-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DflP33Pcj+2nfLCvxGTWGAo5Am9h+rLXGlOA8ZubxS7tnEB3TwuG1swcYwTn3VWS hEaqiGra1Qj+r6iyCgvwhw== 0000012355-04-000078.txt : 20040507 0000012355-04-000078.hdr.sgml : 20040507 20040506173402 ACCESSION NUMBER: 0000012355-04-000078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040328 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLACK & DECKER CORP CENTRAL INDEX KEY: 0000012355 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 520248090 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-03593 FILM NUMBER: 04786222 BUSINESS ADDRESS: STREET 1: 701 E JOPPA RD CITY: TOWSON STATE: MD ZIP: 21286 BUSINESS PHONE: 4107163900 MAIL ADDRESS: STREET 1: 701 EAST JOPPA ROAD STREET 2: MAIL STOP TW 290 CITY: TOWSON STATE: MD ZIP: 21286 FORMER COMPANY: FORMER CONFORMED NAME: BLACK & DECKER MANUFACTURING CO DATE OF NAME CHANGE: 19850206 10-Q 1 form10q05062004a.txt PERIOD ENDED 3/28/2004 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 2004 ------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ----------------------- Commission File Number: 1-1553 -------------------------------------------------------- THE BLACK & DECKER CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-0248090 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 701 East Joppa Road Towson, Maryland 21286 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (410) 716-3900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES NO ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). X YES NO ----- ----- The number of shares of Common Stock outstanding as of April 23, 2004: 79,177,101 - ---------- The exhibit index as required by item 601(a) of Regulation S-K is included in this report. -2- THE BLACK & DECKER CORPORATION INDEX - FORM 10-Q March 28, 2004 Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Earnings (Unaudited) For the Three Months Ended March 28, 2004 and March 30, 2003 3 Consolidated Balance Sheet March 28, 2004 (Unaudited) and December 31, 2003 4 Consolidated Statement of Stockholders' Equity (Unaudited) For the Three Months Ended March 28, 2004 and March 30, 2003 5 Consolidated Statement of Cash Flows (Unaudited) For the Three Months Ended March 28, 2004 and March 30, 2003 6 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Controls and Procedures 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28 -3- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Amounts) - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Sales $1,092.9 $939.2 Cost of goods sold 690.1 603.9 Selling, general, and administrative expenses 295.1 263.0 Restructuring and exit costs - .2 - -------------------------------------------------------------------------------- Operating Income 107.7 72.1 Interest expense (net of interest income) 5.2 12.1 Other expense .8 1.7 - -------------------------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 101.7 58.3 Income taxes 27.4 15.2 - -------------------------------------------------------------------------------- Net Earnings from Continuing Operations 74.3 43.1 Discontinued Operations (Net of Income Taxes): Earnings of discontinued operations .6 .3 Gain on sale of discontinued operations (net of impairment charge of $24.4) 11.7 - - -------------------------------------------------------------------------------- Net Earnings from Discontinued Operations 12.3 .3 - -------------------------------------------------------------------------------- Net Earnings $ 86.6 $ 43.4 ================================================================================ Basic Earnings Per Common Share Continuing Operations $ .94 $ .55 Discontinued Operations .16 - - -------------------------------------------------------------------------------- Net Earnings Per Common Share - Basic $ 1.10 $ .55 ================================================================================ Shares Used in Computing Basic Earnings Per Share (in Millions) 78.4 78.3 ================================================================================ Diluted Earnings Per Common Share Continuing Operations $ .93 $ .55 Discontinued Operations .16 - - -------------------------------------------------------------------------------- Net Earnings Per Common Share - Assuming Dilution $ 1.09 $ .55 ================================================================================ Shares Used in Computing Diluted Earnings Per Share (in Millions) 79.5 78.5 ================================================================================ Dividends Per Common Share $ .21 $ .12 ================================================================================ See Notes to Consolidated Financial Statements (Unaudited). -4- CONSOLIDATED BALANCE SHEET The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Amount) - -------------------------------------------------------------------------------- March 28, 2004 (Unaudited) December 31, 2003 - -------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 321.7 $ 308.2 Trade receivables 889.2 808.6 Inventories 789.7 709.9 Current assets of discontinued operations 68.6 160.2 Other current assets 232.4 216.1 - -------------------------------------------------------------------------------- Total Current Assets 2,301.6 2,203.0 - -------------------------------------------------------------------------------- Property, Plant, and Equipment 650.7 660.2 Goodwill 779.9 771.7 Other Assets 600.0 587.6 - -------------------------------------------------------------------------------- $4,332.2 $4,222.5 ================================================================================ Liabilities and Stockholders' Equity Short-term borrowings $ 4.8 $ .1 Current maturities of long-term debt .4 .4 Trade accounts payable 460.1 379.8 Current liabilities of discontinued operations 30.2 38.0 Other accrued liabilities 757.9 893.8 - -------------------------------------------------------------------------------- Total Current Liabilities 1,253.4 1,312.1 - -------------------------------------------------------------------------------- Long-Term Debt 922.5 915.6 Deferred Income Taxes 182.1 179.8 Postretirement Benefits 465.0 451.9 Other Long-Term Liabilities 515.1 516.6 Stockholders' Equity Common stock, par value $.50 per share 39.4 39.0 Capital in excess of par value 525.9 486.7 Retained earnings 843.0 773.0 Accumulated other comprehensive income (loss) (414.2) (452.2) - -------------------------------------------------------------------------------- Total Stockholders' Equity 994.1 846.5 - -------------------------------------------------------------------------------- $4,332.2 $4,222.5 ================================================================================ See Notes to Consolidated Financial Statements (Unaudited). -5- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Outstanding Capital in Other Com- Total Common Par Excess of Retained prehensive Stockholders' Shares Value Par Value Earnings Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 79,604,786 $39.8 $550.1 $524.3 $(514.6) $599.6 Comprehensive income: Net earnings -- -- -- 43.4 -- 43.4 Net loss on derivative instruments (net of tax) -- -- -- -- (.2) (.2) Foreign currency translation adjustments, less effect of hedging activities (net of tax) -- -- -- -- 1.3 1.3 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- -- 43.4 1.1 44.5 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends ($.12 per share) -- -- -- (9.3) -- (9.3) Purchase and retirement of common stock (2,011,570) (1.0) (76.5) -- -- (77.5) Common stock issued under employee benefit plans 1,377 -- .1 -- -- .1 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 30, 2003 77,594,593 $38.8 $473.7 $558.4 $(513.5) $557.4 ==================================================================================================================================== Balance at December 31, 2003 77,933,464 $39.0 $486.7 $773.0 $(452.2) $846.5 Comprehensive income: Net earnings -- -- -- 86.6 -- 86.6 Net gain on derivative instruments (net of tax) -- -- -- -- 11.4 11.4 Foreign currency translation adjustments, less effect of hedging activities (net of tax) -- -- -- -- 55.3 55.3 Write-off of accumulated foreign currency translation adjustments due to sale of businesses -- -- -- -- (28.7) (28.7) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- -- 86.6 38.0 124.6 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends ($.21 per share) -- -- -- (16.6) -- (16.6) Common stock issued under employee benefit plans 903,253 .4 39.2 -- -- 39.6 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 28, 2004 78,836,717 $39.4 $525.9 $843.0 $(414.2) $994.1 ====================================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited). -6- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) The Black & Decker Corporation and Subsidiaries (Dollars in Millions) - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Operating Activities Net earnings $ 86.6 $ 43.4 Adjustments to reconcile net earnings to cash flow from operating activities of continuing operations: Earnings of discontinued operations (.6) (.3) Gain on sale of discontinued operations (net of impairment charge) (11.7) - Non-cash charges and credits: Depreciation and amortization 35.1 35.1 Restructuring and exit costs - .2 Other .9 1.8 Changes in selected working capital items: Trade receivables (66.3) (8.3) Inventories (66.0) (57.2) Trade accounts payable 75.3 21.9 Restructuring spending (11.4) (15.0) Other assets and liabilities (98.6) (140.5) - -------------------------------------------------------------------------------- Cash flow from operating activities of continuing operations (56.7) (118.9) Cash flow from operating activities of discontinued operations 1.9 (1.5) - -------------------------------------------------------------------------------- Cash Flow From Operating Activities (54.8) (120.4) - -------------------------------------------------------------------------------- Investing Activities Proceeds from disposal of assets .7 .2 Proceeds from sale of discontinued operations, net of cash transferred 74.6 - Capital expenditures (20.4) (26.0) Purchase of business, net of cash acquired (7.9) - Capital expenditures of discontinued operations (.3) (.4) Other investing activities (.2) - - -------------------------------------------------------------------------------- Cash Flow From Investing Activities 46.5 (26.2) - -------------------------------------------------------------------------------- Financing Activities Net increase in short-term borrowings .3 1.3 Payments on long-term debt (.1) (.9) Purchase of common stock - (77.5) Issuance of common stock 35.0 - Cash dividends (16.6) (9.3) - -------------------------------------------------------------------------------- Cash Flow From Financing Activities 18.6 (86.4) Effect of exchange rate changes on cash 3.2 2.6 - -------------------------------------------------------------------------------- Increase (Decrease) In Cash And Cash Equivalents 13.5 (230.4) Cash and cash equivalents at beginning of period 308.2 517.1 - -------------------------------------------------------------------------------- Cash And Cash Equivalents At End Of Period $ 321.7 $ 286.7 ================================================================================ See Notes to Consolidated Financial Statements (Unaudited). -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Black & Decker Corporation and Subsidiaries NOTE 1: ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited consolidated financial statements of The Black & Decker Corporation (collectively with its subsidiaries, the Corporation) have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the financial position and the results of operations. Operating results for the three-month period ended March 28, 2004, are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and notes included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. Certain amounts presented for the three months ended March 30, 2003, have been reclassified to conform to the 2004 presentation. Stock-Based Compensation As more fully disclosed in Notes 1 and 16 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, the Corporation has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation. In addition, the Corporation provides pro forma disclosure of stock-based compensation expense, as measured under the fair value requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. These pro forma disclosures are provided as required under SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. A reconciliation of the Corporation's net earnings to pro forma net earnings, and the related pro forma earnings per share amounts, for the three-month periods ended March 28, 2004 and March 30, 2003, is provided below. - -------------------------------------------------------------------------------- Three Months Ended (Amounts in Millions Except Per Share Data) March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Net earnings $86.6 $43.4 Adjustments to net earnings for: Stock-based compensation expense included in net earnings, net of tax 2.3 .5 Pro forma stock-based compensation (expense), net of tax (5.8) (5.7) - -------------------------------------------------------------------------------- Pro forma net earnings $83.1 $38.2 ================================================================================ Pro forma net earnings per common share -- basic $1.06 $ .49 ================================================================================ Pro forma net earnings per common share -- assuming dilution $1.05 $ .49 ================================================================================ -8- NOTE 2: DISCONTINUED OPERATIONS As more fully described in Note 3 of Notes to Consolidated Financial Statements included in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2003, the Corporation met the requirements to classify its European security hardware business as discontinued operations at the end of 2003. The European security hardware business, consisting of the NEMEF, Corbin, and DOM businesses, was previously included in the Corporation's Hardware and Home Improvement segment. In January 2004, the Corporation completed the sale of the NEMEF and Corbin businesses to Assa Abbloy and received cash proceeds, net of cash transferred, of $74.6 million. Also, in January 2004, the Corporation signed an agreement with Assa Abloy to sell its remaining European security hardware business, DOM, for $28.0 million. That sale is subject to regulatory approval. During the three months ended March 28, 2004, the Corporation recognized an $11.7 million net gain on the sale of these discontinued operations (the "net gain on sale of discontinued operations"). That net gain consisted of a $36.1 million gain on the sale of the NEMEF and Corbin businesses, less a $24.4 million goodwill impairment charge associated with the remaining European security hardware business, DOM. That goodwill impairment charge was determined as the excess of the carrying value of goodwill associated with the DOM business over its implied fair value inherent in the contractual value of $28.0 million. The European security hardware business discussed above is reported as discontinued operations in the consolidated financial statements and prior periods presented have been adjusted to reflect this presentation. Sales and earnings before income taxes of the discontinued operations were $16.1 million and $.8 million, respectively, for the three months ended March 28, 2004, and $28.9 million and $1.1 million, respectively, for the three months ended March 30, 2003. The results of the discontinued operations do not reflect any expense for interest allocated by or management fees charged by the Corporation. The major classes of assets and liabilities of discontinued operations in the Consolidated Balance Sheet at the end of each period, in millions of dollars, were as follows: - -------------------------------------------------------------------------------- March 28, 2004 December 31, 2003 - -------------------------------------------------------------------------------- Trade receivables, less allowances $ 8.7 $16.1 Inventories 11.7 28.4 Property, plant and equipment 17.3 27.9 Goodwill 26.6 82.7 Other assets 4.3 5.1 - -------------------------------------------------------------------------------- Total assets 68.6 160.2 - -------------------------------------------------------------------------------- Trade accounts payable 3.4 8.5 Other accrued liabilities 9.5 11.5 Postretirement benefits and other long-term liabilities 17.3 18.0 - -------------------------------------------------------------------------------- Total liabilities 30.2 38.0 - -------------------------------------------------------------------------------- Net assets $38.4 $122.2 ================================================================================ -9- NOTE 3: INVENTORIES The classification of inventories at the end of each period, in millions of dollars, was as follows: - -------------------------------------------------------------------------------- March 28, 2004 December 31, 2003 - -------------------------------------------------------------------------------- FIFO cost Raw materials and work-in-process $205.7 $186.3 Finished products 569.9 510.3 - -------------------------------------------------------------------------------- 775.6 696.6 Adjustment to arrive at LIFO inventory value 14.1 13.3 - -------------------------------------------------------------------------------- $789.7 $709.9 ================================================================================ Inventories are stated at the lower of cost or market. The cost of United States inventories is based primarily on the last-in, first-out (LIFO) method; all other inventories are based on the first-in, first-out (FIFO) method. NOTE 4: SHORT-TERM BORROWINGS AND LONG-TERM DEBT The terms of the Corporation's $500 million commercial paper program and $1.0 billion unsecured revolving credit facility are more fully disclosed in Note 7 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. The Corporation's average borrowings outstanding under its unsecured revolving credit facilities and its commercial paper program were $358.0 million and $403.1 million for the three-month periods ended March 28, 2004 and March 30, 2003, respectively. Indebtedness of subsidiaries of the Corporation in the aggregate principal amounts of $305.9 million and $301.3 million were included in the Consolidated Balance Sheet at March 28, 2004 and December 31, 2003, respectively, in short-term borrowings, current maturities of long-term debt, and long-term debt. NOTE 5: INTEREST EXPENSE (NET OF INTEREST INCOME) Interest expense (net of interest income) for each period, in millions of dollars, was as follows: - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Interest expense $13.7 $18.5 Interest (income) (8.5) (6.4) - -------------------------------------------------------------------------------- $ 5.2 $12.1 ================================================================================ NOTE 6: BUSINESS SEGMENTS The following table provides selected financial data for the Corporation's reportable business segments (in millions of dollars): -10-
- ------------------------------------------------------------------------------------------------------------------------------------ Reportable Business Segments ------------------------------------------------ Power Hardware Fastening Currency Corporate, Tools & & Home & Assembly Translation Adjustments, Three Months Ended March 28, 2004 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ Sales to unaffiliated customers $689.6 $220.4 $138.4 $1,048.4 $44.5 $ - $1,092.9 Segment profit (loss) (for Consolidated, operating income) 74.1 31.7 18.4 124.2 3.5 (20.0) 107.7 Depreciation and amortization 19.3 7.6 4.2 31.1 1.2 2.8 35.1 Capital expenditures 14.3 2.9 2.3 19.5 .7 .2 20.4 Three Months Ended March 30, 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Sales to unaffiliated customers $666.4 $146.2 $133.2 $945.8 $(6.6) $ - $939.2 Segment profit (loss) (for Consolidated, operating income before restructuring and exit costs) 59.5 13.0 19.3 91.8 (.2) (19.3) 72.3 Depreciation and amortization 20.1 6.8 3.8 30.7 - 4.4 35.1 Capital expenditures 15.2 7.3 3.5 26.0 (.2) .2 26.0
The Corporation operates in three reportable business segments: Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems. The Power Tools and Accessories segment has worldwide responsibility for the manufacture and sale of consumer and professional power tools and accessories, electric cleaning and lighting products, and electric lawn and garden tools, as well as for product service. In addition, the Power Tools and Accessories segment has responsibility for the sale of security hardware to customers in Mexico, Central America, the Caribbean, and South America; for the sale of plumbing products to customers outside the United States and Canada; and for sales of household products. The Hardware and Home Improvement segment has worldwide responsibility for the manufacture and sale of security hardware (except for the sale of security hardware in Mexico, Central America, the Caribbean, and South America). On September 30, 2003, the Corporation acquired Baldwin Hardware Corporation and Weiser Lock Corporation (Baldwin and Weiser). These acquired businesses are included in the Hardware and Home Improvement segment. The Hardware and Home Improvement segment also has responsibility for the manufacture of plumbing products and for the sale of plumbing products to customers in the United States and Canada. The Fastening and Assembly Systems segment has worldwide responsibility for the manufacture and sale of fastening and assembly systems. As more fully described in Note 2, the Corporation's European security hardware business has been classified as discontinued operations. Sales, segment profit, depreciation and amortization, and capital expenditures set forth in the preceding table exclude the results of discontinued operations. The Corporation assesses the performance of its reportable business segments based upon a number of factors, including segment profit. In general, segments follow the same accounting policies as those described in Note 1 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, except with respect to foreign currency translation and except as further indicated below. The financial statements of a segment's operating units located outside of the United States, except those units operating in highly inflationary economies, are generally measured using the local currency as the functional currency. For these units located outside of the United States, segment assets and elements of segment profit are translated using budgeted rates of exchange. Budgeted rates of exchange are established annually and, once established, all prior period segment data is restated to reflect the current year's budgeted rates of exchange. The amounts included in the -11- preceding table under the captions "Reportable Business Segments" and "Corporate, Adjustments, & Eliminations" are reflected at the Corporation's budgeted rates of exchange for 2004. The amounts included in the preceding table under the caption "Currency Translation Adjustments" represent the difference between consolidated amounts determined using those budgeted rates of exchange and those determined based upon the rates of exchange applicable under accounting principles generally accepted in the United States. Segment profit excludes interest income and expense, non-operating income and expense, adjustments to eliminate intercompany profit in inventory, and income tax expense. In addition, segment profit excludes restructuring and exit costs. In determining segment profit, expenses relating to pension and other postretirement benefits are based solely upon estimated service costs. Corporate expenses, as well as certain centrally managed expenses, are allocated to each reportable segment based upon budgeted amounts. While sales and transfers between segments are accounted for at cost plus a reasonable profit, the effects of intersegment sales are excluded from the computation of segment profit. Intercompany profit in inventory is excluded from segment assets and is recognized as a reduction of cost of goods sold by the selling segment when the related inventory is sold to an unaffiliated customer. Because the Corporation compensates the management of its various businesses on, among other factors, segment profit, the Corporation may elect to record certain segment-related expense items of an unusual or non-recurring nature in consolidation rather than reflect such items in segment profit. In addition, certain segment-related items of income or expense may be recorded in consolidation in one period and transferred to the various segments in a later period. The reconciliation of segment profit to the Corporation's earnings from continuing operations before income taxes for each period, in millions of dollars, is as follows: - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Segment profit for total reportable business segments $124.2 $ 91.8 Items excluded from segment profit: Adjustment of budgeted foreign exchange rates to actual rates 3.5 (.2) Depreciation of Corporate property (.4) (.3) Adjustment to businesses' postretirement benefit expenses booked in consolidation .1 3.8 Other adjustments booked in consolidation directly related to reportable business segments (2.1) (8.8) Amounts allocated to businesses in arriving at segment profit in excess of (less than) Corporate center operating expenses, eliminations, and other amounts identified above (17.6) (14.0) - -------------------------------------------------------------------------------- Operating income before restructuring and exit costs 107.7 72.3 Restructuring and exit costs - .2 - -------------------------------------------------------------------------------- Operating income 107.7 72.1 Interest expense, net of interest income 5.2 12.1 Other expense .8 1.7 - -------------------------------------------------------------------------------- Earnings from continuing operations before income taxes $101.7 $58.3 ================================================================================ -12- NOTE 7: EARNINGS PER SHARE The computations of basic and diluted earnings per share for each period are as follows: - -------------------------------------------------------------------------------- Three Months Ended (Amounts in Millions Except Per Share Data) March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Numerator: Net earnings from continuing operations $74.3 $43.1 Net earnings of discontinued operations 12.3 .3 - -------------------------------------------------------------------------------- Net earnings $86.6 $43.4 ================================================================================ Denominator: Denominator for basic earnings per share -- weighted-average shares 78.4 78.3 Employee stock options and stock issuable under employee benefit plans 1.1 .2 - -------------------------------------------------------------------------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 79.5 78.5 ================================================================================ Basic earnings per share Continuing operations $ .94 $ .55 Discontinued operations .16 - - -------------------------------------------------------------------------------- Basic earnings per share $1.10 $ .55 ================================================================================ Diluted earnings per share Continuing operations $ .93 $ .55 Discontinued operations .16 - - -------------------------------------------------------------------------------- Diluted earnings per share $1.09 $ .55 ================================================================================ As of March 28, 2004, options to purchase approximately 1.5 million shares of common stock, with a weighted-average exercise price of $53.96, were outstanding, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive. These options were anti-dilutive because the related exercise price was greater than the average market price of the common shares during the quarter. -13- NOTE 8: RESTRUCTURING ACTIVITY The Corporation's restructuring activities are more fully disclosed in Note 19 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. A summary of restructuring activity during the three-month period ended March 28, 2004, is set forth below (in millions of dollars):
- ------------------------------------------------------------------------------------------------------------- Reserves at Utilization of Reserves Foreign Reserves at December 31, ----------------------- Currency March 28, 2003 Cash Non-Cash Translation 2004 - ------------------------------------------------------------------------------------------------------------- Severance benefits $42.6 $(11.3) $ - $.1 $31.4 Other charges 1.1 (.1) - - 1.0 - ------------------------------------------------------------------------------------------------------------- Total $43.7 $(11.4) $ - $.1 $32.4 =============================================================================================================
Of the $32.4 million restructuring accrual as of March 28, 2004, $21.4 million -- principally associated with actions by the Corporation's Power Tools and Accessories segment -- relates to the restructuring plan that was formulated by the Corporation in the fourth quarter of 2001. The Corporation anticipates that these restructuring actions will be completed during 2004. The remaining $11.0 million relates to restructuring actions associated with the closure of a manufacturing facility in the Corporation's Hardware and Home Improvement segment as a result of the acquisition of the Baldwin and Weiser businesses. The Corporation anticipates that these restructuring actions will be completed during 2005. NOTE 9: POSTRETIREMENT BENEFITS The Corporation's pension and other postretirement benefit plans are more fully disclosed in Notes 1 and 12 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. The following table presents the components of the Corporation's net periodic cost (benefit) related to its defined benefit pension plans for the three months ended March 28, 2004 and March 30, 2003 (in millions of dollars):
- --------------------------------------------------------------------------------------------------------------- Pension Benefits Plans Pension Benefits Plans In the United States Outside of the United States ------------------------------ -------------------------------- 2004 2003 2004 2003 - --------------------------------------------------------------------------------------------------------------- Service cost $ 4.7 $ 4.1 $ 3.4 $3.4 Interest cost 13.7 14.6 8.9 6.8 Expected return on plan assets (20.6) (21.7) (8.7) (7.9) Amortization of prior service cost .3 .3 .4 .3 Amortization of net actuarial loss 4.0 1.9 2.5 1.2 - --------------------------------------------------------------------------------------------------------------- Net periodic cost (benefit) $ 2.1 $ (.8) $ 6.5 $3.8 ===============================================================================================================
-14- The Corporation's defined postretirement benefits consist of several unfunded health care plans that provide certain postretirement medical, dental, and life insurance benefits for most United States employees. The postretirement medical benefits are contributory and include certain cost-sharing features, such as deductibles and co-payments. The following table presents the components of the Corporation's net periodic cost related to its defined benefit postretirement plans for the three months ended March 28, 2004 and March 30, 2003 (in millions of dollars): - -------------------------------------------------------------------------------- 2004 2003 - -------------------------------------------------------------------------------- Service cost $ .2 $ .2 Interest cost 2.3 2.7 Amortization of prior service cost (.5) (.6) Amortization of net actuarial loss .4 .5 - -------------------------------------------------------------------------------- Net periodic cost $2.4 $2.8 ================================================================================ As more fully described in Note 1 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, the Corporation elected to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) and the resultant Financial Accounting Standards Board Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, until authoritative guidance on the accounting for the federal subsidy is issued or until a significant event occurs that ordinarily would call for the remeasurement of the postretirement benefit plan's obligations. The accrued benefit obligation and the net periodic postretirement cost (benefit) included in the consolidated financial statements do not reflect the effects of the Act on the Corporation's postretirement benefit plan. NOTE 10: LITIGATION AND CONTINGENT LIABILITIES As more fully disclosed in Note 20 of Notes to Consolidated Financial Statements included in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, the Corporation is involved in various lawsuits in the ordinary course of business. These lawsuits primarily involve claims for damages arising out of the use of the Corporation's products, allegations of patent and trademark infringement, and litigation and administrative proceedings relating to employment matters and commercial disputes. In addition, the Corporation is party to litigation and administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. The Corporation's estimate of the costs associated with product liability claims, environmental exposures, and other legal proceedings is accrued if, in management's judgment, the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. These accrued liabilities are not discounted. During 2003, the Corporation received notices of proposed adjustments from the United States Internal Revenue Service (I.R.S.) in connection with audits of the tax years 1998 through 2000. The principal adjustment proposed by the I.R.S. consists of the disallowance of a capital loss deduction taken in the Corporation's tax returns. The Corporation intends to vigorously dispute the position taken by the I.R.S. in this matter. The Corporation has provided adequate -15- reserves in the event that the I.R.S. prevails in its disallowance of the previously described capital loss and the imposition of related interest. Should the I.R.S. prevail in its disallowance of the capital loss deduction and imposition of related interest, it would result in a cash outflow by the Corporation of approximately $140 million. The Corporation believes that any such cash outflow is unlikely to occur until some time after 2004. In the opinion of management, amounts accrued for exposures relating to product liability claims, environmental matters, and other legal proceedings are adequate and, accordingly, the ultimate resolution of these matters is not expected to have a material adverse effect on the Corporation's consolidated financial statements. As of March 28, 2004, the Corporation had no known probable but inestimable exposures relating to product liability claims, environmental matters, or other legal proceedings that are expected to have a material adverse effect on the Corporation. There can be no assurance, however, that unanticipated events will not require the Corporation to increase the amount it has accrued for any matter or accrue for a matter that has not been previously accrued because it was not considered probable. -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Corporation is a global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. As more fully described in Note 6 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments -- Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems -- with these business segments comprising approximately 66%, 21% and 13%, respectively, of the Corporation's sales for the three-month period ended March 28, 2004. The Corporation markets its products and services in over 100 countries. During 2003, approximately 63%, 25% and 12% of its sales were made to customers in the United States, in Europe (including the United Kingdom), and in other geographic regions, respectively. The Power Tools and Accessories and Hardware and Home Improvement segments are subject to general economic conditions in the countries in which they operate as well as the strength of the retail economies. The Fastening and Assembly Systems segment is also subject to general economic conditions in the countries in which it operates as well as to automotive and industrial demand. The Corporation reported net earnings from continuing operations of $74.3 million, or $.93 per share on a diluted basis, for the three-month period ended March 28, 2004, compared to net earnings from continuing operations of $43.1 million, or $.55 per share on a diluted basis, for the three-month period ended March 30, 2003. The Corporation reported net earnings of $86.6 million, or $1.09 per share on a diluted basis, for the three-month period ended March 28, 2004, compared to net earnings of $43.4 million, or $.55 per share on a diluted basis, for the three-month period ended March 30, 2003. As more fully described in Note 2 of Notes to Consolidated Financial Statements, net earnings for the three months ended March 28, 2004 included a net gain on sale of discontinued operations of $11.7 million. Total consolidated sales of $1,092.9 million for the three months ended March 28, 2004, increased by 16% over the corresponding period in the prior year. Of that 16% increase, 8% was attributable to an increase in unit volume of existing businesses (that is, the Corporation's businesses excluding the newly acquired Baldwin, Weiser, and MasterFix businesses), 6% was attributable to the incremental sales of newly acquired businesses, and 5% was attributable to the favorable impact of foreign currency translation, offset by 3% attributable to the negative effect of pricing actions. Operating income for the three months ended March 28, 2004, increased to $107.7 million, or 9.9% of sales, from $72.1 million, or 7.7% of sales, in the corresponding period of 2003. The increase in operating income as a percentage of sales during the first quarter of 2004, as compared to the prior year level, resulted from percentage improvements in both gross margin and selling, general, and administrative expenses. The improvement in gross margin--which increased from 35.7% in the first quarter of 2003 to 36.9% in the first quarter of 2004--was mainly attributable to the positive effects of restructuring initiatives and favorable foreign currency exchange rates, partially offset by the negative effect of pricing actions. Although selling, general, and administrative expenses for the first quarter of 2004 increased over the prior year level, that increase was principally due to incremental expenses of newly acquired businesses and the effects of foreign currency translation. Selling, general, and administrative expenses as a percentage of sales decreased from 28.0% for the first quarter of 2003 to 27.0% for the first quarter of 2004. Earnings from continuing operations before income -17- taxes increased by $43.4 million over the 2003 level to $101.7 million for the three months ended March 28, 2004. In addition to the improvement in operating income described above, pre-tax earnings from continuing operations benefited from a $6.9 million reduction in net interest expense during the first quarter of 2004 from the prior year level. In the discussion and analysis of financial condition and results of operations that follows, the Corporation generally attempts to list contributing factors in order of significance to the point being addressed. RESULTS OF OPERATIONS SALES The following chart sets forth an analysis of the consolidated changes in sales for the three-month periods ended March 28, 2004 and March 30, 2003: ANALYSIS OF CHANGES IN SALES - -------------------------------------------------------------------------------- Three Months Ended (Dollars in Millions) March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Total sales $1,092.9 $939.2 - -------------------------------------------------------------------------------- Unit volume - existing (a) 8 % (2)% Unit volume - acquired (b) 6 % - % Price (3)% (1)% Currency 5 % 4 % - -------------------------------------------------------------------------------- Change in total sales 16 % 1 % ================================================================================ (a) Represents change in unit volume for businesses where year-to-year comparability exists. (b) Represents change in unit volume for businesses that were acquired and were not included in prior period results. Total consolidated sales for the three months ended March 28, 2004 increased by 16% over sales in the corresponding 2003 period. Excluding the newly acquired Baldwin, Weiser, and MasterFix businesses, total unit volume increased by 8% during the three months ended March 28, 2004, over the corresponding period in 2003. This improvement was primarily attributable to the Corporation's North American businesses, which benefited from an improving economy. As compared to the first quarter of 2003, a double-digit increase in sales volume was experienced by the power tools and accessories, Kwikset security hardware, and plumbing products businesses in North America during the quarter ended March 28, 2004. Unit volume of the newly acquired Baldwin, Weiser, and MasterFix businesses contributed 6% to the sales growth for the first three months of 2004 as compared to the 2003 period. Pricing actions had a 3% negative effect on sales for the three-month period ended March 28, 2004, as compared to the corresponding period in 2003. In addition to pricing actions taken during the first quarter of 2004 in response to customer and competitive pressures, additional promotional programs that were initiated in the fourth quarter of 2004 and pricing actions to reduce certain excess inventory also negatively impacted the comparison to the first quarter of 2003. The effects of a weaker U.S. dollar compared to other currencies, particularly the euro and, to a lesser degree, the pound sterling, and Canadian dollar, caused a 5% increase in the Corporation's consolidated sales during the three-month period ended March 28, 2004, as compared to the corresponding period in 2003. -18- EARNINGS The Corporation reported consolidated operating income of $107.7 million, or 9.9% of sales, during the first three months of 2004, as compared to operating income of $72.1 million, or 7.7% of sales, for the corresponding period in 2003. Consolidated gross margin as a percentage of sales for the first three months of 2004 was 36.9% as compared to 35.7% for the first three months of 2003. The results of restructuring initiatives, and, in Europe, foreign currency effects favorably impacted gross margin as a percentage of sales. These positive factors were partially offset by negative pricing actions taken by the Corporation as described on the preceding page. Consolidated selling, general, and administrative expenses as a percentage of sales were 27.0% and 28.0% for the three-month periods ended March 28, 2004, and March 30, 2003, respectively. Selling, general, and administrative expenses increased by $32.1 million for the three months ended March 28, 2004, over the 2003 level. The effects of foreign currency translation accounted for approximately half of this increase, with the remaining increase principally resulting from incremental expenses of the newly acquired Baldwin, Weiser, and MasterFix businesses. Consolidated net interest expense (interest expense less interest income) for the three months ended March 28, 2004, was $5.2 million compared to net interest expense of $12.1 million for the three months ended March 30, 2003. The decrease in net interest expense between periods was primarily the result of lower borrowing levels in the first quarter of 2004 due to a bond repayment in April 2003, coupled with higher interest income associated with the Corporation's foreign currency hedging activities in the 2004 period. Other expense was $.8 million and $1.7 million for the three months ended March 28, 2004 and March 30, 2003, respectively. Consolidated income tax expense of $27.4 million and $15.2 million was recognized on the Corporation's earnings from continuing operations before income taxes of $101.7 million and $58.3 million for the three-month periods ended March 28, 2004 and March 30, 2003, respectively. The Corporation's effective tax rate of 27% for the first three months of 2004 approximated the 26% rate for the corresponding period in 2003. The Corporation's income tax expense and resultant effective tax rate, for both the three-month periods ended March 28, 2004 and March 30, 2003, were based upon the estimated effective tax rates applicable for the full years, after giving effect to any significant items related specifically to interim periods. The Corporation reported net earnings from continuing operations of $74.3 million, or $.93 per share on a diluted basis, for the three-month period ended March 28, 2004, compared to net earnings from continuing operations of $43.1 million, or $.55 per share on a diluted basis, for the three-month period ended March 30, 2003. The Corporation reported net earnings from discontinued operations of $12.3 million during the first three months of 2004, as compared to $.3 million during the corresponding period of 2003. The discontinued European security hardware business consists of the NEMEF, Corbin, and DOM businesses. As more fully described in Note 2 of Notes to Consolidated Financial Statements, net earnings from discontinued operations for the three-month period ended March 28, 2004 included an $11.7 million net gain on sale of discontinued operations. That net gain consisted of a $36.1 million gain on the sale during the first quarter of 2004 of two discontinued businesses (NEMEF and Corbin) partially offset by a $24.4 million goodwill impairment charge associated with the remaining discontinued business (DOM). The sale of the DOM business, currently under contract for $28.0 million, is subject to regulatory approval. -19- The Corporation reported net earnings of $86.6 million, or $1.09 per share on a diluted basis, for the three-month period ended March 28, 2004, as compared to net earnings of $43.4 million, or $.55 per share on a diluted basis, for the corresponding period in 2003. BUSINESS SEGMENTS As more fully described in Note 6 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments: Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems. Power Tools and Accessories Segment sales and profit for the Power Tools and Accessories segment, determined on the basis described in Note 6 of Notes to Consolidated Financial Statements, were as follows (in millions of dollars): - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Sales to unaffiliated customers $689.6 $666.4 Segment profit 74.1 59.5 - -------------------------------------------------------------------------------- Sales to unaffiliated customers in the Power Tools and Accessories segment during the first quarter of 2004 increased 3% over the 2003 level. Sales in North America during the first quarter of 2004 increased at a high single-digit rate over the prior year level. Sales of professional power tools and accessories increased at a double-digit rate as sales increases were experienced in all major channels and product lines. Consumer power tools and accessories sales grew at a low single-digit rate as an increase in sales of consumer power tools and cleaning products more than offset a reduction in sales of outdoor products. The Corporation believes that that reduction in sales of outdoor products is due to a shift in the timing of orders -- with outdoor product orders received in the first quarter in 2003 but expected during the second quarter in 2004. Sales in Europe decreased at a high single-digit rate during the first quarter of 2004 from the level experienced in the corresponding period in 2003. In comparison to the first quarter of 2003, sales of European consumer power tools and accessories decreased at a double-digit rate and sales of professional power tools and accessories decreased at a mid-single-digit rate during the three months ended March 28, 2004. Weak economic conditions continued to depress sales throughout most of Europe. Sales of professional products during the first quarter of 2004 were also adversely affected by back-orders associated with production issues at a manufacturing facility in the Czech Republic. Sales in other geographic areas increased at a high single-digit rate in the first quarter of 2004, as compared to the prior year level, as sales increased throughout most of South America and Asia as well as in Australia. Segment profit as a percentage of sales for the Power Tools and Accessories segment was 10.7% for the three months ended March 28, 2004, as compared to 8.9% for the corresponding 2003 period. That increase in segment profit as a percentage of sales primarily resulted from a reduction in selling, general, and administrative expenses as a percentage of sales due to the leverage of expenses over higher sales volume. Gross margin as a percentage of sales also increased slightly during the first quarter of 2004 as compared to the first quarter of 2003. That gross margin -20- improvement was predominantly attributable to the positive results of restructuring initiatives and foreign currency effects, partially offset by the negative effects of pricing actions. Hardware and Home Improvement Segment sales and profit for the Hardware and Home Improvement segment, determined on the basis described in Note 6 of Notes to Consolidated Financial Statements, were as follows (in millions of dollars): - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Sales to unaffiliated customers $220.4 $146.2 Segment profit 31.7 13.0 - -------------------------------------------------------------------------------- Sales to unaffiliated customers in the Hardware and Home Improvement segment increased 51% during the three months ended March 28, 2004, over the corresponding period in 2003. Incremental sales of the newly acquired Baldwin and Weiser businesses accounted for 37 percentage points of that increase, while higher sales of the Kwikset security hardware and Price Pfister plumbing products businesses accounted for the remaining 14 percentage points. Sales of plumbing products increased at a double-digit rate, reflecting the expansion of listings at Lowe's Home Improvement Warehouse (Lowe's) that occurred during the third quarter of 2003, as well as growth at other retailers. Sales of Kwikset security hardware products also increased at a double-digit rate in the first quarter of 2004 over the corresponding period in 2003 due to strong retail sales. Segment profit as a percentage of sales for the Hardware and Home Improvement segment was 14.4% and 8.9% for the three months ended March 28, 2004 and March 30, 2003, respectively. Segment profit as a percentage of sales for the three-month period ended March 28, 2004, benefited from significant gross margin improvement. That gross margin improvement was primarily driven by the positive effects of restructuring initiatives and productivity improvements, including volume leverage. The newly acquired Baldwin and Weiser businesses did not have a material effect on segment profit as a percentage of sales for the Hardware and Home Improvement segment during the first quarter of 2004. While the Corporation anticipates that the Hardware and Home Improvement segment will continue to experience increases in segment profit as a percentage of sales over the remainder of 2004 as compared to 2003, it expects that the rate of improvement will moderate from the 5.5 percentage point improvement experienced in the first quarter of 2004 given the increases in the comparable segment profit as a percentage of sales in each of the successive quarterly periods in 2003. In addition, restructuring-related expenses -- associated with the integration of the Baldwin and Weiser businesses into the Kwikset security hardware business --are anticipated to increase during the remainder of 2004 as integration actions intensify. -21- Fastening and Assembly Systems Segment sales and profit for the Fastening and Assembly Systems segment, determined on the basis described in Note 6 of Notes to Consolidated Financial Statements, were as follows (in millions of dollars): - -------------------------------------------------------------------------------- Three Months Ended March 28, 2004 March 30, 2003 - -------------------------------------------------------------------------------- Sales to unaffiliated customers $138.4 $133.2 Segment profit 18.4 19.3 - -------------------------------------------------------------------------------- Sales to unaffiliated customers in the Fastening and Assembly Systems segment increased by 4% in the first quarter of 2004 over the corresponding 2003 period. Sales in Asia increased at a double-digit rate, and sales of industrial fasteners and automotive fasteners in the rest of the world grew at a mid-single-digit and low single-digit rate, respectively, during the three months ended March 28, 2004. Segment profit as a percentage of sales for the Fastening and Assembly Systems segment of 13.3% in the first quarter of 2004 decreased from 14.5% in the prior year. That decline was attributable to unfavorable product mix as well as costs associated with the transfer of production from a small manufacturing facility. During March 2004, the Corporation completed the acquisition of the MasterFix B.V. (MasterFix), an industrial fastening company with operations in Europe and Asia, which is expected to generate annualized sales of approximately $20 million. The acquisition of MasterFix did not have a significant effect on sales or segment profit of the Fastening and Assembly Systems segment during the first quarter of 2004. Other Segment-Related Matters As more fully described in Note 6 of Notes to Consolidated Financial Statements, in determining segment profit, expenses relating to pension and other postretirement benefits are based solely upon estimated service costs. Also, as more fully described in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, in Item 7 under the caption "Financial Condition", the Corporation anticipates that the expense recognized relating to its pension and other postretirement benefits plans in 2004 will increase over the 2003 levels. The Corporation anticipates that its expense recognized relating to its pension and other postretirement benefit plans will increase by approximately $20 million over the 2003 levels. The adjustment to businesses' postretirement benefit income (expense) booked in consolidation as identified in the final table included in Note 6 of Notes to Consolidated Financial Statements was $.1 million and $3.8 million for the three-month periods ended March 28, 2004 and March 30, 2003, respectively. This decrease reflects the impact excluded from the Corporation's reportable business segments of that increase in pension and other postretirement benefits expense. Expenses directly related to reportable business segments booked in consolidation and, thus, excluded from segment profit for the reportable business segments were $2.1 million and $8.8 million for the three-month periods ended March 28, 2004 and March 30, 2003, respectively. The principal item that contributed to this decrease was a higher level of restructuring-related expenses (associated with the Power Tools and Accessories segment) that was recognized in the 2003 period. Amounts allocated to businesses in arriving at segment profit in excess of (less than) Corporate -22- center operating expenses, eliminations, and other amounts identified in the final table included in Note 6 of Notes to Consolidated financial statements were $(17.6) million and $(14.0) million for the three-month periods ended March 28, 2004 and March 30, 2003, respectively. The increase in these unallocated Corporate center operating expenses for the three months ended March 28, 2004, as compared to the prior year level, was primarily due to higher employee-related expenses not allocated directly to the Corporation's business segments. RESTRUCTURING ACTIVITY The Corporation's restructuring activities are more fully discussed in Note 8 of Notes to Consolidated Financial Statements and in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003 in both Item 7 under the caption "Restructuring Actions" and Item 8 in Note 19 of Notes to Consolidated Financial Statements. The Corporation realized benefits of approximately $20 million during the three months ended March 28, 2004, net of restructuring-related expenses. Of those restructuring savings, approximately 85% benefited gross margin, with the remainder realized through a reduction of selling, general, and administrative expenses. The Corporation expects that incremental pre-tax savings associated with the restructuring plan that was formulated in the fourth quarter of 2001 will benefit results by at least $45 million in 2004 and $10 million in 2005, net of restructuring-related expenses. The Corporation expects that, of those incremental pre-tax savings in 2004 and 2005, approximately 80-85% will benefit gross margin, with the remainder realized through a reduction of selling, general, and administrative expenses. The Corporation expects that pre-tax savings associated with the restructuring actions associated with the integration of Baldwin and Weiser into its Kwikset security hardware business will benefit 2005 and 2006 results by approximately $5 million and $25 million, respectively, net of restructuring-related expenses. The restructuring-related expenses associated with these integration plans will have an adverse pre-tax impact of approximately $15 million in 2004. Ultimate savings realized from restructuring actions may be mitigated by such factors as economic weakness and competitive pressures, as well as decisions to increase costs in areas such as promotion or research and development above levels that were otherwise assumed. FINANCIAL CONDITION Operating activities used cash of $54.8 million for the three months ended March 28, 2004, as compared to $120.4 million of cash used in the corresponding period in 2003. Cash flow from operating activities included positive cash flow from discontinued operations of $1.9 million for the three months ended March 28, 2004 and negative cash flow from discontinued operations of $1.5 million for the three months ended March 30, 2003. The decrease in cash used by operating activities during the three months ended March 28, 2004, as compared to the prior year level, was primarily a result of increased earnings from continuing operations and lower cash usage associated with other assets and liabilities. These factors were partially offset by an increase in accounts receivable in the first quarter of 2004 -- associated with the higher level of sales -- that exceeded that period's increase in accounts payable -- associated with higher production levels as well as the timing of payments -- all as compared to the corresponding 2003 period. The reduction during the first quarter of 2004 from the prior year level in cash used from operating activities associated with -23- other assets and liabilities was due to an increase in cash proceeds associated with foreign currency hedging activities and lower value added tax payments. As part of its capital management, the Corporation reviews certain working capital metrics. For example, the Corporation evaluates its accounts receivable and inventory levels through the computation of days sales outstanding and inventory turnover ratio, respectively. The number of days sales outstanding at March 28, 2004, increased modestly from the number of days sales outstanding at March 30, 2003. Average inventory turns at March 28, 2004, increased slightly in comparison to the same period in 2003. Average inventory turns as of March 30, 2003 were affected by safety stock that the Corporation maintained during 2003 related to the Corporation's restructuring program as well as to lower-than-expected sales in the first quarter of 2003. Investing activities for the three months ended March 28, 2004, provided cash of $46.5 million as compared to $26.2 million of cash used during the corresponding period in 2003. The increase in cash provided was primarily due to $74.6 million of net proceeds from the sale of two of the discontinued European security hardware businesses. Investing activities for the three months ended March 28, 2004 included a payment of $7.9 million, net of cash acquired, related to the purchase of Masterfix. The results of MasterFix, included in the consolidated financial statements from the date of acquisition, were not material. While there was a reduction in capital expenditures during the first three months of 2004 as compared to 2003, the Corporation anticipates that its capital spending in 2004 will approximate $120 million -- an increase from the $102.5 million of capital expenditures incurred in 2003. In January 2004, the Corporation signed an agreement to sell its remaining discontinued business, DOM, for $28.0 million. The sale of DOM, which is subject to regulatory approval, is expected to be completed during 2004. Financing activities provided cash of $18.6 million during the three-month period ended March 28, 2004, as compared to cash used of $86.4 million during the corresponding period in 2003. Cash provided by financing activities for the 2004 period was principally attributable to $35.0 million in proceeds received on the issuance of common stock under employee benefit plans, which exceeded cash dividends of $16.6 million. Cash provided by financing activities in the 2004 period were reduced by the Corporation's quarterly dividend payments, which increased -- on a per share basis -- from $.12 in the first quarter of 2003 to $.21 in the first quarter of 2004. During the three months ended March 30, 2003, the Corporation repurchased 2,011,570 shares of its common stock at an aggregate cost of $77.5 million. During the corresponding period in 2004, no common stock was repurchased. As of March 28, 2004, the Corporation had remaining authorization from its Board of Directors to repurchase 2,911,595 shares of its common stock. The variable-rate debt to total debt ratio, after taking interest rate hedges into account, was 47% at both March 28, 2004 and December 31, 2003. Average debt maturity was 8.5 years at March 28, 2004, compared to 8.8 years at December 31, 2003. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor for forward-looking statements made by or on behalf of the Corporation. The Corporation and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Corporation's filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," and similar expressions identify statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of -24- 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that the Corporation expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. The Corporation undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including but not limited to those factors identified in Item 1(g) of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required under this Item is contained under the caption "Hedging Activities", included in Item 7, and in Notes 1 and 9 of Notes to Consolidated Financial Statements, included in Item 8, of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, and is incorporated by reference herein. There have been no material changes in the reported market risks since the end of the most recent fiscal year. ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, the Corporation carried out an evaluation of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures as of March 28, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. (b) There have been no changes in the Corporation's internal controls over financial reporting during the quarterly period ended March 28, 2004, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. -25- THE BLACK & DECKER CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is involved in various lawsuits in the ordinary course of business. These lawsuits primarily involve claims for damages arising out of the use of the Corporation's products and allegations of patent and trademark infringement. The Corporation also is involved in litigation and administrative proceedings involving employment matters and commercial disputes. Some of these lawsuits include claims for punitive as well as compensatory damages. The Corporation, using current product sales data and historical trends, actuarially calculates the estimate of its exposure for product liability. The Corporation is insured for product liability claims for amounts in excess of established deductibles and accrues for the estimated liability as described above up to the limits of the deductibles. All other claims and lawsuits are handled on a case-by-case basis. Pursuant to authority granted under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the United States Environmental Protection Agency (EPA) has issued a National Priority List (NPL) of sites at which action is to be taken to mitigate the risk of release of hazardous substances into the environment. The Corporation is engaged in continuing activities with regard to various sites on the NPL and other sites covered under CERCLA. The Corporation also is engaged in site investigations and remedial activities to address environmental contamination from past operations at current and former manufacturing facilities in the United States and abroad. To minimize the Corporation's potential liability with respect to these sites, management has undertaken, when appropriate, active participation in steering committees established at the sites and has agreed to remediation through consent orders with the appropriate government agencies. Due to uncertainty over the Corporation's involvement in some of the sites, uncertainty over the remedial measures, and the fact that imposition of joint and several liability with the right of contribution is possible under CERCLA and other laws and regulations, the liability of the Corporation with respect to any site at which remedial measures have not been completed cannot be established with certainty. On the basis of periodic reviews conducted with respect to these sites, however, the Corporation has established appropriate liability accruals. The Corporation's estimate of costs associated with product liability claims, environmental matters, and other legal proceedings is accrued if, in management's judgment, the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. These accrued liabilities are not discounted. In the opinion of management, amounts accrued for exposures relating to product liability claims, environmental matters, and other legal proceedings are adequate and, accordingly, the ultimate resolution of these matters is not expected to have a material adverse effect on the Corporation's consolidated financial statements. As of March 28, 2004, the Corporation had no known probable but inestimable exposures relating to product liability claims, environmental matters, or other legal proceedings that are expected to have a material adverse effect on the Corporation. There can be no assurance, however, that unanticipated events will not require the Corporation to increase the amount it has accrued for any matter or accrue for a matter that has not been previously accrued because it was not considered probable. -26- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2004 Annual Meeting of Stockholders was held on April 27, 2004, for the election of directors, to ratify the selection of Ernst & Young LLP as the Corporation's independent auditor for fiscal year 2004, to approve The Black & Decker Corporation 2004 Restricted Stock Plan, and to act on a stockholder proposal. A total of 70,427,230 of the 78,226,668 votes entitled to be cast at the meeting were present in person or by proxy. At the meeting, the stockholders: (1) Elected the following directors: Number of Shares Number of Shares Directors Voted For Authority Withheld --------------------------------------------------------------------------- Nolan D. Archibald 68,218,087 2,209,143 Norman R. Augustine 67,739,332 2,687,898 Barbara L. Bowles 67,252,899 3,174,331 M. Anthony Burns 67,745,024 2,682,206 Kim B. Clark 68,780,253 1,646,977 Manuel A. Fernandez 65,269,536 5,157,694 Benjamin H. Griswold, IV 65,268,415 5,158,815 Anthony Luiso 64,810,042 5,617,188 (2) Ratified the selection of Ernst & Young LLP as the Corporation's independent auditor for fiscal year 2004 by an affirmative vote of 67,673,362; votes against ratification were 2,146,140; and abstentions were 607,728. (3) Approved The Black & Decker Corporation 2004 Restricted Stock Plan by an affirmative vote of 40,756,969; votes against the proposal were 19,349,690; abstentions were 568,489; and broker non-votes were 9,752,082. (4) Rejected the stockholder proposal by a negative vote of 55,174,577; affirmative votes for the stockholder proposal were 4,517,718; abstentions were 982,853; and broker non-votes were 9,752,082. No other matters were submitted to a vote of the stockholders at the meeting. -27- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. Description 10 The Black & Decker Corporation 2004 Restricted Stock Plan, included as Exhibit B to the Proxy Statement, dated March 16, 2004, for the 2004 Annual Meeting of Stockholders of the Registrant, is incorporated herein by reference. 31.1 Chief Executive Officer's Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. On January 29, 2004, the Corporation furnished a Current Report on Form 8-K with the Commission. That Current Report on Form 8-K, furnished pursuant to Item 9 and Item 12 of that Form, stated that, on January 29, 2004, the Corporation had reported its earnings for the three months and year ended December 31, 2003. The Corporation did not file nor furnish any other reports on Form 8-K during the three-month period ended March 28, 2004. All other items were not applicable. -28- THE BLACK & DECKER CORPORATION S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BLACK & DECKER CORPORATION By /s/ MICHAEL D. MANGAN ----------------------------------------------------- Michael D. Mangan Senior Vice President and Chief Financial Officer Principal Accounting Officer By /s/ CHRISTINA M. McMULLEN ----------------------------------------------------- Christina M. McMullen Vice President and Controller Date: May 6, 2004 EX-31 2 form10q05062004b.txt EXHIBIT 31.1 Exhibit 31.1 THE BLACK & DECKER CORPORATION C E R T I F I C A T I O N S I, Nolan D. Archibald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ NOLAN D. ARCHIBALD - ------------------------------------------------ Nolan D. Archibald Chairman, President, and Chief Executive Officer May 6, 2004 EX-31 3 form10q05062004c.txt EXHIBIT 31.2 Exhibit 31.2 THE BLACK & DECKER CORPORATION C E R T I F I C A T I O N S I, Michael D. Mangan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ MICHAEL D. MANGAN - -------------------------------------------- Michael D. Mangan Senior Vice President and Chief Financial Officer May 6, 2004 EX-32 4 form10q05062004d.txt EXHIBIT 32-1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Black & Decker Corporation (the "Corporation") on Form 10-Q for the period ended March 28, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nolan D. Archibald, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ NOLAN D. ARCHIBALD - ----------------------- Nolan D. Archibald Chief Executive Officer May 6, 2004 EX-32 5 form10q05062004e.txt EXHIBIT 32-2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Black & Decker Corporation (the "Corporation") on Form 10-Q for the period ended March 28, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael D. Mangan, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ MICHAEL D. MANGAN - ----------------------- Michael D. Mangan Chief Financial Officer May 6, 2004 -----END PRIVACY-ENHANCED MESSAGE-----