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 September 28, 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
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The number of shares of Common Stock outstanding as of October 24, 2003:
77,737,489
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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
September 28, 2003
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months and Nine Months Ended September 28, 2003
and September 29, 2002 3
Consolidated Balance Sheet
September 28, 2003 (Unaudited) and December 31, 2002 4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 28, 2003 and September 29, 2002 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 28, 2003 and September 29, 2002 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
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Sales $1,143.8 $1,085.2 $3,231.7 $3,162.2
Cost of goods sold 739.3 704.5 2,084.0 2,096.1
Selling, general, and
administrative expenses 273.6 259.0 831.6 774.7
Restructuring and exit costs 21.0 38.4 21.0 38.4
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Operating Income 109.9 83.3 295.1 253.0
Interest expense (net of
interest income) 7.6 14.2 27.4 44.8
Other expense .4 1.7 2.7 5.1
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Earnings Before Income Taxes 101.9 67.4 265.0 203.1
Income taxes 27.5 12.5 71.5 49.1
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Net Earnings $ 74.4 $ 54.9 $ 193.5 $ 154.0
====================================================================================================================================
Net Earnings Per Common
Share - Basic $ .96 $ .68 $ 2.48 $ 1.92
====================================================================================================================================
Shares Used in Computing Basic
Earnings Per Share (in Millions) 77.7 80.5 77.9 80.4
====================================================================================================================================
Net Earnings Per Common
Share - Assuming Dilution $ .95 $ .68 $ 2.48 $ 1.90
====================================================================================================================================
Shares Used in Computing Diluted
Earnings Per Share (in Millions) 78.0 80.9 78.1 80.9
====================================================================================================================================
Dividends Per Common Share $ .12 $ .12 $ .36 $ .36
====================================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED BALANCE SHEET
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amount)
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September 28,
2003 December 31,
(Unaudited) 2002
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Assets
Cash and cash equivalents $ 201.9 $ 517.1
Trade receivables 856.0 729.0
Inventories 764.9 748.9
Other current assets 220.0 198.9
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Total Current Assets 2,042.8 2,193.9
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Property, Plant, and Equipment 620.1 655.9
Goodwill 736.8 729.1
Other Assets 550.0 551.6
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$3,949.7 $4,130.5
================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 10.1 $ 4.6
Current maturities of long-term debt .4 312.0
Trade accounts payable 417.8 343.2
Other accrued liabilities 762.3 793.6
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Total Current Liabilities 1,190.6 1,453.4
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Long-Term Debt 922.4 927.6
Deferred Income Taxes 212.3 211.3
Postretirement Benefits 417.2 409.0
Other Long-Term Liabilities 519.9 529.6
Stockholders' Equity
Common stock, par value $.50 per share 38.9 39.8
Capital in excess of par value 478.3 550.1
Retained earnings 689.8 524.3
Accumulated other comprehensive income (loss) (519.7) (514.6)
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Total Stockholders' Equity 687.3 599.6
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$3,949.7 $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) $751.0
Comprehensive income:
Net earnings -- -- -- 154.0 -- 154.0
Net loss on derivative
instruments (net of tax) -- -- -- -- (7.9) (7.9)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 26.4 26.4
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Comprehensive income -- -- -- 154.0 18.5 172.5
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Cash dividends ($.36 per share) -- -- -- (29.0) -- (29.0)
Common stock issued under
employee benefit plans 714,327 .4 23.7 -- -- 24.1
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Balance at September 29, 2002 80,543,968 $40.3 $590.3 $458.2 $(170.2) $918.6
====================================================================================================================================
Balance at December 31, 2002 79,604,786 $39.8 $550.1 $524.3 $(514.6) $599.6
Comprehensive income:
Net earnings -- -- -- 193.5 -- 193.5
Net loss on derivative
instruments (net of tax) -- -- -- -- (2.0) (2.0)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (3.1) (3.1)
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Comprehensive income -- -- -- 193.5 (5.1) 188.4
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Cash dividends ($.36 per share) -- -- -- (28.0) -- (28.0)
Purchase and retirement of
common stock (2,011,570) (1.0) (76.5) -- -- (77.5)
Common stock issued under
employee benefit plans 127,798 .1 4.7 -- -- 4.8
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Balance at September 28, 2003 77,721,014 $38.9 $478.3 $689.8 $(519.7) $687.3
====================================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions)
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Nine Months Ended
September 28, September 29,
2003 2002
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Operating Activities
Net earnings $ 193.5 $154.0
Adjustments to reconcile net earnings to cash
flow from operating activities:
Non-cash charges and credits:
Depreciation and amortization 105.0 95.9
Restructuring and exit costs 21.0 38.4
Other (4.8) (4.2)
Changes in selected working capital items:
Trade receivables (113.2) (92.5)
Inventories (3.4) (58.0)
Trade accounts payable 71.7 98.5
Restructuring spending (33.2) (26.7)
Other assets and liabilities (76.5) 28.6
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Cash Flow From Operating Activities 160.1 234.0
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Investing Activities
Proceeds from disposal of assets 9.7 3.9
Capital expenditures (79.5) (70.2)
Other investing activities (1.0) 1.4
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Cash Flow From Investing Activities (70.8) (64.9)
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Financing Activities
Net increase (decrease) in short-term borrowings 5.3 (4.2)
Payments on long-term debt (310.5) (33.8)
Purchase of common stock (77.5) --
Issuance of common stock 4.0 18.8
Cash dividends (28.0) (29.0)
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Cash Flow From Financing Activities (406.7) (48.2)
Effect of exchange rate changes on cash 2.2 8.7
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(Decrease) Increase In Cash And Cash Equivalents (315.2) 129.6
Cash and cash equivalents at beginning of period 517.1 244.5
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Cash And Cash Equivalents At End Of Period $ 201.9 $374.1
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
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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 nine-month periods ended September 28,
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 nine months ended September 29,
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 nine months ended September 28,
2003 and September 29, 2002, the Corporation has presented comprehensive income
in the accompanying Consolidated Statement of Stockholders' Equity.
Comprehensive income for the three months ended September 28, 2003 and September
29, 2002, was $43.3 million and $78.9 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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September 28, December 31,
2003 2002
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FIFO cost
Raw materials and work-in-process $169.7 $186.1
Finished products 581.8 553.9
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751.5 740.0
Adjustment to arrive at LIFO inventory value 13.4 8.9
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$764.9 $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
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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.
The Corporation's average borrowings outstanding under its unsecured
revolving credit facilities and its commercial paper program were $401.6 million
and $480.2 million for the nine-month periods ended September 28, 2003 and
September 29, 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 nine-month period ended September 28, 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 $31.1 million and $19.2
million at September 28, 2003 and December 31, 2002, respectively. At September
28, 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 $303.7 million and $306.9 million were included in the Consolidated
Balance Sheet at September 28, 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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
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Interest expense $13.4 $20.8 $ 45.7 $ 63.8
Interest (income) (5.8) (6.6) (18.3) (19.0)
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$ 7.6 $14.2 $ 27.4 $ 44.8
================================================================================
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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 September 28, 2003 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
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Sales to unaffiliated customers $ 788.2 $198.8 $122.4 $1,109.4 $ 34.4 $ - $1,143.8
Segment profit (loss) (for
Consolidated, operating income
before restructuring and exit costs) 95.3 26.7 16.2 138.2 2.4 (9.7) 130.9
Depreciation and amortization 20.8 6.1 3.8 30.7 .8 .8 32.3
Capital expenditures 22.4 1.3 3.0 26.7 1.0 .2 27.9
Three Months Ended September 29, 2002
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Sales to unaffiliated customers $ 778.0 $179.7 $125.9 $1,083.6 $ 1.6 $ - $1,085.2
Segment profit (loss) (for
Consolidated, operating income
before restructuring and exit costs) 106.2 10.5 19.2 135.9 .1 (14.3) 121.7
Depreciation and amortization 19.9 7.4 3.6 30.9 .1 .1 31.1
Capital expenditures 16.8 2.4 1.6 20.8 .1 .4 21.3
Nine Months Ended September 28, 2003
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Sales to unaffiliated customers $2,200.9 $563.5 $379.6 $3,144.0 $ 87.7 $ - $3,231.7
Segment profit (loss) (for
Consolidated, operating income
before restructuring and exit costs) 238.1 59.8 53.0 350.9 8.9 (43.7) 316.1
Depreciation and amortization 60.4 22.1 11.4 93.9 2.1 9.0 105.0
Capital expenditures 52.7 14.8 9.4 76.9 1.9 .7 79.5
Nine Months Ended September 29, 2002
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Sales to unaffiliated customers $2,245.0 $577.3 $384.5 $3,206.8 $(44.6) $ - $3,162.2
Segment profit (loss) (for
Consolidated, operating income
before restructuring and exit costs) 240.5 32.9 54.8 328.2 (3.5) (33.3) 291.4
Depreciation and amortization 60.1 25.0 10.8 95.9 (1.1) 1.1 95.9
Capital expenditures 52.3 8.6 9.0 69.9 (.4) .7 70.2
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.
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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.
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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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
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Segment profit for total reportable business segments $138.2 $135.9 $350.9 $328.2
Items excluded from segment profit:
Adjustment of budgeted foreign exchange rates
to actual rates 2.4 .1 8.9 (3.5)
Depreciation of Corporate property (.3) (.1) (.8) (1.1)
Adjustment to businesses' postretirement benefit
expenses booked in consolidation 3.6 9.3 10.9 28.3
Other adjustments booked in consolidation directly
related to reportable business segments 1.0 (2.1) (10.2) (3.6)
Amounts allocated to businesses in arriving at segment profit
in excess of (less than) Corporate center operating expenses,
eliminations, and other amounts identified above (14.0) (21.4) (43.6) (56.9)
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Operating income before restructuring and exit costs 130.9 121.7 316.1 291.4
Restructuring and exit costs 21.0 38.4 21.0 38.4
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Operating income 109.9 83.3 295.1 253.0
Interest expense, net of interest income 7.6 14.2 27.4 44.8
Other expense .4 1.7 2.7 5.1
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $101.9 $ 67.4 $265.0 $203.1
====================================================================================================================================
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 Nine Months Ended
September 28, September 29, September 28, September 29,
(Amounts in Millions Except Per Share Data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings $74.4 $54.9 $193.5 $154.0
====================================================================================================================================
Denominator:
Denominator for basic earnings per share
- weighted-average shares 77.7 80.5 77.9 80.4
Employee stock options .3 .4 .2 .5
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Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions 78.0 80.9 78.1 80.9
====================================================================================================================================
Basic earnings per share $ .96 $ .68 $ 2.48 $ 1.92
====================================================================================================================================
Diluted earnings per share $ .95 $ .68 $ 2.48 $ 1.90
====================================================================================================================================
As of September 28, 2003, options to purchase approximately 6.9 million
shares of common stock, with a weighted-average exercise price of $47.23, 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.
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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 nine-month
periods ended September 28, 2003 and September 29, 2002, is provided below.
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Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
(Amounts in Millions Except Per Share Data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $74.4 $54.9 $193.5 $154.0
Adjustments to net earnings for:
Stock-based compensation expense
included in net earnings, net of tax .4 - 1.6 -
Pro forma stock-based compensation
(expense), net of tax (4.3) (5.0) (15.5) (13.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $70.5 $49.9 $179.6 $140.1
====================================================================================================================================
====================================================================================================================================
Pro forma net earnings per common share - basic $ .91 $ .62 $ 2.31 $ 1.74
====================================================================================================================================
Pro forma net earnings per common share
- assuming dilution $ .91 $ .62 $ 2.31 $ 1.74
====================================================================================================================================
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. During the
nine months ended September 28, 2003, the Corporation recorded a $21.0 million
pre-tax restructuring charge. That $21.0 million charge was net of $11.8 million
of reversals of previously provided restructuring reserves that were no longer
required. A summary of restructuring activity during the nine-month period ended
September 28, 2003, is as follows (in millions of dollars):
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Reserves at Reserves Utilization of Reserves Foreign Reserves at
December 31, Established Reversal of ----------------------- Currency September 28,
2002 in 2003 Reserves Cash Non-Cash Translation 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Severance benefits $45.1 $23.0 $ (7.0) $(20.7) $ - $.3 $40.7
Write-down to net
realizable value of
certain long-lived assets - 9.3 (3.4) - (5.9) - -
Other charges 14.8 .5 (1.4) (12.5) 1.3 - 2.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total $59.9 $32.8 $(11.8) $(33.2) $(4.6) $.3 $43.4
====================================================================================================================================
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During the second quarter of 2003, the Corporation recognized $4.4 million
of pre-tax restructuring and exit costs of which $3.0 million related to actions
taken in its Power Tools and Accessories segment and $1.4 million related to
actions taken in its Hardware and Home Improvement segment. The restructuring
actions taken in the second quarter principally reflected (1) the write-down of
certain equipment to fair value less, if applicable, cost to sell; (2) lease
termination costs; and (3) severance benefits.
During the three months ended September 28, 2003, the Corporation
recognized $28.4 million in additional pre-tax restructuring and exit costs of
which $27.2 million relates to actions taken in its Power Tools and Accessories
segment and $1.2 million relates to actions taken in its Hardware and Home
Improvement segment. The restructuring actions taken during the three months
ended September 28, 2003 principally reflect (1) severance benefits related to
the European and North American power tools businesses, and (2) the write-down
of certain long-lived assets to fair value less, if applicable, cost to sell.
The $4.4 million charge recognized during the second quarter of 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. The $28.4
million charge recognized during the three months ended September 28, 2003, was
offset by $7.4 million of severance accruals, other exit costs, and asset
impairment charges that will no longer be required. The net effect of these
actions was to recognize an additional pre-tax restructuring charge of $21.0
million during the three and nine months ended September 28, 2003.
During the three and nine months ended September 29, 2002, the Corporation
recorded a pre-tax restructuring charge of $38.4 million. That $38.4 million
charge was net of $8.2 million of reversals of previously provided restructuring
reserves that were no longer required. The $38.4 million pre-tax restructuring
charge recognized during the three and nine months ended September 29, 2002,
reflected actions to reduce the Corporation's manufacturing cost base in its
Hardware and Home Improvement and its Power Tools and Accessories segments.
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 September 28, 2003, the Corporation had no known
probable but inestimable exposures relating to product liability claims,
environmental
- 14 -
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 11: SUBSEQUENT EVENTS
On September 30, 2003, the Corporation purchased the Baldwin Hardware
Corporation and the Weiser Lock Corporation from Masco Corporation. The cash
purchase price for the transaction was $275 million. The Corporation is in the
process of finalizing its plan to integrate the acquired businesses into its
security hardware business, a component of its Hardware and Home Improvement
segment. The Corporation's plan will eliminate excess costs and capacity from
the combined businesses. The businesses acquired will be included in the
consolidated financial statements from the date of the acquisition.
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $74.4 million, or $.95 per share on a
diluted basis, for the three-month period ended September 28, 2003, compared to
net earnings of $54.9 million, or $.68 per share on a diluted basis, for the
three-month period ended September 29, 2002.
For the nine-month period ended September 28, 2003, the Corporation
reported net earnings of $193.5 million, or $2.48 per share on a diluted basis,
compared to net earnings of $154.0 million, or $1.90 per share on a diluted
basis, for the nine-month period ended September 29, 2002.
During the three- and nine-month periods ended September 28, 2003 the
Corporation recognized pre-tax restructuring and exit costs of $21.0 million
($15.3 million net of tax). During the three- and nine-month periods ended
September 29, 2002, the Corporation recognized pre-tax restructuring and exit
costs of $38.4 million ($22.3 million net of tax). The increase in the
Corporation's net earnings and earnings per share for the 2003 periods, as
compared to the 2002 periods, is partially attributable to the lower level of
restructuring and exit costs recognized in the 2003 periods.
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 nine-month periods ended September 28, 2003 and September 29,
2002:
ANALYSIS OF CHANGES IN SALES
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
(Dollars in Millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $1,143.8 $1,085.2 $3,231.7 $3,162.2
- ------------------------------------------------------------------------------------------------------------------------------------
Unit volume 4 % 4 % - % 5 %
Price (2)% (2)% (2)% (1)%
Currency 3 % 2 % 4 % - %
- ------------------------------------------------------------------------------------------------------------------------------------
Change in total sales 5 % 4 % 2 % 4 %
====================================================================================================================================
Total consolidated sales for the three months ended September 28, 2003
increased by 5% over the sales in the corresponding 2002 period. Total
consolidated sales for the nine months ended September 28, 2003, increased by 2%
over the 2002 level. Total unit volume had a 4% positive impact on sales during
the three-month period ended September 28, 2003, as compared to the
corresponding period in 2002. That increase in unit volume was principally
attributable to the power tools and accessories businesses in North America, and
to the plumbing products and security hardware businesses. Changes in unit
volume did not have a material impact on sales during the nine-month period
ended September 28, 2003, as compared to the corresponding period in 2002, as
increases in the power tools and accessories businesses in the Americas were
offset by declines in the plumbing products business and the European power
tools and accessories business.
- 16 -
Pricing actions had a 2% negative effect on sales for both the three- and
nine-month periods ended September 28, 2003, respectively, as compared to the
corresponding periods in 2002. The effects of a weaker U.S. dollar compared to
other currencies, particularly the euro, pound sterling, and Canadian dollar,
caused a 3% and 4% increase in the Corporation's consolidated sales during the
three- and nine-month periods ended September 28, 2003, respectively, as
compared to the corresponding periods in 2002. These positive effects were
partially offset by the devaluation of several Latin American currencies during
the nine-month period ended September 28, 2003, as compared to the corresponding
period in 2002.
EARNINGS
Operating income for the three months ended September 28, 2003, was $109.9
million as compared to operating income of $83.3 million for the corresponding
period in 2002. Operating income for the nine months ended September 28, 2003,
was $295.1 million as compared to operating income of $253.0 million for the
corresponding period in 2002. Operating income for the three- and nine-month
periods ended September 28, 2003, included a pre-tax restructuring charge of
$21.0 million. Operating income for the three- and nine-month periods ended
September 29, 2002, included a pre-tax restructuring charge of $38.4 million.
The increase in the Corporation's operating income for the 2003 periods, as
compared to the 2002 periods, is partially attributable to the lower amount of
restructuring and exit costs recognized in the 2003 periods.
Gross margin as a percentage of sales was 35.4% and 35.1% for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively, and was 35.5% and 33.7% for the nine-month periods ended September
28, 2003 and September 29, 2002, respectively. The results of restructuring
initiatives, and, in Europe, foreign currency effects favorably impacted gross
margin as a percentage of sales for both the three- and nine-month periods ended
September 28, 2003. Productivity improvements and lower warranty and recall
costs also had a positive effect on gross margin as a percentage of sales for
the nine-month period ended September 28, 2003. For both the three- and
nine-month periods ended September 28, 2003, these positive factors were
partially offset by the impact of price reductions, lower production volumes,
higher pension and postretirement benefit expenses, and, for the nine-month
period, 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 fourth quarter 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
23.9% and 25.7% for the three- and nine-month periods ended September 28, 2003,
respectively, as compared to 23.9% and 24.5% for the corresponding three- and
nine-month periods in 2002, respectively. Selling, general, and administrative
expenses increased by $14.6 million and $56.9 million for the three and nine
months ended September 28, 2003, respectively, over the 2002 levels. The effects
of foreign currency translation accounted for $9.1 million and $35.7 million of
the increase in selling, general, and administrative expenses for the three- and
nine-month periods ended September 28, 2003, respectively. In both periods, the
remaining increase was principally attributable to higher marketing and
promotional expenses, partially offset by lower transportation and distribution
expenses and other selling, general, and administrative expenses, including
expenses associated with environmental remediation matters.
- 17 -
Net interest expense (interest expense less interest income) for the three
months ended September 28, 2003, was $7.6 million compared to net interest
expense of $14.2 million for the three months ended September 29, 2002. Net
interest expense was $27.4 million for the nine months ended September 28, 2003,
as compared to net interest expense of $44.8 million for the corresponding
period in 2002. The decrease in net interest expense for the three- and
nine-month periods ended September 28, 2003, as compared to the corresponding
periods in 2002, was primarily the result of both lower borrowing levels and
interest rates.
Other expense was $.4 million and $2.7 million for the three and nine
months ended September 28, 2003, respectively, as compared to $1.7 million and
$5.1 million for the corresponding periods in 2002.
The Corporation's effective tax rate was 27% for both the three- and
nine-month periods ended September 28, 2003, compared to an effective tax rate
of 19% and 24% for the three- and nine-month periods ended September 28, 2002,
respectively. The Corporation's income tax expense, and resultant effective tax
rate, for both the three- and nine-month periods ended September 28, 2003 and
September 29, 2002, are based upon the estimated effective tax rates applicable
for the full year, after giving effect to significant items related specifically
to the interim periods. For the three- and nine-month periods ended September
28, 2003 and September 29, 2002, those significant items consisted solely of tax
benefits associated with the periods' restructuring and exit costs. For the
three and nine months ended September 28, 2003, tax benefits of $5.7 million
were recognized on pre-tax restructuring and exit costs of $21.0 million, as
compared to tax benefits of $16.1 million on pre-tax restructuring and exit
costs of $38.4 million in the corresponding periods in 2002. The lower effective
tax rates during the 2002 periods, as compared to the 2003 periods, reflects the
effect of the higher tax benefits associated with the 2002 restructuring charge.
The Corporation reported net earnings of $74.4 million, or $.95 per share
on a diluted basis, for the three-month period ended September 28, 2003,
compared to net earnings of $54.9 million, or $.68 per share on a diluted basis,
for the three-month period ended September 29, 2002. The Corporation reported
net earnings of $193.5 million, or $2.48 per share on a diluted basis, for the
nine-month period ended September 28, 2003, as compared to $154.0 million, or
$1.90 per share on a diluted basis, for the corresponding period in 2002. The
increase in the Corporation's net earnings and earnings per share for the 2003
periods, as compared to the 2002 periods, is partially attributable to the lower
level of restructuring and exit costs recognized in the 2003 periods. 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.
- 18 -
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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $788.2 $778.0 $2,200.9 $2,245.0
Segment profit 95.3 106.2 238.1 240.5
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the third quarter of 2003 increased 1% over the 2002 level. Sales to
unaffiliated customers in the Power Tools and Accessories segment during the
nine months ended September 28, 2003, decreased 2% from the corresponding 2002
level.
Sales in North America during the third quarter of 2003 increased at a low
single-digit rate over the prior year level, with sales increases in both the
consumer and professional power tools businesses. Sales of consumer power tools
and accessories increased at a mid-single-digit rate due to strong sales of
consumer power tools and lawn and garden products. Sales of professional power
tools and accessories grew at a low single-digit rate, primarily as a result of
increases in the industrial construction independent channel.
During the first nine months of 2003, sales of power tools and accessories
in North America decreased at a low single-digit rate from the same period in
2002 as a mid-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. Increases in sales of
professional power tools and accessories during the third quarter noted above
were more than offset by both actions taken by certain large retailers to reduce
inventories and effects of the weak market for commercial construction during
the first half of 2003. Sales of consumer power tools and accessories for the
first nine months of 2003 benefited from strong sales of new products as well as
from expanded product placement at a significant customer.
Sales in Europe decreased at a low single-digit rate in both the third
quarter of 2003 and the first nine months of 2003 from the corresponding periods
in 2002, as a low single-digit rate of growth in sales of professional power
tools was more than offset by 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 in both the three- and nine-month periods in 2003.
Sales in other geographic areas increased at a high single-digit rate for
both the third quarter and the first nine months of 2003 over the prior year
levels, as sales increased in Asia, Latin America, and Australia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 12.1% for the three-month period ended September 28, 2003, as
compared to 13.7% for the
- 19 -
corresponding 2002 period. The decrease in segment profit as a percentage of
sales during the three-month period ended September 28, 2003, resulted from
lower gross margin as a percentage of sales. Gross margins as a percentage of
sales for the three months ended September 28, 2003, decreased from the prior
year level as benefits from productivity initiatives and restructuring actions
were more than offset by the unfavorable effect of lower production levels and
higher promotional costs.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 10.8% for the first nine months of 2003 as compared to 10.7% for the
corresponding 2002 period. Improvements in gross margin as a percentage of sales
occurred due to productivity improvements, the positive results of restructuring
initiatives, and lower warranty and recall costs, but were mitigated by the
negative effect of lower production levels. Selling general, and administrative
expenses as a percentage of sales for the nine-month period ended September 28,
2003, increased over the prior year level due to higher marketing and
promotional expenses.
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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $198.8 $179.7 $563.5 $577.3
Segment profit 26.7 10.5 59.8 32.9
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment increased 11% during the three months ended September 28, 2003, over the
corresponding period in 2002. Sales of plumbing products increased at a
double-digit rate, reflecting the expansion of listings at Lowe's Home
Improvement Warehouse (Lowe's) announced earlier in 2003 and described more
fully below. Sales of security hardware increased at a high single-digit rate in
the third quarter of 2003 over the corresponding period in 2002 due, in part, to
successful combination kit promotions in North America.
Sales to unaffiliated customers in the Hardware and Home Improvement
segment decreased 2% for the nine months ended September 28, 2003, from the 2002
level as sales of security hardware increased at a low single-digit rate, but
were more than offset by a high single-digit rate of decline in sales of
plumbing products. Sales of plumbing products decreased due to the previously
announced loss of shelf space at The Home Depot that was partially offset by the
expansion of plumbing products listings at Lowe's mentioned above.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 13.4% and 10.6% for the three and nine months ended
September 28, 2003, respectively, as compared to 5.8% and 5.7% for the three and
nine months ended September 29, 2002, respectively. Segment profit as a
percentage of sales for the three- and nine-month periods ended September 28,
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 lower product costs, resulting from productivity improvements and
benefits of restructuring initiatives.
- 20 -
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 nine 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 mitigate the effect of the loss of shelf space at The
Home Depot.
As discussed in Note 11 of Notes to Consolidated Financial Statements, the
Corporation acquired Baldwin Hardware Corporation and Weiser Lock Corporation on
September 30, 2003. The Corporation does not expect the acquisitions of these
businesses to have a material effect on either consolidated sales or net
earnings during the balance of 2003.
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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $122.4 $125.9 $379.6 $384.5
Segment profit 16.2 19.2 53.0 54.8
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment decreased by 3% in the third quarter of 2003 and 1% for the first nine
months in 2003 from the corresponding 2002 periods. During the three months
ended September 28, 2003, sales in the North American industrial and automotive
sectors declined at a double-digit and high single-digit rate, respectively, as
compared to the corresponding period in the prior year. During the nine-month
period ended September 28, 2003, sales in the North American industrial sector
also declined at a double-digit rate, but sales in the North American automotive
sector declined at a mid-single-digit rate, both as compared to the
corresponding period in the previous year. These declines were partially offset
in both periods by increases in sales in Asia and Europe.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment of 13.3% in the third quarter of 2003 decreased from 15.3% in
the prior year and decreased from 14.3% in the first nine months of 2002 to
14.0% for the corresponding period in 2003. Segment profit as a percentage of
sales declined in both periods due to lower sales and production volumes.
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 over 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 $3.6
million and $9.3 million for the three-month periods ended September 28, 2003
and
- 21 -
September 29, 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 $10.9
million and $28.3 million for the nine-month periods ended September 28, 2003
and September 29, 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 $(1.0) million and $10.2 million for the three- and
nine-month periods ended September 28, 2003, respectively, and $2.1 million and
$3.6 million for the three- and nine-month periods ended September 29, 2002,
respectively. The decrease in these expenses during the three-month period ended
September 28, 2003, as compared to the corresponding period in 2002, was
primarily due to certain legal expenses in the 2002 period that did not recur in
2003. The increase in these expenses for the nine-month period ended September
28, 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 $(14.0) million and $(43.6) million for the three- and
nine-month periods ended September 28, 2003, respectively, and $(21.4) million
and $(56.9) million for the three- and nine-month periods ended September 29,
2002, respectively. The decrease in these unallocated Corporate center operating
expenses for the three and nine months ended September 28, 2003, as compared to
the prior year levels, was primarily due to lower medical-related expenses in
the 2003 periods, reflecting the results of changes in plan design as well as
higher expense allocations to the Corporation's business segments. Decreases
during the nine-month period ended September 28, 2003, as compared to the
corresponding period in 2002, were also the result of lower reserves for certain
environmental remediation matters established in the 2003 periods than those
established in the 2002 periods.
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 selling,
general, and administrative expenses. During 2001 and 2002, the Corporation has
recognized pre-tax restructuring charges under this plan totaling $150.5
million. During the three months ended September 28, 2003, the Corporation
recorded its final pre-tax charge associated with this restructuring plan in the
amount of $21.0 million, which results in a cumulative pre-tax charge under the
restructuring program of $171.5 million.
The Corporation expects that incremental pre-tax savings associated with
the restructuring plan will benefit 2003, 2004, and 2005 results, by $40
million, $45 million, and $10 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.
- 22 -
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. As discussed further in Note 11 of
Notes to Consolidated Financial Statements, the Corporation is in the process of
finalizing its plan to integrate the acquired Baldwin Hardware Corporation and
Weiser Lock Corporation into its security hardware business. The Corporation's
plan will eliminate excess costs and capacity from the combined businesses. The
Corporation anticipates that its plan will likely result in a restructuring
charge to be taken in the fourth quarter of 2003.
FINANCIAL CONDITION
Operating activities provided cash of $160.1 million for the nine months ended
September 28, 2003, as compared to $234.0 million of cash provided in the
corresponding period in 2002. The decrease in cash provided by operating
activities during the nine months ended September 28, 2003, was primarily a
result of higher value added tax receivables, higher cash taxes, higher cash
payments associated with foreign currency hedging, lower accounts payable, and
higher trade receivables, all as compared to the corresponding 2002 period.
These factors were partially offset by lower inventory levels, 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
September 28, 2003, improved slightly from the number of days sales outstanding
at September 29, 2002. Average inventory turns at September 28, 2003, decreased
in comparison to the same period in 2002 as a result of safety stock that the
Corporation maintained during the last year related to the Corporation's
restructuring program. The Corporation reduced the level of safety stock during
the third quarter of 2003 from the second quarter's level and expects that it
will be eliminated by year end.
Investing activities for the nine months ended September 28, 2003, used
cash of $70.8 million as compared to $64.9 million of cash used during the
corresponding period in 2002. The increase in cash usage was primarily due to
higher capital expenditures during the first nine months of 2003 as compared to
the corresponding period in 2002. The Corporation anticipates that its capital
spending in 2003 will approximate $110 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 approvals. If all or some
regulatory approvals are not received in the near future, the sale may be
delayed until 2004 or the terms of the sale may be revised. This sale - or the
lack of this sale during 2003 - is not expected to have a material effect on the
Corporation's financial results for 2003.
As discussed further in Note 11 of Notes to Consolidated Financial
Statements, on September 30, 2003, the Corporation announced that it had
completed its purchase of the Baldwin Hardware and Weiser Lock businesses from
Masco Corporation. The cash purchase price for the transaction was $275 million.
Financing activities used cash of $406.7 million for the nine-month period
ended September 28, 2003, as compared to cash used of $48.2 million during the
first nine months of 2002. The increase in cash used was primarily the result of
higher payments on long-term debt,
- 23 -
including $309.5 million of debt that was repaid on April 1, 2003, and cash used
for stock repurchases during the 2003 period. During the nine months ended
September 28, 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
September 28, 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.
On October 17, 2003, the Corporation announced that its Board of Directors
declared a quarterly cash dividend of $.21 per share of the Corporation's
outstanding common stock payable during the fourth quarter of 2003. This amount
represents a 75% increase over the $.12 quarterly dividend paid by the
Corporation since 1996. Future dividends will depend on the Corporation's
earnings, financial condition, and other factors.
The variable-rate debt to total debt ratio, after taking interest rate
hedges into account, was 47% at September 28, 2003, compared to 52% at December
31, 2002. Average debt maturity was 8.9 years at September 28, 2003, compared to
7.2 years at December 31, 2002.
On October 27, 2003, the Corporation received notices of proposed
adjustments from the United States Internal Revenue Service (I.R.S.) in
connection with audits of the tax years 1998 through 2000. The principal
adjustment proposed by the I.R.S. consists of the disallowance of a capital loss
deduction taken in the Corporation's tax returns. The Corporation intends to
vigorously dispute the position taken by the I.R.S. in this matter. The
Corporation has provided adequate reserves in the event that the I.R.S. prevails
in its disallowance of the previously described capital loss and the imposition
of related interest. Should the I.R.S. prevail in its disallowance of the
capital loss deduction and imposition of related interest, it would result in a
cash outflow by the Corporation of approximately $140 million. The Corporation
believes that any such cash outflow is unlikely to occur until some time after
2004.
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
- 24 -
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained in the following and is
incorporated by reference herein:
o in Note 4 of Notes to Consolidated Financial Statements, included in Item 1
of Part I of this Quarterly Report on Form 10-Q;
o under the caption "Interest Rate Sensitivity", included in Item 2 of Part I
of the Corporation's Quarterly Report on Form 10-Q for the quarterly period
ended June 29, 2003; and
o 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.
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 September 28, 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 September 28, 2003, that
have materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
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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 September 28, 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 July 1, 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 July 1, 2003, the Corporation and Masco Corporation
announced that they had signed a letter of intent in which the Corporation would
purchase from Masco Corporation the Baldwin Hardware and Weiser Lock businesses.
On July 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 July 24, 2003, the Corporation had
reported its earnings for the three and six months ended June 29, 2003.
On August 11, 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 August 11, 2003, the Corporation and Masco
Corporation announced that they had received notification from the Federal Trade
Commission that the Commission had granted early termination of the waiting
period, under the Hart Scott Rodino Antitrust Improvements Act of 1976, with
respect to Masco's sale of Baldwin Hardware Corporation and Weiser Lock
Corporation to the Corporation.
The Corporation did not file nor furnish any other reports on Form 8-K during
the three-month period ended September 28, 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: November 6, 2003