-----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, Cvi580pqfVARpTwWlcWbbZuDsKUN59Zdv43OcVNj8J5l3MlHO6VKBDkgwwkp/NZR B9AD/jlQNBm65qyJCoU79w== 0000012355-04-000208.txt : 20041217 0000012355-04-000208.hdr.sgml : 20041217 20041217171607 ACCESSION NUMBER: 0000012355-04-000208 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041217 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041217 DATE AS OF CHANGE: 20041217 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-03593 FILM NUMBER: 041212106 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 8-K/A 1 form8ka12172004a.txt FORM 8K/A DATED OCTOBER 4, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT No. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 4, 2004 -------------------------------- THE BLACK & DECKER CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 1-1553 52-0248090 - ---------------------------- ------------------------ ---------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 701 East Joppa Road, Towson, Maryland 21286 - ---------------------------------------- ------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 410-716-3900 ------------------------------ Not Applicable - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) The Black & Decker Corporation hereby amends and supplements the Current Report on Form 8-K filed by the Corporation on October 4, 2004, to include the historical financial statements of the Tools Group of Pentair, Inc. and the unaudited pro forma financial information listed below. ITEM 2.01 Completion of Acquisition or Disposition of Assets On October 4, 2004, the Corporation announced that it has completed the purchase of the Tools Group from Pentair, Inc., which was previously announced on July 19, 2004. Under the purchase agreement, the Corporation acquired the Tools Group for a purchase price of approximately $775 million in cash. 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 includes the Porter-Cable, Delta, DeVilbiss Air Power, Oldham Saw and FLEX businesses. Attached to this Current Report on Form 8-K as Exhibit 99.1 is a copy of the Corporation's related press release dated October 4, 2004. ITEM 9.01 Financial Statements and Exhibits (a) Financial statements of businesses acquired. The following audited combined financial statements of the Pentair, Inc. Tools Group are filed herewith as Exhibit 99.2: i Report of Independent Registered Public Accounting Firm ii Combined Statement of Income For the Year Ended December 31, 2003 iii Combined Balance Sheet as of December 31, 2003 iv Combined Statement of Cash Flows For the Year Ended December 31, 2003 v Combined Statement of Changes in Shareholder's Equity as of December 31, 2003 vi Notes to Combined Financial Statements The following unaudited interim combined financial statements of the Pentair, Inc. Tools Group are filed herewith as Exhibit 99.3: i Combined Statements of Income (Unaudited) For the Nine Months Ended October 2, 2004 and September 27, 2003 ii Combined Balance Sheet as of October 2, 2004 (Unaudited) and December 31, 2003 iii Condensed Combined Statements of Cash Flows (Unaudited) For the Nine Months Ended October 2, 2004 and September 27, 2003 iv Notes to Combined Financial Statements (Unaudited) (b) Pro forma financial information The following unaudited pro forma combined financial statements of the Corporation are filed herewith as Exhibit 99.4: i Introduction to Pro Forma Combined Financial Information (Unaudited) ii Pro Forma Combined Statement of Earnings (Unaudited) For the Nine Months Ended September 26, 2004 iii Pro Forma Combined Statement of Earnings (Unaudited) For the Year Ended December 31, 2003 iv Pro Forma Combined Balance Sheet as of September 26, 2004 (Unaudited) v Notes to Pro Forma Combined Financial Statements (Unaudited) (c) Exhibits Exhibit Description ------- ----------- Exhibit 2 Purchase Agreement between The Black & Decker 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 23.1 Consent of Deloitte & Touche LLP. Exhibit 99.1* Press Release of the Corporation dated October 4, 2004. Exhibit 99.2 Combined balance sheet of the Pentair, Inc. Tools Group as of December 31, 2003, and the related combined statements of income, cash flows and changes in shareholder's equity for the year ended December 31, 2003. Exhibit 99.3 Unaudited combined balance sheet of the Pentair, Inc. Tools Group as of October 2, 2004 and the related combined statements of income and condensed combined statements of cash flows for the nine months ended October 2, 2004 and September 27, 2003. Exhibit 99.4 Unaudited pro forma combined financial information of the Corporation as of September 26, 2004 and for the nine months ended September 26, 2004 and year ended December 31, 2003. -------------------- * Previously filed as an exhibit to the Current Report on Form 8-K filed on October 4, 2004. 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 hereunto duly authorized. THE BLACK & DECKER CORPORATION By: /s/CHRISTINA M. MCMULLEN --------------------------- Christina M. McMullen Vice President and Controller Date: December 17, 2004 The Black & Decker Corporation Exhibit Index Exhibit Number Description - -------------- ----------- 2 Purchase Agreement between The Black & Decker 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. 23.1 Consent of Deloitte & Touche LLP. 99.1* Press Release of the Corporation dated October 4, 2004. 99.2 Combined balance sheet of the Pentair, Inc. Tools Group as of December 31, 2003, and the related combined statements of income, cash flows and changes in shareholder's equity for the year ended December 31, 2003. 99.3 Unaudited combined balance sheet of the Pentair, Inc. Tools Group as of October 2, 2004 and the related combined statements of income and condensed combined statements of cash flows for the nine months ended October 2, 2004 and September 27, 2003. 99.4 Unaudited pro forma combined financial information of the Corporation as of September 26, 2004 and for the nine months ended September 26, 2004 and year ended December 31, 2003. - --------------------- *Previously filed as an exhibit to the Current Report on Form 8-K filed on October 4, 2004. EX-23 2 form8ka12172004b.txt EX 23-1, FORM 8K/A DATED OCTOBER 4, 2004 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 33-6610, 33-6612, 33-26917, 33-26918, 33-33251, 33-47651, 33-47652, 33-58795, 33-65013, 333-03593, 333-51155, 333-51157, 333-35986, 333-115301, and 333-113283 of The Black & Decker Corporation on Form S-8 of our report dated April 30, 2004, relating to the combined financial statements of the Pentair, Inc. Tools Group as of December 31, 2003 and for the year then ended (which report expresses an unqualified opinion and includes an explanatory paragraph related to the preparation of such financial statements that includes allocations from home-office items as discussed in Notes 2 and 3 to the financial statements), appearing in this Current Report on Form 8-K/A of The Black & Decker Corporation. /s/ DELOITTE & TOUCHE LLP - -------------------------- Minneapolis, Minnesota December 17, 2004 EX-99 3 form8ka12172004c.txt EX 99-2, FORM 8K/A DATED OCTOBER 4, 2004 Exhibit 99.2 Pentair, Inc. Tools Group Combined Financial Statements as of and for the year ended December 31, 2003 and Report of Independent Registered Public Accounting Firm - 2 - TABLE OF CONTENTS Pentair, Inc. Tools Group Report of Independent Registered Public Accounting Firm 3 Combined Statement of Income For the Year Ended December 31, 2003 4 Combined Balance Sheet as of December 31, 2003 5 Combined Statement of Cash Flows For the Year Ended December 31, 2003 6 Combined Statement of Changes in Shareholder's Equity as of December 31, 2003 7 Notes to Combined Financial Statements 8 - 3 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of The Black & Decker Corporation We have audited the accompanying combined balance sheet of the Pentair, Inc. Tools Group (the "Tools Group") as of December 31, 2003, and the related combined statements of income, cash flows, and changes in shareholder's equity for the year then ended. The combined financial statements include the accounts of the Tools Group, which consists of the companies listed in Note 1. These companies are under common ownership and common management. These combined financial statements are the responsibility of Tools Group management. Our responsibility is to express an opinion on these combined financial statements 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 the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Pentair, Inc. Tools Group at December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying combined financial statements have been prepared from the separate records maintained by the Tools Group and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Tools Group had been operated as an unaffiliated company. Portions of certain expenses represent allocations made from home-office items applicable to the Tools Group as a whole. /s/ DELOITTE & TOUCHE LLP - ------------------------- Minneapolis, Minnesota April 30, 2004 - 4 - COMBINED STATEMENT OF INCOME Pentair, Inc. Tools Group (In Thousands) Year Ended December 31, 2003 -------------- Net Sales $ 1,081,378 Cost of goods sold 848,570 -------------- Gross Profit 232,808 Selling, general and administrative 122,498 Research and development 20,966 Allocated Pentair services charge 7,570 Allocated Pentair home office charge 8,583 -------------- Operating Income 73,191 Interest income 267 Interest expense 101 Intercompany interest expense 28,936 -------------- Income Before Income Taxes 44,421 Provision for income taxes 17,023 -------------- Net Income $ 27,398 ============== See Notes to Combined Financial Statements - 5 - COMBINED BALANCE SHEET Pentair, Inc. Tools Group (In Thousands) December 31, 2003 -------------- Assets Cash and cash equivalents $ 4,023 Accounts receivables, net of allowance of $2,795 168,929 Inventories 118,714 Deferred tax assets 20,118 Prepaid expenses and other current assets 3,550 -------------- Total Current Assets 315,334 -------------- Property, Plant and Equipment, Net 110,444 Goodwill 376,366 Intangibles, Net 9,630 Equity Method Investments 28,905 Cost Method Investment 10,000 Other Assets 5,166 -------------- $ 855,845 ============== Liabilities and Stockholder's Equity Demand notes payable to Pentair and EuroPentair $ 513,997 Due to Pentair and its affiliates 123,652 Accounts payable 77,046 Employee compensation and benefits 23,374 Accrued product claims and warranties 12,721 Income taxes payable to Pentair 721 Other current liabilities 43,798 -------------- Total Current Liabilities 795,309 -------------- Pension 9,267 Postretirement Medical and Other Benefits 15,907 Deferred Tax Liabilities 13,757 Other Liabilities 915 Stockholder's Equity Pentair's net investment 24,041 Accumulated other comprehensive loss (3,351) -------------- Total Stockholder's Equity 20,690 -------------- $ 855,845 ============== See Notes to Combined Financial Statements - 6 - COMBINED STATEMENT OF CASH FLOWS Pentair, Inc. Tools Group (In Thousands) Year Ended December 31, 2003 -------------- Operating Activities Net income $ 27,398 Adjustments to reconcile net income to cash flow from operating activities of continuing operations: Non-cash charges and credits: Depreciation 20,320 Amortization 440 Deferred income taxes 2,701 Loss on equity method investment 1,708 Changes in selected working capital items (net of assets and liabilities of acquired businesses): Account receivables 14,191 Inventories 12,609 Prepaid expenses and other current assets 2,062 Accounts payable (2,772) Employee compensation (11,235) Accrued product claims and warranties 744 Income taxes paid to Pentair (1,284) Other current liabilities 4,328 Pension 692 Other assets and liabilities (693) -------------- Cash Flow From Operating Activities 71,209 -------------- Investing Activities Capital expenditures (14,618) Acquisitions of equity and cost investments (5,603) -------------- Cash Flow From Investing Activities (20,221) -------------- Financing Activities Net repayments to Pentair and affiliates (57,546) Dividends paid to Pentair and affiliates (2,576) -------------- Cash Flow From Financing Activities (60,122) Effect of exchange rate changes on cash (200) -------------- Decrease In Cash and Cash Equivalents (9,334) Cash and cash equivalents at beginning of year 13,357 -------------- Cash And Cash Equivalents At End Of Year $ 4,023 ============== See Notes to Combined Financial Statements - 7 - COMBINED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY Pentair, Inc. Tools Group (In Thousands)
Accumulated Other Pentair's net Comprehensive Comprehensive investment loss Total income --------------- --------------- --------- --------------- Balance at December 31, 2002 $ 1,443 $ (7,242) $ (5,799) Net income 27,398 - 27,398 $ 27,398 Change in cumulative translation adjustment - 2,620 2,620 2,620 Adjustment in minimum pension liability, net of $813 tax expense - 1,271 1,271 1,271 --------- Comprehensive income - - - $ 31,289 ========= Dividends declared to Pentair and its affiliates (4,800) - (4,800) --------- --------- --------- Balance at December 31, 2003 $ 24,041 $ (3,351) $ 20,690 ========= ========= =========
See Notes to Combined Financial Statements - 8 - NOTES TO COMBINED FINANCIAL STATEMENTS Pentair, Inc. Tools Group 1. Description of Business The Pentair Tools Group is a segment of Pentair, Inc. (Pentair). Unless otherwise indicated, all references to "Tools", "Tools Group", "we", "our", and "us" refer to The Pentair Tools Group. The Tools Group consists of the following investees or subsidiaries of Pentair or Pentair's subsidiaries: Subsidiary Country Status - ---------- ------- ------ Biesemeyer Manufacturing Corporation United States Operating Delta International Machinery Corp. United States Operating DeVilbiss Air Power Company United States Operating Distribuidora PorterCable Limitada Chile Operating Flex Elektrowerkzeuge GmbH Germany Operating Hangtech Limited (1) Hong Kong Operating Joinery Industrial Co. Ltd. (1) Taiwan Operating Jointech Corporation Ltd. (1) Cayman Islands Holding Oldham Saw Co. Inc. United States Operating Orion International LLC (2) United States Operating Pentair Canada, Inc. (3) Canada Operating Pentair Taiwan LLC Taiwan Operating Pentair Tool and Equipment Sales Co. United States Operating Pentair Tools Group, Inc. United States Holding Porter-Cable Argentina S.R.L. Argentina Operating Porter-Cable Argentina, LLC United States Holding Porter-Cable Corporation United States Operating Porter-Cable de Mexico SA de C.V. Mexico Operating Qingdao Sungun Power Tool Co. Ltd. (1) P.R.C. Operating Surewood Acquisition Corporation United States Holding The Woodworkers Choice, Inc. United States Operating Wintech Corporation Limited (1) Cayman Islands Holding Wisetech Industrial Ltd. Co. (1) P.R.C. Operating (1) - 49% owned (2) - 40% owned (3) - 50% owned The Tools Group designs, manufactures and markets power tool products positioned at the mid- to upper-end of the market and targets non-professional do-it-yourselfers (DIY), upscale hobbyists, and professional end users. Tools Group products include woodworking machinery, portable power tools, power tool accessories, metal and stone working tools, pneumatic tools, compressors, generators, and pressure washers. - 9 - 2. Summary of Significant Accounting Policies Fiscal year Our fiscal year ends on December 31. Basis of presentation The combined financial statements reflect the assets, liabilities, revenues and expenses that were directly related to Tools as they were operated within Pentair. The financial information included herein may not necessarily be indicative of the financial position, results of operations or cash flows of Tools in the future or what the financial position, results of operations or cash flows would have been if Tools had been a separate, independent company during the period presented. Basis of combination The accompanying combined financial statements include the accounts of Tools, both U.S. and non-U.S. operations, that we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20 percent to 50 percent of the voting stock and have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and, as a result, our share of the earnings or losses of such equity affiliates is included in the statement of income. The cost method of accounting is used for investments in which Tools has less than a 20 percent ownership interest and does not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only for other-than-temporary declines in fair value. Use of estimates The preparation of our combined financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in these combined financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that could differ from those estimates. The critical accounting policies that require our most significant estimates and judgments include: o the assessment of recoverability of long-lived assets, including goodwill, and cost and equity method investments; and o accounting for pension benefits, because of the importance in making the estimates necessary to apply these policies. Revenue recognition We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller's price to the buyer is fixed or determinable; and collectibility is reasonably assured. - 10 - Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal, ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied. Sales Returns The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is recognized only if the price is fixed and determinable at the date of sale; the customer has paid or is obligated to pay; the customer's obligation would not be changed in the event of theft or physical destruction or damage of the product, the customer has economic substance apart from us; we do not have significant obligations for future performance to directly bring about resale of the product by the customer; and the amount of returns can reasonably be estimated. In general, our return policy allows for customer returns only upon authorization. Goods returned must be product we continue to market and must be in salable condition. At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future. Pricing and Sales Incentives We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions, and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers is recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received. The following represents a description of our pricing arrangements, promotions, and other volume-based incentives: Pricing Arrangements Pricing is established up front with our customers and we record sales at the agreed upon net selling price. Promotions Our primary promotional activity is what we refer to as cooperative advertising. Under this cooperative advertising program, we agree to pay the customer a fixed percentage of sales as an allowance to be used to advertise and promote our products. The customer is not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales. - 11 - Volume-based Incentives These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves a specified cumulative level of sales. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least monthly, for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer. There has been no material accounting revisions for revenue-recognition related estimates. Shipping and handling costs Amounts billed to customers for shipping and handling is recorded in net sales in the accompanying combined statement of income. Shipping and handling costs incurred by Tools for the delivery of goods to customers are included in cost of goods sold in the accompanying combined statements of income. Cash equivalents We consider highly liquid investments with original maturities of three months or less to be cash equivalents. Trade receivables and concentration of credit risk We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. We perform periodic credit evaluations of our customer's financial condition and generally do not require collateral. In addition, we encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. Accounts receivable due from three large home centers and retail chains accounted for approximately 28 percent, 15 percent and 13 percent of total accounts receivable as of December 31, 2003. Inventories Inventories are stated at the lower of cost or market. Inventories of United States subsidiaries are generally determined by the last-in, first-out (LIFO) method. Inventories of foreign-based subsidiaries are determined by the first-in, first-out (FIFO) and moving average methods. - 12 - Property, plant, and equipment Property, plant, and equipment are stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives: Years ---------------- Land improvements 5 to 20 Buildings and leasehold improvements 5 to 50 Machinery and equipment 3 to 15 Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income. We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. Goodwill and identifiable intangible assets Goodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of this statement, goodwill is no longer amortized but tested for impairment on an annual basis. We adopted the provisions of SFAS No. 142 effective January 1, 2002. During the fourth quarter of 2003, we completed our annual impairment test of goodwill and determined that we did not have an impairment. The fair values of our Tools Group reporting units were estimated using a combination of the discounted cash flow and market comparable approaches. - 13 - The primary identifiable intangible assets of our Tools Group include trademarks acquired in business combinations, patents, non-compete agreements, and customer relationships. Under the provisions of SFAS No. 142, identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually, or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. During the fourth quarter of 2003, we completed our annual impairment test for those identifiable assets not subject to amortization and determined there was no impairment charge. Cost and equity method investments We have investments that are accounted for at historical cost or, if we have significant influence over the investee, using the equity method. The Tools Group's proportionate share of income or losses from investments accounted for under the equity method is recorded in the combined statement of income. We write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment, including assessment of the investees' financial condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees' historical results of operations, and projected results and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments. Income taxes The income and expenses of the Tools Group are included in the consolidated Federal income tax return of Pentair. Any tax benefit or liability incurred by the Tools Group from such inclusion in Pentair's consolidated Federal income tax return is to be currently reimbursed to, or paid by the Tools Group. For financial reporting purposes, the income tax provision of the Tools Group has been computed as if we had filed a separate Federal income tax return. The Tools Group uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. - 14 - Environmental We recognize environmental cleanup liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental cleanup is estimated by engineering, financial, and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where the Tools Group may be jointly and severally liable. The process of estimating environmental cleanup liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in cleanup technologies, and additional information about the ultimate cleanup remedy that is used could significantly change our estimates. Foreign currency translation The financial statements of subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets 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 loss, a separate component of stockholders' equity. Income and expense items are translated at average monthly rates of exchange. Fair value of financial instruments The carrying amount of accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. The carrying amount of debt approximates fair value as the interest component is reset on an annual basis. - 15 - Other newly adopted accounting standards In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This new standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this standard on January 1, 2003 did not have a material impact on our combined financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This new standard nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, be recognized when the liability is incurred, rather than the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The adoption of this standard on January 1, 2003 did not have a material impact on our combined financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time an entity issues a guarantee, the issuing entity must recognize an initial liability for the fair value of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties, guarantees accounted for as derivatives, or other guarantees of an entity's own future performance. We have adopted the disclosure requirements of the interpretation as of December 31, 2002. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and measurement provisions were not material to the combined financial position or results of operations. - 16 - In December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about Pensions and Other Post-retirement Benefits. The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit post-retirement plans. As revised, SFAS No. 132 is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this standard are effective for interim periods beginning after December 15, 2003. However, disclosure of the estimated future benefit payments is effective for fiscal years ending after June 15, 2004. See Note 12 for disclosures regarding our defined benefit pension plans and other post-retirement benefits. New accounting standards to be adopted in the future In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In December 2003, the FASB revised FIN 46, delaying the effective dates for certain entities created before February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable interest entities other than any Special Purpose Entities (SPEs), the revised FIN 46 (FIN 46R) is now required to be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004. The original guidance under FIN 46 is still applicable, however, for all SPEs created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46R also requires certain disclosures of an entity's relationship with variable interest entities. The adoption of this standard on April 3, 2004 did not have a material effect on our consolidated financial position or results of operations. On January 12, 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. As a sponsor of a post-retirement health care plan that provides a prescription drug benefit, we have made a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 under the guidance of FSB 106-1. We do not believe the FSP will have a material effect, if any, on our financial statements because we do not expect to receive significant subsidies under the Act. - 17 - 3. Related Party Transactions and Balances Demand notes payable to Pentair and EuroPentair Pentair has capitalized its domestic subsidiaries through a combination of demand notes payable to Pentair and equity. The intent of the demand notes payable is to provide long-term financing. Interest on the notes is payable monthly, at a rate of 6 percent per annum for 2003. All amounts are due on demand by Pentair. Annually on January 1, Pentair adjusts the note balance to a targeted capital structure. Foreign subsidiaries are capitalized through a combination of an intercompany debt and equity. The intercompany debt is payable to EuroPentair on demand with interest payable at an interest rate of 3.4 percent as of December 31, 2003. Due to Pentair and affiliates Pentair and affiliates provide the Tools Group daily funding requirements. The balance is included in Due to Pentair and affiliates on the combined balance sheet. Funding transactions are primarily non-interest bearing with the exception of cash pooling balances held with Pentair Global Sarl (Pentair's European financing subsidiary). Pentair services allocation The Pentair services charge allocation (Allocated Pentair services charge) represents the cost of various traditional corporate services that Pentair provides for the benefit of its subsidiaries. Such services include treasury, tax, internal audit, finance, human resource management of company-wide programs, and information technology strategic oversight management. These allocations represent the Tools Group's proportionate share of these costs and are allocated to Tools based on a percent of sales. Corporate overhead allocation The Pentair corporate overhead allocation (Allocated Pentair home office charge) represents the cost of providing traditional corporate executive management services, including the executive officers of Pentair, business development, investor relations, legal and communications. These allocations represent the Tools Group's proportionate share of these costs and are allocated to Tools based on a percent of sales. Savings plan Tools participates in a Pentair sponsored 401(k) plan with an employee stock ownership (ESOP) bonus component, managed by Pentair, which covers certain union and nearly all nonunion U.S. employees who meet certain age requirements. In addition to the matching contribution, all U.S. employees who meet certain service requirements receive a discretionary ESOP contribution. Stock incentive plans Certain Tools' employees are eligible for participation in Pentair's compensatory and noncompensatory stock incentive plans. - 18 - Pension plans Certain Tools' U.S. employees participate in Pentair's noncontributory defined-benefit employee pension plan as discussed in Note 12. Insurance Pentair provides the Tools Group with primary insurance coverage for general and product liability and deductible reimbursement coverage for workers compensation, auto and property insurance through its wholly owned captive insurance company, Penwald. Interest expense Tools' interest expense primarily represents intercompany interest to Pentair and its affiliates. Provision for income taxes As a segment of Pentair, the U.S. entities of Tools do not file separate tax returns, but rather are included in the income tax returns filed for Pentair. Foreign affiliates of Tools file separate returns in their respective countries, sometimes as a part of combined groups in those countries with other Pentair affiliates. For purposes of the combined financial statements, Tools' allocated share of Pentair's income tax provision is based on the "separate return" method. Pentair allocated expenses The following is a summary of Pentair allocated expenses and Pentair managed benefits and insurance included in net income for the year ended December 31, 2003: In thousands 2003 -------------- Allocated Pentair services charge $ 7,570 Allocated Pentair home office charge 8,583 Pentair savings plan 2,393 Pentair restricted stock incentive plan 1,433 Pentair salaried pension plan 2,769 Net Penwald insurance premiums (Pentair's wholly owned insurance subsidiary)* 7,893 -------------- Total $ 30,641 ============== * Balance excludes outside insurance costs. - 19 - 4. Acquisition On October 1, 2002, we acquired all of the common stock of privately-held Oldham Saw Co., Inc. and affiliated entities (Oldham Saw) for total consideration of $53.0 million cash, including debt assumed of $1.5 million and cash acquired of $1.7 million. Oldham Saw designs, manufactures, and markets router bits, circular saw blades, and related accessories for the do-it-yourself (DIY) and professional power tool markets. Identifiable intangible assets acquired as part of the acquisition were $9.6 million. Goodwill recorded as part of the initial purchase price allocation was $29.9 million. Pursuant to an earn-out provision, the purchase price could increase depending on Oldham Saw achieving certain net sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) targets in 2003 and 2004. In 2003, there were no contingent payments made. In 2004, the maximum total contingent payments based on these targets could be $1 million. 5. Goodwill and Other Identifiable Intangible Assets The changes in the carrying amount of goodwill for the year ended December 31, 2003 is as follows: In thousands Tools -------------- Balance December 31, 2002 $ 375,098 Foreign currency translation 676 Net purchase accounting adjustments 592 -------------- Balance December 31, 2003 $ 376,366 ============== The detail of acquired intangible assets consisted of the following at December 31, 2003: 2003 ------------------------------------------ In thousands Gross carrying Accumulated amount amortization Net ------------ ------------ ------------ Finite-life intangible assets Patents $2,018 $ (182) $1,836 Non-compete agreements 384 (240) 144 Customer relationships 250 (116) 134 Other 873 (592) 281 ------ -------- ------- Total finite-life intangible assets $3,525 $(1,130) $2,395 Indefinite-life intangible assets Trademarks 7,235 - 7,235 ------ -------- ------- Total indefinite-life intangible assets $7,235 $ - $7,235 Total intangibles, net $9,630 ======= - 20 - Amortization expense was $0.4 million in 2003. The estimated future amortization expense for identifiable intangible assets during the next five years is as follows: In thousands 2004 2005 2006 2007 2008 ------ ------ ------ ------ ------ Estimated amortization expense $ 410 $ 218 $ 142 $ 115 $ 115 6. Supplemental Balance Sheet Information In thousands 2003 -------------- Inventories Raw materials and supplies $ 18,229 Work-in-process 16,920 Finished goods 83,565 -------------- Total inventories $ 118,714 ============== Property, plant and equipment Land and land improvements $ 3,476 Buildings and leasehold improvements 64,062 Machinery and equipment 191,476 Construction in progress 4,261 -------------- Total property, plant and equipment 263,275 Less accumulated depreciation and amortization 152,831 -------------- Property, plant and equipment, net $ 110,444 ============== Other assets Prepaid benefit cost $ 3,850 Intangible pension asset 619 Other 697 -------------- Total other assets $ 5,166 ============== 7. Investments Equity Method Investments We have invested approximately $30.5 million to acquire a 49 percent interest in certain joint venture operations of a long time Asian supplier for bench top power tools, of which $5.6 million was paid in 2003. In March 2004, we signed amendments to the stock purchase agreements to acquire the remaining 51 percent ownership interest of these operations. Our share of the loss or income for these joint ventures was a loss of $1.7 million in 2003. Our share of the joint venture loss or income is included in cost of goods sold as the Asian operations exist primarily to supply the manufacturing needs of the Tools Group. - 21 - Cost Method Investment We have invested approximately $10.0 million to acquire an 18 percent interest, on a fully diluted basis, in certain operations of a laser leveling and measuring device manufacturer, of which $5.0 million was paid in 2002 and $5.0 million was paid in 2001. The value of our investment is dependent on the success of new product launches, greater penetration of distribution channels, and continued financial support from other investors. 8. Facility Exit Costs In 2003, we decided to merge our Tupelo, Mississippi plant operations into our facilities in Jackson, Tennessee and in Asia as part of a facility rationalization initiative. Since April 2003, we have incurred $3.1 million of pre-tax expenses principally related to employee severance and benefits of $2.9 million, and other exit activity charges of $0.2 million. The employee severance and benefits charges were recorded in the period when management approved the plans and after severance benefits had been communicated to the employees. The charges related to other exit activities include incremental costs for items such as relocation expenses and inventory disposals incurred as a direct result of this plan. In connection with our facility exit plan, we have eliminated 41 positions and will eliminate 140 additional positions in 2004. We believe the closure of the plant will occur in August 2004 and require additional charges of $2.9 million; $1.8 million in employee severance and benefits and $1.1 million in other exit activities. The facility exit charges are recorded as part of selling, general, and administrative expense. Selected information related to these charges is as follows: Employee Severance and In thousands Benefits Other Total --------------- ------- ------- 2003 charges $2,864 $ 251 $3,115 2003 cash payments (440) (248) (688) ------- ------- ------- Current liability at December 31, 2003 $2,424 $ 3 $2,427 ======= ======= ======= 9. Supplemental Cash Flow Information The following table summarizes supplemental cash flow information: In thousands 2003 -------------- Interest paid to Pentair and affiliates $ 28,936 Interest paid to nonaffiliates 101 Income tax expense paid by Pentair 16,741 - 22 - 10. Accumulated Other Comprehensive Loss Components of the accumulated other comprehensive loss consists of the following: In thousands 2003 -------------- Minimum pension liability adjustment, net of tax $ (3,002) Foreign currency translation adjustment (349) -------------- Accumulated other comprehensive loss $ (3,351) ============== 11. Income Taxes Income before income taxes consisted of the following: In thousands 2003 -------------- United States $ 35,356 International 9,065 -------------- Income before income taxes $ 44,421 ============== The provision for income taxes consisted of the following: In thousands 2003 -------------- Currently payable Federal $ 10,130 State 1,592 International 3,753 -------------- Total current taxes 15,475 Deferred Federal 1,717 International (169) -------------- Total deferred taxes 1,548 -------------- Total provision for income taxes $ 17,023 ============== Reconciliation of the U.S. statutory income tax rate to our effective tax rate follows: Percentages 2003 -------------- U.S. statutory income tax rate 35.0 State income taxes, net of federal tax benefit 2.7 Tax effect of international operations 0.1 Non-deductible goodwill - All other, net 0.5 ------ Effective tax rate 38.3 ====== - 23 - Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items that we received a tax deduction for, but not yet been recorded in the combined statement of income). United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. Accordingly, we believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits. The tax effects of the items recorded as deferred tax assets and liabilities are: 2003 Deferred tax ------------------------------- In thousands Assets Liabilities ------------- ------------- Accounts receivable allowances $ 2,312 $ - Inventory reserves 5,855 - Accelerated depreciation/amortization - 11,952 Accrued product claims and warranties 4,936 - Employee benefit accruals 9,339 - Goodwill - 7,814 Other, net 3,685 - --------- --------- Total deferred taxes $ 26,127 $ 19,766 ========= ========= Net deferred tax asset $ 6,361 ========= 12. Pension and Post-retirement Benefits Pentair sponsored and managed plans Most of Tools' U.S. employees participate in Pentair's main noncontributory defined-benefit employee pension plan. Pension benefits for Delta and Porter-Cable salaried employees are based on an employee's years of service and compensation levels near retirement, while benefits for DeVilbiss Air Power Company employees are determined using the cash balance approach. The pension funding policy is to deposit with independent trustees amounts as required by applicable law. Pension expense allocated to Tools by Pentair was $2.8 million in 2003. As plan assets for these plans exceed the accumulated benefit obligation, no additional minimum liability or other comprehensive income amounts are needed in the Tools Group financial statements. The Tool Group has been treated as a participating employer in a multi-employer plan according to FAS 87 Q&A No. 87. - 24 - Tools sponsored and managed plans Our U.S. Tools subsidiaries and our German subsidiary provide separate defined-benefit pension plans for certain of their respective employees. The plans covering hourly employees of Porter-Cable and union employees of Tupelo are based on service at retirement. The German subsidiary plan is a frozen plan covering a small number of its employees. In addition, Tools also provides certain post-retirement health care and life insurance benefits for certain of its retirees. Generally, the postretirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date. Obligations and Funded Status The following tables present reconciliations of the benefit obligation of the Tools sponsored and managed plans, the plan assets of such plans, and the funded status of such plans: Pension Post- benefits retirement In thousands 2003 2003 ------------ ------------ Change in benefit obligation Benefit obligation beginning of year $ 21,156 $ 14,418 Service cost 511 278 Interest cost 1,296 874 Amendments - - Actuarial loss (gain) 88 (1,073) Translation loss 242 - Benefits paid (1,071) (581) --------- --------- Benefit obligation end of year $ 22,222 $ 13,916 ========= ========= Change in plan assets Fair value of plan assets beginning of year $ 14,614 $ - Actual return on plan assets 3,507 - Company contributions 2,035 581 Benefits paid (1,071) (581) --------- --------- Fair value of plan assets end of year $ 19,085 $ - ========= ========= Funded status Plan assets less than benefit obligation $ (3,137) $(13,916) Unrecognized cost: Net actuarial loss (gain) 4,898 (156) Prior service cost (benefit) 619 (1,835) --------- --------- Net amount recognized $ 2,380 $(15,907) ========= ========= Of the $3.1 million underfunding of pension plans at December 31, 2003, $1.4 million relates to our foreign pension plan which is unfunded. - 25 - Amounts recognized in the consolidated balance sheets of: Pension Post- benefits retirement In thousands 2003 2003 ------------ ------------ Prepaid benefit cost $ 3,850 $ - Accrued benefit liability (7,010) (15,907) Intangible pension asset 619 - Accumulated other comprehensive income - pre-tax 4,921 - --------- --------- Net amount recognized $ 2,380 $(15,907) ========= ========= Information for pension plans with an accumulated benefit obligation in excess of plan assets are as follows: In thousands 2003 ------------ Projected benefit obligation $ 22,222 Accumulated benefit obligation 22,222 Fair value of plan assets 19,085 The pension benefit obligation equals the accumulated benefit obligation since the Tools Group hourly pension plans do not include compensation as variable in determining future pension benefits. Components of the net period benefit cost are as follows: Pension Post- benefits retirement In thousands 2003 2003 ------------ ------------ Service cost $ 511 $ 278 Interest cost 1,296 874 Expected return on plan assets (1,490) - Amortization of prior year service cost (benefit) 144 (185) Recognized net actuarial loss 90 - --------- --------- Net periodic benefit cost $ 551 $ 967 ========= ========= Additional Information Pension benefits In thousands 2003 ------------ Decrease in minimum liability included in other comprehensive loss $ 1,271 - 26 - Assumptions Weighted-average assumptions used to determine benefit obligations at December 31 are as follows: Pension Post- benefits retirement Percentages 2003 2003 ------------ ------------ Discount rate 6.25 6.25 Weighted-average assumptions used to determine net periodic benefit cost for the year ending December 31 is as follows: Pension Post- benefits retirement Percentages 2003 2003 ------------ ------------ Discount rate 6.25 6.25 Expected long-term return on plan assets 8.5 Discount Rate The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate of 6.25 percent. There are no known or anticipated changes in our discount assumption that will impact our pension expense in 2004. Expected Rate of Return The expected rate of return on plan assets is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical ten year compounded return of 9.5 percent, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer term market indices. In 2003, the pension plan assets yielded a positive return of 24.8 percent. Our expected rate of return in 2003 equaled 8.5 percent. The difference between our expected return on plan assets of $1.5 million compared to the actual return on plan assets of $3.5 million was primarily due to the economic recovery and the resurgence of the financial markets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2004. - 27 - We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded. Net Periodic Benefit Cost Total net periodic pension benefits cost was $0.6 million in 2003 for our Tools sponsored and managed plans. Total net periodic pension benefits cost is expected to be approximately $0.4 million in 2004. The net periodic pension benefit cost for 2004 has been estimated assuming a discount rate of 6.25 percent and an expected return on plan assets of 8.5 percent. Unrecognized Pension Losses As of the December 31, 2003 measurement date, our pension plans have $4.9 million of cumulative unrecognized losses of which approximately $1.2 million relates to the use of the market related value method and is not immediately subject to amortization. The remaining unrecognized loss, to the extent it exceeds 10% of the projected benefit obligation, will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently approximating 11 years). The amount included in pension expense for loss amortization in 2003 was $0.1 million. Assumed health care cost trend rates at December 31 are as follows: 2003 ------------ Health care cost trend rate assumed for next year 9.14% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.50% Year that the rate reaches the ultimate trend rate 2024 The assumed health care cost trend rates do not have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage- In thousands Point Increase Point Decrease ---------------- ---------------- Effect on total of service and interest cost $ 34 $ 28 Effect on postretirement benefit obligation 447 381 - 28 - Plan Assets Objective The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the Tools Group. This is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income. Asset Allocation The Tools Group sponsored plans invest all plan assets in Pentair's Master Trust. Pentair's actual overall asset allocation for the all plans in the Master Trust as compared to Pentair's investment policy goals is as follows: Investment Policy ------------------------------------------------------ Asset Class Actual (1) Target Minimum Maximum ------------ ------------ ------------ ------------ Large Capitalization, U.S. Stocks 21% 25% 20% 30% Small/Mid Capitalization, U.S. Stocks 22% 20% 15% 25% Pentair Stock 8% 5% 3% 7% International (Non-U.S.) Stocks 12% 15% 10% 20% Private Equity 1% 5% 0% 10% Fixed Income (Bonds) 17% 20% 15% 25% Other Investments 12% 10% 5% 15% Cash 7% 0% 0% 0% (1) Actual asset allocation as of December 31, 2003 Pentair regularly reviews its asset allocation and periodically rebalances the Master Trust investments to its targeted allocation when considered appropriate. The cash balance is higher than normal due to a $15.1 million contribution made to the domestic defined benefit plans as of December 31, 2003, of which $2.0 million was contributed to the Pentair Tool Group benefit plans. From time to time, we may be outside our targeted ranges by acceptable amounts. Equity securities in the Master Trust include Pentair's common stock in the amount of $21.6 million (8 percent of total plan assets) at December 31, 2003. Cash Flows Contributions Pension contributions for the Pentair Tools Group in 2003 total $2.0 million, including $1.9 million of contributions to domestic defined benefit pension plans. The contributions in 2003 exceeded the minimum funding requirement. Pentair Tools Group 2004 pension contributions are expected to be in the range of $1.0 million to $2.0 million. - 29 - Savings plan Pentair has a 401(k) plan with an employee stock ownership (ESOP) bonus component, which covers certain union and nearly all-nonunion U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching contributions are made in cash to employees who meet certain eligibility and service requirements. Pentair's matching contribution is based on its financial performance and ranges from 30 percent to 90 percent of eligible employee contributions, limited to 4 percent of compensation contributed by employees. In addition to the matching contribution, all U.S. employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5 percent of annual eligible compensation. Tools Group combined expense for the 401(k) and ESOP was approximately $2.4 million in 2003. 13. Geographic Information The following table presents certain geographic information for the year ended December 31: In thousands 2003 -------------------------------------------- Net sales to external customers Long-lived assets -------------------- ------------------- United States $ 976,475 $ 99,744 Canada 62,067 931 Germany 42,836 9,769 ----------- ---------- Total $1,081,378 $ 110,444 =========== ========== Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and equipment, net of related depreciation. We sell our products through various distribution channels including home centers and retail chains. In 2003, sales to three large home centers and retail chains accounted for approximately 35 percent, 11 percent and 10 percent of total net sales. If any one of these customers were lost, it would have a material adverse effect on the Tools Group business. - 30 - 14. Commitments and Contingencies Operating lease commitments Rental expense under operating leases was $9.4 million in 2003. Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and machinery and equipment, are as follows:
There- In thousands 2004 2005 2006 2007 2008 after Total -------- -------- -------- -------- -------- --------- --------- Minimum lease payments $ 7,642 $ 5,625 $ 2,981 $ 1,325 $ 706 $ 300 $ 18,579 Minimum sublease rentals - - - - - - - -------- -------- -------- -------- -------- --------- --------- Net future minimum lease commitments $ 7,642 $ 5,625 $ 2,981 $ 1,325 $ 706 $ 300 $ 18,579 ======== ======== ======== ======== ======== ========= =========
Litigation We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities based on the expected eventual disposition of these matters. We believe the effect on Tool's combined results of operations and financial position, if any, for the disposition of all currently pending matters will not be material. Ellerbrake et al v. DeVilbiss Air Power Company In August 2001, a national class action was brought against DeVilbiss Air Power Company (DAPC) and four other manufacturers of retail air compressors on behalf of consumers that had purchased certain air compressors. Plaintiffs alleged that the manufacturers mislabeled horsepower ratings on compressors they manufacture. Plaintiffs sought to represent a class of all persons who had purchased since August 1996 an air compressor for which the horsepower ratings were allegedly mislabeled. Without admitting any liability, DAPC settled with plaintiffs and the settlement was preliminarily approved by the Court in January 2004. Terms of the settlement include changes in labeling, an education program for consumers, attorney's fees and tools or accessories for qualifying claimants. While certain elements of the settlement have specific dollars assigned to them, the ultimate cost of some elements is still unknown at this time. The Tools Group believes reserves recorded in 2003 are sufficient to cover the cost of this settlement based on the information available to them at this time. - 31 - Environmental We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When it has been possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2003, our reserve for such environmental liabilities was approximately $0.4 million, measured on an undiscounted basis. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental cleanup costs and liabilities will not exceed the amount of our current reserves. Guarantees At the inception of a guarantee, we recognize a liability for the related contingent loss. The liability initially recorded for that guarantee is the greater of (a) the fair value of the guarantee or (b) the contingent liability amount required to be recognized at inception of the guarantee if it is deemed probable a liability has been incurred and the amount of loss can be reasonably estimated. No guarantees were outstanding or accrued as of December 31, 2003. Warranties We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant. In addition, we incur discretionary costs to service our products in connection with product performance issues. The changes in the carrying amount of service and product warranties for the year ended December 31 is as follows: In thousands 2003 ------------ Balance at the beginning of the year $ 11,698 Service and product warranty provision 21,001 Payments (20,257) Translation 279 --------- Balance at the end of the year $ 12,721 ========= Earn-out provision Pursuant to an earn-out provision for the 2002 acquisition of Oldham Saw, the purchase price could increase depending on Oldham Saw achieving certain net sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) targets in 2003 and 2004. In 2003, no contingent payments were earned or paid. In 2004, the maximum total contingent payments based on these targets could be $1 million. - 32 - 15. Subsequent Events On April 5, 2004, we acquired all of the remaining stock of the Asian joint venture business from Pentair's long-time Asian tool sourcing partner for $21.1 million in cash, $6.4 million of which is to be paid at the earlier of December 31, 2005 or 15 days following a sale of the Pentair Tools Group. The acquisition included cash acquired of $6.2 million and debt assumed of $9.6 million, of which $4.2 million is classified as short-term borrowings in current liabilities. Pentair acquired an initial 40 percent ownership stake in the joint venture in 2001 and subsequently increased its ownership to 49 percent in 2003. Our completion of the purchase enhances both our overall cost position and our ability to provide customers with quality, innovative products and improved service. The initial allocation of purchase price for the Asian joint venture business acquisition was based on preliminary estimates and may be revised as better information becomes available in 2004. The purchase price, including the initial 49 percent ownership stake, of the Asian joint venture business has been allocated based on management's estimates as follows: Estimated Fair In thousands Value -------------- Current assets $ 41,654 Property, plant, and equipment 24,468 Goodwill 31,682 Other noncurrent assets 3,918 --------- Total assets acquired $ 101,722 Current liabilities $ (46,144) Long-term debt (5,350) ---------- Total liabilities assumed (51,494) ---------- Net assets acquired $ 50,228 ========== Pursuant to an earn-out provision, the purchase price could increase depending primarily on the Asian tool sourcing partner achieving return on sales targets in 2004 and 2005. The maximum total contingent payments based on the earn-out could be $5.0 million. There were no intangible assets recognized as an asset apart from goodwill as the Tools Group is the primary customer of the Asian supplier and the Tools Group already held the legal right to the patents, proprietary technologies and trade names used by the Asian joint venture business. On an unaudited pro forma basis, the effects of the acquisitions were not significant to the Tools Groups results of operations. EX-99 4 form8ka12172004d.txt EX 99-3, FORM 8K/A DATED OCTOBER 4, 2004 Exhibit 99.3 Pentair, Inc. Tools Group Combined Financial Statements (Unaudited) as of October 2, 2004 and for the nine months ended October 2, 2004 and September 27, 2003 -2- TABLE OF CONTENTS Pentair, Inc. Tools Group Combined Statements of Income (Unaudited) For the Nine Months Ended October 2, 2004 and September 27, 2003 3 Combined Balance Sheet as of October 2, 2004 (Unaudited) and December 31, 2003 4 Condensed Combined Statements of Cash Flows (Unaudited) For the Nine Months Ended October 2, 2004 and September 27, 2003 5 Notes to Combined Financial Statements (Unaudited) 6 -3- COMBINED STATEMENTS OF INCOME (Unaudited) Pentair, Inc. Tools Group (In Thousands) Nine Months Ended October 2, September 27, 2004 2003 --------------- --------------- Net Sales $ 844,192 $ 803,209 Cost of goods sold 664,281 630,160 ---------- ---------- Gross Profit 179,911 173,049 Selling, general and administrative 93,166 89,184 Research and development 16,353 15,634 Allocated Pentair services charge 6,930 5,957 Allocated Pentair home office charge 6,863 7,369 ---------- ---------- Operating Income 56,599 54,905 Interest income 78 229 Interest expense 723 69 Intercompany interest expense 20,076 15,905 ---------- ---------- Income Before Income Taxes 35,878 39,160 Income taxes 13,718 15,013 ---------- ---------- Net Income $ 22,160 $ 24,147 ========== ========== See Notes to Combined Financial Statements (Unaudited) -4- COMBINED BALANCE SHEET Pentair, Inc. Tools Group (In Thousands) October 2, 2004 December 31, (Unaudited) 2003 -------------- -------------- Assets Cash and cash equivalents $ 8,323 $ 4,023 Accounts receivables, net of allowances of $3,897 at October 2, 2004 and $2,795 at December 31, 2004 204,027 168,929 Inventories 169,453 118,714 Deferred tax assets 19,551 20,118 Prepaid expenses and other current assets 6,170 3,550 ---------- ---------- Total Current Assets 407,524 315,334 ---------- ---------- Property, Plant and Equipment, net 123,465 110,444 Goodwill 409,661 376,366 Intangibles, net 10,256 9,630 Equity Method Investments - 28,905 Cost Method Investment 10,000 10,000 Other Assets 7,594 5,166 ---------- ---------- $ 968,500 $ 855,845 ========== ========== Liabilities and Stockholder's Equity Demand notes payable to Pentair and affiliates $ 476,600 $ 513,997 Due to Pentair and affiliates 207,993 123,652 Accounts payable 114,792 77,046 Employee compensation and benefits 31,061 23,374 Accrued product claims and warranties 14,409 12,721 Income taxes payable to Pentair 1,469 721 Other current liabilities 51,610 43,798 ---------- ---------- Total Current Liabilities 897,934 795,309 ---------- ---------- Pension 10,055 9,267 Postretirement Medical and Other Benefits 16,252 15,907 Deferred Tax Liabilities 15,634 13,757 Other Liabilities 390 915 Stockholder's Equity Pentair's net investment 31,526 24,041 Accumulated other comprehensive loss (3,291) (3,351) ---------- ---------- Total Stockholder's Equity 28,235 20,690 ---------- ---------- $ 968,500 $ 855,845 ========== ========== See Notes to Combined Financial Statements (Unaudited) -5- CONDENSED COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Pentair, Inc. Tools Group (In Thousands) Nine Months Ended October 2, September 27, 2004 2003 ------------- --------------- Cash Flow From Operating Activities $ (1,154) $ 22,967 ---------- ---------- Investing Activities Capital expenditures (5,898) (11,351) Acquisitions of equity and cost investments (10,069) (5,426) ---------- ---------- Cash Flow From Investing Activities (15,967) (16,777) ---------- ---------- Financing Activities Net borrowings from Pentair and affiliates 36,631 1,669 Dividends paid to Pentair and affiliates (14,570) (2,576) ---------- ---------- Cash Flow From Financing Activities 22,061 (907) Effect of exchange rate changes on cash (640) (590) ---------- ---------- Increase In Cash and Cash Equivalents 4,300 4,693 Cash and cash equivalents at beginning of period 4,023 13,357 ---------- ---------- Cash and Cash Equivalents at End of Period $ 8,323 $ 18,050 ========== ========== See Notes to Combined Financial Statements (Unaudited) -6- NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Pentair, Inc. Tools Group 1. Basis of Presentation Through October 2, 2004, the Pentair, Inc. Tools Group was a segment of Pentair, Inc. (Pentair). Unless otherwise indicated, all references to the "Tools Group" refer to The Pentair, Inc. Tools Group. The Tools Group consists of the following investees or subsidiaries of Pentair or Pentair's subsidiaries: Subsidiary Country Status - ---------- ------- ------ Biesemeyer Manufacturing Corporation United States Operating Delta International Machinery Corp. United States Operating DeVilbiss Air Power Company United States Operating Distribuidora PorterCable Limitada Chile Operating Flex Elektrowerkzeuge GmbH Germany Operating Hangtech Limited Hong Kong Operating Joinery Industrial Co. Ltd. Taiwan Operating Jointech Corporation Ltd. Cayman Islands Holding Oldham Saw Co. Inc. United States Operating Orion International LLC United States Operating Pentair Canada, Inc. (1) Canada Operating Pentair Taiwan LLC Taiwan Operating Pentair Tool and Equipment Sales Co. United States Operating Pentair Tools Group, Inc. United States Holding Porter-Cable Argentina S.R.L. Argentina Operating Porter-Cable Argentina, LLC United States Holding Porter-Cable Corporation United States Operating Porter-Cable de Mexico SA de C.V. Mexico Operating Qingdao Sungun Power Tool Co. Ltd. The People's Republic of China Operating Surewood Acquisition Corporation United States Holding The Woodworkers Choice, Inc. United States Operating Wintech Corporation Limited Cayman Islands Holding Wisetech Industrial Ltd. Co. The People's Republic of China Operating (1) - 50% owned The Tools Group designs, manufactures and markets power tool products positioned at the mid- to upper-end of the market and targets non-professional do-it-yourselfers (DIY), upscale hobbyists, and professional end users. Tools Group products include woodworking machinery, portable power tools, power tool accessories, metal and stone working tools, pneumatic tools, compressors, generators, and pressure washers. -7- The combined financial statements reflect the assets, liabilities, revenues and expenses that were directly related to the Tools Group as they were operated within Pentair. The financial information included herein may not necessarily be indicative of the financial position, results of operations or cash flows of the Tools Group in the future or what the financial position, results of operations or cash flows would have been if the Tools Group had been operated as a separate, independent company during the periods presented. For further information, refer to the combined financial statements and notes for the year ended December 31, 2003 included on Exhibit 99.2 on Form 8-K/A filed by The Black & Decker Corporation (Black & Decker) on December 17, 2004. The accompanying unaudited combined financial statements have been prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting 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 combined 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. On July 16, 2004, Pentair signed a definitive agreement to sell the Tools Group to Black & Decker (the Sale Agreement). Effective after the close of business on October 2, 2004, Black & Decker acquired the Tools Group. Accordingly, the accompanying financial statements do not reflect the impact of the Black & Decker acquisition. The cash purchase price for the transaction was approximately $775 million. Based upon the estimated increase in the net assets of the Tools Group, Black & Decker paid an additional $21.8 million, on a preliminary basis, to Pentair. The final purchase price is subject to customary adjustments based upon changes in the net assets of the Tools Group through the closing date. Other comprehensive income SFAS No. 130, Reporting Comprehensive Income, requires that, as part of a full set of financial statements, entities must present comprehensive income, which is the sum of net income and other comprehensive income. Other comprehensive income represents total non-stockholder changes in equity. Comprehensive income for the nine months ended October 2, 2004 and September 27, 2003, was $22.2 million and $25.8 million, respectively. New accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51, which requires all VIEs to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. -8- In December 2003, the FASB revised FIN 46, delaying the effective dates for certain entities created before February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable interest entities other than any Special Purpose Entities (SPEs), the revised FIN 46 (FIN 46R) is now required to be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004. The original guidance under FIN 46 is still applicable, however, for all SPEs created prior to February 1, 2003 at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46R also requires certain disclosures of an entity's relationship with variable interest entities. The adoption of this standard on April 3, 2004 did not have a material effect on the combined financial position or results of operations of the Tools Group. In May 2004, the FASB issued Staff Position (FSP) 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which supercedes FSP 106-1 of the same title issued in January 2004. FSP 106-2 becomes effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 also requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act. Since the postretirement health care plan of the Tools Group is a fully insured plan and is not eligible to receive the federal subsidy, the adoption of FSP 106-2 did not have any effect on the financial condition or results of operations of the Tools Group. -9- 2. Related Party Transactions and Balances Pentair allocated expenses The following is a summary of Pentair allocated expenses and Pentair managed benefits and insurance costs included in net income: Nine Months Ended October 2, September 27, 2004 2003 In thousands -------------- --------------- Allocated Pentair services charge $ 6,930 $ 5,957 Allocated Pentair home office charge 6,863 7,369 Pentair savings plan 2,197 1,794 Pentair restricted stock incentive plan 1,945 1,075 Pentair salaried pension plan 2,242 2,077 Net insurance premiums to Penwald (Pentair's wholly owned insurance subsidiary)* 6,700 5,889 --------- --------- Total $ 26,877 $ 24,161 ========= ========= * Excludes outside insurance costs. 3. Acquisition On April 5, 2004, the Tools Group acquired all of the remaining stock of the Asian joint venture business from Pentair's long-time Asian tool sourcing partner for approximately $21.9 million in cash of which $6.5 million plus interest was to be paid at the earlier of December 31, 2005 or 15 days following the sale of the Tools Group. Under the terms of the purchase agreement between Pentair and Black & Decker, Pentair retained the obligation to pay the $6.5 million of purchase consideration previously noted. Pentair acquired an initial 40 percent ownership stake in this joint venture in 2001 and subsequently increased its ownership to 49 percent in 2003. The Tools Group has not yet obtained all information required to complete the purchase price allocation related to the acquisition. The final allocation will be completed in 2005 and is not expected to have a material impact on the Tools Group's financial position or results of operations. In addition to the original purchase price of $21.9 million, an earn-out cash payment of $1.9 million resulted from the Asian tools sourcing partner achieving certain returns on sales targets. During the nine months ended October 2, 2004, the Tools Group paid $0.9 million in cash of the earn-out provision. The remaining $1.0 million of the provision is expected to be paid in the final quarter of 2004. This earn-out provision extends through the remainder of 2004 and until the end of 2005. The maximum total contingent payment is $5.0 million. -10- The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million, of which $4.2 million was classified as short-term borrowings in current liabilities. The purchase price, including the initial 49 percent ownership stake, of the Asian joint venture business has been allocated as follows: Estimated Fair Value ---------------- In thousands Current assets $ 39,400 Property, plant, and equipment 23,856 Goodwill 33,367 Intangible assets 1,130 Other noncurrent assets 3,386 ----------- Total assets acquired $ 101,139 Current liabilities $ (44,225) Long-term debt (5,438) ----------- Total liabilities assumed (49,663) ----------- Net assets acquired $ 51,476 =========== The acquisition resulted in approximately $1.1 million of intangible assets with finite lives which primarily consisted of land rights with an approximate life of four years. Prior to the acquisition of a controlling interest in the Asian joint venture, the results were reported one month in arrears using the equity method for investments. The Tools Group's share of the joint venture loss or income was included in cost of goods sold as the Asian operations existed primarily to supply the manufacturing needs of the Tools Group. Since the acquisition, the Asian operations are accounted for on a current basis. On an unaudited pro forma basis, the effects of the acquisitions were not significant to the results of operations. 4. Inventories The classification of inventories consisted of the following: October 2, December 31, 2004 2003 In thousands -------------- -------------- Raw materials and supplies $ 33,011 $ 18,229 Work-in-process 17,902 16,920 Finished goods 118,540 83,565 ---------- ---------- Total inventories $ 169,453 $ 118,714 ========== ========== Inventories are stated at the lower of cost or market. Inventories of United States subsidiaries are generally determined by the last-in, first-out (LIFO) method. Inventories of foreign-based subsidiaries are determined by the first-in, first-out (FIFO) and moving average methods. -11- 5. Goodwill and Other Identifiable Intangible Assets The changes in the carrying amount of goodwill are as follows: Tools Group In thousands ------------- Balance December 31, 2003 $ 376,366 Foreign currency translation (72) Acquisition of Asian joint venture (Note 3) 33,367 ---------- Balance October 2, 2004 $ 409,661 ========== The detail of acquired intangible assets consisted of the following: October 2, 2004 -------------------------------------- Gross carrying Accumulated amount amortization Net In thousands ---------- ------------ --------- Finite-life intangible assets Patents $ 2,018 $ (230) $ 1,788 Non-compete agreements 404 (336) 68 Other 1,852 (687) 1,165 -------- --------- -------- Total finite-life intangible assets $ 4,274 $ (1,253) $ 3,021 Indefinite-life intangible assets Trademarks 7,235 7,235 -------- -------- Total indefinite-life intangible assets $ 7,235 $ 7,235 Total intangibles, net $ 10,256 ========= Amortization expense relating to intangible assets for the nine months ended October 2, 2004 was $0.3 million. The estimated future amortization expense for identifiable intangible assets during the next five years is as follows: Three Months Ended In thousands December 31, 2004 2005 2006 2007 2008 -------------------- -------- -------- -------- -------- Estimated amortization Expense $ 156 $ 412 $ 372 $ 372 $ 270 -12- 6. Facility Exit Costs In 2003, the Tools Group decided to merge its Tupelo, Mississippi plant operations into its facilities in Jackson, Tennessee and in Asia as part of a facility rationalization initiative. Since April 2003, the Tools Group has incurred $5.8 million of pre-tax expenses principally related to employee severance and benefits of $4.7 million, and other exit activity charges of $1.1 million. The employee severance and benefits charges were recorded in the period when management approved the plans and after severance benefits had been communicated to the employees. The charges related to other exit activities include incremental costs for items such as relocation expenses and inventory disposals incurred as a direct result of this plan. In connection with the facility exit plan, the Tools Group has eliminated 150 positions and expects to eliminate an additional 42 positions through April 2005. The Tools Group believes the closure of the plant will occur in April 2005 and require additional charges of $0.3 million associated with other exit activities. These charges are recorded as part of selling, general, and administrative expense. Selected information related to these charges is as follows: Employee Severance In thousands and Benefits Other Total --------------- --------- --------- Current liability at December 31, 2003 $ 2,424 $ 3 $ 2,427 2004 charges 1,804 870 2,674 2004 cash payments (2,764) (621) (3,385) -------- ------ -------- Current liability at October 2, 2004 $ 1,464 $ 252 $ 1,716 ======== ====== ======== Facility exit charges of $2.3 million were recognized during the nine months ended September 27, 2003. 7. Pension and Post-retirement Benefits Components of the net periodic benefit cost relating to Tools Group sponsored and managed plans are as follows:
Pension benefits Post-retirement ------------------------------- ------------------------------ Nine Months Ended Nine Months Ended October 2, September 27, October 2, September 27, In thousands 2004 2003 2004 2003 ------------ --------------- ------------ --------------- Service cost $ 352 $ 383 $ 186 $ 209 Interest cost 1,001 972 632 655 Expected return on plan assets (1,226) (1,118) - - Amortization of prior year service cost (benefit) 73 108 (72) (139) Recognized net actuarial loss 110 68 - - --------- ---- --------- ------- ------- Net periodic benefit cost $ 310 $ 413 $ 746 $ 725 ========= ========= ======= =======
-13- 8. Contingencies Litigation The Tools Group is occasionally a party to litigation arising in the normal course of business. The Tools Group regularly analyzes current information and, as necessary, provides accruals for probable liabilities based on the expected eventual disposition of these matters. The Tools Group believes the effect on its combined results of operations and financial position, if any, for the disposition of all currently pending matters will not be material. Ellerbrake et al v. DeVilbiss Air Power Company In August 2001, a national class action was brought against DeVilbiss Air Power Company (DAPC) and four other manufacturers of retail air compressors on behalf of consumers that had purchased certain air compressors. Plaintiffs alleged that the manufacturers mislabeled horsepower ratings on compressors they manufacture. Plaintiffs sought to represent a class of all persons who had purchased since August 1996 an air compressor for which the horsepower ratings were allegedly mislabeled. Without admitting any liability, DAPC settled with plaintiffs and the settlement was preliminarily approved by the Court in January 2004. Subsequently, an appeal was filed on August 16, 2004 and then finally dismissed on October 14, 2004. Terms of the settlement include changes in labeling, an education program for consumers, attorney's fees and tools or accessories for qualifying claimants. While certain elements of the settlement have specific dollars assigned to them, the ultimate cost of some elements is still unknown at this time. The Tools Group believes reserves recorded at October 2, 2004 are sufficient to cover the cost of this settlement based on the information available to them at this time. Environmental The Tools Group may be named as a potentially responsible party at other sites in the future, for both divested and acquired businesses. When it has been possible to provide reasonable estimates of the liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of October 2, 2004, the reserve for such environmental liabilities was approximately $0.6 million, measured on an undiscounted basis. The Tools Group cannot ensure that environmental requirements will not change or become more stringent over time or that eventual environmental cleanup costs and liabilities will not exceed the amount of the current reserves. Guarantees At the inception of a guarantee, the Tools Group recognizes a liability for the related contingent loss. The liability initially recorded for that guarantee is the greater of (a) the fair value of the guarantee or (b) the contingent liability amount required to be recognized at inception of the guarantee if it is deemed probable a liability has been incurred and the amount of loss can be reasonably estimated. No guarantees were outstanding or accrued as of October 2, 2004. -14- Warranties The Tools Group provides service and warranty policies on its products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant. In addition, the Tools Group incurs discretionary costs to service its products in connection with product performance issues. The changes in the carrying amount of service and product warranties are as follows: Tools Group In thousands ------------- Balance at December 31, 2003 $ 12,721 Service and product warranty provision 17,677 Acquisition of Asian joint venture (Note 3) 40 Payments (15,869) Other (160) ---------- Balance at October 2, 2004 $ 14,409 ========== Earn-out provision Pursuant to an earn-out provision for the 2002 acquisition of Oldham Saw, the purchase price could increase depending on Oldham Saw achieving certain net sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) targets in 2003 and 2004. The earn-out agreement ended as of September 30, 2004. In the nine months ended October 2, 2004, no contingent payments were earned or paid. EX-99 5 form8ka12172004e.txt EX 99-4, FORM 8K/A DATED OCTOBER 4, 2004 Exhibit 99.4 The Black & Decker Corporation and Subsidiaries Unaudited pro forma combined financial information as of September 26, 2004 and for the nine months ended September 26, 2004 and the year ended December 31, 2003 -2- TABLE OF CONTENTS The Black & Decker Corporation and Subsidiaries Introduction to Pro Forma Combined Financial Information (Unaudited) 3 Pro Forma Combined Statement of Earnings (Unaudited) For the Nine Months Ended September 26, 2004 5 Pro Forma Combined Statement of Earnings (Unaudited) For the Year Ended December 31, 2003 6 Pro Forma Combined Balance Sheet as of September 26, 2004 (Unaudited) 7 Notes to Pro Forma Combined Financial Statements (Unaudited) 8 -3- INTRODUCTION TO PRO FORMA COMBINED FINANCIAL INFORMATION (Unaudited) The Black & Decker Corporation and Subsidiaries The following unaudited pro forma combined financial statements relate to the acquisition by The Black & Decker Corporation (Black & Decker) of the Tools Group (the Tools Group) from Pentair, Inc. (Pentair). On July 16, 2004, Black & Decker signed a definitive agreement to acquire the Tools Group from Pentair. On October 4, 2004, Black & Decker acquired the Tools Group. The cash purchase price for the transaction was approximately $775 million. Based upon the estimated increase in the net assets of the Tools Group, Black & Decker paid an additional $21.8 million, on a preliminary basis, to Pentair. The final purchase price is subject to customary adjustments based upon changes in the net assets of the Tools Group through the closing date. Finalization of the purchase price adjustment is expected in 2005. The effective closing date of the acquisition was after the close of business on October 2, 2004. As more fully described in note (e) of Notes to Pro Forma Combined Financial Statements, Black & Decker funded the acquisition of the Tools Group by utilizing existing cash, borrowings under its short-term borrowing facilities, and the issuance of $300.0 million of 4.75% senior unsecured notes, due in 2014. The pro forma adjustments are based upon presently available information, estimates and assumptions described herein and in the notes to the unaudited pro forma combined financial statements. The unaudited pro forma combined statements of earnings reflect the historical results of operations of Black & Decker for the year ended December 31, 2003 and the nine months ended September 26, 2004, with pro forma adjustments as if the acquisition of the Tools Group had occurred as of January 1, 2003. The unaudited pro forma combined balance sheet reflects the historical financial position of Black & Decker, with pro forma adjustments as if the acquisition had occurred on September 26, 2004. The pro forma adjustments are described in the accompanying notes and give effect to events that are (a) directly attributable to the acquisition, (b) factually supported, and (c) in the case of certain earnings adjustments, expected to have a continuing impact. The unaudited pro forma combined financial statements are based upon the purchase method of accounting and Black & Decker's historical consolidated financial statements. These unaudited pro forma combined financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Black & Decker's 2003 Annual Report on Form 10-K and the unaudited consolidated financial statements in Black & Decker's Quarterly Report on Form 10-Q for the quarterly period ended September 26, 2004. -4- Prior to the date of the acquisition, Black & Decker began to evaluate opportunities to restructure and integrate the Tools Group into its existing power tools and accessories business. Those evaluations continue at the present time. Black & Decker anticipates that, while certain integration actions will be formally approved and commence in 2004, finalization of its planned integration actions will not occur until some time in 2005. The pro forma adjustments do not reflect cost savings from synergies which may be realized or costs associated with the integration of the Tools Group into Black & Decker's existing business. In addition, the pro forma adjustments do not reflect the related accruals that would be established under purchase accounting, adjustments to estimated fair values of acquired assets, and the related change in goodwill that are likely to occur upon finalization of the plan of integration. The effects of one-time, nonrecurring transactions associated with the acquisition are not reflected in the unaudited pro forma combined statements of earnings. A final determination of the required purchase accounting adjustments has not yet been made, and the earnings results will vary from the pro forma earnings shown. The unaudited pro forma combined financial statements presented are for informational purposes only and do not purport to represent what Black & Decker's financial position or results of operations as of the dates or for the periods presented would have been had the acquisition in fact occurred on such date or at the beginning of the periods indicated, or to project Black & Decker's financial position or results of operations for any future date or period. For purposes of preparing Black & Decker's consolidated financial statements subsequent to the acquisition, Black & Decker will establish a new basis for the Tools Group's assets and liabilities based upon fair values thereof and Black & Decker's purchase price, including the costs of the acquisition. A final determination of the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values has not yet been completed. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma combined financial statements are preliminary and have been made solely for purposes of developing such unaudited pro forma combined financial statements. Black & Decker will perform an evaluation to determine the fair value of the Tools Group's assets and liabilities and will make appropriate purchase accounting adjustments upon completion of that evaluation. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein. -5- PRO FORMA COMBINED STATEMENT OF EARNINGS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 26, 2004 The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Amounts)
Pro Forma Historical Historical Adjustments Combined Black & Tools for Statements for Decker Group Acquisition (a) Ref. Acquisition ------------ ------------ ----------------- ------ ---------------- Sales $ 3,673.0 $ 844.2 $ - $ 4,517.2 Cost of goods sold 2,309.3 664.3 (37.8) (b)(c) 2,935.8 Selling, general and administrative expenses 926.4 123.3 37.5 (c)(d) 1,087.2 Restructuring and exit costs - - 1.8 (c) 1.8 ---------- -------- -------- ---------- Operating Income 437.3 56.6 (1.5) 492.4 Interest expense (net of interest income) 13.8 20.7 (2.4) (e)(f) 32.1 Other expense 2.4 - - 2.4 ---------- -------- -------- ---------- Earnings from Continuing Operations Before Income Taxes 421.1 35.9 .9 457.9 Income taxes 113.7 13.7 1.0 (g) 128.4 ---------- -------- -------- ---------- Net Earnings from Continuing Operations $ 307.4 $ 22.2 $ (.1) $ 329.5 ========== ======== ======== ========== Net Earnings per Common Share from Continuing Operations - Basic $ 3.88 $ 4.16 ========== ========== Shares Used in Computing Basic Earnings Per Share (in Millions) 79.3 79.3 ========== ========== Net Earnings per Common Share from Continuing Operations - Diluted $ 3.80 $ 4.07 ========== ========== Shares Used in Computing Diluted Earnings Per Share (in Millions) 80.9 80.9 ========== ==========
See Notes to Pro Forma Combined Financial Statements (Unaudited) -6- PRO FORMA COMBINED STATEMENT OF EARNINGS (Unaudited) FOR THE YEAR ENDED DECEMBER 31, 2003 The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Amounts)
Pro Forma Historical Historical Adjustments Combined Black & Tools for Statements for Decker Group Acquisition (a) Ref. Acquisition ------------ ------------ ----------------- ------ ---------------- Sales $ 4,482.7 $ 1,081.4 $ - $ 5,564.1 Cost of goods sold 2,887.1 848.6 (51.2) (b)(c) 3,684.5 Selling, general and administrative expenses 1,135.3 159.6 50.2 (c)(d) 1,345.1 Restructuring and exit costs 31.6 - 2.9 (c) 34.5 ---------- --------- -------- ---------- Operating Income 428.7 73.2 (1.9) 500.0 Interest expense (net of interest income) 35.2 28.8 (5.2) (e)(f) 58.8 Other expense 2.6 - - 2.6 ---------- --------- -------- ---------- Earnings from Continuing Operations Before Income Taxes 390.9 44.4 3.3 438.6 Income taxes 103.7 17.0 2.1 (g) 122.8 ---------- --------- -------- ---------- Net Earnings from Continuing Operations $ 287.2 $ 27.4 $ 1.2 $ 315.8 ========== ========= ======== ========== Net earnings per Common Share from Continuing Operations - Basic $ 3.69 $ 4.05 ========== ========== Shares Used in Computing Basic Earnings Per Share (in Millions) 77.9 77.9 ========== ========== Net earnings per Common Share from Continuing Operations - Diluted $ 3.68 $ 4.04 ========== ========== Shares Used in Computing Diluted Earnings Per Share (in Millions) 78.2 78.2 ========== ==========
See Notes to Pro Forma Combined Financial Statements (Unaudited) -7- PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 26, 2004 (Unaudited) The Black & Decker Corporation and Subsidiaries (Dollars in Millions Except Per Share Amounts)
Pro Forma Historical Historical Adjustments Combined Black & Tools for Statements for Decker Group Acquisition (h) Ref. Acquisition ------------ ------------ ----------------- ------ ---------------- Assets Cash and cash equivalents $ 626.4 $ 8.3 $ (501.0) (e) $ 133.7 Trade receivables 982.7 204.0 - 1,186.7 Inventories 903.4 169.5 10.3 (i) 1,083.2 Current assets of discontinued operations 66.3 - - 66.3 Other current assets 179.8 25.7 (14.0) (j) 191.5 ---------- --------- --------- ---------- Total Current Assets 2,758.6 407.5 (504.7) 2,661.4 ---------- --------- --------- ---------- Property, Plant and Equipment 613.9 123.5 7.3 (b)(k) 744.7 Goodwill 786.6 409.7 (8.8) (d) 1,187.5 (d)(j) Other Assets 578.8 27.8 112.8 (l)(m) 719.4 ---------- --------- --------- ---------- $ 4,737.9 $ 968.5 $ (393.4) $ 5,313.0 ========== ========= ========= ========== Liabilities and Stockholders' Equity Short-term borrowings $ 2.8 $ - $ - $ 2.8 Current maturities of long-term debt 0.4 - - 0.4 Due to Pentair and affiliates - 686.1 (686.1) (n) - Trade accounts payable 508.1 114.8 - 622.9 Current liabilities of discontinued operations 29.8 - - 29.8 Other accrued liabilities 880.2 97.1 (6.3) (k)(o) 971.0 ---------- --------- --------- ---------- Total Current Liabilities 1,421.3 898.0 (692.4) 1,626.9 ---------- --------- --------- ---------- Long-Term Debt 909.8 - 295.8 (e) 1,205.6 Deferred Income Taxes 180.8 15.6 (9.1) (j) 187.3 Postretirement Benefits 460.7 26.3 (1.9) (l) 485.1 Other Long-Term Liabilities 506.7 0.4 42.4 (k)(o) 549.5 Stockholders' Equity Common stock, par value 40.3 - - 40.3 Capital in excess of par value 616.4 31.5 (31.5) (p) 616.4 Unearned restricted stock compensation (12.2) - - (12.2) Retained earnings 1,043.4 - - 1,043.4 Accumulated other comprehensive income (loss) (429.3) (3.3) 3.3 (p) (429.3) ---------- --------- --------- ---------- TOTAL STOCKHOLDERS' EQUITY 1,258.6 28.2 (28.2) 1,258.6 ---------- --------- --------- ---------- $ 4,737.9 $ 968.5 $ (393.4) $ 5,313.0 ========== ========= ========= ==========
See Notes to Pro Forma Combined Financial Statements (Unaudited) -8- NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (Unaudited) The Black & Decker Corporation and Subsidiaries The unaudited pro forma combined statement of earnings for the nine months ended September 26, 2004 includes the results of operations of Black & Decker and the Tools Group for the nine months ended September 26, 2004 and October 2, 2004, respectively. The unaudited pro forma combined statement of earnings for the year ended December 31, 2003 includes the results of operations of Black & Decker and the Tools Group, both for the year ended December 31, 2003. The unaudited pro forma combined balance sheet includes the financial position of Black & Decker as of September 26, 2004 and the Tools Group as of October 2, 2004. As noted in the Introduction to Pro Forma Combined Financial Statements, a final determination of the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values has not yet been completed. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma combined financial statements are preliminary and have been made solely for purposes of developing such unaudited pro forma combined financial statements. Black & Decker will perform an evaluation to determine the fair value of the Tools Group's assets and liabilities and will make appropriate purchase accounting adjustments upon completion of that evaluation. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein. Prior to the date of the acquisition, Black & Decker began to evaluate opportunities to restructure and integrate the Tools Group into its existing power tools and accessories business. Those evaluations continue at the present time. Black & Decker anticipates that, while certain integration actions will be formally approved and commence in 2004, finalization of its planned integration actions will not occur until some time in 2005. The pro forma adjustments do not reflect cost savings from synergies which may be realized or costs associated with the integration of the Tools Group into Black & Decker's existing business. In addition, the pro forma adjustments do not reflect the related accruals that would be established under purchase accounting, adjustments to estimated fair values of acquired assets, and the related change in goodwill that are likely to occur upon finalization of the plan of integration. The effects of one-time, nonrecurring transactions associated with the acquisition are not reflected in the unaudited pro forma combined statements of earnings. A final determination of the required purchase accounting adjustments has not yet been made, and the earnings results will vary from the pro forma earnings shown. (a) The unaudited pro forma combined statement of earnings reflects the historical results of operations of Black & Decker and the Tools Group for the year ended December 31, 2003 and the nine months ended September 26, 2004, with pro forma adjustments as if the acquisition had occurred on January 1, 2003. -9- (b) Under the purchase method of accounting, the Tools Group's property, plant and equipment has been adjusted to estimate its fair value. The preliminary fair value adjustment of $7.6 million includes adjustments for land and improvements, buildings, and machinery and equipment. Additional depreciation expense resulting from the increase in fair value is approximately $.6 million and $.5 million for the year ended December 31, 2003 and for the nine months ended September 26, 2004, respectively. (c) This adjustment reclassifies certain expenses of the Tools Group to conform to the classifications used by Black & Decker. This adjustment includes the reclassification of shipping and handling costs - from cost of goods sold to selling, general and administrative expenses - in the amount of $51.8 million and $38.3 million for the year ended December 31, 2003 and the nine months ended September 26, 2004, respectively. This adjustment also includes the reclassification of $2.9 million and $1.8 million from selling, general and administrative expenses to restructuring and exit costs for the year ended December 31, 2003 and the nine months ended September 26, 2004, respectively. (d) In determining the estimated fair value of acquired intangible assets for purposes of this pro forma financial information, Black & Decker has utilized generally accepted valuation techniques, coupled with available historical information and future assumptions. The results of that assessment are preliminary and subject to adjustment. Black & Decker has engaged a third party valuation specialist to perform a valuation. Such valuation will include an evaluation of the propriety of the inputs to the valuation models as well as the reasonableness of the resultant fair values and amortization periods. Upon completion of the third party valuation, which is currently in progress, the estimated fair values, related amortization periods, and amortization charges are subject to change. The following table summarizes, based upon Black & Decker's preliminary assessment, the identified intangible asset categories and average amortization periods: In millions Amortization Fair Value Period -------------- ------------ Finite-life intangible assets Patented and proprietary technology 10 years $ 9.3 Customer relationships 15 years 12.3 -------- Weighted average amortization period 13 years $ 21.6 Indefinite-life intangible assets Trade names $ 105.4 Goodwill 400.9 -------- $ 527.9 ======== -10- Additional amortization expense resulting from the increase in fair value of finite-life intangible assets is approximately $1.3 million and $1.0 million for the year ended December 31, 2003 and for the nine months ended September 26, 2004, respectively. (e) This adjustment represents the incremental interest expense associated with Black & Decker's acquisition of the Tools Group. The cash purchase price for the Tools Group was approximately $775 million. Based upon the estimated increase in the net assets of the Tools Group, Black & Decker paid an additional $21.8 million, on a preliminary basis, to Pentair. The final purchase price is subject to customary adjustments based upon changes in the net assets of the Tools Group through the closing date. Black & Decker initially funded the payment of the purchase price of the Tools Group by utilizing existing cash and cash equivalents and $125.0 million in additional borrowings under Black & Decker's existing commercial paper program. On October 18, 2004, Black & Decker issued senior unsecured notes in the principal amount of $300.0 million. The notes bear interest at a fixed rate of 4.75% and are due in 2014. Concurrently, Black & Decker entered into fixed-to-variable interest rate swap agreements with notional amounts totaling $200.0 million. Under the new swap agreements, Black & Decker receives a weighted-average fixed rate of 4.70% and pays at variable rates based on the six-month London Interbank Offered Rate (LIBOR). The senior unsecured notes resulted in $295.8 million of proceeds of which $125.0 million was used to repay the additional borrowings under Black & Decker's commercial paper program and the remaining proceeds were used to purchase short term investments. Additional interest expense resulting from the purchase of the Tools Group is $23.7 million and $17.7 million for the year ended December 31, 2003 and nine months ended September 26, 2004, respectively. A .125% increase in interest rates relative to the variable-rate elements of Black & Decker's financing of the Tools Group acquisition would result in a reduction in pro forma net income of $.6 million and $.4 million, for the year ended December 31, 2003 and nine months ended September 26, 2004, respectively. (f) This adjustment eliminates the intercompany interest expense of the Tools Group from Pentair and affiliates of $28.9 million and $20.1 million for the year ended December 31, 2003 and for the nine months ended September 26, 2004, respectively. (g) This adjustment records the tax impact of the pro forma adjustments. Pro forma adjustments relating to the Tools Group are recorded at its incremental tax rate of 38.3%. Other pro forma adjustments are recorded at the incremental tax rates of the respective jurisdictions. -11- (h) The unaudited pro forma combined balance sheet reflects the historical financial position of Black & Decker and the Tools Group, with pro forma adjustments as if the acquisition had occurred September 26, 2004. (i) Under the purchase method of accounting, the Tools Group's inventory has been adjusted to its estimated fair value. The preliminary fair value adjustment of $10.3 million principally relates to work in progress and finished goods inventories. The pro forma statements of income exclude any adjustment to costs of goods sold related to the fair value step-up in the September 26, 2004 pro forma combined balance sheet due to the non-recurring nature of this expense. (j) This purchase accounting adjustment adjusts the recognized deferred tax assets and liabilities associated with the estimated tax effect on the difference between the new book basis and the tax basis of acquired assets and liabilities of the Tools Group, including valuation adjustments. (k) This adjustment eliminates assets and liabilities of the Tools Group that were not acquired or assumed by Black & Decker under the terms of the purchase agreement with Pentair. Assets that were not acquired consist of certain machinery and equipment with a net book value of $.3 million. Liabilities that were included in the Tools Group combined balance sheet at the acquisition date but were not assumed by Black & Decker consist of current liabilities of $16.8 million and long-term liabilities of $.4 million. Those current liabilities not assumed by Black & Decker principally include certain employee benefit accruals, estimated costs associated with the closure of a manufacturing facility, and additional purchase consideration associated with the Tools Group acquisition during 2004 of the remaining interest in an Asian joint venture. (l) This adjustment is to adjust the historical amounts recorded by the Tools Group to reflect, based upon preliminary actuarial valuations, the excess of projected benefit obligations assumed over the estimated fair value of plan assets to be transferred. (m) This adjustment of $7.0 million represents the write-down of a cost basis investment of the Tools Group to reflect the Tools Group's pro rata share of the underlying equity of that investment at the time of acquisition. Black & Decker continues to evaluate the estimated fair value of this cost basis investment. (n) This adjustment eliminates the amounts due to Pentair and affiliates reflected on the Tools Group combined balance sheet as of October 2, 2004. Adjustments include the elimination of intercompany debt of $476.6 million, intercompany payables of $208.0 million and intercompany income taxes payable of $1.5 million, all with Pentair and affiliates. These amounts were either not assumed by Black & Decker or were settled at the acquisition. -12- (o) This adjustment represents liabilities that were contractually assumed by Black & Decker under the purchase agreement with Pentair. The liabilities have been recognized at their estimated fair value. The estimated fair value of these liabilities is preliminary. Current liabilities that were contractually assumed include a future payment of $5.5 million to an affiliate of Pentair. In addition Black & Decker contractually assumed future product liability claims for products manufactured and sold prior to the acquisition date and, under the purchase method of accounting, has estimated the preliminary fair value of this assumed liability to be $47.8 million. Black & Decker has engaged a third party actuary to perform a valuation. Such valuation will include an evaluation of the propriety of the inputs to the valuation models as well as the reasonableness of the resultant fair value of the assumed liability. (p) This adjustment eliminates the Tools Group's equity that represents the book value of net assets acquired. -----END PRIVACY-ENHANCED MESSAGE-----