UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 29, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-1553
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THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 East Joppa Road Towson, Maryland 21286
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(Address of principal executive offices) (Zip Code)
(410) 716-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
----- ------
The number of shares of Common Stock outstanding as of October 25, 2002:
80,552,525
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The exhibit index as required by item 601(a) of Regulation S-K is included in
this report.
-2-
THE BLACK & DECKER CORPORATION
INDEX - FORM 10-Q
September 29, 2002
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months and Nine Months Ended September 29, 2002
and September 30, 2001 3
Consolidated Balance Sheet
September 29, 2002 (Unaudited) and December 31, 2001 4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 29, 2002 and September 30, 2001 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 29, 2002 and September 30, 2001 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
-3-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amounts)
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Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Sales $1,085.2 $1,039.2 $3,162.2 $3,050.9
Cost of goods sold 704.5 696.4 2,096.1 2,043.0
Selling, general, and
administrative expenses 259.0 253.8 774.7 762.3
Restructuring and exit costs 38.4 -- 38.4 --
- ----------------------------------------------------------------------------------------------------------------
Operating Income 83.3 89.0 253.0 245.6
Interest expense (net of
interest income) 14.2 20.4 44.8 65.5
Other expense 1.7 2.7 5.1 7.3
- ----------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 67.4 65.9 203.1 172.8
Income taxes 12.5 19.7 49.1 51.8
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Net Earnings $ 54.9 $ 46.2 $ 154.0 $ 121.0
================================================================================================================
Net Earnings Per Common
Share -- Basic $ .68 $ .57 $ 1.92 $ 1.49
================================================================================================================
Shares Used in Computing Basic
Earnings Per Share (in Millions) 80.5 80.8 80.4 81.0
================================================================================================================
Net Earnings Per Common
Share -- Assuming Dilution $ .68 $ .57 $ 1.90 $ 1.49
================================================================================================================
Shares Used in Computing Diluted
Earnings Per Share (in Millions) 80.9 81.0 80.9 81.4
================================================================================================================
Dividends Per Common Share $ .12 $ .12 $ .36 $ .36
================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited).
</FN>
-4-
CONSOLIDATED BALANCE SHEET
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amount)
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September 29,
2002 December 31,
(Unaudited) 2001
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Assets
Cash and cash equivalents $ 374.1 $ 244.5
Trade receivables 824.0 708.6
Inventories 787.3 712.2
Other current assets 200.5 227.0
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Total Current Assets 2,185.9 1,892.3
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Property, Plant, and Equipment 658.1 687.5
Goodwill 726.5 710.4
Other Assets 778.8 724.0
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$4,349.3 $4,014.2
================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 7.8 $ 12.3
Current maturities of long-term debt 310.7 33.7
Trade accounts payable 418.0 312.7
Other accrued liabilities 762.3 711.9
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Total Current Liabilities 1,498.8 1,070.6
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Long-Term Debt 927.0 1,191.4
Deferred Income Taxes 257.5 261.1
Postretirement Benefits 233.8 238.0
Other Long-Term Liabilities 513.6 502.1
Stockholders' Equity
Common stock, par value $.50 per share 40.3 39.9
Capital in excess of par value 590.3 566.6
Retained earnings 458.2 333.2
Accumulated other comprehensive income (loss) (170.2) (188.7)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 918.6 751.0
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$4,349.3 $4,014.2
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
-5-
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Data)
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Accumulated
Outstanding Capital in Other Com- Total
Common Par Excess of Retained prehensive Stockholders'
Shares Value Par Value Earnings Income (Loss) Equity
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Balance at December 31, 2000 80,343,094 $40.2 $560.0 $264.0 $(171.8) $692.4
Comprehensive income:
Net earnings -- -- -- 121.0 -- 121.0
Cumulative effect of accounting
change (net of tax) -- -- -- -- (.7) (.7)
Net gain on derivative
instruments (net of tax) -- -- -- -- 1.1 1.1
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (30.1) (30.1)
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Comprehensive income -- -- -- 121.0 (29.7) 91.3
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Cash dividends ($.36 per share) -- -- -- (29.2) -- (29.2)
Purchase and retirement of
common stock (400,000) (.2) (12.5) -- -- (12.7)
Common stock retired under
equity forwards (765,326) (.4) -- -- -- (.4)
Common stock issued under
employee benefit plans 1,245,048 .6 27.9 -- -- 28.5
- -------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 80,422,816 $40.2 $575.4 $355.8 $(201.5) $769.9
===================================================================================================================
Balance at December 31, 2001 79,829,641 $39.9 $566.6 $333.2 $(188.7) $751.0
Comprehensive income:
Net earnings -- -- -- 154.0 -- 154.0
Net loss on derivative
instruments (net of tax) -- -- -- -- (7.9) (7.9)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- 26.4 26.4
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Comprehensive income -- -- -- 154.0 18.5 172.5
- -------------------------------------------------------------------------------------------------------------------
Cash dividends ($.36 per share) -- -- -- (29.0) -- (29.0)
Common stock issued under
employee benefit plans 714,327 .4 23.7 -- -- 24.1
- -------------------------------------------------------------------------------------------------------------------
Balance at September 29, 2002 80,543,968 $40.3 $590.3 $458.2 $(170.2) $918.6
===================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited).
</FN>
-6-
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions)
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Nine Months Ended
September 29, September 30,
2002 2001
- --------------------------------------------------------------------------------
Operating Activities
Net earnings $154.0 $ 121.0
Adjustments to reconcile net earnings to cash
flow from operating activities:
Non-cash charges and credits:
Depreciation and amortization 95.9 122.8
Restructuring and exit costs 38.4 --
Other (4.2) (5.7)
Changes in selected working capital items:
Trade receivables (92.5) (45.2)
Inventories (58.0) (34.0)
Trade accounts payable 98.5 53.0
Restructuring spending (26.7) (18.7)
Other assets and liabilities 28.6 (92.7)
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Cash Flow From Operating Activities 234.0 100.5
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Investing Activities
Purchase of business -- (30.5)
Proceeds from disposal of assets 3.9 8.1
Capital expenditures (70.2) (100.4)
Cash inflow from other investing activities 1.4 --
- --------------------------------------------------------------------------------
Cash Flow From Investing Activities (64.9) (122.8)
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Cash Flow Before Financing Activities 169.1 (22.3)
Financing Activities
Net decrease in short-term borrowings (4.2) (284.5)
Proceeds from long-term debt (net of
debt issue costs of $3.1) -- 393.8
Payments on long-term debt (33.8) (40.9)
Purchase of common stock -- (38.2)
Issuance of common stock 18.8 25.2
Cash dividends (29.0) (29.2)
- --------------------------------------------------------------------------------
Cash Flow From Financing Activities (48.2) 26.2
Effect of exchange rate changes on cash 8.7 .4
- --------------------------------------------------------------------------------
Increase In Cash And Cash Equivalents 129.6 4.3
Cash and cash equivalents at beginning of period 244.5 135.0
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Cash And Cash Equivalents At End Of Period $374.1 $ 139.3
================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Black & Decker Corporation and Subsidiaries
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Black &
Decker Corporation (collectively with its subsidiaries, the Corporation) have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
of the financial position and the results of operations.
Operating results for the three- and nine-month periods ended September 29,
2002, are not necessarily indicative of the results that may be expected for a
full fiscal year. For further information, refer to the consolidated financial
statements and notes included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001.
Certain amounts presented for the three and nine months ended September 30,
2001, have been reclassified to conform to the 2002 presentation.
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, requires that, as part of a full set of financial
statements, entities must present comprehensive income, which is the sum of net
income and other comprehensive income. Other comprehensive income represents
total non-stockholder changes in equity. For the nine months ended September 29,
2002, and September 30, 2001, the Corporation has presented comprehensive income
in the accompanying Consolidated Statement of Stockholders' Equity.
Comprehensive income for the three months ended September 29, 2002, and
September 30, 2001, was $78.9 million and $37.7 million, respectively.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
addresses the financial accounting and reporting for certain costs associated
with exit or disposal activities, including restructuring actions. SFAS No. 146
excludes from its scope severance benefits that are subject to an on-going
benefit arrangement governed by SFAS No. 112, Employer's Accounting for
Postemployment Benefits, and asset impairments governed by SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
The Corporation has not determined the effect that the adoption of SFAS No.
146, effective January 1, 2003, will have on its earnings or financial position.
However, the impact of SFAS No. 146 on the Corporation will likely be mitigated
as restructuring charges recognized by the Corporation to date have principally
consisted of severance benefits that are subject to an on-going benefit
arrangement and asset impairments.
-8-
NOTE 2: CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Corporation adopted Emerging Issues Task Force
Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products (EITF 01-9). Upon adoption of EITF 01-9, the
Corporation was required to classify certain payments to its customers as a
reduction of sales. The Corporation previously classified certain of these
payments as selling expenses in its Consolidated Statement of Earnings. Upon the
adoption of EITF 01-9, prior period amounts were restated and resulted in a
reduction of sales (and an offsetting reduction of selling expenses) of $23.8
million and $61.5 million for the three- and nine-month periods ended September
30, 2001, respectively.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 requires that its provisions be
applied on a prospective basis. Under SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized, but are subject
to an annual impairment test. Other intangible assets continue to be amortized
over their useful lives. As of January 1, 2002, the Corporation performed the
first of the required impairment tests of goodwill. At that date, goodwill
associated with the Corporation's reportable business segments was $29.4 million
for Power Tools and Accessories, $423.2 million for Hardware and Home
Improvement, and $257.8 million for Fastening and Assembly Systems. No
impairment was present upon adoption of SFAS No. 142. The Corporation cannot
predict the occurrence of certain events that might adversely affect the
reported value of goodwill. Such events may include, but are not limited to,
strategic decisions made in response to economic and competitive conditions, the
impact of the economic environment on the Corporation's customer base, or a
material negative change in its relationships with significant customers.
The Corporation recognized goodwill amortization of $6.6 million and $19.8
million during the three- and nine-month periods ended September 30, 2001,
respectively. Net earnings for the three and nine months ended September 30,
2001, excluding goodwill amortization, would have been $52.8 million and $140.8
million, respectively. Basic earnings per share for the three and nine months
ended September 30, 2001, would have been $.65 and $1.74, respectively,
excluding goodwill amortization. Diluted earnings per share for the three and
nine months ended September 30, 2001, would have been $.65 and $1.73,
respectively, excluding goodwill amortization.
NOTE 3: INVENTORIES
The classification of inventories at the end of each period, in millions of
dollars, was as follows:
- --------------------------------------------------------------------------------
September 29, December 31,
2002 2001
- --------------------------------------------------------------------------------
FIFO cost
Raw materials and work-in-process $185.2 $192.9
Finished products 604.1 527.0
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789.3 719.9
Excess of FIFO cost over LIFO inventory value (2.0) (7.7)
- --------------------------------------------------------------------------------
$787.3 $712.2
================================================================================
Inventories are stated at the lower of cost or market. The cost of United
States inventories is based primarily on the last-in, first-out (LIFO) method;
all other inventories are based on the first-in, first-out (FIFO) method.
-9-
NOTE 4: SHORT-TERM BORROWINGS
In April 2002, the Corporation entered into a $250 million 364-day unsecured
revolving credit facility (the Credit Facility) replacing its expiring $400
million 364-day unsecured revolving credit facility. The Corporation reduced the
borrowing availability under the Credit Facility based upon its anticipated
short-term financing needs. The Credit Facility provides for annual renewals
upon request by the Corporation and approval by the lending banks. The terms of
the Credit Facility remained unchanged from the expiring 364-day unsecured
revolving credit facility. The terms of that facility and the Corporation's $1.0
billion unsecured revolving credit facility that expires in April 2006 are more
fully disclosed in Note 6 of Notes to Consolidated Financial Statements included
in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
NOTE 5: LONG-TERM DEBT
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $310.2 million and $314.4 million was included in the Consolidated
Balance Sheet at September 29, 2002, and December 31, 2001, respectively, in
short-term borrowings, current maturities of long-term debt, and long-term debt.
NOTE 6: INTEREST EXPENSE (NET OF INTEREST INCOME)
Interest expense (net of interest income) for each period, in millions of
dollars, was as follows:
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Interest expense $20.8 $28.1 $63.8 $94.2
Interest (income) (6.6) (7.7) (19.0) (28.7)
- --------------------------------------------------------------------------------
$14.2 $20.4 $44.8 $65.5
================================================================================
-10-
NOTE 7: BUSINESS SEGMENTS
The following table provides selected financial data for the Corporation's
business segments (in millions of dollars):
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Reportable Business Segments
----------------------------------------------
Power Hardware Fastening Currency Corporate,
Tools & & Home & Assembly Translation Adjustments,
Three Months Ended September 29, 2002 Accessories Improvement Systems Total Adjustments & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 767.6 $177.6 $123.4 $1,068.6 $16.6 $ - $1,085.2
Segment profit (loss) (for Consoli-
dated, operating income before
restructuring and exit costs) 105.6 10.5 18.5 134.6 1.4 (14.3) 121.7
Depreciation and amortization 19.7 7.3 3.5 30.5 .5 .1 31.1
Capital expenditures 16.3 2.4 1.6 20.3 .6 .4 21.3
Three Months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 741.2 $185.2 $118.1 $1,044.5 $(5.3) $ - $1,039.2
Segment profit (loss) (for Consoli-
dated, operating income) 77.9 16.1 14.5 108.5 .1 (19.6) 89.0
Depreciation and amortization 20.2 8.0 4.0 32.2 (.1) 6.3 38.4
Capital expenditures 20.1 7.3 3.6 31.0 - - 31.0
Nine Months Ended September 29, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $2,209.9 $571.0 $376.2 $3,157.1 $ 5.1 $ - $3,162.2
Segment profit (loss) (for Consoli-
dated, operating income before
restructuring and exit costs) 237.9 32.6 52.8 323.3 .8 (32.7) 291.4
Depreciation and amortization 59.2 24.7 10.5 94.4 .4 1.1 95.9
Capital expenditures 51.4 8.5 8.9 68.8 .7 .7 70.2
Nine Months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $2,121.5 $569.9 $362.1 $3,053.5 $(2.6) $ - $3,050.9
Segment profit (loss) (for Consoli-
dated, operating income) 167.5 42.0 53.8 263.3 .7 (18.4) 245.6
Depreciation and amortization 64.8 26.8 11.4 103.0 .4 19.4 122.8
Capital expenditures 64.6 24.9 9.7 99.2 .5 .7 100.4
The Corporation operates in three reportable business segments: Power Tools
and Accessories, Hardware and Home Improvement, and Fastening and Assembly
Systems. The Power Tools and Accessories segment has worldwide responsibility
for the manufacture and sale of consumer and professional power tools and
accessories, electric cleaning and lighting products, and electric lawn and
garden tools, as well as for product service. In addition, the Power Tools and
Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside the United States and Canada; and
for sales of household products. The Hardware and Home Improvement segment has
worldwide responsibility for the manufacture and sale of security hardware
(except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). It also has responsibility for the manufacture of
plumbing products and for the sale of plumbing products to customers in the
United States and Canada. The Fastening and Assembly Systems segment has
worldwide responsibility for the manufacture and sale of fastening and assembly
systems.
-11-
The Corporation assesses the performance of its reportable business
segments based upon a number of factors, including segment profit. In general,
segments follow the same accounting policies as those described in Note 1 of
Notes to Consolidated Financial Statements included in Item 8 of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2001,
except with respect to foreign currency translation and except as further
indicated below. The financial statements of a segment's operating units located
outside of the United States, except those units operating in highly
inflationary economies, are generally measured using the local currency as the
functional currency. For these units located outside of the United States,
segment assets and elements of segment profit are translated using budgeted
rates of exchange. Budgeted rates of exchange are established annually and, once
established, all prior period segment data is restated to reflect the current
year's budgeted rates of exchange. The amounts included in the preceding table
under the captions "Reportable Business Segments" and "Corporate, Adjustments, &
Eliminations" are reflected at the Corporation's budgeted rates of exchange for
2002. The amounts included in the preceding table under the caption "Currency
Translation Adjustments" represent the difference between consolidated amounts
determined using those budgeted rates of exchange and those determined based
upon the rates of exchange applicable under accounting principles generally
accepted in the United States.
Segment profit excludes interest income and expense, non-operating income
and expense, adjustments to eliminate intercompany profit in inventory, income
tax expense, and, for 2001, goodwill amortization (except for the amortization
of goodwill associated with certain acquisitions made by the Power Tools and
Accessories and Fastening and Assembly Systems segments). In addition, segment
profit excludes restructuring and exit costs. In determining segment profit,
expenses relating to pension and other postretirement benefits are based solely
upon estimated service costs. Corporate expenses, as well as certain centrally
managed expenses, are allocated to each reportable segment based upon budgeted
amounts. While sales and transfers between segments are accounted for at cost
plus a reasonable profit, the effects of intersegment sales are excluded from
the computation of segment profit. Intercompany profit in inventory is excluded
from segment assets and is recognized as a reduction of cost of goods sold by
the selling segment when the related inventory is sold to an unaffiliated
customer. Because the Corporation compensates the management of its various
businesses on, among other factors, segment profit, the Corporation may elect to
record certain segment-related expense items of an unusual or non-recurring
nature in consolidation rather than reflect such items in segment profit. In
addition, certain segment-related items of income or expense may be recorded in
consolidation in one period and transferred to the various segments in a later
period.
-12-
The reconciliation of segment profit to the Corporation's earnings before
income taxes, in millions of dollars, is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Segment profit for total reportable business segments $134.6 $108.5 $323.3 $263.3
Items excluded from segment profit:
Adjustment of budgeted foreign exchange rates
to actual rates 1.4 .1 .8 .7
Depreciation of Corporate property and, for 2001,
amortization of certain goodwill (.1) (6.3) (1.1) (19.4)
Adjustment to businesses' postretirement benefit
expenses booked in consolidation 9.3 9.4 28.3 30.3
Other adjustments booked in consolidation directly
related to reportable business segments (2.1) (8.2) (3.6) (2.9)
Amounts allocated to businesses in arriving at segment
profit in excess of (less than) Corporate center operating
expenses, eliminations, and other amounts
identified above (21.4) (14.5) (56.3) (26.4)
- ----------------------------------------------------------------------------------------------------------------------------
Operating income before restructuring and exit costs 121.7 89.0 291.4 245.6
Restructuring and exit costs 38.4 - 38.4 -
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 83.3 89.0 253.0 245.6
Interest expense, net of interest income 14.2 20.4 44.8 65.5
Other expense 1.7 2.7 5.1 7.3
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 67.4 $ 65.9 $203.1 $172.8
============================================================================================================================
NOTE 8: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period are as
follows:
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
(Amounts in Millions Except Per Share Data) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings $54.9 $46.2 $154.0 $121.0
===================================================================================================================
Denominator:
Denominator for basic earnings per share
- weighted-average shares 80.5 80.8 80.4 81.0
Employee stock options and stock issuable
under employee benefit plans .4 .2 .5 .4
- -------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions 80.9 81.0 80.9 81.4
===================================================================================================================
Basic earnings per share $ .68 $ .57 $ 1.92 $ 1.49
===================================================================================================================
Diluted earnings per share $ .68 $ .57 $ 1.90 $ 1.49
===================================================================================================================
As of September 29, 2002, approximately 3.9 million options to purchase
shares of common stock, with a weighted-average exercise price of $50.76, were
outstanding, but were not included in the computation of diluted earnings per
share because the effect would be anti-dilutive. These
-13-
options were anti-dilutive because the related exercise price was greater than
the average market price of the common shares during the quarter.
NOTE 9: RESTRUCTURING ACTIVITY
As more fully disclosed in Note 18 of Notes to Consolidated Financial Statements
included in Item 8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001, the Corporation recorded a restructuring charge of
$99.8 million during the fourth quarter of 2001. During the three and nine
months ended September 29, 2002, the Corporation recorded a $38.4 million
restructuring charge. A summary of restructuring activity during the nine-month
period ended September 29, 2002, is as follows (in millions of dollars):
- -------------------------------------------------------------------------------------------------------------------------
Reserves at Reserves Utilization of Reserves Foreign Reserves at
December 31, Established Reversal of ----------------------- Currency September 29,
2001 In 2002 Reserves Cash Non-Cash Translation 2002
- -------------------------------------------------------------------------------------------------------------------------
Severance benefits $53.7 $18.6 $(4.5) $(20.9) $ - $2.2 $49.1
Write-down to net
realizable value of
certain buildings
and equipment - 11.4 (2.1) - (9.3) - -
Other charges 13.7 16.6 (1.6) (5.8) (9.1) - 13.8
- -------------------------------------------------------------------------------------------------------------------------
Total $67.4 $46.6 $(8.2) $(26.7) $(18.4) $2.2 $62.9
=========================================================================================================================
During the nine months ended September 29, 2002, the Corporation recognized
$46.6 million of additional pre-tax restructuring and exit costs, of which $23.9
million relates to actions taken in its Hardware and Home Improvement segment
and $22.7 million relates to actions taken in its Power Tools and Accessories
segment. The restructuring actions taken in 2002 principally reflect: (1)
severance benefits related to the reduction of approximately 750 manufacturing
and administrative positions; (2) pension curtailment losses stemming from
headcount reductions associated with restructuring actions; (3) lease
termination costs; and (4) the write-down of certain equipment and buildings to
fair value less, if applicable, cost to sell. The severance costs include the
elimination of manufacturing employees in high-cost locations. The Corporation
estimates that, as a result of increases in manufacturing employee headcount in
low-cost locations, approximately 500 replacement positions will be filled,
yielding a net total of 250 positions eliminated as a result of the 2002
restructuring actions. In the preceding table, the $9.1 million non-cash
utilization of the reserves established for other charges represents curtailment
losses relating to certain of the Corporation's defined benefit pension plans in
the United States and England.
The $46.6 million charge recognized during the nine months ended September
29, 2002, was offset by the reversal of $8.2 million of severance accruals,
asset impairment charges, and other exit costs. That $8.2 million, established
as part of the 2001 restructuring charge, will no longer be required,
principally as a result of higher employee attrition and higher salvage values
than initially contemplated.
-14-
NOTE 10: POSTRETIREMENT BENEFITS
Due to declines in equity markets, the fair value of the Corporation's pension
fund assets has decreased since the fourth quarter of 2001. At the same time,
due to lower interest rates, the Corporation's accumulated benefit obligation--a
discounted measure of its current pension obligation--has increased. The
combination of these two factors has resulted in an underfunded status in
certain of the Corporation's pension plans.
As a result, the Corporation expects to record a minimum pension liability
adjustment at December 31, 2002, in accordance with SFAS No. 87, Employers'
Accounting for Pensions. This adjustment, which will not impact net earnings or
cash flow in 2002, will result in a direct charge to stockholders' equity and be
included in accumulated other comprehensive income (loss). The charge to
stockholders' equity is expected to approximate $350 million, net of tax.
NOTE 11: INCOME TAXES
The tax provisions for the three- and nine-month periods ended September 29,
2002 and September 30, 2001 are based on the estimated effective tax rates
applicable for the full years, after giving effect to significant unusual items,
if any, related specifically to the interim periods.
The Corporation's effective tax rates for the three- and nine-month periods
ended September 29, 2002, were 19% and 24%, respectively, compared to an
effective tax rate of 30% for the three- and nine-month periods ended September
30, 2001. Excluding the income tax benefit of $16.1 million relating to the
pre-tax restructuring charge of $38.4 million recognized in 2002, the effective
tax rate for the three- and nine-month periods ended September 29, 2002, would
have been 27%. The reduction in the effective tax rate during 2002, excluding
the income tax benefit associated with the 2002 restructuring charge, is
attributable to the amortization of non-deductible goodwill in the 2001 periods.
NOTE 12: LITIGATION AND CONTINGENT LIABILITIES
As more fully disclosed in Note 19 of Notes to Consolidated Financial Statements
included in Item 8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001, the Corporation is involved in various lawsuits in the
ordinary course of business. These lawsuits involve claims for damages arising
out of the use of the Corporation's products, allegations of patent and
trademark infringement, and litigation and administrative proceedings relating
to employment matters and commercial disputes. In addition, the Corporation is
involved in lawsuits and administrative proceedings with respect to claims
involving the discharge of hazardous substances into the environment.
The Corporation's estimate of the costs associated with legal, product
liability, and environmental exposures is accrued if, in management's judgment,
the likelihood of a loss is probable. These accrued liabilities are not
discounted.
As of September 29, 2002, the Corporation had no known probable but
inestimable exposures that are expected to have a material adverse effect on the
Corporation.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $54.9 million, or $.68 per share on a
diluted basis, for the three-month period ended September 29, 2002, compared to
net earnings of $46.2 million, or $.57 per share on a diluted basis, for the
three-month period ended September 30, 2001. Net earnings for the three-month
period ended September 29, 2002, included a pre-tax restructuring charge of
$38.4 million ($22.3 million net of tax). Excluding the impact of this
restructuring charge, net earnings for the three-month period ended September
29, 2002, would have been $77.2 million, or $.95 per share on a diluted basis.
Net earnings for the three-month period ended September 30, 2001, would have
been $52.8 million, or $.65 per share on a diluted basis, using the new
accounting standard for goodwill.
For the nine months ended September 29, 2002, the Corporation reported net
earnings of $154.0 million, or $1.90 per share on a diluted basis, compared to
net earnings of $121.0 million, or $1.49 per share on a diluted basis, for the
nine-month period ended September 30, 2001. Excluding the restructuring charge,
net earnings for the nine-month period ended September 29, 2002, would have been
$176.3 million, or $2.18 per share on a diluted basis. Net earnings for the
nine-month period ended September 30, 2001, would have been $140.8 million, or
$1.73 per share on a diluted basis, using the new accounting standard for
goodwill.
In the discussion and analysis of financial condition and results of
operations that follows, the Corporation generally attempts to list contributing
factors in order of significance to the point being addressed.
RESULTS OF OPERATIONS
SALES
The following chart sets forth an analysis of the consolidated changes in sales
for the three- and nine-month periods ended September 29, 2002, and September
30, 2001:
ANALYSIS OF CHANGES IN SALES
- -------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
(Dollars in Millions) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Total sales $1,085.2 $1,039.2 $3,162.2 $3,050.9
- -------------------------------------------------------------------------------------------------------
Unit volume 4 % (2)% 5 % (1)%
Price (2)% (2)% (1)% (2)%
Currency 2 % (2)% - % (3)%
- -------------------------------------------------------------------------------------------------------
Change in total sales 4 % (6)% 4 % (6)%
=======================================================================================================
Total consolidated sales for the three and nine months ended September 29,
2002, increased by 4% over the corresponding 2001 levels, as unit volume growth
more than offset negative pricing effects. For the three months ended September
29, 2002, that unit volume growth was augmented by positive foreign currency
effects.
-16-
Growth in unit volume during the three- and nine-month periods ended
September 29, 2002, caused a 4% and 5% increase, respectively, in sales as
compared to the same periods in 2001. The increase in both the three- and
nine-month periods was primarily attributable to higher unit volumes in both the
power tools and accessories and security hardware businesses in North America.
For the nine-month period ended September 29, 2002, the incremental sales of a
business acquired by the Fastening and Assembly Systems segment in April 2001
also contributed to unit volume growth. Those increases were partially offset by
unit volume declines in the plumbing products and European security hardware
businesses.
Pricing actions, taken as a result of customer and competitive pressure,
had a 2% and 1% negative effect on sales for the three- and nine-month periods
ended September 29, 2002, respectively, as compared to the corresponding periods
in 2001.
The effects of a weaker U.S. dollar compared to certain other foreign
currencies, particularly the euro and the pound sterling, caused a 2% increase
in the Corporation's consolidated sales during the three-month period ended
September 29, 2002, as compared to the corresponding period in 2001. The effects
of foreign currency translation did not have a material impact on sales for the
nine months ended September 29, 2002, as compared to the corresponding 2001
period.
EARNINGS
Operating income for the three months ended September 29, 2002, was $83.3
million compared to operating income of $89.0 million for the corresponding
period in 2001. Operating income for the nine months ended September 29, 2002,
was $253.0 million compared to operating income of $245.6 million for the
corresponding period in 2001. Operating income for the three and nine months
ended September 29, 2002, included a restructuring charge of $38.4 million.
Operating income for the three and nine months ended September 30, 2001,
included goodwill amortization of $6.6 million and $19.8 million, respectively.
No goodwill amortization is included in the 2002 results due to a change in
accounting standards. Excluding both the 2002 restructuring charge and the 2001
goodwill amortization, operating income for the third quarter increased from
$95.6 million, or 9.2% of sales, in 2001 to $121.7 million, or 11.2% of sales,
in 2002. Excluding both the 2002 restructuring charge and 2001 goodwill
amortization, operating income for the first nine months increased from $265.4
million, or 8.7% of sales, in 2001 to $291.4 million, or 9.2% of sales, in 2002.
Gross margin as a percentage of sales was 35.1% and 33.0% for the
three-month periods ended September 29, 2002, and September 30, 2001,
respectively, and was 33.7% and 33.0% for the nine-month periods ended September
29, 2002, and September 30, 2001, respectively. The increase in gross margin as
a percentage of sales for both the three- and nine-month periods ended September
29, 2002, as compared to the corresponding period in 2001, was principally the
result of higher production levels in the Power Tools and Accessories segment in
2002 from the lower levels experienced in 2001 when the business took actions to
reduce inventory levels. Those higher production levels in the Power Tools and
Accessories segment in 2002 were partially offset by lower production levels in
the Hardware and Home Improvement segment. The Hardware and Home Improvement
segment operated at lower production levels during the three and nine months
ended September 29, 2002, both in order to reduce inventory levels and in
response to lower sales in the plumbing products and European security hardware
businesses. For the quarter ended September 29, 2002, gross margin improvements
also stemmed from savings associated with Six Sigma initiatives and
restructuring actions, as well as from lower warranty costs.
-17-
Selling, general, and administrative expenses as a percentage of sales were
23.9% and 24.5% for the three and nine months ended September 29, 2002,
respectively. Selling, general, and administrative expenses as a percentage of
sales for the three- and nine-month periods ended September 30, 2001, would have
been 23.8% and 24.3%, respectively, using the new accounting standard for
goodwill. Excluding goodwill amortization recognized in 2001, selling, general,
and administrative expenses increased by $11.8 million for the three months
ended September 29, 2002, and $32.2 million for the nine months ended September
29, 2002, as compared to the corresponding periods in 2001, as the Corporation
increased its reserves for certain environmental remediation matters, recognized
greater employee-related expenses, and incurred additional transportation and
distribution costs as a result of the higher sales levels in 2002.
Net interest expense (interest expense less interest income) for the three
months ended September 29, 2002, was $14.2 million compared to net interest
expense of $20.4 million for the three months ended September 30, 2001. Net
interest expense was $44.8 million for the nine months ended September 29, 2002,
compared to net interest expense of $65.5 million for the corresponding period
in 2001. The decrease in net interest expense for the three- and nine-month
periods ended September 29, 2002, as compared to the corresponding periods in
2001, resulted from both lower borrowing levels and interest rates.
Other expense was $1.7 million and $5.1 million for the three and nine
months ended September 29, 2002, respectively, compared to $2.7 million and $7.3
million for the corresponding periods in 2001.
The Corporation's effective tax rates for the three- and nine-month periods
ended September 29, 2002, were 19% and 24%, respectively, compared to an
effective tax rate of 30% for the three- and nine-month periods ended September
30, 2001. Excluding the income tax benefit of $16.1 million relating to the
pre-tax restructuring charge of $38.4 million, the effective tax rate for the
three- and nine-month periods ended September 29, 2002 would have been 27%. The
reduction in the effective tax rate during 2002, excluding the income tax
benefit associated with the 2002 restructuring charge, is attributable to the
amortization of non-deductible goodwill in the 2001 periods.
The Corporation reported net earnings of $54.9 million, or $.68 per share
on a diluted basis, for the three-month period ended September 29, 2002,
compared to net earnings of $46.2 million, or $.57 per share on a diluted basis,
for the three-month period ended September 30, 2001. The Corporation reported
net earnings of $154.0 million, or $1.90 per share on a diluted basis, for the
nine-month period ended September 29, 2002, compared to net earnings of $121.0
million, or $1.49 per share on a diluted basis, for the corresponding period in
2001. Net earnings for the three- and nine-month periods ended September 29,
2002, included a $22.3 million after-tax restructuring charge. Net earnings for
the three- and nine-month periods ended September 30, 2001, included $6.6
million and $19.8 million, respectively, of goodwill amortization. No goodwill
amortization is included in the 2002 results due to a change in accounting
standards. Excluding both the 2002 restructuring charge and the 2001 goodwill
amortization, net earnings for the three-month period ended September 29, 2002
would have been $77.2 million, or $.95 per share on a diluted basis, as compared
to $52.8 million, or $.65 per share on a diluted basis, for the corresponding
period in 2001. Excluding both the 2002 restructuring charge and the 2001
goodwill amortization, net earnings for the nine-month period ended September
29, 2002, would have been $176.3 million, or $2.18 per share on a diluted basis,
compared to $140.8 million, or $1.73 per share on a diluted basis, for the
corresponding period in 2001.
-18-
BUSINESS SEGMENTS
As more fully described in Note 7 of Notes to Consolidated Financial Statements,
the Corporation operates in three reportable business segments: Power Tools and
Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems.
Power Tools and Accessories
Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 7 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $767.6 $741.2 $2,209.9 $2,121.5
Segment profit 105.6 77.9 237.9 167.5
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the third quarter of 2002 increased 4% over the 2001 level.
Sales of power tools and accessories in North America increased at a
mid-single-digit rate in the third quarter of 2002 over the corresponding period
in 2001, reflecting a double-digit rate of growth in sales of consumer power
tools and accessories. Sales of consumer power tools and accessories in North
America increased in most product categories during the quarter and benefited
from new product launches and success in the mass merchant channel. Sales of
professional power tools and accessories in North America during the third
quarter of 2002 matched the level of the third quarter of 2001, a period in
which the business introduced a significant number of new products. During the
three months ended September 29, 2002, the power tools and accessories business
in North America benefited from orders in preparation for fourth-quarter
promotions. The Corporation believes that, at September 29, 2002, the levels of
its inventories held by certain large customers increased over the comparable
levels held earlier in 2002. The Corporation attributes that increase to
purchases by those customers in anticipation of planned fourth quarter
promotional activities by both the Corporation and the customers. The
Corporation's sales during the fourth quarter of 2002 could be adversely
impacted if those promotional activities do not meet the customers'
expectations.
Sales of power tools and accessories in Europe increased at a low
single-digit rate during the third quarter of 2002 over the corresponding period
in 2001, as a high single-digit rate of growth in sales of professional power
tools and accessories was offset by a low single-digit decline in sales of
consumer products. Lower sales in Germany were more than offset by higher sales
in most other European countries. The sales declines in Germany were mainly
driven by the continued lower sales of consumer products.
Sales of power tools and accessories in other geographic areas increased at
a mid-single-digit rate for the third quarter of 2002 over the prior year level.
Sales of consumer power tools and accessories increased at a high single-digit
rate, while sales of professional power tools approximated the prior year's
level.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 13.8% for the three-month period ended September 29, 2002, compared
to 10.5% for the
-19-
corresponding 2001 period. The increase in segment profit as a percentage of
sales during the third quarter of 2002 was driven by higher gross margins and by
slightly lower selling, general, and administrative expenses as a percentage of
sales. The higher gross margins principally resulted from higher production
levels in 2002 as compared to the lower levels experienced in the corresponding
period in 2001 when the business took actions to reduce inventory levels. Gross
margin improvements also resulted from savings gained through Six Sigma
initiatives and restructuring actions, more favorable product mix, and a
decrease in warranty costs during the third quarter of 2002. Gross margins in
2001 were also depressed by price reductions taken by the business in order to
trim inventory levels. Segment profit as a percentage of sales during the third
quarter of 2002 also increased due to the leverage of selling, general, and
administrative expenses over the higher sales volume and to cost reduction
initiatives.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the nine months ended September 29, 2002, increased 4% over the 2001
level.
During the first nine months of 2002, sales of power tools and accessories
in North America increased at a mid-single-digit rate over the same period in
2001. That increase resulted as sales of consumer power tools and accessories
grew at a high single-digit rate and sales of professional power tools and
accessories grew at a mid-single-digit rate. The consumer business experienced
double-digit rates of growth in sales of both its outdoor and home products
lines and a mid-single-digit rate of growth in sales of consumer power tools.
The consumer business benefited from new product introductions and success in
the mass merchant channels. Both the consumer and professional businesses in
North America benefited from strong promotional activities during the first nine
months of 2002.
Sales of power tools and accessories in Europe during the first nine months
of 2002 decreased at a low single-digit rate from the 2001 level. That decrease
resulted as a mid-single-digit rate of increase in sales of professional power
tools and accessories was offset by a mid-single-digit rate of decline in sales
of consumer products. Lower sales in Germany and the United Kingdom were
partially offset by higher sales in most other European countries. The sales
declines in Germany and the United Kingdom were mainly driven by lower sales of
consumer products, due to the exit of the lawnmower product line in the United
Kingdom and to the high level of private label Asian-sourced inventory held by
retailers.
Sales of power tools and accessories in other geographic areas increased at
a mid-single-digit rate in the first nine months of 2002 over the 2001 level.
That increase occurred as sales of professional power tools and accessories
increased at a low single-digit rate and sales of consumer power tools and
accessories increased at a mid-single-digit rate.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 10.8% for the first nine months of 2002 as compared to 7.9% for the
corresponding period in 2001. The principal factors that contributed to this
improvement also were the primary factors for the improvement in segment profit
as a percentage of sales in the three months ended September 29, 2002,
previously described. The higher gross margins for the first nine months of 2002
as compared to the corresponding period in 2001 were realized despite the
business's provision for expected costs associated with product recalls.
-20-
Hardware and Home Improvement
Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 7 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $177.6 $185.2 $571.0 $569.9
Segment profit 10.5 16.1 32.6 42.0
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment decreased 4% for the three months ended September 29, 2002, as compared
to the 2001 level. Lower sales of plumbing products, coupled with lower sales of
security hardware in Europe, more than offset a double-digit rate of growth in
sales of security hardware in the rest of the world. During the third quarter of
2002, sales of plumbing products declined at a double-digit rate from the prior
year level, principally as a result of its loss of shelf space at The Home
Depot, and sales of security hardware in Europe also declined at a double-digit
rate, principally due to weakness in the construction industry. Those declines
were partially offset by a double-digit-rate of growth in sales of security
hardware in the rest of the world, due primarily to the success of the brand and
product repositioning introduced in North American home centers in late 2001 and
to other retailers in 2002.
As a result of a line review in 2002, the Corporation's plumbing products
business will lose significant shelf space at The Home Depot. The plumbing
products business expects to lose its shelf space at Home Depot stores in the
central and eastern United States, and retain most of its shelf space at Home
Depot stores in the western United States. The transition should be complete by
the end of 2002. The Corporation expects that this loss of shelf space will
negatively impact its plumbing product sales by approximately $15 million in
2002 and by approximately $50 million on an annual basis thereafter. While the
plumbing products business is expected to take action to mitigate the impact of
this sales loss, the Corporation believes that profitability of its plumbing
products business will be adversely affected during the remainder of 2002 and
beyond. Because the Corporation has goodwill associated with the plumbing
products business, a sustained reduction in the future cash flows of that
business beyond that currently anticipated could result in a non-cash write-down
of goodwill.
Sales to unaffiliated customers in the Hardware and Home Improvement
segment for the nine months ended September 29, 2002, approximated the 2001
level. Sales of security hardware in North America grew at a high single-digit
rate over the corresponding period in 2001 due to the brand and product
repositioning previously described. That increase was substantially offset by a
double-digit rate of decline in sales of plumbing products, due primarily to the
effects of the loss of shelf space at The Home Depot, lower sales in non-home
center channels, and a high single-digit rate of decline in sales of European
security hardware.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 5.9% and 5.7% for the three and nine months ended
September 29, 2002, respectively, compared to 8.7% and 7.4% for the three and
nine months ended September 30, 2001, respectively. That decrease in segment
profit as a percentage of sales for the three- and nine-month periods ended
September 29, 2002, was principally due to declines in gross margins which were
only partially
-21-
offset by lower selling, general, and administrative expenses as a percentage of
sales. Those declines in gross margin resulted from lower production levels at
North American security hardware and plumbing product plants, as those
businesses took action to reduce inventory levels, and from lower production
volumes at European security hardware plants in response to lower sales. In
addition, gross margins were negatively impacted by costs related to
restructuring activities underway in the plumbing products business. Lower
selling, general, and administrative expenses as a percentage of sales for both
the three- and nine-month periods ended September 29, 2002, principally resulted
from restructuring actions that were taken in 2001 to reduce headcount and
reduced promotional spending.
Fastening and Assembly Systems
Segment sales and profit for the Fastening and Assembly Systems segment,
determined on the basis described in Note 7 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
- ------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $123.4 $118.1 $376.2 $362.1
Segment profit 18.5 14.5 52.8 53.8
- ------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased 4% for the three-month period ended September 29, 2002, as
compared to the corresponding 2001 level. That increase stemmed from
mid-single-digit rates of increase in sales to automotive and industrial
customers in North America, and customers in Asia, coupled with a low
single-digit rate of increase in sales to automotive customers in Europe. Those
increases were partially offset by lower sales to industrial customers in
Europe, where sales declined at a low single-digit rate.
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased 4% for the nine months ended September 29, 2002, over the
corresponding 2001 period. Incremental sales associated with a distribution
business acquired in April 2001 accounted for 3% of the 4% sales growth
realized. A double-digit rate of increase in sales to automotive customers,
including the effect of the business acquired in April 2001, was partially
offset by a mid-single-digit rate of decline in sales to industrial customers,
particularly in Europe.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment was 15.0% for the three months ended September 29, 2002,
compared to 12.3% for the corresponding period in 2001. That increase in segment
profit as a percentage of sales for the three-month period was principally due
to higher gross margins, reflecting higher production levels and lower material
costs.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment decreased from 14.9% in the first nine months of 2001 to 14.0%
for the corresponding period in 2002. That decline in segment profit as a
percentage of sales for the nine-month period was principally due to lower gross
margins, reflecting the inherently lower margins in the distribution business
acquired in April 2001, and unfavorable product mix.
-22-
Other Segment-Related Matters
Amounts allocated to businesses in arriving at segment profit in excess of (less
than) Corporate center operating expenses, eliminations, and other amounts
identified in the final table included in Note 7 of Notes to Consolidated
Financial Statements were $(21.4) million and $(56.3) million for the three- and
nine-month periods ended September 29, 2002, respectively, compared to $(14.5)
million and $(26.4) million for the comparable periods in 2001. The increase in
these unallocated Corporate center operating expenses for the three and nine
months ended September 29, 2002, as compared to the prior year levels, was
primarily due to an increase in reserves for certain environmental remediation
matters and to higher employee-related expenses, including certain centrally
managed expenses not allocated directly to the Corporation's business segments.
RESTRUCTURING ACTIVITY
As more fully discussed in Note 9 of Notes to Consolidated Financial Statements
and Item 7 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001, under the caption "Restructuring Actions", during the fourth
quarter of 2001, the Corporation formulated a restructuring plan--expected to be
completed over a two- to three-year period at a total cost of approximately $190
million. During the fourth quarter of 2001, the Corporation commenced the first
phase of that plan and recorded a $99.8 million pre-tax restructuring charge to
reduce the Corporation's manufacturing cost base in its Power Tools and
Accessories and Hardware and Home Improvement segments, as well as to reduce
selling, general, and administrative expenses throughout all of its businesses.
During the three and nine months ended September 29, 2002, the Corporation
recorded a $38.4 million restructuring charge relating to its Power Tools and
Accessories and Hardware and Home Improvement segments, bringing the
project-to-date charges to $138.2 million. During the first nine months of 2002,
the Corporation spent approximately $26.7 million on the restructuring plan. A
number of the severance actions taken under the restructuring plan require
payouts over time periods mandated by local authorities or by the Corporation's
existing severance plans.
The $38.4 million restructuring charge recognized by the Corporation during
the three and nine months ended September 29, 2002, principally provides for the
closure of a security hardware facility in Waynesboro, Georgia; closure of an
accessories packaging facility in England; transfer of certain power tool
production from a facility in England to a low-cost facility in the Czech
Republic; and the elimination of certain administrative positions, principally
in Europe.
The Corporation anticipates that the pre-tax savings associated with its
restructuring actions will benefit 2002 results by at least $10 million. The
Corporation expects that pre-tax savings associated with its restructuring
actions will approximate $60 million in 2003. The savings that the Corporation
expects to achieve in 2002 and 2003 are net of restructuring-related expenses
and inefficiencies inherent in the transfer of production and services.
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, the Corporation is required to adopt SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, for restructuring actions
initiated after December 31, 2002. As previously indicated, the overall
restructuring plan, formulated in the fourth quarter of 2001, is expected to be
completed over a two- to three-year period. The Corporation anticipates that
additional restructuring actions under this overall plan will be undertaken
during the balance of 2002 and/or the 2003-2004 timeframe. After adoption of
SFAS No. 146 in 2003, the timing of recognition of
-23-
certain costs--associated with restructuring actions to be taken by the
Corporation in the future--will be affected. The Corporation believes that the
impact of the adoption of SFAS No. 146 will be mitigated as the new standard
excludes from its scope two significant components of its overall restructuring
plan--severance benefits that are subject to an on-going benefit arrangement and
asset impairments.
The Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve
processes, and eliminate excess capacity.
FINANCIAL CONDITION
Operating activities provided cash of $234.0 million for the nine months ended
September 29, 2002, compared to $100.5 million of cash provided in the
corresponding period in 2001. The increase in cash provided by operating
activities during the nine months ended September 29, 2002, was primarily a
result of the amount and timing of payments on certain accrued liabilities,
including the favorable timing of income tax payments, and higher net earnings.
The Corporation reviews certain working capital metrics. For example, the
Corporation evaluates its accounts receivable and inventory levels through the
computation of days sales outstanding and inventory turnover ratio,
respectively. The number of days sales outstanding at September 29, 2002,
improved slightly as compared to the number of days sales outstanding at
September 30, 2001. Inventory turns at September 29, 2002, increased in
comparison to the corresponding period in 2001 as a result of the Corporation's
focus on reducing inventory levels. The Corporation expects that its year-end
inventory level for 2002 will be similar to 2001, reflecting additional safety
stock required to implement its restructuring program.
Investing activities for the nine months ended September 29, 2002, used
cash of $64.9 million compared to $122.8 million of cash used for the
corresponding period in 2001. Cash flow from investing activities for the
nine-month period ended September 30, 2001, included the use of $30.5 million
associated with the acquisition of the automotive division of Bamal Corporation.
Cash flow from investing activities benefited from lower capital expenditures
during the first nine months of 2002 compared to the corresponding period in
2001. The Corporation anticipates that its capital spending in 2002 will be
lower than capital spending in 2001.
Financing activities used cash of $48.2 million for the nine-month period
ended September 29, 2002, compared to cash provided of $26.2 million during the
first nine months of 2001. The decrease in cash provided from financing
activities is primarily the result of reduced cash proceeds from the issuance of
long-term debt, lower outstanding borrowings under the Corporation's short-term
credit facilities during the 2002 period as compared to the 2001 period when the
Corporation was reducing its borrowing levels, and stock repurchases that
occurred during the 2001 period.
As discussed further in Note 4 of Notes to Consolidated Financial
Statements, in April 2002, the Corporation entered into a $250 million 364-day
unsecured revolving credit facility. This facility replaced the Corporation's
former $400 million 364-day unsecured revolving credit facility. The Corporation
reduced the borrowing availability under the facility based upon its anticipated
short-term financing needs.
During the nine months ended September 29, 2002, the Corporation did not
repurchase any shares of its common stock. At September 29, 2002, the
Corporation had remaining authorization from its Board of Directors to
repurchase 1,911,595 shares of its common stock.
On October 23, 2002, the Corporation announced that, in order to reduce
account servicing
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costs, it has implemented a Selling/Purchasing Program (the "program") for
stockholders who, as of November 4, 2002, own fewer than 100 shares of the
Corporation's common stock. The Corporation anticipates that the maximum amount
of common stock that will be repurchased under the program will be approximately
215,000 shares.
As discussed further in Note 10 of Notes to Consolidated Financial
Statements, in accordance with SFAS No. 87, Employers' Accounting for Pensions,
the Corporation expects to record a minimum pension liability adjustment at
December 31, 2002 that will result in a direct charge to stockholders' equity of
approximately $350 million, net of tax. That charge to stockholders' equity will
not impact the Corporation's compliance with its covenants under its borrowing
agreements, net earnings in 2002, or cash flow in 2002. The Corporation
anticipates that the expense recognized relating to its pension benefit plans in
2003 will increase by approximately $20 million from the 2002 levels.
In addition to measuring its cash flow generation and usage based upon the
operating, investing, and financing classifications included in the Consolidated
Statement of Cash Flows, the Corporation also measures its free cash flow. Free
cash flow, a measure commonly employed by the financial community, is defined by
the Corporation as cash flow from operating activities, less capital
expenditures, plus proceeds from the disposal of assets (excluding proceeds from
business sales). During the nine months ended September 29, 2002, the
Corporation had free cash flow of $167.7 million compared to free cash flow of
$8.2 million for the corresponding period in 2001.
The variable rate debt to total debt ratio, after taking interest rate
hedges into account, was 52% at September 29, 2002, compared to 51% at December
31, 2001. Average debt maturity was 7.4 years at September 29, 2002, compared to
7.9 years at December 31, 2001.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating
to sales growth, earnings or earnings per share growth, and market share, as
well as statements expressing optimism or pessimism about future operating
results, are forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements for a number of reasons, including but not
limited to those factors identified in Item 1(f) of Part I of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2001. An additional
risk factor that should be considered is the effect of the U.S. longshoreman's
lockout at West Coast
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ports on the Corporation's ability to obtain products from its facilities and
suppliers in China and elsewhere in a timely and cost-effective manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained under the caption "Hedging
Activities," included in Item 7, and in Notes 1 and 9 of Notes to Consolidated
Financial Statements included in Item 8 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2001, and is incorporated by reference
herein. There have been no material changes in the reported market risks since
the end of the most recent fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, the Corporation
carried out an evaluation--under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer--of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
(b) There have been no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation described in the preceding paragraph.
-26-
THE BLACK & DECKER CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings involving employment matters and commercial disputes. Some of these
lawsuits include claims for punitive as well as compensatory damages. The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability as described above up to the
limits of the deductibles. All other claims and lawsuits are handled on a
case-by-case basis.
Pursuant to authority granted under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), the United States
Environmental Protection Agency (EPA) has issued a National Priority List (NPL)
of sites at which action is to be taken by the EPA or state authorities to
mitigate the risk of release of hazardous substances into the environment. The
Corporation is engaged in continuing activities with regard to various sites on
the NPL and other sites covered under CERCLA. The Corporation also is engaged in
site investigations and remedial activities to address environmental
contamination from past operations at current and former manufacturing
facilities in the United States and abroad. To minimize the Corporation's
potential liability with respect to these sites, when appropriate, management
has undertaken, among other things, active participation in steering committees
established at the sites and has agreed to remediation through consent orders
with the appropriate government agencies. Due to uncertainty over the
Corporation's involvement in some of the sites, uncertainty over the remedial
measures to be adopted at various sites and facilities, and the fact that
imposition of joint and several liability with the right of contribution is
possible under CERCLA and other laws and regulations, the liability of the
Corporation with respect to any site at which remedial measures have not been
completed cannot be established with certainty. On the basis of periodic reviews
conducted with respect to the sites, however, the Corporation has established
appropriate liability accruals.
The Corporation's estimate of the costs associated with legal, product
liability, and environmental exposures is accrued if, in management's judgment,
the likelihood of a loss is probable. These accrued liabilities are not
discounted.
As of September 29, 2002, the Corporation's aggregate probable exposure
with respect to environmental liabilities, for which accruals have been
established in the Consolidated Financial Statements, was $39.4 million.
As of September 29, 2002, the Corporation had no known probable but
inestimable exposures for awards and assessments in connection with
environmental matters and litigation and administrative proceedings that are
expected to have a material adverse effect on the Corporation. In the opinion of
management, amounts accrued for awards or assessments in connection with
environmental matters and litigation and administrative proceedings to which the
Corporation is a party are adequate and, accordingly, the ultimate resolution of
these matters will not have a material adverse effect on the Corporation.
-27-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
3 Bylaws of the Corporation, as amended.
99.0 Chief Executive Officer's Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
99.1 Chief Financial Officer's Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
On July 23, 2002, the Corporation filed a Current Report on Form 8-K with the
Commission. That Current Report on Form 8-K, filed pursuant to Item 5 of that
Form, stated that, on July 23, 2002, the Corporation had reported its earnings
for the three and six months ended June 30, 2002.
On August 12, 2002, the Corporation filed a Current Report on Form 8-K with the
Commission. That Current Report on Form 8-K, filed pursuant to Item 9 of that
Form, stated that, on August 12, 2002, the Corporation's principal executive
officer and principal financial officer submitted to the Securities and Exchange
Commission sworn statements pursuant to Securities and Exchange Commission Order
No. 4-460.
On September 23, 2002, the Corporation filed a Current Report on Form 8-K with
the Commission. That Current Report on Form 8-K, filed pursuant to Item 9 of
that Form, stated that, on September 23, 2002, the Corporation announced that it
affirmed comfort with consensus earnings estimates for the third quarter and
full year 2002 despite the loss of shelf space by its plumbing products
business.
The Corporation did not file any other reports on Form 8-K during the
three-month period ended September 29, 2002.
All other items were not applicable.
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THE BLACK & DECKER CORPORATION
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BLACK & DECKER CORPORATION
By /s/ MICHAEL D. MANGAN
-----------------------------------------------------
Michael D. Mangan
Senior Vice President and Chief Financial Officer
Principal Accounting Officer
By /s/ CHRISTINA M. McMULLEN
-----------------------------------------------------
Christina M. McMullen
Vice President and Controller
Date: November 11, 2002
-29-
THE BLACK & DECKER CORPORATION
C E R T I F I C A T I O N S
I, Nolan D. Archibald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ NOLAN D. ARCHIBALD
- ------------------------------------------------
Nolan D. Archibald
Chairman, President, and Chief Executive Officer
November 11, 2002
-30-
THE BLACK & DECKER CORPORATION
C E R T I F I C A T I O N S
I, Michael D. Mangan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Black & Decker
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ MICHAEL D. MANGAN
- -------------------------------------------------
Michael D. Mangan
Senior Vice President and Chief Financial Officer
November 11, 2002