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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 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 of (I.R.S. Employer Identification No.)
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 October 24, 2004:
80,740,042
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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
September 26, 2004
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months and Nine Months Ended September 26, 2004 and
September 28, 2003.......................................................3
Consolidated Balance Sheet
September 26, 2004 (Unaudited) and December 31, 2003.....................4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 26, 2004 and September 28, 2003......5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 26, 2004 and September 28, 2003......6
Notes to Consolidated Financial Statements (Unaudited).....................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk............32
Item 4. Controls and Procedures...............................................32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................33
Item 6. Exhibits..............................................................34
SIGNATURES....................................................................35
-3-
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 26, September 28, September 26, September 28,
2004 2003 2004 2003
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Sales $1,282.5 $1,115.8 $3,673.0 $3,145.1
Cost of goods sold 809.2 720.2 2,309.3 2,023.5
Selling, general, and administrative expenses 315.3 266.9 926.4 810.3
Restructuring and exit costs - 21.0 - 21.6
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 158.0 107.7 437.3 289.7
Interest expense (net of interest income) 4.1 7.6 13.8 27.4
Other expense 1.4 .3 2.4 2.6
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Earnings from Continuing Operations
Before Income Taxes 152.5 99.8 421.1 259.7
Income taxes 41.2 26.6 113.7 68.7
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Net Earnings from Continuing Operations 111.3 73.2 307.4 191.0
Discontinued Operations (Net of Income Taxes):
Earnings of discontinued operations .2 1.2 .6 2.5
Gain on sale of discontinued operations (Note 2) 1.0 - 12.7 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Earnings from Discontinued Operations 1.2 1.2 13.3 2.5
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Net Earnings $ 112.5 $ 74.4 $ 320.7 $ 193.5
====================================================================================================================================
Basic Earnings Per Common Share
Continuing Operations $ 1.38 $ .94 $ 3.88 $ 2.45
Discontinued Operations .02 .02 .16 .03
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Net Earnings Per Common Share - Basic $ 1.40 $ .96 $ 4.04 $ 2.48
====================================================================================================================================
Shares Used in Computing Basic Earnings Per
Share (in Millions) 80.1 77.7 79.3 77.9
====================================================================================================================================
Diluted Earnings Per Common Share
Continuing Operations $ 1.35 $ .94 $ 3.80 $ 2.45
Discontinued Operations .02 .01 .16 .03
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Net Earnings Per Common Share - Assuming
Dilution $ 1.37 $ .95 $ 3.96 $ 2.48
====================================================================================================================================
Shares Used in Computing Diluted Earnings Per
Share (in Millions) 82.3 78.0 80.9 78.1
====================================================================================================================================
Dividends Per Common Share $ .21 $ .12 $ .63 $ .36
====================================================================================================================================
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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September 26,
2004 December 31,
(Unaudited) 2003
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Assets
Cash and cash equivalents $ 626.4 $ 308.2
Trade receivables 982.7 808.6
Inventories 903.4 709.9
Current assets of discontinued operations 66.3 160.2
Other current assets 179.8 216.1
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Total Current Assets 2,758.6 2,203.0
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Property, Plant, and Equipment 613.9 660.2
Goodwill 786.6 771.7
Other Assets 578.8 587.6
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$4,737.9 $4,222.5
================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 2.8 $ .1
Current maturities of long-term debt .4 .4
Trade accounts payable 508.1 379.8
Current liabilities of discontinued operations 29.8 38.0
Other accrued liabilities 880.2 893.8
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Total Current Liabilities 1,421.3 1,312.1
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Long-Term Debt 909.8 915.6
Deferred Income Taxes 180.8 179.8
Postretirement Benefits 460.7 451.9
Other Long-Term Liabilities 506.7 516.6
Stockholders' Equity
Common stock, par value $.50 per share 40.3 39.0
Capital in excess of par value 616.4 486.7
Unearned restricted stock compensation (12.2) --
Retained earnings 1,043.4 773.0
Accumulated other comprehensive income (loss) (429.3) (452.2)
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Total Stockholders' Equity 1,258.6 846.5
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$4,737.9 $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 Total
Common Par Excess of Retained Comprehensive 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) $599.6
Comprehensive income:
Net earnings -- -- -- 193.5 -- 193.5
Net loss on derivative
instruments (net of tax) -- -- -- -- (2.0) (2.0)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (3.1) (3.1)
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Comprehensive income -- -- -- 193.5 (5.1) 188.4
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Cash dividends ($.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
====================================================================================================================================
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Unearned Accumulated
Outstanding Capital in Restricted Other Total
Common Par Excess of Stock Retained Comprehensive Stockholders'
Shares Value Par Value Compensation Earnings Income (Loss) Equity
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Balance at December 31, 2003 77,933,464 $39.0 $486.7 $ -- $773.0 $(452.2) $ 846.5
Comprehensive income:
Net earnings -- -- -- -- 320.7 -- 320.7
Net gain on derivative
instruments (net of tax) -- -- -- -- -- 17.9 17.9
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- -- 33.7 33.7
Write-off of accumulated
foreign currency translation
adjustments due to sale
of businesses -- -- -- -- -- (28.7) (28.7)
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Comprehensive income -- -- -- -- 320.7 22.9 343.6
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Cash dividends ($.63 per share) -- -- -- -- (50.3) -- (50.3)
Restricted stock grants 255,296 .1 14.0 (14.1) -- -- --
Restricted stock amortization, net
of forfeitures (3,700) -- (.2) 1.9 -- -- 1.7
Purchase and retirement of
common stock (66,100) -- (3.6) -- -- -- (3.6)
Common stock issued under
employee benefit plans 2,511,770 1.2 119.5 -- -- -- 120.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 26, 2004 80,630,730 $40.3 $616.4 $(12.2) $1,043.4 $(429.3) $1,258.6
====================================================================================================================================
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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Nine Months Ended
September 26, September 28,
2004 2003
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Operating Activities
Net earnings $ 320.7 $ 193.5
Adjustments to reconcile net earnings to cash
flow from operating activities of continuing
operations:
Earnings of discontinued operations (.6) (2.5)
Gain on sale of discontinued operations
(net of impairment charge) (12.7) -
Non-cash charges and credits:
Depreciation and amortization 103.0 100.7
Restructuring and exit costs - 21.6
Other (.5) (4.8)
Changes in selected working capital items:
Trade receivables (167.9) (110.8)
Inventories (188.0) (3.4)
Trade accounts payable 126.8 72.6
Restructuring spending (19.5) (31.0)
Other assets and liabilities 100.0 (78.8)
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Cash flow from operating activities of
continuing operations 261.3 157.1
Cash flow from operating activities of
discontinued operations 3.0 3.0
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Cash Flow From Operating Activities 264.3 160.1
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Investing Activities
Proceeds from disposal of assets 15.8 9.7
Proceeds from sale of discontinued operations,
net of cash transferred 77.5 -
Capital expenditures (74.0) (77.8)
Purchase of businesses, net of cash acquired (12.6) -
Investing activities of discontinued operations (.9) (1.7)
Cash inflow from hedging activities 4.2 -
Cash outflow from hedging activities (7.0) -
Other investing activities, net - (1.0)
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Cash Flow From Investing Activities 3.0 (70.8)
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Financing Activities
Net (decrease) increase in short-term borrowings (1.7) 5.3
Payments on long-term debt (.4) (310.5)
Purchase of common stock (3.6) (77.5)
Issuance of common stock 105.2 4.0
Cash dividends (50.3) (28.0)
- --------------------------------------------------------------------------------
Cash Flow From Financing Activities 49.2 (406.7)
Effect of exchange rate changes on cash 1.7 2.2
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Increase (Decrease) In Cash And Cash Equivalents 318.2 (315.2)
Cash and cash equivalents at beginning of period 308.2 517.1
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Cash And Cash Equivalents At End Of Period $ 626.4 $ 201.9
================================================================================
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- and nine-month periods ended September 26,
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 and nine months ended September 28,
2003, have been reclassified to conform to the 2004 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 26,
2004, and September 28, 2003, the Corporation has presented comprehensive income
in the accompanying Consolidated Statement of Stockholders' Equity.
Comprehensive income for the three months ended September 26, 2004 and September
28, 2003, was $142.7 million and $43.3 million, respectively.
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 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 26, 2004 and September 28, 2003, is provided below.
-8-
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Three Months Ended Nine Months Ended
(Amounts in Millions Except Per Share Data) September 26, September 28, September 26, September 28,
2004 2003 2004 2003
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Net earnings $ 112.5 $ 74.4 $ 320.7 $ 193.5
Adjustments to net earnings for:
Stock-based compensation expense
included in net earnings, net of tax 3.5 .4 7.8 1.6
Pro forma stock-based compensation
(expense), net of tax (5.8) (4.3) (16.6) (15.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 110.2 $ 70.5 $ 311.9 $ 179.6
====================================================================================================================================
Pro forma net earnings per common share - basic $ 1.37 $ .91 $ 3.93 $ 2.31
====================================================================================================================================
Pro forma net earnings per common share
- assuming dilution $ 1.35 $ .91 $ 3.88 $ 2.31
====================================================================================================================================
New Accounting Pronouncements
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. In January 2004, the
FASB issued FASB Staff Position (FSP) No. FAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. As provided under FSP No. FAS 106-1, the Corporation
elected to defer accounting for the effects of the Act until authoritative
guidance on the accounting for the federal subsidy was issued or until a
significant event occured that ordinarily would call for the remeasurement of
the postretirement benefit plan's obligations.
In May 2004, the FASB issued FSP No. FAS 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. The provisions of FSP No. FAS 106-2 are effective for
the first interim or annual period beginning after June 15, 2004, and as such,
the Corporation prospectively accounted for the effects of the Act as of the
beginning of its third quarter of 2004. The accrued benefit obligation and the
net periodic postretirement cost included in the consolidated financial
statements, for the periods prior to the date of adoption, do not reflect the
effects of the Act on the Corporation's postretirement benefit plan. The
adoption did not have a material impact on the Corporation's financial position
or results of operations.
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.
-9-
In January 2004, the Corporation completed the sale of the NEMEF and Corbin
businesses to Assa Abloy and received cash proceeds, net of cash transferred, of
$74.6 million. In September 2004, the Corporation received additional cash
proceeds of $2.9 million. These additional cash proceeds reflect the final
adjustment to the purchase price for the net assets of the NEMEF and Corbin
businesses at the date of closing. 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. The DOM sales contract provides the
Corporation with the right to terminate the sales contract in the event that
regulatory approval is not obtained by December 31, 2004. In August 2004, the
German Federal Cartel Office indicated its disapproval of the sale of DOM to
Assa Abloy. Therefore, it is unlikely that the sale to Assa Abloy will occur by
December 31, 2004 as required by the sales contract. If the Corporation is
unable to sell the DOM business to Assa Abloy by December 31, 2004, it intends
to market the business for sale to other potential buyers. During the three and
nine months ended September 26, 2004, the Corporation recognized a $1.0 million
and $12.7 million gain on the sale of the discontinued operations, respectively.
The gain recognized during the nine months ended September 26, 2004 consisted of
a $37.1 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 $15.7 million
and $.5 million, respectively, and $47.0 million and $1.3 million, respectively,
for the three and nine months ended September 26, 2004, and $27.9 million and
$2.0 million, respectively, and $86.6 million and $5.2 million, respectively,
for the three and nine months ended September 28, 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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September 26, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Trade receivables $ 8.1 $ 16.1
Inventories 11.6 28.4
Property, plant, and equipment 15.8 27.9
Goodwill 25.7 82.7
Other assets 5.1 5.1
- --------------------------------------------------------------------------------
Total assets 66.3 160.2
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Trade accounts payable 4.0 8.5
Other accrued liabilities 8.7 11.5
Postretirement benefits and
other long-term liabilities 17.1 18.0
- --------------------------------------------------------------------------------
Total liabilities 29.8 38.0
- --------------------------------------------------------------------------------
Net assets $ 36.5 $ 122.2
================================================================================
-10-
NOTE 3: INVENTORIES
The classification of inventories at the end of each period, in millions of
dollars, was as follows:
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September 26, 2004 December 31, 2003
- --------------------------------------------------------------------------------
FIFO cost
Raw materials and work-in-process $ 218.3 $ 186.3
Finished products 670.5 510.3
- --------------------------------------------------------------------------------
888.8 696.6
Adjustment to arrive at LIFO inventory value 14.6 13.3
- --------------------------------------------------------------------------------
$ 903.4 $ 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
In September 2004, the Corporation increased the maximum amount authorized for
issuance under its commercial paper program from $500 million to $1.0 billion.
The Corporation's commercial paper program, which has been in existence since
2002, allows the Corporation to issue, at market rates, commercial paper with
maturities of up to 365 days.
The Corporation's average borrowings outstanding under its commercial paper
program and its unsecured revolving credit facility were $278.5 million and
$401.6 million for the nine-month periods ended September 26, 2004 and September
28, 2003, respectively.
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $303.8 million and $301.3 million were included in the Consolidated
Balance Sheet at September 26, 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:
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Interest expense $ 13.7 $ 13.4 $ 40.2 $ 45.7
Interest (income) (9.6) (5.8) (26.4) (18.3)
- --------------------------------------------------------------------------------
$ 4.1 $ 7.6 $ 13.8 $ 27.4
================================================================================
-11-
NOTE 6: BUSINESS SEGMENTS
The following table provides selected financial data for the Corporation's
reportable 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 26, 2004 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 854.4 $ 248.3 $ 142.4 $1,245.1 $ 37.4 $ - $ 1,282.5
Segment profit (loss) (for Consoli-
dated, operating income) 121.2 38.0 17.5 176.7 4.1 (22.8) 158.0
Depreciation and amortization 20.4 6.1 4.2 30.7 .9 2.2 33.8
Capital expenditures 14.9 8.9 3.7 27.5 .7 .1 28.3
Three Months Ended September 28, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 808.5 $ 174.3 $ 126.3 $1,109.1 $ 6.7 $ - $ 1,115.8
Segment profit (loss) (for Consoli-
dated, operating income before
restructuring and exit costs) 98.1 25.1 17.2 140.4 (.4) (11.3) 128.7
Depreciation and amortization 21.2 4.7 3.9 29.8 .2 .8 30.8
Capital expenditures 23.0 .8 3.1 26.9 .4 .2 27.5
Nine Months Ended September 26, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,420.3 $ 704.6 $ 432.8 $3,557.7 $ 115.3 $ - $ 3,673.0
Segment profit (loss) (for Consoli-
dated, operating income) 320.2 111.3 57.8 489.3 10.9 (62.9) 437.3
Depreciation and amortization 59.1 21.3 12.5 92.9 2.9 7.2 103.0
Capital expenditures 46.0 17.2 8.2 71.4 1.9 .7 74.0
Nine Months Ended September 28, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,261.1 $ 486.5 $ 391.5 $3,139.1 $ 6.0 $ - $ 3,145.1
Segment profit (loss) (for Consoli-
dated, operating income before
restructuring and exit costs) 244.9 55.0 55.8 355.7 .4 (44.8) 311.3
Depreciation and amortization 61.5 18.2 11.7 91.4 .3 9.0 100.7
Capital expenditures 53.9 13.2 9.7 76.8 .3 .7 77.8
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.
-12-
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 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.
-13-
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:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Segment profit for total reportable business segments $ 176.7 $ 140.4 $ 489.3 $ 355.7
Items excluded from segment profit:
Adjustment of budgeted foreign exchange rates
to actual rates 4.1 (.4) 10.9 .4
Depreciation of Corporate property (.3) (.3) (1.0) (.8)
Adjustment to businesses' postretirement benefit
expenses booked in consolidation .1 3.8 .4 11.5
Other adjustments booked in consolidation directly
related to reportable business segments (3.1) 1.0 (8.6) (9.0)
Amounts allocated to businesses in arriving at segment profit
in excess of (less than) Corporate center operating expenses,
eliminations, and other amounts identified above (19.5) (15.8) (53.7) (46.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income before restructuring and exit costs 158.0 128.7 437.3 311.3
Restructuring and exit costs - 21.0 - 21.6
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 158.0 107.7 437.3 289.7
Interest expense, net of interest income 4.1 7.6 13.8 27.4
Other expense 1.4 .3 2.4 2.6
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes $ 152.5 $ 99.8 $ 421.1 $ 259.7
====================================================================================================================================
-14-
NOTE 7: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period are as
follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
(Amounts in Millions Except Per Share Data) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings from continuing operations $ 111.3 $ 73.2 $ 307.4 $ 191.0
Net earnings of discontinued operations 1.2 1.2 13.3 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 112.5 $ 74.4 $ 320.7 $ 193.5
====================================================================================================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 80.1 77.7 79.3 77.9
Employee stock options 2.2 .3 1.6 .2
- ------------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions 82.3 78.0 80.9 78.1
====================================================================================================================================
Basic earnings per share
Continuing operations $ 1.38 $ .94 $ 3.88 $ 2.45
Discontinued operations .02 .02 .16 .03
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.40 $ .96 $ 4.04 $ 2.48
====================================================================================================================================
Diluted earnings per share
Continuing operations $ 1.35 $ .94 $ 3.80 $ 2.45
Discontinued operations .02 .01 .16 .03
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.37 $ .95 $ 3.96 $ 2.48
====================================================================================================================================
As of September 26, 2004, there were no anti-dilutive options outstanding.
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 nine-month period ended September
26, 2004, is set forth below (in millions of dollars):
-15-
- --------------------------------------------------------------------------------
Write-down to
Fair Value
Less Costs to
Sell of Certain
Severance Long-lived Other
Benefits Assets Charges Total
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2003 $ 42.6 $ - $ 1.1 $ 43.7
Reserves established in 2004 5.2 - .2 5.4
Reversal of reserves (4.0) - - (4.0)
Proceeds received in excess
of the adjusted carrying
value of long-lived assets - (1.4) - (1.4)
Utilization of reserves:
Cash (19.4) - (.1) (19.5)
Non-cash - 1.4 - 1.4
- --------------------------------------------------------------------------------
Restructuring reserve at
September 26, 2004 $ 24.4 $ - $ 1.2 $ 25.6
================================================================================
During the nine-month period ended September 26, 2004, the Corporation
recognized $5.4 million of pre-tax restructuring and exit costs related to
actions taken in its Power Tools and Accessories segment. The restructuring
actions taken in 2004 principally reflect severance benefits. The $5.4 million
charge recognized during the nine-month period ended September 26, 2004 was
offset, however, by the reversal of $4.0 million of severance accruals
established as part of previously provided restructuring reserves that were no
longer required and $1.4 million representing the excess of proceeds received on
the sale of long-lived assets, written down as part of restructuring actions,
over their adjusted carrying values.
Of the $25.6 million restructuring accrual as of September 26, 2004, $12.7
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 substantially completed during 2004;
however, payments under certain severance actions will continue into 2005. Also,
$8.7 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. The remaining $4.2 million relates to restructuring actions that
were recognized in the second quarter of 2004 and are associated with the
Corporation's Power Tools and Accessories segment. 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 tables present the components of the
Corporation's net periodic cost (benefit) related to its defined benefit pension
plans for the three and nine months ended September 26, 2004 and September 28,
2003 (in millions of dollars):
-16-
- ------------------------------------------------------------------------------------------------------------------
Pension Benefits Plans Pension Benefits Plans
In the United States Outside of the United States
-------------------------------- --------------------------------
Three Months Ended Three Months Ended
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Service cost $ 4.7 $ 4.1 $ 3.4 $ 3.8
Interest cost 13.7 14.6 8.9 6.8
Expected return on plan assets (20.6) (21.7) (8.8) (7.7)
Amortization of prior service cost .3 .3 .3 .3
Amortization of net actuarial loss 4.1 1.9 2.6 1.1
- ------------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 2.2 $ (.8) $ 6.4 $ 4.3
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
Pension Benefits Plans Pension Benefits Plans
In the United States Outside of the United States
-------------------------------- --------------------------------
Nine Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Service cost $ 14.1 $ 12.3 $ 10.4 $ 10.6
Interest cost 41.1 43.8 26.5 20.4
Expected return on plan assets (61.8) (65.1) (26.1) (23.3)
Amortization of prior service cost .9 .9 1.0 .9
Amortization of net actuarial loss 12.1 5.7 7.6 3.4
- ------------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 6.4 $ (2.4) $ 19.4 $ 12.0
==================================================================================================================
The Corporation's defined benefit postretirement plans 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
and nine months ended September 26, 2004 and September 28, 2003 (in millions of
dollars):
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Service cost $ .2 $ .3 $ .6 $ .7
Interest cost 2.1 2.7 6.7 8.1
Amortization of prior service cost (.5) (.6) (1.5) (1.8)
Amortization of net actuarial loss .2 .5 1.0 1.5
- ------------------------------------------------------------------------------------------------------------------
Net periodic cost $ 2.0 $ 2.9 $ 6.8 $ 8.5
==================================================================================================================
As more fully described in Note 1, the Corporation adopted the provisions
of FSP No. FAS 106-2 as of the beginning of its third quarter of 2004. Net
periodic cost of the Corporation's defined benefit postretirement plans for the
three months ended September 26, 2004 reflects the adoption of FSP No. FAS
106-2, which was not material.
-17-
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 (IRS) in connection with audits of
the tax years 1998 through 2000. The principal adjustment proposed by the IRS
consists of the disallowance of a capital loss deduction taken in the
Corporation's tax returns and interest on the deficiency. The Corporation
intends to vigorously dispute the position taken by the IRS in this matter.
Prior to receiving the notices of proposed adjustments from the IRS, the
Corporation filed a petition against the IRS in the Federal District Court of
Maryland (the Court) seeking refunds of approximately $57 million, plus
interest. The Corporation's refund claim is for a carryback of a portion of the
aforementioned capital loss deduction. The IRS subsequently filed a counterclaim
to the Corporation's petition. In October 2004, the Court granted the
Corporation's motion for summary judgment on its complaint against the IRS and
dismissed the IRS counterclaim. In its opinion, the Court ruled in the
Corporation's favor that the capital losses cannot be disallowed by the IRS. The
Corporation expects that the IRS will appeal this decision. The Corporation has
provided adequate reserves in the event that the IRS prevails in its
disallowance of the previously described capital loss and the imposition of
related interest. Should the IRS 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 2005 or later.
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 26, 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.
-18-
NOTE 11: SUBSEQUENT EVENTS
On October 4, 2004, the Corporation acquired the Tools Group from Pentair, Inc.
(the Tools Group). The cash purchase price for the transaction was approximately
$775 million. Based upon the estimated increase in the net assets of the Tools
Group, the Corporation paid an additional $21.8 million, on a preliminary basis,
to Pentair, Inc. The final purchase price is subject to customary adjustments
based upon changes in the net assets of the Tools Group through the closing
date. The Corporation is in the process of evaluating and finalizing its plan to
integrate the acquired businesses into its Power Tools and Accessories segment.
The Corporation's plan will eliminate excess costs and capacity from the
combined businesses. The Corporation has initiated certain actions under this
integration plan and intends to continue to formulate and finalize additional
actions under the integration plan over the next year. The business acquired
will be included in the consolidated financial statements from the date of
acquisition.
On October 18, 2004, the Corporation issued senior unsecured notes in the
principal amount of $300.0 million. The notes bear interest at a fixed rate of
4.75% and are due in 2014. Concurrently, the Corporation entered into
fixed-to-variable interest rate swap agreements with notional amounts totaling
$200.0 million. Under the new swap agreements, the Corporation receives a
weighted-average fixed rate of 4.70% and pays at variable rates based on the
six-month London Interbank Offered Rate (LIBOR). The Corporation has designated
these swap agreements as fair value hedges of the underlying fixed-rate
obligations.
On October 29, 2004, the Corporation replaced its $1.0 billion unsecured
revolving credit facility (the Former Credit Facility) that would have expired
in April 2006 with a $1.0 billion unsecured revolving credit facility (the
Credit Facility) that expires in October 2009. Under the Credit Facility, the
Corporation has the option of borrowing at LIBOR plus a specified percentage, or
at other variable rates set forth therein. The Credit Facility provides that the
interest rate margin over LIBOR, initially set at .375%, will increase (by a
maximum amount of .625%) or decrease (by a maximum amount of .115%) based upon
changes in the ratings of the Corporation's long-term senior unsecured debt.
In addition to interest payable on the principal amount of indebtedness
outstanding from time to time under the Credit Facility, the Corporation is
required to pay an annual facility fee, initially equal to .125%, of the amount
of the Credit Facility's commitment, whether used or unused. The Corporation is
also required to pay a utilization fee, initially equal to .125%, applied to the
outstanding balance when borrowings under the Credit Facility exceed 50% of the
Credit Facility. The Credit Facility provides that both the facility fee and the
utilization fee will increase or decrease based upon changes in the ratings of
the Corporation's long-term senior unsecured debt. The Credit Facility includes
various customary covenants. Some of the covenants limit the ability of the
Corporation and its subsidiaries to pledge assets or incur liens on assets.
Other financial covenants require the Corporation to maintain a specified
leverage ratio and interest coverage ratio.
The terms of the Corporation's Former 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.
-19-
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 68%, 19% and 13%, respectively, of the Corporation's sales for the
nine-month period ended September 26, 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 to the strength of the retail
economies and industrial demand. 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 $111.3
million, or $1.35 per share on a diluted basis, for the three-month period ended
September 26, 2004, compared to net earnings from continuing operations of $73.2
million, or $.94 per share on a diluted basis, for the three-month period ended
September 28, 2003. The Corporation reported net earnings from continuing
operations of $307.4 million, or $3.80 per share on a diluted basis, for the
nine-month period ended September 26, 2004, compared to net earnings from
continuing operations of $191.0 million, or $2.45 per share on a diluted basis,
for the nine-month period ended September 28, 2003. During the three and nine
months ended September 28, 2003, the Corporation recognized pre-tax
restructuring and exit costs of $21.0 million ($15.3 million net of tax) and
$21.6 million ($15.6 million net of tax), respectively.
The Corporation reported net earnings of $112.5 million, or $1.37 per share
on a diluted basis, for the three-month period ended September 26, 2004,
compared to net earnings of $74.4 million, or $.95 per share on a diluted basis,
for the corresponding period in 2003. The Corporation reported net earnings of
$320.7 million, or $3.96 per share on a diluted basis, for the nine-month period
ended September 26, 2004, compared to 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 more fully described in Note 2 of Notes to Consolidated Financial
Statements, net earnings for the three and nine months ended September 26, 2004,
included a gain on sale of discontinued operations of $1.0 million and $12.7
million, respectively. For the nine months ended September 26, 2004, that gain
was net of a $24.4 million impairment charge associated with the component of
the discontinued security hardware business that is held for sale.
Total consolidated sales of $1,282.5 million for the three months ended
September 26, 2004, increased by 15% over the corresponding period in 2003. Of
that 15% increase, 7% was attributable to an increase in unit volume of existing
businesses (in the following discussion "existing businesses" are defined as the
Corporation's businesses excluding the Baldwin, Weiser and MasterFix businesses
acquired in the past year), 6% was attributable to the incremental sales of the
Baldwin, Weiser and MasterFix businesses acquired in the past year, and 3% was
-20-
attributable to the favorable impact of foreign currency translation, offset by
1% attributable to the negative effect of pricing actions. During the nine
months ended September 26, 2004, total consolidated sales increased by 17% over
the corresponding period in the prior year to $3,673.0 million. Of that 17%
increase, 10% was attributable to an increase in unit volume of existing
businesses, 6% was attributable to the incremental sales of the Baldwin, Weiser,
and MasterFix businesses acquired in the past year, and 3% was attributable to
the favorable impact of foreign currency translation, offset by 2% attributable
to the negative effect of pricing actions.
Operating income for the three months ended September 26, 2004, increased
to $158.0 million, or 12.3% of sales, from $107.7 million, or 9.7% of sales, for
the corresponding period of 2003. That $107.7 million of operating income for
the third quarter of 2003 was reduced by $21.0 million of restructuring and exit
costs. Operating income for the nine months ended September 26, 2004, increased
to $437.3 million, or 11.9% of sales, from $289.7 million, or 9.2% of sales, for
the corresponding period of 2003. That $289.7 million of operating income for
the nine months ended September 28, 2003, was reduced by $21.6 million of
restructuring and exit costs. The increases in operating income as a percentage
of sales during both the third quarter and the first nine months of 2004, as
compared to the corresponding periods in the prior year, primarily resulted from
restructuring and exit costs in 2003 and improved gross margins in 2004. Gross
margin as a percentage of sales increased from 35.5% in the third quarter of
2003 to 36.9% in the comparable period in 2004 and from 35.7% in the first nine
months of 2003 to 37.1% in the comparable period in 2004. Those improvements
were mainly attributable to the positive effects of restructuring and other
productivity initiatives as well as of favorable foreign currency exchange
rates, partially offset by the negative effect of pricing actions. Selling,
general, and administrative expenses for both the three and nine months ended
September 26, 2004, increased over the prior year's levels, principally due to
incremental expenses of the businesses acquired in the past year, the effects of
foreign currency translation, increased promotional and marketing expenses and
higher Corporate expenses associated with stock-based compensation and
compliance with Section 404 of the Sarbanes-Oxley Act.
Earnings from continuing operations before income taxes increased over the
2003 levels by $52.7 million and $161.4 million to $152.5 million and $421.1
million for the three months and nine months ended September 26, 2004,
respectively. In addition to the improvements in operating income described
above, pre-tax earnings from continuing operations benefited from a $3.5 million
and $13.6 million reduction from the 2003 levels of net interest expense during
the three and nine months ended September 26, 2004, respectively.
As discussed further in Note 11 of Notes to the Consolidated Financial
Statements, on October 4, 2004, the Corporation acquired the Tools Group from
Pentair, Inc. for a purchase price of approximately $775 million in cash. Based
upon the estimated increase in the net assets of the Tools Group, the
Corporation paid an additional $21.8 million, on a preliminary basis, to
Pentair, Inc. The final purchase price is subject to customary adjustments based
upon changes in the net assets of the Tools Group through the closing date. The
Tools Group business will be included in the Corporation's Power Tools and
Accessories segment. The Corporation believes that its acquisition of the Tools
Group was both strategically and financially compelling. The acquisition of the
Tools Group has added well-respected brands to the Corporation's portfolio and
expands offerings in product lines where the Corporation has relatively low
market share, including woodworking equipment, compressors, pressure washers,
and nailers. In addition, the acquisition of the Tools Group will give the
Corporation a stronger presence throughout its distribution network. Finally,
the acquisition of the Tools Group provides the Corporation with
-21-
the opportunity to achieve cost synergies as it integrates the acquired business
into its existing professional power tools business.
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 26, 2004 and September 28,
2003:
ANALYSIS OF CHANGES IN SALES
- --------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 28, September 26, September 28,
(Dollars in Millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
Total sales $ 1,282.5 $ 1,115.8 $ 3,673.0 $ 3,145.1
- --------------------------------------------------------------------------------------------------
Unit volume - existing (a) 7 % 4 % 10 % - %
Unit volume - acquired (b) 6 % - % 6 % - %
Price (1)% (2)% (2)% (2)%
Currency 3 % 3 % 3 % 4 %
- --------------------------------------------------------------------------------------------------
Change in total sales 15 % 5 % 17 % 2 %
==================================================================================================
(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 and nine months ended September 26,
2004 increased by 15% and 17%, respectively, over sales for the corresponding
2003 periods. Excluding the Baldwin, Weiser, and MasterFix businesses acquired
in the past year, total unit volume increased by 7% and 10%, respectively,
during the three and nine months ended September 26, 2004, over the
corresponding periods in 2003. The improvement in both periods was primarily
attributable to the Corporation's North American businesses. As compared to the
corresponding periods in 2003, a double-digit increase in sales volume was
experienced by both the professional power tools and accessories and the
plumbing products businesses in North America during both the quarter and the
nine months ended September 26, 2004. Unit volume of the Baldwin, Weiser, and
MasterFix businesses acquired in the past year contributed 6% to the sales
growth for both the three and nine months ended September 26, 2004,
respectively, over the 2003 levels. Pricing actions in response to competitive
conditions had a 1% and 2% negative effect on sales for the three- and
nine-month periods ended September 26, 2004, respectively, as compared to the
corresponding periods in 2003. In addition to pricing actions taken in response
to competitive conditions, the impact of pricing in non-U.S. markets during the
first nine months of 2004 as a result of the favorable currency effects of U.S.
dollar-sourced products also negatively impacted the comparison to 2003. The
effects of a weaker U.S. dollar compared to other currencies, particularly the
euro and, to a lesser degree, the pound sterling, caused a 3% increase in the
Corporation's consolidated sales during both the three- and nine-month periods
ended September 26, 2004, respectively, as compared to the corresponding periods
in 2003.
-22-
EARNINGS
The Corporation reported consolidated operating income of $158.0 million, or
12.3% of sales, during the three months ended September 26, 2004, as compared to
operating income of $107.7 million, or 9.7% of sales, for the corresponding
period in 2003. That $107.7 million of operating income for the third quarter of
2003 was reduced by $21.0 million of restructuring and exit costs. Operating
income for the nine months ended September 26, 2004 was $437.3 million, or 11.9%
of sales, compared to operating income of $289.7 million, or 9.2% of sales, for
the corresponding period in 2003. That $289.7 million of operating income for
the nine months ended September 28, 2003, was reduced by $21.6 million of
restructuring and exit costs.
Consolidated gross margin as a percentage of sales was 36.9% and 35.5% for
the three-month periods ended September 26, 2004 and September 28, 2003,
respectively, and was 37.1% and 35.7% for the nine-month periods ended September
26, 2004 and September 28, 2003, respectively. The results of restructuring and
other productivity initiatives and, in Europe, foreign currency effects
favorably affected gross margin as a percentage of sales. These positive factors
were partially offset by negative pricing actions taken by the Corporation as
previously described.
Consolidated selling, general, and administrative expenses as a percentage
of sales were 24.6% and 25.2% for the three- and nine-month periods ended
September 26, 2004, respectively, compared to 23.9% and 25.8%, respectively, for
the corresponding three- and nine-month periods in 2003. Selling, general, and
administrative expenses increased by $48.4 million and $116.1 million for the
three and nine months ended September 26, 2004, respectively, over the 2003
levels. The incremental expenses of the Baldwin, Weiser, and MasterFix
businesses acquired in the past year accounted for approximately 30% and 35% of
those increases in selling, general, and administrative expenses during the
three- and nine-month periods ended September 26, 2004, respectively. In
addition, the effects of foreign currency translation accounted for
approximately 20% and 30% of those increases during the three and nine months
ended September 26, 2004, respectively. Higher promotional and marketing
expenses, particularly in the North American power tools and accessories
business, and higher Corporate expenses accounted for much of the remaining
increase in selling, general, and administrative expenses during the three and
nine months ended September 26, 2004.
Net interest expense (interest expense less interest income) for the three
months ended September 26, 2004, was $4.1 million, compared to net interest
expense of $7.6 million for the comparable 2003 period. Net interest expense was
$13.8 million for the nine months ended September 26, 2004, compared to net
interest expense of $27.4 million for the corresponding period in 2003. The
decrease in net interest expense for the both the three and nine months ended
September 26, 2004, from the 2003 levels was primarily the result of higher
interest income associated with the Corporation's foreign cash investment
activities in the 2004 periods, coupled with lower borrowing levels, including
the effects of a bond repayment in April 2003.
Other expense was $1.4 million and $2.4 million for the three and nine
months ended September 26, 2004, respectively, compared to $.3 million and $2.6
million for the corresponding periods in 2003.
Income tax expense of $41.2 million and $113.7 million was recognized on
the Corporation's earnings from continuing operations before income taxes of
$152.5 million and $421.1 million for the three- and nine-month periods ended
September 26, 2004, respectively. Consolidated income tax expense of $26.6
million and $68.7 million was recognized on the Corporation's
-23-
earnings from continuing operations before income taxes of $99.8 million and
$259.7 million for the three- and nine-month periods ended September 28, 2003,
respectively. The Corporation's effective tax rate of 27% for both the three and
nine months ended September 26, 2004, approximated the 27% and 26% effective tax
rates for the corresponding periods in 2003. The Corporation's income tax
expense and resultant effective tax rate, for both the three- and nine-month
periods ended September 26, 2004 and September 28, 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 $111.3
million, or $1.35 per share on a diluted basis, for the three months ended
September 26, 2004, compared to net earnings from continuing operations of $73.2
million, or $.94 per share on a diluted basis, for the corresponding period in
2003. The Corporation reported net earnings from continuing operations of $307.4
million, or $3.80 per share on a diluted basis, for the nine months ended
September 26, 2004, compared to $191.0 million, or $2.45 per share on a diluted
basis, for the corresponding period in 2003.
The Corporation reported net earnings from discontinued operations of $1.2
million and $13.3 million during the three- and nine-month periods ended
September 26, 2004, as compared to $1.2 million and $2.5 million during the
corresponding periods 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 and nine months ended September 26,
2004, included a $1.0 and $12.7 million gain on sale of discontinued operations,
respectively. The $12.7 million gain recognized in the nine months ended
September 26, 2004, consisted of a $37.1 million gain on the sale of two
discontinued businesses (NEMEF and Corbin) in early 2004, 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. The DOM sales
contract provides the Corporation with the right to terminate the sales contract
in the event that regulatory approval is not obtained by December 31, 2004. In
August 2004, the German Federal Cartel Office indicated its disapproval of the
sale of DOM to Assa Abloy. Therefore, it is unlikely that the sale to Assa Abloy
will occur by December 31, 2004 as required by the sales contract. If the
Corporation is unable to sell the DOM business to Assa Abloy by December 31,
2004, it intends to market the business for sale to other potential buyers.
The Corporation reported net earnings of $112.5 million, or $1.37 per share
on a diluted basis, for the three-month period ended September 26, 2004, as
compared to net earnings of $74.4 million, or $.95 per share on a diluted basis,
for the corresponding period in 2003. The Corporation reported net earnings of
$320.7 million, or $3.96 per share on a diluted basis, for the nine-month period
ended September 26, 2004, compared to $193.5 million, or $2.48 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.
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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 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 854.4 $ 808.5 $ 2,420.3 $ 2,261.1
Segment profit 121.2 98.1 320.2 244.9
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the third quarter of 2004 increased 6% over the 2003 level.
Sales in North America during the third quarter of 2004 increased at a
mid-single-digit rate over the prior year's level. Sales of professional power
tools and accessories increased at a double-digit rate, reflecting both
continued strong power tool demand as well as the effects of new products. Sales
of consumer power tools and accessories decreased at a high single-digit rate
due to the timing of orders. A greater percentage of the sales of products for
the holiday season are expected to occur in the fourth quarter in 2004 compared
to the third quarter in 2003.
Sales in Europe increased at a mid-single-digit rate during the third
quarter of 2004 over the corresponding period in 2003, led by a mid-single-digit
rate of increase in sales of professional power tools and accessories. In
comparison to the third quarter of 2003, sales of European consumer power tools
and accessories increased at a low single-digit rate during the comparable 2004
period, as increases in sales of home products and consumer power tools were
partially offset by decreases in sales of outdoor products.
Sales in other geographic areas increased at a double-digit rate in the
third quarter of 2004, as compared to the prior year's level, as sales increased
at a double-digit rate in Asia and in Central and South America.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment increased from 12.1% in the third quarter of 2003 to 14.2% in the third
quarter of 2004. That increase resulted from gross margin improvement, which was
predominantly attributable to the positive results of restructuring and other
productivity initiatives and foreign currency effects, partially offset by the
negative effects of pricing actions. Selling, general and administrative
expenses as a percentage of sales increased slightly due to higher promotional
and marketing expenses during the three months ended September 26, 2004,
compared to the corresponding period in the prior year.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the nine months ended September 26, 2004 increased 7% over the 2003
level.
Sales in North America increased at a double-digit rate during the first
nine months of 2004 over the prior year's 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 during the nine-month period,
compared to the corresponding period in the prior year, as increases in sales of
consumer power tools and outdoor products were partially offset by decreases in
sales of accessories and cleaning and lighting products.
Sales in Europe during the nine months ended September 26, 2004
approximated the prior year's level as a mid-single-digit rate of increase in
sales of professional power tools and
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accessories was offset by a mid-single-digit rate of decrease in sales of
consumer power tools and accessories largely as a result of lower sales of
outdoor products.
Sales in other geographic areas increased at a double-digit rate during the
first nine months of 2004, as compared to the prior year's level, as sales
increased at a double-digit rate in Asia, Central and South America, and
Australia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment improved from 10.8% for the nine months ended September 28, 2003 to
13.2% for the corresponding period in 2004. That increase primarily resulted
from an increase in gross margin and a reduction in selling, general, and
administrative expenses, both as a percentage of sales. Improvements in gross
margin as a percentage of sales were due to the positive results of
restructuring and other productivity initiatives and foreign currency effects,
partially offset by the negative effects of pricing actions. The reduction in
selling, general, and administrative expenses as a percentage of sales was due
to the leverage of expenses over higher sales volume.
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 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 248.3 $ 174.3 $ 704.6 $ 486.5
Segment profit 38.0 25.1 111.3 55.0
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment increased 42% and 45% during the three months and the nine months ended
September 26, 2004, respectively, over the corresponding periods in 2003. During
the three months ended September 26, 2004, incremental sales of the Baldwin and
Weiser businesses accounted for 35 percentage points of the 42% increase, while
higher sales of the Price Pfister plumbing products and Kwikset security
hardware businesses accounted for the remaining 7 percentage points. During the
nine months ended September 26, 2004, incremental sales of the Baldwin and
Weiser businesses accounted for 35 percentage points of the 45% increase, while
higher sales of the Price Pfister and Kwikset businesses accounted for the
remaining 10 percentage points. Sales of plumbing products increased at a
double-digit rate during both the three and nine months ended September 26,
2004, reflecting the expansion of listings at a key retailer that occurred
during the third quarter of 2003. Sales of Kwikset security hardware products
increased over the corresponding periods in 2003 at a low single-digit rate in
the third quarter of 2004, with gains in nearly all channels, and at a
mid-single-digit rate during the first nine months of 2004 due to strong retail
sales.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 15.3% and 15.8% for the three and nine months ended
September 26, 2004, respectively, as compared to 14.4% and 11.3% for the three
and nine months ended September 28, 2003, respectively. Segment profit as a
percentage of sales for the three- and nine-month periods ended September 26,
2004, benefited from significant gross margin improvement. That gross margin
improvement was primarily driven by productivity improvements, and, for the
nine-month period,
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restructuring actions. The acquisition of Baldwin and Weiser did not have a
significant effect on segment profit as a percentage of sales during the third
quarter or the first nine months of 2004.
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 26, September 28, September 26, September 28,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 142.4 $ 126.3 $ 432.8 $ 391.5
Segment profit 17.5 17.2 57.8 55.8
- ---------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased by 13% in the third quarter of 2004 and 11% in the first nine
months of 2004 over the corresponding 2003 periods. During March 2004, the
Corporation completed the acquisition of the MasterFix B.V. (MasterFix), an
industrial fastening company with operations in Europe and Asia. Incremental
sales of the MasterFix business accounted for 4 percentage points of the 13%
sales increase during the third quarter of 2004 and 3 percentage points of the
11% sales increase during the first nine months of 2004. Sales in North America
during the three and nine months ended September 26, 2004, increased at a
double-digit and a high single-digit rate, respectively, over the comparable
2003 periods with increases in both the industrial and automotive channels.
Sales in Europe during the three and nine months ended September 26, 2004
increased over the prior year's levels at a mid-single-digit and high
single-digit rate, respectively, due largely to the incremental sales of the
MasterFix business. The Corporation's existing European industrial business
experienced a high single-digit and mid-single-digit rate of growth during the
three- and nine-month periods ended September 26, 2004, as compared to the
corresponding periods in 2003, but were partially offset by a double-digit
decline in European automotive sales during the three months ended September 26,
2004. Sales in Asia increased at a double-digit rate during both the three- and
nine-month periods ended September 26, 2004 as compared to the corresponding
periods in 2003.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment declined from 13.6% in the third quarter of 2003 to 12.3% in the
third quarter of 2004, and from 14.3% in the first nine months of 2003 to 13.4%
in the corresponding period in 2004. Those declines in segment profit as a
percentage of sales were primarily due to increased materials costs but, for the
nine-month period ended September 26, 2004, were also affected by unfavorable
product mix and costs associated with the transfer of production from a small
manufacturing facility. The incremental impact of the MasterFix business did not
have a significant effect on segment profit as a percentage of sales of the
Fastening and Assembly Systems segment during either the third quarter or the
first nine months 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
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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. A similar increase is expected in 2005 over the
2004 levels. The adjustment to businesses' postretirement benefit expense booked
in consolidation as identified in the final table included in Note 6 of Notes to
Consolidated Financial Statements was income of $.1 million and $3.8 million for
the three months ended September 26, 2004 and September 28, 2003, respectively.
The adjustment to businesses' postretirement benefit expense booked in
consolidation as identified in the final table included in Note 6 of Notes to
Consolidated Financial Statements was income of $.4 million and $11.5 million
for the nine months ended September 26, 2004 and September 28, 2003,
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 $3.1 million and $8.6 million for the three- and
nine-month periods ended September 26, 2004, respectively, and $(1.0) million
and $9.0 million for the three- and nine-month periods ended September 28, 2003,
respectively. The principal item that contributed to the increase in expenses
between the three-month periods was a higher level of restructuring-related
expenses (associated with the Hardware and Home Improvement segment) and certain
reversals of expenses recorded by the Power Tools and Accessories and Fastening
and Assembly Systems segments in the third quarter of 2003 that did not recur in
2004. The principal item that contributed to the decrease in expenses between
the nine-month periods 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 center operating expenses, eliminations, and other amounts
identified in the final table included in Note 6 of Notes to Consolidated
financial statements were $(19.5) million and $(53.7) million for the three- and
nine-month periods ended September 26, 2004, respectively, and $(15.8) million
and $(46.5) million for the three- and nine-month periods ended September 28,
2003, respectively. The increases in these unallocated Corporate center
operating expenses for the three and nine months ended September 26, 2004, as
compared to the prior year's levels, were primarily due to higher stock-based
compensation expense not allocated directly to the Corporation's business
segments as well as costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act, partially offset by lower legal, environmental, and employee
medical expenses.
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 incremental benefits of approximately $16 million
and $58 million during the three and nine months ended September 26, 2004,
respectively, 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 approximately
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$65 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 the restructuring-related costs associated
with the integration of Baldwin and Weiser into its Kwikset security hardware
business will have an adverse pre-tax impact of approximately $15 million in
2004. The Corporation expects that incremental pre-tax savings associated with
these restructuring actions will benefit results by approximately $20 million in
2005 and $20 million in 2006, net of restructuring-related expenses, resulting
in annual savings of approximately $25 million.
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
evaluating and finalizing its plan to integrate the acquired Tools Group into
its power tools and accessories business. The Corporation's plan will eliminate
excess costs and capacity from the combined businesses. The Corporation has
initiated certain actions under this integration plan and intends to continue to
formulate and finalize additional actions under the integration plan over the
next year.
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 provided cash of $264.3 million for the nine months ended
September 26, 2004, as compared to $160.1 million of cash provided in the
corresponding period in 2003. Cash flow from operating activities included
positive cash flow from discontinued operations of $3.0 million for both the
nine months ended September 26, 2004 and September 28, 2003. The increase in
cash provided by operating activities during the nine months ended September 26,
2004, as compared to the prior year's level, was primarily a result of increased
earnings from continuing operations and lower cash usage associated with other
assets and liabilities. Increases in accounts receivable and inventories -
associated with the higher level of sales, and, for inventory, to achieve higher
service levels - exceeded the increase in accounts payable and accrued
liabilities - associated with higher production levels - in the first nine
months of 2004 as compared to the corresponding 2003 period. The increase during
the first nine months of 2004 from the prior year's level in cash provided by
operating activities associated with 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
September 26, 2004, increased modestly from the number of days sales outstanding
at September 28, 2003. Average inventory turns at September 26, 2004, increased
modestly in comparison to the same period in 2003. Average inventory turns as of
September 28, 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 half of 2003.
-29-
Investing activities for the nine months ended September 26, 2004, provided
cash of $3.0 million as compared to $70.8 million of cash used during the
corresponding period in 2003. The increase in cash provided was primarily due to
$77.5 million of net proceeds from the sale of two of the discontinued European
security hardware businesses and proceeds from the sale of a former
manufacturing site. Investing activities for the nine months ended September 26,
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 nine months of
2004 as compared to 2003, the Corporation anticipates that its capital spending
in 2004 will approximate $110 million -- an increase from the $102.5 million of
capital expenditures incurred in 2003.
In January 2004, the Corporation signed an agreement with Assa Abloy to
sell its remaining European security hardware business, DOM, for $28.0 million.
The DOM sales contract provides the Corporation with the right to terminate the
sales contract in the event that regulatory approval is not obtained by December
31, 2004. In August 2004, the German Federal Cartel Office indicated its
disapproval of the sale of DOM to Assa Abloy. Therefore, it is unlikely that the
sale to Assa Abloy will occur by December 31, 2004 as required by the sales
contract. If the Corporation is unable to sell the DOM business to Assa Abloy by
December 31, 2004, it intends to market the business for sale to other potential
buyers.
As discussed further in Note 11 of Notes to the Consolidated Financial
Statements, on October 4, 2004, the Corporation acquired the Tools Group from
Pentair, Inc. The cash purchase price for the transaction was approximately $775
million. Based upon the estimated increase in the net assets of the Tools Group,
the Corporation paid an additional $21.8 million, on a preliminary basis, to
Pentair, Inc. The final purchase price is subject to customary adjustments based
upon changes in the net assets of the Tools Group through the closing date.
Financing activities provided cash of $49.2 million during the nine-month
period ended September 26, 2004, as compared to cash used of $406.7 million
during the corresponding period in 2003. Cash provided by financing activities
for the 2004 period was principally attributable to $105.2 million in proceeds
received on the issuance of common stock under employee benefit plans, which
exceeded cash dividends of $50.3 million. Cash provided by financing activities
in the 2004 period were reduced by the Corporation's dividend payments, which
increased -- on a per share basis -- from $.36 during the first nine months of
2003 to $.63 during the first nine months of 2004. Cash used by financing
activities for the 2003 period was principally attributable to the repayment of
$309.5 million of debt that was repaid on April 1, 2003. During the nine months
ended September 26, 2004, the Corporation repurchased 66,100 shares of its
common stock at an aggregate cost of $3.6 million. During the corresponding
period in 2003, the Corporation repurchased 2,011,570 shares of its common stock
at an aggregate cost of $77.5 million. As of September 26, 2004, the Corporation
had remaining authorization from its Board of Directors to repurchase 2,845,495
shares of its common stock.
The variable-rate debt to total debt ratio, after taking interest rate
hedges into account, was 47% at both September 26, 2004 and December 31, 2003.
Average debt maturity was 8.0 years at September 26, 2004, compared to 8.8 years
at December 31, 2003.
As discussed further in Note 11 of Notes to the Consolidated Financial
Statements, on October 18, 2004, the Corporation issued $300.0 million of 4 3/4%
Senior Notes Due 2014. Concurrently, the Corporation entered into
fixed-to-variable interest rate swap agreements with notional amounts totaling
$200.0 million. Also, on October 29, 2004, the Corporation replaced its
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$1.0 billion unsecured revolving credit facility that expired in April 2006 with
a $1.0 billion unsecured revolving credit facility that expires in October 2009.
During 2003, the Corporation received notices of proposed adjustments from
the United States Internal Revenue Service (IRS) in connection with audits of
the tax years 1998 through 2000. The principal adjustment proposed by the IRS
consists of the disallowance of a capital loss deduction taken in the
Corporation's tax returns and interest on the deficiency. The Corporation
intends to vigorously dispute the position taken by the IRS in this matter.
Prior to receiving the notices of proposed adjustments from the IRS, the
Corporation filed a petition against the IRS in the Federal District Court of
Maryland (the Court) seeking refunds of approximately $57 million, plus
interest. The Corporation's refund claim is for a carryback of a portion of the
aforementioned capital loss deduction. The IRS subsequently filed a counterclaim
to the Corporation's petition. In October 2004, the Court granted the
Corporation's motion for summary judgment on its complaint against the IRS and
dismissed the IRS counterclaim. In its opinion, the Court ruled in the
Corporation's favor that the capital losses cannot be disallowed by the IRS. The
Corporation expects that the IRS will appeal this decision. The Corporation has
provided adequate reserves in the event that the IRS prevails in its
disallowance of the previously described capital loss and the imposition of
related interest. Should the IRS 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 2005 or later.
The Corporation will continue to have cash requirements to support seasonal
working capital needs and capital expenditures, to pay interest, to service
debt, and to complete the integration and restructuring actions previously
described. In order to meet its cash requirements, the Corporation intends to
use its existing cash, internally generated funds, and borrow under its
unsecured revolving credit facility or under short-term borrowing facilities.
The Corporation believes that cash provided from these sources will be adequate
to meet its cash requirements over the next twelve months.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating
to sales growth, earnings or earnings per share growth, and market share, as
well as statements expressing optimism or pessimism about future operating
results, are forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
-31-
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. Additional risk
factors that should be considered include: (i) the ability to successfully
integrate the operations of businesses or companies acquired and realize the
anticipated costs savings, synergies, and other benefits relating to the
acquisitions of such businesses; and (ii) increases in pension and other
postretirement benefit costs in 2005 that are expected to be in excess of the
costs recognized in 2004.
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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. As of September 26, 2004, there were no material changes in the reported
market risks since the end of the most recent fiscal year.
As discussed further in Note 11 of Notes to the Consolidated Financial
Statements, on October 18, 2004, the Corporation issued $300.0 million of 4 3/4%
Senior Notes Due 2014. Concurrently, the Corporation entered into
fixed-to-variable interest rate swap agreements with notional amounts totaling
$200.0 million. On October 29, 2004, the Corporation replaced its $1.0 billion
unsecured revolving credit facility that expired in April 2006 with a $1.0
billion unsecured revolving credit facility that expires in October 2009.
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 26, 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 September 26, 2004, 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 26, 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.
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ITEM 6. EXHIBITS
Exhibit No. Description
4.1 Indenture, dated as of October 18, 2004, between The Black
& Decker Corporation and The Bank of New York, as Trustee,
included in the Corporation's Current Report on Form 8-K
filed with the Commission on October 20, 2004, is
incorporated herein by reference.
4.2 Form of 4 3/4% Senior Note Due 2014 (included in Exhibit
4.1), included in the Corporation's Current Report on Form
8-K filed with the Commission on October 20, 2004, is
incorporated herein by reference.
4.3 Exchange and Registration Rights Agreement, dated as of
October 18, 2004, among The Black & Decker Corporation and
J.P. Morgan Securities Inc., Banc of America Securities
LLC, Citigroup Global Markets Inc. and the other initial
purchasers named therein, included in the Corporation's
Current Report on Form 8-K filed with the Commission on
October 20, 2004, is incorporated herein by reference.
4.4 Credit Agreement, dated as of October 29, 2004, between The
Black & Decker Corporation and Citibank, N.A. as
administrative agent, JPMorgan Chase Bank as syndication
agent, Bank of America, N.A., BNP Paribas and Commerzbank
AG as co-documentation agents, and a syndicate of lenders
identified therein, included in the Corporation's Current
Report on Form 8-K filed with the Commission on November 4,
2004, 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.
All other items were not applicable.
-35-
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 4, 2004
Exhibit 31.1
THE BLACK & DECKER CORPORATION
C E R T I F I C A T I O N S
I, Nolan D. Archibald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ NOLAN D. ARCHIBALD
- ------------------------------------------------
Nolan D. Archibald
Chairman, President, and Chief Executive Officer
November 4, 2004
Exhibit 31.2
THE BLACK & DECKER CORPORATION
C E R T I F I C A T I O N S
I, Michael D. Mangan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ MICHAEL D. MANGAN
- -------------------------------------------------
Michael D. Mangan
Senior Vice President and Chief Financial Officer
November 4, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Black & Decker Corporation (the
"Corporation") on Form 10-Q for the period ended September 26, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Nolan D. Archibald, Chief Executive Officer of the Corporation, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
/s/ NOLAN D. ARCHIBALD
- -----------------------
Nolan D. Archibald
Chief Executive Officer
November 4, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Black & Decker Corporation (the
"Corporation") on Form 10-Q for the period ended September 26, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Michael D. Mangan, Chief Financial Officer of the Corporation, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
/s/ MICHAEL D. MANGAN
- -----------------------
Michael D. Mangan
Chief Financial Officer
November 4, 2004