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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
December 31, 2004 1-1553
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THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State of Incorporation) (I.R.S. Employer
Identification Number)
Towson, Maryland 21286
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 410-716-3900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$.50 per share Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 25, 2004, was $4.82 billion.
The number of shares of Common Stock outstanding as of January 28, 2005, was
82,107,971.
The exhibit index as required by Item 601(a) of Regulation S-K is included in
Item 15 of Part IV of this report.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Report.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Black & Decker Corporation (collectively with its subsidiaries, the
Corporation), incorporated in Maryland in 1910, is a leading global manufacturer
and marketer of power tools and accessories, hardware and home improvement
products, and technology-based fastening systems. With products and services
marketed in over 100 countries, the Corporation enjoys worldwide recognition of
its strong brand names and a superior reputation for quality, design,
innovation, and value.
The Corporation is one of the world's leading producers of power tools,
power tool accessories, and residential security hardware, and the Corporation's
product lines hold leading market share positions in these industries. The
Corporation is also a major global supplier of engineered fastening and assembly
systems. The Corporation is one of the leading producers of faucets in North
America. These assertions are based on total volume of sales of products
compared to the total market for those products and are supported by market
research studies sponsored by the Corporation as well as independent industry
statistics available through various trade organizations and periodicals,
internally generated market data, and other sources.
During the fourth quarter of 2004, the Corporation acquired the
Porter-Cable and Delta Tools Group from Pentair, Inc. The Porter-Cable and Delta
Tools Group (also referred to herein as the "Tools Group") includes the
Porter-Cable, Delta, DeVilbiss Air Power Company, Oldham Saw, and FLEX
businesses.
During the fourth quarter of 2003, the Corporation completed the
acquisition of the Baldwin Hardware Corporation (Baldwin) and Weiser Lock
Corporation (Weiser) from Masco Corporation. For additional information about
the acquisitions of the Tools Group and Baldwin and Weiser, see Note 2 of Notes
to Consolidated Financial Statements included in Item 8 of Part II of this
report.
In January 2004, the Corporation completed the sale of two European
security hardware businesses, Corbin and NEMEF. Together with DOM security
hardware, which is currently held for sale, these businesses are reflected as
discontinued operations in the Consolidated Financial Statements included in
Item 8 of Part II of this report, and as such, operating results, assets and
liabilities, and cash flows of the discontinued European security hardware
business have been reported separately from the continuing operations of the
Corporation. For additional information about the discontinued European security
hardware business, see the discussion in Note 3 of Notes to Consolidated
Financial Statements included in Item 8 of Part II of this report.
(b) Financial Information About Business Segments
The Corporation operates in three reportable business segments: Power Tools and
Accessories, including consumer and professional power tools and accessories,
lawn and garden tools, electric cleaning and lighting products, and product
service; Hardware and Home Improvement, including security hardware and plumbing
products; and Fastening and Assembly Systems. For additional information about
these segments, see Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of Part II, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 of Part II of
this report.
(c) Narrative Description of the Business
The following is a brief description of each of the Corporation's reportable
business segments.
POWER TOOLS AND ACCESSORIES
The Power Tools and Accessories segment has worldwide responsibility for the
manufacture and sale of consumer (home use) and professional corded and cordless
electric power tools and equipment, lawn and garden tools, home products,
accessories and attachments for power tools, and product service. In addition,
the Power Tools and Accessories segment has responsibility for the sale of
security hardware to customers in Mexico, Central America, the Caribbean, and
South America; for the sale of plumbing products to customers outside of the
United States and Canada; and for sales of household products, principally in
Europe and Brazil.
Power tools and equipment include drills, screwdrivers, impact wrenches and
drivers, hammers, wet/dry vacuums, lights, radio/chargers, saws, grinders, band
saws, plate joiners, jointers, lathes, dust management systems, routers,
planers, sanders, benchtop and stationary machinery, air tools, building
instruments, air compressors, generators, laser products, jobsite security
systems, and WORKMATE(R) project centers and related products. Lawn and garden
tools include hedge trimmers, string trimmers, lawn mowers, edgers,
blower/vacuums, power sprayers, pressure washers, and related accessories. Home
products include stick and hand-held vacuums, flexible flashlights, and wet
scrubbers. Power tool accessories include drill bits, hammer bits, router bits,
hacksaws and blades, circular saw blades, jig and reciprocating saw blades,
screwdriver bits and quick-change systems, bonded and other abrasives, and
worksite tool belts and bags. Product service provides replacement parts and
repair and maintenance of power tools, equipment, and lawn and garden tools.
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Power tools, lawn and garden tools, home products, and accessories are
marketed around the world under the BLACK & DECKER name as well as other
trademarks and trade names, including, without limitation, BLACK & DECKER;
ORANGE AND BLACK COLOR SCHEME; BULLET; BULLS EYE; CROSSFIRE; CROSSHAIR;
360(degree); MARKSMAN; AUTOTAPE; FIRESTORM; GELMAX COMFORT GRIP; MEGA MOUSE;
MOUSE; NAVIGATOR; PIVOT DRIVER; PIVOTPLUS; QUANTUM PRO; RTX; SANDSTORM;
DRAGSTER; SCORPION; SWIVEL; VERSAPAK; QUATTRO; WORKMATE; ALLIGATOR; EX-CELL;
DEWALT; YELLOW AND BLACK COLOR SCHEME; PORTER-CABLE; DELTA; THE DELTA TRIANGLE
LOGO; BIESEMEYER; FLEX; DAPC; EMGLO; GUARANTEED TOUGH; XRP; SITELOCK; UNISAW;
TIGER SAW; PORTA-BAND; POWERBACK; EASY AIR; JOB BOSS; SHOPMASTER; AFS AUTOMATIC
FEED SPOOL; FLEX TUBE; GROOM `N' EDGE; EDGE HOG; GRASS HOG; HEDGE HOG; LAWN HOG;
LEAF HOG; REFLEX; STRIMMER; VAC `N' MULCH; DIRTBUSTER; DUSTBUSTER; SCUMBUSTER;
SNAKELIGHT; STEAMBUSTER; ACCESSORIES FINDER; B&D ; PILOT POINT; PIRANHA; RAPID
LOAD; ROCK CARBIDE; TOUGH CASE; MAX LIFE; RAZOR; VIPER; SUPER DUTY; OLDHAM;
DEWALT SERVICENET; DROP BOX EXPRESS; and GUARANTEED REPAIR COST (GRC).
The composition of the Corporation's sales by product groups for 2004,
2003, and 2002 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2004, 2003, or 2002.
The Corporation's product service program supports its power tools and lawn
and garden tools. Replacement parts and product repair services are available
through a network of company-operated service centers, which are identified and
listed in product information material generally included in product packaging.
At December 31, 2004, there were approximately 160 such service centers, of
which roughly three-quarters were located in the United States. The remainder
was located around the world, primarily in Canada and Asia. These
company-operated service centers are supplemented by several hundred authorized
service centers operated by independent local owners. The Corporation also
operates reconditioning centers in which power tools, lawn and garden tools, and
electric cleaning and lighting products are reconditioned and then re-sold
through numerous company-operated factory outlets and service centers.
Most of the Corporation's consumer power tools, lawn and garden tools, and
electric cleaning and lighting products sold in the United States carry a
two-year warranty, pursuant to which the consumer can return defective products
during the two years following the purchase in exchange for a replacement
product or repair at no cost to the consumer. Most of the Corporation's
professional power tools sold in the United States carry a one-year service
warranty and a three-year warranty for manufacturing defects. Products sold
outside of the United States generally have varying warranty arrangements,
depending upon local market conditions and laws and regulations.
The Corporation's product offerings in the Power Tools and Accessories
segment are sold primarily to retailers, wholesalers, distributors, and jobbers,
although some discontinued or reconditioned power tools, lawn and garden tools,
and electric cleaning and lighting products are sold through company-operated
service centers and factory outlets directly to end users. Sales to two of the
segment's customers, The Home Depot and Lowe's Home Improvement Warehouse,
accounted for greater than 10% of the Corporation's consolidated sales for 2004,
2003, and 2002. For additional information regarding sales to The Home Depot and
Lowe's Home Improvement Warehouse, see Note 17 of Notes to Consolidated
Financial Statements included in Item 8 of Part II of this report.
The principal materials used in the manufacturing of products in the Power
Tools and Accessories segment are batteries, copper, aluminum, steel, certain
electronic components, engines, and plastics. These materials are used in
various forms. For example, aluminum or steel may be used in the form of wire,
sheet, bar, and strip stock.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority are available through multiple sources and are
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations.
Principal manufacturing and assembly facilities of the power tools, lawn
and garden tools, electric cleaning and lighting products, and accessories
businesses in the United States are located in Fayetteville, North Carolina;
Jackson, Tennessee; Decatur, Arkansas; and Tampa, Florida. The principal
distribution facilities in the United States, other than those located at the
manufacturing and assembly facilities listed above, are located in Fort Mill,
South Carolina, and Rialto, California.
Principal manufacturing and assembly facilities of the power tools, lawn
and garden tools, electric cleaning and lighting products, and accessories
businesses outside of the United States are located in Suzhou and Qingdao,
China; Taichung, Taiwan; Usti nad Labem, Czech Republic; Buchlberg, Germany;
Perugia, Italy; Spennymoor and Maltby, England;
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Reynosa, Mexico; and Uberaba, Brazil. In addition to the principal facilities
described above, the manufacture and assembly of products for the Power Tools
and Accessories segment also occurs at the facility of its 50%-owned joint
venture located in Shen Zhen, China. The principal distribution facilities
outside of the United States, other than those located at the manufacturing
facilities listed above, consist of a central-European distribution center in
Tongeren, Belgium, and facilities in Aarschot, Belgium; Northampton, England;
and Brockville, Canada.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Power Tools and Accessories segment. Although these patents
and licenses are important, the Corporation is not materially dependent on such
patents or licenses with respect to its operations.
The Corporation holds various trademarks that are employed in its
businesses and operates under various trade names, some of which are stated
previously. The Corporation believes that these trademarks and trade names are
important to the marketing and distribution of its products.
A significant portion of the Corporation's sales in the Power Tools and
Accessories segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature. However, sales of certain
consumer and professional power tools tend to be higher during the period
immediately preceding the Christmas gift-giving season, while the sales of most
lawn and garden tools are at their peak during the winter and early spring
period. Most of the Corporation's other product lines within this segment
generally are not seasonal in nature, but are influenced by other general
economic trends.
The Corporation is one of the world's leaders in the manufacturing and
marketing of portable power tools, electric lawn and garden tools, and
accessories. Worldwide, the markets in which the Corporation sells these
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong,
well-established manufacturers that compete on a global basis. Some of these
companies manufacture products that are competitive with a number of the
Corporation's product lines. Other competitors restrict their operations to
fewer categories, and some offer only a narrow range of competitive products.
Competition from certain of these manufacturers has been intense in recent years
and is expected to continue.
HARDWARE AND HOME IMPROVEMENT
The Hardware and Home Improvement segment has worldwide responsibility for the
manufacture and sale of security hardware products (except for the sale of
security hardware in Mexico, Central America, the Caribbean, and South America).
It also has responsibility for the manufacture of plumbing products, and for the
sale of plumbing products to customers in the United States and Canada. Security
hardware products consist of residential and light commercial door locksets,
electronic keyless entry systems, exit devices, keying systems, tubular and
mortise door locksets, general hardware, decorative hardware, outdoor lighting,
indoor lighting, home accents, and collectibles. General hardware includes door
hinges, cabinet hinges, door stops, kick plates, and house numbers. Decorative
hardware includes cabinet hardware, switchplates, door pulls, and push plates.
Plumbing products consist of a variety of conventional and decorative lavatory,
kitchen, and tub and shower faucets, bath and kitchen accessories, and
replacement parts.
Security hardware products are marketed under a variety of trademarks and
trade names, including, without limitation, KWIKSET SECURITY; KWIKSET MAXIMUM
SECURITY; KWIKSET ULTRAMAX SECURITY; SOCIETY BRASS COLLECTION; KWIKSET; BLACK &
DECKER; PROTECTO LOCK; TYLO; POLO; VENETIAN BRONZE; POWERBOLT; KWIK INSTALL; EZ
INSTALL; GEO; SAFE-LOCK BY BLACK & DECKER; BALDWIN; THE ESTATE COLLECTION; THE
IMAGES COLLECTION; ARCHETYPES; VILLA; CHATEAU; LIFETIME FINISH; CRAFTSMAN;
TIMELESS CRAFTSMANSHIP; LOGAN; SPRINGFIELD; HAMILTON; BLAKELY; MANCHESTER;
CANTERBURY; MADISON; STONEGATE; EDINBURGH; KENSINGTON; BRISTOL; TREMONT; PEYTON;
PASADENA; RICHLAND; WEISER; WEISER LOCK; PRESTIGE SERIES; WELCOME HOME SERIES;
ELEMENTS SERIES; BASICS BY WEISER LOCK; BRILLIANCE LIFETIME ANTI-TARNISH FINISH;
POWERBOLT KEYLESS ACCESS SYSTEM; FASHION DOORWARE; DECORATOR FINISH; WEISERBOLT;
and ENTRYSETS. Plumbing products are marketed under the trademarks and trade
names PRICE PFISTER; CLASSIC SERIES BY PRICE PFISTER; PRICE PFISTER PROFESSIONAL
SERIES; BACH; SOLO; CONTEMPRA; MARIELLE; TWISTPFIT; MATCHMAKERS; CARMEL; PARISA;
SAVANNAH; ARIETTA; ALLEMANDE; GRAZIA; MORCEAU; CATALINA; GEORGETOWN; and
TREVISO.
The composition of the Corporation's sales by product groups for 2004,
2003, and 2002 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2004, 2003, or 2002.
Most of the Corporation's security hardware products sold in the United
States carry a warranty, pursuant to which the consumer can return defective
product during the warranty term in exchange for a replacement product at no
cost to the consumer. Warranty
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terms vary by product and range from a 10-year to a lifetime warranty with
respect to mechanical operations and from a 5-year to a lifetime warranty with
respect to finish. Products sold outside of the United States for residential
use generally have similar warranty arrangements. Such arrangements vary,
however, depending upon local market conditions and laws and regulations. Most
of the Corporation's plumbing products sold in the United States carry a
lifetime warranty with respect to function and finish, pursuant to which the
consumer can return defective product in exchange for a replacement product or
repair at no cost to the consumer.
The Corporation's product offerings in the Hardware and Home Improvement
segment are sold primarily to retailers, wholesalers, distributors, and jobbers.
Certain security hardware products are sold to commercial, institutional, and
industrial customers. Sales to two of the segment's customers, The Home Depot
and Lowe's Home Improvement Warehouse, accounted for greater than 10% of the
Corporation's consolidated sales for 2004, 2003, and 2002. For additional
information regarding sales to The Home Depot and Lowe's Home Improvement
Warehouse, see Note 17 of Notes to Consolidated Financial Statements included in
Item 8 of Part II of this report.
The principal materials used in the manufacturing of products in the
Hardware and Home Improvement segment are zamak, brass, plastics, aluminum,
steel, and ceramics.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority is available through multiple sources and is
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations. From time to
time, the Corporation enters into commodity hedges on certain raw materials used
in the manufacturing process to reduce the risk of market price fluctuations. As
of December 31, 2004, the amount of product under commodity hedges was not
material to the Corporation.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment in the United States are located in Denison, Texas; Bristow,
Oklahoma; and Reading and Leesport, Pennsylvania.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment outside of the United States are located in Mexicali and
Nogales, Mexico. The principal distribution facilities in the United States,
other than those located at the manufacturing and assembly facilities listed
above, are located in Mira Loma, California; Charlotte, North Carolina; and
Northpointe, Pennsylvania.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Hardware and Home Improvement segment. Although these
patents and licenses are important, the Corporation is not materially dependent
on such patents or licenses with respect to its operations.
The Corporation holds various trademarks that are employed in its
businesses and operates under various trade names, some of which are stated
above. The Corporation believes that these trademarks and trade names are
important to the marketing and distribution of its products.
A significant portion of the Corporation's sales in the Hardware and Home
Improvement segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature, but are influenced by
trends in the residential and commercial construction markets and other general
economic trends.
The Corporation is one of the world's leading producers of residential
security hardware and is one of the leading producers of faucets in North
America. Worldwide, the markets in which the Corporation sells these products
are highly competitive on the basis of price, quality, and after-sale service. A
number of competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies
manufacture products that are competitive with a number of the Corporation's
product lines. Other competitors restrict their operations to fewer categories,
and some offer only a narrow range of competitive products. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
FASTENING AND ASSEMBLY SYSTEMS
The Corporation's Fastening and Assembly Systems segment has worldwide
responsibility for the manufacture and sale of an extensive line of metal and
plastic fasteners and engineered fastening systems for commercial applications,
including blind riveting, stud welding, assembly systems, specialty screws,
prevailing torque nuts and assemblies, insert systems, metal and plastic
fasteners, and self-piercing riveting systems. The fastening and assembly
systems products are marketed under a variety of trademarks and trade names,
including, without limitation, EMHART TEKNOLOGIES; EMHART FASTENING TEKNOLOGIES;
EMHART; AUTOSET;
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DODGE; DRIL-KWICK; F-SERIES; GRIPCO; GRIPCO ASSEMBLIES; HELI-COIL; JACK NUT;
KALEI; MENTOR; NPR; NUT-FAST; PARKER-KALON; PLASTIFAST; PLASTI-KWICK; POINT &
SET; POP; POP-LOK; POPMATIC; POPNUT; POP-SERT; POWERLINK; PROSET; SMARTSET; SWS;
T-RIVET; TUCKER; ULTRA-GRIP; ULTRASERT; SWAGEFORM; WARREN; WELDFAST; and
WELL-NUT. The Fastening and Assembly Systems segment provides
platform-management services in addition to the manufacture and sale of the
products previously described.
The composition of the Corporation's sales by product groups for 2004,
2003, and 2002 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2004, 2003, or 2002.
The principal markets for these products include the automotive,
transportation, electronics, aerospace, machine tool, and appliance industries.
Substantial sales are made to automotive manufacturers worldwide.
Products are marketed directly to customers and also through distributors
and representatives. These products face competition from many manufacturers in
several countries. Product quality, performance, reliability, price, delivery,
and technical and application engineering services are the primary competitive
factors. There is little seasonal variation in sales.
The Corporation owns a number of United States and foreign patents,
trademarks, and license rights relating to the fastening and assembly systems
business. While the Corporation considers those patents, trademarks, and license
rights to be valuable, it is not materially dependent upon such patents or
license rights with respect to its operations.
Principal manufacturing facilities of the Fastening and Assembly Systems
segment in the United States are located in Danbury, Connecticut; Montpelier,
Indiana; Campbellsville and Hopkinsville, Kentucky; and Chesterfield, Michigan.
Principal manufacturing and assembly facilities outside of the United States are
located in Birmingham, England; Giessen, Germany; and Toyohashi, Japan. For
additional information with respect to these and other properties owned or
leased by the Corporation, see Item 2, "Properties."
The raw materials used in the fastening and assembly systems business
consist primarily of ferrous and nonferrous metals in the form of wire, bar
stock, and strip and sheet metals; plastics; and rubber. These materials are
readily available from a number of suppliers.
OTHER INFORMATION
The Corporation's product development program for the Power Tools and
Accessories segment is coordinated from the Corporation's headquarters in
Towson, Maryland. Additionally, product development activities are performed at
facilities in Hampstead, Maryland; Jackson, Tennessee; and Pittsburgh,
Pennsylvania; in the United States; Maltby and Spennymoor, England; Brockville,
Canada; Perugia, Italy; Suzhou, China; Taichung, Taiwan; Buchlberg, Idstein and
Steinheim, Germany; Mooroolbark, Australia; Uberaba, Brazil; and Reynosa,
Mexico.
Product development activities for the Hardware and Home Improvement
segment are performed at facilities in Lake Forest, California, and Reading,
Pennsylvania.
Product development activities for the Fastening and Assembly Systems
segment are performed at facilities in Danbury and Shelton, Connecticut;
Montpelier, Indiana; Campbellsville, Kentucky; Chesterfield and Farmington
Hills, Michigan; Birmingham, England; Maastricht, Netherlands; Giessen, Germany;
and Toyohashi, Japan.
Costs associated with development of new products and changes to existing
products are charged to operations as incurred. See Note 1 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report
for amounts of expenditures for product development activities.
As of December 31, 2004, the Corporation employed approximately 26,200
persons in its operations worldwide, excluding approximately 500 employees of
its discontinued European security hardware business. Approximately 450
employees in the United States are covered by collective bargaining agreements.
During 2004, one collective bargaining agreement in the United States was
negotiated without material disruption to operations. Two agreements are
scheduled for negotiation during 2005. Also, the Corporation has
government-mandated collective bargaining arrangements or union contracts with
employees in other countries. The Corporation's operations have not been
affected significantly by work stoppages and, in the opinion of management,
employee relations are good. As more fully described under the caption
"Restructuring Actions" in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7, and in Note 19 of Notes
to Consolidated Financial Statements included in Item 8 of Part II of this
report, in 2003, the Corporation announced the closure of a security hardware
facility in Bristow, Oklahoma. On-going restructuring actions taken by the
Corporation will also result in the transfer of production from the United
States to low-cost facilities in Mexico and China. Such closures and/or
production transfers may result in a deterioration of employee relations at the
impacted locations or elsewhere in the Corporation.
The Corporation's operations are subject to foreign, federal, state, and
local environmental laws and regulations. Many foreign, federal, state, and
local governments also have enacted laws and regulations that govern the
labeling and packaging of products and limit the sale of products containing
certain materials deemed to be environmentally sensitive. These laws
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and regulations not only limit the acceptable methods for the discharge of
pollutants and the disposal of products and components that contain certain
substances, but also require that products be designed in a manner to permit
easy recycling or proper disposal of environmentally sensitive components such
as nickel cadmium batteries. The Corporation seeks to comply fully with these
laws and regulations. Although compliance involves continuing costs, the ongoing
costs of compliance with existing environmental laws and regulations have not
had, nor are they expected to have, a material adverse effect upon the
Corporation's capital expenditures or financial position.
Pursuant to authority granted under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), the United States
Environmental Protection Agency (EPA) has issued a National Priority List (NPL)
of sites at which action is to be taken to mitigate the risk of release of
hazardous substances into the environment. The Corporation is engaged in
continuing activities with regard to various sites on the NPL and other sites
covered under analogous state environmental laws. As of December 31, 2004, the
Corporation had been identified as a potentially responsible party (PRP) in
connection with approximately 26 sites being investigated by federal or state
agencies under CERCLA or analogous state environmental laws. The Corporation
also is engaged in site investigations and remedial activities to address
environmental contamination from past operations at current and former
manufacturing facilities in the United States and abroad.
To minimize the Corporation's potential liability with respect to these
sites, management has undertaken, when appropriate, active participation in
steering committees established at the sites and has agreed to remediation
through consent orders with the appropriate government agencies. Due to
uncertainty as to the Corporation's involvement in some of the sites,
uncertainty over the remedial measures to be adopted, and the fact that
imposition of joint and several liability with the right of contribution is
possible under CERCLA and other laws and regulations, the liability of the
Corporation with respect to any site at which remedial measures have not been
completed cannot be established with certainty. On the basis of periodic reviews
conducted with respect to these sites, however, the Corporation has established
appropriate liability accruals. The Corporation's estimate of the costs
associated with environmental exposures is accrued if, in management's judgment,
the likelihood of a loss is probable and the amount of the loss can be
reasonably estimated. As of December 31, 2004, the Corporation's aggregate
probable exposure with respect to environmental liabilities, for which accruals
have been established in the consolidated financial statements, was $65.2
million. In the opinion of management, the amount accrued for probable exposure
for aggregate environmental liabilities is adequate and, accordingly, the
ultimate resolution of these matters is not expected to have a material adverse
effect on the Corporation's consolidated financial statements. As of December
31, 2004, the Corporation had no known probable but inestimable exposures
relating to environmental matters that are expected to have a material adverse
effect on the Corporation. There can be no assurance, however, that
unanticipated events will not require the Corporation to increase the amount it
has accrued for any environmental matter or accrue for an environmental matter
that has not been previously accrued because it was not considered probable.
(d) Financial Information About Geographic Areas
Reference is made to Note 17 of Notes to Consolidated Financial Statements,
entitled "Business Segments and Geographic Information", included in Item 8 of
Part II of this report.
(e) Available Information
The Corporation files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The public may read and copy
any materials that the Corporation files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the Corporation, that file electronically with the SEC. The
public can obtain any documents that the Corporation files with the SEC at
http://www.sec.gov.
The Corporation also makes available free of charge on or through its
Internet website (http://www.bdk.com) the Corporation's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the
Corporation electronically files such material with, or furnishes it to, the
SEC.
Black & Decker's Corporate Governance Policies and Procedures Statement is
available free of charge on or through its Internet website (http://www.bdk.com)
or in print by calling (800) 992-3042 or (410) 716-2914. The Statement contains
charters of the standing committees of the Board of Directors, the Code of
Ethics and Standards of Conduct, and the Code of Ethics for Senior Financial
Officers.
In April 2004, the Corporation submitted to the New York Stock Exchange the
CEO certification required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual.
-6-
(f) Executive Officers and Other Senior Officers of the Corporation
The current Executive Officers and Other Senior Officers of the Corporation,
their ages, current offices or positions, and their business experience during
the past five years are set forth below.
o NOLAN D. ARCHIBALD - 61
Chairman, President, and Chief Executive Officer,
January 1990 - present.
o CHARLES E. FENTON - 56
Senior Vice President and General Counsel,
December 1996 - present.
o PAUL A. GUSTAFSON - 62
Executive Vice President of the Corporation and
President - Fastening and Assembly Systems,
December 1996 - present.
o LES H. IRELAND - 40
Vice President of the Corporation and
President - Europe/Middle East/Africa,
Power Tools and Accessories,
January 2005 - present;
Vice President of the Corporation and
Managing Director - Commercial Operations,
Europe, Black & Decker Consumer Group,
Power Tools and Accessories Group,
November 2001 - January 2005;
Vice President of the Corporation and
Vice President and General Manager -
DEWALT Professional Power Tools, North America,
Power Tools and Accessories Group,
January 2001 - November 2001;
Vice President of the Corporation and President -
Accessories, Power Tools and Accessories Group,
September 2000 - January 2001;
President - Price Pfister,
Hardware and Home Improvement Group,
March 1999 - September 2000.
o THOMAS D. KOOS - 41
Group Vice President of the Corporation and
President - Consumer Products Group,
Power Tools and Accessories,
March 2004 - present;
Vice President of the Corporation and President -
Black & Decker Consumer Products,
Power Tools and Accessories Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
North American Consumer Power Tools,
Power Tools and Accessories Group,
December 2000 - January 2001;
President - North American Consumer Power Tools,
Power Tools and Accessories Group,
April 2000 - December 2000;
Vice President - Business Development,
Power Tools and Accessories Group,
August 1999 - April 2000.
o BARBARA B. LUCAS - 59
Senior Vice President - Public Affairs and
Corporate Secretary,
December 1996 - present.
o MICHAEL D. MANGAN - 48
Senior Vice President and Chief Financial Officer,
January 2000 - present;
Vice President - Investor Relations,
November 1999 - January 2000.
o PAUL F. MCBRIDE - 49
Senior Vice President - Human Resources
and Corporate Initiatives,
March 2004 - present;
Executive Vice President of the Corporation and
President - Power Tools and Accessories Group,
April 1999 - March 2004.
o CHRISTINA M. McMULLEN - 49
Vice President and Controller,
April 2000 - present;
Controller,
January 2000 - April 2000;
Assistant Controller,
April 1993 - January 2000.
-7-
o CHRISTOPHER T. METZ - 39
Group Vice President of the Corporation and
President - Hardware and Home Improvement,
March 2004 - present;
Vice President of the Corporation and President -
Hardware and Home Improvement Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
Kwikset, Hardware and Home Improvement Group,
July 1999 - January 2001.
o STEPHEN F. REEVES - 45
Vice President of the Corporation and
Vice President - Global Finance,
Power Tools and Accessories,
March 2004 - present;
Vice President of the Corporation and Vice President
- Finance, Power Tools and Accessories Group,
April 2000 - March 2004;
Vice President - Finance and Strategic Planning,
January 2000 - April 2000;
Vice President and Controller,
September 1996 - January 2000.
o MARK M. ROTHLEITNER - 46
Vice President - Investor Relations and Treasurer,
January 2000 - present;
Vice President and Treasurer,
March 1997 - January 2000.
o EDWARD J. SCANLON - 50
Vice President of the Corporation and President -
Commercial Operations, North and South America,
Power Tools and Accessories,
March 2004 - present;
Vice President of the Corporation and President -
Commercial Operations, North America,
Power Tools and Accessories Group,
May 1999 - March 2004.
o JOHN W. SCHIECH - 46
Group Vice President of the Corporation
and President - Industrial Products Group,
Power Tools and Accessories,
March 2004 - present;
Vice President of the Corporation and President -
DEWALT Professional Products, Power Tools
and Accessories Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
North American Professional Power Tools,
Power Tools and Accessories Group,
May 1999 - January 2001.
o ROBERT B. SCHWARZ - 56
Vice President of the Corporation and Vice President
- Manufacturing, Industrial Products Group,
Power Tools and Accessories,
March 2004 - present;
Vice President of the Corporation and Vice President
- Manufacturing, DEWALT Professional Products,
Power Tools and Accessories Group,
October 2001 - March 2004;
Vice President - Manufacturing, DEWALT Professional
Products, Power Tools and Accessories Group,
December 1995 - October 2001.
(g) Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating
to sales growth, earnings or earnings per share growth, and market share, as
well as statements expressing optimism or pessimism about future operating
results, are forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements for a number of reasons, including but not
limited to:
o The strength of the retail economies in various parts of the world, primarily
in the United States and Europe and, to a lesser extent, in Mexico, Central
America, the Caribbean, South America, Canada, Asia, and Australia. The
Corporation's business is subject to economic conditions in its major markets,
including recession, inflation, deflation, general weakness in retail,
automotive, and housing markets, and changes in consumer purchasing power.
-8-
o The Corporation's ability to maintain mutually beneficial relationships with
key customers and to penetrate new channels of distribution. The Corporation has
a number of significant customers, including two customers that, in the
aggregate, constituted approximately 30% of its consolidated sales for 2004. The
loss of either of these significant customers or a material negative change in
the Corporation's relationships with these significant customers could have an
adverse effect on its business. The Corporation's inability to continue
penetrating new channels of distribution may have a negative impact on its
future sales and business.
o Unforeseen inventory adjustments or changes in purchasing patterns by major
customers and the resultant impact on manufacturing volumes and inventory
levels.
o Market acceptance of the new products introduced in 2004 and scheduled for
introduction in 2005, as well as the level of sales generated from these new
products relative to expectations, based on existing investments in productive
capacity and commitments of the Corporation to fund advertising and product
promotions in connection with the introduction of these new products.
o The Corporation's ability to develop and introduce new products at favorable
margins. Numerous uncertainties are inherent in successfully developing and
introducing new products on a consistent basis.
o Adverse changes in currency exchange rates or raw material commodity prices,
both in absolute terms and relative to competitors' risk profiles. The
Corporation has a number of manufacturing sites throughout the world and sells
its products in more than 100 countries. As a result, the Corporation is exposed
to movements in the exchange rates of various currencies against the United
States dollar and against the currencies of countries in which it manufactures.
The Corporation believes its most significant foreign currency exposures are the
euro, pound sterling, and Chinese renminbi.
o Increased competition. Worldwide, the markets in which the Corporation sells
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong,
well-established manufacturers that compete on a global basis. Certain of the
Corporation's major customers sell their own "private label" brands that compete
directly with products sold by the Corporation. Competition has been intense in
recent years and is expected to continue.
o Changes in consumer preference or loyalties.
o Price reductions taken by the Corporation in response to customer and
competitive pressures, as well as price reductions or promotional actions taken
in order to drive demand that may not result in anticipated sales levels.
o The Corporation's ability to successfully integrate the operation of
businesses or companies acquired and to realize the anticipated cost savings,
synergies, and other benefits relating to the acquisition of such businesses,
including, without limitation, the Porter-Cable and Delta Tools Group acquired
from Pentair Inc. in October 2004.
o The Corporation's ability to achieve projected levels of efficiencies and cost
reduction measures and to avoid delays in or unanticipated inefficiencies
resulting from manufacturing and administrative reorganization actions in
progress or contemplated.
o Foreign operations may be affected by factors such as tariffs,
nationalization, exchange controls, interest rate fluctuations, civil unrest,
governmental changes, limitations on foreign investment in local business and
other political, economic, and regulatory risks and difficulties. Over the past
several years, such factors have become increasingly important as a result of
the Corporation's higher percentage of manufacturing in China, Mexico, and the
Czech Republic and purchases of products and components from foreign countries.
o The effects of litigation, environmental remediation matters, and product
liability exposures, as well as other risks and uncertainties detailed from time
to time in the Corporation's filings with the Securities and Exchange
Commission.
o The Corporation's ability to generate sufficient cash flows to support capital
expansion, business acquisition plans, share repurchase program, and general
operating activities, and the Corporation's ability to obtain necessary
financing at favorable interest rates.
o The ability of certain subsidiaries of the Corporation to generate future cash
flows sufficient to support the recorded amounts of goodwill related to those
subsidiaries.
o Changes in laws and regulations, including changes in accounting standards,
taxation requirements, including tax rate changes, new tax laws and revised tax
law interpretations, and environmental laws, in both domestic and foreign
jurisdictions.
o The impact of unforeseen events, including war or terrorist activities, on
economic conditions and consumer confidence.
o Interest rate fluctuations and other capital market conditions.
o Adverse weather conditions which could reduce demand for the Corporation's
products.
The foregoing list is not exhaustive. There can be no assurance that the
Corporation has correctly identified and appropriately assessed all factors
affecting its business or that the publicly available and other information with
respect to these matters is complete and correct. Additional risks and
uncertainties not presently known to the Corporation or that it currently
believes to be immaterial also may adversely impact the Corporation. Should any
risks and uncertainties develop into actual events, these developments could
have material adverse effects on the Corporation's business, financial
condition, and results of operations. For these reasons, you are cautioned not
to place undue reliance on the Corporation's forward-looking statements.
-9-
ITEM 2. PROPERTIES
The Corporation operates 44 manufacturing facilities around the world, including
22 located outside of the United States in 10 foreign countries. The major
properties associated with each business segment are listed in "Narrative
Description of the Business" in Item 1(c) of Part I of this report.
The following are the Corporation's major leased facilities:
In the United States: Lake Forest, Mira Loma, and Rialto, California;
Jackson, Tennessee; Tampa, Florida; Chesterfield, Michigan; and Towson,
Maryland.
Outside of the United States: Maltby, England; Tongeren and Aarschot,
Belgium; Reynosa and Mexicali, Mexico; Brockville, Canada; Usti nad Labem, Czech
Republic; Taichung, Taiwan; and Suzhou and Qingdao, China.
Additional property both owned and leased by the Corporation in Towson,
Maryland, is used for administrative offices. Subsidiaries of the Corporation
lease certain locations primarily for smaller manufacturing and/or assembly
operations, service operations, sales and administrative offices, and for
warehousing and distribution centers. The Corporation also owns a manufacturing
plant located on leased land in Suzhou, China.
As more fully described in Item 7 of Part II of this report under the
caption "Restructuring Actions", during the fourth quarter of 2001, the
Corporation commenced actions on a restructuring plan that will, among other
matters, reduce its manufacturing footprint. Additional actions under that
restructuring plan were initiated during the second half of 2003. In addition,
during the fourth quarter of 2003, the Corporation commenced actions on a
restructuring plan associated with the integration of the newly acquired Baldwin
and Weiser businesses into its security hardware business. In the fourth quarter
of 2004, the Corporation approved certain actions under a restructuring plan
associated with the integration of the acquired Porter-Cable and Delta Tools
Group into its Power Tools and Accessories business. The Corporation continues
to evaluate its worldwide manufacturing cost structure to identify opportunities
to improve capacity utilization and lower product costs and will take
appropriate action as deemed necessary.
Management believes that its owned and leased facilities are suitable and
adequate to meet the Corporation's anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings involving employment matters and commercial disputes. Some of these
lawsuits include claims for punitive as well as compensatory damages. The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability as described above up to the
limits of the deductibles. All other claims and lawsuits are handled on a
case-by-case basis.
As previously noted under Item 1(c) of Part I of this report, the
Corporation also is party to litigation and administrative proceedings with
respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a PRP. Others involve current and former manufacturing facilities.
The Corporation's estimate of costs associated with product liability
claims, environmental matters, and other legal proceedings is accrued if, in
management's judgment, the likelihood of a loss is probable and the amount of
the loss can be reasonably estimated. These accrued liabilities are not
discounted.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, and other legal proceedings are
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation's consolidated
financial statements. As of December 31, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-10-
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Corporation's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock as reported in the consolidated reporting system
for the New York Stock Exchange Composite Transactions:
QUARTER 2004 2003
- --------------------------------------------------------------------------------
January to
March $56.590 to $48.070 $44.240 to $33.200
April to June $61.500 to $54.440 $44.790 to $33.890
July to
September $75.200 to $59.090 $45.640 to $38.380
October to
December $89.640 to $72.090 $49.900 to $39.510
- --------------------------------------------------------------------------------
(b) Holders of the Corporation's Capital Stock
As of January 28, 2005, there were 12,493 holders of record of the Corporation's
Common Stock.
(c) Dividends
The Corporation has paid consecutive quarterly dividends on its Common Stock
since 1937. Future dividends will depend upon the Corporation's earnings,
financial condition, and other factors. The Credit Facility, as more fully
described in Note 7 of Notes to Consolidated Financial Statements included in
Item 8 of Part II of this report, does not restrict the Corporation's ability to
pay regular dividends in the ordinary course of business on the Common Stock.
Quarterly dividends per common share for the most recent two years are as
follows:
QUARTER 2004 2003
- --------------------------------------------------------------------------------
January to March $.21 $.12
April to June .21 .12
July to September .21 .12
October to December .21 .21
- --------------------------------------------------------------------------------
$.84 $.57
================================================================================
Common Stock:
150,000,000 shares authorized, $.50 par value, 82,095,161 and 77,933,464
outstanding as of December 31, 2004 and 2003, respectively.
Preferred Stock:
5,000,000 shares authorized, without par value, no shares outstanding as of
December 31, 2004 and 2003.
(d) Annual Meeting of Stockholders
The 2005 Annual Meeting of Stockholders of the Corporation is scheduled to be
held on April 26, 2005, at 9:00 a.m. at the Sheraton Baltimore North Hotel, 903
Dulaney Valley Road, Towson, Maryland 21204.
-11-
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
(MILLIONS OF DOLLARS EXCEPT PER SHARE DATA) 2004 2003(b) 2002(b)(d) 2001(b) 2000(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $5,398.4 $4,482.7 $4,291.8 $4,139.9 $4,365.7
Net earnings from continuing operations 441.1 287.2 228.5 101.5 273.7
Earnings from discontinued operations (a) 14.9 5.8 1.2 6.5 8.3
Net earnings 456.0 293.0 229.7 108.0 282.0
Basic earnings per share:
Continuing operations 5.53 3.69 2.85 1.26 3.27
Discontinued operations .19 .07 .01 .08 .10
Net earnings per common share - basic 5.72 3.76 2.86 1.34 3.37
Diluted earnings per share:
Continuing operations 5.40 3.68 2.83 1.25 3.24
Discontinued operations .19 .07 .01 .08 .10
Net earnings per common share - assuming dilution 5.59 3.75 2.84 1.33 3.34
Total assets 5,530.8 4,222.5 4,130.5 4,014.2 4,089.7
Long-term debt 1,200.6 915.6 927.6 1,191.4 798.5
Redeemable preferred stock of subsidiary (e) 192.2 202.6 208.4 196.5 188.0
Cash dividends per common share .84 .57 .48 .48 .48
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Earnings from discontinued operations represent the earnings, net of
applicable income taxes, of the Corporation's discontinued European
security hardware business. Earnings from discontinued operations for the
year ended December 31, 2004, include a gain on sale of discontinued of
operations of $12.7 million. That gain was net of a $24.4 million goodwill
impairment charge associated with the remaining European security hardware
business, DOM. The earnings of the discontinued operations do not reflect
any expense for interest allocated by or management fees charged by the
Corporation. For additional information about the discontinued European
security hardware business, see Note 3 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report.
(b) As more fully disclosed in Note 19 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, under a
restructuring program developed by the Corporation in the fourth quarter of
2001, earnings from continuing operations for 2003, 2002, and 2001 include
a restructuring charge of $20.6 million, $46.6 million, and $99.7 million
before taxes, respectively ($14.9 million, $29.2 million, and $70.6 million
after taxes, respectively). Those 2003, 2002, and 2001 pre-tax charges were
net of reversals of $13.2 million, $11.0 million, and $4.1 million,
respectively, representing reversals of previously provided restructuring
reserves as well as the excess proceeds received on the sale of long-lived
assets, written down as part of restructuring actions, over their adjusted
carrying values. In addition, earnings from continuing operations for 2003
include a restructuring charge of $11.0 million before taxes ($7.2 million
after taxes) associated with the integration of the Baldwin and Weiser
businesses into the security hardware business.
(c) Earnings from continuing operations for 2000 include a restructuring charge
of $39.9 million before taxes ($28.1 million after taxes) and a gain on
sale of business of $20.1 million before taxes ($13.1 million after taxes).
(d) As more fully disclosed in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, effective January
1, 2002, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Effective
January 1, 2002, goodwill is no longer amortized by the Corporation.
(e) As of December 31, 2004, redeemable preferred stock of subsidiary was
included in other current liabilities. As of December 31, 2000 through
2003, redeemable preferred stock of subsidiary was included in other
long-term liabilities.
-12-
ITEM 7. 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 17 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 71%,
18% and 11%, respectively, of the Corporation's sales in 2004. The percentage of
the Corporation's total sales contributed by its Power Tools and Accessories
segment will increase in 2005 when a full year's sales of the Porter-Cable and
Delta Tools Group, acquired on October 2, 2004, are included in that segment's
results. The Porter-Cable and Delta Tools Group includes the Porter-Cable,
Delta, DeVilbiss Air Power Company, Oldham Saw, and FLEX businesses.
The Corporation markets its products and services in over 100 countries.
During 2004, approximately 64%, 23%, and 13% of its sales were made to customers
in the United States, in Europe (including the United Kingdom), and in other
geographic regions, respectively. The Power Tools and Accessories and Hardware
and Home Improvement segments are subject to general economic conditions in the
countries in which they operate as well as the strength of the retail economies.
The Fastening and Assembly Systems segment is also subject to general economic
conditions in the countries in which it operates as well as to automotive and
industrial demand.
The Corporation reported net earnings of $456.0 million, or $5.59 per
share, on a diluted basis, for the year ended December 31, 2004, compared to net
earnings of $293.0 million, or $3.75 per share on a diluted basis, for the year
ended December 31, 2003. As more fully described in Note 3 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report,
net earnings for the year ended December 31, 2004, included a $12.7 million net
gain on the sale of discontinued operations.
The Corporation reported net earnings from continuing operations of $441.1
million, or $5.40 per share on a diluted basis, for the year ended December 31,
2004, as compared to net earnings from continuing operations of $287.2 million,
or $3.68 per share on a diluted basis, for the year ended December 31, 2003. Net
earnings from continuing operations for the year ended December 31, 2003,
included a pre-tax restructuring charge of $31.6 million ($22.1 million net of
tax). That $31.6 million pre-tax restructuring charge was net of $13.2 million,
representing reversals of previously provided restructuring reserves as well as
the excess of proceeds received on the sale of long-lived assets, written down
as part of restructuring actions, over their adjusted carrying values. The
increase in the Corporation's net earnings and earnings per share from
continuing operations for 2004, as compared to 2003, is partially attributable
to restructuring and exit costs recognized in 2003.
Total consolidated sales of $5.40 billion for the year ended December 31,
2004, increased by 20% over the prior year's level. Of that 20% increase, 10%
was attributable to an increase in unit volume of existing businesses, 9% was
attributable to sales of acquired businesses, and 3% was attributable to the
favorable impact of foreign currency translation, offset by 2% attributable to
the negative effect of pricing actions. In this Management's Discussion and
Analysis, the Corporation has attempted to differentiate between sales of its
"existing" or "legacy" businesses and sales of acquired businesses. That
differentiation includes sales of businesses where year-to-year comparability
exists in the category of "existing" or "legacy" businesses. For example, in
2004, the sales of both the Porter-Cable and Delta Tools Group business and the
MasterFix business--each acquired in 2004--are included in sales of acquired
businesses. In addition, sales of the Baldwin and Weiser businesses, acquired in
the fourth quarter of 2003, are included in acquired businesses for the first
nine months of 2004 but in "existing" or "legacy" businesses for the final three
months of 2004.
Operating income for the year ended December 31, 2004, increased to $629.2
million, or 11.7% of sales, from $428.7 million, or 9.6% of sales, in 2003. That
$428.7 million of operating income for the year ended December 31, 2003, was
reduced by $31.6 million of restructuring and exit costs. The increase in
operating income as a percentage of sales during the year ended December 31,
2004, primarily resulted from improved gross margins, the leverage of fixed
costs over a higher sales base, and the absence of charges for restructuring and
exit costs. The improvements in gross margin in 2004 were attributable to the
positive effects of restructuring and other productivity initiatives as well as
favorable foreign currency exchange rates, partially offset by the negative
effects of pricing actions and higher raw material costs. Selling, general, and
administrative expenses for the year ended December 31, 2004, increased in
dollar terms over the prior year's level, principally due to incremental
expenses of the businesses acquired in the past year and the effects of foreign
currency translation. During 2004, the Corporation also recognized increased
promotional and marketing expenses as well as higher expenses associated with
stock-based compensation and compliance with Section 404 of the Sarbanes-Oxley
Act. Selling, general, and administrative expenses as a percentage of sales
declined from 25.3% in 2003 to 24.8% in 2004 principally due to the impact of
the Porter-Cable and Delta Tools Group acquisition.
-13-
Earnings from continuing operations before income taxes for the year ended
December 31, 2004, increased by $213.4 million over the 2003 level to $604.3
million. In addition to the improvements in operating income described above,
pre-tax earnings from continuing operations during 2004 benefited from a $13.1
million reduction in interest expense (net of interest income) from the 2003
level.
As discussed further in Note 2 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, on October 2, 2004, the
Corporation acquired the Porter-Cable and Delta Tools Group from Pentair, Inc.
for a purchase price of approximately $792.0 million net of cash acquired of
$8.3 million and including transaction costs of $3.5 million. That cash purchase
price of $792.0 million included a payment of $21.8 million, on a preliminary
basis, based upon the estimated increase in the net assets of the Porter-Cable
and Delta Tools Group. 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 has been 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 expanded the offerings in product lines where
the Corporation had relatively low market share, including woodworking
equipment, compressors, pressure washers, and nailers. In addition, the
acquisition of the Tools Group provided the Corporation with the opportunity to
achieve cost synergies as it integrates the acquired businesses 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.
Sales
The following chart provides an analysis of the consolidated changes in sales
for the years ended December 31, 2004, 2003, and 2002.
YEAR ENDED DECEMBER 31,
(DOLLARS IN MILLIONS) 2004 2003 2002
- --------------------------------------------------------------------------------
Total sales $5,398.4 $4,482.7 $4,291.8
- --------------------------------------------------------------------------------
Unit volume - existing (a) 10 % 1 % 5 %
Unit volume - acquired (b) 9 % 1 % -
Price (2)% (2)% (2)%
Currency 3 % 4 % 1 %
- --------------------------------------------------------------------------------
Change in total sales 20 % 4 % 4 %
================================================================================
(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 year ended December 31, 2004, were
$5,398.4 million, which represented a 20% increase over 2003 sales of $4,482.7
million. Excluding the incremental effects of the MasterFix and Porter-Cable and
Delta Tools Group businesses acquired in 2004, and of the Baldwin and Weiser
businesses for the first nine months of 2004, total unit volume increased by 10%
during the year ended December 31, 2004. The improvement was primarily
attributable to the Corporation's North American businesses. As compared to the
corresponding period in 2003, a double-digit increase in sales volume was
experienced by the Corporation's legacy professional power tools and accessories
business as well as its plumbing products business in North America. Unit volume
of acquired businesses contributed 9% to the sales growth for 2004 over the 2003
levels. Pricing actions had a 2% negative effect on sales for 2004, as compared
to 2003. In addition to pricing actions taken in response to competitive
conditions, the impact of pricing in non-U.S. markets during 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 2004, as compared to 2003.
Total consolidated sales for the year ended December 31, 2003, were
$4,482.7 million, which represented a 4% increase over 2002 sales of $4,291.8
million. Excluding the incremental effects of the Baldwin and Weiser businesses,
acquired in October 2003, total unit volume increased by 1% during the year
ended December 31, 2003. Unit volume of the acquired Baldwin and Weiser
businesses contributed 1% to the sales growth for 2003 over the 2002 level. The
remainder of the increase in unit volume was due to higher sales of the power
tools and accessories and security hardware businesses, particularly in North
America, partially offset by a unit volume decline in the plumbing products
business. Pricing actions, taken in response to customer and competitive
pressures, had a 2% negative effect on sales for 2003 as compared to 2002. The
effects of a weaker U.S. dollar compared to other currencies, particularly the
euro and, to a lesser degree, the pound sterling and Canadian dollar, caused a
4% increase in the Corporation's consolidated sales during 2003 over the prior
year's level. These positive effects were partially offset by the devaluation of
several Latin American currencies during 2003 as compared to 2002.
-14-
Earnings
The Corporation reported consolidated operating income of $629.2 million on
sales of $5,398.4 million in 2004, compared to operating income of $428.7
million on sales of $4,482.7 million in 2003 and to operating income of $368.0
million on sales of $4,291.8 million in 2002.
Consolidated operating income for 2003 and 2002 included pre-tax
restructuring charges of $31.6 million and $46.6 million, respectively. Those
2003 and 2002 pre-tax charges were net of reversals of $13.2 million and $11.0
million, respectively, representing reversals of previously provided
restructuring reserves as well as the excess of proceeds received on the sale of
long-lived assets, written down as part of restructuring actions, over their
adjusted carrying values.
Consolidated gross margin as a percentage of sales for 2004 was 36.4%
compared to 35.6% for 2003. The increase in gross margin in 2004 was
attributable to the positive effects of restructuring and other productivity
initiatives, the leverage of fixed costs over a higher sales base and, in
Europe, favorable foreign currency exchange rates. These positive factors were
partially offset by the negative effect of pricing actions taken by the
Corporation as previously described, by higher raw material and pension costs,
and by lower gross margins of the acquired Porter-Cable and Delta Tools Group.
Consolidated gross margin as a percentage of sales for 2003 was 35.6% as
compared to 34.6% for 2002. The increase in gross margin in 2003 was
attributable to several positive factors that included: (i) the positive effect
of restructuring initiatives, (ii) higher productivity, including Six Sigma
productivity initiatives, and (iii) favorable foreign currency exchange rates.
These positive factors were partially offset by pricing actions taken by the
Corporation in response to customer and competitive pressures and by lower
production levels in 2003 as compared to 2002.
Consolidated selling, general and administrative expenses as a percentage
of sales were 24.8% in 2004, compared to 25.3% in 2003 and 25.0% in 2002.
Selling, general, and administrative expenses increased by $201.0 million in
2004, over the 2003 level. The incremental expenses of the acquired businesses
and the effects of foreign currency translation accounted for approximately 40%
and 20% of that increase, respectively. Higher promotional, marketing, and
research and development expenses, particularly in the North American power
tools and accessories business, higher transportation and distribution expenses
to support the increased sales level, and higher Corporate expenses--driven by
expenses related to stock-based compensation and compliance with Section 404 of
the Sarbanes-Oxley Act--accounted for much of the remaining increase in selling,
general, and administrative expenses during 2004.
Consolidated selling, general, and administrative expenses increased by
$63.7 million in 2003 over the 2002 level. The effects of foreign currency
translation and acquired businesses accounted for $48.5 million and $13.3
million of the increase in selling, general, and administrative expenses,
respectively. The increase in selling, general, and administrative expenses as a
percentage of sales from 2002 to 2003 was primarily a result of higher marketing
and promotional expenses, which were partially offset by lower selling, general,
and administrative expenses, including expenses associated with legal and
environmental matters.
Consolidated net interest expense (interest expense less interest income)
was $22.1 million in 2004, compared to $35.2 million in 2003 and $57.8 million
in 2002. The lower net interest expense in 2004, as compared to 2003, was
primarily the result of higher interest income associated with the Corporation's
foreign cash investment activities in 2004, coupled with lower borrowing levels.
The lower net interest expense in 2003, as compared to 2002, resulted from both
lower borrowing levels and lower interest rates.
Other expense was $2.8 million in 2004 compared to $2.6 million in 2003 and
$4.8 million in 2002.
Consolidated income tax expense of $163.2 million, $103.7 million, and
$76.9 million was recognized on the Corporation's earnings from continuing
operations before income taxes of $604.3 million, $390.9 million, and $305.4
million, for 2004, 2003 and 2002, respectively. The Corporation's effective tax
rate was 27% for 2004, compared to an effective tax rate of 27% for 2003 and 25%
for 2002. For 2003, tax benefits of $9.5 million were recognized on pre-tax
restructuring and exit costs of $31.6 million, as compared to a $17.4 million
benefit on pre-tax restructuring and exit costs of $46.6 million in the
corresponding 2002 period. The lower effective tax rate during 2002 reflects the
higher tax benefit associated with the 2002 restructuring charge.
A further analysis of taxes on earnings is included in Note 11 of Notes to
Consolidated Financial Statements.
The Corporation reported net earnings from continuing operations of $441.1
million, or $5.40 per share on a diluted basis, for the year ended December 31,
2004, compared to net earnings from continuing operations of $287.2 million, or
$3.68 per share on a diluted basis for the year ended December 31, 2003, and
$228.5 million, or $2.83 per share on a diluted basis, for the year ended
December 31, 2002.
The Corporation reported net earnings from discontinued operations of $14.9
million in 2004, as compared to $5.8 million in 2003 and $1.2 million in 2002.
As more fully described in Note 3 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report, net earnings from discontinued
operations for the year ended December 31, 2004,
-15-
included a $12.7 million gain on sale of discontinued operations. The $12.7
million gain recognized during 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). During 2004, the discontinued DOM
business was under contract for sale at $28.0 million, pending regulatory
approval. The Corporation terminated that contract in January 2005 when
regulatory approval was not obtained and is currently marketing the DOM business
for sale.
The Corporation reported net earnings of $456.0 million, $293.0 million,
and $229.7 million, or $5.59, $3.75, and $2.84 per share on a diluted basis, for
the years ended December 31, 2004, 2003, and 2002, respectively. In addition to
the impact of operational matters, earnings per share for 2003 also benefited
from lower shares outstanding than those outstanding in 2004 and 2002.
Business Segments
As more fully described in Note 17 of Notes to Consolidated Financial
Statements, the Corporation operates in three reportable business segments:
Power Tools and Accessories, Hardware and Home Improvement, and Fastening and
Assembly Systems.
POWER TOOLS AND ACCESSORIES
Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 17 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Sales to unaffiliated
customers $3,667.2 $3,198.4 $3,242.5
Segment profit 478.2 361.2 361.5
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2004 increased 15% over the 2003 level. Sales of the Porter-Cable and
Delta Tools Group businesses acquired early in the fourth quarter of 2004,
accounted for 8 percentage points of the 15% increase in 2004, while sales of
the legacy Power Tools and Accessories businesses accounted for the remaining 7
percentage points of growth.
Sales in North America increased at a double-digit rate during 2004 over
the prior year's level. Approximately half of this increase was due to the
incremental sales of the acquired Porter-Cable and Delta Tools Group businesses.
Sales of the Corporation's legacy professional power tools and accessories
business in North America increased at a double-digit rate as sales grew in all
major channels and product lines. Sales of the Corporation's consumer power
tools and accessories business grew at a mid-single-digit rate during 2004,
compared to 2003, as increased sales of consumer power tools and outdoor
products were partially offset by lower sales of accessories and cleaning and
lighting products.
Sales in Europe during 2004 increased at a low single-digit rate due to the
incremental sales of FLEX, a component of the acquired Porter-Cable and Delta
Tools Group business, and a high single-digit rate of increase in sales of the
Corporation's legacy European professional power tools and accessories business.
These increases were partially offset by a low 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
2004 over the 2003 levels. Sales of the Corporation's legacy power tools and
accessories businesses in other geographic areas during 2004 increased at a high
single-digit rate over the prior year's level as sales increased at a high
single-digit rate in Central and South America and at a double-digit rate in
Asia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment improved from 11.3% in 2003 to 13.0% in 2004. That improvement 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 effects of
restructuring and other productivity initiatives, favorable product mix, and
foreign currency effects, partially offset by the negative effects of pricing
actions and, to a lesser extent, rising raw material costs. While the impact of
rising material costs was mitigated in 2004 by fixed-price supply agreements,
the business anticipates additional cost pressures in 2005 as those supply
agreements are renegotiated. The reduction in selling, general, and
administrative expenses as a percentage of sales was principally due to the
impact of the Porter-Cable and Delta Tools Group acquisition. The acquisition of
the lower-margin Porter-Cable and Delta Tools Group early in the fourth quarter
of 2004 had a 40-basis-point negative impact on segment profit as a percentage
of sales for the year ended December 31, 2004, and is expected to continue to
depress segment profit as a percentage of sales in 2005.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2003 decreased 1% from the 2002 level. In North America, sales of power
tools and accessories during 2003 decreased at a low single-digit rate from the
2002 level due predominantly to a low single-digit decrease in sales of the
consumer power tools and accessories business. Strength in the North American
professional power tools and accessories business in the second half of the year
nearly offset declines during the first sixth months of 2003. Sales of the
consumer power tools and accessories business decreased at a low single-digit
rate from the
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2002 level, as a double-digit rate of growth in sales of outdoor products was
more than offset by a double-digit rate of decline in sales of home products and
a low single-digit rate of decrease of sales of power tools and accessories as
unfavorable price more than offset increased volume. Both the professional and
consumer power tools and accessories businesses were negatively affected by
customers' actions to manage inventory levels during 2003.
Sales of power tools and accessories in Europe during 2003 decreased at a
mid-single-digit rate from the 2002 level, as sales of professional power tools
and accessories decreased at a low single-digit rate and sales of consumer power
tools and accessories declined at a mid-single-digit rate. Sales were down
across Europe and in most product lines as weak economic conditions persisted
during 2003.
Sales in other geographic areas increased at a high single-digit rate in
2003 over the 2002 level, as higher sales were achieved in professional power
tools and accessories, consumer power tools and accessories, and home products.
Increases in sales occurred throughout South and Central America, Asia, and
Australia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 11.3% for 2003 as compared to 11.1% for 2002. Gross margin as a
percentage of sales improved slightly as the positive effects of productivity
initiatives, restructuring actions, and foreign currency rates were offset by
the negative effects of pricing actions, promotional activities, and lower
production levels. During 2003, the Power Tools and Accessories segment reduced
its production levels by approximately 10% from the 2002 levels. That reduction
in production levels was primarily attributable to the efforts by the business
to reduce its inventory levels. As of December 31, 2003, the Power Tools and
Accessories segment decreased its total inventories, excluding the effects of
foreign currency translation, by approximately 9% from 2002 year-end levels.
That decrease was in comparison to an approximate 9% increase in total
inventories, excluding the effects of foreign currency translation at December
31, 2002, over the 2001 year-end levels. Selling, general, and administrative
expenses as a percentage of sales increased slightly during 2003 as compared to
2002 as promotional and marketing expenses increased.
HARDWARE AND HOME IMPROVEMENT
Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 17 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $959.4 $718.1 $660.7
Segment profit 145.2 93.2 47.4
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment increased 34% during 2004 over the 2003 level. During 2004, the impact
of the Baldwin and Weiser acquisition accounted for 23 percentage points of the
34% increase, while higher sales of the Price Pfister and Kwikset businesses,
coupled with sales growth in the Baldwin and Weiser businesses after the
anniversary of the acquisition, accounted for the remaining 11 percentage
points. Sales of plumbing products increased at a double-digit rate during 2004,
reflecting the expansion of listings at a key retailer that occurred during the
third quarter of 2003 as well as higher sales at other retailers. Sales of
Kwikset security hardware products increased over the 2003 level at a
mid-single-digit rate due to strong retail sales.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment rose to 15.1% for 2004 from 13.0% for 2003. Segment profit
as a percentage of sales for 2004 benefited from significant gross margin
improvement. That gross margin improvement was primarily driven by volume
leverage and productivity improvements, partially offset by the impact of higher
raw material costs as well as costs associated with manufacturing
rationalization in the security hardware business. The acquisition of Baldwin
and Weiser did not have a significant effect on segment profit as a percentage
of sales during 2004.
Sales to unaffiliated customers in the Hardware and Home Improvement
segment in 2003 increased 9% over the 2002 level. This increase in sales was
almost entirely due to the acquisition of Baldwin and Weiser early in the fourth
quarter of 2003. A low single-digit rate of increase in sales of the Kwikset
security hardware business in North America was partially offset by a low
single-digit rate of decrease in sales of plumbing products.
As a result of a line review in 2002, the Corporation's plumbing products
business lost significant shelf space at The Home Depot stores in the central
and eastern United States. That loss of shelf space at The Home Depot negatively
impacted plumbing product sales in 2002 by approximately $22 million, but was
partially offset in 2003 by an expansion of listings at Lowe's Home Improvement
Warehouse during the second quarter of 2003.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 13.0% for 2003 compared to 7.2% for 2002, mainly driven
by improvements in gross margin as a percentage of sales. Productivity
improvements and the results of restructuring actions were the primary factors
that contributed to the increase in segment profit as a percentage of sales. The
increase in segment profit as a percentage of sales due to gross margin
improvements was slightly offset by a one-percentage-point increase in selling,
general, and administrative expenses as a percentage of sales in 2003 as
compared to the 2002
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level due to higher sales-related expenses, including promotion, marketing, and
salesmen's compensation. The acquisition of Baldwin and Weiser did not have a
significant effect on segment profit during 2003.
FASTENING AND ASSEMBLY SYSTEMS
Segment sales and profit for the Fastening and Assembly Systems segment,
determined on the basis described in Note 17of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $586.3 $530.1 $528.6
Segment profit 79.8 77.6 77.9
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased by 11% in 2004 over the 2003 level. During March 2004, the
Corporation completed the acquisition of MasterFix, an industrial fastening
company with operations in Europe and Asia. Incremental sales of the MasterFix
business accounted for 3 percentage points of the 11% increase in 2004. Sales in
North America during 2004 increased at a high single-digit rate over the 2003
level, with increases in both the industrial and automotive channels. Sales in
Europe during 2004 increased over the 2003 level at a double-digit rate, due
largely to the incremental sales of the MasterFix business. The Fastening and
Assembly System segment's legacy European industrial business experienced a
mid-single-digit rate of growth during 2004 as compared to 2003, while sales in
its legacy European automotive business approximated the 2003 level. Sales in
the segment's legacy businesses in Asia increased at a double-digit rate in
2004, as compared to 2003.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment declined from 14.6% in 2003 to 13.6% in 2004, primarily due to
significant costs increases in steel and other raw materials. 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 2004.
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment during 2003 increased slightly over the 2002 level as a mid-single-digit
rate of increase in sales in Europe and Asia was substantially offset by a
mid-single-digit rate decrease in sales in North America.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment was 14.6% for 2003 as compared to 14.7% during 2002. That
decline was due to lower production volumes, resulting from weak industrial
demand and lower automotive production that were substantially offset by
productivity improvements.
OTHER SEGMENT-RELATED MATTERS
As more fully described in Note 17 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 Item 7 under the caption "Financial Condition",
expense recognized by the Corporation in 2004 relating to its pension and other
postretirement benefits plans increased by approximately $19 million over the
2003 level. The adjustment to businesses' postretirement benefit expense booked
in consolidation as identified in the second table included in Note 17 of Notes
to Consolidated Financial Statements was income of $.8 million and $15.4 million
for the years ended December 31, 2004 and 2003, respectively. That lower income
level in 2004 resulted from higher pension expense--exclusive of estimated
service costs--not allocated to the Corporation's reportable business segments.
Expenses directly related to reportable business segments booked in
consolidation and, thus, excluded from segment profit for the reportable
business segments were $10.0 million, $15.0 million, and $8.4 million for the
years ended December 31, 2004, 2003, and 2002, respectively. The $10.0 million
of segment-related expenses excluded from segment profit in 2004 principally
related to restructuring-related expenses associated with the Hardware and Home
Improvement and Power Tools and Accessories segments. The $15.0 million of
segment-related expenses excluded from segment profit in 2003 principally
related to restructuring-related expenses associated with the Power Tools and
Accessories segment of approximately $9.1 million as well as certain reserves
established relating to the Power Tools and Accessories segment and the Hardware
and Home Improvement segment. The $8.4 million of segment-related expenses
excluded from segment profit in 2002 principally related to reserves for
employee-related matters associated with the Power Tools and Accessories and
Hardware and Home Improvement segments.
Amounts allocated to reportable business segments in arriving at segment
profit were less than Corporate center operating expenses, eliminations, and
other amounts, as identified in the second table included in Note 17 of Notes to
Consolidated Financial Statements, by $83.1 million, $73.6 million, and $89.1
million for the years ended December 31, 2004, 2003, and 2002, respectively. The
increase in these unallocated Corporate center operating expenses for 2004 as
compared to 2003 was 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 medical-
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related expenses. The decrease in these unallocated Corporate center operating
expenses for 2003 as compared to 2002 was primarily due to lower medical-related
expenses in 2003, reflecting the results of changes in plan design as well as
higher expense allocations to the Corporation's business segments, and lower
reserves for certain legal and environmental remediation matters established in
2003 as compared to 2002.
As indicated above and in Note 17 of Notes to Consolidated Financial
Statements, the determination of segment profit excludes restructuring and exit
costs. Of the $31.6 million pre-tax restructuring charge recognized in 2003,
$21.1 million related to the businesses in the Power Tools and Accessories
segment, and $10.5 million related to the businesses in the Hardware and Home
Improvement segment. Of the $46.6 million pre-tax restructuring charge
recognized in 2002, $26.3 million related to the businesses in the Power Tools
and Accessories segment, and $20.3 million related to the businesses in the
Hardware and Home Improvement segment.
DISCONTINUED OPERATIONS
The European security hardware business, consisting of the NEMEF, Corbin, and
DOM businesses, has been reflected as discontinued operations in the
Consolidated Financial Statements included in Item 8 of Part II of this report.
As such, the operating results, assets and liabilities, and cash flows of the
discontinued European security hardware business have been reported separately
from the Corporation's continuing operations. In January 2004, the Corporation
completed the sale of two European security hardware businesses, NEMEF and
Corbin, for an aggregate price of $77.5 million net of cash transferred.
The Corporation's remaining European security hardware business, DOM, was
under contract for sale at $28.0 million in 2004, pending regulatory approval.
The Corporation terminated that contract in January 2005 when regulatory
approval was not obtained and is currently marketing the DOM business for sale.
Net earnings of the discontinued European security hardware business were
$14.9 million ($.19 per share on a diluted basis) for the year ended December
31, 2004; $5.8 million ($.07 per share on a diluted basis) for the year ended
December 31, 2003; and $1.2 million ($.01 per share on a diluted basis) for the
year ended December 31, 2002. Earnings from discontinued operations include
pre-tax restructuring (reversals) charges of $(.6) million and $4.1 million for
the years ended December 31, 2003 and 2002, respectively.
Restructuring Actions
The Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve
processes, and eliminate excess capacity. A tabular summary of restructuring
activity during the three years ended December 31, 2004, is included in Note 19
of Notes to Consolidated Financial Statements.
In 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 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.
During the fourth quarter of 2001, the Corporation formulated a
restructuring plan designed to reduce its manufacturing footprint, variable
production costs, and selling, general, and administrative expenses. The
Corporation initially anticipated that the cost of the total restructuring plan
- - expected to be completed over a two- to three-year period - would be $190
million. The $20.0 million charge recognized by the Corporation during 2003
represented the final pre-tax charge associated with this restructuring plan.
That amount, coupled with restructuring charges recognized in connection with
this plan in 2002 and 2001, brought the total pre-tax restructuring charge under
this plan to $170.5 million. That $170.5 million charge includes $3.6 million
relating to the Corporation's European security hardware business that is
reflected as discontinued operations. The following discussion excludes the
restructuring actions relating to the European security hardware business.
Earnings from discontinued operations include pre-tax restructuring (reversals)
charges of $(.6) million and $4.1 million for the years ended December 31, 2003
and 2002, respectively.
During 2003, the Corporation commenced the final phase of its restructuring
plan and recorded a pre-tax restructuring charge associated with that plan of
$20.6 million. That $20.6 million charge was net of $9.6 million of reversals of
previously provided restructuring reserves that were no longer required and $3.6
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. In addition, during the fourth quarter of 2003 the Corporation
recorded a pre-tax restructuring charge of $11.0 million associated with the
closure
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of a manufacturing facility in its Hardware and Home Improvement segment as a
result of the acquisition of Baldwin and Weiser.
The $20.6 million pre-tax restructuring charge recognized in 2003
principally reflects actions relating to the Power Tools and Accessories segment
to reduce its manufacturing cost base as well as actions to reduce selling,
general, and administrative expenses through the elimination of administrative
positions. Actions to reduce the Corporation's manufacturing cost base in the
Power Tools and Accessories segment include the closure of one facility in the
United States and the transfer of certain additional power tool production from
a facility in the United States to a low-cost facility in Mexico. The 2003
restructuring charge provided for actions to reduce selling, general, and
administrative expenses, principally in Europe, and to a lesser extent in the
United States, principally reducing headcount.
The $46.6 million pre-tax restructuring charge recognized in 2002 reflected
actions to reduce the Corporation's manufacturing cost base in its Power Tools
and Accessories and Hardware and Home Improvement segments, as well as actions
to reduce selling, general, and administrative expenses through the elimination
of administrative positions, principally in Europe. Actions to reduce the
Corporation's manufacturing cost base in the Power Tools and Accessories segment
include the closure of one facility in the United States, the closure of an
accessories packaging facility in England, and the transfer of certain
additional power tool production from a facility in England to a low-cost
facility in the Czech Republic. Actions to reduce the Corporation's
manufacturing cost base in the Hardware and Home Improvement segment include the
closure of a security hardware facility in the United States. The 2002
restructuring charge also includes pension curtailment losses stemming from
headcount reductions associated with the restructuring actions.
As indicated in Note 19 of Notes to Consolidated Financial Statements, the
severance benefits accrual, included in the $31.6 million and $46.6 million
pre-tax restructuring charges taken in 2003 and 2002, respectively, related to
the elimination of approximately 2,700 positions in high-cost manufacturing
locations and in certain administrative positions. The Corporation estimates
that, as a result of increases in manufacturing employee headcount in low-cost
locations, approximately 2,600 replacement positions will be filled, yielding a
net total of 100 positions eliminated as a result of the 2003 and 2002
restructuring actions.
The Corporation anticipates that the execution of the restructuring actions
associated with the restructuring plan that was formulated by the Corporation in
the fourth quarter of 2001 will be completed during 2005. The Corporation
anticipates that the closure of the manufacturing facility in its Hardware and
Home Improvement segment as a result of the acquisition of Baldwin and Weiser
will be completed during 2005.
Given the nature and duration of this restructuring plan, the timing of the
actions is subject to varying degrees of estimation associated with key
assumptions, such as actual timing of execution, general economic conditions,
and other variables.
In addition to the recognition of restructuring and exit costs, the
Corporation also recognizes related expenses, incremental to the cost of the
underlying restructuring actions, that do not qualify as restructuring or exit
costs under accounting principles generally accepted in the United States
(restructuring-related expenses). Those restructuring-related expenses include
items - directly related to the underlying restructuring actions - that benefit
ongoing operations, such as costs associated with the transfer of equipment.
Operating results for the year ended December 31, 2004 and 2003, included
approximately $15 million and $25 million, respectively, of
restructuring-related expenses.
The Corporation realized benefits of approximately $70 million and $50
million in 2004 and 2003, respectively, net of restructuring-related expenses.
Those benefits resulted in a reduction in cost of goods sold of approximately
$58 million and $39 million in 2004 and 2003, respectively, and a reduction in
selling, general, and administrative expenses of approximately $12 million and
$11 million in 2004 and 2003, respectively. The Corporation expects that
incremental pre-tax savings associated with the restructuring plan that was
formulated in the fourth quarter of 2001 will benefit 2005 results by $10
million, net of restructuring-related expenses. The Corporation expects that
those incremental pre-tax savings in 2005 will benefit cost of goods sold and
selling, general, and administrative expenses in approximately the same ratio as
experienced in 2004. The Corporation expects that pre-tax savings associated
with the restructuring actions related to the integration of Baldwin and Weiser
into its existing security hardware business will benefit 2005 and 2006 results
by approximately $20 million, respectively, net of restructuring-related
expenses, resulting in annual savings of approximately $25 million. The
restructuring-related expense associated with these integration plans had an
adverse pre-tax impact of approximately $15 million in 2004. Ultimate savings
realized from restructuring actions may be mitigated by such factors as economic
weakness and competitive pressures, as well as decisions to increase costs in
areas such as promotion or research and development above levels that were
otherwise assumed.
-20-
As previously indicated, the pre-tax restructuring charges recognized in
2004, 2003, and 2002 of $--, $31.6 million, and $46.6 million, respectively,
were net of reversals in 2004, 2003, and 2002 of previously provided
restructuring reserves that were no longer required and proceeds received in
excess of the adjusted carrying value of long-lived assets in the aggregate of
$5.4 million, $13.2 million, and $11.0 million, respectively. Adjustments to the
severance component of restructuring reserves previously established related to:
(i) actual attrition factors that differed from those initially estimated; (ii)
more cost-effective methods of severing employment that became probable,
typically based on negotiations with trade unions or local government
institutions; and (iii) amendments to the initial plan that were approved by the
appropriate level of management, based primarily on changes in market conditions
that dictated a modification to the intended course of action. During 2004,
2003, and 2002, none of the adjustments to the severance obligations recorded in
connection with restructuring actions was individually significant. Adjustments
to the asset write-down component of restructuring reserves previously
established related to the receipt of proceeds in excess of adjusted carrying
values of fixed assets that were disposed of in connection with the
restructuring actions. Adjustments to the other charge component of
restructuring reserves previously established principally related to settlement
of operating lease commitments at amounts less than initially estimated or the
Corporation's ability to sublease certain facilities exited as part of the
restructuring actions.
Asset write-downs taken as part of the 2003 and 2002 restructuring charge
included land, buildings, and manufacturing equipment. The carrying values of
land and buildings to be sold were written down to their estimated fair values,
generally based upon third party offers, less disposal costs. The carrying
values of manufacturing equipment and furniture and fixtures were written down
to their fair value based upon estimated salvage values, which generally were
negligible, less disposal cost.
In addition to the previously discussed restructuring actions, prior to the
date of the acquisition of Baldwin and Weiser and during the fourth quarter of
2003, the Corporation identified opportunities to restructure these businesses
as well as to integrate these businesses into the existing security hardware
business included in the Corporation's Hardware and Home Improvement segment.
Subsequent to the acquisition, the Corporation approved restructuring actions
relating to the acquired businesses of $3.7 million. These actions principally
reflect severance benefits associated with administrative and manufacturing
actions related to the acquired businesses, including the closure of an acquired
administration and distribution facility. The Corporation anticipates that these
restructuring actions will be completed in 2005.
Also, prior to the date of the acquisition of the Porter-Cable and Delta
Tools Group and during the fourth quarter of 2004, the Corporation identified
opportunities to restructure these businesses as well as to integrate these
businesses into its existing Power Tools and Accessories segment. Subsequent to
the acquisition, the Corporation approved restructuring actions relating to the
acquired business of $16.2 million. These actions principally reflect severance
costs associated with administrative and manufacturing actions related to the
acquired businesses, including the closure of two manufacturing facilities, and
lease and other contractual obligations for which no future benefit will be
realized. Certain of these restructuring actions commenced in 2004 with the
remainder commencing in early 2005. The Corporation expects that these
restructuring actions will be completed by the end of 2006. The Corporation
continues its evaluation of the identified opportunities to restructure these
businesses as well as to integrate these businesses into its existing Power
Tools and Accessories segment. The Corporation anticipates that finalization of
its planned integration actions will not occur until 2005.
Hedging Activities
The Corporation has a number of manufacturing sites throughout the world and
sells its products in more than 100 countries. As a result, it is exposed to
movements in the exchange rates of various currencies against the United States
dollar and against the currencies of countries in which it manufactures. The
major foreign currencies in which foreign currency risks exist are the euro,
pound sterling, Canadian dollar, Japanese yen, Chinese renminbi, Australian
dollar, Mexican peso, Czech koruna, and Brazilian real. Through its foreign
currency activities, the Corporation seeks to reduce the risk that cash flows
resulting from the sales of products manufactured in a currency different from
that of the selling subsidiary will be affected by changes in exchange rates.
On January 1, 2002, the twelve participating member countries of the
European Monetary Union canceled their respective legacy currencies which were
replaced by the euro as legal tender. The Corporation believes that the
introduction of the euro has resulted in increased competitive pressures in
continental Europe due to the heightened transparency of intra-European pricing
structures.
From time to time, currency devaluations may occur in countries in which
the Corporation sells or manufactures its product. While the Corporation will
take actions to mitigate the impacts of any future currency devaluations, there
is no assurance that such devaluations will not adversely affect the
Corporation.
-21-
Assets and liabilities of subsidiaries located outside of the United States
are translated at rates of exchange at the balance sheet date as more fully
explained in Note 1 of Notes to Consolidated Financial Statements. The resulting
translation adjustments are included in the accumulated other comprehensive
income (loss) component of stockholders' equity. During 2004, translation
adjustments, recorded in the accumulated other comprehensive income (loss)
component of stockholders' equity, increased stockholders' equity by $95.8
million compared to an increase of $98.4 million in 2003.
As more fully described in Note 9 of Notes to Consolidated Financial
Statements, the Corporation seeks to issue debt opportunistically, whether at
fixed or variable rates, at the lowest possible costs. Based upon its assessment
of the future interest rate environment and its desired variable rate debt to
total debt ratio, the Corporation may elect to manage its interest rate risk
associated with changes in the fair value of its indebtedness, or the cash flows
of its indebtedness, through the use of interest rate swap agreements.
In order to meet its goal of fixing or limiting interest costs, the
Corporation maintains a portfolio of interest rate hedge instruments. The
variable rate debt to total debt ratio, after taking interest rate hedges into
account, was 52% at December 31, 2004, compared to 47% at December 31, 2003, and
52% at December 31, 2002. At December 31, 2004, average debt maturity was 8.3
years compared to 8.8 years at December 31, 2003, and 7.2 years at December 31,
2002.
INTEREST RATE SENSITIVITY
The following table provides information as of December 31, 2004, about the
Corporation's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related average interest rates by contractual maturity dates. For
interest rate swaps, the table presents notional principal amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged under the
interest rate swaps. Weighted-average variable rates are generally based on the
London Interbank Offered Rate (LIBOR) as of the reset dates. The cash flows of
these instruments are denominated in a variety of currencies. Unless otherwise
indicated, the information is presented in U.S. dollar equivalents, which is the
Corporation's reporting currency, as of December 31, 2004.
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
Fair Value
(Assets)/
(U.S. DOLLARS IN MILLIONS) 2005 2006 2007 2008 2009 Thereafter Total Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings
Variable rate (other currencies) $ 1.1 $ -- $ -- $ -- $ -- $ -- $ 1.1 $ 1.1
Average interest rate 10.23% 10.23%
Long-term debt
Fixed rate (U.S. dollars) $ .5 $155.1 $150.2 $ .2 $ .1 $850.0 $1,156.1 $1,248.1
Average interest rate 7.00% 7.00% 6.55% 7.00% 7.00% 6.27% 6.41%
Other current liabilities
Fixed rate (U.S. dollars) $188.0 $ -- $ -- $ -- $ -- $ -- $ 188.0 $ 192.2
Average interest rate 5.69% 5.69%
INTEREST RATE DERIVATIVES
Fixed to Variable Rate Interest
Rate Swaps (U.S. dollars) $188.0 $125.0 $ 75.0 $ -- $ -- $400.0 $ 788.0 $ (32.5)
Average pay rate (a)
Average receive rate 6.49% 6.03% 5.22% 5.11% 5.59%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The average pay rate is based upon 6-month forward LIBOR, except for $275.0
million in notional principal amount which matures in 2007 and thereafter
and is based upon 3-month forward LIBOR.
-22-
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
As discussed above, the Corporation is exposed to market risks arising from
changes in foreign exchange rates. As of December 31, 2004, the Corporation has
hedged a portion of its 2005 estimated foreign currency transactions using
forward exchange contracts. The Corporation estimated the effect on 2005 gross
profits, based upon a recent estimate of foreign exchange exposures, of a
uniform 10% strengthening in the value of the United States dollar. The
Corporation estimated that this would have the effects of reducing gross profits
for 2005 by approximately $18 million. The Corporation also estimated the
effects on 2005 gross profits, based upon a recent estimate of foreign exchange
exposures, of a uniform 10% weakening in the value of the United States dollar.
A uniform 10% weakening in the value of the United States dollar would have the
effect of increasing gross profits.
In addition to their direct effects, changes in exchange rates also affect
sales volumes and foreign currency sales prices as competitors' products become
more or less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates previously described does not reflect a
potential change in sales levels or local currency prices nor does it reflect
higher exchange rates, compared to those experienced during 2004, inherent in
the foreign exchange hedging portfolio at December 31, 2004.
Critical Accounting Policies
The Corporation's accounting policies are more fully described in Note 1 of
Notes to Consolidated Financial Statements. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying notes.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The Corporation believes that, of its significant accounting policies, the
following may involve a higher degree of judgment, estimation, or complexity
than other accounting policies.
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, the Corporation performs goodwill impairment tests on at least an
annual basis and more frequently in certain circumstances. The Corporation
cannot predict the occurrence of certain events that might adversely affect the
reported value of goodwill that totaled $1,184.0 million at December 31, 2004.
Such events may include, but are not limited to, strategic decisions made in
response to economic and competitive conditions, the impact of the economic
environment on the Corporation's customer base, or a material negative change in
its relationships with significant customers.
Pension and other postretirement benefits costs and obligations are
dependent on assumptions used in calculating such amounts. These assumptions
include discount rates, expected return on plan assets, rates of salary
increase, health care cost trend rates, mortality rates, and other factors.
These assumptions are updated on an annual basis prior to the beginning of each
year. The Corporation considers current market conditions, including interest
rates, in making these assumptions. The Corporation develops the discount rates
by considering the yields available on high-quality fixed income investments
with long-term maturities corresponding to the related benefit obligation. The
Corporation's discount rate for United States defined benefit pension plans was
6.00% at December 31, 2004 and 2003. As discussed further in Note 12 of Notes to
Consolidated Financial Statements, the Corporation develops the expected return
on plan assets by considering various factors, which include its targeted asset
allocation percentages, historic returns, and expected future returns. The
Corporation's expected long-term rate of return assumption for United States
defined benefit plans was 8.75% in 2004 and 2005.
The Corporation believes that the assumptions used are appropriate;
however, differences in actual experience or changes in the assumptions may
materially affect the Corporation's financial position or results of operations.
In accordance with accounting principles generally accepted in the United
States, actual results that differ from the actuarial assumptions are
accumulated and, if in excess of a specified corridor, amortized over future
periods and, therefore, generally affect recognized expense and the recorded
obligation in future periods. The expected return on plan assets is determined
using the expected rate of return and a calculated value of assets referred to
as the market-related value of assets. The Corporation's aggregate
market-related value of assets exceeded the fair value of plan assets by
approximately $155 million as of the 2004 measurement date. Differences between
assumed and actual returns are amortized to the market-related value on a
straight-line basis over a five-year period. Also, gains and losses resulting
from changes in assumptions and from differences between assumptions and actual
experience (except those differences being amortized to the market-related value
of assets) are amortized over the expected remaining service period of active
plan participants or, for retired participants, the average remaining life
expectancy, to the extent that such amounts exceed ten percent of the greater of
the market-related value of plan assets
-23-
or the projected benefit obligation at the beginning of the year. The
Corporation expects that its pension and other postretirement benefit costs in
2005 will exceed the costs recognized in 2004 by approximately $20 million. This
increase is principally attributable to two factors--a reduction in the
market-related value of pension plan assets, as compared to the prior year, and
the effect of amortization of certain actuarial losses.
As more fully described in Note 19 of Notes to Consolidated Financial
Statements, the Corporation recognized pre-tax restructuring charges of $--,
$31.6 million, and $46.6 million during 2004, 2003, and 2002, respectively.
Those pre-tax restructuring charges in 2004, 2003, and 2002 were net of
reversals of previously established pre-tax restructuring reserves and proceeds
received in excess of the adjusted carrying value of long-lived assets in the
aggregate of $5.4 million, $13.2 million, and $11.0 million, respectively. The
related restructuring reserves reflect estimates, including those pertaining to
separation costs, settlements of contractual obligations, and asset valuations.
The Corporation reassesses the reserve requirements to complete each individual
plan within the restructuring program at the end of each reporting period.
Actual experience has been and may continue to be different from the estimates
used to establish the restructuring reserves. At December 31, 2004, the
Corporation had liabilities established in conjunction with its restructuring
activities that totaled $20.2 million.
As more fully described in Item 3 of this report, the Corporation is
subject to various legal proceedings and claims, including those with respect to
environmental matters, the outcomes of which are subject to significant
uncertainty. The Corporation evaluates, among other factors, the degree of
probability of an unfavorable outcome, the ability to make a reasonable estimate
of the amount of loss, and in certain instances, the ability of other parties to
share costs. Also, in accordance with accounting principles generally accepted
in the United States when a range of probable loss exists, the Corporation
accrues at the low end of the range when no other more likely amount exists.
Unanticipated events or changes in these factors may require the Corporation to
increase the amount it has accrued for any matter or accrue for a matter that
has not been previously accrued because it was not probable.
Further, as indicated in Note 20 of Notes to Consolidated Financial
Statements, insurance recoveries for environmental and certain general liability
claims have not been recognized until realized. Any insurance recoveries, if
realized in future periods, could have a favorable impact on the Corporation's
financial condition or results of operations in the periods realized.
The Corporation is also subject to income tax laws in many countries.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the Corporation's financial statements or tax returns.
Additionally, the Corporation is subject to periodic examinations by taxing
authorities in many countries. The final outcome of these future tax
consequences, tax audits, and changes in regulatory tax laws and rates could
materially impact the Corporation's financial statements.
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. 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 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 judgement 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. In December 2004, the IRS
appealed the Court's decision in favor of the Corporation to the United States
Circuit Court of Appeals for the Fourth Circuit. That appeal is still pending.
The Corporation intends to vigorously dispute the position taken by the IRS in
this matter. The Corporation has provided adequate reserves in the event that
the IRS prevails in its disallowance of the previously described capital loss
and the impostion of related interest. Should the IRS prevail in its
disallowance of the capital loss deduction and the imposition of related
interest, it would result in a cash outflow of approximately $160 million. If
upheld, the Court's decision would result in the Corporation receiving a refund
of taxes previously paid of approximately $50 million, plus interest. The
Corporation believes that any such outflow or inflow is unlikely to occur until
2006 or later.
Impact of New Accounting Standards
As more fully described in Note 1 of Notes to Consolidated Financial Statements,
the Corporation has not yet adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payments, or No. 151, Inventory Costs.
-24-
Financial Condition
Operating activities generated cash of $619.1 million for the year ended
December 31, 2004, compared to $570.6 million of cash generated for the year
ended December 31, 2003. Cash flow from operating activities included cash flow
from discontinued operations of $3.1 million and $8.7 million for the years
ended December 31, 2004 and 2003, respectively. The increase in cash provided by
operating activities in 2004 over 2003 was primarily the result of increased
earnings from continuing operations and increased cash provided by other assets
and liabilities which was partially offset by lower cash from working capital.
Increases in inventories (associated with the higher level of sales and to
achieve higher service levels) and decreases in accounts payable (associated
with the timing of production and payments) exceeded the increase in accrued
liabilities (associated with higher sales and earnings levels) in 2004 as
compared to 2003. The increase in 2004 over 2003 in cash provided by operating
activities associated with other assets and liabilities was due to lower value
added tax payments and an increase in cash proceeds associated with foreign
currency hedging activities.
As part of its capital management, the Corporation reviews certain working
capital metrics. For example, the Corporation evaluates its accounts receivable
and inventory levels through the computation of days sales outstanding and
inventory turnover ratio, respectively. The number of days sales outstanding as
of December 31, 2004, increased slightly from the number of days sales
outstanding as of December 31, 2003. Average inventory turns remained flat in
comparison to the average inventory turns as of December 31, 2003.
Investing activities for the year ended December 31, 2004 used cash of
$819.6 million compared to $368.1 million of cash used in 2003. Cash used for
investing activities in 2004 included $804.6 million related to the purchase of
businesses as compared to $277.6 million in 2003. Investing activities for the
year ended December 31, 2004 included a $788.5 million payment, net of cash
acquired, to Pentair, Inc. for the acquisition of the Porter-Cable and Delta
Tools Group and related transaction costs. That payment included $21.8 million,
on a preliminary basis, based upon the estimated increase in the net assets of
the Tools Group. Investing activities for 2004 also included a payment of $7.9
million, net of cash acquired, related to the purchase of MasterFix. Investing
activities for the year ended December 31, 2003, included a payment of $275.0
million to Masco Corporation for the acquisition of Baldwin and Weiser and
related transaction costs. Investing activities for 2004 also included $77.5
million of net proceeds from the sale of two of the discontinued European
security hardware businesses as more fully described in Note 3 of Notes to
Consolidated Financial Statements. Capital expenditures were $117.8 million and
$102.5 million in 2004 and 2003, respectively. The Corporation anticipates that
its capital spending in 2005 will approximate $150 million.
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 provided the Corporation with the right to terminate the
sales contract in the event that regulatory approval was not obtained by
December 31, 2004. The Corporation terminated the contract in January 2005
because regulatory approval was not obtained. The Corporation is currently
marketing the DOM business for sale to other potential buyers.
Financing activities provided cash of $391.9 million in 2004, compared to
cash used of $425.7 million in 2003. Cash provided by financing activities in
2004 included $295.4 million of proceeds, net of discounts and debt issuance
costs, received in October 2004 upon the issuance of $300 million of 4 3/4%
Senior Notes due 2014. Cash provided by financing activities in 2004 also
included $171.6 million of proceeds received upon the issuance of common stock
under employee benefit plans. Cash provided by financing activities in 2004 were
reduced by the Corporation's dividend payments, which increased - on a per share
basis - from $.57 during 2003 to $.84 during 2004. Dividend payments were $67.5
million and $44.3 million in 2004 and 2003, respectively. Cash used by financing
activities in 2003 included the repayment of $309.5 million of debt on April 1,
2003. During 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. The Corporation implemented its share repurchase program
based upon the belief that its shares were undervalued and to manage share
growth resulting from option exercises.
At December 31, 2004, the Corporation had remaining authorization from its
Board of Directors to repurchase an additional 2,845,495 shares of its common
stock. Subsequent to December 31, 2004, the Corporation repurchased 2,000,000
shares of its common stock at an aggregate cost of $165.6 million. In February
2005, the Board of Directors authorized the Corporation to repurchase an
additional 2,500,000 shares of its common stock. After those share repurchases
and the additional shares that were authorized by the Board of Directors, the
Corporation had remaining authorization from its Board of Directors to
repurchase an additional 3,345,495 shares of its common stock.
-25-
On February 10, 2005, the Corporation announced that its Board of Directors
declared a quarterly cash dividend of $.28 per share of the Corporation's
outstanding common stock payable during the first quarter of 2005. The $.28
dividend represents a 33% increase over the $.21 quarterly dividend paid by the
Corporation since December 2003. Future dividends will depend on the
Corporation's earnings, financial condition, and other factors.
As discussed further in Notes 7 of Notes to Consolidated Financial
Statements, 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.
As discussed further in Note 12 of Notes to Consolidated Financial
Statements, in accordance with Statement of Financial Accounting Standard (SFAS)
No. 87, Employer's Accounting for Pensions, the Corporation has recorded a
minimum pension liability adjustment at December 31, 2004 as a charge to
stockholders' equity of $368.5 million, net of tax. That charge to stockholders'
equity did not impact the Corporation's compliance with covenants under its
borrowing agreements or cash flow. The Corporation's expense recognized relating
to its pension and other postretirement benefit plans increased by approximately
$19 million in 2004 over the 2003 levels. The Corporation anticipates that the
expense recognized relating to its pension and other postretirement benefit
plans in 2005 will increase by approximately $20 million over the 2004 levels.
That increase is partially attributable to the amortization of previously
unrecognized actuarial losses that gave rise to the minimum liability
adjustment. As discussed further in Note 12 of Notes to Consolidated Financial
Statements, the Corporation does not anticipate that the funding requirements
relating to the pension benefit plans in 2005 will be material.
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. 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 for a carryback of a portion of the aforementioned capital loss
deduction. The IRS subsequently field a counterclaim to the Corporation's
petition. In October 2004, the Court granted the Corporation's motion for
summary judgement 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. In December 2004, the IRS
appealed the Court's decision in favor of the Corporation to the United States
Circuit Court of Appeals for the Fourth Circuit. That appeal is still pending.
The Corporation intends to vigorously dispute the position taken by the IRS in
this matter. 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 the imposition of related
interest, it would result in a cash outflow by the Corporation of approximately
$160 million. If upheld, the Court's decision would result in the Corporation
receiving a refund of taxes previously paid of approximately $50 million, plus
interest. The Corporation believes that any such outflow or inflow is unlikely
to occur until 2006 or later.
The ongoing costs of compliance with existing environmental laws and
regulations have not had, and are not expected to have, a material adverse
effect on the Corporation's capital expenditures or financial position.
The Corporation will continue to have cash requirements to support seasonal
working capital needs and capital expenditures, to pay interest, to service
debt, and to complete the restructuring and integration actions previously
described. For amounts available at December 31, 2004, under the Corporation's
revolving credit facilities and under short-term borrowing facilities, see Note
7 of Notes to Consolidated Financial Statements. In order to meet its cash
requirements, the Corporation intends to use internally generated funds and to
borrow under its existing and future unsecured revolving credit facilities or
under short-term borrowing facilities. The Corporation believes that cash
provided from these sources will be adequate to meet its cash requirements over
the next 12 months.
The following table provides a summary of the Corporation's contractual
obligations by due date (in millions of dollars). The Corporation's short-term
borrowings, long-term debt, other obligations, and lease commitments are more
fully described in Notes 7, 8, 13, and 18, respectively, of Notes to
Consolidated Financial Statements.
-26-
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------
LESS THAN 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS AFTER 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (a) (b) $ 1.1 $ -- $ -- $ -- $ 1.1
Long-term debt .5 305.3 .3 850.0 1,156.1
Operating leases 67.4 87.0 47.5 19.8 221.7
Purchase obligations (c) 348.0 31.6 1.7 4.5 385.8
Redeemable preferred stock of subsidiary (d) 188.0 -- -- -- 188.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations (e) $ 605.0 $ 423.9 $ 49.5 $ 874.3 $ 1,952.7
====================================================================================================================================
(a) As more fully described in Note 7 of Notes to Consolidated Financial
Statements, the Corporation has a $1.0 billion credit facility that matures
in October 2009 and a $1.0 billion commercial paper program. While no
borrowings were outstanding under these facilities at December 31, 2004,
the Corporation had borrowings outstanding under these facilities during
2004 and anticipates that borrowings will occur in 2005. The Corporation's
average borrowing outstanding under these facilities during 2004 was $274.5
million.
(b) As described in Note 7 of Notes to Consolidated Financial Statements,
certain subsidiaries of the Corporation outside of the United States have
uncommitted lines of credit of $388.3 million at December 31, 2004. These
uncommitted lines of credit do not have termination dates and are reviewed
periodically.
(c) The Corporation enters into contractual arrangements that result in its
obligation to make future payments, including purchase obligations. The
Corporation enters into these arrangements in the ordinary course of
business in order to ensure adequate levels of inventories, machinery and
equipment, or services. Purchase obligations primarily consist of inventory
purchase commitments, including raw material, components, and sourced
products, sponsorship arrangements, and arrangements for other services.
(d) Included in other current liabilities.
(e) The Corporation anticipates that funding of its pension and postretirement
benefit plans in 2005 will approximate $36 million. That amount principally
represents contributions either required by regulations or laws or, with
respect to unfunded plans, necessary to fund current benefits. The
Corporation has not presented estimated pension and postretirement funding
in the table above as the funding can vary from year to year based upon
changes in the fair value of the plan assets and actuarial assumptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained in Item 7 of this report under
the caption "Hedging Activities" and in Item 8 of this report in Notes 1 and 9
of Notes to Consolidated Financial Statements, and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Corporation and its
subsidiaries are included herein as indicated below:
Consolidated Financial Statements
Consolidated Statement of Earnings
- years ended December 31, 2004, 2003, and 2002.
Consolidated Balance Sheet
- December 31, 2004 and 2003.
Consolidated Statement of Stockholders' Equity
- years ended December 31, 2004, 2003, and 2002.
Consolidated Statement of Cash Flows
- years ended December 31, 2004, 2003, and 2002.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm on Consolidated
Financial Statements.
-27-
CONSOLIDATED STATEMENT OF EARNINGS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
SALES $5,398.4 $4,482.7 $4,291.8
Cost of goods sold 3,432.9 2,887.1 2,805.6
Selling, general, and
administrative expenses 1,336.3 1,135.3 1,071.6
Restructuring and exit costs -- 31.6 46.6
- --------------------------------------------------------------------------------
OPERATING INCOME 629.2 428.7 368.0
Interest expense (net of interest income
of $35.8 for 2004, $25.5 for 2003,
and $26.5 for 2002) 22.1 35.2 57.8
Other expense 2.8 2.6 4.8
- --------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 604.3 390.9 305.4
Income taxes 163.2 103.7 76.9
- --------------------------------------------------------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS 441.1 287.2 228.5
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS (NET OF INCOME
TAXES):
Earnings of discontinued operations
(net of income taxes of $1.0 for 2004,
$3.5 for 2003, and $.8 for 2002) 2.2 5.8 1.2
Gain on sale of discontinued
operations (net of impairment charge
of $24.4) 12.7 -- --
- --------------------------------------------------------------------------------
NET EARNINGS FROM DISCONTINUED OPERATIONS 14.9 5.8 1.2
- --------------------------------------------------------------------------------
NET EARNINGS $ 456.0 $ 293.0 $ 229.7
================================================================================
BASIC EARNINGS PER COMMON SHARE
Continuing operations $ 5.53 $ 3.69 $ 2.85
Discontinued operations .19 .07 .01
- --------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE --
BASIC $ 5.72 $ 3.76 $ 2.86
================================================================================
DILUTED EARNINGS PER COMMON SHARE
Continuing operations $ 5.40 $ 3.68 $ 2.83
Discontinued operations .19 .07 .01
- --------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE --
ASSUMING DILUTION $ 5.59 $ 3.75 $ 2.84
================================================================================
See Notes to Consolidated Financial Statements.
-28-
CONSOLIDATED BALANCE SHEET
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
DECEMBER 31, 2004 2003
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 514.4 $ 308.2
Trade receivables, less allowances
of $52.1 for 2004 and $47.4 for 2003 1,046.6 808.6
Inventories 981.8 709.9
Current assets of discontinued operations 70.8 160.2
Other current assets 313.6 216.1
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,927.2 2,203.0
- --------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT 754.6 660.2
GOODWILL 1,184.0 771.7
OTHER ASSETS 665.0 587.6
- --------------------------------------------------------------------------------
$5,530.8 $4,222.5
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1.1 $ .1
Current maturities of long-term debt .5 .4
Trade accounts payable 466.9 379.8
Current liabilities of discontinued operations 29.9 38.0
Other current liabilities 1,294.2 893.8
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,792.6 1,312.1
- --------------------------------------------------------------------------------
LONG-TERM DEBT 1,200.6 915.6
DEFERRED INCOME TAXES 171.1 179.8
POSTRETIREMENT BENEFITS 423.4 451.9
OTHER LONG-TERM LIABILITIES 384.4 516.6
STOCKHOLDERS' EQUITY
Common stock (outstanding:
December 31, 2004 -- 82,095,161 shares;
December 31, 2003 -- 77,933,464 shares) 41.0 39.0
Capital in excess of par value 699.6 486.7
Unearned restricted stock compensation (12.6) --
Retained earnings 1,161.5 773.0
Accumulated other comprehensive income (loss) (330.8) (452.2)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,558.7 846.5
- --------------------------------------------------------------------------------
$5,530.8 $4,222.5
================================================================================
See Notes to Consolidated Financial Statements.
-29-
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
OUTSTANDING
COMMON PAR
SHARES VALUE
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 79,829,641 $39.9
Comprehensive income (loss):
Net earnings -- --
Net loss on derivative instruments
(net of tax) -- --
Minimum pension liability adjustment
(net of tax) -- --
Foreign currency translation adjustments,
less effect of hedging activities
(net of tax) -- --
- --------------------------------------------------------------------------------
Comprehensive income (loss) -- --
- --------------------------------------------------------------------------------
Cash dividends on common stock
($.48 per share) -- --
Purchase and retirement of common stock (1,008,101) (.5)
Common stock issued under employee
benefit plans 783,246 .4
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 79,604,786 39.8
Comprehensive income (loss):
Net earnings -- --
Net loss on derivative instruments
(net of tax) -- --
Minimum pension liability adjustment
(net of tax) -- --
Foreign currency translation adjustments,
less effect of hedging activities
(net of tax) -- --
- --------------------------------------------------------------------------------
Comprehensive income -- --
- --------------------------------------------------------------------------------
Cash dividends on common stock
($.57 per share) -- --
Purchase and retirement of common stock (2,011,570) (1.0)
Common stock issued under employee
benefit plans 340,248 .2
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 77,933,464 39.0
Comprehensive income (loss):
Net earnings -- --
Net gain on derivative instruments
(net of tax) -- --
Minimum pension liability adjustment
(net of tax) -- --
Foreign currency translation adjustments,
less effect of hedging activities
(net of tax) -- --
Write-off of accumulated foreign currency
translation adjustments due to sale
of businesses -- --
- --------------------------------------------------------------------------------
Comprehensive income -- --
- --------------------------------------------------------------------------------
Cash dividends on common stock
($.84 per share) -- --
Restricted stock grants 278,296 .1
Restricted stock amortization,
net of forfeitures (7,950) --
Purchase and retirement of common stock (66,100) --
Common stock issued under employee
benefit plans 3,957,451 1.9
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 82,095,161 $41.0
================================================================================
See Notes to Consolidated Financial Statements.
-30-
UNEARNED ACCUMULATED
CAPITAL IN RESTRICTED OTHER TOTAL
EXCESS OF STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
PAR VALUE COMPENSATION EARNINGS INCOME (LOSS) EQUITY
- --------------------------------------------------------------------------------
$566.6 $ -- $ 333.2 $(188.7) $ 751.0
-- -- 229.7 -- 229.7
-- -- -- (16.4) (16.4)
-- -- -- (369.7) (369.7)
-- -- -- 60.2 60.2
- --------------------------------------------------------------------------------
-- -- 229.7 (325.9) (96.2)
- --------------------------------------------------------------------------------
-- -- (38.6) -- (38.6)
(42.6) -- -- -- (43.1)
26.1 -- -- -- 26.5
- --------------------------------------------------------------------------------
550.1 -- 524.3 (514.6) 599.6
-- -- 293.0 -- 293.0
-- -- -- (15.8) (15.8)
-- -- -- (20.2) (20.2)
-- -- -- 98.4 98.4
- --------------------------------------------------------------------------------
-- -- 293.0 62.4 355.4
- --------------------------------------------------------------------------------
-- -- (44.3) -- (44.3)
(76.5) -- -- -- (77.5)
13.1 -- -- -- 13.3
- --------------------------------------------------------------------------------
486.7 -- 773.0 (452.2) 846.5
-- -- 456.0 -- 456.0
-- -- -- 4.9 4.9
-- -- -- 49.4 49.4
-- -- -- 95.8 95.8
-- -- -- (28.7) (28.7)
- --------------------------------------------------------------------------------
-- -- 456.0 121.4 577.4
- --------------------------------------------------------------------------------
-- -- (67.5) -- (67.5)
15.8 (15.9) -- -- --
(.5) 3.3 -- -- 2.8
(3.6) -- -- -- (3.6)
201.2 -- -- -- 203.1
- --------------------------------------------------------------------------------
$699.6 $(12.6) $1,161.5 $(330.8) $1,558.7
================================================================================
-31-
CONSOLIDATED STATEMENT OF CASH FLOWS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
YEAR ENDED DECEMBER 31, 2004 2003 2002
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 456.0 $ 293.0 $ 229.7
Adjustments to reconcile net earnings
to cash flow from operating activities
of continuing operations:
Earnings of discontinued operations (2.2) (5.8) (1.2)
Gain on sale of discontinued operations
(net of impairment charge) (12.7) -- --
Non-cash charges and credits:
Depreciation and amortization 142.5 133.4 122.4
Restructuring and exit costs -- 31.6 46.6
Other (.3) (8.1) (8.6)
Changes in selected working capital items
(net of assets and liabilities
of acquired businesses):
Trade receivables 1.3 (6.4) 13.1
Inventories (66.7) 94.2 (10.0)
Trade accounts payable (39.9) 21.0 18.9
Other current liabilities 102.8 56.4 28.7
Restructuring spending (25.0) (40.4) (36.9)
Other assets and liabilities 60.2 (7.0) 35.6
- --------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 616.0 561.9 438.3
CASH FLOW FROM OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS 3.1 8.7 13.3
- --------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES 619.1 570.6 451.6
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposal of assets 26.0 15.0 4.6
Proceeds from sale of discontinued
operations, net of cash transferred 77.5 -- --
Capital expenditures (117.8) (102.5) (94.3)
Purchase of businesses, net of cash acquired (804.6) (277.6) --
Investing activities of discontinued
operations (1.2) (3.3) (2.3)
Cash inflow from hedging activities 7.2 -- --
Cash outflow from hedging activities (7.9) -- --
Other investing activities, net 1.2 .3 1.4
- --------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES (819.6) (368.1) (90.6)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in short-term borrowings (3.4) (4.9) (7.2)
Proceeds from long-term debt (net of debt
issue cost of $2.4) 295.4 -- --
Payments on long-term debt (.6) (310.6) (33.9)
Purchase of common stock (3.6) (77.5) (43.1)
Issuance of common stock 171.6 11.6 20.8
Cash dividends (67.5) (44.3) (38.6)
- --------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES 391.9 (425.7) (102.0)
Effect of exchange rate changes on cash 14.8 14.3 13.6
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 206.2 (208.9) 272.6
Cash and cash equivalents at beginning
of year 308.2 517.1 244.5
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 514.4 $ 308.2 $ 517.1
================================================================================
See Notes to Consolidated Financial Statements.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
NOTE 1: SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include the
accounts of the Corporation and its subsidiaries. Intercompany transactions have
been eliminated.
Reclassifications: Certain prior years' amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used in 2004.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
Revenue Recognition: Revenue from sales of products is recognized when title
passes, which occurs either upon shipment or upon delivery based upon
contractual terms. The Corporation recognizes customer program costs, including
customer incentives such as volume or trade discounts, cooperative advertising
and other sales related discounts, as a reduction to sales.
Foreign Currency Translation: The financial statements of subsidiaries located
outside of the United States, except those subsidiaries operating in highly
inflationary economies, generally are measured using the local currency as the
functional currency. Assets, including goodwill, and liabilities of these
subsidiaries are translated at the rates of exchange at the balance sheet date.
The resultant translation adjustments are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Income and expense items are translated at average monthly rates of exchange.
Gains and losses from foreign currency transactions of these subsidiaries are
included in net earnings. For subsidiaries operating in highly inflationary
economies, gains and losses from balance sheet translation adjustments are
included in net earnings.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
demand deposits, and short-term investments with maturities of three months or
less from the date of acquisition.
Concentration of Credit: The Corporation sells products and services to
customers in diversified industries and geographic regions and, therefore, has
no significant concentrations of credit risk other than with two major
customers. As of December 31, 2004, approximately 28% of the Corporation's trade
receivables were due from two large home improvement retailers.
The Corporation continuously evaluates the creditworthiness of its
customers and generally does not require collateral.
Inventories: Inventories are stated at the lower of cost or market. The cost of
United States inventories is based primarily on the last-in, first-out (LIFO)
method; all other inventories are based on the first-in, first-out (FIFO)
method.
Property and Depreciation: Property, plant, and equipment is stated at cost.
Depreciation is computed generally on the straight-line method for financial
reporting purposes.
Goodwill and Other Intangible Assets: Effective January 1, 2002, the Corporation
adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but are subject to an
annual impairment test. Other intangible assets continue to be amortized over
their useful lives.
The changes in the carrying amount of goodwill for the year ended December
31, 2004, by segment in millions of dollars, are as follows:
POWER HARDWARE FASTENING
TOOLS & & HOME & ASSEMBLY
ACCESSORIES IMPROVEMENT SYSTEMS
- --------------------------------------------------------------------------------
Goodwill at January 1 $ 25.8 $458.6 $287.3
Acquisitions 384.4 -- 4.1
Activity associated with
prior year acquisitions 4.7 4.8 --
Currency translation
adjustment 2.2 .5 11.6
- --------------------------------------------------------------------------------
Goodwill at December 31 $417.1 $463.9 $303.0
================================================================================
The Corporation assesses the fair value of its reporting units for its
goodwill impairment tests based upon a discounted cash flow methodology. Those
estimated future cash flows - which are based upon historical results and
current projections - are discounted at a rate corresponding to a "market" rate.
If the carrying amount of the reporting unit exceeds the estimated fair value
determined through that discounted cash flow methodology, goodwill impairment
may be present. The Corporation would measure the goodwill impairment loss based
upon the fair value of the underlying assets and liabilities of the reporting
unit, including any unrecognized intangible assets, and estimate the implied
fair value of goodwill. An impairment loss would be recognized to the extent
that a reporting unit's recorded goodwill exceeded the implied fair value of
goodwill.
As of January 1, 2002, the Corporation performed the first of the required
impairment tests of goodwill. Additionally, the Corporation performed its annual
impairment test in the fourth quarters of 2004, 2003, and 2002. No impairment
was present upon performing these impairment tests. The Corporation cannot
predict the occurrence of certain events that might adversely affect the
reported value of goodwill. Such
-33-
events may include, but are not limited to, strategic decisions made in response
to economic and competitive conditions, the impact of the economic environment
on the Corporation's customer base, or a material negative change in its
relationships with significant customers.
Product Development Costs: Costs associated with the development of new products
and changes to existing products are charged to operations as incurred. Product
development costs were $118.6 million in 2004, $100.4 million in 2003, and $94.3
million in 2002.
Shipping and Handling Costs: Shipping and handling costs represent costs
associated with shipping products to customers and handling finished goods.
Included in selling, general, and administrative expenses are shipping and
handling costs of $278.1 million in 2004, $229.4 million in 2003, and $218.1
million in 2002. Freight charged to customers is recorded as revenue.
Advertising and Promotion: Advertising and promotion expense, which is expensed
as incurred, was $174.9 million in 2004, $154.0 million in 2003, and $134.6
million in 2002.
Product Warranties: Most of the Corporation's products in the Power Tools and
Accessories segment and Hardware and Home Improvement segment carry a product
warranty. That product warranty, in the United States, generally provides that
customers can return a defective product during the specified warranty period
following purchase in exchange for a replacement product or repair at no cost to
the consumer. Product warranty arrangements outside the United States vary
depending upon local market conditions and laws and regulations. The Corporation
accrues an estimate of its exposure to warranty claims based upon both current
and historical product sales data and warranty costs incurred.
Postretirement Benefits: Pension plans, which cover substantially all of the
Corporation's employees in North America, Europe, and the United Kingdom,
consist primarily of non-contributory defined benefit plans. The defined benefit
plans are funded in conformity with the funding requirements of applicable
government regulations. Generally, benefits are based on age, years of service,
and the level of compensation during the final years of employment. Prior
service costs for defined benefit plans generally are amortized over the
estimated remaining service periods of employees.
Certain employees are covered by defined contribution plans. The
Corporation's contributions to these plans are based on a percentage of employee
compensation or employee contributions. These plans are funded on a current
basis.
In addition to pension benefits, certain postretirement medical, dental,
and life insurance benefits are provided, principally to most United States
employees. Retirees in other countries generally are covered by
government-sponsored programs.
The Corporation uses the corridor approach in the valuation of defined
benefit plans and other postretirement benefits. The corridor approach defers
all actuarial gains and losses resulting from variances between actual results
and economic estimates or actuarial assumptions. For defined benefit pension
plans, these unrecognized gains and losses are amortized when the net gains and
losses exceed 10% of the greater of the market-related value of plan assets or
the projected benefit obligation at the beginning of the year. For other
postretirement benefits, amortization occurs when the net gains and losses
exceed 10% of the accumulated postretirement benefit obligation at the beginning
of the year. The amount in excess of the corridor is amortized over the average
remaining service period to retirement date of active plan participants or, for
retired participants, the average remaining life expectancy.
Derivative Financial Instruments: The Corporation is exposed to market risks
arising from changes in interest rates. With products and services marketed in
over 100 countries and with manufacturing sites in 11 countries, the Corporation
also is exposed to risks arising from changes in foreign currency rates. The
Corporation uses derivatives principally in the management of interest rate and
foreign currency exposure. It does not utilize derivatives that contain leverage
features. On the date on which the Corporation enters into a derivative, the
derivative is designated as a hedge of the identified exposure. The Corporation
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. In this documentation, the Corporation specifically
identifies the asset, liability, firm commitment, forecasted transaction, or net
investment that has been designated as the hedged item and states how the
hedging instrument is expected to reduce the risks related to the hedged item.
The Corporation measures effectiveness of its hedging relationships both at
hedge inception and on an ongoing basis.
For each derivative instrument that is designated and qualifies as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
For each derivative instrument that is designated and qualifies as a cash flow
hedge, the effective portion of the gain or loss on the derivative instrument is
reported as a component of accumulated other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is
-34-
recognized in current earnings during the period of change. For hedged
forecasted transactions, hedge accounting is discontinued if the forecasted
transaction is no longer probable of occurring, in which case previously
deferred hedging gains or losses would be recorded to earnings immediately. For
derivatives that are designated and qualify as hedges of net investments in
subsidiaries located outside the United States, the gain or loss (net of tax),
is reported in accumulated other comprehensive income (loss) as part of the
cumulative translation adjustment to the extent the derivative is effective. For
derivative instruments not designated as hedging instruments, the gain or loss
is recognized in current earnings during the period of change.
Interest Rate Risk Management: The Corporation has designated each of its
outstanding interest rate swap agreements as fair value hedges of the underlying
fixed rate obligation. The fair value of the interest rate swap agreements is
recorded in other current assets, other assets, other current liabilities, or
other long-term liabilities with a corresponding increase or decrease in the
fixed rate obligation. The changes in the fair value of the interest rate swap
agreements and the underlying fixed rate obligations are recorded as equal and
offsetting unrealized gains and losses in interest expense and other expense
(income) in the Consolidated Statement of Earnings. The Corporation has
structured all existing interest rate swap agreements to be 100% effective. As a
result, there is no current impact to earnings resulting from hedge
ineffectiveness. Gains or losses resulting from the early termination of
interest rate swaps are deferred as an increase or decrease to the carrying
value of the related debt and amortized as an adjustment to the yield of the
related debt instrument over the remaining period originally covered by the
swap.
Foreign Currency Management: The fair value of foreign currency-related
derivatives are generally included in the Consolidated Balance Sheet in other
current assets and other current liabilities. The earnings impact of cash flow
hedges relating to forecasted purchases of inventory is generally reported in
cost of goods sold to match the underlying transaction being hedged. Realized
and unrealized gains and losses on these instruments are deferred in accumulated
other comprehensive income (loss) until the underlying transaction is recognized
in earnings.
The earnings impact of cash flow hedges relating to the variability in cash
flows associated with foreign currency-denominated assets and liabilities is
reported in cost of goods sold, selling, general, and administrative expenses,
or other expense (income), depending on the nature of the assets or liabilities
being hedged. The amounts deferred in accumulated other comprehensive income
(loss) associated with these instruments generally relate to foreign currency
spot-rate to forward-rate differentials and are recognized in earnings over the
term of the hedge. The discount or premium relating to cash flow hedges
associated with foreign currency-denominated assets and liabilities is
recognized in net interest expense over the life of the hedge.
Stock-Based Compensation: As described in Note 16, the Corporation has elected
to follow the accounting provisions of Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, for stock-based
compensation and to furnish the pro forma disclosures required under SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure.
A reconciliation of the Corporation's net earnings to pro forma net
earnings, and the related pro forma earnings per share amounts, for the years
ended December 31, 2004, 2003, and 2002, is provided below. For purposes of pro
forma disclosure, stock-based compensation expense is recognized in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Further, pro forma stock-based compensation expense is amortized to expense on a
straight-line basis over the vesting period.
(DOLLARS IN MILLIONS
EXCEPT PER SHARE DATA) 2004 2003 2002
- --------------------------------------------------------------------------------
Net earnings $456.0 $293.0 $229.7
Adjustment to net earnings for:
Stock-based compensation
expense included
in net earnings, net of tax 11.9 2.6 --
Pro forma stock-based
compensation (expense),
net of tax (22.3) (19.3) (18.5)
- --------------------------------------------------------------------------------
Pro forma net earnings $445.6 $276.3 $211.2
================================================================================
Pro forma net earnings
per common share -- basic $ 5.59 $ 3.55 $ 2.63
================================================================================
Pro forma net earnings
per common share --
assuming dilution $ 5.49 $ 3.55 $ 2.62
================================================================================
New Accounting Pronouncements: In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123 (revised 2004) (FASB 123R), Share-Based Payment. FASB 123R will require the
Corporation to expense share-based payments, including employee stock options,
based on their fair value. The Corporation is required to adopt the provisions
of FASB 123R effective as of the beginning of its third quarter in 2005. FASB
123R provides alternative methods of adoption which include prospective
application and a modified retroactive application. The Corporation is currently
evaluating the financial impact, including the available alternatives of
adoption, of FASB 123R.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law which introduced a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree
-35-
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.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (FASB 151), Inventory Costs. The Corporation is required to
adopt the provisions of FASB 151, on a prospective basis, as of January 1, 2006.
FASB 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. FASB 151 requires that those items
- - if abnormal - be recognized as expenses in the period incurred. In addition,
FASB 151 requires the allocation of fixed production overheads to the costs of
conversions based upon the normal capacity of the production facilities. The
Corporation has not yet determined what effect FASB 151 will have on its
earnings and financial position.
NOTE 2: ACQUISITIONS
Effective after the close of business on October 2, 2004, the Corporation
acquired the Porter-Cable and Delta Tools Group from Pentair, Inc. The
Porter-Cable and Delta Tools Group includes the Porter-Cable, Delta, DeVilbiss
Air Power Company, Oldham Saw and FLEX businesses. The cash purchase price for
the transaction was approximately $792.0 million net of cash acquired of $8.3
million and including transaction costs of $3.5 million. That cash purchase
price of $792.0 million included a payment of $21.8 million, on a preliminary
basis, based upon the estimated increase in the net assets of the Porter-Cable
and Delta Tools Group. The final purchase price is subject to customary
adjustments based upon changes in the net assets of the Porter-Cable and Delta
Tools Group through the closing date. The acquired Porter-Cable and Delta Tools
Group will be integrated into the Corporation's Power Tools and Accessories
segment and will allow the Corporation to offer its customers a broader range of
products.
This transaction has been accounted for in accordance with SFAS No.141,
Business Combinations, and accordingly the financial position and results of
operations have been included in the Corporation's operations since the date of
acquisition.
The Corporation has not yet obtained all information, including, but not
limited to, finalization of independent appraisals, required to complete the
purchase price allocation related to the acquisition of the Porter-Cable and
Delta Tools Group. The final allocation will be completed in 2005. The initial
purchase price allocation of the acquired business based on preliminary
appraisal data and management's estimates at the date of acquisition, in
millions of dollars, is as follows:
- --------------------------------------------------------------------------------
Accounts receivable $ 202.5
Inventories 170.9
Property and equipment 128.1
Goodwill 383.4
Intangible assets 156.5
Other current and long-term assets 42.2
- --------------------------------------------------------------------------------
Total assets acquired 1,083.6
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities 222.3
Other liabilities 69.3
- --------------------------------------------------------------------------------
Total liabilities 291.6
- --------------------------------------------------------------------------------
Fair value of net assets acquired $ 792.0
================================================================================
The preliminary allocation of the purchase price resulted in the
recognition of $383.4 million of goodwill primarily related to the anticipated
future earnings and cash flows of the Porter-Cable and Delta Tools Group,
including the estimated effects of the integration of this business into the
Corporation's Power Tools and Accessories business. The transaction also
generated $156.5 million in intangible assets of which $130.2 million were
indefinite-lived intangible assets related to trade names and $26.3 million
related to finite-lived intangible assets that will be amortized over periods of
10 to 15 years. These intangible assets are reflected in other assets in the
Consolidated Balance Sheet. The Corporation believes that approximately $370
million of the intangible assets and goodwill recognized will be deductible for
income tax purposes.
Prior to the date of the acquisition of the Porter-Cable and Delta Tools
Group and during the fourth quarter of 2004, the Corporation identified
opportunities to restructure the acquired businesses as well as to integrate
these businesses into its existing Power Tools and Accessories segment.
Subsequent to the acquisition, the Corporation approved restructuring actions
-36-
relating to the acquired businesses in the amount of $16.2 million. These
actions principally reflect severance costs associated with administrative and
manufacturing actions related to the acquired businesses, including the closure
of two manufacturing facilities, as well as the cost of lease and other
contractual obligations for which no future benefit will be realized. Certain of
these restructuring actions commenced in 2004 with the remainder commencing in
early 2005. The Corporation expects that these restructuring actions will be
completed by the end of 2006. The Corporation's evaluation of identified
opportunities to restructure the acquired businesses as well as to integrate
these businesses into its existing Power Tools and Accessories segment is
ongoing with finalization not expected until later in 2005.
The following pro forma unaudited combined financial information for the
years ended December 31, 2004 and 2003 are presented as if the Porter-Cable and
Delta Tools Group acquisition had occurred at the beginning of each period
presented:
(AMOUNTS IN MILLIONS
EXCEPT PER SHARE DATA) 2004 2003
- --------------------------------------------------------------------------------
Sales $6,242.6 $5,564.1
- --------------------------------------------------------------------------------
Net Earnings from Continuing Operations 462.9 315.4
- --------------------------------------------------------------------------------
Net earnings per Common Share
from Continuing Operations - Basic $ 5.80 $ 4.05
- --------------------------------------------------------------------------------
Net earnings per Common Share
from Continuing Operations - Diluted $ 5.67 $ 4.04
- --------------------------------------------------------------------------------
These pro forma combined financial results have been prepared for
comparative purposes only and include certain adjustments, such as increased
interest expense on acquisition debt. They do not reflect the effect of
synergies that would have been expected to result from the integration of these
acquisitions. The pro forma information does not purport to be indicative of the
results of operations that actually would have resulted had the combination
occurred on January 1 of each year presented, or of future results of the
consolidated entities.
In March 2004, the Corporation acquired MasterFix for $7.9 million, net of
cash acquired. The results of MasterFix, included in the consolidated financial
statements from the date of acquisition, were not material.
On September 30, 2003, the Corporation acquired Baldwin Hardware
Corporation (Baldwin) and Weiser Lock Corporation (Weiser) from Masco
Corporation for $277.8 million in cash, including transaction costs of $2.8
million. Baldwin is a leading provider of architectural and decorative products
for the home. Weiser is a manufacturer of locksets and decorative exterior
hardware and accessories. These additions to the Corporation's security hardware
businesses, a component of its Hardware and Home Improvement segment, allowed
the Corporation to offer its customers a broader range of styles and price
points.
The Corporation's acquisition of Baldwin and Weiser has been accounted for
in accordance with SFAS No. 141, and accordingly, the financial position and
results of operations have been included in the Corporation's operations since
the date of acquisition. The purchase price allocation of the acquired
businesses based upon independent appraisals and management's estimates at the
date of acquisition, in millions of dollars, is as follows:
- --------------------------------------------------------------------------------
Accounts receivable $ 38.2
Inventories 38.0
Property and equipment 61.1
Goodwill 99.2
Intangible assets 76.3
Other current and long-term assets 10.7
- --------------------------------------------------------------------------------
Total assets acquired 323.5
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities 35.9
Other liabilities 9.8
- --------------------------------------------------------------------------------
Total liabilities 45.7
- --------------------------------------------------------------------------------
Fair value of net assets acquired $277.8
================================================================================
The purchase price allocation resulted in the recognition of $99.2 million
of goodwill primarily related to the future earnings and cash flows of Baldwin
and Weiser, including the estimated effects of the integration of these
businesses into the Corporation's then existing security hardware business. The
transaction also generated $76.3 million in intangible assets of which $71.9
million were indefinite-lived intangible assets related to trademarks and
tradenames and $4.4 million related to finite-lived intangible assets that will
be amortized over a period of 10 years. The Corporation believes that the entire
amount of intangible assets and goodwill recognized will be deductible for
income tax purposes.
Prior to the date of the acquisition of Baldwin and Weiser and during the
fourth quarter of 2003, the Corporation identified opportunities to restructure
these businesses as well as to integrate these businesses into its pre-existing
security hardware business. Subsequent to the acquisition, the Corporation
approved restructuring actions relating to the acquired business of $3.7
million. These actions principally reflect severance benefits associated with
administrative and manufacturing actions related to the acquired businesses,
including the closures of an administrative and distribution facility of the
Weiser business and a distribution facility of the Baldwin business. These
restructuring actions commenced in 2004 and the Corporation expects the actions
to be completed in 2005. In addition, as more fully described in Note 19, during
the fourth quarter of 2003, the Corporation recorded a pre-tax restructuring
charge of $11.0 million relating to the closure of a manufacturing facility in
its Kwikset businesses, a pre-existing component of its Hardware and Home
Improvement segment.
-37-
NOTE 3: DISCONTINUED OPERATIONS
As of December 31, 2003, the Corporation met the requirements to classify its
European security hardware business as discontinued operations. The European
security hardware business, consisting of the NEMEF, Corbin, and DOM businesses,
was previously included in the Corporation's Hardware and Home Improvement
segment. In January 2004, the Corporation completed the sale of the NEMEF and
Corbin businesses to Assa 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 provided the
Corporation with the right to terminate the sales contract in the event that
regulatory approval was not obtained by December 31, 2004. The Corporation
terminated the contract in January 2005 because regulatory approval was not
obtained. The Corporation is currently marketing the DOM business for sale to
other potential buyers.
During 2004, the Corporation recognized a $12.7 million net gain on the
sale of these discontinued operations (the "net gain on sale of discontinued
operations"). That net gain consisted of a $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 all prior
periods presented have been adjusted to reflect this presentation. Sales and
earnings before income taxes of the discontinued operations for each year, in
millions of dollars, were as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Sales $66.2 $119.3 $102.2
Earnings before income taxes 3.1 9.3 2.0
- --------------------------------------------------------------------------------
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 year, in millions of dollars,
were as follows:
2004 2003
- --------------------------------------------------------------------------------
Trade receivables, less allowances $ 9.2 $ 16.1
Inventories 11.9 28.4
Property, plant, and equipment 16.9 27.9
Goodwill 28.1 82.7
Other assets 4.7 5.1
- --------------------------------------------------------------------------------
Total assets 70.8 160.2
- --------------------------------------------------------------------------------
Trade accounts payable 3.7 8.5
Other current liabilities 7.4 11.5
Postretirement benefits and
other long-term liabilities 18.8 18.0
- --------------------------------------------------------------------------------
Total liabilities 29.9 38.0
- --------------------------------------------------------------------------------
Net assets $40.9 $122.2
================================================================================
NOTE 4: INVENTORIES
The classification of inventories at the end of each year, in millions of
dollars, was as follows:
2004 2003
- --------------------------------------------------------------------------------
FIFO cost
Raw materials and work-in-process $267.8 $186.3
Finished products 692.8 510.3
- --------------------------------------------------------------------------------
960.6 696.6
Adjustment to arrive at
LIFO inventory value 21.2 13.3
- --------------------------------------------------------------------------------
$981.8 $709.9
================================================================================
The cost of United States inventories stated under the LIFO method was
approximately 53% and 43% of the value of total inventories at December 31, 2004
and 2003, respectively.
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at the end of each year, in millions of dollars,
consisted of the following:
2004 2003
- --------------------------------------------------------------------------------
Property, plant, and equipment at cost:
Land and improvements $ 51.6 $ 50.0
Buildings 299.5 268.8
Machinery and equipment 1,410.6 1,234.6
- --------------------------------------------------------------------------------
1,761.7 1,553.4
Less accumulated depreciation 1,007.1 893.2
- --------------------------------------------------------------------------------
$ 754.6 $ 660.2
================================================================================
NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities at the end of each year, in millions of dollars,
included the following:
2004 2003
- --------------------------------------------------------------------------------
Trade discounts and allowances $ 254.4 $178.0
Redeemable preferred stock of subsidiary 192.2 --
Employee benefits 154.6 130.3
Salaries and wages 135.6 103.4
Advertising and promotion 57.7 46.4
Warranty 55.2 40.4
Income taxes, including deferred taxes 51.4 39.4
Accruals related to restructuring actions 20.2 43.7
All other 372.9 312.1
- --------------------------------------------------------------------------------
$1,294.2 $893.8
================================================================================
-38-
All other at December 31, 2004 and 2003, consisted primarily of accruals
for foreign currency derivatives, interest, insurance, and taxes other than
income taxes.
The following provides information with respect to the Corporation's
warranty accrual, in millions of dollars:
2004 2003
- --------------------------------------------------------------------------------
Warranty reserve at January 1 $40.4 $41.8
Accruals for warranties issued during
the period and changes in estimates
related to pre-existing warranties 91.0 80.4
Settlements made (92.2) (85.5)
Additions due to acquisitions 14.4 .8
Currency translation adjustments 1.6 2.9
- --------------------------------------------------------------------------------
Warranty reserve at December 31 $55.2 $40.4
================================================================================
NOTE 7: SHORT-TERM BORROWINGS
Short-term borrowings in the amounts of $1.1 million and $.1 million at December
31, 2004 and 2003, respectively, consisted primarily of borrowings under the
terms of uncommitted lines of credit or other short-term borrowing arrangements.
In November 2002, the Corporation entered into a $500 million agreement
under which it may issue commercial paper at market rates with maturities of up
to 365 days from the date of issue. In September 2004, the Corporation increased
the maximum amount authorized for issuance under its commercial paper program
from $500 million to $1.0 billion.
In April 2001, the Corporation entered into a $1.0 billion unsecured
revolving credit facility that expires in April 2006. In October 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. The amount available for borrowing under the Credit Facility at
December 31, 2004 was $1.0 billion.
While no amounts were outstanding under the Corporation's unsecured
revolving credit facilities or commercial paper program at December 31, 2004 or
2003, average borrowings outstanding under these facilities during 2004 and 2003
were $274.5 million and $414.8 million, respectively.
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.
As of December 31, 2004, the Corporation was in compliance with all terms and
conditions of the Credit Facility.
Under the Former Credit Facility, the Corporation had the option of
borrowing at LIBOR plus a specified percentage, or at other variable rates set
forth therein. The Former Credit Facility provided that the interest rate margin
over LIBOR, initially set at .475% would increase or decrease based upon changes
in the ratings of the Corporation's long-term senior unsecured debt. The Former
Credit Facility provided for an interest rate margin over LIBOR of .475% during
2004, 2003, and 2002. In addition to the interest payable on the principal
amount of indebtedness outstanding from time to time under the Former Credit
Facility, the Corporation was required to pay an annual facility fee to each
bank, equal to .150% and .125%, respectively, of the amount of each bank's
commitment, whether used or unused. The Corporation was also required to pay a
utilization fee under the Former Credit Facility equal to .125%, applied to the
outstanding balance when borrowings exceeded 50% of the facility. The Former
Credit Facility provided that both the facility fee and the utilization fee
would increase or decrease based upon changes in the ratings of the
Corporation's senior unsecured debt.
Under the terms of uncommitted lines of credit at December 31, 2004,
certain subsidiaries outside of the United States may borrow up to an additional
$388.3 million on such terms as may be mutually agreed. These arrangements do
not have termination dates and are reviewed periodically. No material
compensating balances are required or maintained.
-39-
NOTE 8: LONG-TERM DEBT
The composition of long-term debt at the end of each year, in millions of
dollars, was as follows:
2004 2003
- --------------------------------------------------------------------------------
7.0% notes due 2006 $ 154.6 $154.6
6.55% notes due 2007 150.0 150.0
7.125% notes due 2011
(including discount of
$2.0 in 2004 and $2.3 in 2003) 398.0 397.7
4.75% notes due 2014
(including discount of $2.2) 297.8 --
7.05% notes due 2028 150.0 150.0
Other loans due through 2009 1.5 1.1
Fair value hedging adjustment 49.2 62.6
Less current maturities of long-term debt (.5) (.4)
- --------------------------------------------------------------------------------
$1,200.6 $915.6
================================================================================
As more fully described in Note 1, at December 31, 2004 and 2003, the
carrying amount of long-term debt and current maturities thereof includes $49.2
million and $62.6 million, respectively, relating to outstanding or terminated
fixed-to-variable rate interest rate swaps agreements.
Indebtedness of subsidiaries in the aggregate principal amounts of $302.6
million and $301.3 million were included in the Consolidated Balance Sheet at
December 31, 2004 and 2003, respectively, in short-term borrowings, current
maturities of long-term debt, and long-term debt.
Principal payments on long-term debt obligations due over the next five
years are as follows: $.5 million in 2005, $155.1 million in 2006, $150.2
million in 2007, $.2 million in 2008, and $.1 million in 2009. Interest payments
on all indebtedness were $77.2 million in 2004, $80.3 million in 2003, and
$100.8 million in 2002.
NOTE 9: DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation is exposed to market risks arising from changes in interest
rates. With products and services marketed in over 100 countries and with
manufacturing sites in 11 countries, the Corporation also is exposed to risks
arising from changes in foreign exchange rates.
Credit Exposure: The Corporation is exposed to credit-related losses in the
event of non-performance by counterparties to certain derivative financial
instruments. The Corporation monitors the creditworthiness of the counterparties
and presently does not expect default by any of the counterparties. The
Corporation does not obtain collateral in connection with its derivative
financial instruments.
The credit exposure that results from interest rate and foreign exchange
contracts is the fair value of contracts with a positive fair value as of the
reporting date. Some derivatives are not subject to credit exposures. The fair
value of all financial instruments is summarized in Note 10.
Interest Rate Risk Management: The Corporation manages its interest rate risk,
primarily through the use of interest rate swap agreements, in order to achieve
a cost-effective mix of fixed and variable rate indebtedness. It seeks to issue
debt opportunistically, whether at fixed or variable rates, at the lowest
possible costs. The Corporation may, based upon its assessment of the future
interest rate environment, elect to manage its interest rate risk associated
with changes in the fair value of its indebtedness, or the future cash flows
associated with its indebtedness, through the use of interest rate swaps.
The amounts exchanged by the counterparties to interest rate swap
agreements normally are based upon the notional amounts and other terms,
generally related to interest rates, of the derivatives. While notional amounts
of interest rate swaps form part of the basis for the amounts exchanged by the
counterparties, the notional amounts are not themselves exchanged and,
therefore, do not represent a measure of the Corporation's exposure as an end
user of derivative financial instruments.
The Corporation's portfolio of interest rate swap instruments at December
31, 2004 and 2003, consisted of $788.0 million notional and $588.0 million
notional amounts of fixed-to-variable rate swaps with a weighted-average fixed
rate receipt of 5.59% and 5.99%, respectively. The basis of the variable rate
paid is LIBOR.
Credit exposure on the Corporation's interest rate derivatives at December
31, 2004 and 2003, was $32.8 million and $54.3 million, respectively. Deferred
gains on the early termination of interest rate swaps were $27.8 million and
$30.2 million at December 31, 2004 and 2003.
Foreign Currency Management: The Corporation enters into various foreign
currency contracts in managing its foreign currency exchange risk. Generally,
the foreign currency contracts have maturity dates of less than twenty-four
months. The contractual amounts of foreign currency derivatives, principally
forward exchange contracts and purchased options, generally are exchanged by the
counterparties. The Corporation's foreign currency derivatives are designated
to, and generally are denominated in the currencies of, the underlying
exposures. To minimize the volatility of reported equity, the Corporation may
hedge, on a limited basis, a portion of its net investment in subsidiaries
located outside the United States through the use of foreign currency forward
contracts and purchased foreign currency options.
-40-
The Corporation seeks to minimize its foreign currency cash flow risk and
hedges its foreign currency transaction exposures (that is, currency exposures
related to assets and liabilities) as well as certain forecasted foreign
currency exposures. Hedges of forecasted foreign currency exposures principally
relate to the cash flow risk relating to the sales of products manufactured or
purchased in a currency different from that of the selling subsidiary. The
Corporation hedges its foreign currency cash flow risk through the use of
forward exchange contracts and, to a small extent, options. Some of the forward
exchange contracts involve the exchange of two foreign currencies according to
the local needs of the subsidiaries. Some natural hedges also are used to
mitigate transaction and forecasted exposures. The Corporation also responds to
foreign exchange movements through various means, such as pricing actions,
changes in cost structure, and changes in hedging strategies.
The following table summarizes the contractual amounts of forward exchange
contracts as of December 31, 2004 and 2003, in millions of dollars, including
details by major currency as of December 31, 2004. Foreign currency amounts were
translated at current rates as of the reporting date. The "Buy" amounts
represent the United States dollar equivalent of commitments to purchase
currencies, and the "Sell" amounts represent the United States dollar equivalent
of commitments to sell currencies.
AS OF DECEMBER 31, 2004 BUY SELL
- --------------------------------------------------------------------------------
United States dollar $1,348.6 $(1,252.5)
Pound sterling 922.8 (378.2)
Euro 689.0 (1,015.1)
Canadian dollar 11.1 (134.5)
Australian dollar 25.9 (56.4)
Czech koruna 65.2 (13.9)
Japanese yen 8.7 (59.1)
Swedish krona 44.4 (90.9)
Swiss franc 10.9 (25.7)
Norwegian krone -- (38.9)
Danish krone .4 (53.4)
Other 3.0 (21.2)
- --------------------------------------------------------------------------------
Total $3,130.0 $(3,139.8)
================================================================================
AS OF DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Total $2,682.6 $(2,710.3)
================================================================================
No purchased options to buy or sell currencies were outstanding at December
31, 2004.
Credit exposure on foreign currency derivatives as of December 31, 2004 and
2003, was $52.2 million and $10.9 million, respectively.
Hedge ineffectiveness and the portion of derivative gains and losses
excluded from the assessment of hedge effectiveness related to the Corporation's
cash flow hedges that were recorded to earnings during 2004 and 2003 were not
significant.
Amounts deferred in accumulated other comprehensive income (loss) at
December 31, 2004, that are expected to be reclassified into earnings during
2005 represent an after-tax loss of $19.7 million. The amount expected to be
reclassified into earnings in the next twelve months includes unrealized gains
and losses related to open foreign currency contracts. Accordingly, the amount
that is ultimately reclassified into earnings may differ materially.
Note 10: Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
o Cash and cash equivalents, trade receivables, certain other current assets,
short-term borrowings, and current maturities of long-term debt: The amounts
reported in the Consolidated Balance Sheet approximate fair value.
o Long-term debt: Publicly traded debt is valued based on quoted market values.
The fair value of other long-term debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Corporation for debt of the same remaining maturities.
o Other current liabilities and other long-term liabilities: The fair value of a
subsidiary's redeemable preferred shares is based on the present value of the
cash flows associated with these preferred shares, discounted at current market
yields.
o Interest rate hedges: The fair value of interest rate hedges reflects the
estimated amounts that the Corporation would receive or pay to terminate the
contracts at the reporting date.
o Foreign currency contracts: The fair value of forward exchange contracts and
options is estimated using prices established by financial institutions for
comparable instruments.
-41-
The following table sets forth, in millions of dollars, the carrying
amounts and fair values of the Corporation's financial instruments, except for
those noted above for which carrying amounts approximate fair values:
ASSETS (LIABILITIES) CARRYING FAIR
AS OF DECEMBER 31, 2004 AMOUNT VALUE
- --------------------------------------------------------------------------------
Non-derivatives:
Other current liabilities $ (192.2) $ (192.2)
Long-term debt (1,200.6) (1,247.6)
- --------------------------------------------------------------------------------
Derivatives relating to:
Other current liabilities
Assets 5.8 5.8
Debt
Assets 27.0 27.0
Liabilities (.3) (.3)
Foreign Currency
Assets 52.2 52.2
Liabilities (61.7) (61.7)
- --------------------------------------------------------------------------------
ASSETS (LIABILITIES) CARRYING FAIR
AS OF DECEMBER 31, 2003 AMOUNT VALUE
- --------------------------------------------------------------------------------
Non-derivatives:
Long-term debt $(915.6) $ (964.7)
Other long-term liabilities (202.6) (202.6)
- --------------------------------------------------------------------------------
Derivatives relating to:
Debt
Assets 38.4 38.4
Other long-term liabilities
Assets 15.9 15.9
Foreign Currency
Assets 10.9 10.9
Liabilities (43.0) (43.0)
- --------------------------------------------------------------------------------
NOTE 11: INCOME TAXES
Earnings from continuing operations before income taxes for each year, in
millions of dollars, were as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
United States $308.4 $189.5 $186.2
Other countries 295.9 201.4 119.2
- --------------------------------------------------------------------------------
$604.3 $390.9 $305.4
================================================================================
Significant components of income taxes (benefits) from continuing
operations for each year, in millions of dollars, were as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Current:
United States $108.0 $ 69.0 $58.7
Other countries 49.6 23.6 13.7
- --------------------------------------------------------------------------------
157.6 92.6 72.4
- --------------------------------------------------------------------------------
Deferred:
United States 7.0 (6.5) 3.8
Other countries (1.4) 17.6 .7
- --------------------------------------------------------------------------------
5.6 11.1 4.5
- --------------------------------------------------------------------------------
$163.2 $103.7 $76.9
================================================================================
Income tax expense recorded directly as an adjustment to equity as a result
of hedging activities was not significant in 2004, 2003, and 2002. Income tax
benefits recorded directly as an adjustment to equity as a result of employee
stock options were $31.2 million, $1.3 million, and $5.4 million in 2004, 2003,
and 2002, respectively.
Income tax payments were $89.5 million in 2004, $82.0 million in 2003, and
$47.0 million in 2002.
Deferred tax (liabilities) assets at the end of each year, in millions of
dollars, were composed of the following:
2004 2003
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ (10.1) $ (15.4)
Employee and postretirement benefits (157.8) (164.8)
Other (9.3) (5.6)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (177.2) (185.8)
- --------------------------------------------------------------------------------
Deferred tax assets:
Tax loss carryforwards 114.6 109.2
Tax credit and capital loss
carryforwards 54.0 57.8
Postretirement benefits 112.1 135.9
Other 140.5 113.6
- --------------------------------------------------------------------------------
Gross deferred tax assets 421.2 416.5
- --------------------------------------------------------------------------------
Deferred tax asset valuation allowance (104.1) (99.9)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 139.9 $ 130.8
================================================================================
Other deferred tax assets principally relate to accrued liabilities that
are not currently deductible.
-42-
Deferred income taxes are included in the Consolidated Balance Sheet in
other current assets, other assets, other current liabilities, and deferred
income taxes.
Tax basis carryforwards at December 31, 2004, consisted of net operating
losses expiring from 2005 to 2010.
At December 31, 2004, unremitted earnings of subsidiaries outside of the
United States were approximately $1.6 billion, on which no United States taxes
had been provided. The Corporation's intention is to reinvest these earnings
permanently or to repatriate the earnings only when possible to do so at minimal
additional tax cost. It is not practicable to estimate the amount of additional
taxes that might be payable upon repatriation of foreign earnings.
The American Jobs Creation Act of 2004 (the Jobs Act) introduced a special
one-time dividends received deduction on the repatriation of certain foreign
earnings to the United States, provided certain conditions are met. If certain
conditions are met, a 5.25% income tax rate would apply to eligible
repatriations of certain foreign earnings. The Corporation is currently
evaluating these provisions under the Jobs Act and is also awaiting interpretive
guidance relating to these regulations from either Congress or the Treasury
Department. At the current date, the Corporation has not determined that it will
repatriate any unremitted foreign earnings under the special one-time
repatriation provisions of the Jobs Act. However, the Corporation continues to
evaluate the special one-time repatriation provisions of the Jobs Act and that
evaluation could result in the Corporation repatriating certain unremitted
foreign earnings. The amount of unremitted foreign earnings that the Corporation
is evaluating for repatriation ranges from zero to $500 million. The Corporation
expects to complete its evaluation of the amount of repatriation, if any, during
2005. If the Corporation was to repatriate certain unremitted foreign earnings
under the special one-time repatriation provisions of the Jobs Act at the high
end of the range noted in the preceding sentence, the income tax effects of such
repatriation could range from approximately $24 million to $41 million.
A reconciliation of income taxes at the federal statutory rate to the
Corporation's income taxes for each year, both from continuing operations, in
millions of dollars, is as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Income taxes at federal
statutory rate $211.5 $136.8 $106.9
Lower effective taxes on
earnings in other countries (57.7) (40.4) (31.9)
Other -- net 9.4 7.3 1.9
- --------------------------------------------------------------------------------
Income taxes $163.2 $103.7 $ 76.9
================================================================================
-43-
NOTE 12: POSTRETIREMENT BENEFITS
The following table sets forth the funded status of the defined benefit pension
and postretirement plans, and amounts recognized in the Consolidated Balance
Sheet, in millions of dollars. The Corporation uses a measurement date of
September 30 for the majority of its defined benefit pension and postretirement
plans. Defined postretirement benefits consist of several unfunded health care
plans that provide certain postretirement medical, dental, and life insurance
benefits for most United States employees. The postretirement medical benefits
are contributory and include certain cost-sharing features, such as deductibles
and co-payments.
OTHER
PENSION BENEFITS PENSION BENEFITS POSTRETIREMENT
PLANS IN THE PLANS OUTSIDE OF THE BENEFITS
UNITED STATES UNITED STATES ALL PLANS
----------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 942.8 $ 895.5 $ 632.6 $ 500.7 $ 157.7 $ 162.1
Service cost 17.7 15.5 13.7 10.9 .7 .9
Interest cost 54.7 58.4 35.5 27.6 8.8 10.7
Plan participants' contributions -- -- 1.8 1.9 6.8 7.8
Actuarial (gains) losses (5.3) 40.4 8.4 58.5 (11.2) (3.7)
Foreign currency exchange rate changes -- -- 55.6 54.2 .7 .8
Benefits paid (61.2) (60.5) (27.5) (25.0) (21.8) (20.9)
Acquisitions 45.2 -- 10.8 -- 2.9 --
Plan amendments .6 .6 2.2 3.8 -- --
Curtailments .3 (7.1) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 994.8 942.8 733.1 632.6 144.6 157.7
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 785.4 717.8 375.3 319.1 -- --
Actual return on plan assets 97.0 131.9 33.8 43.8 -- --
Expenses (5.4) (6.9) (.7) (.7) -- --
Benefits paid (61.2) (60.5) (26.8) (24.3) (21.8) (20.9)
Employer contributions 3.6 3.1 14.0 6.1 15.0 13.1
Contributions by plan participants -- -- 1.8 1.9 6.8 7.8
Acquisitions 28.0 -- 10.0 -- -- --
Effects of currency exchange rates -- -- 33.7 29.4 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 847.4 785.4 441.1 375.3 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (147.4) (157.4) (292.0) (257.3) (144.6) (157.7)
Unrecognized net actuarial loss 411.3 442.4 291.9 269.8 24.4 37.0
Unrecognized prior service cost 4.1 5.3 12.3 10.6 (5.1) (7.0)
Contributions subsequent to measurement date -- -- 3.8 2.0 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 268.0 $ 290.3 $16.0 $ 25.1 $(125.3) $(127.7)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
Prepaid benefit cost $ 44.7 $ 42.2 $ -- $ -- $ -- $ --
Accrued benefit cost (102.6) (132.9) (224.4) (214.8) (125.3) (127.7)
Intangible asset 3.9 5.1 12.5 10.8 -- --
Accumulated other comprehensive income 322.0 375.9 227.9 229.1 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 268.0 $ 290.3 $ 16.0 $ 25.1 $(125.3) $(127.7)
====================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE BENEFIT
OBLIGATIONS AS OF MEASUREMENT DATE
Discount rate 6.00% 6.00% 5.43% 5.40% 6.25% 6.25%
Rate of compensation increase 4.00% 4.00% 3.81% 3.40% -- --
====================================================================================================================================
-44-
The allocation, by asset category, of assets of defined benefit pension
plans in the United States at September 30, 2004 and 2003, respectively, were as
follows:
PLAN ASSETS AT SEPTEMBER 30 2004 2003
- --------------------------------------------------------------------------------
Asset Category
Equity Securities 69% 69%
Fixed Income Securities 28% 28%
Alternative Investments 3% 3%
- --------------------------------------------------------------------------------
100% 100%
================================================================================
At September 30, 2004, the Corporation's targeted allocation, by asset category,
of assets of defined benefit pension plans in the United States is equity
securities 65% (comprised of 50% U.S. and 15% non-U.S. equities); fixed income
securities - 30%; and alternative investments - 5%.
The allocation, by asset category, of assets of defined benefit pension
plans outside of the United States at September 30, 2004 and 2003, respectively,
were as follows:
PLAN ASSETS AT SEPTEMBER 30 2004 2003
- --------------------------------------------------------------------------------
Asset Category
Equity Securities 67% 66%
Fixed Income Securities 25% 27%
Real Estate 7% 6%
Other 1% 1%
- --------------------------------------------------------------------------------
100% 100%
================================================================================
At September 30, 2004, the Corporation's targeted allocation, by asset
category, of assets of defined benefit pension plans outside of the United
States is equity securities - 66%; fixed income securities - 25%; real estate -
6%; and other investments - 3%.
To the extent that the actual allocation of plan assets differs from the
targeted allocation by more than 5% for any category, plan assets are
re-balanced within three months.
The Corporation establishes its estimated long-term return on plan assets
considering various factors, which include the targeted asset allocation
percentages, historic returns, and expected future returns. Specifically, the
factors are considered in the fourth quarter of the year preceding the year for
which those assumptions are applied.
The accumulated benefit obligation of certain plans in the United States
and outside of the United States exceeded the fair value of plan assets. As
required by accounting principles generally accepted in the United States, the
Corporation reflected a minimum pension liability of approximately $549.9
million in the Consolidated Balance Sheet at December 31, 2004.
The accumulated benefit obligation related to all defined benefit pension
plans and information related to unfunded and underfunded defined benefit
pension plans at the end of each year, in millions of dollars, follows:
PENSION BENEFITS PENSION BENEFITS
PLANS IN THE PLANS OUTSIDE OF THE
UNITED STATES UNITED STATES
---------------------------------------------------------
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
All defined benefit plans:
Accumulated benefit obligation $926.9 $895.0 $666.1 $590.9
Unfunded defined benefit plans:
Projected benefit obligation 77.7 66.2 99.8 89.7
Accumulated benefit obligation 73.9 62.7 93.1 83.5
Defined benefit plans with an accumulated benefit obligation
in excess of the fair value of plan assets:
Projected benefit obligation 953.7 899.4 733.1 632.6
Accumulated benefit obligation 885.8 851.7 666.1 590.9
Fair value of plan assets 778.0 719.5 441.1 375.3
- ------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth, in millions of dollars, benefit payments,
which reflect expected future service, as appropriate, expected to be paid in
the periods indicated.
PENSION BENEFITS PLANS PENSION BENEFITS PLANS OTHER POSTRETIREMENT
IN THE UNITED STATES OUTSIDE OF THE UNITED STATES BENEFITS ALL PLANS
- ------------------------------------------------------------------------------------------------------------------------------------
2005 $60.4 $ 30.2 $18.9
2006 59.0 31.3 18.3
2007 58.3 31.3 17.8
2008 58.4 33.4 17.2
2009 59.4 34.5 16.9
2010-2014 312.3 190.6 77.4
- ------------------------------------------------------------------------------------------------------------------------------------
-45-
The net periodic (benefit) cost related to the defined benefit pension
plans included the following components, in millions of dollars:
PENSION BENEFITS PENSION BENEFITS
PLANS IN THE UNITED STATES PLANS OUTSIDE OF THE UNITED STATES
----------------------------------------------------------------------------
2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 19.0 $ 16.5 $ 15.8 $ 13.7 $ 13.8 $ 11.0
Interest cost 54.7 58.4 56.7 35.5 27.5 24.2
Expected return on plan assets (82.4) (87.1) (94.3) (35.1) (31.8) (30.8)
Amortization of the unrecognized
transition obligation or asset -- -- -- .1 .1 (1.2)
Amortization of prior service cost 1.2 1.2 1.1 1.4 1.4 2.3
Curtailment/settlement loss .3 .9 1.1 -- .1 7.6
Amortization of net actuarial loss 15.8 7.6 .8 10.2 4.7 .7
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic (benefit) cost $ 8.6 $ (2.5) $(18.8) $ 25.8 $ 15.8 $ 13.8
====================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
USED IN DETERMINING NET
PERIODIC (BENEFIT) COST FOR YEAR:
Discount rate 6.00% 6.75% 7.25% 5.44% 5.50% 6.10%
Expected return on plan assets 8.75% 9.00% 9.50% 7.49% 7.75% 8.00%
Rate of compensation increase 4.00% 4.00% 4.50% 3.40% 3.90% 3.90%
====================================================================================================================================
The net periodic cost related to the defined benefit postretirement plans
included the following components, in millions of dollars:
2004 2003 2002
- --------------------------------------------------------------------------------
Service cost $ .7 $ .9 $ 1.2
Interest cost 8.8 10.7 10.8
Amortization of
prior service cost (1.9) (2.2) (8.3)
Amortization of
net actuarial loss 1.2 2.0 1.4
- --------------------------------------------------------------------------------
Net periodic cost $ 8.8 $11.4 $ 5.1
================================================================================
Weighted-average discount rate
used in determining net
periodic cost for year 6.25% 7.00% 7.25%
================================================================================
The health care cost trend rate used to determine the postretirement
benefit obligation was 10.0% for 2004. This rate decreases gradually to an
ultimate rate of 5.0% in 2011, and remains at that level thereafter. The trend
rate is a significant factor in determining the amounts reported. A
one-percentage-point change in these assumed health care cost trend rates would
have the following effects, in millions of dollars:
ONE-PERCENTAGE-POINT INCREASE (DECREASE)
- --------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ .6 $ (.5)
Effect on postretirement
benefit obligation 9.7 (8.9)
- --------------------------------------------------------------------------------
In 2005, the Corporation expects to make cash contributions of
approximately $21.0 million to its defined benefit pension plans. The amounts
principally represent contributions required by funding regulations or laws or
those related to unfunded plans necessary to fund current benefits. In addition,
the Corporation expects to continue to make contributions in 2005 sufficient to
fund benefits paid under its other postretirement benefit plans during that
year, net of contributions by plan participants. Such contributions totaled
$15.0 million in 2004.
Expense for defined contribution plans amounted to $11.8 million, $10.4
million, and $9.2 million in 2004, 2003, and 2002, respectively.
NOTE 13: OTHER LIABILITIES
In December 2000, a subsidiary of the Corporation issued preferred shares to
private investors. The preferred shares are redeemable in December 2005,
although redemption may be accelerated under certain conditions, principally
related to changes in tax laws. Holders of the subsidiary's preferred shares are
entitled to annual cash dividends of $10.7 million. Included in other current
liabilities in the Consolidated Balance Sheet at December 31, 2004 is $192.2
million related to those preferred shares. At December 31, 2003, $202.6 million
related to those preferred shares was included in other long-term liabilities.
The carrying value of the subsidiary's preferred shares at December 31, 2004 and
2003 includes the effect of the fair value of the interest rate swap agreement
related to this obligation.
Upon adoption of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, effective December 31, 2003, the
Corporation determined that the subsidiary identified in the preceding paragraph
represented a variable interest entity and that the Corporation was not the
primary beneficiary. That subsidiary was formed in 2000 in order to provide
financing to the Corporation through the issuance of the redeemable preferred
shares previously described. The Corporation's obligation for the subsidiary's
redeemable preferred shares is fully reflected in other current liabilities, as
of December 31, 2004, and other long-term liabilities as of December 31, 2003.
The Corporation does not believe that it has any additional exposure to loss as
a result of its involvement with the subsidiary.
-46-
Other expense in the Consolidated Statement of Earnings for the years ended
December 31, 2003 and 2002, included $5.4 million and $10.7 million,
respectively, of dividends related to those preferred shares. Upon the
Corporation's adoption of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, in July 2003,
$10.7 million and $5.3 million of dividends on those preferred shares were
classified as interest expense in the years ended December 31, 2004 and 2003,
respectively.
At December 31, 2004 and 2003, other long-term liabilities included a
reserve of $239.7 million and $224.4 million, respectively, associated with
various tax matters in a number of jurisdictions.
NOTE 14: STOCKHOLDERS' EQUITY
The Corporation repurchased 66,100, 2,011,570, and 1,008,101 shares of its
common stock during 2004, 2003, and 2002 at an aggregate cost of $3.6 million,
$77.5 million, and $43.1 million, respectively.
In 2004, the Corporation adopted a restricted stock plan. A total of
1,000,000 shares of restricted stock were authorized under this plan. As of
December 31, 2004, 270,346 shares of common stock were issued and outstanding
and 729,654 shares of common stock were reserved for future grants. Under the
Plan, eligible employees are awarded restricted shares of the Corporation's
common stock. Restrictions on awards generally expire from three to four years
after issuance, subject to continuous employment and certain other conditions.
Restricted stock awards are recorded at market value on the date of the grant as
unearned compensation. Unearned compensation is shown as a reduction of
stockholders' equity and is amortized to expense over the restriction period.
Expense recognized relating to restricted stock awards was $2.8 million in 2004.
SFAS No. 130, Reporting Comprehensive Income, defines comprehensive income
as non-stockholder changes in equity. Accumulated other comprehensive income
(loss) at the end of each year, in millions of dollars, included the following:
2004 2003
- --------------------------------------------------------------------------------
Foreign currency translation adjustment $ 65.9 $ (14.6)
Net loss on derivative instruments,
net of tax (28.2) (33.1)
Minimum pension liability adjustment,
net of tax (368.5) (404.5)
- --------------------------------------------------------------------------------
$(330.8) $(452.2)
================================================================================
The Corporation has designated certain intercompany loans and foreign
currency derivative contracts as long-term investments in certain foreign
subsidiaries and foreign currency derivative contracts. Net translation gains
associated with these designated intercompany loans and foreign currency
derivative contracts in the amount of $7.6 million and $25.9 million were
recorded in the foreign currency translation adjustment, in 2004 and 2003,
respectively.
Foreign currency translation adjustments are not generally adjusted for
income taxes as they relate to indefinite investments in foreign subsidiaries.
The minimum pension liability adjustments as of December 31, 2004 and 2003, are
net of taxes of $181.4 million and $200.5 million, respectively.
NOTE 15: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were as
follows:
(AMOUNTS IN MILLIONS
EXCEPT PER SHARE DATA) 2004 2003 2002
- --------------------------------------------------------------------------------
Numerator:
Net earnings from
continuing operations $441.1 $287.2 $228.5
Net earnings from
discontinued operations 14.9 5.8 1.2
- --------------------------------------------------------------------------------
Net earnings $456.0 $293.0 $229.7
================================================================================
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 79.8 77.9 80.4
Employee stock options and
stock issuable under
employee benefit plans 1.8 .3 .5
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share --
adjusted weighted-
average shares and
assumed conversions 81.6 78.2 80.9
================================================================================
Basic earnings per share
Continuing operations $ 5.53 $ 3.69 $ 2.85
Discontinued operations .19 .07 .01
- --------------------------------------------------------------------------------
Basic earnings per share $ 5.72 $ 3.76 $ 2.86
================================================================================
Diluted earnings per share
Continuing operations $ 5.40 $ 3.68 $ 2.83
Discontinued operations .19 .07 .01
- --------------------------------------------------------------------------------
Diluted earnings per share $ 5.59 $ 3.75 $ 2.84
================================================================================
The following options to purchase shares of common stock were outstanding
during each year, but were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive. The options indicated below
were anti-dilutive because the related exercise price was greater than the
average market price of the common shares for the year.
2004 2003 2002
- --------------------------------------------------------------------------------
Number of options (in millions) .6 6.5 4.4
Weighted-average exercise price $56.13 $47.36 $49.47
- --------------------------------------------------------------------------------
NOTE 16: STOCK-BASED COMPENSATION
The Corporation has elected to follow APBO No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its stock-based
compensation. In addition, the Corporation provides pro forma disclosure of
stock-based compensation, as measured under the fair value requirements of SFAS
No. 123, Accounting for Stock-Based Compensation.
-47-
These pro forma disclosures are provided in Note 1 as required under SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure.
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Corporation, namely,
broad-based employee stock purchase plans and option grants where the exercise
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock. In contrast, SFAS No. 123 requires recognition of compensation
expense for grants of stock, stock options, and other equity instruments over
the vesting periods of such grants, based on the estimated grant-date fair
values of those grants.
Under various stock option plans, options to purchase common stock may be
granted until 2013. Options generally are granted at fair market value at the
date of grant, are exercisable in installments beginning one year from the date
of grant, and expire 10 years after the date of grant. The plans permit the
issuance of either incentive stock options or non-qualified stock options,
which, for certain of the plans, may be accompanied by stock or cash
appreciation rights or limited stock appreciation rights. Additionally, certain
plans allow for the granting of stock appreciation rights on a stand-alone
basis.
As of December 31, 2004, 6,988,614 non-qualified stock options were
outstanding under domestic plans. There were 300 stock options outstanding under
the United Kingdom plan.
Under all plans, there were 4,062,729 shares of common stock reserved for
future grants as of December 31, 2004. Transactions are summarized as follows:
WEIGHTED-
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 9,087,486 $41.91
Granted 1,279,300 48.13
Exercised 773,297 26.91
Forfeited 213,075 45.17
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 9,380,414 43.92
Granted 1,417,850 39.73
Exercised 321,938 35.08
Forfeited 118,413 45.77
- --------------------------------------------------------------------------------
Outstanding at December 31, 2003 10,357,913 43.60
Granted 710,325 62.34
Exercised 3,917,697 43.41
Forfeited 161,627 44.87
- --------------------------------------------------------------------------------
Outstanding at December 31, 2004 6,988,914 $45.58
================================================================================
Shares exercisable at
December 31, 2002 3,780,183 $44.35
================================================================================
Shares exercisable at
December 31, 2003 6,406,323 $44.83
================================================================================
Shares exercisable at
December 31, 2004 3,567,223 $45.18
================================================================================
Exercise prices for options outstanding as of December 31, 2004, ranged
from $30.00 to $83.19. The following table provides certain information with
respect to stock options outstanding at December 31, 2004:
WEIGHTED-
WEIGHTED- AVERAGE
STOCK AVERAGE REMAINING
RANGE OF OPTIONS EXERCISE CONTRACTUAL
EXERCISE PRICES OUTSTANDING PRICE LIFE
- --------------------------------------------------------------------------------
Under $41.99 2,101,971 $37.12 7.14
$41.99-$58.79 4,196,918 47.06 5.53
Over $58.79 690,025 62.31 9.37
- --------------------------------------------------------------------------------
6,988,914 $45.58 6.40
================================================================================
The following table provides certain information with respect to stock
options exercisable at December 31, 2004:
STOCK WEIGHTED-
RANGE OF OPTIONS AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------
Under $41.99 830,030 $35.21
$41.99-$58.79 2,737,193 48.21
Over $58.79 -- --
- --------------------------------------------------------------------------------
3,567,223 $45.18
================================================================================
The weighted-average fair values at date of grant for options granted
during 2004, 2003, and 2002 were $20.46, $13.31, and $18.17, respectively, and
were estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
2004 2003 2002
- --------------------------------------------------------------------------------
Expected life in years 6.0 6.3 6.3
Interest rate 3.97% 3.38% 4.91%
Volatility 31.9% 32.3% 33.0%
Dividend yield 1.36% 1.21% .99%
- --------------------------------------------------------------------------------
The weighted-average fair value at the date of grant for restricted stock
granted in 2004 was $54.43.
NOTE 17: BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Corporation has elected to organize its businesses based principally upon
products and services. In certain instances where a business does not have a
local presence in a particular country or geographic region, however, the
Corporation has assigned responsibility for sales of that business's products to
one of its other businesses with a presence in that country or region.
The Corporation operates in three reportable business segments: Power Tools
and Accessories, Hardware and Home Improvement, and Fastening and Assembly
Systems. The Power Tools and Accessories segment has worldwide responsibility
for the manufacture and sale of consumer and professional power tools and
accessories, electric cleaning and lighting products, and 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
-48-
sale of plumbing products to customers outside the United States and Canada; and
for sales of household products. On October 2, 2004, the Corporation acquired
the Porter-Cable and Delta Tools Group from Pentair, Inc. This acquired business
is included in the Power Tools and Accessories segment. 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.
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.
Sales, segment profit, depreciation and amortization, and capital
expenditures set forth in the following tables exclude the results of the
discontinued European security hardware business, as more fully described in
Note 3.
Business Segments
(MILLIONS OF DOLLARS)
REPORTABLE BUSINESS SEGMENTS
--------------------------------------------------
POWER HARDWARE FASTENING CURRENCY CORPORATE,
TOOLS & & HOME & ASSEMBLY TRANSLATION ADJUSTMENTS,
YEAR ENDED DECEMBER 31, 2004 ACCESSORIES IMPROVEMENT SYSTEMS TOTAL ADJUSTMENTS & ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,667.2 $959.4 $586.3 $5,212.9 $ 185.5 $ -- $5,398.4
Segment profit (loss)
(for Consolidated, operating income) 478.2 145.2 79.8 703.2 19.5 (93.5) 629.2
Depreciation and amortization 85.9 27.2 16.6 129.7 3.8 9.0 142.5
Income from equity method
investees 15.8 -- -- 15.8 -- (1.2) 14.6
Capital expenditures 74.9 25.9 13.2 114.0 2.9 .9 117.8
Segment assets
(for Consolidated, total assets) 2,609.0 602.4 342.6 3,554.0 237.5 1,739.3 5,530.8
Investment in equity method investees 12.4 -- .3 12.7 .1 (1.7) 11.1
YEAR ENDED DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,198.4 $718.1 $530.1 $4,446.6 $ 36.1 $ -- $4,482.7
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 361.2 93.2 77.6 532.0 2.6 (74.3) 460.3
Depreciation and amortization 82.0 24.4 15.4 121.8 .9 10.7 133.4
Income from equity method
investees 21.3 -- -- 21.3 -- (2.1) 19.2
Capital expenditures 69.8 17.1 13.8 100.7 1.0 .8 102.5
Segment assets
(for Consolidated, total assets) 1,557.1 613.2 320.6 2,490.9 107.6 1,624.0 4,222.5
Investment in equity method investees 10.8 -- .1 10.9 -- (1.7) 9.2
YEAR ENDED DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,242.5 $660.7 $528.6 $4,431.8 $(140.0) $ -- $4,291.8
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 361.5 47.4 77.9 486.8 (11.7) (60.5) 414.6
Depreciation and amortization 81.5 25.5 14.6 121.6 (2.5) 3.3 122.4
Income from equity method
investees 20.8 -- -- 20.8 -- 3.0 23.8
Capital expenditures 72.3 9.0 14.3 95.6 (2.1) .8 94.3
Segment assets
(for Consolidated, total assets) 1,638.5 358.1 325.6 2,322.2 (38.8) 1,847.1 4,130.5
Investment in equity method investees 25.4 -- .1 25.5 -- (1.7) 23.8
- ------------------------------------------------------------------------------------------------------------------------------------
-49-
The profitability measure employed by the Corporation and its chief
operating decision maker for making decisions about allocating resources to
segments and assessing segment performance is segment profit (for the
Corporation on a consolidated basis, operating income before restructuring and
exit costs). In general, segments follow the same accounting policies as those
described in Note 1, except with respect to foreign currency translation and
except as further indicated below. The financial statements of a segment's
operating units located outside of the United States, except those units
operating in highly inflationary economies, are generally measured using the
local currency as the functional currency. For these units located outside of
the United States, segment assets and elements of segment profit are translated
using budgeted rates of exchange. Budgeted rates of exchange are established
annually and, once established, all prior period segment data is restated to
reflect the current year's budgeted rates of exchange. The amounts included in
the preceding table under the captions "Reportable Business Segments", and
"Corporate, Adjustments, & Eliminations" are reflected at the Corporation's
budgeted rates of exchange for 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.
Segment assets exclude assets of discontinued operations, pension and tax
assets, intercompany profit in inventory, intercompany receivables, and goodwill
associated with the Corporation's acquisition of Emhart Corporation in 1989.
The reconciliation of segment profit to consolidated earnings from
continuing operations before income taxes for each year, in millions of dollars,
is as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Segment profit for total
reportable business segments $703.2 $532.0 $486.8
Items excluded from segment profit:
Adjustment of budgeted
foreign exchange rates
to actual rates 19.5 2.6 (11.7)
Depreciation of
Corporate property (1.2) (1.1) (1.3)
Adjustment to businesses'
postretirement benefit
expenses booked
in consolidation .8 15.4 38.3
Other adjustments booked
in consolidation directly
related to reportable
business segments (10.0) (15.0) (8.4)
Amounts allocated to businesses
in arriving at segment profit
in excess of (less than)
Corporate center operating
expenses, eliminations, and
other amounts identified above (83.1) (73.6) (89.1)
- --------------------------------------------------------------------------------
Operating income before
restructuring and exit costs 629.2 460.3 414.6
Restructuring and exit costs -- 31.6 46.6
- --------------------------------------------------------------------------------
Operating income 629.2 428.7 368.0
Interest expense,
net of interest income 22.1 35.2 57.8
Other expense 2.8 2.6 4.8
- --------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes $604.3 $390.9 $305.4
================================================================================
The reconciliation of segment assets to consolidated total assets at the
end of each year, in millions of dollars, is as follows:
2004 2003 2002
- --------------------------------------------------------------------------------
Segment assets for total
reportable business segments $3,554.0 $2,490.9 $2,322.2
Items excluded from segment assets:
Adjustment of budgeted
foreign exchange rates
to actual rates 237.5 107.6 (38.8)
Goodwill 625.4 617.5 604.9
Pension assets 45.1 42.2 36.7
Other Corporate assets 1,068.8 964.3 1,205.5
- --------------------------------------------------------------------------------
$5,530.8 $4,222.5 $4,130.5
================================================================================
-50-
Other Corporate assets principally consist of cash and cash equivalents,
tax assets, property, assets of discontinued operations, and other assets.
Sales to The Home Depot, a customer of the Power Tools and Accessories and
Hardware and Home Improvement segments, accounted for $969.0 million, $779.4
million, and $857.9 million of the Corporation's consolidated sales for the
years ended December 31, 2004, 2003, and 2002, respectively. Sales to Lowe's
Home Improvement Warehouse, a customer of the Power Tools and Accessories and
Hardware and Home Improvement segments, accounted for $700.1 million, $545.3
million, and $467.5 million of the Corporation's consolidated sales for the
years ended December 31, 2004, 2003, and 2002, respectively.
The composition of the Corporation's sales by product group for each year,
in millions of dollars, is set forth below:
2004 2003 2002
- --------------------------------------------------------------------------------
Consumer and professional
power tools and
product service $2,888.0 $2,360.1 $2,308.4
Consumer and professional
accessories 379.1 348.6 317.8
Lawn and garden products 339.2 313.8 285.4
Cleaning, lighting and
household products 180.2 179.1 194.4
Security hardware 730.1 526.0 461.0
Plumbing products 259.5 218.7 221.6
Fastening and
assembly systems 622.3 536.4 503.2
- --------------------------------------------------------------------------------
$5,398.4 $4,482.7 $4,291.8
================================================================================
The Corporation markets its products and services in over 100 countries and
has manufacturing sites in 11 countries. Other than in the United States, the
Corporation does not conduct business in any country in which its sales in that
country exceed 10% of consolidated sales. Sales are attributed to countries
based on the location of customers. The composition of the Corporation's sales
to unaffiliated customers between those in the United States and those in other
locations for each year, in millions of dollars, is set forth below:
2004 2003 2002
- --------------------------------------------------------------------------------
United States $3,442.6 $2,836.9 $2,824.0
Canada 249.4 162.6 138.6
- --------------------------------------------------------------------------------
North America 3,692.0 2,999.5 2,962.6
Europe 1,266.5 1,107.2 986.8
Other 439.9 376.0 342.4
- --------------------------------------------------------------------------------
$5,398.4 $4,482.7 $4,291.8
================================================================================
The composition of the Corporation's property, plant, and equipment between
those in the United States and those in other countries as of the end of each
year, in millions of dollars, is set forth below:
2004 2003 2002
- --------------------------------------------------------------------------------
United States $380.2 $340.0 $362.0
Mexico 110.7 109.0 78.6
United Kingdom 43.8 47.3 72.1
Other countries 219.9 163.9 116.9
- --------------------------------------------------------------------------------
$754.6 $660.2 $629.6
================================================================================
NOTE 18: LEASES
The Corporation leases certain service centers, offices, warehouses,
manufacturing facilities, and equipment. Generally, the leases carry renewal
provisions and require the Corporation to pay maintenance costs. Rental payments
may be adjusted for increases in taxes and insurance above specified amounts.
Rental expense for 2004, 2003, and 2002 amounted to $92.6 million, $85.6
million, and $82.6 million, respectively. Capital leases were immaterial in
amount. Future minimum payments under non-cancelable operating leases with
initial or remaining terms of more than one year as of December 31, 2004, in
millions of dollars, were as follows:
- --------------------------------------------------------------------------------
2005 $ 67.4
2006 49.6
2007 37.4
2008 29.6
2009 17.9
Thereafter 19.8
- --------------------------------------------------------------------------------
$221.7
================================================================================
-51-
NOTE 19: RESTRUCTURING ACTIONS
A summary of restructuring activity during the three years ended December 31,
2004, is set forth below (in millions of dollars).
WRITE-DOWN
TO FAIR VALUE
LESS COSTS
TO SELL
OF CERTAIN
SEVERANCE LONG-LIVED OTHER
BENEFITS ASSETS CHARGES TOTAL
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2001 $ 53.3 $ -- $ 13.7 $ 67.0
Reserves established
in 2002 19.6 18.5 19.5 57.6
Reversal of reserves (5.7) -- (2.6) (8.3)
Proceeds received in excess
of the adjusted carrying
value of long-lived assets -- (2.7) -- (2.7)
Utilization of reserves:
Cash (29.7) -- (7.2) (36.9)
Non-cash -- (15.8) (8.7) (24.5)
Foreign currency translation 3.7 -- .1 3.8
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2002 41.2 -- 14.8 56.0
Reserves established
in 2003 34.3 9.3 1.2 44.8
Reversal of reserves (7.4) -- (2.2) (9.6)
Proceeds received in excess
of the adjusted carrying
value of long-lived assets -- (3.6) -- (3.6)
Utilization of reserves:
Cash (27.1) -- (13.3) (40.4)
Non-cash -- (5.7) .6 (5.1)
Foreign currency translation 1.6 -- -- 1.6
- --------------------------------------------------------------------------------
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 (24.9) -- (.1) (25.0)
Non-cash -- 1.4 -- 1.4
Foreign currency translation .1 -- -- .1
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2004 $ 19.0 $ -- $ 1.2 $ 20.2
================================================================================
In 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 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.
During 2003, the Corporation commenced the final phase of its restructuring
plan that was formulated in the fourth quarter of 2001 and recorded a pre-tax
restructuring charge of $20.6 million. That $20.6 million charge was net of $9.6
million of reversals of previously provided restructuring reserves that were no
longer required and $3.6 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. The $20.6 million pre-tax restructuring
charge recognized in 2003 principally reflects actions relating to the Power
Tools and Accessories segment to reduce its manufacturing cost base as well as
actions to reduce selling, general, and administrative expenses through the
elimination of administrative positions, principally in Europe. In addition,
during the fourth quarter of 2003 the Corporation recorded a pre-tax
restructuring charge of $11.0 million associated with the closure of a
manufacturing facility in its Hardware and Home Improvement segment as a result
of the acquisition of Baldwin and Weiser.
The principal component of the 2003 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefit accrual of
$34.3 million, principally related to the Power Tools and Accessories segment in
North America and Europe ($23.0 million) and the Hardware and Home Improvement
segment in North America ($11.3 million), was included in the restructuring
charge. The 2003 restructuring actions will also result in the closure of two
manufacturing facilities, transferring production to low-cost facilities, and
outsourcing certain manufactured items. As a result, the 2003 restructuring
charge also included a $9.3 million write-down to fair value - less, if
applicable, cost to sell - of certain long-lived assets. The write-down to fair
value was comprised of $6.7 million related to the Power Tools and Accessories
segment in North America and Europe and $2.6 million related to the Hardware and
Home Improvement segment in North America. The balance of the 2003 restructuring
charge, or $1.2 million, related to the accrual of future expenditures,
principally consisting of lease obligations, for which no future benefit would
be realized.
During 2002, the Corporation recorded a restructuring charge of $46.6
million under the restructuring plan that was formulated in the fourth quarter
of 2001. That $46.6 million charge was net of $8.3 million of reversals of
previously provided restructuring reserves that were no longer required and $2.7
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. The $46.6 million pre-tax restructuring charge recognized in
2002 reflects actions to reduce the Corporation's manufacturing cost base in its
Power Tools and Accessories and Hardware and Home
-52-
Improvement segments, as well as actions to reduce selling, general, and
administrative expenses through the elimination of administrative positions,
principally in Europe. The 2002 actions to reduce the Corporation's
manufacturing cost base in the Power Tools and Accessories segment include the
closure of one facility in the United States, the closure of an accessories
packaging facility in England, and the transfer of certain additional power tool
production from a facility in England to a low-cost facility in the Czech
Republic. Actions to reduce the Corporation's manufacturing cost base in the
Hardware and Home Improvement segment include the closure of a security hardware
facility in the United States.
The principal component of the 2002 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefits accrual of
$19.6 million, principally related to the Power Tools and Accessories segment in
North America and Europe ($18.3 million) and the Hardware and Home Improvement
segment in North America ($1.3 million), was included in the restructuring
charge. The 2002 restructuring charge also included non-cash pension curtailment
losses of $8.9 million stemming from headcount reductions associated with the
restructuring actions, principally related to the Corporation's defined benefit
pension plan in the United Kingdom. The 2002 restructuring actions will also
result in the closure of a number of manufacturing facilities, transferring
production to low-cost facilities, and outsourcing certain manufactured items.
As a result, the 2002 restructuring charge also included an $18.5 million
write-down to fair value - less, if applicable, cost to sell - of certain
long-lived assets. The write-down to fair value was comprised of $4.8 million
related to the Power Tools and Accessories segment in Europe and $13.7 million
related to the Hardware and Home Improvement segment in North America. The
balance of the 2002 restructuring charge, or $10.6 million, related to the
accrual of future expenditures, principally consisting of lease and other
contractual obligations, for which no future benefit will be realized.
The severance benefits accrual, included in the $31.6 million and $46.6
million pre-tax restructuring charges taken in 2003 and 2002, respectively,
related to the elimination of approximately 2,700 positions in high-cost
manufacturing locations and in certain administrative positions. The Corporation
estimates that, as a result of increases in manufacturing employee headcount in
low-cost locations, approximately 2,600 replacement positions will be filled,
yielding a net total of 100 positions eliminated as a result of the 2003 and
2002 restructuring actions.
During 2004, 2003, and 2002, the Corporation paid severance and other exit
costs of $25.0 million, $40.4 million, and $36.9 million, respectively.
Of the remaining $20.2 million restructuring accrual at December 31, 2004,
$8.5 million relates to the restructuring plan that was formulated by the
Corporation in the fourth quarter of 2001. These restructuring accruals
primarily relate to the Corporation's Power Tools and Accessories segment. The
Corporation anticipates that these restructuring actions will be completed
during 2005. $8.0 million relates to the closure of a manufacturing facility in
the Corporation's Hardware and Home Improvement segment that was recognized in
conjunction with the integration of the Baldwin and Weiser businesses into the
Corporation's existing security hardware business. The Corporation anticipates
that these restructuring actions will be completed during 2005. The remaining
$3.7 million relates to the closure of a manufacturing facility and actions to
reduce selling, general and administrative expenses in the Corporation's Power
Tools and Accessories segment that are expected to be completed during 2005.
The amounts reflected in the column titled write-down to fair value less
costs to sell of certain long-lived assets, as included within this Note,
relating to reserves established during the three years ended December 31, 2004,
represent adjustments to the carrying value of those long-lived assets.
As of December 31, 2004, the carrying value of facilities to be exited as
part of the Corporation's restructuring actions was not significant.
NOTE 20: LITIGATION AND CONTINGENT LIABILITIES
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings relating to employment matters and commercial disputes. Some of
these lawsuits include claims for punitive as well as compensatory damages.
Using current product sales data and historical trends, the Corporation
actuarially calculates the estimate of its current exposure for product
liability. The Corporation is insured for product liability claims for amounts
in excess of established deductibles and accrues for the estimated liability up
to the limits of the deductibles. The Corporation accrues for all other claims
and lawsuits on a case-by-case basis.
The Corporation also is party to litigation and administrative proceedings
with respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a potentially responsible
-53-
party under federal and state environmental laws and regulations. Other matters
involve current and former manufacturing facilities.
For sites never operated by the Corporation, the Corporation makes an
assessment of the costs involved based on environmental studies, prior
experience at similar sites, and the experience of other named parties. The
Corporation also considers the ability of other parties to share costs, the
percentage of the Corporation's exposure relative to all other parties, and the
effects of inflation on these estimated costs. For matters associated with
properties currently operated by the Corporation, the Corporation makes an
assessment as to whether an investigation and remediation would be required
under applicable federal and state laws. For matters associated with properties
previously sold or operated by the Corporation, the Corporation considers any
applicable terms of sale and applicable federal and state laws to determine if
it has any remaining liability. If it is determined that the Corporation has
potential liability for properties currently owned or previously sold, an
estimate is made of the total costs of investigation and remediation and other
potential costs associated with the site.
As of December 31, 2004, the Corporation's aggregate probable exposure with
respect to environmental liabilities, for which accruals have been established
in the consolidated financial statements, was $65.2 million. These accruals are
reflected in other current liabilities and other long-term liabilities in the
Consolidated Balance Sheet.
On October 27, 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. 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 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 judgement 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. In December 2004, the
IRS appealed the Court's decision in favor of the Corporation to the United
States Circuit Court of Appeals for the Fourth Circuit. That appeal is still
pending. The Corporation intends to vigorously dispute the position taken by the
IRS in this matter. 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 $160
million. If upheld, the Court's decision would result in the Corporation
receiving a refund of taxes previously paid of approximately $50 million, plus
interest.
The Corporation's estimate of the costs associated with product liability
claims, environmental exposures, income tax 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. Insurance recoveries for
environmental and certain general liability claims have not been recognized
until realized.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, income tax matters, and other
legal proceedings are adequate and, accordingly, the ultimate resolution of
these matters is not expected to have a material adverse effect on the
Corporation's consolidated financial statements. As of December 31, 2004, the
Corporation had no known probable but inestimable exposures relating to product
liability claims, environmental matters, income tax 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. While it is possible that the increase or establishment of
an accrual could have a material adverse effect on the financial results for any
particular fiscal quarter or year, in the opinion of management there exists no
known potential exposure that would have a material adverse effect on the
financial condition or on the financial results of the Corporation beyond any
such fiscal quarter or year.
-54-
NOTE 21: QUARTERLY RESULTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 2004 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $1,092.9 $1,297.6 $1,282.5 $1,725.4
Gross margin 402.8 487.6 473.3 601.8
Net earnings from continuing operations 74.3 121.8 111.3 133.7
Net earnings 86.6 121.6 112.5 135.3
====================================================================================================================================
Net earnings from continuing operations per common share - basic $ .94 $ 1.53 $ 1.38 $ 1.65
Net earnings per common share--basic 1.10 1.53 1.40 1.67
====================================================================================================================================
Net earnings from continuing operations per common share - diluted $ .93 $ 1.50 $ 1.35 $ 1.60
Net earnings per common share--diluted 1.09 1.50 1.37 1.62
====================================================================================================================================
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 2003 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $ 939.2 $1,090.1 $1,115.8 $1,337.6
Gross margin 335.3 390.7 395.6 474.0
Net earnings from continuing operations 43.1 74.7 73.2 96.2
Net earnings 43.4 75.7 74.4 99.5
====================================================================================================================================
Net earnings from continuing operations per common share - basic $ .55 $ .96 $ .94 $ 1.24
Net earnings per common share--basic .55 .98 .96 1.28
====================================================================================================================================
Net earnings from continuing operations per common share - diluted $ .55 $ .96 $ .94 $ 1.23
Net earnings per common share--diluted .55 .97 .95 1.27
====================================================================================================================================
As more fully described in Note 3, net earnings for the first quarter of
2004 included an $11.7 million net gain on the sale of discontinued operations.
Net earnings for the third quarter of 2004 included a $1.0 million gain on the
sale of discontinued operations.
Earnings from continuing operations for the first quarter of 2003 included
a pre-tax restructuring charge of $.2 million ($.1 million net of tax). Earnings
from continuing operations for the second quarter of 2003 included a pre-tax
restructuring charge of $.4 million ($.2 million net of tax). Earnings from
continuing operations for the third quarter of 2003 included a pre-tax
restructuring charge of $21.0 million ($15.3 million net of tax). Earnings from
continuing operations for the fourth quarter of 2003 included a pre-tax
restructuring charge of $10.0 million ($6.5 million net of tax).
Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarters may not be equal to the
full year earnings per share.
-55-
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF THE BLACK & DECKER CORPORATION:
We have audited the accompanying consolidated balance sheet of The Black &
Decker Corporation and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Black & Decker Corporation and Subsidiaries at December 31, 2004 and 2003,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
- ---------------------
Baltimore, Maryland
February 17, 2005
-56-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of Corporation's management,
including the Chief Executive Officer and Chief Financial Officer, the
Corporation evaluated the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures as of December 31, 2004. Based
upon that evaluation, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Under the supervision and
with the participation of Corporation's management, including the Chief
Executive Officer and Chief Financial Officer, the Corporation evaluated the
effectiveness of the design and operation of the its internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, the Corporation's Chief Executive Officer
and Chief Financial Officer concluded that the Corporation's internal control
over financial reporting was effective as of December 31, 2004.
The scope of management's assessment of the effectiveness of internal
control over financial reporting includes all of the Corporation's businesses
except for the Porter-Cable and Delta Tools Group, a material business acquired
on October 2, 2004. The Corporation's consolidated sales for the year ended
December 31, 2004, were $5.4 billion, of which the Tools Group represented
$244.5 million. The Corporation's total assets as of December 31, 2004, were
$5.5 billion, of which the Tools Group represented $1.1 billion.
Ernst & Young LLP, the Corporation's independent registered public
accounting firm, audited management's assessment of the effectiveness of
internal control over financial reporting and, based on that audit, issued the
report set forth on the following page.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
On October 2, 2004, the Corporation acquired the Porter-Cable and Delta Tools
Group. During the quarterly period ended December 31, 2004, the Porter-Cable and
Delta Tools Group's processes and systems were discrete and did not
significantly impact internal controls over financial reporting at the
Corporation's other businesses. The Corporation's management performed due
diligence procedures associated with the acquisition of the Porter-Cable and
Delta Tools Group. During these due diligence procedures and in the quarterly
period after the acquisition, the Corporation's management found no significant
deficiencies or material weaknesses in the design of the Porter-Cable and Delta
Tools Group's internal controls over financial reporting.
There were no other changes in the Corporation's internal controls over
financial reporting during the quarterly period ended December 31, 2004, that
have materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
-57-
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF THE BLACK & DECKER CORPORATION:
We have audited management's assessment, included in Management's Report on
Internal Control Over Financial Reporting, that The Black & Decker Corporation
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Black & Decker Corporation's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control
Over Financial Reporting included in Item 9A, management's assessment of and
conclusion on the effectiveness of internal control over financial reporting did
not include the internal controls of the Porter-Cable and Delta Tools Group,
which is included in the 2004 consolidated financial statements of The Black &
Decker Corporation, and constituted 19% of total assets as of December 31, 2004
and 5% of sales for the year then ended. Management did not assess the
effectiveness of internal control over financial reporting at this entity
because The Black & Decker Corporation acquired the Tools Group on October 2,
2004. Our audit of internal control over financial reporting of The Black &
Decker Corporation also did not include an evaluation of the internal control
over financial reporting of the Porter-Cable and Delta Tools Group.
In our opinion, management's assessment that The Black & Decker Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, The Black & Decker Corporation maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of The Black & Decker Corporation and Subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004, and our report dated February 17, 2005 expressed an unqualified
opinion thereon.
/s/ ERNST & YOUNG LLP
- ---------------------
Baltimore, Maryland
February 17, 2005
-58-
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to Directors is contained in
the Corporation's Proxy Statement for the Annual Meeting of Stockholders to be
held April 26, 2005, under the captions "Election of Directors", "Board of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by reference.
Information required under this Item with respect to Executive Officers of
the Corporation is included in Item 1 of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 26, 2005,
under the captions "Board of Directors" and "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 26, 2005,
under the captions "Voting Securities", "Security Ownership of Management", and
"Equity Compensation Plan Information" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 26, 2005,
under the caption "Executive Compensation" and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required under this Item is contained in the Corporation's Proxy
Statement of the Annual Meeting of Stockholders to be held April 26, 2005, under
the caption "Ratification of the Selection of the Independent Registered Public
Accounting Firm" and is incorporated herein by reference.
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Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits
(1) LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and its
subsidiaries are included in Item 8 of Part II of this report:
Consolidated Statement of Earnings - years ended December 31, 2004, 2003,
and 2002.
Consolidated Balance Sheet - December 31, 2004 and 2003.
Consolidated Statement of Stockholders' Equity - years ended December 31,
2004, 2003, and 2002.
Consolidated Statement of Cash Flows - years ended December 31, 2004, 2003,
and 2002.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm on Consolidated
Financial Statements.
(2) LIST OF FINANCIAL
STATEMENT SCHEDULES
The following financial statement schedules of the Corporation and its
subsidiaries are included herein:
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
(3) LIST OF EXHIBITS
The following exhibits are either included in this report or incorporated herein
by reference as indicated below:
Exhibit 2
Purchase Agreement between the Corporation and Pentair, Inc. dated as of July
16, 2004, included in the Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 27, 2004, is incorporated herein by reference.
Exhibit 3(a)
Articles of Restatement of the Charter of the Corporation, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997,
are incorporated herein by reference.
Exhibit 3(b)
Bylaws of the Corporation, as amended, included in the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, are
incorporated herein by reference.
Exhibit 4(a)
Form of 7% Notes due February 1, 2006, included in the Corporation's Current
Report on Form 8-K filed with the Commission on January 20, 1994, is
incorporated herein by reference.
Exhibit 4(b)
Indenture dated as of March 24, 1993, by and between the Corporation and
Security Trust Company, National Association, as Trustee, included in the
Corporation's Current Report on Form 8-K filed with the Commission on March 26,
1993, is incorporated herein by reference.
Exhibit 4(c)
Indenture dated as of June 26, 1998, by and among Black & Decker Holdings Inc.,
as Issuer, the Corporation, as Guarantor, and The First National Bank of
Chicago, as Trustee, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998, is incorporated herein by reference.
Exhibit 4(d)
Credit Agreement, dated as of April 2, 2001, among the Corporation, Black &
Decker Holdings, Inc., as Initial Borrowers, the initial lenders named therein,
as Initial Lenders, Citibank, N.A., as Administrative Agent, JPMorgan, a
division of Chase Securities Inc., as Syndication Agent, and Bank of America,
N.A. and Commerzbank AG, as Co-Syndication Agents, included in the Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 1, 2001, is
incorporated herein by reference.
Exhibit 4(e)
Indenture between the Corporation and The Bank of New York, as Trustee, dated as
of June 5, 2001, included in the Corporation's Registration Statement on Form
S-4 (Reg. No. 333-64790), is incorporated herein by reference.
Exhibit 4(f)
Form of 7.125% Senior Note Due 2011, included in the Corporation's Registration
Statement on Form S-4 (Reg. No. 333-64790), is incorporated herein by reference.
Exhibit 4(g)
Indenture, dated as of October 18, 2004, between the 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.
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Exhibit 4(h)
Exchange and Registration Rights Agreement, dated as of October 18, 2004, among
the Corporation and J.P. Morgan Securities Inc., Banc of America Securities,
LLC, Citigroup Global Markets Inc. and 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.
Exhibit 4(i)
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.
The Corporation agrees to furnish a copy of any other documents with respect to
long-term debt instruments of the Corporation and its subsidiaries upon request.
Exhibit 10(a)
The Black & Decker Corporation Deferred Compensation Plan for Non-Employee
Directors, as amended, included in the Corporation's Current Report on Form 8-K
filed with the Commission on December 15, 2004, is incorporated herein by
reference.
Exhibit 10(b)
The Black & Decker Non-Employee Directors Stock Plan, included as Exhibit A to
the Proxy Statement, for the 1998 Annual Meeting of Stockholders of the
Corporation dated March 3, 1998, is incorporated herein by reference.
Exhibit 10(c)
The Black & Decker 1986 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(d)
The Black & Decker 1986 U.K. Approved Option Scheme, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-47651), is
incorporated herein by reference.
Exhibit 10(e)
The Black & Decker 1989 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(f)
The Black & Decker 1992 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(g)
The Black & Decker 1995 Stock Option Plan for Non-Employee Directors, as
amended, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998, is incorporated herein by reference.
Exhibit 10(h)
The Black & Decker 1996 Stock Option Plan, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 333-51155), is
incorporated herein by reference.
Exhibit 10(i)
The Black & Decker 2003 Stock Option Plan, included in the definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders of the Corporation dated
March 11, 2003, is incorporated herein by reference.
Exhibit 10(j)
The Black & Decker Corporation 2004 Restricted Stock Plan, included as Exhibit B
to the Proxy Statement, dated March 16, 2004, for the 2004 Annual Meeting of
Stockholders of the Registrant, is incorporated herein by reference.
Exhibit 10(k)
The Black & Decker Performance Equity Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, is incorporated herein by reference.
Exhibit 10(l)
The Black & Decker Executive Annual Incentive Plan, included in the Proxy
Statement for the 1996 Annual Meeting of Stockholders of the Corporation dated
March 1, 1996, is incorporated herein by reference.
Exhibit 10(m)
The Black & Decker Management Annual Incentive Plan, included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995,
is incorporated herein by reference.
Exhibit 10(n)
The Black & Decker Executive Long-Term Performance/Retention Plan, included in
the Corporation's Annual Report on Form 10-K for the year ended Decem- ber 31,
2001, is incorporated herein by reference.
Exhibit 10(o)(1)
The Black & Decker Supplemental Pension Plan, as amended, included in the
Corporation's Annual Report on Form 10-K for the year ended Decem- ber 31, 1991,
is incorporated herein by reference.
Exhibit 10(o)(2)
Amendment to The Black & Decker Supplemental Pension Plan, dated as of May 21,
1997, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(p)(1)
The Black & Decker Executive Deferred Compensation Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended October 3,
1993, is incorporated herein by reference.
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Exhibit 10(p)(2)
Amendment to The Black & Decker Executive Deferred Compensation Plan dated as of
July 17, 1996, included in the Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated herein by reference.
Exhibit 10(q)(1)
The Black & Decker Supplemental Retirement Savings Plan, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-65013), is
incorporated herein by reference.
Exhibit 10(q)(2)
Amendment to The Black & Decker Supplemental Retirement Savings Plan dated as of
April 22, 1997, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(q)(3)
Amendment No. 2 to The Black & Decker Supplemental Retirement Savings Plan dated
as of July 16, 1998, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998, is incorporated herein by reference.
Exhibit 10(q)(4)
Amendment No. 3 to The Black & Decker Supplemental Retirement Savings Plan dated
as of July 20, 2000, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended October 1, 2000, is incorporated herein by reference.
Exhibit 10(q)(5)
Amendment No. 4 to The Black & Decker Supplemental Retirement Savings Plan dated
as of October 18, 2001, included in the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, is incorporated herein by
reference.
Exhibit 10(q)(6)
Amendment No. 5 to The Black & Decker Supplemental Retirement Savings Plan dated
as of October 17, 2002, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002, is incorporated herein by reference.
Exhibit 10(q)(7)
Amendment No. 6 to The Black & Decker Supplemental Retirement Savings Plan dated
as of December 12, 2002, included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2002, is incorporated herein by reference.
Exhibit 10(r)
The Black & Decker Supplemental Executive Retirement Plan, as amended, included
in the Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, is incorporated herein by reference.
Exhibit 10(s)
The Black & Decker Supplemental Executive Retirement Plan, as amended and
restated, included in the Corporation's Quarterly Report on 10-Q for the quarter
ended June 27, 2004, is incorporated herein by reference.
Exhibit 10(t)
The Black & Decker Executive Life Insurance Program, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 4, 1993,
is incorporated herein by reference.
Exhibit 10(u)
The Black & Decker Executive Salary Continuance Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 2, 1995,
is incorporated herein by reference.
Exhibit 10(v)
Description of the Corporation's policy and procedures for relocation of
existing employees (individual transfers), included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1991, is incorporated herein
by reference.
Exhibit 10(w)
Description of the Corporation's policy and procedures for relocation of new
employees, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by reference.
Exhibit 10(x)
Description of certain incidental benefits provided to executive officers of the
Corporation, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(y)
Form of Severance Benefits Agreement by and between the Corporation and
approximately 15 of its key employees, included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002, is incorporated herein
by reference.
Exhibit 10(z)(1)
Amended and Restated Employment Agreement, dated as of November 1, 1995, by and
between the Corporation and Nolan D. Archibald, included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
Exhibit 10(z)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Nolan D. Archibald, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
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Exhibit 10(aa)(1)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and John W. Schiech.
Exhibit 10(bb)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Charles E. Fenton, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(cc)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Michael D. Mangan, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(dd)(1)
Special Deferral Agreement, dated February 7, 2000, by and between the
Corporation and Paul A. Gustafson, included in the Corporation's Annual Report
for the year ended December 31, 1999, is incorporated herein by reference.
Exhibit 10(dd)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Paul A. Gustafson, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(ee)
The Black & Decker Corporation Corporate Governance Polices and Procedures
Statement, as amended, included in the Corporation's Current Report on Form 8-K
filed with the Commission on December 15, 2004, is incorporated herein by
reference.
Items 10(a) through 10(ee) constitute management contracts and compensatory
plans and arrangements required to be filed as exhibits under Item 14(c) of this
report.
Exhibit 21
List of Subsidiaries.
Exhibit 23
Consent of Independent Registered Public Accounting Firm.
Exhibit 24
Powers of Attorney.
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 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 are "not applicable" or "none".
(b) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(c) Financial Statement Schedules and Other Financial Statements
The Financial Statement Schedule required by Regulation S-X is filed herewith.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
BALANCE ADDITIONS OTHER
AT CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND ADD AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (DEDUCT) OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004
Reserve for doubtful accounts and cash discounts $47.4 $86.3 $93.0 (a) $11.4 (b) $52.1
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003
Reserve for doubtful accounts and cash discounts $46.3 $70.5 $74.3 (a) $ 4.9 (b) $47.4
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Reserve for doubtful accounts and cash discounts $50.5 $70.3 $76.7 (a) $ 2.2 (b) $46.3
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Accounts written off during the year and cash discounts taken by customers.
(b) Primarily includes currency translation adjustments and, for 2004 and 2003,
amounts associated with acquired businesses.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE BLACK & DECKER CORPORATION
Date: February 18, 2005 By /s/ NOLAN D. ARCHIBALD
----------------------------
Nolan D. Archibald
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 18, 2005, by the following persons on behalf
of the registrant and in the capacities indicated.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
Principal Executive Officer
/s/ NOLAN D. ARCHIBALD February 18, 2005
- ---------------------- -----------------
Nolan D. Archibald Chairman, President, and
Chief Executive Officer
Principal Financial Officer
/s/ MICHAEL D. MANGAN February 18, 2005
- --------------------- -----------------
Michael D. Mangan Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
/s/ CHRISTINA M. MCMULLEN February 18, 2005
- ------------------------- -----------------
Christina M. McMullen Vice President and Controller
- --------------------------------------------------------------------------------
This report has been signed by the following directors, constituting a majority
of the Board of Directors, by Nolan D. Archibald, Attorney-in-Fact.
Nolan D. Archibald Manuel A. Fernandez
Norman R. Augustine Benjamin H. Griswold, IV
Barbara L. Bowles Anthony Luiso
M. Anthony Burns Mark H. Willes
Kim B. Clark
By /s/ NOLAN D. ARCHIBALD Date: February 18, 2005
---------------------- -----------------
Nolan D. Archibald
Attorney-in-Fact
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