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 March 28, 2004
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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 April 23, 2004:
79,177,101
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The exhibit index as required by item 601(a) of Regulation S-K is included in
this report.
-2-
THE BLACK & DECKER CORPORATION
INDEX - FORM 10-Q
March 28, 2004
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months Ended March 28, 2004 and March 30, 2003 3
Consolidated Balance Sheet
March 28, 2004 (Unaudited) and December 31, 2003 4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 28, 2004 and March 30, 2003 5
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 28, 2004 and March 30, 2003 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 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
March 28, 2004 March 30, 2003
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Sales $1,092.9 $939.2
Cost of goods sold 690.1 603.9
Selling, general, and administrative expenses 295.1 263.0
Restructuring and exit costs - .2
- --------------------------------------------------------------------------------
Operating Income 107.7 72.1
Interest expense (net of interest income) 5.2 12.1
Other expense .8 1.7
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Earnings from Continuing Operations
Before Income Taxes 101.7 58.3
Income taxes 27.4 15.2
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Net Earnings from Continuing Operations 74.3 43.1
Discontinued Operations (Net of Income Taxes):
Earnings of discontinued operations .6 .3
Gain on sale of discontinued operations (net
of impairment charge of $24.4) 11.7 -
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Net Earnings from Discontinued Operations 12.3 .3
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Net Earnings $ 86.6 $ 43.4
================================================================================
Basic Earnings Per Common Share
Continuing Operations $ .94 $ .55
Discontinued Operations .16 -
- --------------------------------------------------------------------------------
Net Earnings Per Common Share - Basic $ 1.10 $ .55
================================================================================
Shares Used in Computing Basic Earnings Per Share
(in Millions) 78.4 78.3
================================================================================
Diluted Earnings Per Common Share
Continuing Operations $ .93 $ .55
Discontinued Operations .16 -
- --------------------------------------------------------------------------------
Net Earnings Per Common Share - Assuming Dilution $ 1.09 $ .55
================================================================================
Shares Used in Computing Diluted Earnings Per Share
(in Millions) 79.5 78.5
================================================================================
Dividends Per Common Share $ .21 $ .12
================================================================================
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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March 28, 2004
(Unaudited) December 31, 2003
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Assets
Cash and cash equivalents $ 321.7 $ 308.2
Trade receivables 889.2 808.6
Inventories 789.7 709.9
Current assets of discontinued operations 68.6 160.2
Other current assets 232.4 216.1
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Total Current Assets 2,301.6 2,203.0
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Property, Plant, and Equipment 650.7 660.2
Goodwill 779.9 771.7
Other Assets 600.0 587.6
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$4,332.2 $4,222.5
================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 4.8 $ .1
Current maturities of long-term debt .4 .4
Trade accounts payable 460.1 379.8
Current liabilities of discontinued operations 30.2 38.0
Other accrued liabilities 757.9 893.8
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Total Current Liabilities 1,253.4 1,312.1
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Long-Term Debt 922.5 915.6
Deferred Income Taxes 182.1 179.8
Postretirement Benefits 465.0 451.9
Other Long-Term Liabilities 515.1 516.6
Stockholders' Equity
Common stock, par value $.50 per share 39.4 39.0
Capital in excess of par value 525.9 486.7
Retained earnings 843.0 773.0
Accumulated other comprehensive income (loss) (414.2) (452.2)
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Total Stockholders' Equity 994.1 846.5
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$4,332.2 $4,222.5
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
-5-
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, 2002 79,604,786 $39.8 $550.1 $524.3 $(514.6) $599.6
Comprehensive income:
Net earnings -- -- -- 43.4 -- 43.4
Net loss on derivative
instruments (net of tax) -- -- -- -- (.2) (.2)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 1.3 1.3
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Comprehensive income -- -- -- 43.4 1.1 44.5
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Cash dividends ($.12 per share) -- -- -- (9.3) -- (9.3)
Purchase and retirement of
common stock (2,011,570) (1.0) (76.5) -- -- (77.5)
Common stock issued under
employee benefit plans 1,377 -- .1 -- -- .1
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Balance at March 30, 2003 77,594,593 $38.8 $473.7 $558.4 $(513.5) $557.4
====================================================================================================================================
Balance at December 31, 2003 77,933,464 $39.0 $486.7 $773.0 $(452.2) $846.5
Comprehensive income:
Net earnings -- -- -- 86.6 -- 86.6
Net gain on derivative
instruments (net of tax) -- -- -- -- 11.4 11.4
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 55.3 55.3
Write-off of accumulated
foreign currency translation
adjustments due to sale
of businesses -- -- -- -- (28.7) (28.7)
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Comprehensive income -- -- -- 86.6 38.0 124.6
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Cash dividends ($.21 per share) -- -- -- (16.6) -- (16.6)
Common stock issued under
employee benefit plans 903,253 .4 39.2 -- -- 39.6
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Balance at March 28, 2004 78,836,717 $39.4 $525.9 $843.0 $(414.2) $994.1
====================================================================================================================================
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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Three Months Ended
March 28, 2004 March 30, 2003
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Operating Activities
Net earnings $ 86.6 $ 43.4
Adjustments to reconcile net earnings to cash
flow from operating activities of continuing
operations:
Earnings of discontinued operations (.6) (.3)
Gain on sale of discontinued operations (net
of impairment charge) (11.7) -
Non-cash charges and credits:
Depreciation and amortization 35.1 35.1
Restructuring and exit costs - .2
Other .9 1.8
Changes in selected working capital items:
Trade receivables (66.3) (8.3)
Inventories (66.0) (57.2)
Trade accounts payable 75.3 21.9
Restructuring spending (11.4) (15.0)
Other assets and liabilities (98.6) (140.5)
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Cash flow from operating activities of
continuing operations (56.7) (118.9)
Cash flow from operating activities of
discontinued operations 1.9 (1.5)
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Cash Flow From Operating Activities (54.8) (120.4)
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Investing Activities
Proceeds from disposal of assets .7 .2
Proceeds from sale of discontinued operations,
net of cash transferred 74.6 -
Capital expenditures (20.4) (26.0)
Purchase of business, net of cash acquired (7.9) -
Capital expenditures of discontinued operations (.3) (.4)
Other investing activities (.2) -
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Cash Flow From Investing Activities 46.5 (26.2)
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Financing Activities
Net increase in short-term borrowings .3 1.3
Payments on long-term debt (.1) (.9)
Purchase of common stock - (77.5)
Issuance of common stock 35.0 -
Cash dividends (16.6) (9.3)
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Cash Flow From Financing Activities 18.6 (86.4)
Effect of exchange rate changes on cash 3.2 2.6
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Increase (Decrease) In Cash And Cash Equivalents 13.5 (230.4)
Cash and cash equivalents at beginning of period 308.2 517.1
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Cash And Cash Equivalents At End Of Period $ 321.7 $ 286.7
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Black & Decker Corporation and Subsidiaries
NOTE 1: ACCOUNTING POLICIES
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-month period ended March 28, 2004, 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, 2003.
Certain amounts presented for the three months ended March 30, 2003, have
been reclassified to conform to the 2004 presentation.
Stock-Based Compensation
As more fully disclosed in Notes 1 and 16 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, 2003, 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-month periods ended March 28, 2004 and March 30, 2003, is provided below.
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Three Months Ended
(Amounts in Millions Except Per Share Data) March 28, 2004 March 30, 2003
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Net earnings $86.6 $43.4
Adjustments to net earnings for:
Stock-based compensation expense
included in net earnings, net of tax 2.3 .5
Pro forma stock-based compensation
(expense), net of tax (5.8) (5.7)
- --------------------------------------------------------------------------------
Pro forma net earnings $83.1 $38.2
================================================================================
Pro forma net earnings per common share --
basic $1.06 $ .49
================================================================================
Pro forma net earnings per common share --
assuming dilution $1.05 $ .49
================================================================================
-8-
NOTE 2: DISCONTINUED OPERATIONS
As more fully described in Note 3 of Notes to Consolidated Financial Statements
included in Item 8 of its Annual Report on Form 10-K for the year ended December
31, 2003, the Corporation met the requirements to classify its European security
hardware business as discontinued operations at the end of 2003. The European
security hardware business, consisting of the NEMEF, Corbin, and DOM businesses,
was previously included in the Corporation's Hardware and Home Improvement
segment.
In January 2004, the Corporation completed the sale of the NEMEF and Corbin
businesses to Assa Abbloy and received cash proceeds, net of cash transferred,
of $74.6 million. Also, in January 2004, the Corporation signed an agreement
with Assa Abloy to sell its remaining European security hardware business, DOM,
for $28.0 million. That sale is subject to regulatory approval. During the three
months ended March 28, 2004, the Corporation recognized an $11.7 million net
gain on the sale of these discontinued operations (the "net gain on sale of
discontinued operations"). That net gain consisted of a $36.1 million gain on
the sale of the NEMEF and Corbin businesses, less a $24.4 million goodwill
impairment charge associated with the remaining European security hardware
business, DOM. That goodwill impairment charge was determined as the excess of
the carrying value of goodwill associated with the DOM business over its implied
fair value inherent in the contractual value of $28.0 million.
The European security hardware business discussed above is reported as
discontinued operations in the consolidated financial statements and prior
periods presented have been adjusted to reflect this presentation. Sales and
earnings before income taxes of the discontinued operations were $16.1 million
and $.8 million, respectively, for the three months ended March 28, 2004, and
$28.9 million and $1.1 million, respectively, for the three months ended March
30, 2003. The results of the discontinued operations do not reflect any expense
for interest allocated by or management fees charged by the Corporation.
The major classes of assets and liabilities of discontinued operations in
the Consolidated Balance Sheet at the end of each period, in millions of
dollars, were as follows:
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March 28, 2004 December 31, 2003
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Trade receivables, less allowances $ 8.7 $16.1
Inventories 11.7 28.4
Property, plant and equipment 17.3 27.9
Goodwill 26.6 82.7
Other assets 4.3 5.1
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Total assets 68.6 160.2
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Trade accounts payable 3.4 8.5
Other accrued liabilities 9.5 11.5
Postretirement benefits and other
long-term liabilities 17.3 18.0
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Total liabilities 30.2 38.0
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Net assets $38.4 $122.2
================================================================================
-9-
NOTE 3: INVENTORIES
The classification of inventories at the end of each period, in millions of
dollars, was as follows:
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March 28, 2004 December 31, 2003
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FIFO cost
Raw materials and work-in-process $205.7 $186.3
Finished products 569.9 510.3
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775.6 696.6
Adjustment to arrive at LIFO inventory value 14.1 13.3
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$789.7 $709.9
================================================================================
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 4: SHORT-TERM BORROWINGS AND LONG-TERM DEBT
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 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, 2003.
The Corporation's average borrowings outstanding under its unsecured revolving
credit facilities and its commercial paper program were $358.0 million and
$403.1 million for the three-month periods ended March 28, 2004 and March 30,
2003, respectively.
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $305.9 million and $301.3 million were included in the Consolidated
Balance Sheet at March 28, 2004 and December 31, 2003, 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
March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Interest expense $13.7 $18.5
Interest (income) (8.5) (6.4)
- --------------------------------------------------------------------------------
$ 5.2 $12.1
================================================================================
NOTE 6: BUSINESS SEGMENTS
The following table provides selected financial data for the Corporation's
reportable business segments (in millions of dollars):
-10-
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Reportable Business Segments
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Power Hardware Fastening Currency Corporate,
Tools & & Home & Assembly Translation Adjustments,
Three Months Ended March 28, 2004 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $689.6 $220.4 $138.4 $1,048.4 $44.5 $ - $1,092.9
Segment profit (loss) (for
Consolidated, operating income) 74.1 31.7 18.4 124.2 3.5 (20.0) 107.7
Depreciation and amortization 19.3 7.6 4.2 31.1 1.2 2.8 35.1
Capital expenditures 14.3 2.9 2.3 19.5 .7 .2 20.4
Three Months Ended March 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $666.4 $146.2 $133.2 $945.8 $(6.6) $ - $939.2
Segment profit (loss) (for
Consolidated, operating income
before restructuring and exit
costs) 59.5 13.0 19.3 91.8 (.2) (19.3) 72.3
Depreciation and amortization 20.1 6.8 3.8 30.7 - 4.4 35.1
Capital expenditures 15.2 7.3 3.5 26.0 (.2) .2 26.0
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). On September 30, 2003, the Corporation acquired
Baldwin Hardware Corporation and Weiser Lock Corporation (Baldwin and Weiser).
These acquired businesses are included in the Hardware and Home Improvement
segment. The Hardware and Home Improvement segment 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.
As more fully described in Note 2, the Corporation's European security
hardware business has been classified as discontinued operations. Sales, segment
profit, depreciation and amortization, and capital expenditures set forth in the
preceding table exclude the results of discontinued operations.
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, 2003,
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
-11-
preceding table under the captions "Reportable Business Segments" and
"Corporate, Adjustments, & Eliminations" are reflected at the Corporation's
budgeted rates of exchange for 2004. 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.
The reconciliation of segment profit to the Corporation's earnings from
continuing operations before income taxes for each period, in millions of
dollars, is as follows:
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Three Months Ended
March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Segment profit for total
reportable business segments $124.2 $ 91.8
Items excluded from segment profit:
Adjustment of budgeted foreign exchange
rates to actual rates 3.5 (.2)
Depreciation of Corporate property (.4) (.3)
Adjustment to businesses' postretirement
benefit expenses booked in consolidation .1 3.8
Other adjustments booked in consolidation
directly related to reportable business
segments (2.1) (8.8)
Amounts allocated to businesses in arriving
at segment profit in excess of (less
than) Corporate center operating
expenses, eliminations, and other
amounts identified above (17.6) (14.0)
- --------------------------------------------------------------------------------
Operating income before restructuring and
exit costs 107.7 72.3
Restructuring and exit costs - .2
- --------------------------------------------------------------------------------
Operating income 107.7 72.1
Interest expense, net of interest income 5.2 12.1
Other expense .8 1.7
- --------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes $101.7 $58.3
================================================================================
-12-
NOTE 7: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period are as
follows:
- --------------------------------------------------------------------------------
Three Months Ended
(Amounts in Millions Except Per Share Data) March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Numerator:
Net earnings from continuing operations $74.3 $43.1
Net earnings of discontinued operations 12.3 .3
- --------------------------------------------------------------------------------
Net earnings $86.6 $43.4
================================================================================
Denominator:
Denominator for basic earnings per share --
weighted-average shares 78.4 78.3
Employee stock options and stock issuable
under employee benefit plans 1.1 .2
- --------------------------------------------------------------------------------
Denominator for diluted earnings per share --
adjusted weighted-average shares and
assumed conversions 79.5 78.5
================================================================================
Basic earnings per share
Continuing operations $ .94 $ .55
Discontinued operations .16 -
- --------------------------------------------------------------------------------
Basic earnings per share $1.10 $ .55
================================================================================
Diluted earnings per share
Continuing operations $ .93 $ .55
Discontinued operations .16 -
- --------------------------------------------------------------------------------
Diluted earnings per share $1.09 $ .55
================================================================================
As of March 28, 2004, options to purchase approximately 1.5 million shares
of common stock, with a weighted-average exercise price of $53.96, 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.
-13-
NOTE 8: RESTRUCTURING ACTIVITY
The Corporation's restructuring activities are more fully disclosed in Note 19
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, 2003. A
summary of restructuring activity during the three-month period ended March 28,
2004, is set forth below (in millions of dollars):
- -------------------------------------------------------------------------------------------------------------
Reserves at Utilization of Reserves Foreign Reserves at
December 31, ----------------------- Currency March 28,
2003 Cash Non-Cash Translation 2004
- -------------------------------------------------------------------------------------------------------------
Severance benefits $42.6 $(11.3) $ - $.1 $31.4
Other charges 1.1 (.1) - - 1.0
- -------------------------------------------------------------------------------------------------------------
Total $43.7 $(11.4) $ - $.1 $32.4
=============================================================================================================
Of the $32.4 million restructuring accrual as of March 28, 2004, $21.4
million -- principally associated with actions by the Corporation's Power Tools
and Accessories segment -- relates to the restructuring plan that was formulated
by the Corporation in the fourth quarter of 2001. The Corporation anticipates
that these restructuring actions will be completed during 2004. The remaining
$11.0 million relates to restructuring actions associated with the closure of a
manufacturing facility in the Corporation's Hardware and Home Improvement
segment as a result of the acquisition of the Baldwin and Weiser businesses. The
Corporation anticipates that these restructuring actions will be completed
during 2005.
NOTE 9: POSTRETIREMENT BENEFITS
The Corporation's pension and other postretirement benefit plans are more fully
disclosed in Notes 1 and 12 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, 2003. The following table presents the components of the
Corporation's net periodic cost (benefit) related to its defined benefit pension
plans for the three months ended March 28, 2004 and March 30, 2003 (in millions
of dollars):
- ---------------------------------------------------------------------------------------------------------------
Pension Benefits Plans Pension Benefits Plans
In the United States Outside of the United States
------------------------------ --------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ 4.7 $ 4.1 $ 3.4 $3.4
Interest cost 13.7 14.6 8.9 6.8
Expected return on plan assets (20.6) (21.7) (8.7) (7.9)
Amortization of prior service cost .3 .3 .4 .3
Amortization of net actuarial loss 4.0 1.9 2.5 1.2
- ---------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 2.1 $ (.8) $ 6.5 $3.8
===============================================================================================================
-14-
The Corporation's defined postretirement benefits consist of several
unfunded health care plans that provide certain postretirement medical, dental,
and life insurance benefits for most United States employees. The postretirement
medical benefits are contributory and include certain cost-sharing features,
such as deductibles and co-payments.
The following table presents the components of the Corporation's net
periodic cost related to its defined benefit postretirement plans for the three
months ended March 28, 2004 and March 30, 2003 (in millions of dollars):
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Service cost $ .2 $ .2
Interest cost 2.3 2.7
Amortization of prior service cost (.5) (.6)
Amortization of net actuarial loss .4 .5
- --------------------------------------------------------------------------------
Net periodic cost $2.4 $2.8
================================================================================
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, 2003, the Corporation elected to defer
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) and the resultant Financial Accounting
Standards Board Staff Position No. FAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, until authoritative guidance on the accounting for
the federal subsidy is issued or until a significant event occurs that
ordinarily would call for the remeasurement of the postretirement benefit plan's
obligations. The accrued benefit obligation and the net periodic postretirement
cost (benefit) included in the consolidated financial statements do not reflect
the effects of the Act on the Corporation's postretirement benefit plan.
NOTE 10: LITIGATION AND CONTINGENT LIABILITIES
As more fully disclosed in Note 20 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, 2003, 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.
During 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
-15-
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.
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 March 28, 2004, 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.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Corporation is a global manufacturer and marketer of power tools and
accessories, hardware and home improvement products, and technology-based
fastening systems. 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 -- with these business segments comprising
approximately 66%, 21% and 13%, respectively, of the Corporation's sales for the
three-month period ended March 28, 2004.
The Corporation markets its products and services in over 100 countries.
During 2003, approximately 63%, 25% and 12% of its sales were made to customers
in the United States, in Europe (including the United Kingdom), and in other
geographic regions, respectively. The Power Tools and Accessories and Hardware
and Home Improvement segments are subject to general economic conditions in the
countries in which they operate as well as the strength of the retail economies.
The Fastening and Assembly Systems segment is also subject to general economic
conditions in the countries in which it operates as well as to automotive and
industrial demand.
The Corporation reported net earnings from continuing operations of $74.3
million, or $.93 per share on a diluted basis, for the three-month period ended
March 28, 2004, compared to net earnings from continuing operations of $43.1
million, or $.55 per share on a diluted basis, for the three-month period ended
March 30, 2003. The Corporation reported net earnings of $86.6 million, or $1.09
per share on a diluted basis, for the three-month period ended March 28, 2004,
compared to net earnings of $43.4 million, or $.55 per share on a diluted basis,
for the three-month period ended March 30, 2003. As more fully described in Note
2 of Notes to Consolidated Financial Statements, net earnings for the three
months ended March 28, 2004 included a net gain on sale of discontinued
operations of $11.7 million.
Total consolidated sales of $1,092.9 million for the three months ended
March 28, 2004, increased by 16% over the corresponding period in the prior
year. Of that 16% increase, 8% was attributable to an increase in unit volume of
existing businesses (that is, the Corporation's businesses excluding the newly
acquired Baldwin, Weiser, and MasterFix businesses), 6% was attributable to the
incremental sales of newly acquired businesses, and 5% was attributable to the
favorable impact of foreign currency translation, offset by 3% attributable to
the negative effect of pricing actions. Operating income for the three months
ended March 28, 2004, increased to $107.7 million, or 9.9% of sales, from $72.1
million, or 7.7% of sales, in the corresponding period of 2003. The increase in
operating income as a percentage of sales during the first quarter of 2004, as
compared to the prior year level, resulted from percentage improvements in both
gross margin and selling, general, and administrative expenses. The improvement
in gross margin--which increased from 35.7% in the first quarter of 2003 to
36.9% in the first quarter of 2004--was mainly attributable to the positive
effects of restructuring initiatives and favorable foreign currency exchange
rates, partially offset by the negative effect of pricing actions. Although
selling, general, and administrative expenses for the first quarter of 2004
increased over the prior year level, that increase was principally due to
incremental expenses of newly acquired businesses and the effects of foreign
currency translation. Selling, general, and administrative expenses as a
percentage of sales decreased from 28.0% for the first quarter of 2003 to 27.0%
for the first quarter of 2004. Earnings from continuing operations before income
-17-
taxes increased by $43.4 million over the 2003 level to $101.7 million for the
three months ended March 28, 2004. In addition to the improvement in operating
income described above, pre-tax earnings from continuing operations benefited
from a $6.9 million reduction in net interest expense during the first quarter
of 2004 from the prior year level.
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-month periods ended March 28, 2004 and March 30, 2003:
ANALYSIS OF CHANGES IN SALES
- --------------------------------------------------------------------------------
Three Months Ended
(Dollars in Millions) March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Total sales $1,092.9 $939.2
- --------------------------------------------------------------------------------
Unit volume - existing (a) 8 % (2)%
Unit volume - acquired (b) 6 % - %
Price (3)% (1)%
Currency 5 % 4 %
- --------------------------------------------------------------------------------
Change in total sales 16 % 1 %
================================================================================
(a) Represents change in unit volume for businesses where year-to-year
comparability exists.
(b) Represents change in unit volume for businesses that were acquired and
were not included in prior period results.
Total consolidated sales for the three months ended March 28, 2004
increased by 16% over sales in the corresponding 2003 period. Excluding the
newly acquired Baldwin, Weiser, and MasterFix businesses, total unit volume
increased by 8% during the three months ended March 28, 2004, over the
corresponding period in 2003. This improvement was primarily attributable to the
Corporation's North American businesses, which benefited from an improving
economy. As compared to the first quarter of 2003, a double-digit increase in
sales volume was experienced by the power tools and accessories, Kwikset
security hardware, and plumbing products businesses in North America during the
quarter ended March 28, 2004. Unit volume of the newly acquired Baldwin, Weiser,
and MasterFix businesses contributed 6% to the sales growth for the first three
months of 2004 as compared to the 2003 period. Pricing actions had a 3% negative
effect on sales for the three-month period ended March 28, 2004, as compared to
the corresponding period in 2003. In addition to pricing actions taken during
the first quarter of 2004 in response to customer and competitive pressures,
additional promotional programs that were initiated in the fourth quarter of
2004 and pricing actions to reduce certain excess inventory also negatively
impacted the comparison to the first quarter of 2003. The effects of a weaker
U.S. dollar compared to other currencies, particularly the euro and, to a lesser
degree, the pound sterling, and Canadian dollar, caused a 5% increase in the
Corporation's consolidated sales during the three-month period ended March 28,
2004, as compared to the corresponding period in 2003.
-18-
EARNINGS
The Corporation reported consolidated operating income of $107.7 million, or
9.9% of sales, during the first three months of 2004, as compared to operating
income of $72.1 million, or 7.7% of sales, for the corresponding period in 2003.
Consolidated gross margin as a percentage of sales for the first three
months of 2004 was 36.9% as compared to 35.7% for the first three months of
2003. The results of restructuring initiatives, and, in Europe, foreign currency
effects favorably impacted gross margin as a percentage of sales. These positive
factors were partially offset by negative pricing actions taken by the
Corporation as described on the preceding page.
Consolidated selling, general, and administrative expenses as a percentage
of sales were 27.0% and 28.0% for the three-month periods ended March 28, 2004,
and March 30, 2003, respectively. Selling, general, and administrative expenses
increased by $32.1 million for the three months ended March 28, 2004, over the
2003 level. The effects of foreign currency translation accounted for
approximately half of this increase, with the remaining increase principally
resulting from incremental expenses of the newly acquired Baldwin, Weiser, and
MasterFix businesses.
Consolidated net interest expense (interest expense less interest income)
for the three months ended March 28, 2004, was $5.2 million compared to net
interest expense of $12.1 million for the three months ended March 30, 2003. The
decrease in net interest expense between periods was primarily the result of
lower borrowing levels in the first quarter of 2004 due to a bond repayment in
April 2003, coupled with higher interest income associated with the
Corporation's foreign currency hedging activities in the 2004 period.
Other expense was $.8 million and $1.7 million for the three months ended
March 28, 2004 and March 30, 2003, respectively.
Consolidated income tax expense of $27.4 million and $15.2 million was
recognized on the Corporation's earnings from continuing operations before
income taxes of $101.7 million and $58.3 million for the three-month periods
ended March 28, 2004 and March 30, 2003, respectively. The Corporation's
effective tax rate of 27% for the first three months of 2004 approximated the
26% rate for the corresponding period in 2003. The Corporation's income tax
expense and resultant effective tax rate, for both the three-month periods ended
March 28, 2004 and March 30, 2003, were based upon the estimated effective tax
rates applicable for the full years, after giving effect to any significant
items related specifically to interim periods.
The Corporation reported net earnings from continuing operations of $74.3
million, or $.93 per share on a diluted basis, for the three-month period ended
March 28, 2004, compared to net earnings from continuing operations of $43.1
million, or $.55 per share on a diluted basis, for the three-month period ended
March 30, 2003.
The Corporation reported net earnings from discontinued operations of $12.3
million during the first three months of 2004, as compared to $.3 million during
the corresponding period of 2003. The discontinued European security hardware
business consists of the NEMEF, Corbin, and DOM businesses. As more fully
described in Note 2 of Notes to Consolidated Financial Statements, net earnings
from discontinued operations for the three-month period ended March 28, 2004
included an $11.7 million net gain on sale of discontinued operations. That net
gain consisted of a $36.1 million gain on the sale during the first quarter of
2004 of two discontinued businesses (NEMEF and Corbin) partially offset by a
$24.4 million goodwill impairment charge associated with the remaining
discontinued business (DOM). The sale of the DOM business, currently under
contract for $28.0 million, is subject to regulatory approval.
-19-
The Corporation reported net earnings of $86.6 million, or $1.09 per share
on a diluted basis, for the three-month period ended March 28, 2004, as compared
to net earnings of $43.4 million, or $.55 per share on a diluted basis, for the
corresponding period in 2003.
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
March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $689.6 $666.4
Segment profit 74.1 59.5
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the first quarter of 2004 increased 3% over the 2003 level.
Sales in North America during the first quarter of 2004 increased at a high
single-digit rate over the prior year level. Sales of professional power tools
and accessories increased at a double-digit rate as sales increases were
experienced in all major channels and product lines. Consumer power tools and
accessories sales grew at a low single-digit rate as an increase in sales of
consumer power tools and cleaning products more than offset a reduction in sales
of outdoor products. The Corporation believes that that reduction in sales of
outdoor products is due to a shift in the timing of orders -- with outdoor
product orders received in the first quarter in 2003 but expected during the
second quarter in 2004.
Sales in Europe decreased at a high single-digit rate during the first
quarter of 2004 from the level experienced in the corresponding period in 2003.
In comparison to the first quarter of 2003, sales of European consumer power
tools and accessories decreased at a double-digit rate and sales of professional
power tools and accessories decreased at a mid-single-digit rate during the
three months ended March 28, 2004. Weak economic conditions continued to depress
sales throughout most of Europe. Sales of professional products during the first
quarter of 2004 were also adversely affected by back-orders associated with
production issues at a manufacturing facility in the Czech Republic.
Sales in other geographic areas increased at a high single-digit rate in
the first quarter of 2004, as compared to the prior year level, as sales
increased throughout most of South America and Asia as well as in Australia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 10.7% for the three months ended March 28, 2004, as compared to 8.9%
for the corresponding 2003 period. That increase in segment profit as a
percentage of sales primarily resulted from a reduction in selling, general, and
administrative expenses as a percentage of sales due to the leverage of expenses
over higher sales volume. Gross margin as a percentage of sales also increased
slightly during the first quarter of 2004 as compared to the first quarter of
2003. That gross margin
-20-
improvement was predominantly attributable to the positive results of
restructuring initiatives and foreign currency effects, partially offset by the
negative effects of pricing actions.
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
March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $220.4 $146.2
Segment profit 31.7 13.0
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment increased 51% during the three months ended March 28, 2004, over the
corresponding period in 2003. Incremental sales of the newly acquired Baldwin
and Weiser businesses accounted for 37 percentage points of that increase, while
higher sales of the Kwikset security hardware and Price Pfister plumbing
products businesses accounted for the remaining 14 percentage points. Sales of
plumbing products increased at a double-digit rate, reflecting the expansion of
listings at Lowe's Home Improvement Warehouse (Lowe's) that occurred during the
third quarter of 2003, as well as growth at other retailers. Sales of Kwikset
security hardware products also increased at a double-digit rate in the first
quarter of 2004 over the corresponding period in 2003 due to strong retail
sales.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 14.4% and 8.9% for the three months ended March 28, 2004
and March 30, 2003, respectively. Segment profit as a percentage of sales for
the three-month period ended March 28, 2004, benefited from significant gross
margin improvement. That gross margin improvement was primarily driven by the
positive effects of restructuring initiatives and productivity improvements,
including volume leverage. The newly acquired Baldwin and Weiser businesses did
not have a material effect on segment profit as a percentage of sales for the
Hardware and Home Improvement segment during the first quarter of 2004. While
the Corporation anticipates that the Hardware and Home Improvement segment will
continue to experience increases in segment profit as a percentage of sales over
the remainder of 2004 as compared to 2003, it expects that the rate of
improvement will moderate from the 5.5 percentage point improvement experienced
in the first quarter of 2004 given the increases in the comparable segment
profit as a percentage of sales in each of the successive quarterly periods in
2003. In addition, restructuring-related expenses -- associated with the
integration of the Baldwin and Weiser businesses into the Kwikset security
hardware business --are anticipated to increase during the remainder of 2004 as
integration actions intensify.
-21-
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
March 28, 2004 March 30, 2003
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $138.4 $133.2
Segment profit 18.4 19.3
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased by 4% in the first quarter of 2004 over the corresponding 2003
period. Sales in Asia increased at a double-digit rate, and sales of industrial
fasteners and automotive fasteners in the rest of the world grew at a
mid-single-digit and low single-digit rate, respectively, during the three
months ended March 28, 2004.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment of 13.3% in the first quarter of 2004 decreased from 14.5% in
the prior year. That decline was attributable to unfavorable product mix as well
as costs associated with the transfer of production from a small manufacturing
facility.
During March 2004, the Corporation completed the acquisition of the
MasterFix B.V. (MasterFix), an industrial fastening company with operations in
Europe and Asia, which is expected to generate annualized sales of approximately
$20 million. The acquisition of MasterFix did not have a significant effect on
sales or segment profit of the Fastening and Assembly Systems segment during the
first quarter of 2004.
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, 2003, 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 2004 will increase over the 2003
levels. The Corporation anticipates that its expense recognized relating to its
pension and other postretirement benefit plans will increase by approximately
$20 million over the 2003 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 $.1
million and $3.8 million for the three-month periods ended March 28, 2004 and
March 30, 2003, respectively. This decrease reflects the impact excluded from
the Corporation's reportable business segments of that increase in pension and
other postretirement benefits expense.
Expenses directly related to reportable business segments booked in
consolidation and, thus, excluded from segment profit for the reportable
business segments were $2.1 million and $8.8 million for the three-month periods
ended March 28, 2004 and March 30, 2003, respectively. The principal item that
contributed to this decrease was a higher level of restructuring-related
expenses (associated with the Power Tools and Accessories segment) that was
recognized in the 2003 period.
Amounts allocated to businesses in arriving at segment profit in excess of
(less than) Corporate
-22-
center operating expenses, eliminations, and other amounts identified in the
final table included in Note 6 of Notes to Consolidated financial statements
were $(17.6) million and $(14.0) million for the three-month periods ended March
28, 2004 and March 30, 2003, respectively. The increase in these unallocated
Corporate center operating expenses for the three months ended March 28, 2004,
as compared to the prior year level, was primarily due to higher
employee-related expenses not allocated directly to the Corporation's business
segments.
RESTRUCTURING ACTIVITY
The Corporation's restructuring activities are more fully discussed in Note 8 of
Notes to Consolidated Financial Statements and in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2003 in both Item 7 under
the caption "Restructuring Actions" and Item 8 in Note 19 of Notes to
Consolidated Financial Statements.
The Corporation realized benefits of approximately $20 million during the
three months ended March 28, 2004, net of restructuring-related expenses. Of
those restructuring savings, approximately 85% benefited gross margin, with the
remainder realized through a reduction of selling, general, and administrative
expenses.
The Corporation expects that incremental pre-tax savings associated with
the restructuring plan that was formulated in the fourth quarter of 2001 will
benefit results by at least $45 million in 2004 and $10 million in 2005, net of
restructuring-related expenses. The Corporation expects that, of those
incremental pre-tax savings in 2004 and 2005, approximately 80-85% will benefit
gross margin, with the remainder realized through a reduction of selling,
general, and administrative expenses.
The Corporation expects that pre-tax savings associated with the
restructuring actions associated with the integration of Baldwin and Weiser into
its Kwikset security hardware business will benefit 2005 and 2006 results by
approximately $5 million and $25 million, respectively, net of
restructuring-related expenses. The restructuring-related expenses associated
with these integration plans will have an adverse pre-tax impact of
approximately $15 million in 2004.
Ultimate savings realized from restructuring actions may be mitigated by
such factors as 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.
FINANCIAL CONDITION
Operating activities used cash of $54.8 million for the three months ended March
28, 2004, as compared to $120.4 million of cash used in the corresponding period
in 2003. Cash flow from operating activities included positive cash flow from
discontinued operations of $1.9 million for the three months ended March 28,
2004 and negative cash flow from discontinued operations of $1.5 million for the
three months ended March 30, 2003. The decrease in cash used by operating
activities during the three months ended March 28, 2004, as compared to the
prior year level, was primarily a result of increased earnings from continuing
operations and lower cash usage associated with other assets and liabilities.
These factors were partially offset by an increase in accounts receivable in the
first quarter of 2004 -- associated with the higher level of sales -- that
exceeded that period's increase in accounts payable -- associated with higher
production levels as well as the timing of payments -- all as compared to the
corresponding 2003 period. The reduction during the first quarter of 2004 from
the prior year level in cash used from operating activities associated with
-23-
other assets and liabilities was due to an increase in cash proceeds associated
with foreign currency hedging activities and lower value added tax payments.
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
March 28, 2004, increased modestly from the number of days sales outstanding at
March 30, 2003. Average inventory turns at March 28, 2004, increased slightly in
comparison to the same period in 2003. Average inventory turns as of March 30,
2003 were affected by safety stock that the Corporation maintained during 2003
related to the Corporation's restructuring program as well as to
lower-than-expected sales in the first quarter of 2003.
Investing activities for the three months ended March 28, 2004, provided
cash of $46.5 million as compared to $26.2 million of cash used during the
corresponding period in 2003. The increase in cash provided was primarily due to
$74.6 million of net proceeds from the sale of two of the discontinued European
security hardware businesses. Investing activities for the three months ended
March 28, 2004 included a payment of $7.9 million, net of cash acquired, related
to the purchase of Masterfix. The results of MasterFix, included in the
consolidated financial statements from the date of acquisition, were not
material. While there was a reduction in capital expenditures during the first
three months of 2004 as compared to 2003, the Corporation anticipates that its
capital spending in 2004 will approximate $120 million -- an increase from the
$102.5 million of capital expenditures incurred in 2003.
In January 2004, the Corporation signed an agreement to sell its remaining
discontinued business, DOM, for $28.0 million. The sale of DOM, which is subject
to regulatory approval, is expected to be completed during 2004.
Financing activities provided cash of $18.6 million during the three-month
period ended March 28, 2004, as compared to cash used of $86.4 million during
the corresponding period in 2003. Cash provided by financing activities for the
2004 period was principally attributable to $35.0 million in proceeds received
on the issuance of common stock under employee benefit plans, which exceeded
cash dividends of $16.6 million. Cash provided by financing activities in the
2004 period were reduced by the Corporation's quarterly dividend payments, which
increased -- on a per share basis -- from $.12 in the first quarter of 2003 to
$.21 in the first quarter of 2004. During the three months ended March 30, 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 2004, no common stock
was repurchased. As of March 28, 2004, the Corporation had remaining
authorization from its Board of Directors to repurchase 2,911,595 shares of its
common stock.
The variable-rate debt to total debt ratio, after taking interest rate
hedges into account, was 47% at both March 28, 2004 and December 31, 2003.
Average debt maturity was 8.5 years at March 28, 2004, compared to 8.8 years at
December 31, 2003.
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
-24-
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, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained under the caption "Hedging
Activities", included in Item 7, and in Notes 1 and 9 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, 2003, and is incorporated by reference
herein. There have been no material changes in the reported market risks since
the end of the most recent fiscal year.
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 March 28, 2004, 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 March 28, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
-25-
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 March 28, 2004, 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.
-26-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2004 Annual Meeting of Stockholders was held on April 27, 2004, for the
election of directors, to ratify the selection of Ernst & Young LLP as the
Corporation's independent auditor for fiscal year 2004, to approve The Black &
Decker Corporation 2004 Restricted Stock Plan, and to act on a stockholder
proposal. A total of 70,427,230 of the 78,226,668 votes entitled to be cast at
the meeting were present in person or by proxy. At the meeting, the
stockholders:
(1) Elected the following directors:
Number of Shares Number of Shares
Directors Voted For Authority Withheld
---------------------------------------------------------------------------
Nolan D. Archibald 68,218,087 2,209,143
Norman R. Augustine 67,739,332 2,687,898
Barbara L. Bowles 67,252,899 3,174,331
M. Anthony Burns 67,745,024 2,682,206
Kim B. Clark 68,780,253 1,646,977
Manuel A. Fernandez 65,269,536 5,157,694
Benjamin H. Griswold, IV 65,268,415 5,158,815
Anthony Luiso 64,810,042 5,617,188
(2) Ratified the selection of Ernst & Young LLP as the Corporation's
independent auditor for fiscal year 2004 by an affirmative vote of
67,673,362; votes against ratification were 2,146,140; and abstentions
were 607,728.
(3) Approved The Black & Decker Corporation 2004 Restricted Stock Plan by
an affirmative vote of 40,756,969; votes against the proposal were
19,349,690; abstentions were 568,489; and broker non-votes were
9,752,082.
(4) Rejected the stockholder proposal by a negative vote of 55,174,577;
affirmative votes for the stockholder proposal were 4,517,718;
abstentions were 982,853; and broker non-votes were 9,752,082.
No other matters were submitted to a vote of the stockholders at the meeting.
-27-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
10 The Black & Decker Corporation 2004 Restricted Stock Plan,
included as Exhibit B to the Proxy Statement, dated March
16, 2004, for the 2004 Annual Meeting of Stockholders of the
Registrant, is incorporated herein by reference.
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 January 29, 2004, 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 January 29, 2004, the Corporation had
reported its earnings for the three months and year ended December 31, 2003.
The Corporation did not file nor furnish any other reports on Form 8-K during
the three-month period ended March 28, 2004.
All other items were not applicable.
-28-
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: May 6, 2004