UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
December 31, 2003 1-1553
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THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State of Incorporation) (I.R.S. Employer
Identification Number)
Towson, Maryland 21286
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 410-716-3900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, New York Stock Exchange
par value $.50 per share Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 27, 2003, was $3,320,303,326.
The number of shares of Common Stock outstanding as of February 20, 2004, was
78,452,693.
The exhibit index as required by Item 601(a) of Regulation S-K is included in
Item 15 of Part IV of this report.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Report.
Part I
ITEM 1. BUSINESS
(a) General Development of Business
The Black & Decker Corporation (collectively with its subsidiaries, the
Corporation), incorporated in Maryland in 1910, is a leading global manufacturer
and marketer of power tools and accessories, hardware and home improvement
products, and technology-based fastening systems. With products and services
marketed in over 100 countries, the Corporation enjoys worldwide recognition of
strong brand names and a superior reputation for quality, design, innovation,
and value.
The Corporation is one of the world's leading producers of power tools,
power tool accessories, and residential security hardware, and the Corporation's
product lines hold leading market share positions in these industries. The
Corporation is a major global supplier of engineered fastening and assembly
systems. The Corporation is one of the leading producers of faucets in North
America. These assertions are based on total volume of sales of products
compared to the total market for those products and are supported by market
research studies sponsored by the Corporation as well as independent industry
statistics available through various trade organizations and periodicals,
internally generated market data, and other sources.
During the fourth quarter of 2003, the Corporation completed the
acquisition of the Baldwin Hardware Corporation (Baldwin) and Weiser Lock
Corporation (Weiser) from Masco Corporation. The acquisition of these businesses
expands the Corporation's presence in the security hardware business in North
America. For additional information about the acquisition of Baldwin and Weiser,
see Note 2 of Notes to Consolidated Financial Statements included in Item 8 of
Part II of this report.
In January 2004, the Corporation completed the sale of two European
security hardware businesses, Corbin and NEMEF. Together with DOM security
hardware, which is currently held for sale, these businesses are reflected as
discontinued operations in the Consolidated Financial Statements included in
Item 8 of Part II of this report, and as such, operating results, assets and
liabilities, and cash flows of the discontinued European security hardware
business have been reported separately from the continuing operations of the
Corporation. For additional information about the discontinued European security
hardware business, see the discussion in Note 3 of Notes to Consolidated
Financial Statements included in Item 8 of Part II of this report.
(b) Financial Information About Business Segments
The Corporation operates in three reportable business segments: Power Tools and
Accessories, including consumer and professional power tools and accessories,
electric lawn and garden tools, electric cleaning and lighting products, and
product service; Hardware and Home Improvement, including security hardware and
plumbing products; and Fastening and Assembly Systems. For additional
information about these segments, see Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of
Part II of this report.
(c) Narrative Description of the Business
The following is a brief description of each of the Corporation's reportable
business segments.
POWER TOOLS AND ACCESSORIES
The Power Tools and Accessories segment has worldwide responsibility for the
manufacture and sale of consumer (home use) and professional corded and cordless
electric power tools, lawn and garden tools, home products, accessories and
attachments for power tools, and product service. In addition, the Power Tools
and Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside of the United States and Canada;
and for sales of household products, principally in Europe and Brazil.
Power tools include drills, screwdrivers, impact wrenches, hammers,
routers, wet/dry vacuums, planers, lights, radio/chargers, saws, sanders,
grinders, pneumatic nailers, bench and stationary machinery, air compressors,
generators, laser products, and WORKMATE(R) project centers and related
products. Lawn and garden tools include hedge trimmers, string trimmers, lawn
mowers, edgers, blower/vacuums, power sprayers, electric pressure washers, and
related accessories. Home products include stick and hand-held vacuums, flexible
flashlights, and wet scrubbers. Power tool accessories include drill bits,
hammer bits, router bits, hacksaws and blades, circular saw blades, jig and
reciprocating saw blades, screwdriver bits and quick-change systems, bonded and
other abrasives, and worksite tool belts and bags. Product service provides
replacement parts and repair and maintenance of power tools and lawn and garden
tools.
Power tools, lawn and garden tools, home products, and accessories are
marketed around the world under the BLACK & DECKER name as well as other
trademarks and trade names, including, without limitation, ORANGE AND BLACK
COLOR SCHEME; DEWALT; YELLOW AND BLACK COLOR SCHEME; BULLET; BULLS EYE;
CROSSHAIR; FIRESTORM; GELMAX COMFORT GRIP; MEGA MOUSE; MOUSE; NAVIGATOR; PIVOT
DRIVER; PIVOTPLUS; QUANTUM PRO; RTX; SANDSTORM; SCORPION; SWIVEL; VERSAPAK;
WORKMATE; ZIPSAW MULTI PROJECT TOOL; 360(degree); ALLIGATOR; EMGLO; GUARANTEED
TOUGH; HOLGUN; MOMENTUM; QUATTRO; SCRUGUN; WILDCAT; XRP; AFS; AUTOMATIC FEED
SPOOL;
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FLEX TUBE; GROOM 'N' EDGE; EDGE HOG; GRASS HOG; HEDGE HOG; LAWN HOG; LEAF HOG;
REFLEX; STRIMMER; VAC 'N' MULCH; DIRTBUSTER; DUSTBUSTER; SCUMBUSTER; SNAKELIGHT;
STEAMBUSTER; ACCESSORIES FINDER; B&D; PILOT POINT; PIRANHA; RAPID LOAD; ROCK
CARBIDE; SERIES 20; SERIES 40; SERIES 60; TOUGH CASE; DEWALT SERVICENET; DROP
BOX EXPRESS; and GUARANTEED REPAIR COST (GRC).
The composition of the Corporation's sales by product groups for 2003,
2002, and 2001 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2003, 2002, or 2001.
The Corporation's product service program supports its power tools and
electric lawn and garden tools. Replacement parts and product repair services
are available through a network of company-operated service centers, which are
identified and listed in product information material generally included in
product packaging. At December 31, 2003, there were approximately 130 such
service centers, of which roughly two-thirds were located in the United States.
The remainder was located around the world, primarily in Canada and Asia. These
company-operated service centers are supplemented by several hundred authorized
service centers operated by independent local owners. The Corporation also
operates reconditioning centers in which power tools, electric lawn and garden
tools, and electric cleaning and lighting products are reconditioned and then
re-sold through numerous company-operated factory outlets and service centers.
Most of the Corporation's consumer power tools, electric lawn and garden
tools, and electric cleaning and lighting products sold in the United States
carry a two-year warranty, pursuant to which the consumer can return defective
products during the two years following the purchase in exchange for a
replacement product or repair at no cost to the consumer. Most of the
Corporation's professional power tools sold in the United States carry a
one-year service warranty and a three-year warranty for manufacturing defects.
Products sold outside of the United States generally have varying warranty
arrangements, depending upon local market conditions and laws and regulations.
The Corporation's product offerings in the Power Tools and Accessories
segment are sold primarily to retailers, wholesalers, distributors, and jobbers,
although some discontinued or reconditioned power tools, electric lawn and
garden tools, and electric cleaning and lighting products are sold through
company-operated service centers and factory outlets directly to end users.
Sales to The Home Depot, one of the segment's customers, accounted for greater
than 10% of the Corporation's consolidated sales for 2003, 2002, and 2001. Sales
to Lowe's Home Improvement Warehouse, one of the segment's customers, accounted
for greater than 10% of the Corporation's consolidated sales for 2003 and 2002.
For additional information regarding sales to The Home Depot and Lowe's Home
Improvement Warehouse, see Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report.
The principal materials used in the manufacturing of products in the Power
Tools and Accessories segment are plastics, aluminum, copper, steel, certain
electronic components, and batteries. These materials are used in various forms.
For example, aluminum or steel may be used in the form of wire, sheet, bar, and
strip stock.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority are available through multiple sources and are
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations.
Principal manufacturing and assembly facilities of the power tools,
electric lawn and garden tools, electric cleaning and lighting products, and
accessories businesses in the United States are located in Fayetteville, North
Carolina and Tampa, Florida. The principal distribution facilities in the United
States, other than those located at the manufacturing and assembly facilities
listed above, are located in Fort Mill, South Carolina, and Rancho Cucamonga,
California.
Principal manufacturing and assembly facilities of the power tools,
electric lawn and garden tools, electric cleaning and lighting products, and
accessories businesses outside of the United States are located in Suzhou,
China; Usti nad Labem, Czech Republic; Buchlberg, Germany; Perugia, Italy;
Spennymoor and Maltby, England; Reynosa, Mexico; and Uberaba, Brazil. In
addition to the principal facilities described above, the manufacture and
assembly of products for the Power Tools and Accessories segment also occurs at
the facility of its 50%-owned joint venture located in Shen Zhen, China. The
principal distribution facilities outside of the United States, other than those
located at the manufacturing facilities listed above, consist of a
central-European distribution center in Tongeren, Belgium, and a facility in
Northampton, England.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Power Tools and Accessories segment. Although these patents
and licenses are important, the Corporation is not materially dependent on such
patents or licenses with respect to its operations.
The Corporation holds various trademarks that are employed in its
businesses and operates under various trade names, some of which are stated
previously. The Corporation believes that these trademarks and trade names are
important to the marketing and distribution of its products.
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A significant portion of the Corporation's sales in the Power Tools and
Accessories segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature. However, sales of certain
consumer and professional power tools tend to be higher during the period
immediately preceding the Christmas gift-giving season, while the sales of most
electric lawn and garden tools are at their peak during the winter and early
spring period. Most of the Corporation's other product lines within this segment
generally are not seasonal in nature, but are influenced by other general
economic trends.
The Corporation is one of the world's leaders in the manufacturing and
marketing of portable power tools, electric lawn and garden tools, and
accessories. Worldwide, the markets in which the Corporation sells these
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong,
well-established manufacturers that compete on a global basis. Some of these
companies manufacture products that are competitive with a number of the
Corporation's product lines. Other competitors restrict their operations to
fewer categories, and some offer only a narrow range of competitive products.
Competition from certain of these manufacturers has been intense in recent years
and is expected to continue.
HARDWARE AND HOME IMPROVEMENT
The Hardware and Home Improvement segment has worldwide responsibility for the
manufacture and sale of security hardware products (except for the sale of
security hardware in Mexico, Central America, the Caribbean, and South America).
It also has responsibility for the manufacture of plumbing products, and for the
sale of plumbing products to customers in the United States and Canada. Security
hardware products consist of residential and light commercial door locksets,
electronic keyless entry systems, exit devices, keying systems, tubular and
mortise door locksets, general hardware, decorative hardware, outdoor lighting,
indoor lighting, home accents, and collectibles. General hardware includes door
hinges, cabinet hinges, door stops, kick plates, house numbers, and
switchplates. Decorative hardware includes cabinet hardware, switchplates, door
pulls, and push plates. Plumbing products consist of a variety of conventional
and decorative lavatory, kitchen, and tub and shower faucets, bath and kitchen
accessories, and replacement parts.
Security hardware products are marketed under a variety of trademarks and
trade names, including, without limitation, KWIKSET SECURITY; KWIKSET MAXIMUM
SECURITY; KWIKSET ULTRAMAX SECURITY; SOCIETY BRASS COLLECTION; KWIKSET; BLACK &
DECKER; PROTECTO LOCK; TYLO; POLO; KWIK INSTALL; EZ INSTALL; DIAMANT; ELS; GEO;
SAFE-LOCK BY BLACK & DECKER; BALDWIN; THE ESTATE COLLECTION; THE IMAGES
COLLECTION; LIFETIME FINISH; TIMELESS CRAFTSMANSHIP; LOGAN; SPRINGFIELD;
HAMILTON; BLAKELY; MANCHESTER; CANTERBURY; MADISON; STONEGATE; EDINBURGH;
KENSINGTON; BRISTOL; TREMONT; PEYTON; PASADENA; RICHLAND; WEISER; WEISER LOCK;
PRESTIGE SERIES; WELCOME HOME SERIES; ELEMENTS SERIES; BASICS BY WEISER LOCK;
BRILLIANCE LIFETIME ANTI-TARNISH FINISH; POWERBOLT; POWERBOLT KEYLESS ACCESS
SYSTEM; FASHION DOORWARE; DECORATOR FINISH; WEISERBOLT; ENTRYSETS; and VENETIAN
BRONZE. Plumbing products are marketed under the trademarks and trade names
PRICE PFISTER; CLASSIC SERIES BY PRICE PFISTER; PRICE PFISTER PROFESSIONAL
SERIES; BACH; SOLO; CONTEMPRA; MARIELLE; TWISTPFIT; MATCHMAKERS; CARMEL; PARISA;
SAVANNAH; ARIETTA; ALLEMANDE; GRAZIA; MORCEAU; CATALINA; GEORGETOWN; and
TREVISO.
The composition of the Corporation's sales by product groups for 2003,
2002, and 2001 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2003, 2002, or 2001.
Most of the Corporation's security hardware products sold in the United
States carry a warranty, pursuant to which the consumer can return defective
product during the warranty term in exchange for a replacement product at no
cost to the consumer. Warranty terms vary by product and range from a 10-year to
a lifetime warranty with respect to mechanical operations and from a 5-year to a
lifetime warranty with respect to finish. Products sold outside of the United
States for residential use generally have similar warranty arrangements. Such
arrangements vary, however, depending upon local market conditions and laws and
regulations. Most of the Corporation's plumbing products sold in the United
States carry a lifetime warranty with respect to function and finish, pursuant
to which the consumer can return defective product in exchange for a replacement
product or repair at no cost to the consumer.
The Corporation's product offerings in the Hardware and Home Improvement
segment are sold primarily to retailers, wholesalers, distributors, and jobbers.
Certain security hardware products are sold to commercial, institutional, and
industrial customers. Sales to The Home Depot, one of the segment's customers,
accounted for greater than 10% of the Corporation's consolidated sales for 2003,
2002, and 2001. Sales to Lowe's Home Improvement Warehouse, one of the segment's
customers, accounted for greater than 10% of the Corporation's consolidated
sales for 2003 and 2002. For additional information regarding sales to The Home
Depot and Lowe's Home Improvement Warehouse, see Note 17 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report.
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The principal materials used in the manufacturing of products in the
Hardware and Home Improvement segment are plastics, aluminum, steel, brass,
zamak, and ceramics.
The materials used in the various manufacturing processes are purchased on
the open market, and the majority is available through multiple sources and is
in adequate supply. The Corporation has experienced no significant work
stoppages to date as a result of shortages of materials. The Corporation has
certain long-term commitments for the purchase of various component parts and
raw materials and believes that it is unlikely that any of these agreements
would be terminated prematurely. Alternate sources of supply at competitive
prices are available for most, if not all, materials for which long-term
commitments exist. The Corporation believes that the termination of any of these
commitments would not have a material adverse effect on operations. From time to
time, the Corporation enters into commodity hedges on certain raw materials used
in the manufacturing process to reduce the risk of market price fluctuations. As
of December 31, 2003, the amount of product under commodity hedges was not
material to the Corporation.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment in the United States are located in Denison, Texas; Bristow,
Oklahoma; and Reading and Leesport, Pennsylvania.
Principal manufacturing and assembly facilities of the Hardware and Home
Improvement segment outside of the United States are located in Mexicali and
Nogales, Mexico. The principal distribution facilities in the United States,
other than those located at the manufacturing and assembly facilities listed
above, are located in Tucson, Arizona; Mira Loma, California; and Northpoint,
Pennsylvania.
For additional information with respect to these and other properties owned
or leased by the Corporation, see Item 2, "Properties."
The Corporation holds various patents and licenses on many of its products
and processes in the Hardware and Home Improvement segment. Although these
patents and licenses are important, the Corporation is not materially dependent
on such patents or licenses with respect to its operations.
The Corporation holds various trademarks that are employed in its
businesses and operates under various trade names, some of which are stated
above. The Corporation believes that these trademarks and trade names are
important to the marketing and distribution of its products.
A significant portion of the Corporation's sales in the Hardware and Home
Improvement segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature, but are influenced by
trends in the residential and commercial construction markets and other general
economic trends.
The Corporation is one of the world's leading producers of residential
security hardware and is one of the leading producers of faucets in North
America. Worldwide, the markets in which the Corporation sells these products
are highly competitive on the basis of price, quality, and after-sale service. A
number of competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies
manufacture products that are competitive with a number of the Corporation's
product lines. Other competitors restrict their operations to fewer categories,
and some offer only a narrow range of competitive products. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
FASTENING AND ASSEMBLY SYSTEMS
The Corporation's Fastening and Assembly Systems segment has worldwide
responsibility for the manufacture and sale of an extensive line of metal and
plastic fasteners and engineered fastening systems for commercial applications,
including blind riveting, stud welding, assembly systems, specialty screws,
prevailing torque nuts and assemblies, insert systems, metal and plastic
fasteners, self-piercing riveting systems, and platform-management services. The
fastening and assembly systems products are marketed under a variety of
trademarks and trade names, including, without limitation, EMHART TEKNOLOGIES;
EMHART FASTENING TEKNOLOGIES; EMHART; AUTOSET; DODGE; DRIL-KWICK; F-SERIES;
GRIPCO; GRIPCO ASSEMBLIES; HELI-COIL; JACK NUT; KALEI; MENTOR; NPR; NUT-FAST;
PARKER-KALON; PLASTIFAST; PLASTI-KWICK; POINT & SET; POP; POP-LOK; POPMATIC;
POPNUT; POP-SERT; POWERLINK; PROSET; SPLITFAST; SWAGEFORM; SWS; T-RIVET; TUCKER;
ULTRA-GRIP; ULTRASERT; WARREN; WELDFAST; and WELL-NUT. The Fastening and
Assembly Systems segment provides platform-management services in addition to
the manufacture and sale of the products previously described.
The composition of the Corporation's sales by product groups for 2003,
2002, and 2001 is included in Note 17 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report. Within each product
group shown, there existed no individual product that accounted for greater than
10% of the Corporation's consolidated sales for 2003, 2002, or 2001.
The principal markets for these products include the automotive,
transportation, electronics, aerospace, machine tool, and appliance industries.
Substantial sales are made to automotive manufacturers worldwide.
Products are marketed directly to customers and also through distributors
and representatives. These products face competition from many manufacturers in
several countries. Product quality, performance, reliability, price, delivery,
and technical and application engineering services are the primary competitive
factors. There is little seasonal variation in sales.
The Corporation owns a number of United States and foreign patents,
trademarks, and license rights relating to the fastening and assembly systems
business. While the Corporation considers those patents, trademarks, and license
rights to be valuable, it is not materially dependent upon such patents or
license rights with respect to its operations.
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Principal manufacturing facilities of the Fastening and Assembly Systems
segment in the United States are located in Danbury, Connecticut; Montpelier,
Indiana; Campbellsville and Hopkinsville, Kentucky; and Chesterfield, Michigan.
Principal manufacturing and assembly facilities outside of the United States are
located in Birmingham, England; Giessen, Germany; and Toyohashi, Japan. For
additional information with respect to these and other properties owned or
leased by the Corporation, see Item 2, "Properties."
The raw materials used in the fastening and assembly systems business
consist primarily of ferrous and nonferrous metals in the form of wire, bar
stock, and strip and sheet metals; plastics; and rubber. These materials are
readily available from a number of suppliers.
OTHER INFORMATION
The Corporation's product development program for the Power Tools and
Accessories segment is coordinated from the Corporation's headquarters in
Towson, Maryland. Additionally, product development activities are performed at
facilities in Hampstead, Maryland, in the United States; Maltby and Spennymoor,
England; Brockville, Canada; Perugia, Italy; Suzhou, China; Buchlberg and
Idstein, Germany; Mooroolbark, Australia; and Reynosa, Mexico.
Product development activities for the Hardware and Home Improvement
segment are performed at facilities in Lake Forest, California, and Reading,
Pennsylvania.
Product development activities for the Fastening and Assembly Systems
segment are currently performed at facilities in Danbury and Shelton,
Connecticut; Montpelier, Indiana; Campbellsville, Kentucky; Chesterfield and
Farmington Hill, Michigan; Birmingham, England; Giessen, Germany; and Toyohashi,
Japan.
Costs associated with development of new products and changes to existing
products are charged to operations as incurred. See Note 1 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report
for amounts of expenditures for product development activities.
As of December 31, 2003, the Corporation employed approximately 22,100
persons in its operations worldwide, excluding approximately 900 employees of
its discontinued European security hardware business. Approximately 450
employees in the United States are covered by collective bargaining agreements.
During 2003, one collective bargaining agreement in the United States was
negotiated without material disruption to operations. One agreement is scheduled
for negotiation during 2004. Also, the Corporation has government-mandated
collective bargaining arrangements or union contracts with employees in other
countries. The Corporation's operations have not been affected significantly by
work stoppages and, in the opinion of management, employee relations are good.
As more fully described under the caption "Restructuring Actions" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7, and in Note 19 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, in 2003, the
Corporation announced the closure of a security hardware facility in Bristow,
Oklahoma, and the closure of an administrative and distribution facility in
Tucson, Arizona. On-going restructuring actions taken by the Corporation will
also result in the transfer of production from the United States to low-cost
facilities in Mexico and China. Such closures and/or production transfers may
result in a deterioration of employee relations at the impacted locations or
elsewhere in the Corporation.
The Corporation's operations are subject to foreign, federal, state, and
local environmental laws and regulations. Many foreign, federal, state, and
local governments also have enacted laws and regulations that govern the
labeling and packaging of products and limit the sale of products containing
certain materials deemed to be environmentally sensitive. These laws and
regulations not only limit the acceptable methods for the discharge of
pollutants and the disposal of products and components that contain certain
substances, but also require that products be designed in a manner to permit
easy recycling or proper disposal of environmentally sensitive components such
as nickel cadmium batteries. The Corporation seeks to comply fully with these
laws and regulations. Although compliance involves continuing costs, the ongoing
costs of compliance with existing environmental laws and regulations have not
had, nor are they expected to have, a material adverse effect upon the
Corporation's capital expenditures or financial position.
Pursuant to authority granted under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), the United States
Environmental Protection Agency (EPA) has issued a National Priority List (NPL)
of sites at which action is to be taken to mitigate the risk of release of
hazardous substances into the environment. The Corporation is engaged in
continuing activities with regard to various sites on the NPL and other sites
covered under analogous state environmental laws. As of December 31, 2003, the
Corporation had been identified as a potentially responsible party (PRP) in
connection with approximately 26 sites being investigated by federal or state
agencies under CERCLA or analogous state environmental laws. The Corporation
also is engaged in site investigations and remedial activities to address
environmental contamination from past operations at current and former
manufacturing facilities in the United States and abroad.
To minimize the Corporation's potential liability with respect to these
sites, management has undertaken, when appropriate, active participation in
steering committees established at the sites and has agreed to remediation
through consent orders with the appropriate government agencies. Due to
uncertainty as to the Corporation's involvement in some of the sites,
uncertainty over the remedial measures to be adopted, and the fact that
imposition of joint and several liability with the right of contribution is
possible under CERCLA and other laws and regulations, the liability of the
Corporation with respect to any site at which remedial measures have not been
completed cannot be established with certainty. On the basis of periodic reviews
conducted with respect to these sites, however, the Corporation has established
appropriate liability accruals. The Corporation's estimate of the costs
associated with environmental exposures is accrued
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if, in management's judgment, the likelihood of a loss is probable and the
amount of the loss can be reasonably estimated. As of December 31, 2003, the
Corporation's aggregate probable exposure with respect to environmental
liabilities, for which accruals have been established in the consolidated
financial statements, was $51.7 million. In the opinion of management, the
amount accrued for probable exposure for aggregate environmental liabilities is
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation's consolidated
financial statements. As of December 31, 2003, the Corporation had no known
probable but inestimable exposures relating to environmental matters that are
expected to have a material adverse effect on the Corporation. There can be no
assurance, however, that unanticipated events will not require the Corporation
to increase the amount it has accrued for any environmental matter or accrue for
an environmental matter that has not been previously accrued because it was not
considered probable.
(d) Financial Information About Geographic Areas
Reference is made to Note 17 of Notes to Consolidated Financial Statements,
entitled "Business Segments and Geographic Information", included in Item 8 of
Part II of this report.
(e) Available Information
The Corporation files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The public may read and copy
any materials that the Corporation files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the Corporation, that file electronically with the SEC. The
public can obtain any documents that the Corporation files with the SEC at
http://www.sec.gov.
The Corporation also makes available free of charge on or through its
Internet website (http://www.bdk.com) the Corporation's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the
Corporation electronically files such material with, or furnishes it to, the
SEC.
Black & Decker's Corporate Governance Policies and Procedures Statement is
available free of charge on or through its Internet website (http://www.bdk.com)
or in print by calling (800) 992-3042 or (410) 716-2914. The Statement contains
charters of the standing committees of the Board of Directors, the Code of
Ethics and Standards of Conduct, and the Code of Ethics for Senior Financial
Officers.
(f) Executive Officers and Other Senior Officers of the Corporation
The current Executive Officers and Other Senior Officers of the Corporation,
their ages, current offices or positions, and their business experience during
the past five years are set forth below.
o NOLAN D. ARCHIBALD - 60
Chairman, President, and Chief Executive Officer,
January 1990 - present.
o IAN R. CARTER - 42
Vice President of the Corporation and President -
Europe and Asia, Black & Decker Consumer Group,
March 2004 - present;
Vice President of the Corporation and President -
Europe, Power Tools and Accessories Group,
July 2000 - March 2004;
Vice President and General Manager -
European Professional Power Tools,
Power Tools and Accessories Group,
December 1999 - June 2000;
Director - Low & Bonar PLC,
August 1998 - December 1999.
o CHARLES E. FENTON - 55
Senior Vice President and General Counsel,
December 1996 - present.
o PAUL A. GUSTAFSON - 61
Executive Vice President of the Corporation and
President - Fastening and Assembly Systems Group,
December 1996 - present.
o LES H. IRELAND - 39
Vice President of the Corporation and
Managing Director - Commercial Operations,
Europe, Black & Decker Consumer Group,
March 2004 - present;
Vice President of the Corporation and
Managing Director - Commercial Operations,
Europe, Power Tools and Accessories Group,
November 2001 - March 2004;
Vice President of the Corporation and Vice President and
General Manager - DEWALT Professional Power Tools,
North America, Power Tools and Accessories Group,
January 2001 - November 2001;
Vice President of the Corporation and President -
Accessories, Power Tools and Accessories Group,
September 2000 - January 2001;
President - Price Pfister,
Hardware and Home Improvement Group,
March 1999 - September 2000;
Vice President - Sales, Price Pfister,
Hardware and Home Improvement Group,
November 1998 - March 1999.
- 6 -
o THOMAS D. KOOS - 40
Group Vice President of the Corporation and President -
Black & Decker Consumer Group,
March 2004 - present;
Vice President of the Corporation and President -
Black & Decker Consumer Products,
Power Tools and Accessories Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
North American Consumer Power Tools,
Power Tools and Accessories Group,
December 2000 - January 2001;
President - North American Consumer Power Tools,
Power Tools and Accessories Group,
April 2000 - December 2000;
Vice President - Business Development,
Power Tools and Accessories Group,
August 1999 - April 2000;
President - Goody Products, Division of
Newell Rubbermaid Corporation,
January 1998 - August 1999.
o BARBARA B. LUCAS - 58
Senior Vice President - Public Affairs and
Corporate Secretary,
December 1996 - present.
o MICHAEL D. MANGAN - 47
Senior Vice President and Chief Financial Officer,
January 2000 - present;
Vice President - Investor Relations,
November 1999 - January 2000;
Executive Vice President and Chief Financial Officer -
The Ryland Group, Inc.,
November 1994 - September 1999.
o PAUL F. MCBRIDE - 48
Senior Vice President - Human Resources
and Corporate Initiatives,
March 2004 - present;
Executive Vice President of the Corporation and
President - Power Tools and Accessories Group,
April 1999 - March 2004;
Vice President - General Electric Company,
GE Silicones,
January 1998 - April 1999.
o CHRISTINA M. MCMULLEN - 48
Vice President and Controller,
April 2000 - present;
Controller,
January 2000 - April 2000;
Assistant Controller,
April 1993 - January 2000.
o CHRISTOPHER T. METZ - 38
Group Vice President of the Corporation and President -
Hardware and Home Improvement Group,
March 2004 - present;
Vice President of the Corporation and President -
Hardware and Home Improvement Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
Kwikset, Hardware and Home Improvement Group,
July 1999 - January 2001;
President - Kwikset, Hardware and
Home Improvement Group,
June 1999 - July 1999;
Vice President and General Manager - European
Professional Power Tools and Accessories,
Power Tools and Accessories Group,
August 1996 - May 1999.
o STEPHEN F. REEVES - 44
Vice President of the Corporation and Vice President -
Global Finance, Black & Decker Consumer Group,
March 2004 - present;
Vice President of the Corporation and Vice President -
Finance, Power Tools and Accessories Group,
April 2000 - March 2004;
Vice President - Finance and Strategic Planning,
January 2000 - April 2000;
Vice President and Controller,
September 1996 - January 2000.
o MARK M. ROTHLEITNER - 45
Vice President - Investor Relations and Treasurer,
January 2000 - present;
Vice President and Treasurer,
March 1997 - January 2000.
o EDWARD J. SCANLON - 49
Vice President of the Corporation and President -
Commercial Operations, North and South America,
DEWALT Professional Group,
March 2004 - present;
Vice President of the Corporation and President -
Commercial Operations, North America,
Power Tools and Accessories Group,
May 1999 - March 2004;
Vice President of the Corporation and Vice President
and General Manager - The Home Depot Division,
Power Tools and Accessories Group,
December 1997 - May 1999.
- 7 -
o JOHN W. SCHIECH - 45
Group Vice President of the Corporation and President -
DEWALT Professional Group,
March 2004 - present;
Vice President of the Corporation and President -
DEWALT Professional Products, Power Tools
and Accessories Group,
January 2001 - March 2004;
Vice President of the Corporation and President -
North American Professional Power Tools,
Power Tools and Accessories Group,
May 1999 - January 2001;
Vice President of the Corporation and Vice President
and General Manager - North American Professional
Power Tools, Power Tools and Accessories Group,
December 1997 - May 1999.
o ROBERT B. SCHWARZ - 55
Vice President of the Corporation and Vice President -
Manufacturing, DEWALT Professional Group,
March 2004 - present;
Vice President of the Corporation and Vice President -
Manufacturing, DEWALT Professional Products,
Power Tools and Accessories Group,
October 2001 - March 2004;
Vice President - Manufacturing, DEWALT Professional
Products, Power Tools and Accessories Group,
December 1995 - October 2001.
(g) Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that the Corporation
expects or anticipates will occur in the future, including statements relating
to sales growth, earnings or earnings per share growth, and market share, as
well as statements expressing optimism or pessimism about future operating
results, are forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements for a number of reasons, including but not
limited to:
o The strength of the retail economies in various parts of the world, primarily
in the United States and Europe and, to a lesser extent, in Mexico, Central
America, the Caribbean, South America, Canada, Asia, and Australia. The
Corporation's business is subject to economic conditions in its major markets,
including recession, inflation, deflation, general weakness in retail,
automotive, and housing markets, and changes in consumer purchasing power.
o The Corporation's ability to maintain mutually beneficial relationships with
key customers and to penetrate new channels of distribution. The Corporation has
a number of significant customers, including two customers that, in the
aggregate, constituted approximately 30% of its consolidated sales for 2003. The
loss of either of these significant customers or a material negative change in
the Corporation's relationships with these significant customers could have an
adverse effect on its business. The Corporation's inability to continue
penetrating new channels of distribution may have a negative impact on its
future sales and business.
o Unforeseen inventory adjustments or changes in purchasing patterns by major
customers and the resultant impact on manufacturing volumes and inventory
levels.
o Market acceptance of the new products introduced in 2003 and scheduled for
introduction in 2004, as well as the level of sales generated from these new
products relative to expectations, based on existing investments in productive
capacity and commitments of the Corporation to fund advertising and product
promotions in connection with the introduction of these new products.
o The Corporation's ability to develop and introduce new products at favorable
margins. Numerous uncertainties are inherent in successfully developing and
introducing new products on a consistent basis.
o Adverse changes in currency exchange rates or raw material commodity prices,
both in absolute terms and relative to competitors' risk profiles. The
Corporation has a number of manufacturing sites throughout the world and sells
its products in more than 100 countries. As a result, the Corporation is exposed
to movements in the exchange rates of various currencies against the United
States dollar and against the currencies of countries in which it manufactures.
The Corporation believes its most significant foreign currency exposures are the
euro, pound sterling, and Chinese renminbi.
o Increased competition. Worldwide, the markets in which the Corporation sells
products are highly competitive on the basis of price, quality, and after-sale
service. A number of competing domestic and foreign companies are strong,
well-established manufacturers that compete on a global basis. Certain of the
Corporation's major customers sell their own "private label" brands that compete
directly with products sold by the Corporation. Competition has been intense in
recent years and is expected to continue.
o Changes in consumer preference or loyalties.
- 8 -
o Price reductions taken by the Corporation in response to customer and
competitive pressures, as well as price reductions or promotional actions taken
in order to drive demand that may not result in anticipated sales levels.
o The Corporation's ability to achieve projected levels of efficiencies and cost
reduction measures and to avoid delays in or unanticipated inefficiencies
resulting from manufacturing and administrative reorganization actions in
progress or contemplated.
o Foreign operations may be affected by factors such as tariffs,
nationalization, exchange controls, interest rate fluctuations, civil unrest,
governmental changes, limitations on foreign investment in local business and
other political, economic, and regulatory risks and difficulties. Over the past
several years, such factors have become increasingly important as a result of
the Corporation's higher percentage of manufacturing in China, Mexico, and the
Czech Republic and purchases of products and components from foreign countries.
o The effects of litigation, environmental remediation matters, and product
liability exposures, as well as other risks and uncertainties detailed from time
to time in the Corporation's filings with the Securities and Exchange
Commission.
o The Corporation's ability to generate sufficient cash flows to support capital
expansion, business acquisition plans, share repurchase program, and general
operating activities, and the Corporation's ability to obtain necessary
financing at favorable interest rates.
o The ability of certain subsidiaries of the Corporation to generate future cash
flows sufficient to support the recorded amounts of goodwill related to those
subsidiaries.
o Changes in laws and regulations, including changes in accounting standards,
taxation requirements, including tax rate changes, new tax laws and revised tax
law interpretations, and environmental laws, in both domestic and foreign
jurisdictions.
o The impact of unforeseen events, including war or terrorist activities, on
economic conditions and consumer confidence.
o Interest rate fluctuations and other capital market conditions.
o Adverse weather conditions which could reduce demand for the Corporation's
products.
The foregoing list is not exhaustive. There can be no assurance that the
Corporation has correctly identified and appropriately assessed all factors
affecting its business or that the publicly available and other information with
respect to these matters is complete and correct. Additional risks and
uncertainties not presently known to the Corporation or that it currently
believes to be immaterial also may adversely impact the Corporation. Should any
risks and uncertainties develop into actual events, these developments could
have material adverse effects on the Corporation's business, financial
condition, and results of operations. For these reasons, you are cautioned not
to place undue reliance on the Corporation's forward-looking statements.
ITEM 2. PROPERTIES
The Corporation operates 36 manufacturing facilities around the world, including
18 located outside of the United States in 9 foreign countries. The major
properties associated with each business segment are listed in "Narrative
Description of the Business" in Item 1(c) of Part I of this report.
The following are the Corporation's major leased facilities:
In the United States: Lake Forest and Mira Loma, California; Tampa,
Florida; Chesterfield, Michigan; and Towson, Maryland.
Outside of the United States: Maltby, England; Tongeren, Belgium; Reynosa
and Mexicali, Mexico; Usti nad Labem, Czech Republic; and Suzhou, China.
Additional property both owned and leased by the Corporation in Towson,
Maryland, is used for administrative offices. Subsidiaries of the Corporation
lease certain locations primarily for smaller manufacturing and/or assembly
operations, service operations, sales and administrative offices, and for
warehousing and distribution centers. The Corporation also owns a manufacturing
plant located on leased land in Suzhou, China.
As more fully described in Item 7 of Part II of this report under the
caption "Restructuring Actions", during the fourth quarter of 2001, the
Corporation commenced actions on a restructuring plan that will, among other
matters, reduce its manufacturing footprint. Additional actions under that
restructuring plan were initiated during the second half of 2003. In addition,
during the fourth quarter of 2003, the Corporation commenced actions on a
restructuring plan associated with the integration of the newly acquired Baldwin
and Weiser businesses into its security hardware business. The Corporation
continues to evaluate its worldwide manufacturing cost structure to identify
opportunities to improve capacity utilization and lower product costs and will
take appropriate action as deemed necessary.
Management believes that its owned and leased facilities are suitable and
adequate to meet the Corporation's anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings involving employment matters and commercial disputes. Some of these
lawsuits include claims for punitive as well as compensatory damages. The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability as described above up to the
limits of the deductibles. All other claims and lawsuits are handled on a
case-by-case basis.
As previously noted under Item 1(c) of Part I of this report, the
Corporation also is party to litigation and administrative proceedings with
respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a PRP. Others involve current and former manufacturing facilities.
- 9 -
The Corporation's estimate of costs associated with product liability
claims, environmental matters, and other legal proceedings is accrued if, in
management's judgment, the likelihood of a loss is probable and the amount of
the loss can be reasonably estimated. These accrued liabilities are not
discounted.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, and other legal proceedings are
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation's consolidated
financial statements. As of December 31, 2003, the Corporation had no known
probable but inestimable exposures relating to product liability claims,
environmental matters, or other legal proceedings that are expected to have a
material adverse effect on the Corporation. There can be no assurance, however,
that unanticipated events will not require the Corporation to increase the
amount it has accrued for any matter or accrue for a matter that has not been
previously accrued because it was not considered probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Corporation's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock as reported in the consolidated reporting system
for the New York Stock Exchange Composite Transactions:
QUARTER 2003 2002
- --------------------------------------------------------------------------------
January to
March $44.240 to $33.200 $49.950 to $35.000
April to June $44.790 to $33.890 $50.500 to $45.320
July to
September $45.640 to $38.380 $49.060 to $35.660
October to
December $49.900 to $39.510 $48.210 to $37.000
- --------------------------------------------------------------------------------
(b) Holders of the Corporation's Capital Stock
As of February 20, 2004, there were 13,497 holders of record of the
Corporation's Common Stock.
(c) Dividends
The Corporation has paid consecutive quarterly dividends on its Common Stock
since 1937. Future dividends will depend upon the Corporation's earnings,
financial condition, and other factors. The Credit Facility, as more fully
described in Note 7 of Notes to Consolidated Financial Statements included in
Item 8 of Part II of this report, does not restrict the Corporation's ability to
pay regular dividends in the ordinary course of business on the Common Stock.
Quarterly dividends per common share for the most recent two years are as
follows:
QUARTER 2003 2002
- --------------------------------------------------------------------------------
January to March $.12 $.12
April to June .12 .12
July to September .12 .12
October to December .21 .12
- --------------------------------------------------------------------------------
$.57 $.48
================================================================================
Common Stock:
150,000,000 shares authorized, $.50 par value, 77,933,464 and 79,604,786 shares
outstanding as of December 31, 2003 and 2002, respectively.
Preferred Stock:
5,000,000 shares authorized, without par value, no shares outstanding as of
December 31, 2003 and 2002.
(d) Annual Meeting of Stockholders
The 2004 Annual Meeting of Stockholders of the Corporation is scheduled to be
held on April 27, 2004, at 9:00 a.m. at the Sheraton Baltimore North Hotel, 903
Dulaney Valley Road, Towson, Maryland 21204.
- 10 -
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
(Millions of Dollars Except Per Share Data) 2003 (c) 2002 (c)(e) 2001(c) 2000 (d) 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (a) $4,482.7 $4,291.8 $4,139.9 $4,365.7 $4,323.4
Net earnings from continuing operations 287.2 228.5 101.5 273.7 294.2
Earnings from discontinued operations (b) 5.8 1.2 6.5 8.3 6.1
Net earnings 293.0 229.7 108.0 282.0 300.3
Basic earnings per share:
Continuing operations 3.69 2.85 1.26 3.27 3.38
Discontinued operations .07 .01 .08 .10 .07
Net earnings per common share - basic 3.76 2.86 1.34 3.37 3.45
Diluted earnings per share:
Continuing operations 3.68 2.83 1.25 3.24 3.33
Discontinued operations .07 .01 .08 .10 .07
Net earnings per common share - assuming dilution 3.75 2.84 1.33 3.34 3.40
Total assets 4,222.5 4,130.5 4,014.2 4,089.7 4,012.7
Long-term debt 915.6 927.6 1,191.4 798.5 847.1
Redeemable preferred stock of subsidiary (f) 202.6 208.4 196.5 188.0 --
Cash dividends per common share .57 .48 .48 .48 .48
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) As more fully disclosed in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, sales for the
years ended December 31, 1999 through 2001, have been restated to reflect
the adoption, effective January 1, 2002, of Emerging Issues Task Force
Issue No. 01-9, Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products.
(b) Earnings from discontinued operations represent the earnings, net of
applicable income taxes, of the Corporation's discontinued European
security hardware business. The earnings of the discontinued operations do
not reflect any expense for interest allocated by or management fees
charged by the Corporation. For additional information about the
discontinued European security hardware business, see Note 3 of Notes to
Consolidated Financial Statements included in Item 8 of Part II of this
report.
(c) As more fully disclosed in Note 19 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, under a
restructuring program developed by the Corporation in the fourth quarter of
2001, earnings from continuing operations for 2003, 2002, and 2001 include
a restructuring charge of $20.6 million, $46.6 million, and $99.7 million
before taxes, respectively ($14.9 million, $29.2 million, and $70.6 million
after taxes, respectively). Those 2003, 2002, and 2001 pre-tax charges were
net of reversals of $13.2 million, $11.0 million, and $4.1 million,
respectively, representing reversals of previously provided restructuring
reserves as well as the excess of proceeds received on the sale of
long-lived assets, written down as part of restructuring actions, over
their adjusted carrying values. In addition, earnings from continuing
operations for 2003 include a restructuring charge of $11.0 million before
taxes ($7.2 million after taxes) associated with the integration of the
Baldwin and Weiser businesses into the security hardware business.
(d) Earnings from continuing operations for 2000 include a restructuring charge
of $39.9 million before taxes ($28.1 million after taxes) and a gain on
sale of business of $20.1 million before taxes ($13.1 million after taxes).
(e) As more fully disclosed in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report, effective January
1, 2002, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Effective
January 1, 2002, goodwill is no longer amortized by the Corporation.
(f) Included in other long-term liabilities.
</FN>
- 11 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Corporation is a global manufacturer and marketer of power tools and
accessories, hardware and home improvement products, and technology-based
fastening systems. As more fully described in Note 17 of Notes to Consolidated
Financial Statements, the Corporation operates in three reportable business
segments - Power Tools and Accessories, Hardware and Home Improvement, and
Fastening and Assembly Systems - with these business segments comprising
approximately 72%, 16%, and 12%, respectively, of the Corporation's sales in
2003. The percentage of the Corporation's total sales contributed by its
Hardware and Home Improvement segment will increase in 2004 when a full year's
sales of the Baldwin and Weiser businesses, acquired on September 30, 2003, are
included in that segment's results.
The Corporation markets its products and services in over 100 countries.
During 2003, approximately 63%, 25%, and 12% of its sales were made to customers
in the United States, in Europe (including the United Kingdom), and in other
geographic regions, respectively. The Power Tools and Accessories and Hardware
and Home Improvement segments are subject to general economic conditions in the
countries in which they operate as well as the strength of the retail economies.
The Fastening and Assembly Systems segment is also subject to general economic
conditions in the countries in which it operates as well as to automotive and
industrial demand.
The Corporation reported net earnings of $293.0 million, or $3.75 per share
on a diluted basis, for the year ended December 31, 2003, compared to net
earnings of $229.7 million, or $2.84 per share on a diluted basis, for the year
ended December 31, 2002.
Net earnings from continuing operations for the year ended December 31,
2003, included a pre-tax restructuring charge of $31.6 million ($22.1 million
net of tax). That $31.6 million pre-tax restructuring charge was net of $13.2
million, representing reversals of previously provided restructuring reserves as
well as the excess of proceeds received on the sale of long-lived assets,
written down as part of restructuring actions, over their adjusted carrying
values. Net earnings from continuing operations for the year ended December 31,
2002, included a pre-tax restructuring charge of $46.6 million ($29.2 million
net of tax). That $46.6 million pre-tax restructuring charge was net of $11.0
million, representing reversals of previously provided restructuring reserves as
well as the excess of proceeds received on the sale of long-lived assets,
written down as part of restructuring actions, over their adjusted carrying
values. The increase in the Corporation's net earnings and earnings per share
for 2003, as compared to 2002, is partially attributable to the lower level of
restructuring and exit costs recognized in 2003.
Total consolidated sales for the year ended December 31, 2003, of $4.48
billion increased by 4% over the prior year level. Of that 4% increase, 2% is
attributable to an increase in unit volume, with approximately half of the
increase in unit volume attributable to the incremental sales in the fourth
quarter of 2003 from the acquired Baldwin and Weiser businesses, and 4% is
attributable to the favorable impact of foreign currency translation, offset by
2% attributable to the negative effect of pricing actions. Operating income for
the year ended December 31, 2003, increased to $428.7 million from $368.0
million in 2002. This increase was principally attributable to a
one-percentage-point increase in gross margin as a percentage of sales in 2003
as compared to 2002. This gross margin increase was driven by the Corporation's
restructuring actions. Selling, general, and administrative expenses as a
percentage of sales in 2003 increased slightly from 2002. The increase in
operating income for the year ended December 31, 2003 as compared to the 2002
level was also aided by a $15.0 million decrease in restructuring and exit
costs. Earnings from continuing operations before income taxes for the year
ended December 31, 2003 increased by $85.5 million over the 2002 level to $390.9
million. In addition to the improvement in operating income previously noted,
earnings from continuing operations before income taxes increased due to a
reduction in net interest expense of $22.6 million in 2003 as compared to the
2002 level. That reduction in net interest expense was principally the result of
lower borrowing levels and, to a lesser extent, lower interest rates.
In the discussion and analysis of financial condition and results of
operations that follows, the Corporation generally attempts to list contributing
factors in order of significance to the point being addressed.
Sales
The following chart provides an analysis of the consolidated changes in sales
for the years ended December 31, 2003, 2002, and 2001.
YEAR ENDED DECEMBER 31,
(Dollars in millions) 2003 2002 2001
- --------------------------------------------------------------------------------
Total sales $4,482.7 $4,291.8 $4,139.9
- --------------------------------------------------------------------------------
Unit volume 2% 5% (1)%
Price (2)% (2)% (2)%
Currency 4% 1% (2)%
- --------------------------------------------------------------------------------
Change in total sales 4% 4% (5)%
================================================================================
Total consolidated sales for the year ended December 31, 2003, were
$4,482.7 million, which represented a 4% increase over 2002 sales of $4,291.8
million. Total unit volume had a 2% positive impact on sales during 2003
compared to 2002. Approximately half of the increase in unit volume was
attributable to the incremental sales in the fourth quarter of 2003 from the
acquired Baldwin and Weiser businesses. The remainder of the increase in unit
volume was due to higher sales of the power tools and accessories and security
hardware businesses, particularly in North America, partially offset by a unit
volume decline in the plumbing products business. Pricing actions, taken in
response to customer and competitive pressures, had a 2% negative effect on
sales for 2003 as compared to 2002. The effects of a weaker U.S. dollar
- 12 -
compared to other currencies, particularly the euro and, to a lesser degree, the
pound sterling and Canadian dollar, caused a 4% increase in the Corporation's
consolidated sales during 2003 over the prior year level. These positive effects
were partially offset by the devaluation of several Latin American currencies
during 2003 as compared to 2002.
Total consolidated sales for the year ended December 31, 2002, were
$4,291.8 million, which represented a 4% increase over 2001 sales of $4,139.9
million. Total unit volume had a 5% positive impact on sales during 2002
compared to 2001. The increase in unit volume was primarily attributable to
higher unit volume in both the power tools and accessories and security hardware
businesses in North America as well as unit volume increases in sales to
automotive customers by the Fastening and Assembly Systems segment. These
increases were partially offset by a unit volume decline in the plumbing
products business. Pricing actions, taken as a result of customer and
competitive pressure, had a 2% negative effect on sales for 2002 as compared to
2001. The effect of a weaker U.S. dollar compared to certain other foreign
currencies, particularly the euro and the pound sterling, caused a 1% increase
in the Corporation's consolidated sales during 2002 over the prior year level.
Earnings
The Corporation reported consolidated operating income of $428.7 million on
sales of $4,482.7 million in 2003, compared to operating income of $368.0
million on sales of $4,291.8 million in 2002 and to operating income of $238.3
million on sales of $4,139.9 million in 2001.
Consolidated operating income for 2003, 2002, and 2001 included a pre-tax
restructuring charge of $31.6 million, $46.6 million, and $99.7 million,
respectively. Those 2003, 2002, and 2001 pre-tax charges were net of reversals
of $13.2 million, $11.0 million, and $4.1 million, respectively, representing
reversals of previously provided restructuring reserves as well as the excess of
proceeds received on the sale of long-lived assets, written down as part of
restructuring actions, over their adjusted carrying values. Operating income for
the year ended December 31, 2001, included goodwill amortization of $24.2
million. No goodwill amortization is included in the 2003 or 2002 results due to
a change in accounting standards.
Consolidated gross margin as a percentage of sales for 2003 was 35.6% as
compared to 34.6% for 2002. The increase in gross margin in 2003 was
attributable to several positive factors that included: (i) the positive effect
of restructuring initiatives, (ii) higher productivity, including Six Sigma
productivity initiatives, and (iii) favorable foreign currency exchange rates.
These positive factors were partially offset by pricing actions taken by the
Corporation in response to customer and competitive pressures and by lower
production levels in 2003 as compared to 2002.
Consolidated gross margin as a percentage of sales for 2002 was 34.6% as
compared to 32.9% for 2001. The increase in gross margin in 2002 was
attributable to several positive factors that included: (i) higher productivity,
including Six Sigma productivity initiatives; (ii) higher production levels as
the Corporation returned to more normal production levels in its power tools and
accessories business in 2002, after lowering production levels in 2001 to reduce
inventories; (iii) more favorable product mix; and (iv) savings associated with
restructuring actions. These positive factors more than offset the cost of
end-user promotional programs as well as pricing actions taken by the
Corporation as a result of customer and competitive pressure.
Consolidated selling, general, and administrative expenses as a percentage
of sales were 25.3% in 2003, compared to 25.0% in 2002 and 24.8% in 2001.
Selling, general, and administrative expenses increased by $63.7 million in 2003
over the 2002 level. The effects of foreign currency translation and acquired
businesses accounted for $48.5 million and $13.3 million of the increase in
selling, general, and administrative expenses, respectively. The Corporation
recognized goodwill amortization of $24.2 million in 2001. There was no goodwill
amortization recorded in 2003 or 2002. The increase in selling, general, and
administrative expenses as a percentage of sales from 2002 to 2003 was primarily
a result of higher marketing and promotional expenses, which were partially
offset by lower selling, general, and administrative expenses, including
expenses associated with legal and environmental matters. Selling, general, and
administrative expenses for 2002 rose, as compared to 2001, as the Corporation
increased its reserves for certain environmental remediation matters and
recognized greater employee-related expenses. These items were partially offset
by the impact of goodwill amortization in 2001.
Consolidated net interest expense (interest expense less interest income)
was $35.2 million in 2003, compared to $57.8 million in 2002 and $84.3 million
in 2001. The lower net interest expense in 2003, as compared to 2002, and for
2002 compared to 2001 resulted from both lower borrowing levels and lower
interest rates.
Other expense was $2.6 million in 2003 compared to $4.8 million in 2002 and
$8.2 million in 2001.
Consolidated income tax expense of $103.7 million, $76.9 million, and $44.3
million was recognized on the Corporation's earnings from continuing operations
before income taxes of $390.9 million, $305.4 million, and $145.8 million, for
2003, 2002, and 2001, respectively. The Corporation's effective tax rate was 27%
for 2003, compared to an effective tax rate of 25% for 2002, and 30% for 2001.
For 2003, tax benefits of $9.5 million were recognized on pre-tax restructuring
and exit costs of $31.6 million, as compared to tax benefits of $17.4 million on
pre-tax restructuring and exit costs of $46.6 million in the corresponding 2002
period, and a $29.1 million benefit on pre-tax restructuring and exit costs of
$99.7 million in the corresponding 2001 period. The higher effective tax rate
during the 2003 period, as compared to the 2002 period, reflects the effect of
the lower effective tax rate associated with the 2003 restructuring charge. The
lower effective tax rate during the 2002 period, as compared to the 2001 period,
is primarily attributable to the amortization of non-deductible goodwill in
2001, offset by
- 13 -
the effect of a higher effective tax rate associated with the 2001 restructuring
charge. A further analysis of taxes on earnings is included in Note 11 of Notes
to Consolidated Financial Statements.
The Corporation reported net earnings of $293.0 million, $229.7 million,
and $108.0 million, or $3.75, $2.84, and $1.33 per share on a diluted basis, for
the years ended December 31, 2003, 2002, and 2001, respectively. The increase in
the Corporation's net earnings and earnings per share for the 2003 period, as
compared to 2002, was partially attributable to the lower level of restructuring
and exit costs recognized in the 2003 period. Net earnings for the year ended
December 31, 2001, included $26.4 million of goodwill amortization, of which
$24.2 million related to continuing operations and $2.2 million related to
discontinued operations. No goodwill amortization is included in the 2003 or
2002 results due to a change in accounting standards. In addition to the impact
of the operational matters, earnings per share for 2003, also benefited from
lower shares outstanding.
Business Segments
As more fully described in Note 17 of Notes to Consolidated Financial
Statements, the Corporation operates in three reportable business segments:
Power Tools and Accessories, Hardware and Home Improvement, and Fastening and
Assembly Systems.
POWER TOOLS AND ACCESSORIES
Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 17 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Sales to unaffiliated
customers $3,114.9 $3,156.2 $3,059.5
Segment profit 350.9 354.7 250.9
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2003 decreased 1% from the 2002 level. In North America, sales of power
tools and accessories during 2003 decreased at a low single-digit rate from the
2002 level due predominantly to a low single-digit decrease in sales of the
consumer power tools and accessories business. Strength in the North American
professional power tools and accessories business in the second half of the year
nearly offset declines during the first sixth months of 2003. Sales of the
consumer power tools and accessories business decreased at a low single-digit
rate from the 2002 level, as a double-digit rate of growth in sales of outdoor
products was more than offset by a double-digit decline in sales of home
products and a low single-digit rate of decrease of sales of power tools and
accessories as unfavorable price more than offset increased volume. Both the
professional and consumer power tools and accessories businesses were negatively
affected by customers' actions to manage inventory levels during 2003.
Sales of power tools and accessories in Europe during 2003 decreased at a
mid-single-digit rate from the 2002 level, as sales of professional power tools
and accessories decreased at a low single-digit rate and sales of consumer power
tools and accessories declined at a mid-single-digit rate. Sales were down
across Europe and in most product lines as weak economic conditions persisted
during 2003.
Sales in other geographic areas increased at a high single-digit rate in
2003 over the 2002 level, as higher sales were achieved in professional power
tools and accessories, consumer power tools and accessories, and home products.
Increases in sales occurred throughout South and Central America, Asia, and
Australia.
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 11.3% for 2003 as compared to 11.2% for 2002. Gross margin as a
percentage of sales improved slightly as the positive effects of productivity
initiatives, restructuring actions, and foreign currency rates were offset by
the negative effects of pricing actions, promotional activities, and lower
production levels. During 2003, the Power Tools and Accessories segment reduced
its production levels by approximately 10% from the 2002 levels. That reduction
in production levels was primarily attributable to the efforts by the business
to reduce its inventory levels. As of December 31, 2003, the Power Tools and
Accessories segment decreased its total inventories, excluding the effects of
foreign currency translation, by approximately 9% from 2002 year-end levels.
That decrease was in comparison to an approximate 9% increase in total
inventories, excluding the effects of foreign currency translation at December
31, 2002, over the 2001 year-end levels. Selling, general, and administrative
expenses as a percentage of sales increased slightly during 2003 as compared to
2002 as promotional and marketing expenses increased.
Sales to unaffiliated customers in the Power Tools and Accessories segment
during 2002 increased 3% over the 2001 level. In North America, sales of
consumer power tools and accessories 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 low single-digit rate of growth in sales of consumer power tools.
Both the consumer and professional businesses in North America benefited from
promotional activities during 2002.
Sales of power tools and accessories in Europe during 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
early in 2002.
- 14 -
Sales in other geographic areas increased at a mid-single-digit rate in
2002 over the 2001 levels as sales of professional power tools and accessories
and 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 11.2% for 2002 compared to 8.2% in 2001. The increase in segment
profit as a percentage of sales during 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, savings gained through Six Sigma initiatives and restructuring actions,
more favorable product mix, and a decrease in warranty costs. Gross margins in
2001 were also depressed by price reductions taken by the business in order to
reduce inventory levels. Segment profit as a percentage of sales during 2002
also increased due to the leverage of selling, general, and administrative
expenses over the higher sales volume. Selling, general, and administrative
expenses increased in 2002 over the 2001 levels due to increased marketing and
promotional expenses and higher employee-related costs, which were partially
offset by restructuring and other cost reduction initiatives.
HARDWARE AND HOME IMPROVEMENT
Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 17 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $715.7 $659.3 $658.3
Segment profit 92.8 47.4 47.8
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Hardware and Home Improvement
segment in 2003 increased 9% over the 2002 level. This increase in sales was
almost entirely due to the acquisition of Baldwin Hardware Corporation (Baldwin)
and Weiser Lock Corporation (Weiser) from Masco Corporation early in the fourth
quarter of 2003. A low single-digit increase in sales of the Kwikset security
hardware business in North America was partially offset by a low single-digit
decrease in sales of plumbing products.
As a result of a line review in 2002, the Corporation's plumbing products
business lost significant shelf space at The Home Depot stores in the central
and eastern United States. That loss of shelf space at The Home Depot negatively
impacted plumbing product sales in 2002 by approximately $22 million, but was
partially offset in 2003 by an expansion of listings at Lowe's Home Improvement
Warehouse (Lowe's) during the second quarter of 2003.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment was 13.0% for 2003 compared to 7.2% for 2002, mainly driven
by improvements in gross margin as a percentage of sales. Productivity
improvements and the results of restructuring actions were the primary factors
that contributed to the increase in segment profit as a percentage of sales. The
increase in segment profit as a percentage of sales due to gross margin
improvements was slightly offset by a one-percentage-point increase in selling,
general, and administrative expenses as a percentage of sales in 2003 as
compared to the 2002 level due to higher sales-related expenses, including
promotion, marketing, and salesmen's compensation. The acquisition of Baldwin
and Weiser did not have a significant effect on segment profit during 2003.
Sales to unaffiliated customers in the Hardware and Home Improvement
segment for 2002 approximated the 2001 level. Sales of security hardware in
North America grew at a high single-digit rate over the 2001 level due primarily
to the success of the brand and product repositioning introduced in North
American home centers in late 2001 and to other customers in 2002. That increase
was offset by a double-digit rate of decline in sales of plumbing products, due
primarily to the effects of a loss of shelf space at The Home Depot and lower
sales in non-home center channels.
Segment profit as a percentage of sales for the Hardware and Home
Improvement segment declined to 7.2% in 2002 from 7.3% in 2001. That decrease in
segment profit as a percentage of sales was principally due to declines in gross
margins which were only partially offset by lower selling, general, and
administrative expenses as a percentage of sales. Those declines in gross
margins resulted from lower production levels at North American security
hardware and plumbing product plants, as those businesses took action to reduce
inventory levels. In addition, gross margins were negatively impacted by costs
related to restructuring activities in the plumbing products business. Lower
selling, general, and administrative expenses as a percentage of sales for 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 17 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $514.2 $513.3 $489.5
Segment profit 73.9 74.7 71.0
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment during 2003 increased slightly over the 2002 level as a mid-single-digit
rate of increase in sales in Europe and Asia was substantially offset by a
mid-single-digit rate decrease in sales in North America.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment was 14.4% for 2003 as compared to 14.6% during 2002. That
decline was due to lower production volumes, resulting from weak industrial
demand and lower automotive production, that were substantially offset by
productivity improvements.
- 15 -
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased 5% in 2002 over 2001. Incremental sales associated with a
distribution business acquired in April 2001 accounted for 2 percentage points
of the 5% 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 of 14.6% in 2002 approximated the 2001 level.
OTHER SEGMENT-RELATED MATTERS
As more fully described in Note 17 of Notes to Consolidated Financial
Statements, in determining segment profit, expenses relating to pension and
other postretirement benefits are based solely upon estimated service costs.
Also, as more fully described in Item 7 under the caption "Financial Condition",
the Corporation's expense recognized relating to its pension and other
postretirement benefits plans in 2003 increased by approximately $32 million
over the 2002 levels. The adjustment to businesses' postretirement benefit
expense booked in consolidation as identified in the second table included in
Note 17 of Notes to Consolidated Financial Statements was income of $15.4
million and $38.3 million for the years ended December 31, 2003 and 2002,
respectively. This decrease reflects the impact excluded from the Corporation's
reportable business segments.
Expenses directly related to reportable business segments booked in
consolidation and, thus, excluded from segment profit for the reportable
business segments were $15.0 million, $8.4 million, and $.7 million for the
years ended December 31, 2003, 2002, and 2001, respectively. The $15.0 million
of segment-related expenses excluded from segment profit in 2003 principally
related to restructuring-related expenses associated with the Power Tools and
Accessories segment of approximately $9.1 million as well as certain reserves
established relating to the Power Tools and Accessories segment and the Hardware
and Home Improvement segment. The $8.4 million of segment-related expenses
excluded from segment profit in 2002 principally related to reserves for
employee-related matters associated with the Power Tools and Accessories and
Hardware and Home Improvement segments.
Amounts allocated to reportable business segments in arriving at segment
profit were less than Corporate center operating expenses, eliminations, and
other amounts, as identified in the second table included in Note 17 of Notes to
Consolidated Financial Statements, by $70.9 million, $86.9 million, and $48.7
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
decrease in these unallocated Corporate center operating expenses for 2003 as
compared to 2002 was primarily due to lower medical-related expenses in 2003,
reflecting the results of changes in plan design as well as higher expense
allocations to the Corporation's business segments, and lower reserves for
certain legal and environmental remediation matters established in 2003 as
compared to 2002. The increase in these unallocated Corporate center operating
expenses for 2002 as compared to 2001 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.
As indicated above and in Note 17 of Notes to Consolidated Financial
Statements, the determination of segment profit excludes restructuring and exit
costs. Of the $31.6 million pre-tax restructuring charge recognized in 2003,
$21.1 million related to the businesses in the Power Tools and Accessories
segment, and $10.5 million related to the businesses in the Hardware and Home
Improvement segment. Of the $46.6 million pre-tax restructuring charge
recognized in 2002, $26.3 million related to the businesses in the Power Tools
and Accessories segment, and $20.3 million related to the businesses in the
Hardware and Home Improvement segment. Of the $99.7 million pre-tax
restructuring charge recognized in 2001, $81.4 million related to the businesses
in the Power Tools and Accessories segment, $17.4 million related to the
businesses in the Hardware and Home Improvement segment, and $.9 million related
to the businesses in the Fastening and Assembly Systems segment.
DISCONTINUED OPERATIONS
The European security hardware business, consisting of the NEMEF, Corbin, and
DOM businesses, is reflected as discontinued operations in the Consolidated
Financial Statements included in Item 8 of Part II of this report. As such, the
operating results, assets and liabilities, and cash flows of the discontinued
European security hardware business have been reported separately from the
Corporation's continuing operations. In January 2004, the Corporation completed
the sale of two European security hardware businesses, NEMEF and Corbin, for an
aggregate price of $80 million, subject to post-closing adjustments.
Net earnings of the discontinued European security hardware business were
$5.8 million ($.07 per share on a diluted basis) for the year ended December 31,
2003, $1.2 million ($.01 per share on a diluted basis) for the year ended
December 31, 2002, and $6.5 million ($.08 per share on a diluted basis) for the
year ended December 31, 2001. Earnings from discontinued operations include
pre-tax restructuring (reversals) charges of $(.6) million, $4.1 million, and
$.1 million for the years ended December 31, 2003, 2002, and 2001, respectively.
Restructuring Actions
The Corporation is committed to continuous productivity improvement and
continues to evaluate opportunities to reduce fixed costs, simplify or improve
processes, and eliminate excess capacity. A tabular summary of restructuring
activity during the three years ended December 31, 2003, is included in Note 19
of Notes to Consolidated Financial Statements.
- 16 -
During the fourth quarter of 2001, the Corporation formulated a
restructuring plan designed to reduce its manufacturing footprint, variable
production costs, and selling, general, and administrative expenses. The
Corporation initially anticipated that the cost of the total restructuring plan
- - expected to be completed over a two- to three-year period - would be $190
million. The $20.0 million charge recognized by the Corporation during 2003
represented the final pre-tax charge associated with this restructuring plan.
That amount, coupled with restructuring charges recognized in connection with
this plan in 2002 and 2001, brought the total pre-tax restructuring charge under
this plan to $170.5 million. That $170.5 million charge includes $3.6 million
relating to the Corporation's European security hardware business that is
reflected as discontinued operations. The following discussion excludes the
restructuring actions relating to the European security hardware business.
Earnings from discontinued operations include pre-tax restructuring (reversals)
charges of $(.6) million, $4.1 million and $.1 million for the years ended
December 31, 2003, 2002, and 2001, respectively.
During 2001, the Corporation commenced the first phase of that
restructuring plan and recorded a pre-tax restructuring charge of $99.7 million.
That $99.7 million charge was net of $4.1 million of reversals of previously
provided restructuring reserves that were no longer required. During 2002, the
Corporation continued to execute its restructuring plans and recorded a pre-tax
restructuring charge of $46.6 million. That $46.6 million charge was net of $8.3
million of reversals of previously provided restructuring reserves that were no
longer required and $2.7 million, representing the excess of proceeds received
on the sale of long-lived assets, written down as part of restructuring actions,
over their adjusted carrying values.
During 2003, the Corporation commenced the final phase of its restructuring
plan and recorded a pre-tax restructuring charge associated with that plan of
$20.6 million. That $20.6 million charge was net of $9.6 million of reversals of
previously provided restructuring reserves that were no longer required and $3.6
million, representing the excess of proceeds received on the sale of long-lived
assets, written down as part of restructuring actions, over their adjusted
carrying values. In addition, during the fourth quarter of 2003 the Corporation
recorded a pre-tax restructuring charge of $11.0 million associated with the
closure of a manufacturing facility in its Hardware and Home Improvement segment
as a result of the acquisition of Baldwin and Weiser.
The $20.6 million pre-tax restructuring charge recognized in 2003 reflects
actions relating to the Power Tools and Accessories segment to reduce its
manufacturing cost base as well as actions to reduce selling, general, and
administrative expenses through the elimination of administrative positions.
Actions to reduce the Corporation's manufacturing cost base in the Power Tools
and Accessories segment include the closure of one facility in the United States
and the transfer of certain additional power tool production from a facility in
the United States to a low-cost facility in Mexico. The 2003 restructuring
charge provided for actions to reduce selling, general, and administrative
expenses, principally in Europe, and to a lesser extent in the United States,
principally reducing headcount.
The $46.6 million pre-tax restructuring charge recognized in 2002 reflected
actions to reduce the Corporation's manufacturing cost base in its Power Tools
and Accessories and Hardware and Home Improvement segments, as well as actions
to reduce selling, general, and administrative expenses through the elimination
of administrative positions, principally in Europe. Actions to reduce the
Corporation's manufacturing cost base in the Power Tools and Accessories segment
include the closure of one facility in the United States, the closure of an
accessories packaging facility in England, and the transfer of certain
additional power tool production from a facility in England to a low-cost
facility in the Czech Republic. Actions to reduce the Corporation's
manufacturing cost base in the Hardware and Home Improvement segment include the
closure of a security hardware facility in the United States. The 2002
restructuring charge also includes pension curtailment losses stemming from
headcount reductions associated with the restructuring actions.
The $99.7 million pre-tax restructuring charge recognized in 2001 reflected
actions to reduce the Corporation's manufacturing cost base in its Power Tools
and Accessories and Hardware and Home Improvement segments, as well as actions
to reduce selling, general, and administrative expenses throughout all of its
businesses. Actions to reduce the Corporation's manufacturing cost base included
the closure of two facilities in the Power Tools and Accessories segment in the
United States as well as the closure by the Hardware and Home Improvement
segment of a plumbing products facility in the United States. In addition,
actions associated with the 2001 restructuring charge included the transfer of
certain production and service operations in the Power Tools and Accessories and
Hardware and Home Improvement segments from facilities in the United States and
England to low-cost facilities in Mexico and China and to a new low-cost
facility in the Czech Republic. In addition to these changes to the
Corporation's manufacturing footprint, the 2001 restructuring plan also provided
for the outsourcing of certain manufactured items. The 2001 restructuring charge
provided for actions to reduce selling, general, and administrative expenses,
principally in the United States and Europe, including consolidation of certain
distribution locations and other administrative functions, as well as reductions
in selling and administrative headcount.
As indicated in Note 19 of Notes to Consolidated Financial Statements, the
severance benefits accrual, included in the $31.6 million, $46.6 million, and
$99.7 million pre-tax restructuring charges taken in 2003, 2002, and 2001,
respectively, related to the elimination of approximately 5,200 positions in
high-cost manufacturing locations and in certain administrative positions. The
Corporation estimates that, as a result of increases in manufacturing employee
headcount in low-cost locations, approximately 4,500 replacement positions will
be filled, yielding a net total of 700 positions eliminated as a result of the
2003, 2002, and 2001 restructuring actions.
- 17 -
The Corporation anticipates that the execution of the restructuring actions
associated with the restructuring plan that was formulated by the Corporation in
the fourth quarter of 2001 will be completed during 2004. The Corporation
anticipates that the closure of the manufacturing facility in its Hardware and
Home Improvement segment as a result of the acquisition of Baldwin and Weiser
will be completed during 2005.
Given the nature and duration of this restructuring plan, the timing of the
actions is subject to varying degrees of estimation associated with key
assumptions, such as actual timing of execution, general economic conditions,
and other variables.
In addition to the recognition of restructuring and exit costs, the
Corporation also recognizes related expenses, incremental to the cost of the
underlying restructuring actions, that do not qualify as restructuring or exit
costs under generally accepted accounting principles (restructuring-related
expenses). Those restructuring-related expenses include items - directly related
to the underlying restructuring actions - that benefit ongoing operations, such
as costs associated with the transfer of equipment. Operating results for the
year ended December 31, 2003 and 2002, included $25.0 million and $17.0 million,
respectively, of restructuring-related expenses.
The Corporation realized benefits of approximately $50 million and $25
million in 2003 and 2002, respectively, net of restructuring-related expenses.
Those benefits resulted in a reduction in cost of goods sold of approximately
$39 million and $10 million in 2003 and 2002, respectively, and a reduction in
selling, general, and administrative expenses of approximately $11 million and
$15 million in 2003 and 2002, respectively. The Corporation expects that
incremental pre-tax savings associated with the restructuring plan that was
formulated in the fourth quarter of 2001 will benefit 2004 and 2005 results, by
$45 million and $10 million, respectively, net of restructuring-related
expenses. The Corporation expects that those incremental pre-tax savings in 2004
and 2005 will benefit cost of goods sold and selling, general, and
administrative expenses in approximately the same ratio as experienced in 2003.
The Corporation expects that pre-tax savings associated with the restructuring
actions associated with the integration of Baldwin and Weiser into its existing
security hardware business will benefit 2005 and 2006 results by approximately
$10 million and $25 million respectively, net of restructuring-related expenses.
The restructuring-related expense associated with these integration plans will
have an adverse pre-tax impact of approximately $15 million in 2004. Ultimate
savings realized from restructuring actions may be mitigated by such factors as
continued economic weakness and competitive pressures, as well as decisions to
increase costs in areas such as promotion or research and development above
levels that were otherwise assumed.
As previously indicated, the pre-tax restructuring charges recognized in
2003, 2002, and 2001 of $31.6 million, $46.6 million, and $99.7 million,
respectively, were net of reversals in 2003, 2002, and 2001 of previously
provided restructuring reserves that were no longer required and proceeds
received in excess of the adjusted carrying value of long-lived assets in the
aggregate of $13.2 million, $11.0 million, and $4.1 million, respectively.
Adjustments to the severance component of restructuring reserves previously
established related to: (i) actual attrition factors that differed from those
initially estimated; (ii) more cost-effective methods of severing employment
that became probable, typically based on negotiations with trade unions or local
government institutions; and (iii) amendments to the initial plan that were
approved by the appropriate level of management, based primarily on changes in
market conditions that dictated a modification to the intended course of action.
During 2003, 2002, and 2001, none of the adjustments to the severance
obligations recorded in connection with restructuring actions was individually
significant. Adjustments to the asset write-down component of restructuring
reserves previously established related to the receipt of proceeds in excess of
adjusted carrying values of fixed assets that were disposed of in connection
with the restructuring actions. Adjustments to the other charge component of
restructuring reserves previously established principally related to settlement
of operating lease commitments at amounts less than initially estimated or the
Corporation's ability to sublease certain facilities exited as part of the
restructuring actions.
Asset write-downs taken as part of the 2003 and 2002 restructuring charge
included land, buildings, and manufacturing equipment. Asset write-downs taken
as part of the 2001 restructuring charge principally related to manufacturing
equipment. The carrying values of land and buildings to be sold were written
down to their estimated fair values, generally based upon third party offers,
less disposal costs. The carrying values of manufacturing equipment and
furniture and fixtures were written down to their fair value based upon
estimated salvage values, which generally were negligible, less disposal cost.
In addition to the previously discussed restructuring actions, prior to the
date of the acquisition of Baldwin and Weiser and during the fourth quarter of
2003, the Corporation identified opportunities to restructure these businesses
as well as to integrate these businesses into the existing security hardware
business included in the Corporation's Hardware and Home Improvement segment.
Subsequent to the acquisition, the Corporation approved restructuring actions
relating to the acquired businesses of $8.9 million. These actions principally
reflect severance benefits associated with administrative and manufacturing
actions related to the acquired businesses, including the closure of an acquired
administration and distribution facility. The Corporation anticipates that these
restructuring actions will be completed in 2004.
Hedging Activities
The Corporation has a number of manufacturing sites throughout the world and
sells its products in more than 100 countries. As a result, it is exposed to
movements in the exchange rates of various currencies against the United States
dollar and against the currencies of countries in which it manufactures. The
major foreign currencies in which foreign currency risks exist are the euro,
pound sterling, Canadian dollar, Swedish krona, Japanese
- 18 -
yen, Chinese renminbi, Australian dollar, Mexican peso, Czech koruna, and
Brazilian real. Through its foreign currency activities, the Corporation seeks
to reduce the risk that cash flows resulting from the sales of products
manufactured in a currency different from that of the selling subsidiary will be
affected by changes in exchange rates.
On January 1, 2002, the twelve participating member countries of the
European Monetary Union canceled their respective legacy currencies which were
replaced by the euro as legal tender. The Corporation believes that the
introduction of the euro has resulted in increased competitive pressures in
continental Europe due to the heightened transparency of intra-European pricing
structures.
From time to time, currency devaluations may occur in countries in which
the Corporation sells or manufactures its product. While the Corporation will
take actions to mitigate the impacts of any future currency devaluations, there
is no assurance that such devaluations will not adversely affect the
Corporation.
Assets and liabilities of subsidiaries located outside of the United States
are translated at rates of exchange at the balance sheet date as more fully
explained in Note 1 of Notes to Consolidated Financial Statements. The resulting
translation adjustments are included in the accumulated other comprehensive
income (loss) component of stockholders' equity. During 2003, translation
adjustments, recorded in the accumulated other comprehensive income (loss)
component of stockholders' equity, increased stockholders' equity by $98.4
million compared to an increase of $60.2 million in 2002.
As more fully described in Note 9 of Notes to Consolidated Financial
Statements, the Corporation seeks to issue debt opportunistically, whether at
fixed or variable rates, at the lowest possible costs. Based upon its assessment
of the future interest rate environment and its desired variable rate debt to
total debt ratio, the Corporation may elect to manage its interest rate risk
associated with changes in the fair value of its indebtedness, or the cash flows
of its indebtedness, through the use of interest rate swap agreements.
In order to meet its goal of fixing or limiting interest costs, the
Corporation maintains a portfolio of interest rate hedge instruments. The
variable rate debt to total debt ratio, after taking interest rate hedges into
account, was 47% at December 31, 2003, compared to 52% at December 31, 2002, and
51% at December 31, 2001. At December 31, 2003, average debt maturity was 8.8
years compared to 7.2 years at December 31, 2002, and 7.9 years at December 31,
2001.
INTEREST RATE SENSITIVITY
The following table provides information as of December 31, 2003, about the
Corporation's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related average interest rates by contractual maturity dates. For
interest rate swaps, the table presents notional principal amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged under the
interest rate swaps. Weighted-average variable rates are generally based on the
London Interbank Offered Rate (LIBOR) as of the reset dates. The cash flows of
these instruments are denominated in a variety of currencies. Unless otherwise
indicated, the information is presented in U.S. dollar equivalents, which is the
Corporation's reporting currency, as of December 31, 2003.
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
FAIR VALUE
(ASSETS)/
(U.S. Dollars in Millions) 2004 2005 2006 2007 2008 THEREAFTER TOTAL LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings
Variable rate (other currencies) $ .1 $ -- $ -- $ -- $ -- $ -- $ .1 $ .1
Average interest rate 2.73% 2.73%
Long-term debt
Fixed rate (U.S. dollars) $ .4 $ .4 $154.9 $150.0 $ -- $550.0 $855.7 $965.1
Average interest rate 7.00% 7.00% 7.00% 6.55% 7.11% 6.99%
Other long-term liabilities
Fixed rate (U.S. dollars) $ -- $188.0 $ -- $ -- $ -- $ -- $188.0 $202.6
Average interest rate 5.69% 5.69%
INTEREST RATE DERIVATIVES
Fixed to Variable Rate Interest
Rate Swaps (U.S. dollars) $ -- $188.0 $125.0 $ 75.0 $ -- $200.0 $588.0 $(54.3)
Average pay rate (a)
Average receive rate 6.49% 6.03% 5.93% 5.52% 5.99%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The average pay rate is based upon 6-month forward LIBOR, except for $275.0
million in notional principal amount which matures in 2007 and thereafter
and is based upon 3-month forward LIBOR.
</FN>
- 19 -
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
As discussed above, the Corporation is exposed to market risks arising from
changes in foreign exchange rates. As of December 31, 2003, the Corporation has
hedged a portion of its 2004 estimated foreign currency transactions using
forward exchange contracts. The Corporation estimated the effect on 2004 gross
profits, based upon a recent estimate of foreign exchange exposures, of a
uniform 10% strengthening in the value of the United States dollar and a uniform
10% weakening in the value of the United States dollar. The larger loss computed
was that under an assumed uniform 10% strengthening of the United States dollar,
which the Corporation estimated would have the effect of reducing gross profits
for 2004 by approximately $17 million. A uniform 10% weakening in the value of
the United States dollar would have the effect of increasing gross profits.
In addition to their direct effects, changes in exchange rates also affect
sales volumes and foreign currency sales prices as competitors' products become
more or less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates previously described does not reflect a
potential change in sales levels or local currency prices nor does it reflect
higher exchange rates, compared to those experienced during 2003, inherent in
the foreign exchange hedging portfolio at December 31, 2003.
Critical Accounting Policies
The Corporation's accounting policies are more fully described in Note 1 of
Notes to Consolidated Financial Statements. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The Corporation believes that of its significant accounting policies, the
following may involve a higher degree of judgment, estimation, or complexity
than other accounting policies.
As more fully described in Note 1 of Notes to Consolidated Financial
Statements, the Corporation performs goodwill impairment tests on at least an
annual basis and more frequently in certain circumstances. The Corporation
cannot predict the occurrence of certain events that might adversely affect the
reported value of goodwill that totaled $771.7 million at December 31, 2003.
Such events may include, but are not limited to, strategic decisions made in
response to economic and competitive conditions, the impact of the economic
environment on the Corporation's customer base, or a material negative change in
its relationships with significant customers.
Pension and other postretirement benefits costs and obligations are
dependent on assumptions used in calculating such amounts. These assumptions
include discount rates, expected return on plan assets, rates of salary
increase, health care cost trend rates, mortality rates, and other factors.
These assumptions are updated on an annual basis prior to the beginning of each
year. The Corporation considers current market conditions, including interest
rates, in making these assumptions. The Corporation develops the discount rates
by considering the yields available on high-quality fixed income investments
with long-term maturities corresponding to the related benefit obligation. The
Corporation lowered its discount rate for United States defined benefit pension
plans from 6.75% in 2002 to 6.00% in 2003. As discussed further in Note 12 of
Notes to Consolidated Financial Statements, the Corporation develops the
expected return on plan assets by considering various factors, which include its
targeted asset allocation percentages, historic returns, and expected future
returns. The Corporation lowered its expected long-term rate of return
assumption for United States defined benefit pension plans from 9.0% in 2003 to
8.75% in 2004.
The Corporation believes that the assumptions used are appropriate;
however, differences in actual experience or changes in the assumptions may
materially affect the Corporation's financial position or results of operations.
In accordance with accounting principles generally accepted in the United
States, actual results that differ from the actuarial assumptions are
accumulated and, if in excess of a specified corridor, amortized over future
periods and, therefore, generally affect recognized expense and the recorded
obligation in future periods. The expected return on plan assets is determined
using the expected rate of return and a calculated value of assets referred to
as the market-related value of assets. The Corporation's aggregate
market-related value of assets exceeded the fair value of plan assets by
approximately $260 million as of the 2003 measurement date. Differences between
assumed and actual returns are amortized to the market-related value on a
straight-line basis over a five-year period. Also, gains and losses resulting
from changes in assumptions and from differences between assumptions and actual
experience (except those differences being amortized to the market-related value
of assets) are amortized over the expected remaining service period of active
plan participants or, for retired participants, the average remaining life
expectancy, to the extent that such amounts exceed ten percent of the greater of
the market-related value of plan assets or the projected benefit obligation at
the beginning of the year. The Corporation expects that its pension and other
postretirement benefit costs in 2004 will exceed the costs recognized in 2003 by
approximately $25 million. This increase is principally attributable to two
factors--a reduction in the market-related value of pension plan assets, as
compared to the prior year, and the effect of amortization of certain actuarial
losses.
- 20 -
As more fully described in Note 19 of Notes to Consolidated Financial
Statements, the Corporation recognized pre-tax restructuring charges of $31.6
million, $46.6 million, and $99.7 million during 2003, 2002, and 2001,
respectively. Those pre-tax restructuring charges in 2003, 2002, and 2001 were
net of reversals of previously established pre-tax restructuring reserves and
proceeds received in excess of the adjusted carrying value of long-lived assets
in the aggregate of $13.2 million, $11.0 million, and $4.1 million,
respectively. The related restructuring reserves reflect estimates, including
those pertaining to separation costs, settlements of contractual obligations,
and asset valuations. The Corporation reassesses the reserve requirements to
complete each individual plan within the restructuring program at the end of
each reporting period. Actual experience has been and may continue to be
different from the estimates used to establish the restructuring reserves. At
December 31, 2003, the Corporation had liabilities established in conjunction
with its restructuring activities that totaled $43.7 million.
As more fully described in Item 3 of this report, the Corporation is
subject to various legal proceedings and claims, including those with respect to
environmental matters, the outcomes of which are subject to significant
uncertainty. The Corporation evaluates, among other factors, the degree of
probability of an unfavorable outcome, the ability to make a reasonable estimate
of the amount of loss, and in certain instances, the ability of other parties to
share costs. Also, in accordance with accounting principles generally accepted
in the United States when a range of probable loss exists, the Corporation
accrues at the low end of the range when no other more likely amount exists.
Unanticipated events or changes in these factors may require the Corporation to
increase the amount it has accrued for any matter or accrue for a matter that
has not been previously accrued because it was not probable. Selling, general,
and administrative expenses in 2002 increased by approximately $23.8 million
over the prior year level due to increased environmental and legal expenses
associated with changes in various factors related to matters for which reserves
had previously been established as well as to matters which arose during 2002.
Further, as indicated in Note 20 of Notes to Consolidated Financial
Statements, insurance recoveries for environmental and certain general liability
claims have not been recognized until realized. Any insurance recoveries, if
realized in future periods, could have a favorable impact on the Corporation's
financial condition or results of operations in the periods realized.
The Corporation is also subject to income tax laws in many countries.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the Corporation's financial statements or tax returns.
During 2004, the Corporation expects that taxing authorities may complete tax
audits currently underway in two significant countries. The final outcome of
these future tax consequences, tax audits, and changes in regulatory tax laws
and rates could materially impact the Corporation's financial statements.
During 2003, the Corporation received notices of proposed adjustments from
the United States Internal Revenue Service (I.R.S.) in connection with audits of
the tax years 1998 through 2000. The principal adjustment proposed by the I.R.S.
consists of the disallowance of a capital loss deduction taken in the
Corporation's tax returns. The Corporation intends to vigorously dispute the
position taken by the I.R.S. in this matter. The Corporation has provided
adequate reserves in the event that the I.R.S. prevails in its disallowance of
the previously described capital loss and the imposition of related interest.
Should the I.R.S. prevail in its disallowance of the capital loss deduction and
imposition of related interest, it would result in a cash outflow by the
Corporation of approximately $140 million. The Corporation believes that any
such cash outflow is unlikely to occur until some time after 2004.
Impact of New Accounting Standards
As more fully described in Note 1 of Notes to Consolidated Financial Statements,
the Corporation has not yet adopted the Financial Accounting Standards Board
Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
Financial Condition
Operating activities generated cash of $570.6 million for the year ended
December 31, 2003, compared to $451.6 million of cash generated for the year
ended December 31, 2002. Cash flow from operating activities included cash flow
from discontinued operations of $8.7 million, $13.3 million, and $10.7 million
for the years ended December 31, 2003, 2002, and 2001, respectively. The
increase in cash provided by operating activities in 2003 over the 2002 levels
was primarily the result of lower inventory levels and higher earnings. The
favorable factors were partially offset by higher trade receivables associated
with increased sales in 2003 as compared to 2002.
As part of its capital management, the Corporation reviews certain working
capital metrics. For example, the Corporation evaluates its accounts receivable
and inventory levels through the computation of days sales outstanding and
inventory turnover ratio, respectively. The number of days sales outstanding as
of December 31, 2003, approximated the number of days sales outstanding as of
December 31, 2002. Average inventory turns during 2003 approximated the 2002
level.
- 21 -
Investing activities for the year ended December 31, 2003, used cash of
$368.1 million compared to $90.6 million of cash used in 2002. The increase in
cash used in investing activities was primarily the result of the $275.0 million
payment to Masco Corporation for the acquisition of Baldwin and Weiser and
related transaction costs. The Corporation anticipates that its capital spending
in 2004 will approximate $125 million.
In January 2004, the Corporation sold two of its European security hardware
businesses for approximately $80 million. The third and last European security
hardware business is expected to be sold during 2004 for approximately $28
million.
Investing activities for the year ended December 31, 2001, included a
payment of $30.5 million in connection with the April 30, 2001, acquisition of
the automotive division of Bamal Corporation.
Financing activities used cash of $425.7 million in 2003, compared to cash
used of $102.0 million in 2002. The increase in cash used in financing
activities was primarily the result of higher payments on long-term debt,
including $309.5 million of debt that was repaid on April 1, 2003, and cash used
for stock repurchases during the 2003 period.
During 2003 and 2002, the Corporation repurchased 2,011,570 and 1,008,101
shares of its common stock at an aggregate cost of $77.5 million and $43.1
million, respectively. During 2001, the Corporation repurchased 525,050 shares
of its common stock at an aggregate cost of $25.5 million upon the termination
of its equity forward purchase agreements, as more fully described in Note 14 of
Notes to Consolidated Financial Statements, and also repurchased 1,085,000
shares of its common stock at an aggregate cost of $33.5 million. The
Corporation implemented its share repurchase program based upon the belief that
its shares were undervalued and to manage share growth resulting from option
exercises.
At December 31, 2003, the Corporation had remaining authorization from its
Board of Directors to repurchase an additional 2,911,595 shares of its common
stock.
During the fourth quarter of 2003, the Corporation announced that its Board
of Directors declared a quarterly cash dividend of $.21 per share of the
Corporation's outstanding common stock payable during the fourth quarter of
2003. This amount represents a 75% increase over the $.12 quarterly dividend
paid by the Corporation since 1996. Future dividends will depend on the
Corporation's earnings, financial condition, and other factors.
As discussed further in Note 12 of Notes to Consolidated Financial
Statements, in accordance with Statement of Financial Accounting Standard (SFAS)
No. 87, Employer's Accounting for Pensions, the Corporation has recorded a
minimum pension liability adjustment at December 31, 2003 as a charge to
stockholders' equity of $404.5 million, net of tax. That charge to stockholders'
equity did not impact the Corporation's compliance with covenants under its
borrowing agreements or cash flow. The Corporation's expense recognized relating
to its pension and other postretirement benefit plans increased by approximately
$32 million in 2003 over the 2002 levels. The Corporation anticipates that the
expense recognized relating to its pension and other postretirement benefit
plans in 2004 will increase by approximately $25 million over the 2003 levels.
That increase is partially attributable to the amortization of previously
unrecognized actuarial losses that gave rise to the minimum liability
adjustment. As discussed further in Note 12 of Notes to Consolidated Financial
Statements, the Corporation does not anticipate that the funding requirements
relating to the pension benefit plans in 2004 will be material.
During 2003, the Corporation received notices of proposed adjustments from
the United States Internal Revenue Service (I.R.S.) in connection with audits of
the tax years 1998 through 2000. The principal adjustment proposed by the I.R.S.
consists of the disallowance of a capital loss deduction taken in the
Corporation's tax returns. The Corporation intends to vigorously dispute the
position taken by the I.R.S. in this matter. The Corporation has provided
adequate reserves in the event that the I.R.S. prevails in its disallowance of
the previously described capital loss and the imposition of related interest.
Should the I.R.S. prevail in its disallowance of the capital loss deduction and
imposition of related interest, it would result in a cash outflow by the
Corporation of approximately $140 million. The Corporation believes that any
such cash outflow is unlikely to occur until some time after 2004.
The ongoing costs of compliance with existing environmental laws and
regulations have not had, and are not expected to have, a material adverse
effect on the Corporation's capital expenditures or financial position.
The Corporation will continue to have cash requirements to support seasonal
working capital needs and capital expenditures, to pay interest, to service
debt, and to complete the restructuring actions previously described. For
amounts available at December 31, 2003, under the Corporation's revolving credit
facilities and under short-term borrowing facilities, see Note 7 of Notes to
Consolidated Financial Statements. In order to meet its cash requirements, the
Corporation intends to use internally generated funds and to borrow under its
existing and future unsecured revolving credit facilities or under short-term
borrowing facilities. The Corporation believes that cash provided from these
sources will be adequate to meet its cash requirements over the next 12 months.
- 22 -
The following table provides a summary of the Corporation's contractual
obligations by due date (in millions of dollars). The Corporation's short-term
borrowings, long-term debt, other long-term obligations, and lease commitments
are more fully described in Notes 7, 8, 13, and 18, respectively, of Notes to
Consolidated Financial Statements.
PAYMENTS DUE BY PERIOD
------------------------------------------------
LESS THAN 1 to 3 3 to 5 AFTER
1 YEAR YEARS YEARS 5 YEARS TOTAL
- --------------------------------------------------------------------------------
Short-term borrowings (a)(b) $ .1 $ -- $ -- $ -- $ .1
Long-term debt .4 155.3 150.0 550.0 855.7
Operating leases 59.0 84.7 40.0 26.2 209.9
Purchase obligations (c) 217.4 40.7 1.0 .3 259.4
Other long-term obligations -- 188.0 -- -- 188.0
- --------------------------------------------------------------------------------
Total contractual
cash obligations (d) $276.9 $468.7 $191.0 $576.5 $1,513.1
================================================================================
(a) As more fully described in Note 7 of Notes to Consolidated Financial
Statements, the Corporation has a $1.0 billion credit facility that matures
in April 2006 and a $500.0 million commercial paper program. While no
borrowings were outstanding under these facilities at December 31, 2003,
the Corporation had borrowings outstanding under these facilities during
2003 and anticipates that borrowings will occur in 2004. The Corporation's
average borrowing outstanding under these facilities during 2003 was $414.8
million.
(b) As described in Note 7 of Notes to Consolidated Financial Statements,
certain subsidiaries of the Corporation outside of the United States have
uncommitted lines of credit of $285.0 million at December 31, 2003. These
uncommitted lines of credit do not have termination dates and are reviewed
periodically.
(c) The Corporation enters into contractual arrangements that result in its
obligation to make future payments, including purchase obligations. The
Corporation enters into these arrangements in the ordinary course of
business in order to ensure adequate levels of inventories, machinery and
equipment, or services. Purchase obligations primarily consist of inventory
purchase commitments, including raw material, components, and sourced
products, sponsorship arrangements, and arrangements for other services.
(d) The Corporation anticipates that funding of its pension and postretirement
benefit plans in 2004 will approximate $25 million. That amount principally
represents contributions either required by regulations or laws or, with
respect to unfunded plans, necessary to fund current benefits. The
Corporation has not presented estimated pension and postretirement funding
in the table above as the funding can vary from year to year based upon
changes in the fair value of the plan assets and actuarial assumptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is contained in Item 7 of this report under
the caption "Hedging Activities" and in Item 8 of this report in Notes 1 and 9
of Notes to Consolidated Financial Statements, and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Corporation and its
subsidiaries are included herein as indicated below:
Consolidated Financial Statements
Consolidated Statement of Earnings
- years ended December 31, 2003, 2002, and 2001.
Consolidated Balance Sheet
- December 31, 2003 and 2002.
Consolidated Statement of Stockholders' Equity
- years ended December 31, 2003, 2002, and 2001.
Consolidated Statement of Cash Flows
- years ended December 31, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
- 23 -
CONSOLIDATED STATEMENT OF EARNINGS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(Dollars in Millions Except Per Share Data)
Year Ended December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
SALES $4,482.7 $4,291.8 $4,139.9
Cost of goods sold 2,887.1 2,805.6 2,776.6
Selling, general, and administrative expenses 1,135.3 1,071.6 1,025.3
Restructuring and exit costs 31.6 46.6 99.7
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 428.7 368.0 238.3
Interest expense (net of interest income of
$25.5 for 2003, $26.5 for 2002, and $34.7 for 2001) 35.2 57.8 84.3
Other expense 2.6 4.8 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 390.9 305.4 145.8
Income taxes 103.7 76.9 44.3
- ------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS 287.2 228.5 101.5
Earnings of discontinued operations (net of income taxes
of $3.5 for 2003, $.8 for 2002, and $3.0 for 2001) 5.8 1.2 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 293.0 $ 229.7 $ 108.0
====================================================================================================================================
BASIC EARNINGS PER COMMON SHARE
Continuing operations $ 3.69 $ 2.85 $ 1.26
Discontinued operations .07 .01 .08
- ------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE -- BASIC $ 3.76 $ 2.86 $ 1.34
====================================================================================================================================
DILUTED EARNINGS PER COMMON SHARE
Continuing operations $ 3.68 $ 2.83 $ 1.25
Discontinued operations .07 .01 .08
- ------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE --
ASSUMING DILUTION $ 3.75 $ 2.84 $ 1.33
====================================================================================================================================
See Notes to Consolidated Financial Statements.
- 24 -
CONSOLIDATED BALANCE SHEET
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(Millions of Dollars)
December 31, 2003 2002
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 308.2 $ 517.1
Trade receivables, less allowances of $47.4 for 2003 and $46.3 for 2002 808.6 715.5
Inventories 709.9 725.7
Current assets of discontinued operations 160.2 38.0
Other current assets 216.1 197.6
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,203.0 2,193.9
- -------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT 660.2 629.6
GOODWILL 771.7 658.4
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS -- 99.7
OTHER ASSETS 587.6 548.9
- -------------------------------------------------------------------------------------------------------------------
$4,222.5 $4,130.5
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ .1 $ 4.6
Current maturities of long-term debt .4 312.0
Trade accounts payable 379.8 336.2
Current liabilities of discontinued operations 38.0 18.8
Other accrued liabilities 893.8 781.8
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,312.1 1,453.4
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 915.6 927.6
DEFERRED INCOME TAXES 179.8 211.3
POSTRETIREMENT BENEFITS 451.9 395.7
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS -- 14.4
OTHER LONG-TERM LIABILITIES 516.6 528.5
STOCKHOLDERS' EQUITY
Common stock (outstanding: December 31, 2003 -- 77,933,464 shares;
December 31, 2002 -- 79,604,786 shares) 39.0 39.8
Capital in excess of par value 486.7 550.1
Retained earnings 773.0 524.3
Accumulated other comprehensive income (loss) (452.2) (514.6)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 846.5 599.6
- -------------------------------------------------------------------------------------------------------------------
$4,222.5 $4,130.5
===================================================================================================================
See Notes to Consolidated Financial Statements.
- 25 -
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(Dollars in Millions Except Per Share Data)
Accumulated
Outstanding Capital in Other Total
Common Par Excess of Retained Comprehensive Stockholders'
Shares Value Par Value Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 80,343,094 $40.2 $560.0 $264.0 $(171.8) $ 692.4
Comprehensive income (loss):
Net earnings -- -- -- 108.0 -- 108.0
Cumulative effect of accounting change (net of tax) -- -- -- -- (.7) (.7)
Net loss on derivative instruments (net of tax) -- -- -- -- (.2) (.2)
Minimum pension liability adjustment (net of tax) -- -- -- -- 1.7 1.7
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- (17.7) (17.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- 108.0 (16.9) 91.1
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.48 per share) -- -- -- (38.8) -- (38.8)
Purchase and retirement of common stock (1,085,000) (.6) (32.9) -- -- (33.5)
Common stock retired under equity forwards (765,326) (.4) -- -- -- (.4)
Common stock issued under employee benefit plans 1,336,873 .7 39.5 -- -- 40.2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 79,829,641 39.9 566.6 333.2 (188.7) 751.0
Comprehensive income (loss):
Net earnings -- -- -- 229.7 -- 229.7
Net loss on derivative instruments (net of tax) -- -- -- -- (16.4) (16.4)
Minimum pension liability adjustment (net of tax) -- -- -- -- (369.7) (369.7)
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- 60.2 60.2
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- 229.7 (325.9) (96.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.48 per share) -- -- -- (38.6) -- (38.6)
Purchase and retirement of common stock (1,008,101) (.5) (42.6) -- -- (43.1)
Common stock issued under employee benefit plans 783,246 .4 26.1 -- -- 26.5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 79,604,786 39.8 550.1 524.3 (514.6) 599.6
Comprehensive income (loss):
Net earnings -- -- -- 293.0 -- 293.0
Net loss on derivative instruments (net of tax) -- -- -- -- (15.8) (15.8)
Minimum pension liability adjustment (net of tax) -- -- -- -- (20.2) (20.2)
Foreign currency translation adjustments,
less effect of hedging activities (net of tax) -- -- -- -- 98.4 98.4
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- 293.0 62.4 355.4
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock ($.57 per share) -- -- -- (44.3) -- (44.3)
Purchase and retirement of common stock (2,011,570) (1.0) (76.5) -- -- (77.5)
Common stock issued under employee benefit plans 340,248 .2 13.1 -- -- 13.3
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 77,933,464 $39.0 $486.7 $773.0 $(452.2) $ 846.5
====================================================================================================================================
See Notes to Consolidated Financial Statements.
- 26 -
CONSOLIDATED STATEMENT OF CASH FLOWS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(Millions of Dollars)
Year Ended December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 293.0 $ 229.7 $ 108.0
Adjustments to reconcile net earnings to cash flow
from operating activities:
Non-cash charges and credits:
Depreciation and amortization 133.4 122.4 152.3
Restructuring and exit costs 31.6 46.6 99.7
Other (8.1) (8.6) (4.4)
Earnings of discontinued operations (5.8) (1.2) (6.5)
Changes in selected working capital items
(net of assets and liabilities of acquired businesses):
Trade receivables (6.4) 13.1 69.0
Inventories 94.2 (10.0) 128.0
Trade accounts payable 21.0 18.9 (53.5)
Restructuring spending (40.4) (36.9) (24.9)
Other assets and liabilities 49.4 64.3 (98.8)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 561.9 438.3 368.9
CASH FLOW FROM OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS 8.7 13.3 10.7
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES 570.6 451.6 379.6
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposal of assets 15.0 4.6 12.3
Capital expenditures (102.5) (94.3) (131.4)
Purchase of businesses, including transaction costs (277.6) -- (30.5)
Investing activities of discontinued operations (3.3) (2.3) (3.4)
Other investing activities .3 1.4 --
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES (368.1) (90.6) (153.0)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in short-term borrowings (4.9) (7.2) (390.0)
Proceeds from long-term debt (net of debt issue cost of $3.1 in 2001) -- -- 393.8
Payments on long-term debt (310.6) (33.9) (48.6)
Purchase of common stock (77.5) (43.1) (59.0)
Issuance of common stock 11.6 20.8 27.9
Cash dividends (44.3) (38.6) (38.8)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES (425.7) (102.0) (114.7)
Effect of exchange rate changes on cash 14.3 13.6 (2.4)
- ------------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (208.9) 272.6 109.5
Cash and cash equivalents at beginning of year 517.1 244.5 135.0
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 308.2 $ 517.1 $ 244.5
====================================================================================================================================
See Notes to Consolidated Financial Statements.
- 27 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
NOTE 1: SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include the
accounts of the Corporation and its subsidiaries. Intercompany transactions have
been eliminated.
Reclassifications: Certain prior years' amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used in 2003.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Revenue Recognition: Revenue from sales of products is recognized when title
passes, which principally occurs upon shipment but also, to a lesser extent,
occurs upon delivery.
Foreign Currency Translation: The financial statements of subsidiaries located
outside of the United States, except those subsidiaries operating in highly
inflationary economies, generally are measured using the local currency as the
functional currency. Assets, including goodwill, and liabilities of these
subsidiaries are translated at the rates of exchange at the balance sheet date.
The resultant translation adjustments are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Income and expense items are translated at average monthly rates of exchange.
Gains and losses from foreign currency transactions of these subsidiaries are
included in net earnings. For subsidiaries operating in highly inflationary
economies, gains and losses from balance sheet translation adjustments are
included in net earnings.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
demand deposits, and short-term investments with maturities of three months or
less from the date of acquisition.
Concentration of Credit: The Corporation sells products and services to
customers in diversified industries and geographic regions and, therefore, has
no significant concentrations of credit risk other than with two major
customers. As of December 31, 2003, approximately 25% of the Corporation's trade
receivables were due from two large home improvement retailers.
The Corporation continuously evaluates the creditworthiness of its
customers and generally does not require collateral.
Inventories: Inventories are stated at the lower of cost or market. The cost of
United States inventories is based primarily on the last-in, first-out (LIFO)
method; all other inventories are based on the first-in, first-out (FIFO)
method.
Property and Depreciation: Property, plant, and equipment is stated at cost.
Depreciation is computed generally on the straight-line method for financial
reporting purposes.
Goodwill and Other Intangible Assets: Effective January 1, 2002, the Corporation
adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but are subject to an
annual impairment test. Other intangible assets continue to be amortized over
their useful lives.
The changes in the carrying amount of goodwill for the year ended December
31, 2003, by segment in millions of dollars, are as follows:
POWER HARDWARE FASTENING
TOOLS & & HOME & ASSEMBLY
ACCESSORIES IMPROVEMENT SYSTEMS
- --------------------------------------------------------------------------------
Goodwill at January 1 $25.8 $363.9 $268.7
Acquisitions -- 94.4 --
Currency translation
adjustment -- .3 18.6
- --------------------------------------------------------------------------------
Goodwill at December 31 $25.8 $458.6 $287.3
================================================================================
The Corporation assesses the fair value of its reporting units for its
goodwill impairment tests based upon a discounted cash flow methodology. Those
estimated future cash flows - which are based upon historical results and
current projections - are discounted at a rate corresponding to a "market" rate.
If the carrying amount of the reporting unit exceeds the estimated fair value
determined through that discounted cash flow methodology, goodwill impairment
may be present. The Corporation would measure the goodwill impairment loss based
upon the fair value of the underlying assets and liabilities of the reporting
unit, including any unrecognized intangible assets, and estimate the implied
fair value of goodwill. An impairment loss would be recognized to the extent
that a reporting unit's recorded goodwill exceeded the implied fair value of
goodwill.
As of January 1, 2002, the Corporation performed the first of the required
impairment tests of goodwill. Additionally, the Corporation performed its annual
impairment test in the fourth quarters of 2003 and 2002. No impairment was
present upon performing these impairment tests. The Corporation cannot predict
the occurrence of certain events that might adversely affect the reported value
of goodwill. Such 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 $26.4 million in 2001,
of which $24.2 million related to continuing operations and $2.2 million related
to discontinued operations. Net earnings from continuing operations for the year
ended December 31, 2001, excluding goodwill amortization, would have been $125.7
million. Basic and diluted earnings per share from continuing operations for the
year ended December 31, 2001, excluding goodwill amortization, would have been
$1.56 and $1.55, respectively. Net earnings
- 28 -
for the year ended December 31, 2001, excluding goodwill amortization, would
have been $134.4 million. Basic and diluted earnings per share for the year
ended December 31, 2001, excluding goodwill amortization, would have been $1.67
and $1.66, respectively.
Accounting Policy Prior to January 1, 2002: Goodwill and other intangible assets
were amortized on the straight-line method. Goodwill was amortized principally
over a 40-year period. On a periodic basis, the Corporation estimated the future
discounted cash flows of the businesses to which goodwill related. If such
estimates of the future discounted cash flows, net of the carrying amount of the
tangible net assets, were less than the carrying amount of goodwill, the
difference would have been charged to operations. The projected discounted cash
flows were discounted at a rate corresponding to the Corporation's estimated
cost of capital, which also was the hurdle rate used by the Corporation in
making investment decisions.
Product Development Costs: Costs associated with the development of new products
and changes to existing products are charged to operations as incurred. Product
development costs were $100.4 million in 2003, $94.3 million in 2002, and $96.6
million in 2001.
Shipping and Handling Costs: Shipping and handling costs represent costs
associated with shipping products to customers and handling finished goods.
Included in selling, general, and administrative expenses are shipping and
handling costs of $229.4 million in 2003, $218.1 million in 2002, and $209.4
million in 2001. Freight charged to customers is recorded as revenue.
Advertising and Promotion: 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 promotion expense, a component of selling, general,
and administrative expenses in the Consolidated Statement of Earnings. Upon the
adoption of EITF 01-9, prior period amounts were reclassified and resulted in a
reduction of sales (and an offsetting reduction of selling expenses) of $87.5
million in 2001.
Advertising and promotion expense, which is expensed as incurred, was
$154.0 million in 2003, $134.6 million in 2002, and $132.9 million in 2001.
Product Warranties: Most of the Corporation's products in the Power Tools and
Accessories segment and Hardware and Home Improvement segment carry a product
warranty. That product warranty, in the United States, generally provides that
customers can return a defective product during the specified warranty period
following purchase in exchange for a replacement product or repair at no cost to
the consumer. Product warranty arrangements outside the United States vary
depending upon local market conditions and laws and regulations. The Corporation
accrues an estimate of its exposure to warranty claims based upon both current
and historical product sales data and warranty costs incurred.
Postretirement Benefits: Pension plans, which cover substantially all of the
Corporation's employees in North America, Europe, and the United Kingdom,
consist primarily of non-contributory defined benefit plans. The defined benefit
plans are funded in conformity with the funding requirements of applicable
government regulations. Generally, benefits are based on age, years of service,
and the level of compensation during the final years of employment. Prior
service costs for defined benefit plans generally are amortized over the
estimated remaining service periods of employees.
Certain employees are covered by defined contribution plans. The
Corporation's contributions to these plans are based on a percentage of employee
compensation or employee contributions. These plans are funded on a current
basis.
In addition to pension benefits, certain postretirement medical, dental,
and life insurance benefits are provided, principally to most United States
employees. Retirees in other countries generally are covered by
government-sponsored programs.
The Corporation uses the corridor approach in the valuation of defined
benefit plans and other postretirement benefits. The corridor approach defers
all actuarial gains and losses resulting from variances between actual results
and economic estimates or actuarial assumptions. For defined benefit pension
plans, these unrecognized gains and losses are amortized when the net gains and
losses exceed 10% of the greater of the market-related value of plan assets or
the projected benefit obligation at the beginning of the year. For other
postretirement benefits, amortization occurs when the net gains and losses
exceed 10% of the accumulated postretirement benefit obligation at the beginning
of the year. The amount in excess of the corridor is amortized over the average
remaining service period to retirement date of active plan participants or, for
retired participants, the average remaining life expectancy.
Derivative Financial Instruments: Effective January 1, 2001, the Corporation
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS No. 133 requires that the Corporation recognize all
derivatives on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. At the time of its
adoption of SFAS No. 133 on January 1, 2001, the Corporation recognized an
after-tax reduction of $.7 million to other comprehensive income (loss), a
component of stockholders' equity, as a cumulative effect adjustment.
The Corporation is exposed to market risks arising from changes in interest
rates. With products and services marketed in over 100 countries and with
manufacturing sites in 10 countries, the Corporation also is exposed to risks
arising from changes in foreign currency rates. The Corporation uses derivatives
principally in the management of interest rate and foreign currency exposure. It
does not utilize derivatives that contain leverage features. On the date on
which the Corporation enters into a derivative, the derivative is designated as
a hedge of the identified exposure. The Corporation formally documents all
relationships between hedging instruments and
- 29 -
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. In this documentation, the Corporation
specifically identifies the asset, liability, firm commitment, forecasted
transaction, or net investment that has been designated as the hedged item and
states how the hedging instrument is expected to reduce the risks related to the
hedged item. The Corporation measures effectiveness of its hedging relationships
both at hedge inception and on an ongoing basis.
For each derivative instrument that is designated and qualifies as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
For each derivative instrument that is designated and qualifies as a cash flow
hedge, the effective portion of the gain or loss on the derivative instrument is
reported as a component of accumulated other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during
the period of change. For hedged forecasted transactions, hedge accounting is
discontinued if the forecasted transaction is no longer probable of occurring,
in which case previously deferred hedging gains or losses would be recorded to
earnings immediately. For derivatives that are designated and qualify as hedges
of net investments in subsidiaries located outside the United States, the gain
or loss is reported in accumulated other comprehensive income (loss) as part of
the cumulative translation adjustment to the extent the derivative is effective.
For derivative instruments not designated as hedging instruments, the gain or
loss is recognized in current earnings during the period of change.
Interest Rate Risk Management: The Corporation has designated each of its
outstanding interest rate swap agreements as fair value hedges of the underlying
fixed rate obligation. The fair value of the interest rate swap agreements is
recorded in other assets or other long-term liabilities with a corresponding
increase or decrease in the fixed rate obligation. The changes in the fair value
of the interest rate swap agreements and the underlying fixed rate obligations
are recorded as equal and offsetting unrealized gains and losses in interest
expense and other expense (income) in the Consolidated Statement of Earnings.
The Corporation has structured all existing interest rate swap agreements to be
100% effective. As a result, there is no current impact to earnings resulting
from hedge ineffectiveness. Gains or losses resulting from the early termination
of interest rate swaps are deferred as an increase or decrease to the carrying
value of the related debt and amortized as an adjustment to the yield of the
related debt instrument over the remaining period originally covered by the
swap.
Foreign Currency Management: The fair value of foreign currency-related
derivatives are generally included in the Consolidated Balance Sheet in other
current assets and other accrued liabilities. The earnings impact of cash flow
hedges relating to forecasted purchases of inventory is generally reported in
cost of goods sold to match the underlying transaction being hedged. Realized
and unrealized gains and losses on these instruments are deferred in accumulated
other comprehensive income (loss) until the underlying transaction is recognized
in earnings.
The earnings impact of cash flow hedges relating to the variability in cash
flows associated with foreign currency-denominated assets and liabilities is
reported in cost of goods sold, selling, general, and administrative expenses,
or other expense (income), depending on the nature of the assets or liabilities
being hedged. The amounts deferred in accumulated other comprehensive income
(loss) associated with these instruments generally relate to foreign currency
spot-rate to forward-rate differentials and are recognized in earnings over the
term of the hedge. The discount or premium relating to cash flow hedges
associated with foreign currency-denominated assets and liabilities is
recognized in net interest expense over the life of the hedge.
Stock-Based Compensation: As described in Note 16, the Corporation has elected
to follow the accounting provisions of Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, for stock-based
compensation and to furnish the pro forma disclosures required under SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure.
A reconciliation of the Corporation's net earnings to pro forma net
earnings, and the related pro forma earnings per share amounts, for the years
ended December 31, 2003, 2002, and 2001, is provided below. For purposes of pro
forma disclosure, stock-based compensation expense is recognized in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Further, pro forma stock-based compensation expense is amortized to expense on a
straight-line basis over the vesting period.
(Dollars in Millions
Except Per Share Data) 2003 2002 2001
- --------------------------------------------------------------------------------
Net earnings $293.0 $229.7 $108.0
Adjustment to net earnings for:
Stock-based compensation
expense (income) included
in net earnings, net of tax 2.6 -- (2.3)
Pro forma stock-based
compensation (expense),
net of tax (19.3) (18.5) (13.8)
- --------------------------------------------------------------------------------
Pro forma net earnings $276.3 $211.2 $ 91.9
================================================================================
Pro forma net earnings
per common share -- basic $ 3.55 $ 2.63 $ 1.14
================================================================================
Pro forma net earnings
per common share --
assuming dilution $ 3.55 $ 2.62 $ 1.13
================================================================================
New Accounting Pronouncements: On December 8, 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law
which introduced a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
January 2004,
- 30 -
the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. As provided under
FSP No. FAS 106-1, the Corporation elected to defer accounting for the effects
of the Act until authoritative guidance on the accounting for the federal
subsidy is issued or until a significant event occurs that ordinarily would call
for the remeasurement of the postretirement benefit plan's obligations. The
accrued benefit obligation and the net periodic postretirement benefit cost
included in the consolidated financial statements do not reflect the effects of
the Act on the Corporation's postretirement benefit plan.
NOTE 2: ACQUISITIONS
On September 30, 2003, the Corporation acquired Baldwin Hardware Corporation
(Baldwin) and Weiser Lock Corporation (Weiser) from Masco Corporation for $277.6
million in cash, including transaction costs of $2.6 million. Baldwin is a
leading provider of architectural and decorative products for the home. Weiser
is a manufacturer of locksets and decorative exterior hardware and accessories.
These additions to the Corporation's security hardware business, a component of
its Hardware and Home Improvement segment, will be integrated into the existing
security hardware business and will allow the Corporation to offer its customers
a broader range of styles and price points.
This transaction has been accounted for in accordance with SFAS No. 141,
Business Combinations, and accordingly, the financial position and results of
operations have been included in the Corporation's operations since the date of
acquisition.
The Corporation has not yet obtained all information, including, but not
limited to, environmental studies and finalization of independent appraisals,
required to complete the purchase price allocation related to the acquisition.
The final allocation will be completed in 2004 and is not expected to have a
material impact on the Corporation's financial position or results of
operations. The initial purchase price allocation of the acquired businesses
based on independent appraisals and management's estimates at the date of
acquisition, in millions of dollars, is as follows:
- --------------------------------------------------------------------------------
Accounts receivable $ 38.3
Inventories 38.6
Property and equipment 63.1
Goodwill 94.4
Intangible assets 76.3
Other current and long-term assets 10.5
- --------------------------------------------------------------------------------
Total assets acquired 321.2
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities 41.0
Other liabilities 2.6
- --------------------------------------------------------------------------------
Total liabilities 43.6
- --------------------------------------------------------------------------------
Fair value of net assets acquired $277.6
================================================================================
The preliminary allocation of the purchase price resulted in the
recognition of $94.4 million of goodwill primarily related to the anticipated
future earnings and cash flows of Baldwin and Weiser, including the estimated
effects of the integration of these businesses into the Corporation's existing
security hardware business. The transaction also generated approximately $76.3
million in intangible assets of which $71.9 million were indefinite-lived
intangible assets related to trademarks and tradenames and $4.4 million related
to finite-lived intangible assets that will be amortized over a period of 10
years. The Corporation believes that the entire amount of intangible assets and
goodwill recognized will be deductible for income tax purposes.
Prior to the date of the acquisition of Baldwin and Weiser and during the
fourth quarter of 2003, the Corporation identified opportunities to restructure
these businesses as well as to integrate these businesses into its existing
security hardware business. Subsequent to the acquisition, the Corporation
approved restructuring actions relating to the acquired businesses of $8.9
million. These actions principally reflect severance benefits associated with
administrative and manufacturing actions related to the acquired businesses,
including the closure of an acquired administration and distribution facility.
These restructuring actions will commence in 2004, and the Corporation expects
the actions to be completed by the end of 2004. In addition, as more fully
described in Note 19, during the fourth quarter of 2003, the Corporation
recorded a pre-tax restructuring charge of $11.0 million relating to the closure
of a manufacturing facility in its Kwikset business, a pre-existing component of
its Hardware and Home Improvement segment.
NOTE 3: DISCONTINUED OPERATIONS
As of December 31, 2003, the Corporation met the requirements to classify its
European security hardware business as discontinued operations. The European
security hardware business, consisting of the NEMEF, Corbin, and DOM businesses,
was previously included in the Corporation's Hardware and Home Improvement
segment. In January 2004, the Corporation completed the sale of the NEMEF and
Corbin businesses to Assa Abloy for an aggregate sales price of $80.0 million,
subject to post-closing adjustments. Also, in January 2004, the Corporation
signed an agreement with Assa Abloy to sell its remaining European security
hardware business, DOM, for $28.0 million. That sale is subject to regulatory
approval. The Corporation's sale of its European security hardware business in
2004 is expected to result in a net gain.
The European security hardware business discussed above is reported as
discontinued operations in the consolidated financial statements and all prior
periods presented have been adjusted to reflect this presentation. Sales and
earnings before income taxes of the discontinued operations for each year, in
millions of dollars, were as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Sales $119.3 $102.2 $105.7
Earnings before income taxes 9.3 2.0 9.5
- --------------------------------------------------------------------------------
The results of the discontinued operations do not reflect any expense for
interest allocated by or management fees charged by the Corporation.
- 31 -
The major classes of assets and liabilities of discontinued operations in
the Consolidated Balance Sheet at the end of each year, in millions of dollars,
were as follows:
2003 2002
- --------------------------------------------------------------------------------
Trade receivables, less allowances $ 16.1 $ 13.5
Inventories 28.4 23.2
Property, plant, and equipment 27.9 26.3
Goodwill 82.7 70.7
Other assets 5.1 4.0
- --------------------------------------------------------------------------------
Total assets 160.2 137.7
- --------------------------------------------------------------------------------
Trade accounts payable 8.5 7.0
Other accrued liabilities 11.5 11.8
Postretirement benefits and
other long-term liabilities 18.0 14.4
- --------------------------------------------------------------------------------
Total liabilities 38.0 33.2
- --------------------------------------------------------------------------------
Net assets $122.2 $104.5
================================================================================
NOTE 4: INVENTORIES
The classification of inventories at the end of each year, in millions of
dollars, was as follows:
2003 2002
- --------------------------------------------------------------------------------
FIFO cost
Raw materials and work-in-process $186.3 $170.3
Finished products 510.3 546.5
- --------------------------------------------------------------------------------
696.6 716.8
Adjustment to arrive at
LIFO inventory value 13.3 8.9
- --------------------------------------------------------------------------------
$709.9 $725.7
================================================================================
The cost of United States inventories stated under the LIFO method was
approximately 43% and 52% of the value of total inventories at December 31, 2003
and 2002, respectively.
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at the end of each year, in millions of dollars,
consisted of the following:
2003 2002
- --------------------------------------------------------------------------------
Property, plant, and equipment at cost:
Land and improvements $ 50.0 $ 46.4
Buildings 268.8 260.5
Machinery and equipment 1,234.6 1,185.3
- --------------------------------------------------------------------------------
1,553.4 1,492.2
Less accumulated depreciation 893.2 862.6
- --------------------------------------------------------------------------------
$ 660.2 $ 629.6
================================================================================
NOTE 6: OTHER ACCRUED LIABILITIES
Other accrued liabilities at the end of each year, in millions of dollars,
included the following:
2003 2002
- --------------------------------------------------------------------------------
Salaries and wages $103.4 $ 82.5
Employee benefits 130.3 107.2
Trade discounts and allowances 149.8 121.6
Advertising and promotion 74.7 62.9
Income taxes, including deferred taxes 39.4 21.7
Accruals related to restructuring actions 43.7 56.0
Warranty 40.4 41.8
All other 312.1 288.1
- --------------------------------------------------------------------------------
$893.8 $781.8
================================================================================
All other at December 31, 2003 and 2002, consisted primarily of accruals
for foreign currency derivatives, interest, insurance, and taxes other than
income taxes.
The following provides information with respect to the Corporation's
warranty accrual, in millions of dollars:
2003 2002
- --------------------------------------------------------------------------------
Warranty reserve at January 1 $ 41.8 $ 38.6
Accruals for warranties issued during
the period and changes in estimates
related to pre-existing warranties 80.4 94.9
Settlements made (85.5) (94.0)
Additions due to acquisitions .8 --
Currency translation adjustments 2.9 2.3
- --------------------------------------------------------------------------------
Warranty reserve at December 31 $ 40.4 $ 41.8
================================================================================
NOTE 7: SHORT-TERM BORROWINGS
Short-term borrowings in the amounts of $.1 million and $4.6 million at December
31, 2003 and 2002, respectively, consisted primarily of borrowings under the
terms of uncommitted lines of credit or other short-term borrowing arrangements.
The weighted-average interest rate on short-term borrowings outstanding was 2.7%
and 3.4% at December 31, 2003 and 2002, respectively.
In November 2002, the Corporation entered into a $500 million agreement under
which it may issue commercial paper at market rates with maturities of up to 365
days from the date of issue.
In April 2001, the Corporation replaced an expiring $1.0 billion former
unsecured revolving credit facility, which consisted of two individual
facilities, with a $1.0 billion unsecured revolving credit facility that expires
in April 2006 and a $400.0 million 364-day unsecured revolving credit facility
(collectively, the Credit Facilities). In April 2002, the Corporation entered
into a $250 million 364-day unsecured revolving credit facility (the 364-day
Credit Facility) replacing its expiring $400 million 364-day unsecured revolving
credit facility. The Corporation reduced the borrowing availability under the
364-day Credit Facility based upon its anticipated short-term financing needs.
In April 2003, the Corporation elected not to renew the 364-day Credit Facility,
again, based upon its anticipated short-term financing needs. The amount
available for borrowing under the $1.0 billion unsecured revolving credit
facility (the Credit Facility) at December 31, 2003, was $1.0 billion.
While no amounts were outstanding under the Corporation's unsecured
revolving credit facilities or commercial paper program at December 31, 2003 or
2002, average borrowings outstanding under these facilities during 2003 and 2002
were $414.8 million and $429.9 million, respectively.
Under the Credit Facilities, the Corporation has the option of borrowing at
the London Interbank Offered Rate (LIBOR) plus a specified percentage, or at
other variable rates set forth therein. The Credit Facilities provide that the
interest rate margin over LIBOR, initially set at .475% and .500%, respectively,
for each of the two individual facilities, will increase or decrease based upon
changes in the ratings of the Corporation's long-term senior unsecured debt. The
Credit
- 32 -
Facilities provided for an interest rate margin over LIBOR of .475% during 2003,
2002, and 2001. That interest rate margin will increase (by a maximum amount of
..525%) or decrease (by a maximum amount of .220%) based upon changes in the
ratings of the Corporation's long-term senior unsecured debt. In addition to the
interest payable on the principal amount of indebtedness outstanding from time
to time under the Credit Facilities, the Corporation is required to pay an
annual facility fee to each bank, equal to .150% and .125%, respectively, of the
amount of each bank's commitment, whether used or unused. The Corporation is
also required to pay a utilization fee under the Credit Facilities equal to
..125%, applied to the outstanding balance when borrowings under the respective
facility exceeds 50% of the facility. The Credit Facilities provide that both
the facility fee and the utilization fee will increase or decrease based upon
changes in the ratings of the Corporation's senior unsecured debt.
The Credit Facility includes various customary covenants. Some of the
covenants limit the ability of the Corporation or its subsidiaries to pledge
assets or incur liens on assets. Other covenants require the Corporation to
maintain a specified interest coverage ratio and certain cash flow to fixed
expense coverage ratios. As of December 31, 2003, the Corporation was in
compliance with all terms and conditions of the Credit Facility.
Under the terms of uncommitted lines of credit at December 31, 2003,
certain subsidiaries outside of the United States may borrow up to an additional
$285.0 million on such terms as may be mutually agreed. These arrangements do
not have termination dates and are reviewed periodically. No material
compensating balances are required or maintained.
NOTE 8: LONG-TERM DEBT
The composition of long-term debt at the end of each year, in millions of
dollars, was as follows:
2003 2002
- --------------------------------------------------------------------------------
7.50% notes due 2003 $ -- $ 309.5
7.0% notes due 2006 154.6 154.6
6.55% notes due 2007 150.0 150.0
7.125% notes due 2011
(including discount of
$2.3 in 2003 and $2.6 in 2002) 397.7 397.4
7.05% notes due 2028 150.0 150.0
Other loans due through 2007 1.1 2.2
Fair value hedging adjustment 62.6 75.9
Less current maturities of long-term debt (.4) (312.0)
- --------------------------------------------------------------------------------
$ 915.6 $ 927.6
================================================================================
As more fully described in Note 9, at December 31, 2003 and 2002, the
carrying amount of long-term debt and current maturities thereof includes $62.6
million and $75.9 million, respectively, relating to outstanding or terminated
fixed-to-variable rate interest rate swaps agreements.
Indebtedness of subsidiaries in the aggregate principal amounts of $301.3
million and $306.9 million were included in the Consolidated Balance Sheet at
December 31, 2003 and 2002, respectively, in short-term borrowings, current
maturities of long-term debt, and long-term debt.
Principal payments on long-term debt obligations due over the next four
years are as follows: $.4 million in 2004, $.4 million in 2005, $154.9 million
in 2006, and $150.0 million in 2007. There are no principal payments due in
2008. Interest payments on all indebtedness were $80.3 million in 2003, $100.8
million in 2002, and $122.2 million in 2001.
NOTE 9: DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation is exposed to market risks arising from changes in interest
rates. With products and services marketed in over 100 countries and with
manufacturing sites in 10 countries, the Corporation also is exposed to risks
arising from changes in foreign exchange rates.
Credit Exposure: The Corporation is exposed to credit-related losses in the
event of non-performance by counterparties to certain derivative financial
instruments. The Corporation monitors the creditworthiness of the counterparties
and presently does not expect default by any of the counterparties. The
Corporation does not obtain collateral in connection with its derivative
financial instruments.
The credit exposure that results from interest rate and foreign exchange
contracts is the fair value of contracts with a positive fair value as of the
reporting date. Some derivatives are not subject to credit exposures. The fair
value of all financial instruments is summarized in Note 10.
Interest Rate Risk Management: The Corporation manages its interest rate risk,
primarily through the use of interest rate swap agreements, in order to achieve
a cost-effective mix of fixed and variable rate indebtedness. It seeks to issue
debt opportunistically, whether at fixed or variable rates, at the lowest
possible costs. The Corporation may, based upon its assessment of the future
interest rate environment, elect to manage its interest rate risk associated
with changes in the fair value of its indebtedness, or the future cash flows
associated with its indebtedness, through the use of interest rate swaps.
The amounts exchanged by the counterparties to interest rate swap
agreements normally are based upon the notional amounts and other terms,
generally related to interest rates, of the derivatives. While notional amounts
of interest rate swaps form part of the basis for the amounts exchanged by the
counterparties, the notional amounts are not themselves exchanged and,
therefore, do not represent a measure of the Corporation's exposure as an end
user of derivative financial instruments.
The Corporation's portfolio of interest rate swap instruments at December
31, 2003 and 2002, consisted of $588.0 million notional and $788.0 million
notional amounts of fixed-to-variable rate swaps with a weighted-average fixed
rate receipt of 5.99% and 6.01%, respectively. The basis of the variable rate
paid is LIBOR.
Credit exposure on the Corporation's interest rate derivatives at December
31, 2003 and 2002, was $54.3 million and $85.0 million, respectively. Deferred
gains on the early termination of interest rate swaps were $30.2 million and
$19.2 million at December 31, 2003 and 2002.
- 33 -
Foreign Currency Management: The Corporation enters into various foreign
currency contracts in managing its foreign currency exchange risk. Generally,
the foreign currency contracts have maturity dates of less than twenty-four
months. The contractual amounts of foreign currency derivatives, principally
forward exchange contracts and purchased options, generally are exchanged by the
counterparties. The Corporation's foreign currency derivatives are designated
to, and generally are denominated in the currencies of, the underlying
exposures. To minimize the volatility of reported equity, the Corporation may
hedge, on a limited basis, a portion of its net investment in subsidiaries
located outside the United States through the use of foreign currency forward
contracts and purchased foreign currency options.
The Corporation seeks to minimize its foreign currency cash flow risk and
hedges its foreign currency transaction exposures (that is, currency exposures
related to assets and liabilities) as well as certain forecasted foreign
currency exposures. Hedges of forecasted foreign currency exposures principally
relate to the cash flow risk relating to the sales of products manufactured or
purchased in a currency different from that of the selling subsidiary. The
Corporation hedges its foreign currency cash flow risk through the use of
forward exchange contracts and, to a small extent, options. Some of the forward
exchange contracts involve the exchange of two foreign currencies according to
the local needs of the subsidiaries. Some natural hedges also are used to
mitigate transaction and forecasted exposures. The Corporation also responds to
foreign exchange movements through various means, such as pricing actions,
changes in cost structure, and changes in hedging strategies.
The following table summarizes the contractual amounts of forward exchange
contracts as of December 31, 2003 and 2002, in millions of dollars, including
details by major currency as of December 31, 2003. Foreign currency amounts were
translated at current rates as of the reporting date. The "Buy" amounts
represent the United States dollar equivalent of commitments to purchase
currencies, and the "Sell" amounts represent the United States dollar equivalent
of commitments to sell currencies.
As of December 31, 2003 BUY SELL
- --------------------------------------------------------------------------------
United States dollar $1,090.8 $(1,106.0)
Pound sterling 883.3 (202.1)
Euro 512.4 (952.4)
Canadian dollar 30.0 (100.3)
Australian dollar 41.9 (75.2)
Czech koruna 64.2 (13.1)
Japanese yen -- (54.4)
Swedish krona 41.2 (83.0)
Danish krone .4 (46.2)
Other 18.4 (77.6)
- --------------------------------------------------------------------------------
Total $2,682.6 $(2,710.3)
================================================================================
As of December 31, 2002
- --------------------------------------------------------------------------------
Total $2,128.4 $(2,144.9)
================================================================================
No purchased options to buy or sell currencies were outstanding at December
31, 2003.
Credit exposure on foreign currency derivatives as of December 31, 2003 and
2002, was $10.9 million and $6.6 million, respectively.
Hedge ineffectiveness and the portion of derivative gains and losses
excluded from the assessment of hedge effectiveness related to the Corporation's
cash flow hedges that were recorded to earnings during 2003 and 2002 were not
significant.
Amounts deferred in accumulated other comprehensive income (loss) at
December 31, 2003, that are expected to be reclassified into earnings during
2004 represent an after-tax loss of $24.5 million. The amount expected to be
reclassified into earnings in the next twelve months includes unrealized gains
and losses related to open foreign currency contracts. Accordingly, the amount
that is ultimately reclassified into earnings may differ materially.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
o Cash and cash equivalents, trade receivables, certain other current assets,
short-term borrowings, and current maturities of long-term debt: The amounts
reported in the Consolidated Balance Sheet approximate fair value.
o Long-term debt: Publicly traded debt is valued based on quoted market values.
The fair value of other long-term debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Corporation for debt of the same remaining maturities.
o Other long-term liabilities: The fair value of a subsidiary's redeemable
preferred shares is based on the present value of the cash flows associated with
these preferred shares, discounted at current market yields.
o Interest rate hedges: The fair value of interest rate hedges reflects the
estimated amounts that the Corporation would receive or pay to terminate the
contracts at the reporting date.
o Foreign currency contracts: The fair value of forward exchange contracts and
options is estimated using prices established by financial institutions for
comparable instruments.
- 34 -
The following table sets forth, in millions of dollars, the carrying
amounts and fair values of the Corporation's financial instruments, except for
those noted above for which carrying amounts approximate fair values:
Assets (Liabilities) CARRYING FAIR
As of December 31, 2003 AMOUNT VALUE
- --------------------------------------------------------------------------------
Non-derivatives:
Long-term debt $(915.6) $(964.7)
Other long-term liabilities (202.6) (202.6)
- --------------------------------------------------------------------------------
Derivatives relating to:
Debt
Assets 38.4 38.4
Other long-term liabilities
Assets 15.9 15.9
Foreign Currency
Assets 10.9 10.9
Liabilities (43.0) (43.0)
- --------------------------------------------------------------------------------
Assets (Liabilities) CARRYING FAIR
As of December 31, 2002 AMOUNT VALUE
- --------------------------------------------------------------------------------
Non-derivatives:
Long-term debt $(927.6) $(965.8)
Other long-term liabilities (208.4) (208.4)
- --------------------------------------------------------------------------------
Derivatives relating to:
Debt
Assets 63.8 63.8
Other long-term liabilities
Assets 21.2 21.2
Foreign Currency
Assets 6.6 6.6
Liabilities (21.1) (21.1)
- --------------------------------------------------------------------------------
NOTE 11: INCOME TAXES
Earnings from continuing operations before income taxes for each year, in
millions of dollars, were as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
United States $189.5 $186.2 $ 93.0
Other countries 201.4 119.2 52.8
- --------------------------------------------------------------------------------
$390.9 $305.4 $145.8
================================================================================
Significant components of income taxes (benefits) from continuing
operations for each year, in millions of dollars, were as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Current:
United States $ 69.0 $ 58.7 $ 26.8
Other countries 23.6 13.7 15.6
- --------------------------------------------------------------------------------
92.6 72.4 42.4
- --------------------------------------------------------------------------------
Deferred:
United States (6.5) 3.8 16.1
Other countries 17.6 .7 (14.2)
- --------------------------------------------------------------------------------
11.1 4.5 1.9
- --------------------------------------------------------------------------------
$103.7 $ 76.9 $ 44.3
================================================================================
Income tax expense recorded directly as an adjustment to equity as a result
of hedging activities was not significant in 2003, 2002, and 2001. Income tax
benefits recorded directly as an adjustment to equity as a result of employee
stock options were $1.3 million, $5.4 million, and $8.8 million in 2003, 2002,
and 2001, respectively.
Income tax payments were $82.0 million in 2003, $47.0 million in 2002, and
$74.3 million in 2001.
Deferred tax (liabilities) assets at the end of each year, in millions of
dollars, were composed of the following:
2003 2002
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ (15.4) $ (8.1)
Employee and postretirement benefits (164.8) (189.8)
Other (5.6) (18.2)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (185.8) (216.1)
- --------------------------------------------------------------------------------
Deferred tax assets:
Tax loss carryforwards 109.2 110.2
Tax credit and capital loss
carryforwards 57.8 82.4
Postretirement benefits 135.9 123.8
Other 113.6 109.1
- --------------------------------------------------------------------------------
Gross deferred tax assets 416.5 425.5
- --------------------------------------------------------------------------------
Deferred tax asset valuation allowance (99.9) (86.8)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 130.8 $ 122.6
================================================================================
Deferred income taxes are included in the Consolidated Balance Sheet in
other current assets, other assets, other accrued liabilities, and deferred
income taxes.
During the year ended December 31, 2003, the deferred tax asset valuation
allowance increased by $13.1 million. The increase was principally the result of
tax losses generated by a subsidiary that cannot be utilized in the consolidated
United States tax return.
Tax basis carryforwards at December 31, 2003, consisted of net operating
losses expiring from 2004 to 2009.
At December 31, 2003, unremitted earnings of subsidiaries outside of the
United States were approximately $1.4 billion, on which no United States taxes
had been provided. The Corporation's intention is to reinvest these earnings
permanently or to repatriate the earnings only when possible to do so at minimal
additional tax cost. It is not practicable to estimate the amount of additional
taxes that might be payable upon repatriation of foreign earnings.
A reconciliation of income taxes at the federal statutory rate to the
Corporation's income taxes for each year, both from continuing operations, in
millions of dollars, is as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Income taxes at federal
statutory rate $136.8 $106.9 $ 51.0
Lower effective taxes on
earnings in other countries (40.4) (31.9) (16.0)
Amortization of goodwill -- -- 8.1
Other -- net 7.3 1.9 1.2
- --------------------------------------------------------------------------------
Income taxes $103.7 $ 76.9 $ 44.3
================================================================================
- 35 -
Note 12: POSTRETIREMENT BENEFITS
The following table sets forth the funded status of the defined benefit pension
and postretirement plans, and amounts recognized in the Consolidated Balance
Sheet, in millions of dollars. The Corporation uses a measurement date of
September 30 for the majority of its defined benefit pension and postretirement
plans. Defined postretirement benefits consist of several unfunded health care
plans that provide certain postretirement medical, dental, and life insurance
benefits for most United States employees. The postretirement medical benefits
are contributory and include certain cost-sharing features, such as deductibles
and co-payments.
OTHER
PENSION BENEFITS PENSION BENEFITS POSTRETIREMENT
PLANS IN THE PLANS OUTSIDE OF THE BENEFITS
UNITED STATES UNITED STATES ALL PLANS
------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 895.5 $ 810.7 $ 500.7 $ 399.7 $ 162.1 $ 158.2
Service cost 15.5 15.0 10.9 11.0 .9 1.2
Interest cost 58.4 56.7 27.6 24.2 10.7 10.8
Plan participants' contributions -- -- 1.9 1.9 7.8 4.3
Actuarial (gains) losses 40.4 72.1 58.5 33.8 (3.7) 10.1
Foreign currency exchange rate changes -- -- 54.2 50.8 .8 .1
Benefits paid (60.5) (60.3) (25.0) (22.1) (20.9) (22.6)
Plan amendments .6 1.3 3.8 1.4 -- --
Curtailments (7.1) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 942.8 895.5 632.6 500.7 157.7 162.1
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 717.8 836.7 319.1 340.5 -- --
Actual return on plan assets 131.9 (54.1) 43.8 (36.6) -- --
Expenses (6.9) (7.4) (.7) (.7) -- --
Benefits paid (60.5) (60.3) (24.3) (21.4) (20.9) (22.6)
Employer contributions 3.1 2.9 6.1 2.9 13.1 18.3
Contributions by plan participants -- -- 1.9 1.9 7.8 4.3
Effects of currency exchange rates -- -- 29.4 32.5 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 785.4 717.8 375.3 319.1 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (157.4) (177.7) (257.3) (181.6) (157.7) (162.1)
Unrecognized net actuarial loss 442.4 456.2 269.8 207.3 37.0 43.1
Unrecognized prior service cost 5.3 6.0 10.6 9.7 (7.0) (9.2)
Unrecognized net obligation (asset)
at date of adoption -- -- -- .3 -- --
Contributions subsequent to measurement date -- -- 2.0 .7 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 290.3 $ 284.5 $ 25.1 $ 36.4 $(127.7) $(128.2)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
Prepaid benefit cost $ 42.2 $ 36.7 $ -- $ -- $ -- $ --
Accrued benefit cost (132.9) (140.9) (214.8) (152.0) (127.7) (128.2)
Intangible asset 5.1 5.8 10.8 10.0 -- --
Accumulated other comprehensive income 375.9 382.9 229.1 178.4 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 290.3 $ 284.5 $ 25.1 $ 36.4 $(127.7) $(128.2)
====================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE
BENEFIT OBLIGATIONS
AS OF MEASUREMENT DATE
Discount rate 6.00% 6.75% 5.40% 5.60% 6.25% 7.00%
Rate of compensation increase 4.00% 4.50% 3.40% 3.90% -- --
====================================================================================================================================
- 36 -
The allocation, by asset category, of assets of defined benefit pension
plans in the United States at December 31, 2003 and 2002, respectively, were
equity securities - 69% and 59%; fixed income securities - 28% and 38%; and
alternative investments - 3% and 3%. At December 31, 2003, the Corporation's
targeted allocation, by asset category, of assets of defined benefit pension
plans in the United States is equity securities - 65% (comprised of 50% U.S. and
15% non-U.S. equities); fixed income securities - 30%; and alternative
investments - 5%. To the extent that the actual allocation of plan assets
differs from the targeted allocation by more than 5% for any category, plan
assets are re-balanced within three months. Assets of defined benefit pension
plans outside of the United States consist principally of investments in equity
securities, fixed income securities, and alternative investments. The
Corporation establishes its estimated long-term return on plan assets
considering various factors, which include the targeted asset allocation
percentages, historic returns, and expected future returns. Specifically, the
factors are considered in the fourth quarter of the year preceding the year for
which those assumptions are applied.
The funded status of the Corporation's defined benefit pension plans at
December 31, 2003, reflects the effects of negative returns experienced in the
global capital markets over the past several years and a decline in the discount
rate used to estimate the pension liability. As a result, the accumulated
benefit obligation of certain plans in the United States and outside of the
United States exceeded the fair value of plan assets. As required by accounting
principles generally accepted in the United States, the Corporation reflected a
minimum pension liability of approximately $605.0 million in the Consolidated
Balance Sheet at December 31, 2003.
The accumulated benefit obligation related to all defined benefit pension
plans and information related to unfunded and underfunded defined benefit
pension plans at the end of each year, in millions of dollars, follows:
PENSION BENEFITS PENSION BENEFITS
PLANS IN THE PLANS OUTSIDE OF THE
UNITED STATES UNITED STATES
----------------------------------------------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
All defined benefit plans:
Accumulated benefit obligation $895.0 $841.2 $590.9 $468.2
Unfunded defined benefit plans:
Projected benefit obligation 66.2 56.3 89.7 72.9
Accumulated benefit obligation 62.7 52.0 83.5 65.8
Defined benefit plans with an accumulated benefit obligation
in excess of the fair value of plan assets:
Projected benefit obligation 899.4 858.6 632.6 500.7
Accumulated benefit obligation 851.7 806.6 590.9 468.2
Fair value of plan assets 719.5 665.9 375.3 319.1
- ------------------------------------------------------------------------------------------------------------------------------------
The net periodic (benefit) cost related to the defined benefit pension plans
included the following components, in millions of dollars:
PENSION BENEFITS PENSION BENEFITS
PLANS IN THE UNITED STATES PLANS OUTSIDE OF THE UNITED STATES
-----------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 16.5 $ 15.8 $ 15.3 $ 13.8 $ 11.0 $ 10.7
Interest cost 58.4 56.7 54.4 27.5 24.2 22.8
Expected return on plan assets (87.1) (94.3) (91.1) (31.8) (30.8) (29.0)
Amortization of the unrecognized
transition obligation or asset -- -- .3 .1 (1.2) (1.5)
Amortization of prior service cost 1.2 1.1 1.1 1.4 2.3 2.2
Curtailment/settlement loss .9 1.1 -- .1 7.6 1.6
Amortization of net actuarial loss 7.6 .8 .9 4.7 .7 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic (benefit) cost $ (2.5) $(18.8) $(19.1) $ 15.8 $ 13.8 $ 8.0
====================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
USED IN DETERMINING NET
PERIODIC (BENEFIT) COST FOR YEAR:
Discount rate 6.75% 7.25% 7.50% 5.50% 6.10% 6.00%
Expected return on plan assets 9.00% 9.50% 9.50% 7.75% 8.00% 8.00%
Rate of compensation increase 4.00% 4.50% 5.00% 3.90% 3.90% 3.90%
====================================================================================================================================
- 37 -
The net periodic cost related to the defined benefit postretirement plans
included the following components, in millions of dollars:
2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ .9 $ 1.2 $ 1.1
Interest cost 10.7 10.8 10.5
Amortization of
prior service cost (2.2) (8.3) (8.3)
Amortization of
net actuarial gain 2.0 1.4 --
- --------------------------------------------------------------------------------
Net periodic cost $11.4 $ 5.1 $ 3.3
================================================================================
Weighted-average discount rate
used in determining net
periodic cost for year 7.00% 7.25% 7.50%
================================================================================
The health care cost trend rate used to determine the postretirement
benefit obligation was 11.0% for 2003. This rate decreases gradually to an
ultimate rate of 5.0% in 2009, and remains at that level thereafter. The trend
rate is a significant factor in determining the amounts reported. A
one-percentage-point change in these assumed health care cost trend rates would
have the following effects, in millions of dollars:
One-Percentage-Point INCREASE (DECREASE)
- --------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ .6 $ (.6)
Effect on postretirement
benefit obligation 9.1 (9.0)
- --------------------------------------------------------------------------------
In 2004, the Corporation expects to make cash contributions of
approximately $12 million to its defined benefit pension plans. In addition, the
Corporation expects to continue to make contributions in 2004 sufficient to fund
benefits paid under its other postretirement benefit plans during that year, net
of contributions by plan participants. Such contributions totaled $13.1 million
in 2003. The amounts principally represent contributions required by funding
regulations or laws or those related to unfunded plans necessary to fund current
benefits.
Expense for defined contribution plans amounted to $10.4 million, $9.2
million, and $8.9 million in 2003, 2002, and 2001, respectively.
NOTE 13: OTHER LONG-TERM LIABILITIES
In December 2000, a subsidiary of the Corporation issued preferred shares to
private investors. The preferred shares are redeemable in five years, although
redemption may be accelerated under certain conditions, principally related to
changes in tax laws. Holders of the subsidiary's preferred shares are entitled
to annual cash dividends of $10.7 million. Included in other long-term
liabilities in the Consolidated Balance Sheet at December 31, 2003 and 2002, is
$202.6 million and $208.4 million, respectively, related to those preferred
shares. The carrying value of the subsidiary's preferred shares at December 31,
2003 and 2002 includes the effect of the fair value of the interest rate swap
agreement related to this obligation.
Upon adoption of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, effective December 31, 2003, the
Corporation determined that the subsidiary identified in the preceding paragraph
represented a variable interest entity and that the Corporation was not the
primary beneficiary. That subsidiary was formed in 2000 in order to provide
financing to the Corporation through the issuance of the redeemable preferred
shares previously described. The Corporation's obligation for the subsidiary's
redeemable preferred shares is fully reflected in other long-term liabilities.
The Corporation does not believe that it has any additional exposure to loss as
a result of its involvement with the subsidiary.
Other expense in the Consolidated Statement of Earnings for the years ended
December 31, 2003 and 2002, included $5.4 million and $10.7 million,
respectively, of dividends related to those preferred shares. Upon the
Corporation's adoption of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, in July 2003,
$5.3 million of dividends on those preferred shares were classified as interest
expense.
At December 31, 2003 and 2002, other long-term liabilities included a
reserve of $224.4 million and $235.9 million, respectively, associated with
various tax matters in a number of jurisdictions.
NOTE 14: STOCKHOLDERS' EQUITY
The Corporation repurchased 2,011,570, 1,008,101, and 1,085,000 shares of its
common stock during 2003, 2002, and 2001 at an aggregate cost of $77.5 million,
$43.1 million, and $33.5 million, respectively.
During 1999, the Corporation executed two agreements (the Agreements) under
which the Corporation could enter into forward purchase contracts on its common
stock. The Agreements provided the Corporation with two purchase alternatives: a
standard forward purchase contract and a forward purchase contract subject to a
cap (a capped forward contract). The settlement methods generally available
under the Agreements, at the Corporation's option, were net settlement, either
in cash or in shares, or physical settlement.
During 2001, the Corporation terminated the capped forward contracts and
standard forward purchase contracts, electing full physical settlement through
its purchase of the final 525,050 shares subject to the Agreements for $25.5
million. Previously during 2001, the Corporation had received 240,276 shares of
its common stock through net share settlements under the Agreements.
- 38 -
SFAS No. 130, Reporting Comprehensive Income, defines comprehensive income as
non-stockholder changes in equity. Accumulated other comprehensive income (loss)
at the end of each year, in millions of dollars, included the following:
2003 2002
- --------------------------------------------------------------------------------
Foreign currency translation adjustment $ (14.6) $(123.7)
Net loss on derivative instruments,
net of tax (33.1) (17.3)
Minimum pension liability adjustment,
net of tax (404.5) (373.6)
- --------------------------------------------------------------------------------
$(452.2) $(514.6)
================================================================================
The Corporation has designated certain intercompany loans as long-term
investments in certain foreign subsidiaries. Net translation gains associated
with these designated intercompany loans in the amount of $25.9 million and $1.5
million were recorded in the foreign currency translation adjustment, in 2003
and 2002, respectively.
Foreign currency translation adjustments are not generally adjusted for
income taxes as they relate to indefinite investments in foreign subsidiaries.
The minimum pension liability adjustments as of December 31, 2003 and 2002, are
net of taxes of $200.5 million and $187.7 million, respectively.
NOTE 15: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were as
follows:
(Amounts in Millions
Except Per Share Data) 2003 2002 2001
- --------------------------------------------------------------------------------
Numerator:
Net earnings from
continuing operations $287.2 $228.5 $101.5
Net earnings of
discontinued operations 5.8 1.2 6.5
- --------------------------------------------------------------------------------
Net earnings $293.0 $229.7 $108.0
================================================================================
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 77.9 80.4 80.7
Employee stock options and
stock issuable under
employee benefit plans .3 .5 .4
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share --
adjusted weighted-
average shares and
assumed conversions 78.2 80.9 81.1
================================================================================
Basic earnings per share
Continuing operations $ 3.69 $ 2.85 $ 1.26
Discontinued operations .07 .01 .08
- --------------------------------------------------------------------------------
Basic earnings per share $ 3.76 $ 2.86 $ 1.34
================================================================================
Diluted earnings per share
Continuing operations $ 3.68 $ 2.83 $ 1.25
Discontinued operations .07 .01 .08
- --------------------------------------------------------------------------------
Diluted earnings per share $ 3.75 $ 2.84 $ 1.33
================================================================================
The following options to purchase shares of common stock were outstanding
during each year, but were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive. The options indicated below
were anti-dilutive because the related exercise price was greater than the
average market price of the common shares for the year.
2003 2002 2001
- --------------------------------------------------------------------------------
Number of options
(in millions) 6.5 4.4 6.9
Weighted-average
exercise price $47.36 $49.47 $46.15
- --------------------------------------------------------------------------------
NOTE 16: STOCK-BASED COMPENSATION
The Corporation has elected to follow APBO No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its stock-based
compensation. In addition, the Corporation provides pro forma disclosure of
stock-based compensation, as measured under the fair value requirements of SFAS
No. 123, Accounting for Stock-Based Compensation. These pro forma disclosures
are provided in Note 1 as required under SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure.
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Corporation, namely,
broad-based employee stock purchase plans and option grants where the exercise
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock. In contrast, SFAS No. 123 requires recognition of compensation
expense for grants of stock, stock options, and other equity instruments over
the vesting periods of such grants, based on the estimated grant-date fair
values of those grants.
Under various stock option plans, options to purchase common stock may be
granted until 2013. Options generally are granted at fair market value at the
date of grant, are exercisable in installments beginning one year from the date
of grant, and expire 10 years after the date of grant. The plans permit the
issuance of either incentive stock options or non-qualified stock options,
which, for certain of the plans, may be accompanied by stock or cash
appreciation rights or limited stock appreciation rights. Additionally, certain
plans allow for the granting of stock appreciation rights on a stand-alone
basis.
As of December 31, 2003, 10,353,413 non-qualified stock options were
outstanding under domestic plans. There were 4,500 stock options outstanding
under the United Kingdom plan.
- 39 -
Under all plans, there were 4,613,902 shares of common stock reserved for
future grants as of December 31, 2003. Transactions are summarized as follows:
WEIGHTED-
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 9,557,125 $40.42
Granted 1,276,450 34.01
Exercised 1,263,275 21.57
Forfeited 482,814 44.71
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 9,087,486 41.91
Granted 1,279,300 48.13
Exercised 773,297 26.91
Forfeited 213,075 45.17
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 9,380,414 43.92
Granted 1,417,850 39.73
Exercised 321,938 35.08
Forfeited 118,413 45.77
- --------------------------------------------------------------------------------
Outstanding at December 31, 2003 10,357,913 $43.60
================================================================================
Shares exercisable at
December 31, 2001 3,201,321 $39.85
================================================================================
Shares exercisable at
December 31, 2002 3,780,183 $44.35
================================================================================
Shares exercisable at
December 31, 2003 6,406,323 $44.83
================================================================================
Exercise prices for options outstanding as of December 31, 2003, ranged
from $23.00 to $61.00. The following table provides certain information with
respect to stock options outstanding at December 31, 2003:
WEIGHTED-
WEIGHTED- AVERAGE
STOCK AVERAGE REMAINING
Range of OPTIONS EXERCISE CONTRACTUAL
Exercise Prices OUTSTANDING PRICE LIFE
- --------------------------------------------------------------------------------
Under $34.50 1,066,675 $30.20 6.2
$34.50-$51.75 7,759,276 43.40 6.9
Over $51.75 1,531,962 53.95 5.1
- --------------------------------------------------------------------------------
10,357,913 $43.60 6.6
================================================================================
The following table provides certain information with respect to stock
options exercisable at December 31, 2003:
STOCK WEIGHTED-
Range of OPTIONS AVERAGE
Exercise Prices EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------
Under $34.50 667,675 $30.26
$34.50-$51.75 4,206,686 43.82
Over $51.75 1,531,962 53.95
- --------------------------------------------------------------------------------
6,406,323 $44.83
================================================================================
In electing to continue to follow APBO No. 25 for expense recognition
purposes, the Corporation is obliged to provide the expanded disclosures
required under SFAS No. 148 for stock-based compensation granted, including, if
materially different from reported results, disclosure of pro forma net earnings
and earnings per share had compensation expense relating to grants been measured
under the fair value recognition provisions of SFAS No. 123. Those pro forma
disclosures are included in Note 1 under the caption, "Stock-Based
Compensation."
The weighted-average fair values at date of grant for options granted
during 2003, 2002, and 2001 were $13.31, $18.17, and $11.96, respectively, and
were estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
2003 2002 2001
- --------------------------------------------------------------------------------
Expected life in years 6.3 6.3 6.2
Interest rate 3.38% 4.91% 4.70%
Volatility 32.3% 33.0% 32.4%
Dividend yield 1.21% .99% 1.44%
- --------------------------------------------------------------------------------
NOTE 17: BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Corporation has elected to organize its businesses based principally upon
products and services. In certain instances where a business does not have a
local presence in a particular country or geographic region, however, the
Corporation has assigned responsibility for sales of that business's products to
one of its other businesses with a presence in that country or region.
The Corporation operates in three reportable business segments: Power Tools
and Accessories, Hardware and Home Improvement, and Fastening and Assembly
Systems. The Power Tools and Accessories segment has worldwide responsibility
for the manufacture and sale of consumer and professional power tools and
accessories, electric cleaning and lighting products, and electric lawn and
garden tools, as well as for product service. In addition, the Power Tools and
Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside the United States and Canada; and
for sales of household products. The Hardware and Home Improvement segment has
worldwide responsibility for the manufacture and sale of security hardware
(except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). On September 30, 2003, the Corporation acquired
Baldwin Hardware Corporation and Weiser Lock Corporation. These acquired
businesses are included in the Hardware and Home Improvement segment. The
Hardware and Home Improvement segment also has responsibility for the
manufacture of plumbing products and for the sale of plumbing products to
customers in the United States and Canada. The Fastening and Assembly Systems
segment has worldwide responsibility for the manufacture and sale of fastening
and assembly systems.
Sales, segment profit, depreciation and amortization, and capital
expenditures set forth in the following tables exclude the results of the
discontinued European security hardware business, as more fully described in
Note 3.
- 40 -
Business Segments
(Millions of Dollars)
REPORTABLE BUSINESS SEGMENTS
----------------------------------------------------
POWER HARDWARE FASTENING CURRENCY CORPORATE,
TOOLS & & HOME & ASSEMBLY TRANSLATION ADJUSTMENTS,
Year Ended December 31, 2003 ACCESSORIES IMPROVEMENT SYSTEMS TOTAL ADJUSTMENTS & ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,114.9 $715.7 $514.2 $4,344.8 $137.9 $ -- $4,482.7
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 350.9 92.8 73.9 517.6 14.3 (71.6) 460.3
Depreciation and amortization 80.5 24.4 15.0 119.9 2.8 10.7 133.4
Income from equity method
investees 21.3 -- -- 21.3 -- (2.1) 19.2
Capital expenditures 68.2 17.1 13.4 98.7 3.0 .8 102.5
Segment assets
(for Consolidated, total assets) 1,516.7 594.4 312.1 2,423.2 177.7 1,621.6 4,222.5
Investment in equity method investees 10.8 -- .1 10.9 -- (1.7) 9.2
Year Ended December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,156.2 $659.3 $513.3 $4,328.8 $(37.0) $ -- $4,291.8
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 354.7 47.4 74.7 476.8 (3.9) (58.3) 414.6
Depreciation and amortization 80.1 25.5 14.2 119.8 (.7) 3.3 122.4
Income from equity method
investees 20.8 -- -- 20.8 -- 3.0 23.8
Capital expenditures 70.8 9.0 13.9 93.7 (.2) .8 94.3
Segment assets
(for Consolidated, total assets) 1,595.8 357.6 317.0 2,270.4 35.7 1,824.4 4,130.5
Investment in equity method investees 25.4 -- .1 25.5 -- (1.7) 23.8
Year Ended December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $3,059.5 $658.3 $489.5 $4,207.3 $(67.4) $ -- $4,139.9
Segment profit (loss)
(for Consolidated, operating
income before restructuring
and exit costs) 250.9 47.8 71.0 369.7 (1.3) (30.4) 338.0
Depreciation and amortization 87.0 28.7 14.5 130.2 (1.5) 23.6 152.3
Income from equity method
investees 13.2 -- -- 13.2 -- 2.1 15.3
Capital expenditures 86.0 29.7 15.7 131.4 (.8) .8 131.4
Segment assets
(for Consolidated, total assets) 1,605.0 452.1 302.7 2,359.8 (66.2) 1,720.6 4,014.2
Investment in equity method investees 36.7 -- .1 36.8 (.2) (2.7) 33.9
- ------------------------------------------------------------------------------------------------------------------------------------
The profitability measure employed by the Corporation and its chief
operating decision maker for making decisions about allocating resources to
segments and assessing segment performance is segment profit (for the
Corporation on a consolidated basis, operating income before restructuring and
exit costs). In general, segments follow the same accounting policies as those
described in Note 1, except with respect to foreign currency translation and
except as further indicated below. The financial statements of a segment's
operating units located outside of the United States, except those units
operating in highly inflationary economies, are generally measured using the
local currency as the functional currency. For these units located outside of
the United States, segment assets and elements of segment profit are translated
using budgeted rates of exchange. Budgeted rates of exchange are established
annually and, once established, all prior period segment data is restated to
reflect the current year's budgeted rates of exchange. The amounts included in
the preceding table under the captions "Reportable Business Segments", and
"Corporate, Adjustments, & Eliminations" are reflected at the Corporation's
budgeted rates of exchange for 2003. 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.
- 41 -
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.
Segment assets exclude assets of discontinued operations, pension and tax
assets, intercompany profit in inventory, intercompany receivables, and goodwill
associated with the Corporation's acquisition of Emhart Corporation in 1989.
Amounts in the preceding table under the caption "Corporate, Adjustments &
Eliminations" on the lines entitled "Depreciation and amortization" represent
depreciation of Corporate property 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).
The reconciliation of segment profit to consolidated earnings from continuing
operations before income taxes for each year, in millions of dollars, is as
follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Segment profit for total
reportable business segments $517.6 $476.8 $369.7
Items excluded from
segment profit:
Adjustment of budgeted
foreign exchange rates
to actual rates 14.3 (3.9) (1.3)
Depreciation of Corporate
property and amortization
of certain goodwill (1.1) (1.3) (23.6)
Adjustment to businesses'
postretirement benefit
expenses booked
in consolidation 15.4 38.3 42.6
Other adjustments booked
in consolidation directly
related to reportable
business segments (15.0) (8.4) (.7)
Amounts allocated to businesses
in arriving at segment profit
in excess of (less than)
Corporate center operating
expenses, eliminations, and
other amounts identified above (70.9) (86.9) (48.7)
- --------------------------------------------------------------------------------
Operating income before
restructuring and exit costs 460.3 414.6 338.0
Restructuring and exit costs 31.6 46.6 99.7
- --------------------------------------------------------------------------------
Operating income 428.7 368.0 238.3
- --------------------------------------------------------------------------------
Interest expense,
net of interest income 35.2 57.8 84.3
Other expense 2.6 4.8 8.2
- --------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes $390.9 $305.4 $145.8
================================================================================
The reconciliation of segment assets to consolidated total assets at the
end of each year, in millions of dollars, is as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Segment assets for total
reportable business segments $2,423.2 $2,270.4 $2,359.8
Items excluded from
segment assets:
Adjustment of budgeted
foreign exchange rates
to actual rates 177.7 35.7 (66.2)
Goodwill 633.3 604.2 598.0
Pension assets 42.2 36.9 406.1
Other Corporate assets 946.1 1,183.3 716.5
- --------------------------------------------------------------------------------
$4,222.5 $4,130.5 $4,014.2
================================================================================
Other Corporate assets principally consist of cash and cash equivalents,
tax assets, property, assets of discontinued operations, and other assets.
- 42 -
Sales to The Home Depot, a customer of the Power Tools and Accessories and
Hardware and Home Improvement segments, accounted for $779.4 million, $857.9
million, and $841.6 million of the Corporation's consolidated sales for the
years ended December 31, 2003, 2002, and 2001, respectively. Sales to Lowe's
Home Improvement Warehouse (Lowe's), a customer of the Power Tools and
Accessories and Hardware and Home Improvement segments, accounted for $545.3
million and $467.5 million of the Corporation's consolidated sales for the years
ended December 31, 2003 and 2002, respectively. Sales to Lowe's for the year
ended December 31, 2001, did not exceed 10% of the Corporation's consolidated
sales.
The composition of the Corporation's sales by product group for each year, in
millions of dollars, is set forth below:
2003 2002 2001
- --------------------------------------------------------------------------------
Consumer and professional
power tools and
product service $2,360.1 $2,308.4 $2,227.2
Consumer and professional
accessories 348.6 317.8 311.1
Electric lawn and
garden products 313.8 285.4 279.3
Electric cleaning and
lighting products 138.6 157.6 122.8
Household products 40.5 36.8 45.1
Security hardware 526.0 461.0 425.6
Plumbing products 218.7 221.6 252.3
Fastening and assembly systems 536.4 503.2 476.5
- --------------------------------------------------------------------------------
$4,482.7 $4,291.8 $4,139.9
================================================================================
The Corporation markets its products and services in over 100 countries and
has manufacturing sites in 10 countries. Other than in the United States, the
Corporation does not conduct business in any country in which its sales in that
country exceed 10% of consolidated sales. Sales are attributed to countries
based on the location of customers. The composition of the Corporation's sales
to unaffiliated customers between those in the United States and those in other
locations for each year, in millions of dollars, is set forth below:
2003 2002 2001
- --------------------------------------------------------------------------------
United States $2,836.9 $2,824.0 $2,715.6
Canada 162.6 138.6 136.5
- --------------------------------------------------------------------------------
North America 2,999.5 2,962.6 2,852.1
Europe 1,107.2 986.8 950.2
Other 376.0 342.4 337.6
- --------------------------------------------------------------------------------
$4,482.7 $4,291.8 $4,139.9
================================================================================
The composition of the Corporation's property, plant, and equipment between
those in the United States and those in other countries as of the end of each
year, in millions of dollars, is set forth below:
2003 2002 2001
- --------------------------------------------------------------------------------
United States $340.0 $362.0 $406.3
Mexico 109.0 78.6 74.4
United Kingdom 47.3 72.1 72.0
Other countries 163.9 116.9 109.8
- --------------------------------------------------------------------------------
$660.2 $629.6 $662.5
================================================================================
NOTE 18: LEASES
The Corporation leases certain service centers, offices, warehouses,
manufacturing facilities, and equipment. Generally, the leases carry renewal
provisions and require the Corporation to pay maintenance costs. Rental payments
may be adjusted for increases in taxes and insurance above specified amounts.
Rental expense for 2003, 2002, and 2001 amounted to $85.6 million, $82.6
million, and $84.0 million, respectively. Capital leases were immaterial in
amount. Future minimum payments under non-cancelable operating leases with
initial or remaining terms of more than one year as of December 31, 2003, in
millions of dollars, were as follows:
- --------------------------------------------------------------------------------
2004 $ 59.0
2005 48.3
2006 36.4
2007 23.8
2008 16.2
Thereafter 26.2
- --------------------------------------------------------------------------------
$209.9
================================================================================
- 43 -
NOTE 19: RESTRUCTURING ACTIONS
A summary of restructuring activity during the three years ended December 31,
2003, is set forth below (in millions of dollars).
WRITE-DOWN
TO FAIR VALUE
LESS COSTS
TO SELL
OF CERTAIN
SEVERANCE LONG-LIVED OTHER
BENEFITS ASSETS CHARGES TOTAL
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2000 $ 29.4 $ -- $ 4.4 $ 33.8
Reserves established
in 2001 49.1 38.9 15.8 103.8
Reversal of reserves (3.7) -- (.4) (4.1)
Utilization of reserves:
Cash (21.5) -- (3.4) (24.9)
Non-cash -- (38.9) (2.7) (41.6)
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2001 53.3 -- 13.7 67.0
Reserves established
in 2002 19.6 18.5 19.5 57.6
Reversal of reserves (5.7) -- (2.6) (8.3)
Proceeds received in excess
of the adjusted carrying
value of long-lived assets -- (2.7) -- (2.7)
Utilization of reserves:
Cash (29.7) -- (7.2) (36.9)
Non-cash -- (15.8) (8.7) (24.5)
Foreign currency translation 3.7 -- .1 3.8
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2002 41.2 -- 14.8 56.0
Reserves established
in 2003 34.3 9.3 1.2 44.8
Reversal of reserves (7.4) -- (2.2) (9.6)
Proceeds received in excess
of the adjusted carrying
value of long-lived assets -- (3.6) -- (3.6)
Utilization of reserves:
Cash (27.1) -- (13.3) (40.4)
Non-cash -- (5.7) .6 (5.1)
Foreign currency translation 1.6 -- -- 1.6
- --------------------------------------------------------------------------------
Restructuring reserve at
December 31, 2003 $ 42.6 $ -- $ 1.1 $ 43.7
================================================================================
During 2003, the Corporation commenced the final phase of its restructuring
plan that was formulated in the fourth quarter of 2001 and recorded a pre-tax
restructuring charge of $20.6 million. That $20.6 million charge was net of $9.6
million of reversals of previously provided restructuring reserves that were no
longer required and $3.6 million, representing the excess of proceeds received
on the sale of long-lived assets written down as part of restructuring actions
over their adjusted carrying values. The $20.6 million pre-tax restructuring
charge recognized in 2003 principally reflects actions relating to the Power
Tools and Accessories segment to reduce its manufacturing cost base as well as
actions to reduce selling, general, and administrative expenses through the
elimination of administrative positions, principally in Europe. In addition,
during the fourth quarter of 2003 the Corporation recorded a pre-tax
restructuring charge of $11.0 million associated with the closure of a
manufacturing facility in its Hardware and Home Improvement segment as a result
of the acquisition of Baldwin and Weiser.
The principal component of the 2003 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefit accrual of
$34.3 million, principally related to the Power Tools and Accessories segment in
North America and Europe ($23.0 million) and the Hardware and Home Improvement
segment in North America ($11.3 million), was included in the restructuring
charge. The 2003 restructuring actions will also result in the closure of two
manufacturing facilities, transferring production to low-cost facilities, and
outsourcing certain manufactured items. As a result, the 2003 restructuring
charge also included a $9.3 million write-down to fair value - less, if
applicable, cost to sell - of certain long-lived assets. The write-down to fair
value was comprised of $6.7 million to the Power Tools and Accessories segment
in North America and Europe and $2.6 million related to the Hardware and Home
Improvement segment in North America. The balance of the 2003 restructuring
charge, or $1.2 million, related to the accrual of future expenditures,
principally consisting of lease obligations, for which no future benefit would
be realized.
During 2002, the Corporation recorded a restructuring charge of $46.6
million under the restructuring plan that was formulated in the fourth quarter
of 2001. That $46.6 million charge was net of $8.3 million of reversals of
previously provided restructuring reserves that were no longer required and $2.7
million, representing the excess of proceeds received on the sale of long-lived
assets written down as part of restructuring actions over their adjusted
carrying values. The $46.6 million pre-tax restructuring charge recognized in
2002 reflects actions to reduce the Corporation's manufacturing cost base in its
Power Tools and Accessories and Hardware and Home Improvement segments, as well
as actions to reduce selling, general, and administrative expenses through the
elimination of administrative positions, principally in Europe. The 2002 actions
to reduce the Corporation's manufacturing cost base in the Power Tools and
Accessories segment include the closure of one facility in the United States,
the closure of an accessories packaging facility in England, and the transfer of
certain additional power tool production from a facility in England to a
low-cost facility in the Czech Republic. Actions to reduce the Corporation's
manufacturing cost base in the Hardware and Home Improvement segment include the
closure of a security hardware facility in the United States.
- 44 -
The principal component of the 2002 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefits accrual of
$19.6 million, principally related to the Power Tools and Accessories segment in
North America and Europe ($18.3 million) and the Hardware and Home Improvement
segment in North America ($1.3 million), was included in the restructuring
charge. The 2002 restructuring charge also included non-cash pension curtailment
losses of $8.9 million stemming from headcount reductions associated with the
restructuring actions, principally related to the Corporation's defined benefit
pension plan in the United Kingdom. The 2002 restructuring actions will also
result in the closure of a number of manufacturing facilities, transferring
production to low-cost facilities, and outsourcing certain manufactured items.
As a result, the 2002 restructuring charge also included an $18.5 million
write-down to fair value - less, if applicable, cost to sell - of certain
long-lived assets. The write-down to fair value was comprised of $4.8 million
related to the Power Tools and Accessories segment in Europe and $13.7 million
related to the Hardware and Home Improvement segment in North America. The
balance of the 2002 restructuring charge, or $10.6 million, related to the
accrual of future expenditures, principally consisting of lease and other
contractual obligations, for which no future benefit will be realized.
During 2001, the Corporation recorded a restructuring charge of $99.7
million. That restructuring charge reflected actions to reduce the Corporation's
manufacturing cost base in its Power Tools and Accessories and Hardware and Home
Improvement segments, as well as actions to reduce selling, general, and
administrative expenses throughout all of its businesses. The 2001 restructuring
plan includes the transfer of production and service operations in the Power
Tools and Accessories and Hardware and Home Improvement segments from facilities
in the United States and the United Kingdom to low-cost facilities in Mexico and
China and to a new low-cost facility in the Czech Republic.
The principal component of the 2001 restructuring charge related to the
elimination of manufacturing positions, primarily in high-cost locations, and of
certain administrative positions. As a result, a severance benefits accrual of
$45.7 million, principally related to the Power Tool and Accessories segment in
North America and Europe ($36.3 million), the Hardware and Home Improvement
segment in the United States ($8.5 million), and the Fastening and Assembly
Systems segment in Europe ($.9 million), was included in the restructuring
charge. The 2001 restructuring actions will result in the closure of a number of
manufacturing and service facilities, transferring production to low-cost
facilities, and outsourcing certain manufactured items. As a result, the 2001
restructuring charge also included a $38.9 million write-down to fair value -
less, if applicable, cost to sell - of certain equipment. The write-down to fair
value was comprised of $34.0 million related to long-lived assets in the Power
Tools and Accessories segment in Europe and North America and $4.9 million
related to the Hardware and Home Improvement segment in the United States. The
2001 restructuring charge also included $9.6 million, primarily related to the
accrual of future expenditures, principally consisting of lease and other
contractual obligations, for which no future benefit will be realized. The
balance of the 2001 restructuring charge, or $5.5 million, primarily related to
non-cash charges associated with the Corporation's exit from an operating joint
venture in a high-cost region ($3.9 million) and non-cash pension expense ($1.6
million).
During 2001, the Corporation also recognized $4.1 million of restructuring
and exit costs principally related to severance benefits associated with its
Power Tools and Accessories segment in Europe. The $4.1 million charge was
offset, however, by the reversal of $4.1 million of severance accruals and other
exit costs established as part of the 2000 restructuring charge, which were no
longer required.
The severance benefits accrual, included in the $31.6 million, $46.6
million and $99.7 million pre-tax restructuring charges taken in 2003, 2002, and
2001, respectively, related to the elimination of approximately 5,200 positions
in high-cost manufacturing locations and in certain administrative positions.
The Corporation estimates that, as a result of increases in manufacturing
employee headcount in low-cost locations, approximately 4,500 replacement
positions will be filled, yielding a net total of 700 positions eliminated as a
result of the 2003, 2002, and 2001 restructuring actions.
During 2003, 2002, and 2001, the Corporation paid severance and other exit
costs of $40.4 million, $36.9 million, and $24.9 million, respectively.
Of the remaining $43.7 million restructuring accrual at December 31, 2003,
$32.7 million relates to the restructuring plan that was formulated by the
Corporation in the fourth quarter of 2001. These restructuring accruals
primarily relate to the Corporation's Power Tools and Accessories segment. The
Corporation anticipates that these restructuring actions will be completed
during 2004. The remaining $11.0 million relates to the closure of a
manufacturing facility in the Corporation's Hardware and Home Improvement
segment that was recognized in conjunction with the integration of the Baldwin
and Weiser businesses into the Corporation's existing security hardware
business. The Corporation anticipates that these restructuring actions will be
completed during 2005.
The amounts reflected in the column titled write-down to fair value of
certain long-lived assets, as included within this Note, relating to reserves
established during the three years ended December 31, 2003, represent
adjustments to the carrying value of those long-lived assets.
As of December 31, 2003, the carrying value of facilities to be exited as
part of the Corporation's restructuring actions was not significant.
- 45 -
NOTE 20: LITIGATION AND CONTINGENT LIABILITIES
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation also is involved in litigation and administrative
proceedings relating to employment matters and commercial disputes. Some of
these lawsuits include claims for punitive as well as compensatory damages.
Using current product sales data and historical trends, the Corporation
actuarially calculates the estimate of its current exposure for product
liability. The Corporation is insured for product liability claims for amounts
in excess of established deductibles and accrues for the estimated liability up
to the limits of the deductibles. The Corporation accrues for all other claims
and lawsuits on a case-by-case basis.
The Corporation also is party to litigation and administrative proceedings
with respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a potentially responsible party under federal and state
environmental laws and regulations. Other matters involve current and former
manufacturing facilities.
For sites never operated by the Corporation, the Corporation makes an
assessment of the costs involved based on environmental studies, prior
experience at similar sites, and the experience of other named parties. The
Corporation also considers the ability of other parties to share costs, the
percentage of the Corporation's exposure relative to all other parties, and the
effects of inflation on these estimated costs. For matters associated with
properties currently operated by the Corporation, the Corporation makes an
assessment as to whether an investigation and remediation would be required
under applicable federal and state laws. For matters associated with properties
previously sold or operated by the Corporation, the Corporation considers any
applicable terms of sale and applicable federal and state laws to determine if
it has any remaining liability. If it is determined that the Corporation has
potential liability for properties currently owned or previously sold, an
estimate is made of the total costs of investigation and remediation and other
potential costs associated with the site.
As of December 31, 2003, the Corporation's aggregate probable exposure with
respect to environmental liabilities, for which accruals have been established
in the consolidated financial statements, was $51.7 million. These accruals are
reflected in other accrued liabilities and other long-term liabilities in the
Consolidated Balance Sheet.
On October 27, 2003, the Corporation received notices of proposed
adjustments from the United States Internal Revenue Service (I.R.S.) in
connection with audits of the tax years 1998 through 2000. The principal
adjustment proposed by the I.R.S. consists of the disallowance of a capital loss
deduction taken in the Corporation's tax returns. The Corporation intends to
vigorously dispute the position taken by the I.R.S. in this matter. The
Corporation has provided adequate reserves in the event that the I.R.S. prevails
in its disallowance of the previously described capital loss and the imposition
of related interest. Should the I.R.S. prevail in its disallowance of the
capital loss deduction and imposition of related interest, it would result in a
cash outflow by the Corporation of approximately $140 million.
The Corporation's estimate of the costs associated with product liability
claims, environmental exposures, income tax matters, and other legal proceedings
is accrued if, in management's judgment, the likelihood of a loss is probable
and the amount of the loss can be reasonably estimated.
These accrued liabilities are not discounted. Insurance recoveries for
environmental and certain general liability claims have not been recognized
until realized.
In the opinion of management, amounts accrued for exposures relating to
product liability claims, environmental matters, income tax matters, and other
legal proceedings are adequate and, accordingly, the ultimate resolution of
these matters is not expected to have a material adverse effect on the
Corporation's consolidated financial statements. As of December 31, 2003, the
Corporation had no known probable but inestimable exposures relating to product
liability claims, environmental matters, income tax matters, or other legal
proceedings that are expected to have a material adverse effect on the
Corporation. There can be no assurance, however, that unanticipated events will
not require the Corporation to increase the amount it has accrued for any matter
or accrue for a matter that has not been previously accrued because it was not
considered probable. While it is possible that the increase or establishment of
an accrual could have a material adverse effect on the financial results for any
particular fiscal quarter or year, in the opinion of management there exists no
known potential exposure that would have a material adverse effect on the
financial condition or on the financial results of the Corporation beyond any
such fiscal quarter or year.
- 46 -
NOTE 21: QUARTERLY RESULTS (UNAUDITED)
(Dollars in Millions Except Per Share Data) FIRST SECOND THIRD FOURTH
Year Ended December 31, 2003 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $939.2 $1,090.1 $1,115.8 $1,337.6
Gross margin 335.3 390.7 395.6 474.0
Selling, general, and administrative expenses 263.0 280.4 266.9 325.0
Restructuring and exit costs .2 .4 21.0 10.0
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 72.1 109.9 107.7 139.0
Interest expense (net of interest income) 12.1 7.7 7.6 7.8
Other expense 1.7 .6 .3 --
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 58.3 101.6 99.8 131.2
Income taxes 15.2 26.9 26.6 35.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings from continuing operations 43.1 74.7 73.2 96.2
Earnings of discontinued operations, net of tax .3 1.0 1.2 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 43.4 $ 75.7 $ 74.4 $ 99.5
====================================================================================================================================
Basic earnings per common share:
Continuing operations $ .55 $ .96 $ .94 $ 1.24
Discontinued operations -- .02 .02 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share--basic $ .55 $ .98 $ .96 $ 1.28
====================================================================================================================================
Diluted earnings per common share:
Continuing operations $ .55 $ .96 $ .94 $ 1.23
Discontinued operations -- .01 .01 .04
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share--diluted $ .55 $ .97 $ .95 $ 1.27
====================================================================================================================================
FIRST SECOND THIRD FOURTH
Year Ended December 31, 2002 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $927.1 $1,100.6 $1,059.6 $1,204.5
Gross margin 298.6 371.3 373.1 443.2
Selling, general, and administrative expenses 238.5 264.7 252.7 315.7
Restructuring and exit costs -- (1.2) 35.5 12.3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 60.1 107.8 84.9 115.2
Interest expense (net of interest income) 15.8 14.8 14.2 13.0
Other expense (income) 1.2 2.1 1.8 (.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 43.1 90.9 68.9 102.5
Income taxes 11.6 24.1 13.0 28.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings from continuing operations 31.5 66.8 55.9 74.3
Earnings (loss) of discontinued operations, net of tax 1.5 (.7) (1.0) 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 33.0 $ 66.1 $ 54.9 $ 75.7
====================================================================================================================================
Basic earnings (loss) per common share:
Continuing operations $ .39 $ .83 $ .69 $ .92
Discontinued operations .02 (.01) (.01) .02
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share--basic $ .41 $ .82 $ .68 $ .94
====================================================================================================================================
Diluted earnings (loss) per common share:
Continuing operations $ .39 $ .82 $ .69 $ .92
Discontinued operations .02 (.01) (.01) .02
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share--diluted $ .41 $ .81 $ .68 $ .94
====================================================================================================================================
- 47 -
As more fully described in Note 3, as of December 31, 2003, the Corporation
met the requirements to classify its European security hardware business as
discontinued operations. Changes in previously reported results are due to the
reclassification of amounts related to the discontinued operations of the
European security hardware business. The results of the discontinued operations
do not reflect any expense for interest allocated by or management fees charged
by the Corporation.
Earnings from continuing operations for the first quarter of 2003 included
a pre-tax restructuring charge of $.2 million ($.1 million net of tax). Earnings
from continuing operations for the second quarter of 2003 included a pre-tax
restructuring charge of $.4 million ($.2 million net of tax). Earnings from
continuing operations for the third quarter of 2003 included a pre-tax
restructuring charge of $21.0 million ($15.3 million net of tax). Earnings from
continuing operations for the fourth quarter of 2003 included a pre-tax
restructuring charge of $10.0 million ($6.5 million net of tax).
Earnings from continuing operations for the second quarter of 2002 included
a pre-tax reversal of restructuring expenses of $1.2 million ($.8 million net of
tax). Earnings from continuing operations for the third quarter of 2003 included
a pre-tax restructuring charge of $35.5 million ($20.6 million net of tax).
Earnings from continuing operations for the fourth quarter of 2002 included a
pre-tax restructuring charge of $12.3 million ($9.4 million net of tax).
Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarters may not be equal to the
full year earnings per share.
- 48 -
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF THE BLACK & DECKER CORPORATION:
We have audited the accompanying consolidated balance sheet of The Black &
Decker Corporation and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Black & Decker Corporation and Subsidiaries at December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the financial statements, effective January 1,
2002, the Corporation changed its method of accounting for goodwill and other
intangible assets and for certain sales incentives to its customers.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
February 6, 2004
- 49 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, the Corporation evaluated the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures as of December
31, 2003. 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. There have been no changes in the
Corporation's internal controls over financial reporting during the quarterly
period ended December 31, 2003, that have materially affected, or are reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to Directors is contained in
the Corporation's Proxy Statement for the Annual Meeting of Stockholders to be
held April 27, 2004, under the captions "Election of Directors", "Board of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by reference.
Information required under this Item with respect to Executive Officers of
the Corporation is included in Item 1 of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 27, 2004,
under the captions "Board of Directors" and "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 27, 2004,
under the captions "Voting Securities", "Security Ownership of Management", and
"Equity Compensation Plan Information" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in the Corporation's Proxy
Statement for the Annual Meeting of Stockholders to be held April 27, 2004,
under the caption "Executive Compensation" and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required under this Item is contained in the Corporation's Proxy
Statement of the Annual Meeting of Stockholders to be held April 27, 2004, under
the caption "Ratification of the Selection of the Independent Auditor" and is
incorporated herein by reference.
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits
(1) LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and its
subsidiaries are included in Item 8 of Part II of this report:
Consolidated Statement of Earnings - years ended December 31, 2003, 2002,
and 2001.
Consolidated Balance Sheet - December 31, 2003 and 2002.
Consolidated Statement of Stockholders' Equity - years ended December 31,
2003, 2002, and 2001.
Consolidated Statement of Cash Flows - years ended December 31, 2003, 2002,
and 2001.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
- 50 -
(2) LIST OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Corporation and its
subsidiaries are included herein:
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
(3) LIST OF EXHIBITS
The following exhibits are either included in this report or incorporated herein
by reference as indicated below:
Exhibit 3(a)
Articles of Restatement of the Charter of the Corporation, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997,
are incorporated herein by reference.
Exhibit 3(b)
Bylaws of the Corporation, as amended.
Exhibit 4(a)
Form of 7% Notes due February 1, 2006, included in the Corporation's Current
Report on Form 8-K filed with the Commission on January 20, 1994, is
incorporated herein by reference.
Exhibit 4(b)
Indenture dated as of March 24, 1993, by and between the Corporation and
Security Trust Company, National Association, as Trustee, included in the
Corporation's Current Report on Form 8-K filed with the Commission on March 26,
1993, is incorporated herein by reference.
Exhibit 4(c)
Indenture dated as of June 26, 1998, by and among Black & Decker Holdings Inc.,
as Issuer, the Corporation, as Guarantor, and The First National Bank of
Chicago, as Trustee, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998, is incorporated herein by reference.
Exhibit 4(d)
Credit Agreement, dated as of April 2, 2001, among the Corporation, Black &
Decker Holdings, Inc., as Initial Borrowers, the initial lenders named therein,
as Initial Lenders, Citibank, N.A., as Administrative Agent, JPMorgan, a
division of Chase Securities Inc., as Syndication Agent, and Bank of America,
N.A. and Commerzbank AG, as Co-Syndication Agents, included in the Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 1, 2001, is
incorporated herein by reference.
Exhibit 4(e)
Indenture between the Corporation and The Bank of New York, as Trustee, dated as
of June 5, 2001, included in the Corporation's Registration Statement on Form
S-4 (Reg. No. 333-64790), is incorporated herein by reference.
Exhibit 4(f)
Form of 7.125% Senior Note Due 2011, included in the Corporation's Registration
Statement on Form S-4 (Reg. No. 333-64790), is incorporated herein by reference.
The Corporation agrees to furnish a copy of any other documents with respect to
long-term debt instruments of the Corporation and its subsidiaries upon request.
Exhibit 10(a)
The Black & Decker Corporation Deferred Compensation Plan for Non-Employee
Directors, as amended.
Exhibit 10(b)
The Black & Decker Non-Employee Directors Stock Plan, included as Exhibit A to
the Proxy Statement, for the 1998 Annual Meeting of Stockholders of the
Corporation dated March 3, 1998, is incorporated herein by reference.
Exhibit 10(c)
The Black & Decker 1986 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(d)
The Black & Decker 1986 U.K. Approved Option Scheme, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-47651), is
incorporated herein by reference.
Exhibit 10(e)
The Black & Decker 1989 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(f)
The Black & Decker 1992 Stock Option Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
1997, is incorporated herein by reference.
Exhibit 10(g)
The Black & Decker 1995 Stock Option Plan for Non-Employee Directors, as
amended, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998, is incorporated herein by reference.
- 51 -
Exhibit 10(h)
The Black & Decker 1996 Stock Option Plan, as amended, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 333-51155), is
incorporated herein by reference.
Exhibit 10(i)
The Black & Decker 2003 Stock Option Plan, included in the definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders of the Corporation dated
March 11, 2003, is incorporated herein by reference.
Exhibit 10(j)
The Black & Decker Performance Equity Plan, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, is incorporated herein by reference.
Exhibit 10(k)
The Black & Decker Executive Annual Incentive Plan, included in the Proxy
Statement for the 1996 Annual Meeting of Stockholders of the Corporation dated
March 1, 1996, is incorporated herein by reference.
Exhibit 10(l)
The Black & Decker Management Annual Incentive Plan, included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995,
is incorporated herein by reference.
Exhibit 10(m)
The Black & Decker Executive Long-Term Performance/Retention Plan, included in
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by reference.
Exhibit 10(n)(1)
The Black & Decker Supplemental Pension Plan, as amended, included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
Exhibit 10(n)(2)
Amendment to The Black & Decker Supplemental Pension Plan, dated as of May 21,
1997, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(o)(1)
The Black & Decker Executive Deferred Compensation Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended October 3,
1993, is incorporated herein by reference.
Exhibit 10(o)(2)
Amendment to The Black & Decker Executive Deferred Compensation Plan dated as of
July 17, 1996, included in the Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated herein by reference.
Exhibit 10(p)(1)
The Black & Decker Supplemental Retirement Savings Plan, included in the
Corporation's Registration Statement on Form S-8 (Reg. No. 33-65013), is
incorporated herein by reference.
Exhibit 10(p)(2)
Amendment to The Black & Decker Supplemental Retirement Savings Plan dated as of
April 22, 1997, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(p)(3)
Amendment No. 2 to The Black & Decker Supplemental Retirement Savings Plan dated
as of July 16, 1998, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998, is incorporated herein by reference.
Exhibit 10(p)(4)
Amendment No. 3 to The Black & Decker Supplemental Retirement Savings Plan dated
as of July 20, 2000, included in the Corporation's Quarterly Report on Form 10-Q
for the quarter ended October 1, 2000, is incorporated herein by reference.
Exhibit 10(p)(5)
Amendment No. 4 to The Black & Decker Supplemental Retirement Savings Plan dated
as of October 18, 2001, included in the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, is incorporated herein by
reference.
Exhibit 10(p)(6)
Amendment No. 5 to The Black & Decker Supplemental Retirement Savings Plan dated
as of October 17, 2002, included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2002, is incorporated herein by reference.
Exhibit 10(p)(7)
Amendment No. 6 to The Black & Decker Supplemental Retirement Savings Plan dated
as of December 12, 2002, included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2002, is incorporated herein by reference.
Exhibit 10(q)
The Black & Decker Supplemental Executive Retirement Plan, as amended, included
in the Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, is incorporated herein by reference.
Exhibit 10(r)
The Black & Decker Executive Life Insurance Program, as amended, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 4, 1993,
is incorporated herein by reference.
- 52 -
Exhibit 10(s)
The Black & Decker Executive Salary Continuance Plan, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended April 2, 1995,
is incorporated herein by reference.
Exhibit 10(t)
Description of the Corporation's policy and procedures for relocation of
existing employees (individual transfers), included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1991, is incorporated herein
by reference.
Exhibit 10(u)
Description of the Corporation's policy and procedures for relocation of new
employees, included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by reference.
Exhibit 10(v)
Description of certain incidental benefits provided to executive officers of the
Corporation, included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997, is incorporated herein by reference.
Exhibit 10(w)
Form of Severance Benefits Agreement by and between the Corporation and
approximately 15 of its key employees, included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002, is incorporated herein
by reference.
Exhibit 10(x)(1)
Amended and Restated Employment Agreement, dated as of November 1, 1995, by and
between the Corporation and Nolan D. Archibald, included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
Exhibit 10(x)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Nolan D. Archibald, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(y)(1)
Letter Agreement, dated April 19, 1999, by and between the Corporation and Paul
F. McBride, included in the Corporation's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1999, is incorporated herein by reference.
Exhibit 10(y)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Paul F. McBride, included in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(z)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Charles E. Fenton, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(aa)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Michael D. Mangan, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(bb)(1)
Special Deferral Agreement, dated February 7, 2000, by and between the
Corporation and Paul A. Gustafson, included in the Corporation's Annual Report
for the year ended December 31, 1999, is incorporated herein by reference.
Exhibit 10(bb)(2)
Severance Benefits Agreement, dated December 12, 2002, by and between the
Corporation and Paul A. Gustafson, included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2002, is incorporated herein by
reference.
Exhibit 10(cc)(1)
The Black & Decker 1996 Employee Stock Purchase Plan, included in the Proxy
Statement for the 1996 Annual Meeting of Stockholders of the Corporation dated
March 1, 1996, is incorporated herein by reference.
Exhibit 10(cc)(2)
Amendment to The Black & Decker 1996 Employee Stock Purchase Plan, as adopted on
February 12, 1997, included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996, is incorporated herein by reference.
Items 10(a) through 10(cc)(2) constitute management contracts and compensatory
plans and arrangements required to be filed as exhibits under Item 14(c) of this
report.
Exhibit 21
List of Subsidiaries.
Exhibit 23
Consent of Independent Auditors.
Exhibit 24
Powers of Attorney.
Exhibit 31.1
Chief Executive Officer's Certification Pursuant to Rule 13a-14(a)/15d-14(a) and
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
- 53 -
Exhibit 31.2
Chief Financial Officer's Certification Pursuant to Rule 13a-14(a)/15d-14(a) and
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1
Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other items are "not applicable" or "none".
(b) Reports on Form 8-K
The Corporation filed or furnished the following reports on Form 8-K during the
three months ended December 31, 2003:
On October 1, 2003, the Corporation furnished a Current Report on Form 8-K
with the Securities and Exchange Commission. This Current Report on Form 8-K,
furnished pursuant to Item 9 of that Form, stated that the Corporation and Masco
Corporation announced that they had finalized the sale of Masco's Baldwin
Hardware and Weiser Lock businesses to the Corporation.
On October 17, 2003, the Corporation furnished a Current Report on Form 8-K
with the Securities and Exchange Commission. This Current Report on Form 8-K,
furnished pursuant to Item 9 of that Form, stated that the Corporation announced
that its Board of Directors declared a quarterly cash dividend of $0.21 per
share of the Corporation's outstanding common stock payable December 26, 2003,
to stockholders of record at the close of business on December 12, 2003.
On October 22, 2003, the Corporation furnished a Current Report on Form 8-K
with the Securities and Exchange Commission. This Current Report on Form 8-K,
furnished pursuant to Items 9 and 12 of that Form, stated that the Corporation
had reported its earnings for the three and nine months ended September 28,
2003.
All other items are "not applicable" or "none".
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(d) Financial Statement Schedules and Other Financial Statements
The Financial Statement Schedule required by Regulation S-X is filed herewith.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
(Millions of Dollars)
BALANCE ADDITIONS OTHER
AT CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND ADD AT END
Description OF PERIOD EXPENSES DEDUCTIONS (DEDUCT) OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003
Reserve for doubtful accounts and cash discounts $46.3 $70.5 $74.3 (a) $4.9 (b) $47.4
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Reserve for doubtful accounts and cash discounts $50.5 $70.3 $76.7 (a) $2.2 (b) $46.3
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
Reserve for doubtful accounts and cash discounts $50.4 $71.0 $70.4 (a) $(.5)(b) $50.5
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Accounts written off during the year and cash discounts taken by customers.
(b) Primarily includes currency translation adjustments and, for 2003, amounts
associated with acquired businesses.
</FN>
- 54 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE BLACK & DECKER CORPORATION
Date: March 3, 2004 By /s/ NOLAN D. ARCHIBALD
------------- -----------------------------
Nolan D. Archibald
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 3, 2004, by the following persons on behalf of
the registrant and in the capacities indicated.
Signature Title Date
- --------------------------------------------------------------------------------
Principal Executive Officer
/s/ NOLAN D. ARCHIBALD March 3, 2004
- ---------------------- --------------
Nolan D. Archibald Chairman, President, and
Chief Executive Officer
Principal Financial Officer
/s/ MICHAEL D. MANGAN March 3, 2004
- --------------------- --------------
Michael D. Mangan Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
/s/ CHRISTINA M. MCMULLEN March 3, 2004
- ------------------------- --------------
Christina M. McMullen Vice President and Controller
- --------------------------------------------------------------------------------
This report has been signed by the following directors, constituting a majority
of the Board of Directors, by Nolan D. Archibald, Attorney-in-Fact.
Nolan D. Archibald Kim B. Clark
Norman R. Augustine Manuel A. Fernandez
Barbara L. Bowles Benjamin H. Griswold, IV
M. Anthony Burns Anthony Luiso
By /s/ NOLAN D. ARCHIBALD Date: March 3, 2004
----------------------- -------------
Nolan D. Archibald
Attorney-in-Fact
- 55 -