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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 29, 2003
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 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 or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 East Joppa Road Towson, Maryland 21286
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(Address of principal executive offices) (Zip Code)
(410) 716-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal year, if changed since last
report.)
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 12 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. X YES NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). X YES NO
----- -----
The number of shares of Common Stock outstanding as of July 25, 2003:
77,687,951
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The exhibit index as required by item 601(a) of Regulation S-K is included in
this report.
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THE BLACK & DECKER CORPORATION
INDEX - FORM 10-Q
June 29, 2003
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months and Six Months Ended June 29, 2003
and June 30, 2002 3
Consolidated Balance Sheet
June 29, 2003 (Unaudited) and December 31, 2002 4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Six Months Ended June 29, 2003 and June 30, 2002 5
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 29, 2003 and June 30, 2002 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amounts)
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Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
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Sales $1,119.7 $1,125.3 $2,087.9 $2,077.0
Cost of goods sold 720.0 746.8 1,344.7 1,391.6
Selling, general, and
administrative expenses 287.8 271.0 558.0 515.7
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Operating Income 111.9 107.5 185.2 169.7
Interest expense (net of
interest income) 7.7 14.8 19.8 30.6
Other expense .5 2.2 2.3 3.4
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Earnings Before Income Taxes 103.7 90.5 163.1 135.7
Income taxes 28.0 24.4 44.0 36.6
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Net Earnings $ 75.7 $ 66.1 $ 119.1 $ 99.1
====================================================================================================================================
Net Earnings Per Common
Share - Basic $ .98 $ .82 $ 1.53 $ 1.23
====================================================================================================================================
Shares Used in Computing Basic
Earnings Per Share (in Millions) 77.6 80.5 78.0 80.3
====================================================================================================================================
Net Earnings Per Common
Share - Assuming Dilution $ .97 $ .81 $ 1.52 $ 1.23
====================================================================================================================================
Shares Used in Computing Diluted
Earnings Per Share (in Millions) 77.9 81.2 78.2 80.9
====================================================================================================================================
Dividends Per Common Share $ .12 $ .12 $ .24 $ .24
====================================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
- 4 -
CONSOLIDATED BALANCE SHEET
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amount)
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June 29,
2003 December 31,
(Unaudited) 2002
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Assets
Cash and cash equivalents $ 156.6 $ 517.1
Trade receivables 820.7 729.0
Inventories 768.1 748.9
Other current assets 215.0 198.9
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Total Current Assets 1,960.4 2,193.9
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Property, Plant, and Equipment 638.6 655.9
Goodwill 749.6 729.1
Other Assets 560.9 551.6
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$3,909.5 $4,130.5
================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 87.0 $ 4.6
Current maturities of long-term debt .4 312.0
Trade accounts payable 316.3 343.2
Other accrued liabilities 762.1 793.6
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Total Current Liabilities 1,165.8 1,453.4
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Long-Term Debt 936.1 927.6
Deferred Income Taxes 212.4 211.3
Postretirement Benefits 421.5 409.0
Other Long-Term Liabilities 522.8 529.6
Stockholders' Equity
Common stock, par value $.50 per share 38.8 39.8
Capital in excess of par value 475.9 550.1
Retained earnings 624.8 524.3
Accumulated other comprehensive income (loss) (488.6) (514.6)
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Total Stockholders' Equity 650.9 599.6
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$3,909.5 $4,130.5
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Data)
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Accumulated
Outstanding Capital in Other Com- Total
Common Par Excess of Retained prehensive Stockholders'
Shares Value Par Value Earnings Income (Loss) Equity
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Balance at December 31, 2001 79,829,641 $39.9 $566.6 $333.2 $(188.7) $751.0
Comprehensive income:
Net earnings -- -- -- 99.1 -- 99.1
Net loss on derivative
instruments (net of tax) -- -- -- -- (9.2) (9.2)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 3.7 3.7
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Comprehensive income -- -- -- 99.1 (5.5) 93.6
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Cash dividends ($.24 per share) -- -- -- (19.3) -- (19.3)
Common stock issued under
employee benefit plans 709,840 .4 23.5 -- -- 23.9
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Balance at June 30, 2002 80,539,481 $40.3 $590.1 $413.0 $(194.2) $849.2
====================================================================================================================================
Balance at December 31, 2002 79,604,786 $39.8 $550.1 $524.3 $(514.6) $599.6
Comprehensive income:
Net earnings -- -- -- 119.1 -- 119.1
Net loss on derivative
instruments (net of tax) -- -- -- -- (6.1) (6.1)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 32.1 32.1
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Comprehensive income -- -- -- 119.1 26.0 145.1
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Cash dividends ($.24 per share) -- -- -- (18.6) -- (18.6)
Purchase and retirement of
common stock (2,011,570) (1.0) (76.5) -- -- (77.5)
Common stock issued under
employee benefit plans 66,160 -- 2.3 -- -- 2.3
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Balance at June 29, 2003 77,659,376 $38.8 $475.9 $624.8 $(488.6) $650.9
====================================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
- 6 -
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions)
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Six Months Ended
June 29, June 30,
2003 2002
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Operating Activities
Net earnings $ 119.1 $ 99.1
Adjustments to reconcile net earnings to cash
flow from operating activities:
Non-cash charges and credits:
Depreciation and amortization 72.7 64.8
Other 3.2 1.6
Changes in selected working capital items:
Trade receivables (57.7) (95.3)
Inventories 13.0 28.5
Trade accounts payable (35.1) 61.9
Restructuring spending (23.5) (14.5)
Other assets and liabilities (91.1) 16.5
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Cash Flow From Operating Activities .6 162.6
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Investing Activities
Proceeds from disposal of assets 4.9 3.7
Capital expenditures (51.6) (48.9)
Other investing activities (1.2) -
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Cash Flow From Investing Activities (47.9) (45.2)
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Financing Activities
Net increase (decrease) in short-term borrowings 81.9 (4.1)
Payments on long-term debt (310.4) (30.5)
Purchase of common stock (77.5) -
Issuance of common stock 1.8 18.6
Cash dividends (18.6) (19.3)
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Cash Flow From Financing Activities (322.8) (35.3)
Effect of exchange rate changes on cash 9.6 3.3
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(Decrease) Increase In Cash And Cash Equivalents (360.5) 85.4
Cash and cash equivalents at beginning of period 517.1 244.5
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Cash And Cash Equivalents At End Of Period $ 156.6 $329.9
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
- 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Black & Decker Corporation and Subsidiaries
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Black &
Decker Corporation (collectively with its subsidiaries, the Corporation) have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation of the financial position and the
results of operations.
Operating results for the three- and six-month periods ended June 29, 2003,
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the consolidated financial
statements and notes included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002.
Certain amounts presented for the three and six months ended June 30, 2002,
have been reclassified to conform to the 2003 presentation.
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, requires that, as part of a full set of financial
statements, entities must present comprehensive income, which is the sum of net
income and other comprehensive income. Other comprehensive income represents
total non-stockholder changes in equity. For the six months ended June 29, 2003,
and June 30, 2002, the Corporation has presented comprehensive income in the
accompanying Consolidated Statement of Stockholders' Equity. Comprehensive
income for the three months ended June 29, 2003, and June 30, 2002, was $100.6
million and $80.3 million, respectively.
NOTE 2: INVENTORIES
The classification of inventories at the end of each period, in millions of
dollars, was as follows:
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June 29, 2003 December 31, 2002
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FIFO cost
Raw materials and work-in-process $186.9 $186.1
Finished products 568.6 553.9
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755.5 740.0
FIFO cost less than LIFO inventory value 12.6 8.9
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$768.1 $748.9
================================================================================
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.
NOTE 3: SHORT-TERM BORROWINGS
In April 2002, the Corporation replaced an expiring $400 million 364-day
unsecured revolving credit facility with a $250 million 364-day unsecured
revolving credit facility (the Credit Facility). The Credit Facility provided
for annual renewals upon request by the Corporation and approval by the lending
banks. In April 2003, the Corporation elected not to renew the Credit
- 8 -
Facility based upon its anticipated short-term financing needs. The terms of the
Corporation's $500 million commercial paper program and $1.0 billion unsecured
revolving credit facility are more fully disclosed in Note 5 of Notes to
Consolidated Financial Statements included in Item 8 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002.
At June 29, 2003, short-term borrowings include $81.9 million outstanding
under the Corporation's commercial paper program. The Corporation's average
borrowings outstanding under its unsecured revolving credit facilities and its
commercial paper program were $427.3 million and $499.6 million for the
six-month periods ended June 29, 2003 and June 30, 2002, respectively.
NOTE 4: LONG-TERM DEBT
The Corporation's long-term debt and portfolio of interest rate swap instruments
are more fully disclosed in Notes 6 and 7 of Notes to Consolidated Financial
Statements included in Item 8 of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002. On April 1, 2003, the Corporation repaid
$309.5 million of maturing 7.50% notes. Also on April 1, 2003, $125 million
notional amount of fixed-to-variable interest rate swaps expired.
During the quarter ended June 29, 2003, the Corporation terminated
fixed-to-variable interest rate swaps agreements in the notional amount of $75.0
million. As more fully described in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002, the gain recognized on the swap
termination will be amortized as an adjustment to the yield on the related debt
over the remaining period covered by the terminated swap. Deferred gains
associated with the early termination of interest rate swaps, which were
included in the carrying amount of long-term debt, were $32.0 million and $19.2
million at June 29, 2003 and December 31, 2002, respectively. At June 29, 2003,
the Corporation's portfolio of interest rate swap instruments consisted of
$588.0 million notional amount of fixed-to-variable rate swaps with a
weighted-average fixed rate receipt of 5.99%. The basis of the variable rate
paid is LIBOR.
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $381.6 million and $306.9 million were included in the Consolidated
Balance Sheet at June 29, 2003, and December 31, 2002, respectively, in
short-term borrowings, current maturities of long-term debt, and long-term debt.
NOTE 5: INTEREST EXPENSE (NET OF INTEREST INCOME)
Interest expense (net of interest income) for each period, in millions of
dollars, was as follows:
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Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- --------------------------------------------------------------------------------
Interest expense $13.8 $21.3 $32.3 $ 43.0
Interest (income) (6.1) (6.5) (12.5) (12.4)
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$ 7.7 $14.8 $19.8 $ 30.6
================================================================================
- 9 -
NOTE 6: BUSINESS SEGMENTS
The following table provides selected financial data for the Corporation's
business segments (in millions of dollars):
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Reportable Business Segments
----------------------------------------------
Power Hardware Fastening Currency Corporate,
Tools & & Home & Assembly Translation Adjustments,
Three Months Ended June 29, 2003 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 765.6 $192.1 $128.0 $1,085.7 $ 34.0 $ - $1,119.7
Segment profit (loss) (for
Consolidated, operating income) 85.1 18.1 18.4 121.6 4.3 (14.0) 111.9
Depreciation and amortization 19.8 7.9 3.9 31.6 .8 3.8 36.2
Capital expenditures 15.4 5.8 2.9 24.1 .8 .3 25.2
Three Months Ended June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 815.0 $196.6 $132.7 $1,144.3 $(19.0) $ - $1,125.3
Segment profit (loss) (for
Consolidated, operating income) 95.2 6.8 19.1 121.1 (1.6) (12.0) 107.5
Depreciation and amortization 18.5 8.2 3.6 30.3 (.4) .7 30.6
Capital expenditures 20.3 2.8 3.8 26.9 (.2) .1 26.8
Six Months Ended June 29, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $1,412.7 $364.7 $257.2 $2,034.6 $ 53.3 $ - $2,087.9
Segment profit (loss) (for
Consolidated, operating income) 142.8 33.1 36.8 212.7 6.5 (34.0) 185.2
Depreciation and amortization 39.6 16.0 7.6 63.2 1.3 8.2 72.7
Capital expenditures 30.3 13.5 6.4 50.2 .9 .5 51.6
Six Months Ended June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $1,467.0 $397.6 $258.6 $2,123.2 $(46.2) $ - $2,077.0
Segment profit (loss) (for
Consolidated, operating income) 134.3 22.4 35.6 192.3 (3.6) (19.0) 169.7
Depreciation and amortization 40.2 17.6 7.2 65.0 (1.2) 1.0 64.8
Capital expenditures 35.5 6.2 7.4 49.1 (.5) .3 48.9
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.
- 10 -
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 of
Notes to Consolidated Financial Statements included in Item 8 of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2002,
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
2003. 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, and
income tax expense. In addition, segment profit excludes restructuring and exit
costs. 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.
- 11 -
The reconciliation of segment profit to the Corporation's earnings before
income taxes for each period, in millions of dollars, is as follows:
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Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Segment profit for total reportable business segments $121.6 $121.1 $212.7 $192.3
Items excluded from segment profit:
Adjustment of budgeted foreign exchange rates
to actual rates 4.3 (1.6) 6.5 (3.6)
Depreciation of Corporate property (.2) (.7) (.5) (1.0)
Adjustment to businesses' postretirement benefit
expenses booked in consolidation 3.7 8.7 7.3 19.0
Other adjustments booked in consolidation directly
related to reportable business segments (1.2) 3.2 (11.2) (1.5)
Amounts allocated to businesses in arriving at segment
profit in excess of (less than) Corporate center operating
expenses, eliminations, and other amounts identified above (16.3) (23.2) (29.6) (35.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 111.9 107.5 185.2 169.7
Interest expense, net of interest income 7.7 14.8 19.8 30.6
Other expense .5 2.2 2.3 3.4
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $103.7 $ 90.5 $163.1 $135.7
====================================================================================================================================
NOTE 7: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period are as
follows:
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Three Months Ended Six Months Ended
(Amounts in Millions Except Per Share Data) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings $75.7 $66.1 $119.1 $99.1
====================================================================================================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 77.6 80.5 78.0 80.3
Employee stock options .3 .7 .2 .6
- ------------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions 77.9 81.2 78.2 80.9
====================================================================================================================================
Basic earnings per share $ .98 $ .82 $ 1.53 $1.23
====================================================================================================================================
Diluted earnings per share $ .97 $ .81 $ 1.52 $1.23
====================================================================================================================================
As of June 29, 2003, options to purchase approximately 7.2 million shares
of common stock, with a weighted-average exercise price of $47.03, were
outstanding, but were not included in the computation of diluted earnings per
share because the effect would be anti-dilutive. These options were
anti-dilutive because the related exercise price was greater than the average
market price of the common shares during the quarter.
- 12 -
NOTE 8: STOCK-BASED COMPENSATION
As more fully disclosed in Note 14 of Notes to Consolidated Financial Statements
included in Item 8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2002, the Corporation has elected to follow Accounting
Principles Board Opinion 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 expense, as measured under the fair value requirements of Statement
of Financial Accounting Standards (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. A
reconciliation of the Corporation's net earnings to pro forma net earnings, and
the related pro forma earnings per share amounts, for the three- and six-month
periods ended June 29, 2003, and June 30, 2002, is provided below.
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(Amounts in Millions Except Per Share Data) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $75.7 $66.1 $119.1 $99.1
Adjustments to net earnings for:
Stock-based compensation expense
included in net earnings, net of tax .7 - 1.2 -
Pro forma stock-based compensation
(expense), net of tax (5.5) (4.6) (11.2) (8.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $70.9 $61.5 $109.1 $90.2
====================================================================================================================================
====================================================================================================================================
Pro forma net earnings per common share - basic $ .91 $ .76 $ 1.40 $1.12
====================================================================================================================================
Pro forma net earnings per common share
- assuming dilution $ .91 $ .76 $ 1.40 $1.12
====================================================================================================================================
NOTE 9: RESTRUCTURING ACTIVITY
As more fully disclosed in Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2002, the Corporation recorded a pre-tax restructuring charge
of $50.7 million during 2002 and a $99.8 million charge during 2001. A summary
of restructuring activity during the six-month period ended June 29, 2003, is as
follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------------------------------------
Reserves at Reserves Utilization of Reserves Foreign Reserves at
December 31, Established Reversal of ----------------------- Currency June 29,
2002 in 2003 Reserves Cash Non-Cash Translation 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Severance benefits $45.1 $ .2 $(3.2) $(12.1) $ - $1.0 $31.0
Write-down to net
realizable value of
certain equipment - 3.8 (.4) - (3.4) - -
Other charges 14.8 .4 (.8) (11.4) .7 - 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total $59.9 $4.4 $(4.4) $(23.5) $(2.7) $1.0 $34.7
====================================================================================================================================
During the three- and six-month periods ended June 29, 2003, the
Corporation recognized $4.4 million of additional pre-tax restructuring and exit
costs, of which $3.0 million relates to actions taken in its Power Tools and
Accessories segment and $1.4 million relates to actions taken
- 13 -
in its Hardware and Home Improvement segment. The restructuring actions taken in
2003 principally reflect (1) the write-down of certain equipment to fair value
less, if applicable, cost to sell; (2) lease termination costs; and (3)
severance benefits.
The $4.4 million charge recognized during the three- and six-month periods
ended June 29, 2003, was offset, however, by the reversal of $4.4 million of
severance accruals and other exit costs established as part of previously
provided restructuring charges that will no longer be required and by proceeds
on disposals of assets, written down as part of the restructuring plan, that
exceeded previous estimates.
NOTE 10: LITIGATION AND CONTINGENT LIABILITIES
As more fully disclosed in Note 18 of Notes to Consolidated Financial Statements
included in Item 8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2002, 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, allegations of patent and
trademark infringement, and litigation and administrative proceedings relating
to employment matters and commercial disputes. In addition, the Corporation is
party to litigation and administrative proceedings with respect to claims
involving the discharge of hazardous substances into the environment.
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.
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 June 29, 2003, 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.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $75.7 million, or $.97 per share on a
diluted basis, for the three-month period ended June 29, 2003, compared to net
earnings of $66.1 million, or $.81 per share on a diluted basis, for the
three-month period ended June 30, 2002.
For the six-month period ended June 29, 2003, the Corporation reported net
earnings of $119.1 million, or $1.52 per share on a diluted basis, compared to
net earnings of $99.1 million, or $1.23 per share on a diluted basis, for the
six-month period ended June 30, 2002.
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.
RESULTS OF OPERATIONS
SALES
The following chart sets forth an analysis of the consolidated changes in sales
for the three- and six-month periods ended June 29, 2003 and June 30, 2002:
ANALYSIS OF CHANGES IN SALES
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(Dollars in Millions) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $1,119.7 $1,125.3 $2,087.9 $2,077.0
- ------------------------------------------------------------------------------------------------------------------------------------
Unit volume (3)% 8 % (3)% 5 %
Price (2)% (1)% (1)% (1)%
Currency 5 % - % 5 % (1)%
- ------------------------------------------------------------------------------------------------------------------------------------
Change in total sales - % 7 % 1 % 3 %
====================================================================================================================================
Total consolidated sales for the three months ended June 29, 2003,
approximated sales in the corresponding 2002 period. Total consolidated sales
for the six months ended June 29, 2003, increased by 1% over the 2002 level.
Decreases in unit volume resulted in a 3% decline in sales during both the
three- and six-month periods ended June 29, 2003, from the corresponding periods
in 2002. The decline in unit volume during the three-month period ended June 29,
2003, from the corresponding period in 2002, was principally attributable to the
power tools and accessories businesses in North America and Europe and to the
plumbing products business. The decline in unit volume in the six-month period
ended June 29, 2003, from the corresponding period in 2002, was principally
attributable to lower sales in the North American professional power tools and
accessories, plumbing products, and European power tools and accessories
businesses. The Corporation anticipates that the impact of economic conditions
in the United States and Europe will continue to negatively impact sales over
the near term. Pricing actions had a 2% and 1% negative effect on sales for the
three- and six-month periods ended June 29, 2003, respectively, as compared to
the corresponding periods in 2002. The effects of a weaker dollar compared to
other foreign currencies, particularly the euro and pound sterling, caused a 5%
increase in the Corporation's consolidated sales during both the three- and
six-month periods ended June 29, 2003, as compared
- 15 -
to the corresponding periods in 2002. These positive effects were partially
offset by devaluations of many Latin American currencies.
EARNINGS
Operating income for the three months ended June 29, 2003, was $111.9 million,
or 10.0% of sales, compared to operating income of $107.5 million, or 9.5% of
sales, for the corresponding period in 2002. Operating income for the six months
ended June 29, 2003, was $185.2 million, or 8.9% of sales, compared to operating
income of $169.7 million, or 8.2% of sales, for the corresponding period in
2002.
Gross margin as a percentage of sales was 35.7% and 33.6% for the
three-month periods ended June 29, 2003, and June 30, 2002, respectively, and
was 35.6% and 33.0% for the six-month periods ended June 29, 2003, and June 30,
2002, respectively. For both the three- and six-month periods ended June 29,
2003, gross margin as a percentage of sales increased in all of the
Corporation's business segments. Productivity improvements, the results of
restructuring initiatives, lower warranty and product recall costs, and, in
Europe, foreign currency effects favorably impacted gross margin as a percentage
of sales for both the three- and six-month periods ended June 29, 2003. For both
the three- and six-month periods ended June 29, 2003, these positive factors
were partially offset by the impact of price reductions, lower production
volumes, higher pension and postretirement benefit expenses, and higher
restructuring-related expenses. While the Corporation anticipates that the
positive effects of productivity initiatives and restructuring actions will
continue to favorably impact the year-over-year comparisons of gross margins
during the remainder of 2003, it expects that these improvements will be offset
by lower production volumes.
Selling, general, and administrative expenses as a percentage of sales were
25.7% and 26.7% for the three- and six-month periods ended June 29, 2003,
respectively, compared to 24.1% and 24.8% for the three- and six-month periods
in the previous year, respectively. Selling, general, and administrative
expenses increased by $16.8 million and $42.3 million for the three and six
months ended June 29, 2003, respectively, as compared to the corresponding
periods in 2002. The effects of foreign currency translation accounted for $14.5
million and $26.6 million of the increase in selling, general, and
administrative expenses for the three- and six-month periods ended June 29,
2003, respectively. The remainder of the increase was principally attributable
to higher marketing and promotional expenses, partially offset by reductions in
other selling, general, and administrative expenses, including expenses
associated with environmental remediation matters.
Net interest expense (interest expense less interest income) for the three
months ended June 29, 2003, was $7.7 million compared to net interest expense of
$14.8 million for the three months ended June 30, 2002. Net interest expense was
$19.8 million for the six months ended June 29, 2003, compared to net interest
expense of $30.6 million for the corresponding period in 2002. The decrease in
net interest expense for the three- and six-month periods ended June 29, 2003,
as compared to the corresponding periods in 2002, was primarily the result of
both lower borrowing levels and interest rates.
- 16 -
Other expense was $.5 million and $2.3 million for the three and six months
ended June 29, 2003, respectively, compared to $2.2 million and $3.4 million for
the corresponding periods in 2002.
The Corporation's effective tax rate was 27% for the three- and six-month
periods ended June 29, 2003, and June 30, 2002.
The Corporation reported net earnings of $75.7 million, or $.97 per share
on a diluted basis, for the three-month period ended June 29, 2003, compared to
net earnings of $66.1 million, or $.81 per share on a diluted basis, for the
three-month period ended June 30, 2002. The Corporation reported net earnings of
$119.1 million, or $1.52 per share on a diluted basis, for the six-month period
ended June 29, 2003, compared to $99.1 million, or $1.23 per share on a diluted
basis, for the corresponding period in 2002. In addition to the impact of the
operational matters previously described, earnings per share for the 2003
periods also benefited from lower shares outstanding as a result of common
shares repurchased by the Corporation.
BUSINESS SEGMENTS
As more fully described in Note 6 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 6 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $765.6 $815.0 $1,412.7 $1,467.0
Segment profit 85.1 95.2 142.8 134.3
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the second quarter of 2003 decreased 6% from the 2002 level.
Sales in North America during the second quarter of 2003 declined from the
prior year level as sales of both the professional and consumer power tools and
accessories businesses declined at a high single-digit rate. Sales of
professional power tools decreased during the second quarter of 2003 from the
prior year level as certain large retailers took actions to reduce inventories
and the economy, particularly the market for commercial construction, continued
to exhibit weakness. During the second quarter of 2003, sales of consumer power
tools and accessories decreased from the corresponding period in 2002 due to
weak economic conditions and due to price reductions taken to reduce certain
inventories.
Sales in Europe decreased at a mid-single-digit rate in the second quarter
of 2003 from the corresponding period in 2002, primarily due to declines in
sales of consumer power tools and outdoor products. Weak economic conditions
depressed sales throughout most of Europe, with sales declines in Germany and
France accounting for much of the European sales decrease.
Sales in other geographic areas increased at a high single-digit rate for
the second quarter of 2003 over the prior year level, as sales of professional
power tools and accessories and sales of
- 17 -
consumer power tools and accessories increased at a double-digit rate and
mid-single-digit rate, respectively, over the prior year level.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 11.1% for the three-month period ended June 29, 2003, as compared to
11.7% for the corresponding 2002 period. The decrease in segment profit as a
percentage of sales during 2003 resulted from lower sales volumes and higher
selling, general, and administrative expenses. Gross margins as a percentage of
sales for the three months ended June 29, 2003, increased over the prior year
level due to productivity improvements, the results of restructuring
initiatives, lower warranty and product recall costs, and, in Europe, currency
favorability. Those positive factors impacting gross margin as a percentage of
sales for the three months ended June 29, 2003, were partially offset by price
reductions as well as lower production levels. Selling, general, and
administrative expenses as a percentage of sales for the three months ended June
29, 2003, increased over the prior year level due to higher marketing and
promotional expenses and the effects of lower sales volumes in 2003.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the six months ended June 29, 2003, decreased 4% from the 2002 level.
During the first six months of 2003, sales of power tools and accessories
in North America decreased at a mid-single-digit rate from the same period in
2002 as a high single-digit rate of decline in sales of professional power tools
and accessories was partially offset by a low single-digit rate of growth in
sales of consumer power tools and accessories. Sales of professional power tools
and accessories during the first six months of 2003 were affected by the same
factors noted for the second quarter of 2003. Sales of consumer power tools and
accessories for the first six months of 2003 benefited from strong sales of new
products as well as from expanded product placement at a significant customer.
Sales in Europe during the first six months of 2003 decreased at a
mid-single-digit rate from the 2002 level due to lower sales of consumer power
tools and outdoor products, particularly in Germany and France.
Sales in other geographic areas increased at a high single-digit rate in
the first six months of 2003 over the 2002 level as sales of both professional
and consumer power tools and accessories increased at a high single-digit rate
compared to the corresponding period in the previous year.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 10.1% for the first six months of 2003 as compared to 9.2% for the
corresponding 2002 period. The increase in segment profit as a percentage of
sales during 2003 was driven by higher gross margins as a percentage of sales,
principally in the European and North American power tools and accessories
businesses. The increased gross margins were partially offset by an increase in
selling, general, and administrative expenses as a percentage of sales. The
reasons for the gross margin improvements and higher selling, general, and
administrative expenses were attributable to the same factors as identified for
the second quarter of 2003.
- 18 -
Hardware and Home Improvement
Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 6 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $192.1 $196.6 $364.7 $397.6
Segment profit 18.1 6.8 33.1 22.4
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment decreased 2% for the three months ended June 29, 2003, from the
corresponding period in 2002. Sales of plumbing products declined at a
double-digit rate, reflecting a loss of shelf space at The Home Depot, which the
Corporation announced in the latter half of 2002. The impact of this shelf space
loss was mitigated by the expansion of plumbing product listings at Lowe's
described below. Sales of security hardware increased at a mid-single-digit rate
in the second quarter of 2003 over the corresponding period in 2002, due, in
part, to a shift in the timing of promotional programs from the first quarter in
2002 to the second quarter in 2003.
Sales to unaffiliated customers in the Hardware and Home Improvement
segment decreased 8% for the six months ended June 29, 2003, from the 2002
level. The decline was due in large part to the loss of shelf space at The Home
Depot by the plumbing products business mentioned above.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 9.4% and 9.1% for the three and six months ended June
29, 2003, respectively, as compared to 3.5% and 5.6% for the three and six
months ended June 30, 2002, respectively. Segment profit as a percentage of
sales for the three- and six-month periods ended June 29, 2003, benefited from
significant improvements in gross margin as a percentage of sales. The increase
in gross margin as a percentage of sales was primarily driven by productivity
improvements and restructuring benefits.
Although the loss of shelf space at The Home Depot in 2002 had a
significant effect on the Corporation's plumbing products business during the
first six months of 2003, the plumbing products business has announced a
significant expansion of its product listings at Lowe's. This expansion, which
began in the second quarter of 2003, is expected to increase the average stock
keeping units (SKU's) of the Corporation's plumbing products at Lowe's stores by
approximately 75% and to significantly mitigate the effect of the loss of shelf
space at The Home Depot.
Fastening and Assembly Systems
Segment sales and profit for the Fastening and Assembly Systems segment,
determined on the basis described in Note 6 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $128.0 $132.7 $257.2 $258.6
Segment profit 18.4 19.1 36.8 35.6
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment decreased by 4% in the second quarter of 2003 and 1% for the first six
months in 2003 from the corresponding 2002 periods, reflecting losses in both
the automotive and industrial sectors in North America that
- 19 -
were partially offset by increases in sales in Asia.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment of 14.4% in the second quarter of 2003 approximated the prior
year level and increased from 13.8% in the first half of 2002 to 14.3% for the
corresponding period in 2003. Productivity improvements during the three- and
six-month periods ended June 29, 2003, enabled the segment to maintain its
operating margins despite decreases in sales during these periods.
Other Segment-Related Matters
As more fully described in Note 6 of Notes to Consolidated Financial Statements,
in determining segment profit, expenses relating to pension and other
postretirement benefits are based solely upon estimated service costs. Also, as
more fully described in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 2002 in Item 7 under the caption "Financial Condition",
the Corporation anticipates that the expense recognized relating to its pension
and other postretirement benefits plans in 2003 will increase by approximately
$30 million from the 2002 levels. The adjustment to businesses' postretirement
benefit income (expense) booked in consolidation as identified in the final
table included in Note 6 of Notes to Consolidated Financial Statements was $3.7
million and $8.7 million for the three-month periods ended June 29, 2003 and
June 30, 2002, respectively. The adjustment to businesses' postretirement
benefit income (expense) booked in consolidation as identified in the final
table included in Note 6 of Notes to Consolidated Financial Statements was $7.3
million and $19.0 million for the six-month periods ended June 29, 2003 and June
30, 2002, respectively. These decreases reflect the impact excluded from the
Corporation's reportable business segments of that increase in pension and other
postretirement benefits expense.
Expenses (income) directly related to reportable business segments booked
in consolidation and, thus, excluded from segment profit for the reportable
business segments were $1.2 million and $11.2 million for the three- and
six-month periods ended June 29, 2003, respectively, and $(3.2) million and $1.5
million for the three- and six-month periods ended June 30, 2002, respectively.
The increase in these expenses for the three- and six-month periods ended June
29, 2003, as compared to the corresponding 2002 period, principally relates to
restructuring-related expenses associated with the Power Tools and Accessories
segment.
Amounts allocated to businesses in arriving at segment profit in excess of
(less than) Corporate center operating expenses, eliminations, and other amounts
identified in the final table included in Note 6 of Notes to Consolidated
financial statements were $(16.3) million and $(29.6) million for the three- and
six-month periods ended June 29, 2003, respectively, and $(23.2) million and
$(35.5) million for the three- and six-month periods ended June 30, 2002,
respectively. The decrease in these unallocated Corporate center operating
expenses for the three and six months ended June 29, 2003, as compared to the
prior year levels, was primarily due to lower reserves for certain environmental
remediation matters established in the 2003 periods than those established in
the 2002 periods and to lower medical-related expenses in the 2003 periods,
reflecting the results of changes in plan design as well as higher allocations
to the Corporation's business segments.
RESTRUCTURING ACTIVITY
As more fully discussed in Note 9 of Notes to Consolidated Financial Statements
and in the Corporation's Annual Report on Form 10-K for the year ended December
31, 2002 in both Item 7 under the caption "Restructuring Actions", and Note 17
of Notes to Consolidated Financial Statements included in Item 8, during the
fourth quarter of 2001, the Corporation formulated a restructuring plan designed
to reduce its manufacturing footprint, variable production costs, and
- 20 -
selling, general, and administrative expenses. During 2001 and 2002, the
Corporation has recognized pre-tax restructuring charges under this plan
totaling $150.5 million. The Corporation believes that additional pre-tax
restructuring charges of up to $20 million will be recognized over the remaining
life of its restructuring plan, which as currently envisioned, will be
implemented in 2003 and 2004.
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.
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.
INTEREST RATE SENSITIVITY
The following table provides information as of June 29, 2003, about the
Corporation's short-term borrowings, long-term debt, and interest rate hedge
portfolio. This table should be read in conjunction with the information
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations under the heading "Interest Rate Sensitivity" included in
Item 7 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2002.
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ending Dec. 31, Fair Value
6 Mos. Ending ---------------------------------- (Assets)/
(U.S. Dollars in Millions) Dec. 31, 2003 2004 2005 2006 2007 Thereafter Total Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings
Variable rate (U.S. dollars) $81.9 $ -- $ -- $ -- $ -- $ -- $ 81.9 $ 81.9
Average interest rate 1.35% 1.35%
Variable rate (other currencies) $ 5.1 $ -- $ -- $ -- $ -- $ -- $ 5.1 $ 5.1
Average interest rate 9.89% 9.89%
Long-term debt
Fixed rate (U.S. dollars) $ .2 $ .4 $ .4 $154.8 $150.0 $550.0 $855.8 $1,006.3
Average interest rate 7.00% 7.00% 7.00% 7.00% 6.55% 7.11% 6.99%
Other long-term liabilities
Fixed rate (U.S. dollars) $ -- $ -- $188.0 $ -- $ -- $ -- $188.0 $ 208.2
Average interest rate 5.69% 5.69%
INTEREST RATE DERIVATIVES
Fixed to Variable Rate Interest
Rate Swaps (U.S. dollars) $ -- $ -- $188.0 $125.0 $ 75.0 $200.0 $588.0 $ (82.7)
Average pay rate (a)
Average receive rate 6.49% 6.03% 5.93% 5.52% 5.99%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The average pay rate is based upon 6-month forward LIBOR, except for $275.0
million in notional principal amount which matures in 2007 and thereafter
and is based upon 3-month forward LIBOR.
- 21 -
FINANCIAL CONDITION
Operating activities provided cash of $.6 million for the six months ended June
29, 2003, compared to $162.6 million of cash provided in the corresponding
period in 2002. The decrease in cash provided by operating activities during the
six months ended June 29, 2003, was primarily a result of lower accounts
payable, higher cash taxes, higher value added tax payments, and higher cash
payments associated with foreign currency hedging activities, as well as the
payments of higher accrued liabilities that existed at year-end 2002, all as
compared to the corresponding 2002 period. These factors were partially offset
by lower trade accounts receivable, higher earnings, and cash proceeds
associated with the termination of certain interest rate swap agreements.
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 at
June 29, 2003, increased slightly from the number of days sales outstanding at
June 30, 2002. Average inventory turns at June 29, 2003, decreased in comparison
to the comparable period in 2002 as a result of safety stock related to the
Corporation's restructuring program. The Corporation reduced the level of safety
stock during the second quarter of 2003 from the first quarter's level and
expects that it will be eliminated by year end.
Investing activities for the six months ended June 29, 2003, used cash of
$47.9 million as compared to $45.2 million of cash used for the corresponding
period in 2002. The increase in cash usage was primarily due to higher capital
expenditures during the first half of 2003 as compared to the corresponding
period in 2002. The Corporation anticipates that its capital spending in 2003
will approximate $125 million.
The Corporation previously announced that it has signed an agreement to
sell its European Security Hardware business for $108 million. The European
Security Hardware business is a component of the Corporation's Hardware and Home
Improvement segment. The sale is subject to regulatory approval and is not
expected to have a material effect on the Corporation's financial results for
2003. The Corporation has also announced that it has signed a letter of intent
to purchase the Baldwin Hardware and Weiser Lock businesses from Masco
Corporation. This transaction is subject to final negotiation of a definitive
purchase agreement, necessary regulatory clearances, and approval by the
parties' boards of directors.
Financing activities used cash of $322.8 million for the six-month period
ended June 29, 2003, as compared to cash used of $35.3 million during the first
six months of 2002. The increase in cash used was primarily the result of higher
repayment on long-term debt, including $309.5 million of debt that was repaid on
April 1, 2003, and cash used for stock repurchases during the 2003 period,
partially offset by increased proceeds from borrowing on short-term debt. During
the six months ended June 29, 2003, the Corporation repurchased 2,011,570 shares
of its common stock at an aggregate cost of $77.5 million. During the
corresponding period in 2002, the Corporation did not repurchase any shares of
its common stock. At June 29, 2003, the Corporation had remaining authorization
from its Board of Directors to repurchase 2,911,595 shares of its common stock.
As discussed further in Note 3 of Notes to Consolidated Financial
Statements, in April 2002, the Corporation replaced an expiring $400 million
364-day unsecured revolving credit facility with a $250 million 364-day
unsecured revolving credit facility (the Credit Facility). In April 2003, the
Corporation elected not to renew the Credit Facility based upon its anticipated
short-term financing needs. Also, as discussed further in Note 4 of Notes to
Consolidated Financial Statements, on April 1, 2003, the Corporation repaid
$309.5 million of maturing 7.50% notes.
- 22 -
The variable rate debt to total debt ratio, after taking interest rate
hedges into account, was 52% at June 29, 2003, and December 31, 2002. Average
debt maturity was 8.4 years at June 29, 2003, compared to 7.2 years at December
31, 2002.
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 those factors identified in Item 1(g) of Part I of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2002.
- 23 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained in Note 4 of Notes to
Consolidated Financial Statements, in Item 2 of Part I of this report under the
caption "Interest Rate Sensitivity", and under the caption "Hedging Activities",
included in Item 7, and in Notes 1 and 7 of Notes to Consolidated Financial
Statements included in Item 8 of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002, and is incorporated by reference herein.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, the Corporation carried out an evaluation of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures as of June 29, 2003, pursuant to Exchange Act Rule
13a-15. Based upon 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 changes in the Corporation's internal controls over
financial reporting during the quarterly period ended June 29, 2003, that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
- 24 -
THE BLACK & DECKER CORPORATION
PART II - OTHER INFORMATION
ITEM 1. 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.
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 CERCLA. 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 over
the Corporation's involvement in some of the sites, uncertainty over the
remedial measures, 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 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 June 29, 2003, 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
31.1 Chief Executive Officer's Certification Pursuant to
Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification Pursuant to
Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
On April 2, 2003, the Corporation furnished a Current Report on Form 8-K with
the Commission. That Current Report on Form 8-K, furnished pursuant to Item 9 of
that Form, stated that, on April 2, 2003, the Corporation announced that it
affirmed comfort with consensus earnings estimate for the first quarter 2003.
On April 9, 2003, the Corporation filed a Current Report on Form 8-K with the
Commission. That Current Report on Form 8-K, filed pursuant to Item 5 of that
Form, stated that the Corporation had established budgeted rates of exchange for
2003 and, accordingly, had updated segment data for prior periods to reflect the
translation of segment assets, elements of segment profit, and certain other
segment data at the budgeted rates of exchange for 2003.
On April 24, 2003, the Corporation furnished a Current Report on Form 8-K with
the Commission. That Current Report on Form 8-K, furnished pursuant to Item 9
and Item 12 of that Form, stated that, on April 24, 2003, the Corporation had
reported its earnings for the three months ended March 30, 2003.
The Corporation did not file nor furnish any other reports on Form 8-K during
the three-month period ended June 29, 2003.
All other items were not applicable.
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THE BLACK & DECKER CORPORATION
S I G N A T U R E S
Pursuant to the requirements 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
By /s/ MICHAEL D. MANGAN
-----------------------------------------------------
Michael D. Mangan
Senior Vice President and Chief Financial Officer
Principal Accounting Officer
By /s/ CHRISTINA M. McMULLEN
-----------------------------------------------------
Christina M. McMullen
Vice President and Controller
Date: August 7, 2003