per share $ 2.84 $ 1.33 $ 3.34
================================================================================
The following options to purchase shares of common stock were outstanding
during each year, but were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive. The options indicated below
were anti-dilutive because the related exercise price was greater than the
average market price of the common shares for the year.
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Number of options
(in millions) 4.4 6.9 6.4
Weighted-average
exercise price $49.47 $46.15 $46.73
- --------------------------------------------------------------------------------
NOTE 14: STOCK-BASED COMPENSATION
The Corporation has elected to follow APBO No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its stock-based
compensation. In addition, the Corporation provides pro forma disclosure of
stock-based compensation, as measured under the fair value requirements of SFAS
No. 123, Accounting for Stock-Based Compensation. These pro forma disclosures
are provided as required under SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure.
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Corporation, namely,
broad-based employee stock purchase plans and option grants where the exercise
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock. In contrast, SFAS No. 123 requires recognition of compensation
expense for grants of stock, stock options, and other equity instruments over
the vesting periods of such grants, based on the estimated grant-date fair
values of those grants.
-35-
Under various stock option plans, options to purchase common stock may be
granted until 2006. Options generally are granted at fair market value at the
date of grant, are exercisable in installments beginning one year from the date
of grant, and expire 10 years after the date of grant. The plans permit the
issuance of either incentive stock options or non-qualified stock options,
which, for certain of the plans, may be accompanied by stock or cash
appreciation rights or limited stock appreciation rights. Additionally, certain
plans allow for the granting of stock appreciation rights on a stand-alone
basis.
As of December 31, 2002, 9,373,414 non-qualified stock options were
outstanding under domestic plans. There were 7,000 stock options outstanding
under the United Kingdom plan.
Under all plans, there were 944,670 shares of common stock reserved for
future grants as of December 31, 2002. Transactions are summarized as follows:
- --------------------------------------------------------------------------------
Weighted-
Average
Exercise
Stock Options Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999 6,604,790 $39.38
Granted 3,892,450 42.77
Exercised 155,278 23.59
Forfeited 784,837 46.69
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 9,557,125 40.42
Granted 1,276,450 34.01
Exercised 1,263,275 21.57
Forfeited 482,814 44.71
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 9,087,486 41.91
Granted 1,279,300 48.13
Exercised 773,297 26.91
Forfeited 213,075 45.17
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 9,380,414 $43.92
================================================================================
Shares exercisable at
December 31, 2000 3,637,612 $32.07
================================================================================
Shares exercisable at
December 31, 2001 3,201,321 $39.85
================================================================================
Shares exercisable at
December 31, 2002 3,780,183 $44.35
================================================================================
Exercise prices for options outstanding as of December 31, 2002, ranged from
$20.50 to $61.00. The following table provides certain information with respect
to stock options outstanding at December 31, 2002:
- --------------------------------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining
Range of Stock Options Exercise Contractual
Exercise Prices Outstanding Price Life
- --------------------------------------------------------------------------------
Under $30.75 1,028,662 $29.68 7.1
$30.75-$46.13 4,510,065 41.34 6.9
Over $46.13 3,841,687 50.77 7.4
- --------------------------------------------------------------------------------
9,380,414 $43.92 7.1
================================================================================
The following table provides certain information with respect to stock
options exercisable at December 31, 2002:
- --------------------------------------------------------------------------------
Weighted-
Range of Stock Options Average
Exercise Prices Exercisable Exercise Price
- --------------------------------------------------------------------------------
Under $30.75 469,537 $29.30
$30.75-$46.13 1,425,623 39.35
Over $46.13 1,885,023 51.88
- --------------------------------------------------------------------------------
3,780,183 $44.35
================================================================================
In electing to continue to follow APBO No. 25 for expense recognition
purposes, the Corporation is obliged to provide the expanded disclosures
required under SFAS No. 148 for stock-based compensation granted, including, if
materially different from reported results, disclosure of pro forma net earnings
and earnings per share had compensation expense relating to grants been measured
under the fair value recognition provisions of SFAS No. 123.
The weighted-average fair values at date of grant for options granted during
2002, 2001, and 2000 were $18.17, $11.96, and $16.50, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Expected life in years 6.3 6.2 5.9
Interest rate 4.91% 4.70% 6.50%
Volatility 33.0% 32.4% 32.2%
Dividend yield .99% 1.44% 1.12%
- --------------------------------------------------------------------------------
A reconciliation of the Corporation's net earnings to pro forma net earnings,
and the related pro forma earnings per share amounts, for the years ended
December 31, 2002, 2001 and 2000, is provided below. For purposes of pro forma
disclosure, stock-based compensation expense is recognized in accordance with
the provisions of SFAS No. 123. Further, pro forma stock-based compensation
expense is amortized to expense on a straight-line basis over the vesting
period.
- --------------------------------------------------------------------------------
(Dollars in Millions
Except Per Share Data) 2002 2001 2000
- --------------------------------------------------------------------------------
Net earnings $229.7 $108.0 $282.0
Adjustment to net earnings for:
Stock-based compensation
income (expense) included
in net earnings, net of tax -- 2.3 (1.0)
Pro forma stock-based
compensation expense,
net of tax 18.5 13.8 19.7
- --------------------------------------------------------------------------------
Pro forma net earnings $211.2 $ 91.9 $263.3
================================================================================
Pro forma net earnings
per common share -- basic $ 2.63 $ 1.14 $ 3.15
================================================================================
Pro forma net earnings
per common share --
assuming dilution $ 2.62 $ 1.13 $ 3.12
================================================================================
-36-
NOTE 15: BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Corporation has elected to organize its businesses based principally upon
products and services. In certain instances where a business does not have a
local presence in a particular country or geographic region, however, the
Corporation has assigned responsibility for sales of that business's products to
one of its other businesses with a presence in that country or region.
The Corporation operates in three reportable business segments: Power Tools
and Accessories, Hardware and Home Improvement, and Fastening and Assembly
Systems. The Power Tools and Accessories segment has worldwide responsibility
for the manufacture and sale of consumer and professional power tools and
accessories, electric cleaning and lighting products, and electric lawn and
garden tools, as well as for product service. In addition, the Power Tools and
Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside the United States and Canada; and
for sales of household products. The Hardware and Home Improvement segment has
worldwide responsibility for the manufacture and sale of security hardware
(except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). It also has responsibility for the manufacture of
plumbing products and for the sale of plumbing products to customers in the
United States and Canada. The Fastening and Assembly Systems segment has
worldwide responsibility for the manufacture and sale of fastening and assembly
systems.
Business Segments
(Millions of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Reportable Business Segments
----------------------------------------------------
Power Hardware Fastening Currency Corporate,
Tools & & Home & Assembly Translation Adjustments,
Year Ended December 31, 2002 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,108.3 $ 758.0 $502.4 $4,368.7 $ 25.3 $ -- $4,394.0
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 352.1 53.0 72.1 477.2 1.2 (57.6) 420.8
Depreciation and amortization 78.8 30.7 13.8 123.3 1.2 3.3 127.8
Income from equity method
investees 20.8 -- -- 20.8 -- 3.0 23.8
Capital expenditures 69.5 11.2 13.6 94.3 1.5 .8 96.6
Segment assets
(for Consolidated, total assets) 1,570.4 416.2 311.0 2,297.6 82.4 1,750.5 4,130.5
Investment in equity method
investees 25.4 -- .1 25.5 -- (1.7) 23.8
Year Ended December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,008.9 $766.2 $478.4 $4,253.5 $ (7.9) $ -- $4,245.6
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 250.0 59.1 68.4 377.5 .4 (30.3) 347.6
Depreciation and amortization 85.2 33.7 14.3 133.2 .4 25.8 159.4
Income from equity method
investees 13.2 -- -- 13.2 -- 2.1 15.3
Capital expenditures 85.1 33.1 15.4 133.6 .4 .8 134.8
Segment assets
(for Consolidated, total assets) 1,577.2 517.6 296.5 2,391.3 (18.1) 1,641.0 4,014.2
Investment in equity method
investees 36.9 -- .1 37.0 (.4) (2.7) 33.9
Year Ended December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,072.4 $831.5 $489.3 $4,393.2 $81.7 $ -- $4,474.9
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs and gain on
sale of business) 349.4 113.5 80.4 543.3 8.4 (29.4) 522.3
Depreciation and amortization 83.4 34.3 15.9 133.6 3.4 26.4 163.4
Income from equity method
investees 15.6 -- -- 15.6 -- (.1) 15.5
Capital expenditures 138.6 30.8 25.6 195.0 4.4 .8 200.2
Segment assets
(for Consolidated, total assets) 1,771.2 537.5 266.5 2,575.2 16.5 1,498.0 4,089.7
Investment in equity method
investees 25.6 -- .1 25.7 .1 (1.7) 24.1
- ------------------------------------------------------------------------------------------------------------------------------------
-37-
The Corporation assesses the performance of its reportable business segments
based upon a number of factors, including segment profit. In general, segments
follow the same accounting policies as those described in Note 1, except with
respect to foreign currency translation and except as further indicated below.
The financial statements of a segment's operating units located outside of the
United States, except those units operating in highly inflationary economies,
are generally measured using the local currency as the functional currency. For
these units located outside of the United States, segment assets and elements of
segment profit are translated using budgeted rates of exchange. Budgeted rates
of exchange are established annually and, once established, all prior period
segment data is restated to reflect the current year's budgeted rates of
exchange. The amounts included in the preceding table under the captions
"Reportable Business Segments", and "Corporate, Adjustments, & Eliminations" are
reflected at the Corporation's budgeted rates of exchange for 2002. The amounts
included in the preceding table under the caption "Currency Translation
Adjustments" represent the difference between consolidated amounts determined
using those budgeted rates of exchange and those determined based upon the rates
of exchange applicable under accounting principles generally accepted in the
United States.
Segment profit excludes interest income and expense, non-operating income and
expense, adjustments to eliminate intercompany profit in inventory, income tax
expense, and, for 2001 and 2000, goodwill amortization (except for the
amortization of goodwill associated with certain acquisitions made by the Power
Tools and Accessories and Fastening and Assembly Systems segments). In addition,
segment profit excludes restructuring and exit costs and the gain on sale of
business. In determining segment profit, expenses relating to pension and other
postretirement benefits are based solely upon estimated service costs. Corporate
expenses, as well as certain centrally managed expenses, are allocated to each
reportable segment based upon budgeted amounts. While sales and transfers
between segments are accounted for at cost plus a reasonable profit, the effects
of intersegment sales are excluded from the computation of segment profit.
Intercompany profit in inventory is excluded from segment assets and is
recognized as a reduction of cost of goods sold by the selling segment when the
related inventory is sold to an unaffiliated customer. Because the Corporation
compensates the management of its various businesses on, among other factors,
segment profit, the Corporation may elect to record certain segment-related
expense items of an unusual or non-recurring nature in consolidation rather than
reflect such items in segment profit. In addition, certain segment-related items
of income or expense may be recorded in consolidation in one period and
transferred to the various segments in a later period.
Segment assets exclude pension and tax assets, intercompany profit in
inventory, intercompany receivables, and, for 2001 and 2000, goodwill (except
for the goodwill associated with certain acquisitions made by the Power Tools
and Accessories and Fastening and Assembly Systems segments).
Amounts in the preceding table under the caption "Corporate, Adjustments &
Eliminations" on the lines entitled "Depreciation and amortization" represent
depreciation of Corporate property and, for 2001 and 2000, goodwill amortization
(except for the amortization of goodwill associated with certain acquisitions
made by the Power Tools and Accessories and Fastening and Assembly Systems
segments). The reconciliation of segment profit to consolidated earnings before
income taxes for each year, in millions of dollars, is as follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Segment profit for
total reportable
business segments $477.2 $377.5 $543.3
Items excluded from segment profit:
Adjustment of budgeted
foreign exchange rates
to actual rates 1.2 .4 8.4
Depreciation of Corporate
property and amortization
of certain goodwill (1.3) (25.8) (26.4)
Adjustment to businesses'
postretirement benefit
expenses booked
in consolidation 37.6 41.3 36.4
Other adjustments booked
in consolidation directly
related to reportable
business segments (8.6) (.6) (14.1)
Amounts allocated to
businesses in arriving at
segment profit in excess of
(less than) Corporate center
operating expenses,
eliminations, and other
amounts identified above (85.3) (45.2) (25.3)
- --------------------------------------------------------------------------------
Operating income before
restructuring and exit costs,
and gain on sale of business 420.8 347.6 522.3
Restructuring and exit costs 50.7 99.8 39.1
Gain on sale of business -- -- 20.1
- --------------------------------------------------------------------------------
Operating income 370.1 247.8 503.3
Interest expense,
net of interest income 57.8 84.3 104.2
Other expense (income) 4.9 8.2 (5.5)
- --------------------------------------------------------------------------------
Earnings before income taxes $307.4 $155.3 $404.6
================================================================================
-38-
The reconciliation of segment assets to the consolidated total assets at the
end of each year, in millions of dollars, is as follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Segment assets for
total reportable
business segments $2,297.6 $2,391.3 $2,575.2
Items excluded from
segment assets:
Adjustment of budgeted
foreign exchange rates
to actual rates 82.4 (18.1) 16.5
Goodwill 673.0 656.2 690.2
Pension assets 36.7 406.2 380.0
Other Corporate assets 1,040.8 578.6 427.8
- --------------------------------------------------------------------------------
$4,130.5 $4,014.2 $4,089.7
================================================================================
Other Corporate assets principally consist of cash and cash equivalents, tax
assets, property, and other assets.
Sales to The Home Depot, a customer of the Power Tools and Accessories and
Hardware and Home Improvement segments, accounted for $857.9 million, $841.6
million, and $851.9 million of the Corporation's consolidated sales for the
years ended December 31, 2002, 2001, and 2000, respectively. Sales to Lowe's
Home Improvement Warehouse (Lowe's), a customer of the Power Tools and
Accessories and Hardware and Home Improvement segments, accounted for $467.5
million of the Corporation's consolidated sales for the year ended December 31,
2002. Sales to Lowe's for the years ended December 31, 2001 and 2000, did not
exceed 10% of the Corporation's consolidated sales in either of those years.
The composition of the Corporation's sales by product group for each year, in
millions of dollars, is set forth below:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Consumer and professional
power tools and
product service $2,308.4 $2,227.2 $2,304.1
Consumer and professional
accessories 317.8 311.1 337.9
Electric lawn and
garden products 285.4 279.3 300.1
Electric cleaning and
lighting products 157.6 122.8 124.5
Household products 36.8 45.1 47.7
Security hardware 563.2 531.3 573.2
Plumbing products 221.6 252.3 281.4
Fastening and assembly
systems 503.2 476.5 506.0
- --------------------------------------------------------------------------------
$4,394.0 $4,245.6 $4,474.9
================================================================================
The Corporation markets its products and services in over 100 countries and
has manufacturing sites in 11 countries. Other than in the United States, the
Corporation does not conduct business in any country in which its sales in that
country exceed 10% of consolidated sales. Sales are attributed to countries
based on the location of customers. The composition of the Corporation's sales
to unaffiliated customers between those in the United States and those in other
locations for each year, in millions of dollars, is set forth below:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
United States $2,824.0 $2,715.6 $2,843.1
Canada 138.6 136.5 146.1
- --------------------------------------------------------------------------------
North America 2,962.6 2,852.1 2,989.2
Europe 1,089.0 1,055.9 1,136.7
Other 342.4 337.6 349.0
- --------------------------------------------------------------------------------
$4,394.0 $4,245.6 $4,474.9
================================================================================
The composition of the Corporation's property, plant, and equipment between
those in the United States and those in other countries as of the end of each
year, in millions of dollars, is set forth below:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
United States $384.1 $425.2 $466.4
United Kingdom 72.2 72.1 100.5
Other countries 199.6 190.2 181.2
- --------------------------------------------------------------------------------
$655.9 $687.5 $748.1
================================================================================
NOTE 16: LEASES
The Corporation leases certain service centers, offices, warehouses,
manufacturing facilities, and equipment. Generally, the leases carry renewal
provisions and require the Corporation to pay maintenance costs. Rental payments
may be adjusted for increases in taxes and insurance above specified amounts.
Rental expense for 2002, 2001, and 2000 amounted to $83.6 million, $84.9
million, and $83.6 million, respectively. Capital leases were immaterial in
amount. Future minimum payments under non-cancelable operating leases with
initial or remaining terms of more than one year as of December 31, 2002, in
millions of dollars, were as follows:
- --------------------------------------------------------------------------------
2003 $ 54.5
2004 38.7
2005 27.6
2006 19.0
2007 13.5
Thereafter 15.5
- --------------------------------------------------------------------------------
$168.8
================================================================================
-39-
NOTE 17: RESTRUCTURING ACTIONS
A summary of restructuring activity during the three years ended December 31,
2002, is set forth below (in millions of dollars).
- --------------------------------------------------------------------------------
Write-Down
to Net
Realizable
Value of
Certain
Severance Long-Lived Other
Benefits Assets Charges Total
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 1999 $ 18.7 $ -- $ 3.7 $ 22.4
Reserves established
in 2000 21.4 13.9 3.8 39.1
Utilization of reserves:
Cash (10.4) -- (2.2) (12.6)
Non-cash -- (13.9) (.9) (14.8)
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2000 29.7 -- 4.4 34.1
Reserves established
in 2001 49.3 38.9 15.8 104.0
Reversal of reserves (3.8) -- (.4) (4.2)
Utilization of reserves:
Cash (21.5) -- (3.4) (24.9)
Non-cash -- (38.9) (2.7) (41.6)
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2001 53.7 -- 13.7 67.4
Reserves established
in 2002 23.7 18.5 19.5 61.7
Reversal of reserves (5.7) (2.7) (2.6) (11.0)
Utilization of reserves:
Cash (30.6) -- (7.2) (37.8)
Non-cash -- (15.8) (8.7) (24.5)
Foreign currency translation 4.0 -- .1 4.1
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2002 $ 45.1 $ -- $14.8 $ 59.9
================================================================================
During 2002, the Corporation recorded a restructuring charge of $50.7 million
under the restructuring plan that was formulated in the fourth quarter of 2001.
That $50.7 million charge was net of $11.0 million of reversals of previously
provided restructuring reserves that were no longer required. The $50.7 million
pre-tax restructuring charge recognized in 2002 reflects actions to reduce the
Corporation's manufacturing cost base in its Power Tools and Accessories and
Hardware and Home Improvement segments, as well as actions to reduce selling,
general, and administrative expenses through the elimination of administrative
positions, principally in Europe. The 2002 actions to reduce the Corporation's
manufacturing cost base in the Power Tools and Accessories segment include the
closure of one facility in the United States, the closure of an accessories
packaging facility in England, and the transfer of certain additional power tool
production from a facility in England to a low-cost facility in the Czech
Republic. Actions to reduce the Corporation's manufacturing cost base in the
Hardware and Home Improvement segment include the closure of a security hardware
facility in the United States.
The principal component of the 2002 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefits accrual of
$23.7 million, principally related to the Power Tools and Accessories segment in
North America and Europe ($18.3 million) and the Hardware and Home Improvement
segment in North America and Europe ($5.4 million), was included in the
restructuring charge. The 2002 restructuring charge also included non-cash
pension curtailment losses of $8.9 million stemming from headcount reductions
associated with the restructuring actions, principally related to the
Corporation's defined benefit pension plan in the United Kingdom. The 2002
restructuring action will also result in the closure of a number of
manufacturing facilities, transferring production to low-cost facilities, and
outsourcing certain manufactured items. As a result, the 2002 restructuring
charge also included an $18.5 million write-down to fair value - less, if
applicable, cost to sell - of certain long-lived assets. The write-down to fair
value was comprised of $4.8 million related to the Power Tools and Accessories
segment in Europe and $13.7 million related to the Hardware and Home Improvement
segment in North America. The balance of the 2002 restructuring charge, or $10.6
million, related to the accrual of future expenditures, principally consisting
of lease and other contractual obligations, for which no future benefit will be
realized.
During 2001, the Corporation recorded a restructuring charge of $99.8
million. That restructuring charge reflected actions to reduce the Corporation's
manufacturing cost base in its Power Tools and Accessories and Hardware and Home
Improvement segments, as well as actions to reduce selling, general, and
administrative expenses throughout all of its businesses. The 2001 restructuring
plan includes the transfer of production and service operations in the Power
Tools and Accessories and Hardware and Home Improvement segments from facilities
in the United States and the United Kingdom to low-cost facilities in Mexico and
China and to a new low-cost facility in the Czech Republic.
The principal component of the 2001 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefits accrual of
$45.8 million, principally related to the Power Tool and Accessories segment in
North America and Europe ($36.3 million), the Hardware and Home Improvement
segment in the United States ($8.6 million), and the Fastening and Assembly
Systems segment in Europe ($.9 million), was included in the restructuring
charge. The 2001 restructuring actions will result in the closure of a number of
manufacturing and service facilities, transferring production to low-cost
facilities, and outsourcing certain manufactured items. As a result, the 2001
-40-
restructuring charge also included a $38.9 million write-down to fair value -
less, if applicable, cost to sell - of certain equipment. The write-down to fair
value was comprised of $34.0 million related to long-lived assets in the Power
Tools and Accessories segment in Europe and North America and $4.9 million
related to the Hardware and Home Improvement segment in the United States. The
2001 restructuring charge also included $9.6 million, primarily related to the
accrual of future expenditures, principally consisting of lease and other
contractual obligations, for which no future benefit will be realized. The
balance of the 2001 restructuring charge, or $5.5 million, primarily related to
non-cash charges associated with the impairment of an equity method investee and
non-cash pension expense.
During 2001, the Corporation also recognized $4.2 million of restructuring
and exit costs principally related to severance benefits associated with its
Power Tools and Accessories segment in Europe and its Hardware and Home
Improvement segment. The $4.2 million charge was offset, however, by the
reversal of $4.2 million of severance accruals and other exit costs established
as part of the 2000 restructuring charge, which were no longer required.
The severance benefits accrual, included in the $50.7 million and $99.8
million pre-tax restructuring charges taken in 2002 and 2001, respectively,
related to the elimination of approximately 3,500 positions in high-cost
manufacturing locations and in certain administrative functions. The Corporation
estimates that, as a result of increases in manufacturing employee headcount in
low-cost locations, approximately 3,200 replacement positions will be filled,
yielding a net total of 300 positions eliminated as a result of the 2002 and
2001 restructuring actions.
During 2000, the Corporation recorded a restructuring charge of $39.1
million. The 2000 restructuring charge included $9.5 million to rationalize
manufacturing in its Hardware and Home Improvement segment. The 2000
restructuring charge also included $29.6 million related to actions to reduce
costs in its Power Tools and Accessories segment. Included in these cost
reduction initiatives were the transfer of certain production from manufacturing
facilities in the United Kingdom to lower-cost facilities in China, reductions
in administrative functions, principally in Europe, and the integration of the
accessories business in North America into the professional and consumer power
tools businesses.
The major component of the 2000 restructuring charge related to the net
elimination of approximately 400 positions. As a result, an accrual of $21.4
million, principally related to the Power Tools and Accessories segment in
Europe, was included in the restructuring charge. The Corporation also took
action to rationalize manufacturing and reduce administrative costs. As a
result, the restructuring charge recognized in 2000 also included a $13.9
million write-down of machinery and equipment to fair value. This write-down
primarily related to the Hardware and Home Improvement segment's operations in
the United States and to the European and United States businesses of the Power
Tools and Accessories segment. The balance of the 2000 restructuring charge, or
$3.8 million, primarily related to the accrual of future expenditures,
principally consisting of lease and other contractual obligations, for which no
future benefit will be realized.
During 2002, 2001, and 2000, the Corporation paid severance and other exit
costs of $37.8 million, $24.9 million, and $12.6 million, respectively.
As of December 31, 2002, all facilities exited as part of the Corporation's
restructuring actions undertaken in 2001 and prior had been sold. As of December
31, 2002, the carrying value of facilities to be exited as part of the
Corporation's restructuring actions that commenced in 2002 was not significant.
NOTE 18: LITIGATION AND CONTINGENT LIABILITIES
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings relating to employment matters and commercial disputes. Some of
these lawsuits include claims for punitive as well as compensatory damages.
Using current product sales data and historical trends, the Corporation
actuarially calculates the estimate of its current exposure for product
liability. The Corporation is insured for product liability claims for amounts
in excess of established deductibles and accrues for the estimated liability up
to the limits of the deductibles. The Corporation accrues for all other claims
and lawsuits on a case-by-case basis.
The Corporation also is party to litigation and administrative proceedings
with respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a potentially responsible party under federal and state
environmental laws and regulations. Other matters involve current and former
manufacturing facilities.
For sites never operated by the Corporation, the Corporation makes an
assessment of the costs involved based on environmental studies, prior
experience at similar sites, and the experience of other named parties. The
Corporation also considers the ability of other parties to share costs, the
percentage of the Corporation's exposure relative to all other parties, and the
effects of inflation on these estimated costs. For matters associated with
properties
-41-
currently operated by the Corporation, the Corporation makes an assessment as to
whether an investigation and remediation would be required under applicable
federal and state laws. For matters associated with properties previously sold
or operated by the Corporation, the Corporation considers any applicable terms
of sale and applicable federal and state laws to determine if it has any
remaining liability. If it is determined that the Corporation has potential
liability for properties currently owned or previously sold, an estimate is made
of the total costs of investigation and remediation and other potential costs
associated with the site.
The Corporation's estimate of the costs associated with product liability
claims, environmental exposures, and other legal proceedings is accrued if, in
management's judgment, the likelihood of a loss is probable and the amount of
the loss can be reasonably estimated. These accrued liabilities are not
discounted.
Insurance recoveries for environmental and certain general liability claims
have not been recognized until realized.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, and other legal proceedings are
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation's consolidated
financial statements. As of December 31, 2002, the Corporation had no known
probable but inestimable exposures relating to product liability claims,
environmental matters, or other legal proceedings that are expected to have a
material adverse effect on the Corporation. There can be no assurance, however,
that unanticipated events will not require the Corporation to increase the
amount it has accrued for any matter or accrue for a matter that has not been
previously accrued because it was not considered probable.
NOTE 19: QUARTERLY RESULTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions Except Per Share Data) First Second Third Fourth
Year Ended December 31, 2002 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $951.7 $1,125.3 $1,085.2 $1,231.8
Gross margin 306.9 378.5 380.7 451.8
Net earnings 33.0 66.1 54.9 75.7
====================================================================================================================================
Net earnings per common share -- basic $ .41 $ .82 $ .68 $ .94
====================================================================================================================================
Net earnings per common share -- assuming dilution $ .41 $ .81 $ .68 $ .94
====================================================================================================================================
Year Ended December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $962.0 $1,049.7 $1,039.2 $1,194.7
Gross margin 325.6 339.5 342.8 391.1
Net earnings (loss) 33.1 41.7 46.2 (13.0)
====================================================================================================================================
Net earnings (loss) per common share -- basic $ .41 $ .52 $ .57 $ (.16)
====================================================================================================================================
Net earnings (loss) per common share -- assuming dilution $ .40 $ .51 $ .57 $ (.16)
====================================================================================================================================
Results for the third quarter of 2002 included a restructuring charge of
$38.4 million ($22.3 million net of tax). Results for the fourth quarter of 2002
included a restructuring charge of $12.3 million ($9.4 million net of tax).
Results for the fourth quarter of 2001 included a restructuring charge of
$99.8 million ($70.6 million net of tax).
As more fully described in Note 1, effective January 1, 2002, the Corporation
adopted EITF 01-9. Upon the adoption of EITF 01-9, previously reported amounts
were restated and resulted in a reduction of sales (and an offsetting reduction
of selling expenses) of $17.0 million, $20.7 million, $23.8 million, and $26.0
million for the first, second, third, and fourth quarters of 2001, respectively.
As more fully described in Note 1, effective January 1, 2002, the Corporation
adopted SFAS No. 142. Results for the first, second, third, and fourth quarters
of 2001 each include goodwill amortization of $6.6 million. Net earnings (loss),
adjusted to exclude goodwill amortization in the first, second, third, and
fourth quarters of 2001, would have been $39.7 million, $48.3 million, $52.8
million, and $(6.4) million, respectively. Net earnings (loss) per common share
- - basic, adjusted to exclude goodwill amortization in the first, second, third,
and fourth quarters of 2001, would have been $.49, $.60, $.65, and $(.08),
respectively. Net earnings (loss) per common share - assuming dilution, adjusted
to exclude goodwill amortization in the first, second, third, and fourth
quarters of 2001, would have been $.48, $.59, $.65, and $(.08), respectively.
Earnings per common share are computed independently for each of the quarters
presented. Therefore, the sum of the quarters may not be equal to the full year
earnings per share amounts.
-42-
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
of The Black & Decker Corporation:
We have audited the accompanying consolidated balance sheet of The Black &
Decker Corporation and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Black & Decker Corporation and Subsidiaries at December 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the financial statements, effective January 1,
2001, the Corporation changed its method of accounting for derivative financial
instruments. Also, as discussed in Note 1 to the financial statements, effective
January 1, 2002, the Corporation changed its method of accounting for goodwill
and other intangible assets and for certain sales incentives to its customers.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
January 29, 2003
-43-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to Directors is contained in
the Corporation's Proxy Statement for the Annual Meeting of Stockholders to be
held April 29, 2003, under the captions "Election of Directors", "Board of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by reference.
Information required under this Item with respect to Executive Officers of
the Corporation is included in Item 1 of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 29, 2003,
under the captions "Board of Directors" and "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 29, 2003,
under the captions "Voting Securities", "Security Ownership of Management", and
"Equity Compensation Plan Information" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 29, 2003,
under the caption "Executive Compensation" and is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, the Corporation carried out
an evaluation - under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer - of the effectiveness of the design and operation
of the Corporation's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-5. Based on that evaluation, the Corporation's Chief Executive Officer
and Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation described in the preceding paragraph.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits
(1) LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and its
subsidiaries are included in Item 8 of Part II of this report:
Consolidated Statement of Earnings - years ended December 31, 2002, 2001, and
2000.
Consolidated Balance Sheet - December 31, 2002 and 2001.
Consolidated Statement of Stockholders' Equity - years ended December 31,
2002, 2001, and 2000.
Consolidated Statement of Cash Flows - years ended December 31, 2002, 2001,
and 2000.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(2) LIST OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Corporation and its
subsidiaries are included herein:
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
-44-
(3) LIST OF EXHIBITS
The following exhibits are either included in this report or incorporated herein
by reference as indicated below:
Exhibit 3(a)
Articles of Restatement of the Charter of the Corporation, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997,
are incorporated herein by reference.
Exhibit 3(b)
Bylaws of the Corporation, as amended, included in the Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 29, 2002, are incorporated
herein by reference.
Exhibit 4(a)
Indenture, dated as of March 24, 1993, by and between the Corporation and
Security Trust Company, National Association, included in the Corporation's
Current Report on Form 8-K filed with the Commission on March 26, 1993, is
incorporated herein by reference.
Exhibit 4(b)
Form of 7-1/2% Notes due April 1, 2003, included in the Corporation's Current
Report on Form 8-K filed with the Commission on March 26, 1993, is incorporated
herein by reference.
Exhibit 4(c)
Form of 7% Notes due February 1, 2006, included in the Corporation's Current
Report on Form 8-K filed with the Commission on January 20, 1994, is
incorporated herein by reference.
Exhibit 4(d)
Indenture dated as of September 9, 1994, by and between the Corporation and
Marine Midland Bank, as Trustee, included in the Corporation's Current Report on
Form 8-K filed with the Commission on September 9, 1994, is incorporated herein
by reference.
Exhibit 4(e)
Indenture dated as of June 26, 1998, by and among Black & Decker Holdings Inc.,
as Issuer, the Corporation, as Guarantor, and The First National Bank of
Chicago, as Trustee, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998, is incorporated herein by reference.
Exhibit 4(f)
Credit Agreement, dated as of April 2, 2001, among the Corporation, Black &
Decker Holdings, Inc., as Initial Borrowers, the initial lenders named therein,
as Initial Lenders, Citibank, N.A., as Administrative Agent, JPMorgan, a
division of Chase Securities Inc., as Syndication Agent, and Bank of America,
N.A. and Commerzbank AG, as Co-Syndication Agents, included in the Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 1, 2001, is
incorporated herein by reference.
Exhibit 4(g)
Credit Agreement, dated as of April 2, 2001, among the Corporation, Black &
Decker Holdings, Inc., as Initial Borrowers, the initial lenders named therein,
as Initial Lenders, Citibank, N.A., as Administrative Agent, JPMorgan, a
division of Chase Securities Inc., as Syndication Agent, and Bank of America,
N.A. and Commerzbank AG, as Co-Syndication Agents, included in the Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 1, 2001, is
incorporated herein by reference.
Exhibit 4(h)
Credit Agreement, dated as of April 4, 2002, among the Corporation, Black &
Decker Holdings, Inc., as Initial Borrowers, the initial lenders named therein,
as Initial Lenders, Citibank, N.A., as Administrative Agent, JPMorgan Chase
Bank, as Syndication Agent, and Bank of America, N.A., Commerzbank AG, New York
and Grand Cayman Branches, and HSBC Bank, USA, as Co-Syndication Agents,
included in the Corporation's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
Exhibit 4(i)
Indenture between the Corporation and The Bank of New York, as trustee, dated as
of June 5, 2001, included in the Corporation's Registration Statement on Form
S-4 (Reg. No. 333-64790), is incorporated herein by reference.
Exhibit 4(j)
Form of 7.125% Senior Note Due 2011, included in the Corporation's Registration
Statement on Form S-4 (Reg. No. 333-64790), is incorporated herein by reference.
The Corporation agrees to furnish a copy of any other documents with respect to
long-term debt instruments of the Corporation and its subsidiaries upon request.
Exhibit 10(a)
The Black & Decker Corporation Deferred Compensation Plan for Non-Employee
Directors, as amended, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000, is incorporated herein by reference.
Exhibit 10(b)
The Black & Decker 1986 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(c)
The Black & Decker 1986 U.K. Approved Option Scheme, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-47651), is
incorporated herein by reference.
-45-
Exhibit 10(d)
The Black & Decker 1989 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(e)
The Black & Decker 1992 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(f)
The Black & Decker 1995 Stock Option Plan for Non-Employee Directors, as
amended, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998, is incorporated herein by reference.
Exhibit 10(g)
The Black & Decker Non-Employee Directors Stock Plan, included as Exhibit A to
the Proxy Statement, for the 1998 Annual Meeting of Stockholders of the
Corporation dated March 3, 1998, is incorporated herein by reference.
Exhibit 10(h)
The Black & Decker 1996 Stock Option Plan, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 333-51155), is
incorporated herein by reference.
Exhibit 10(i)
The Black & Decker Performance Equity Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, is incorporated herein by reference.
Exhibit 10(j)
The Black & Decker Executive Annual Incentive Plan, included in the Proxy
Statement for the 1996 Annual Meeting of Stockholders of the Corporation dated
March 1, 1996, is incorporated herein by reference.
Exhibit 10(k)
The Black & Decker Management Annual Incentive Plan, included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995,
is incorporated herein by reference.
Exhibit 10(l)
Amended and Restated Employment Agreement, dated as of November 1, 1995, by and
between the Corporation and Nolan D. Archibald, included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
Exhibit 10(m)
The Black & Decker Executive Long-Term Performance/Retention Plan, included in
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by reference.
Exhibit 10(n)(1)
The Black & Decker Supplemental Pension Plan, as amended, included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
Exhibit 10(n)(2)
Amendment to The Black & Decker Supplemental Pension Plan, dated as of May 21,
1997, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(o)(1)
The Black & Decker Executive Deferred Compensation Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended October 3,
1993, is incorporated herein by reference.
Exhibit 10(o)(2)
Amendment to The Black & Decker Executive Deferred Compensation Plan dated as of
July 17, 1996, included in the Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated herein by reference.
Exhibit 10(p)(1)
The Black & Decker Supplemental Retirement Savings Plan, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-65013), is
incorporated herein by reference.
Exhibit 10(p)(2)
Amendment to The Black & Decker Supplemental Retirement Savings Plan dated as of
April 22, 1997, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(p)(3)
Amendment No. 2 to The Black & Decker Supplemental Retirement Savings Plan dated
as of July 16, 1998, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998, is incorporated herein by reference.
Exhibit 10(p)(4)
Amendment No. 3 to The Black & Decker Supplement Retirement Savings Plan dated
as of July 20, 2000, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended October 1, 2000, is incorporated herein by reference.
Exhibit 10(p)(5)
Amendment No. 4 to The Black & Decker Supplement Retirement Savings Plan dated
as of October 18, 2001, included in the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, is incorporated herein by
reference.
-46-
Exhibit 10(p)(6)
Amendment No. 5 to The Black & Decker Supplemental Retirement Savings Plan dated
as of October 17, 2002.
Exhibit 10(p)(7)
Amendment No. 6 to The Black & Decker Supplemental Retirement Savings Plan dated
as of December 12, 2002.
Exhibit 10(q)
The Black & Decker Supplemental Executive Retirement Plan, as amended, included
in the Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, is incorporated herein by reference.
Exhibit 10(r)
The Black & Decker Executive Life Insurance Program, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 4, 1993,
is incorporated herein by reference.
Exhibit 10(s)
The Black & Decker Executive Salary Continuance Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 2, 1995,
is incorporated herein by reference.
Exhibit 10(t)
Description of the Corporation's policy and procedure for relocation of existing
employees (individual transfers), included in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1991, is incorporated herein by
reference.
Exhibit 10(u)
Description of the Corporation's policy and procedures for relocation of new
employees, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by reference.
Exhibit 10(v)
Description of certain incidental benefits provided to executive officers of the
Corporation, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(w)
Form of Severance Benefits Agreement by and between the Corporation and
approximately 17 of its key employees.
Exhibit 10(x)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Nolan D. Archibald.
Exhibit 10(y)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Paul F. McBride.
Exhibit 10(z)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Charles E. Fenton.
Exhibit 10(aa)
Letter Agreement, dated April 19, 1999, by and between the Corporation and Paul
F. McBride, included in the Corporation's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1999, is incorporated herein by reference.
Exhibit 10(bb)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Michael D. Mangan.
Exhibit 10(cc)(1)
Special Deferral Agreement, dated February 7, 2000, by and between the
Corporation and Paul A. Gustafson, included in the Corporation's Annual Report
for the year ended December 31, 1999, is incorporated herein by reference.
Exhibit 10(cc)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Paul A. Gustafson.
Exhibit 10(dd)(1)
The Black & Decker 1996 Employee Stock Purchase Plan, included in the Proxy
Statement for the 1996 Annual Meeting of Stockholders of the Corporation dated
March 1, 1996, is incorporated herein by reference.
Exhibit 10(dd)(2)
Amendment to The Black & Decker 1996 Employee Stock Purchase Plan, as adopted on
February 12, 1997, included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996, is incorporated herein by reference.
Items 10(a) through 10(dd)(2) constitute management contracts and compensatory
plans and arrangements required to be filed as exhibits under Item 15(c) of this
report.
Exhibit 21
List of Subsidiaries.
Exhibit 23
Consent of Independent Auditors.
Exhibit 24
Powers of Attorney.
Exhibit 99(a)
Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
Exhibit 99(b)
Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
Exhibit 99(c)
Code of Ethics for Senior Financial Officers.
All other items are "not applicable" or "none".
-47-
(b) Reports on Form 8-K
The Corporation filed the following reports on Form 8-K during the three months
ended December 31, 2002:
On October 23, 2002, the Corporation filed a Current Report on Form 8-K with
the Securities and Exchange Commission. This Current Report on Form 8-K, filed
pursuant to Item 5 of that Form, stated that the Corporation had reported its
earnings for the three and nine months ended September 29, 2002.
All other items are "not applicable" or "none".
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(d) Financial Statement Schedules and Other Financial Statements
The Financial Statement Schedule required by Regulation S-X is filed herewith.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The Black & Decker Corporation and Subsidiaries
(Millions of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Additions Other
at Charged to Changes Balance
Beginning Costs and Add at End
Description of Period Expenses Deductions (Deduct) of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Reserve for doubtful accounts and cash discounts $51.9 $70.6 $77.4 (a) $2.5 (b) $47.6
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
Reserve for doubtful accounts and cash discounts $51.8 $71.2 $70.5 (a) $(.6)(b) $51.9
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Reserve for doubtful accounts and cash discounts $53.3 $64.8 $65.4 (a) $(.9)(b) $51.8
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Accounts written off during the year and cash discounts taken by customers.
(b) Primarily includes currency translation adjustments.
-48-
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE BLACK & DECKER CORPORATION
Date: February 14, 2003 By /s/ NOLAN D. ARCHIBALD
----------------- -----------------------------
Nolan D. Archibald
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 14, 2003, by the following persons on behalf
of the registrant and in the capacities indicated.
Signature Title Date
- --------------------------------------------------------------------------------
Principal Executive Officer
/s/ NOLAN D. ARCHIBALD February 14, 2003
- ---------------------- -----------------
Nolan D. Archibald Chairman, President, and
Chief Executive Officer
Principal Financial Officer
/s/ MICHAEL D. MANGAN February 14, 2003
- --------------------- -----------------
Michael D. Mangan Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
/s/ CHRISTINA M. MCMULLEN February 14, 2003
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Christina M. McMullen Vice President and Controller
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This report has been signed by the following directors, constituting a majority
of the Board of Directors, by Nolan D. Archibald, Attorney-in-Fact.
Nolan D. Archibald Manuel A. Fernandez
Barbara L. Bowles Benjamin H. Griswold, IV
M. Anthony Burns Anthony Luiso
Malcolm Candlish
By /s/ NOLAN D. ARCHIBALD Date: February 14, 2003
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Nolan D. Archibald
Attorney-in-Fact
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THE BLACK & DECKER CORPORATION
CERTIFICATIONS
I, Nolan D. Archibald, certify that:
1. I have reviewed this annual report on Form 10-K of The Black & Decker
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ NOLAN D. ARCHIBALD
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Nolan D. Archibald
Chairman, President, and Chief Executive Officer
February 14, 2003
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THE BLACK & DECKER CORPORATION
CERTIFICATIONS
I, Michael D. Mangan, certify that:
1. I have reviewed this annual report on Form 10-K of The Black & Decker
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ MICHAEL D. MANGAN
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Michael D. Mangan
Senior Vice President and Chief Financial Officer
February 14, 2003
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