UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 28, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number: 1-1553
THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 East Joppa Road Towson, Maryland 21286
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(Address of principal executive offices) (Zip Code)
(410) 716-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
The number of shares of Common Stock outstanding as of June 28, 1998: 92,956,594
The exhibit index as required by item 601(a) of Regulation S-K is included in
this report.
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THE BLACK & DECKER CORPORATION AND SUBSIDIARIES
INDEX - FORM 10-Q
June 28, 1998
Page
PART I - FINANCIAL INFORMATION
Consolidated Statement of Earnings (Unaudited) For the Three
Months and Six Months Ended June 28, 1998 and June 29, 1997 3
-----------------
Consolidated Balance Sheet
June 28, 1998 (Unaudited) and December 31, 1997 4
----------------------------
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 28, 1998 and June 29, 1997 5
--------------------
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 28, 1998 and June 29, 1997 6
--------------------
Notes to Consolidated Financial Statements (Unaudited) 7
-------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
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Quantitative and Qualitative Disclosures About Market Risk 26
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PART II - OTHER INFORMATION 27
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SIGNATURES 31
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amounts)
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Three Months Ended Six Months Ended
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
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Sales $ 1,169.7 $ 1,182.2 $ 2,178.0 $ 2,197.2
Cost of goods sold 771.9 761.8 1,430.2 1,412.3
Selling, general, and
administrative expenses 285.5 316.1 565.4 607.3
Write-off of goodwill - - 900.0 -
Restructuring and exit costs - - 140.0 -
Gain on sale of businesses 36.5 - 36.5 -
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Operating Income (Loss) 148.8 104.3 (821.1) 177.6
Interest expense (net of
interest income) 29.8 30.6 58.2 61.2
Other expense 2.7 3.6 2.4 5.9
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Earnings (Loss) Before Income
Taxes 116.3 70.1 (881.7) 110.5
Income taxes 57.9 24.6 31.3 38.7
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Net Earnings (Loss) $ 58.4 $ 45.5 $ (913.0) $ 71.8
===================================================================================================================
Net Earnings (Loss) Per Common
Share-- Basic $ .62 $ .48 $ (9.65) $ .76
===================================================================================================================
Shares Used in Computing Basic
Earnings Per Share (in Millions) 94.1 94.5 94.6 94.4
===================================================================================================================
Net Earnings (Loss) Per Common
Share-- Assuming Dilution $ .61 $ .47 $ (9.65) $ .75
===================================================================================================================
Shares Used in Computing Diluted
Earnings Per Share (in Millions) 95.8 96.1 94.6 96.1
===================================================================================================================
Dividends Per Common Share $ .12 $ .12 $ .24 $ .24
===================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
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CONSOLIDATED BALANCE SHEET
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amount)
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(Unaudited)
June 28, 1998 December 31, 1997
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Assets
Cash and cash equivalents $ 204.1 $ 246.8
Trade receivables 815.7 931.4
Inventories 765.0 774.7
Other current assets 205.1 125.9
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Total Current Assets 1,989.9 2,078.8
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Property, Plant, and Equipment 781.3 915.1
Goodwill 935.7 1,877.3
Other Assets 510.7 489.5
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$ 4,217.6 $ 5,360.7
===================================================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 89.1 $ 178.3
Current maturities of long-term debt 60.6 60.5
Trade accounts payable 355.3 372.0
Other accrued liabilities 822.3 761.8
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Total Current Liabilities 1,327.3 1,372.6
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Long-Term Debt 1,658.1 1,623.7
Deferred Income Taxes 55.6 57.7
Postretirement Benefits 283.0 304.2
Other Long-Term Liabilities 192.3 211.1
Stockholders' Equity
Common stock, par value $.50 per share
(outstanding: June 28, 1998--92,956,594 shares;
December 31, 1997--94,842,544 shares) 46.5 47.4
Capital in excess of par value 1,145.3 1,278.2
Retained earnings (deficit) (373.7) 562.0
Accumulated other comprehensive income (116.8) (96.2)
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Total Stockholders' Equity 701.3 1,791.4
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$ 4,217.6 $ 5,360.7
===================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
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CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions Except Per Share Amounts)
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Accumulated
Outstanding Capital in Retained Other Com- Total
Common Par Excess of Earnings prehensive Stockholders'
Shares Value Par Value (Deficit) Income Equity
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Balance at December 31, 1996 94,248,807 $ 47.1 $ 1,261.7 $ 380.2 $ (56.6) $ 1,632.4
Comprehensive income:
Net earnings -- -- -- 71.8 -- 71.8
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (34.2) (34.2)
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Comprehensive income (loss) -- -- -- 71.8 (34.2) 37.6
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Cash dividends ($.24 per share) -- -- -- (22.7) -- (22.7)
Common stock issued under
employee benefit plans 253,935 .2 6.6 -- -- 6.8
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Balance at June 29, 1997 94,502,742 $ 47.3 $ 1,268.3 $ 429.3 $ (90.8) $ 1,654.1
===================================================================================================================
Balance at December 31, 1997 94,842,544 $ 47.4 $ 1,278.2 $ 562.0 $ (96.2) $ 1,791.4
Comprehensive income:
Net loss -- -- -- (913.0) -- (913.0)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (20.6) (20.6)
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Comprehensive income (loss) -- -- -- (913.0) (20.6) (933.6)
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Cash dividends ($.24 per share) -- -- -- (22.7) -- (22.7)
Purchase and retirement of
common stock (2,876,000) (1.4) (153.3) -- -- (154.7)
Common stock issued under
employee benefit plans 990,050 .5 20.4 -- -- 20.9
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Balance at June 28, 1998 92,956,594 $ 46.5 $ 1,145.3 $ (373.7) $ (116.8) $ 701.3
===================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
-6-
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
The Black & Decker Corporation and Subsidiaries
(Dollars in Millions)
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Six Months Ended
June 28, 1998 June 29, 1997
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Operating Activities
Net earnings (loss) $ (913.0) $ 71.8
Adjustments to reconcile net earnings (loss) to cash flow
from operating activities:
Gain on sale of businesses (36.5) -
Non-cash charges and credits:
Goodwill write-off 900.0 -
Restructuring charges and exit costs 140.0 -
Depreciation and amortization 81.6 110.5
Other 5.6 (2.6)
Changes in selected working capital items (excluding, for 1998,
effects of household products business sold):
Trade receivables (3.3) 2.1
Inventories (53.5) (177.1)
Trade accounts payable 2.8 29.9
Restructuring spending (13.0) -
Other assets and liabilities (104.6) (136.5)
Net decrease in receivables sold - (76.0)
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Cash Flow From Operating Activities 6.1 (177.9)
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Investing Activities
Proceeds from sale of business 288.0 -
Proceeds from disposal of assets 3.9 4.2
Capital expenditures (59.8) (85.0)
Cash inflow from hedging activities 168.7 219.4
Cash outflow from hedging activities (166.0) (208.6)
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Cash Flow From Investing Activities 234.8 (70.0)
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Cash Flow Before Financing Activities 240.9 (247.9)
Financing Activities
Net decrease in short-term borrowings (84.6) (101.6)
Proceeds from long-term debt (including revolving credit facility) 576.4 544.0
Payments on long-term debt (including revolving credit facility) (569.7) (186.1)
Redemption of preferred stock of subsidiary (41.7) -
Purchase of common stock (154.7) -
Issuance of common stock 15.3 2.9
Cash dividends (22.7) (22.7)
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Cash Flow From Financing Activities (281.7) 236.5
Effect of exchange rate changes on cash (1.9) (4.1)
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Decrease In Cash And Cash Equivalents (42.7) (15.5)
Cash and cash equivalents at beginning of period 246.8 141.8
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Cash And Cash Equivalents At End Of Period $ 204.1 $ 126.3
===================================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Black & Decker Corporation and Subsidiaries
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
consolidated financial statements include all adjustments consisting only of
normal recurring accruals considered necessary for a fair presentation of the
financial position and the results of operations.
Operating results for the three- and six-month periods ended June 28, 1998,
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the consolidated financial
statements and notes included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997.
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No.
130 requires that, as part of a full set of financial statements, entities must
present comprehensive income, which is the sum of net income and other
comprehensive income. Other comprehensive income represents total
non-stockholder changes in equity. The Corporation has included its presentation
of comprehensive income in the accompanying Consolidated Statement of Changes in
Stockholders' Equity for the six months ended June 28, 1998 and June 29, 1997.
Comprehensive income for the three months ended June 28, 1998 and June 29, 1997,
was $57.6 million and $55.2 million, respectively. In connection with the
adoption of SFAS No. 130, the Corporation has changed the designation of its
"Equity adjustment from translation" component of stockholders' equity in the
accompanying Consolidated Balance Sheet to "Accumulated other comprehensive
income."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted for years beginning after June 15, 1999. Early adoption of SFAS
No. 133 is permitted as of the beginning of any fiscal quarter after its
issuance. SFAS No. 133 will require the Corporation to recognize all derivatives
on the balance sheet at fair value. Derivatives that do not qualify as hedges
under the new standard must be adjusted to fair value through income. If a
derivative qualifies as a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
value will be immediately recognized in earnings.
The Corporation has not yet determined when it will adopt SFAS No. 133,
although early adoption is considered likely due to the new standard's more
favorable treatment of certain foreign currency hedges than that afforded under
prior accounting standards. Further, the Corporation has not yet determined what
effect SFAS No.133 will have on its earnings and financial position.
-8-
NOTE 2: STRATEGIC REPOSITIONING
Overview: A comprehensive strategic repositioning plan, designed to intensify
focus on core operations and improve operating performance, was approved by the
Corporation's Board of Directors on January 26, 1998. As announced, the program
includes the following components: (i) divestiture of the household products
business in North America, Latin America, and Australia, the recreational
products business, and the glass container-forming and inspection equipment
business; (ii) the repurchase of up to 10% of the Corporation's outstanding
common stock over a two-year period; and (iii) a restructuring of the
Corporation's remaining businesses. Also on January 26, 1998, the Board of
Directors elected to authorize a change in the basis upon which the Corporation
evaluates goodwill for impairment.
Divestitures: The Corporation has taken actions to divest its household products
business in North America, Latin America, and Australia, recreational products
business, and glass container-forming and inspection equipment business. The
Corporation has elected to retain the cleaning and lighting products component
of the household products business. The recreational products and household
products businesses are components of the Consumer and Home Improvement Products
(Consumer) segment; the glass container-forming and inspection equipment
business is a component of the Commercial and Industrial Products (Commercial)
segment.
In May 1998, the Corporation announced that it had entered into a definitive
agreement with Windmere-Durable Holdings, Inc. for the sale of the Corporation's
household products business (other than certain assets associated with the
Corporation's cleaning and lighting products, such as the Dustbuster,
SnakeLight, ScumBuster, and FloorBuster products) in North America, Central
America, the Caribbean, and South America (excluding Brazil) for a purchase
price of $315.0 million. The Corporation closed the sale to Windmere, with the
exception of the sale of the household products business in Mexico, on June 26,
1998, and received gross proceeds of $288.0 million. Gross proceeds of $27.0
million from the sale of the household products business in Mexico, which were
held in escrow at June 28, 1998 pending regulatory approval, were reflected in
the accompanying Consolidated Balance Sheet as "Other current assets" at June
28, 1998, and were received in July 1998. As part of the transaction, the
Corporation retained certain liabilities and agreed to license the Black &
Decker name to Windmere in existing household product categories for a period of
six and one-half years on a royalty-free basis, with extension options upon
request of Windmere and at the discretion of the Corporation on a
royalty-bearing basis. At the request of Windmere, additional product categories
may be licensed at the Corporation's option on a royalty-bearing basis. During
the six months ended June 28, 1998, the Corporation also completed the sale of
its household products business in Australia, the proceeds from which were
immaterial. The Corporation continues in its efforts to divest its household
products business in Brazil.
As more fully described in Note 8 of Notes to Consolidated Financial
Statements, subsequent to June 28, 1998, the Corporation announced that it had
signed a definitive agreement to recapitalize its recreational products business
and had entered into a contract to sell its glass container-forming and
inspection equipment business. These transactions are expected to close in 1998.
-9-
The aforementioned sales of the household products business and glass
container-forming and inspection equipment business and recapitalization of the
recreational products business are expected to yield gross cash proceeds of over
$700 million and net cash proceeds of approximately $550 million. Net proceeds
from the sales or recapitalization of these businesses, augmented by cash
generated by remaining operations, have been and are expected to be utilized in
the repurchase of up to 10% of the Corporation's outstanding common stock and to
fund the restructuring program described below.
Sales of the businesses divested and to be divested, in aggregate, were
$146.9 million and $174.8 million for the three months ended June 28, 1998, and
June 29, 1997, and $287.8 million and $327.6 million for the six months ended
June 28, 1998, and June 29, 1997, respectively.
Repurchase of Common Stock: On January 26, 1998, the Board of Directors
authorized the repurchase of up to 10%, or 9,484,254 shares, of the
Corporation's outstanding common stock over a two-year period. A combination of
net proceeds from the sale of divested businesses and cash flow from remaining
operations have been and will be used to fund the stock repurchase program.
Prior to the receipt of proceeds from the sale of divested businesses, the
Corporation also may utilize its existing borrowing facilities to fund a portion
of the stock repurchase program.
During the six months ended June 28, 1998, the Corporation repurchased
2,876,000 shares of common stock at an aggregate cost of $154.7 million. The
aggregate cost of $154.7 million is net of $.7 million in premiums received in
connection with the Corporation's sale of put options on 400,000 shares of its
common stock.
Restructuring Charge: The restructuring program, announced in January 1998,
which will be completed over a period of two years, is being undertaken to
reduce fixed costs and simplify the supply chain and new product introduction
processes. During the first quarter of 1998, the Corporation commenced this
program and recognized a restructuring charge in the amount of $140.0 million.
The Corporation anticipates that additional restructuring charges will be
recognized over the course of the two-year program.
The major component of the restructuring charge relates to the elimination
of approximately 3,700 positions. As a result, an accrual of $102.7 million,
principally associated with European businesses in the Consumer segment, was
included in the restructuring charge. Included in that severance accrual was
$8.1 million related to severance actions taken in the businesses to be divested
and with respect to the closure of a facility in Kuantan, Malaysia, that
manufactures household products predominantly for sale in the United States and
was not included in the assets sold with the household products business.
To reduce fixed costs and simplify the supply chain and new product
introduction processes, the Corporation is taking actions to rationalize certain
manufacturing, sales, and administrative operations resulting in the closure of
a number of facilities. As a result, the restructuring charge also included a
$27.5 million write-down to fair value--less, if applicable, costs to sell--of
certain land, buildings, and equipment. Included in that $27.5 million
write-down was $9.0 million related to the closure of the Malaysian facility
described above. The remainder of the write-down to fair value primarily relates
to long-lived assets of European businesses in the Consumer segment.
-10-
The remaining restructuring charge of $9.8 million, principally associated
with European businesses in the Consumer segment, relates to the accrual of
future expenditures, principally consisting of lease and other contractual
obligations, for which no future benefit will be realized.
Change in Accounting for Goodwill: On a periodic basis through December 31,
1997, the Corporation estimated the future undiscounted cash flows of the
businesses to which goodwill related in order to determine that the carrying
value of the goodwill had not been impaired.
As a consequence of the strategic repositioning plan, the Corporation
elected to change its method of measuring goodwill impairment from an
undiscounted cash flow approach to a discounted cash flow approach effective
January 1, 1998. On a periodic basis, the Corporation estimates the future
discounted cash flows of the businesses to which goodwill relates. When such
estimate of the future discounted cash flows, net of the carrying amount of
tangible net assets, is less than the carrying amount of goodwill, the
difference will be charged to operations. For purposes of determining the future
discounted cash flows of the businesses to which goodwill relates, the
Corporation, based upon historical results, current projections, and internal
earnings targets, determines the projected future operating cash flows, net of
income tax payments, of the individual businesses. These projected future cash
flows are then discounted at a rate corresponding to the Corporation's estimated
cost of capital, which also is the hurdle rate used by the Corporation in making
investment decisions. Future discounted cash flows for the recreational products
business, the glass container-forming and inspection equipment business, and the
household products business in North America, Latin America, and Australia
include an estimate of the proceeds from the eventual sale of such businesses,
net of associated selling expenses and taxes. The Corporation believes that
measurement of the value of goodwill through a discounted cash flow approach is
preferable in that such a measurement facilitates the timely identification of
impairment of the carrying value of investments in businesses and provides a
more current and, with respect to the businesses to be sold, more realistic
valuation than the undiscounted approach.
In connection with the Corporation's change in accounting policy with
respect to measurement of goodwill impairment, $900.0 million of goodwill was
written off through a charge to operations during the first quarter of 1998.
That goodwill write-off represented a per-share net loss of $9.51 both on a
basic and diluted basis for the six-month period ended June 28, 1998. That
write-down, which relates to goodwill associated with the security hardware,
plumbing products, and fastening and assembly systems businesses and includes a
$40.0 million write-down of goodwill associated with a business to be sold,
represents the amount necessary to write-down the carrying values of goodwill
for those businesses to the Corporation's best estimate, as of January 1, 1998,
of those businesses' future discounted cash flows using the methodology
described in the preceding paragraph. This change represents a change in
accounting principle which is indistinguishable from a change in estimate.
-11-
NOTE 3: INVENTORIES
The components of inventory at the end of each period, in millions of dollars,
consisted of the following:
June 28, 1998 December 31, 1997
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FIFO cost
Raw materials and work-in-process $ 205.1 $ 199.4
Finished products 584.7 599.4
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789.8 798.8
Excess of FIFO cost over LIFO inventory value (24.8) (24.1)
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$ 765.0 $ 774.7
===================================================================================================================
Inventories are stated at the lower of cost or market. The cost of United
States inventories is based primarily on the last-in, first-out (LIFO) method;
all other inventories are based on the first-in, first-out (FIFO) method.
NOTE 4: GOODWILL
In connection with the Corporation's change in accounting policy with respect to
measurement of goodwill impairment as discussed in Note 2, goodwill in the
amount of $900.0 million was written off through a charge to operations during
the first quarter of 1998, and has been reflected in the Consolidated Statement
of Earnings as "Write-off of goodwill" for the six months ended June 28, 1998.
That write-down, which relates to goodwill associated with the security
hardware, plumbing products, and fastening and assembly systems businesses and
includes a $40.0 million write-down of goodwill associated with a business to be
sold, represents the amount necessary to write-down the carrying values of
goodwill for those businesses to the Corporation's best estimate, as of January
1, 1998, of those businesses' future discounted cash flows using the methodology
described in Note 2.
In addition, goodwill related to the Corporation's household products
business was written off in connection with the sale of that business during the
quarter ended June 28, 1998.
Goodwill at the end of each period, in millions of dollars, was as follows:
June 28, 1998 December 31, 1997
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Goodwill $1,513.3 $2,499.9
Less accumulated amortization 577.6 622.6
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$ 935.7 $1,877.3
===================================================================================================================
-12-
NOTE 5: LONG-TERM DEBT
In June 1998, a wholly owned subsidiary of the Corporation issued senior
unsecured notes that were guaranteed by the Corporation in the amount of $300.0
million. Of that amount, $150.0 million bear interest at a fixed rate of 6.55%
and are due in 2007, and $150.0 million bear interest at a fixed rate of 7.05%
and are due in 2028. Proceeds from the issuance of the senior unsecured notes
were used to repay indebtedness outstanding under the Corporation's unsecured
revolving credit facility.
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $903.4 million and $776.0 million were included in the Consolidated
Balance Sheet at June 28, 1998 and December 31, 1997, respectively, under the
captions short-term borrowings, current maturities of long-term debt, and
long-term debt.
NOTE 6: SALE OF RECEIVABLES
As more fully described in Note 2 of Notes to Consolidated Financial Statements
included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997, the Corporation voluntarily terminated its sale of
receivables program in December 1997 as the program was no longer deemed
necessary to support its liquidity requirements. As of June 29, 1997, the
Corporation had sold $136.0 million of receivables under this program. The
discount on sale of receivables is included in "Other expense."
NOTE 7: INTEREST EXPENSE (NET OF INTEREST INCOME)
Interest expense (net of interest income) for each period, in millions of
dollars, consisted of the following:
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Three Months Ended Six Months Ended
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
- -------------------------------------------------------------------------------------------------------------------
Interest expense $35.7 $32.1 $72.3 $65.4
Interest (income) (5.9) (1.5) (14.1) (4.2)
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$29.8 $30.6 $58.2 $61.2
===================================================================================================================
NOTE 8: SUBSEQUENT EVENTS
On June 29, 1998, the Corporation announced that it had signed a definitive
agreement with an affiliate of Cornerstone Equity Investors, LLC to recapitalize
its recreational products business, True Temper Sports. In connection with the
transaction, the Corporation will receive $202.7 million in cash and retain
approximately 6% of preferred and common stock valued at approximately $4
million. The transaction is expected to close during the third quarter of 1998,
subject to satisfaction of customary closing conditions.
-13-
On July 14, 1998, the Corporation announced that it had entered into a
definitive agreement with Bucher Holding A.G., of Switzerland, to sell its glass
container-forming and inspection equipment business, Emhart Glass, for $194.0
million. Net proceeds, after costs and taxes, are expected to approximate $150
million. The transaction is expected to close by mid-October 1998, subject to
receipt of regulatory approvals and satisfaction of customary closing
conditions.
-14-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $58.4 million or $.61 per share on a
diluted basis for the three-month period ended June 28, 1998. Included in net
earnings for the quarter ended June 28, 1998, was an after-tax gain on sale of
businesses of $4.2 million ($36.5 million before tax) or $.04 per share on a
diluted basis. Excluding the gain on sale of businesses, net earnings were $54.2
million or $.57 per diluted share for the quarter ended June 28, 1998, compared
to net earnings of $45.5 million or $.47 per share on a diluted basis for the
comparable period in 1997.
During the quarter ended June 28, 1998, the Corporation closed the sale of
its household products business (excluding certain assets associated with the
Corporation's cleaning and lighting products) in North America, Central America,
the Caribbean, and South America (excluding Mexico and Brazil). Proceeds from
the sale of the household products business in Mexico (excluding certain assets
related to the cleaning and lighting business in that country), held in escrow
at June 28, 1998 pending regulatory approval, were received in July 1998.
Subsequent to June 28, 1998, the Corporation entered into definitive agreements
to recapitalize its recreational products business, True Temper Sports, and to
sell its glass container-forming and inspection equipment business, Emhart
Glass. The sales or recapitalization of these three businesses, which will
complete part of the Corporation's strategic repositioning plan, are expected to
yield gross cash proceeds of over $700 million and net cash proceeds of
approximately $550 million.
The Corporation reported a net loss of $913.0 million or $9.65 per share
on a diluted basis for the six-month period ended June 28, 1998, compared to net
earnings of $71.8 million or $.75 per share on a diluted basis for the six-month
period ended June 29, 1997. Excluding the effects of the restructuring charge of
$140.0 million ($100.0 million after tax) and the goodwill write-off of $900.0
million, both recognized in the first quarter of 1998, and the after-tax gain on
sale of businesses recognized in the second quarter of 1998, net earnings for
the six months ended June 28, 1998, would have been $82.8 million or $.86 per
share on a diluted basis.
STRATEGIC REPOSITIONING
As more fully described in Note 2 of Notes to Consolidated Financial Statements,
on January 26, 1998, the Board of Directors approved a comprehensive strategic
repositioning of the Corporation, consisting of three separate elements.
The first element of the strategic repositioning plan is to focus the
Corporation on its core operations-that is, those strategic businesses that the
Corporation believes are capable of delivering superior operating and financial
performance. As a result, the Corporation has taken actions to divest or
recapitalize its non-strategic businesses, which consist of True Temper Sports,
Emhart Glass, and the household products business in North America, Latin
America, and Australia.
During the quarter ended June 28, 1998, the Corporation closed the sale of
its household products business in North America, Central America, the
Caribbean, and South America (excluding Mexico and Brazil) and received gross
proceeds of $288.0 million. Gross proceeds of
-15-
$27.0 million from the sale of the household products business in Mexico, held
in escrow at June 28, 1998 pending regulatory approval, were received by the
Corporation in July 1998. During 1998, the Corporation also completed the sale
of its household products business in Australia. The Corporation continues to
pursue the sale of its household products business in Brazil. In connection with
the sale of the household products businesses, the Corporation will retain its
cleaning and lighting product lines, which include the Dustbuster(R) cordless
vacuum. Subsequent to June 28, 1998, the Corporation entered into definitive
agreements to recapitalize True Temper Sports and to sell Emhart Glass. The
sales or recapitalization of these businesses are expected to yield gross cash
proceeds of over $700 million and net cash proceeds of approximately $550
million.
The pre-tax gain on sale of businesses of $36.5 million ($4.2 million after
tax) recognized by the Corporation during the quarter ended June 28, 1998,
represents the gain on the sale of the household products business (excluding
certain assets associated with the cleaning and lighting product lines) in North
America, Central America, the Caribbean, and South America (excluding Brazil),
and is net of losses recognized in connection with the agreement to sell Emhart
Glass and the anticipated sale of the household products business in Brazil.
Because True Temper Sports, Emhart Glass, and the household products business in
North America, Latin America, and Australia are not treated as discontinued
operations under generally accepted accounting principles, they remain a part of
the Corporation's reported results from continuing operations until their sale.
Under the accounting prescribed by Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, the Corporation is required to reflect the
long-lived assets of these businesses at the lower of their carrying amounts or
their expected fair value less costs to sell and has ceased depreciation of the
businesses' fixed assets and amortization of goodwill related to these
businesses during the period held for sale.
The net proceeds from the sales of these businesses, augmented by free cash
flow generated by the remaining businesses, have been and will be used to fund
the second element of the strategic repositioning plan-the repurchase of up to
10% of the Corporation's outstanding common shares over a two-year period.
During the six months ended June 28, 1998, the Corporation repurchased 2,876,000
common shares at an aggregate cost of $154.7 million, which is net of $.7
million in premiums received in connection with the Corporation's sale of put
options on 400,000 shares of its common stock. During the period from June 29,
1998, through August 11, 1998, the Corporation purchased an additional 1,408,500
common shares at an aggregate cost of $81.0 million, which is net of $.7 million
in premiums received in connection with the Corporation's further sale of put
options on 400,000 shares of its common stock.
The third element of the strategic repositioning plan involves a major
restructuring program. That restructuring program is being undertaken to reduce
fixed costs and to simplify the supply chain and new product introduction
processes. As part of the restructuring program, the Corporation expects to make
significant changes to its European power tools and accessories business by
consolidating distribution and transportation and centralizing finance,
marketing, and support services. These changes in Europe will be accompanied by
investment in state-of-the-art information systems similar to the investments
being made in the North American business. In addition, the worldwide power
tools and accessories business will rationalize its manufacturing plant and
design center network, resulting in the closure of a number of manufacturing
plants and
-16-
design centers. The restructuring program also will include actions to improve
the cost position of other businesses.
This restructuring program is estimated to result in a pre-tax charge of up
to $225 million, of which $140.0 million was recognized in the first quarter of
1998, with the balance to be recognized as the program progresses over a
two-year period. The Corporation expects to recognize an additional portion of
the total anticipated restructuring charge in the third quarter of 1998 in
connection with a voluntary retirement program offered to employees in the
United States. In addition to the restructuring charge, related expenses of
approximately $60 million will be charged to operations over a two-year period
as the restructuring program progresses. These related expenses, which are
incremental to the plans being implemented, do not qualify as restructuring or
exit costs under generally accepted accounting principles.
The major component of the $140.0 million restructuring charge ($100.0
million net of tax) recognized in the first quarter of 1998 related to the
accrual of severance benefits in the amount of $102.7 million, principally
associated with European businesses in the Consumer segment. During the three
and six months ended June 28, 1998, the Corporation recognized $22.8 million and
$28.4 million of expenses, respectively, related to the restructuring program
and divestitures in operating income. Included in those restructuring-related
expenses were inventory write-downs associated with products in the retained
cleaning and lighting business that will be discontinued. Cash spending on the
restructuring program during 1998 is expected to range between $80 million to
$100 million.
Benefits from the restructuring charge taken in the first quarter of 1998,
estimated at more than $60 million on an annual, pre-tax basis once fully
implemented, are not expected to become evident until some time in 1999, as the
1998 benefits are likely to be offset by related expenses associated with the
program. As indicated in Note 2 of Notes to Consolidated Financial Statements,
the severance accrual included in the $140.0 million restructuring charge taken
in the first quarter of 1998 related to the elimination of approximately 3,700
positions. As the Corporation shifts certain production and other activities, it
is anticipated that an additional 1,300 positions will be created. As a result,
the Corporation's estimate of annual, pre-tax savings in excess of $60 million,
expected once the restructuring actions taken in the first quarter of 1998 are
fully implemented, reflects the savings from a net reduction of approximately
2,400 positions.
As a consequence of the strategic repositioning plan, the Corporation
elected to change its method of measuring goodwill impairment from an
undiscounted cash flow approach to a discounted cash flow approach, effective
January 1, 1998. The Corporation believes that measurement of the value of
goodwill through the discounted cash flow approach, as more fully described in
Note 2 of Notes to Consolidated Financial Statements, is preferable in that the
discounted cash flow measurement facilitates the timely identification of
impairment of the carrying value of investments in businesses and provides a
more current and, with respect to the businesses to be sold, realistic valuation
than the undiscounted approach. The adoption of this discounted cash flow
approach, however, may result in greater earnings volatility since decreases in
projected discounted cash flows of certain businesses will, as discussed above,
result in timely recognition of future impairment.
-17-
In connection with this change in accounting with respect to the measurement
of goodwill impairment, a non-cash charge of $900.0 million was recognized
during the first quarter of 1998 ($9.51 per share both on a basic and diluted
basis for the six months ended June 28, 1998). The $900.0 million write-down,
which relates to goodwill associated with the Corporation's security hardware,
plumbing products, and fastening and assembly systems business and includes a
$40.0 million write-down of goodwill associated with a business to be sold,
represents the amount necessary to reduce the carrying values of goodwill for
those businesses to the Corporation's best estimate, as of January 1, 1998, of
those businesses' future discounted cash flows using the methodology described
in Note 2 of Notes to Consolidated Financial Statements. As a result of the
goodwill write-off and the cessation of goodwill amortization related to the
businesses to be sold, goodwill amortization declined from $15.9 million for the
three months ended June 29, 1997 ($31.9 million for the first half of 1997) to
$5.9 million for the three months ended June 28, 1998 ($12.4 million for the
first half of 1998).
SALES
The following chart sets forth an analysis of the consolidated changes in sales
for the three- and six-month periods ended June 28, 1998 and June 29, 1997.
ANALYSIS OF CHANGES IN SALES
- -------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
(Dollars in Millions) June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
- -------------------------------------------------------------------------------------------------------------------
Total sales $1,169.7 $1,182.2 $2,178.0 $2,197.2
Unit volume 2% 1% 3% -%
Price (1)% (1)% (1)% (1)%
Currency (2)% (2)% (3)% (2)%
- -------------------------------------------------------------------------------------------------------------------
Change in total sales (1)% (2)% (1)% (3)%
===================================================================================================================
The Corporation operates in two business segments: Consumer, including
consumer and professional power tools and accessories, household products,
security hardware, outdoor products (composed of electric lawn and garden tools
and recreational products), plumbing products, and product service; and
Commercial, including fastening and assembly systems and glass container-forming
and inspection equipment. As discussed above and in Note 2 of Notes to
Consolidated Financial Statements, the Corporation has sold the household
products business (excluding assets associated with the cleaning and lighting
product lines retained by the Corporation) in North America, Australia, Central
America, the Caribbean, and South America (excluding Brazil), has entered into
agreements to recapitalize True Temper Sports and sell Emhart Glass, and is
pursuing the sale of the household products business in Brazil. The results of
operations and financial positions of these businesses will be included in the
consolidated financial statements through the dates of consummation of the
respective transactions.
-18-
The following chart sets forth an analysis of the change in sales for the
three and six months ended June 28, 1998, compared to the three and six months
ended June 29, 1997, by geographic area for each business segment.
ANALYSIS OF CHANGES IN SALES
FOR THE THREE AND SIX MONTHS ENDED JUNE 28, 1998
- ----------------------------------------------------------------------------------------------------------------------
United States Europe Other Total
(Dollars in Millions) 3 Months 6 Months 3 Months 6 Months 3 Months 6 Months 3 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Consumer
Total sales $610.7 $1,094.1 $279.0 $544.6 $123.3 $221.7 $1,013.0 $1,860.4
Unit volume 6% 6% 6% 6% (12)% (8)% 3% 4%
Price (1)% (1)% -% -% (1)% (2)% (1)% (1)%
Currency -% -% (4)% (6)% (5)% (5)% (2)% (2)%
- ----------------------------------------------------------------------------------------------------------------------
5% 5% 2% -% (18)% (15)% -% 1%
- ----------------------------------------------------------------------------------------------------------------------
Commercial
Total sales $ 71.6 $ 142.6 $ 63.1 $130.3 $ 22.0 $ 44.7 $ 156.7 $ 317.6
Unit volume (5)% (9)% (1)% 6% (27)% (21)% (8)% (5)%
Price (1)% -% 1% -% (1)% (1)% -% -%
Currency -% -% (3)% (5)% (5)% (4)% (2)% (3)%
- ----------------------------------------------------------------------------------------------------------------------
(6)% (9)% (3)% 1% (33)% (26)% (10)% (8)%
- ----------------------------------------------------------------------------------------------------------------------
Consolidated
Total sales $682.3 $1,236.7 $342.1 $674.9 $145.3 $266.4 $1,169.7 $2,178.0
Unit volume 4% 4% 5% 6% (15)% (11)% 2% 3%
Price (1)% (1)% -% -% (1)% (1)% (1)% (1)%
Currency -% -% (4)% (6)% (5)% (5)% (2)% (3)%
- ----------------------------------------------------------------------------------------------------------------------
Change in total sales 3% 3% 1% -% (21)% (17)% (1)% (1)%
======================================================================================================================
The negative effects of a stronger United States dollar compared to most
major foreign currencies caused a decrease in the Corporation's consolidated
sales from the prior year's level of 2% and 3% for the three and six months
ended June 28, 1998, respectively. Pricing actions had a 1% negative effect on
sales for both the three-and six-month periods ended June 28, 1998, compared to
the corresponding periods in 1997. Unit volume increased by 2% for the
three-month period ended June 28, 1998, compared to the prior year's level. For
the six-month period ended June 28, 1998, unit volume rose 3% over the 1997
level.
Unit volume in the Consumer segment for the three months ended June 28,
1998, increased by 3% compared to the corresponding quarter in 1997 while, for
the six months ended June 28, 1998, unit volume exceeded the 1997 level by 4%.
-19-
Sales in the Corporation's Consumer businesses in the United States
increased by 5% for both the three- and six-month periods ended June 28, 1998,
over the 1997 levels. Excluding the sales declines experienced by the
Corporation's accessories business and, most significantly, household products
business in the three and six months ended June 28, 1998, sales in the
Corporation's other domestic Consumer businesses for those periods exceeded the
prior year's levels.
Sales increased at double-digit rates during the three- and six-month
periods ended June 28, 1998, over the corresponding periods in 1997 in the
domestic plumbing products and recreational products businesses. Sales in the
domestic power tools business increased at a high single-digit rate and at a
double-digit rate during the three- and six-month periods ended June 28, 1998,
respectively, compared to the corresponding periods in 1997. Sales in the
security hardware business increased at a double-digit rate for the three-month
period ended June 28, 1998, and at a mid-single digit rate for the six-month
period ended June 28, 1998, both compared to the corresponding periods in 1997.
Sales in the domestic accessories business decreased by mid-single digit rates
for the three- and six-month periods ended June 28, 1998, compared to the
corresponding 1997 periods principally due to SKU reduction efforts in that
business. The domestic power tools business benefited from the strength of the
DEWALT(R) professional power tools line, due largely to products introduced over
the past year, and of outdoor products during the three- and six-month periods
ended June 28, 1998, but those benefits were partially offset by weakness during
the same periods in sales of consumer power tools. Sales gains in the domestic
security hardware business during 1998 were driven by the introduction of the
AccessOneTM Remote Keyless Entry lock and The Society Brass CollectionTM,
principally in the second quarter of 1998. The sales increases in these
businesses were partially offset by sharply lower sales in the domestic
household products business in the three and six months ended June 28, 1998,
compared to the corresponding periods in 1997. The most significant declines in
the household products business were in the cleaning products category,
specifically with respect to the ScumBusterTM cordless submersible scrubber.
While the Corporation sold the domestic household products business on June 26,
1998, it has retained the cleaning and lighting product lines. The Corporation
anticipates that negative comparisons to the prior year with respect to the
retained cleaning and lighting business as well as negative sales comparisons
for the businesses sold or to be sold will continue to affect the Corporation's
1998 results.
Excluding the significant negative effect of changes in foreign exchange
rates, sales in the Corporation's Consumer businesses in Europe improved by 6%
for both the three and six months ended June 28, 1998, from the corresponding
periods in 1997. Increased sales in Europe of consumer and professional power
tools and accessories, outdoor lawn and garden tools, security hardware, and
product service during the three and six months ended June 28, 1998, as compared
to the prior year's levels more than offset declines during those periods in
sales of household products.
Sales of the Corporation's Consumer businesses in Other geographic areas for
the three and six months ended June 28, 1998, decreased by 13% and 10%,
respectively, from the same periods in 1997, excluding the negative effect of
changes in foreign exchange rates during 1998. The continuing effect of the
Asian economic crisis as well as sales weakness in Latin America, excluding
Mexico, were the principal reasons for the decline.
-20-
Excluding the negative effect of changes in foreign exchange rates, sales in
the Corporation's Commercial businesses decreased by 8% and 5% during the three
and six months ended June 28, 1998, respectively, from the prior year's levels.
Despite lower automotive sales during 1998 due to softness in Asia and the
effects of the General Motors strike in the United States during the second
quarter of 1998, sales in the Corporation's fastening and assembly systems
business increased at a low single-digit rate for the three and six months ended
June 28, 1998, compared to the corresponding periods in 1997, exclusive of
negative currency effects. This sales growth was more than offset by sharply
lower sales, exclusive of negative currency effects, in the Emhart Glass
business during the three and six months ended June 28, 1998, compared to the
comparable periods in 1997.
EARNINGS
Operating income for the three-month period ended June 28, 1998, excluding the
gain on sale of businesses of $36.5 million, was $112.3 million, or 9.6% of
sales, compared to $104.3 million, or 8.8% of sales, for the corresponding
period in 1997. An operating loss of $821.1 million was recognized for the six
months ended June 28, 1998, compared to operating income of $177.6 million for
the corresponding period in 1997. Excluding the effects of the $140.0 million
restructuring charge and the $900.0 million write-off of goodwill, both
recognized in the first quarter of 1998, and of the $36.5 million gain on sale
of businesses recognized in the second quarter of 1998, operating income for the
first half of 1998 was $182.4 million, or 8.4% of sales, compared to $177.6
million, or 8.1% of sales, for the first half of 1997.
Operating results for the three and six months ended June 28, 1998, included
$22.8 million and $28.4 million, respectively, of expenses directly related to
the strategic repositioning plan that do not qualify as restructuring or exit
costs under generally accepted accounting principles ("restructuring-related
expenses"). Included in these amounts is the write-down to net realizable value
of cleaning and lighting inventories that will be discontinued in connection
with the assumption of those product lines in North America by the Corporation's
power tool business. Excluding the effects of both these restructuring-related
expenses and the gain on sale of businesses, operating income would have
increased by 30% from $104.3 million, or 8.8% of sales, for the quarter ended
June 29, 1997, to $135.1 million, or 11.5% of sales, for the quarter ended June
28, 1998. Excluding the effects of these restructuring-related expenses, the
restructuring charge, the goodwill write-off, and the gain on sale of
businesses, all recognized in the first half of 1998, operating income would
have increased by 19% from $177.6 million, or 8.1% of sales, for the six months
ended June 29, 1997, to $210.8 million, or 9.7% of sales, for the six months
ended June 28, 1998. In addition to the realization of benefits from
restructuring actions taken in 1998, a major contributor to these improvements
was the $10.0 million and $19.5 million reduction in the level of goodwill
amortization experienced in the three and six months ended June 28, 1998,
respectively, as compared to the corresponding periods in 1997, as a result of
the goodwill write-off and cessation of amortization of goodwill associated with
the businesses to be sold. The lower level of goodwill amortization experienced
in the first half of 1998 will continue in future periods.
-21-
Improvements in operating income as a percentage of sales, exclusive of, for
the six months ended June 28, 1998, the restructuring charge and goodwill
write-off and, for the three and six months ended June 28, 1998, the gain on
sale of businesses and restructuring-related expenses, were experienced in the
Corporation's domestic power tools and accessories business, European security
hardware business, plumbing products business, recreational products business,
and fastening and assembly systems business, offset by decreased profitability
in the household products and Emhart Glass businesses, in the domestic security
hardware business, and in the power tools and accessories businesses outside the
United States.
Gross margin as a percentage of sales was 34.0% and 35.6% for the
three-month periods ended June 28, 1998, and June 29, 1997, respectively. Gross
margin as a percentage of sales was 34.3% for the first half of 1998, compared
to 35.7% for the first half of 1997. The decline in gross margin during the
three and six months ended June 28, 1998, compared to the corresponding periods
in 1997 primarily resulted from adverse foreign exchange effects on product
costs, principally in the European operations, competitive pressures that
continued to constrain pricing, and restructuring-related expenses, partially
offset by increased productivity net of inflation.
Selling, general, and administrative expenses as a percentage of sales for
the three-month period ended June 28, 1998, were 24.4% compared to 26.7% for the
comparable period in 1997. Selling, general, and administrative expenses as a
percentage of sales for the six-month period ended June 28, 1998, were 26.0%,
compared to 27.6% for the comparable period in 1997. These improvements were the
result of lower goodwill amortization in the three and six months ended June 28,
1998, compared to the corresponding periods in 1997, as a result of the goodwill
write-off and cessation of amortization of goodwill related to the businesses to
be sold, as well as benefits realized from restructuring actions taken in 1998.
Net interest expense (interest expense less interest income) was $29.8
million and $58.2 million for the three and six months ended June 28, 1998,
respectively, compared to $30.6 million and $61.2 million for the three and six
months ended June 29, 1997, respectively. The lower level of net interest
expense in the three and six months ended June 28, 1998, as compared to the
corresponding periods in 1997 was primarily the result of more favorable debt
mix in 1998 coupled with a lower level of net debt (total debt less cash and
cash equivalents) due to improved cash flows from operating activities in 1998.
The Corporation maintains a portfolio of interest rate hedge instruments for
the purpose of managing interest rate exposure. During the six months ended June
28, 1998, the Corporation's portfolio was reduced as a result of the following
scheduled maturities: (i) variable to fixed rate interest rate swaps with an
aggregate notional principal amount of $50.0 million; (ii) fixed to variable
rate interest rate swaps with an aggregate notional principal amount of $100.0
million; (iii) rate basis swaps with an aggregate notional principal amount of
$50.0 million; and (iv) interest rate swaps that swapped from fixed rate United
States dollars into fixed rate Japanese yen with an aggregate notional principal
amount of $15.0 million. The Corporation also reduced its portfolio as a result
of its termination of fixed to variable interest rate swaps with an aggregate
notional principal amount of $250.0 million and of termination by the
counterparties of fixed to variable rate interest rate swaps with an aggregate
notional principal amount of $300.0 million. Deferred gains
-22-
and losses on the early termination of interest rate swaps as of June 28, 1998,
were not significant. Partially offsetting these decreases in the interest rate
hedge portfolio, the Corporation entered into new fixed to variable rate
interest rate swaps with an aggregate notional principal amount of $250.0
million during the six months ended June 28, 1998.
Other expense for the three- and six-month periods ended June 28, 1998,
principally consisted of currency losses. Other expense for the three- and
six-month periods ended June 29, 1997, primarily included the discount on the
sale of receivables.
Income tax expense of $57.9 million for the quarter ended June 28, 1998,
included income tax expense of $32.3 million related to the gain on sale of
businesses recognized during that quarter. Excluding the taxes associated with
the gain on sale of businesses, the Corporation's reported tax rate would have
been 32% in the second quarter of 1998, compared to a tax rate of 35% in the
second quarter of 1997.
Income tax expense of $31.3 million was recognized on the Corporation's
pre-tax loss of $881.7 million for the six months ended June 28, 1998. Excluding
the income tax benefit of $40.0 million related to the pre-tax restructuring
charge of $140.0 million and the non-deductible write-off of goodwill in the
amount of $900.0 million, both recognized in the first quarter of 1998, and the
$32.3 million of tax expense recognized on the gain on sale of businesses in the
second quarter of 1998, the Corporation's reported tax rate would have been 32%
in the first six months of 1998, compared to a tax rate of 35% in the first half
of 1997.
This decrease in the effective tax rate in 1998 resulted from the lower
amount of goodwill amortization, which is not tax deductible, in 1998 as
compared to 1997 due to the $900.0 million write-off of goodwill that occurred
in the first quarter of 1998 as a result of the Corporation's change in method
of measuring goodwill impairment.
The Corporation reported net earnings of $58.4 million, or $.62 per basic
share and $.61 per diluted share, for the three months ended June 28, 1998.
Excluding the after-tax gain on sale of businesses of $4.2 million recognized in
the second quarter of 1998, net earnings were $54.2 million, or $.58 per basic
share and $.57 per diluted share, for the three-month period ended June 28,
1998, compared to $45.5 million, or $.48 per basic share and $.47 per diluted
share, for the three-month period ended June 29, 1997.
The Corporation reported a net loss of $913.0 million, or $9.65 per share
both on a basic and diluted basis, for the six-month period ended June 28, 1998,
principally as a result of the restructuring charge and goodwill write-off
during that period. Because the Corporation reported a net loss for the six
months ended June 28, 1998, the calculation of reported earnings per share on a
diluted basis excludes the impact of stock options since their inclusion would
be anti-dilutive--that is, decrease the per-share loss. For comparative
purposes, however, the Corporation believes that the dilutive effect of stock
options should be considered when evaluating the Corporation's performance
excluding the restructuring charge and goodwill write-off. If the dilutive
effect of stock options were considered, net earnings, excluding the goodwill
write-off and the after-tax restructuring charge and gain on sale of businesses,
would have been $82.8 million or $.86 per share on this diluted basis for the
six-month period ended June 28, 1998, compared to net earnings of $71.8 million
or $.75 per share on a diluted basis for the six-month period ended June 29,
1997.
-23-
Interest Rate Sensitivity
As a result of the significant changes during the six months ended June 28,
1998, described above, in the Corporation's interest rate hedge portfolio, the
following table provides information as of June 28, 1998, about that portfolio.
This table should be read in conjunction with the information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Interest Rate Sensitivity" included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
Notional Principal Amounts and Interest Rate Detail by Contractual Maturity Dates
Year Ending Dec. 31, Fair Value
6 Mos. Ending ------------------------------------------- (Assets)/
(U.S. Dollars in Millions) Dec. 31, 1998 1999 2000 2001 2002 Thereafter Total Liabilities
- ------------------------------------------------------------------------------------------------------------------------------
Interest Rate Derivatives
Interest Rate Swaps
(all U.S. dollar denomi-
nated except for U.S. rates
to foreign rates)
Fixed to variable rates $ -- $ -- $ 50.0 $ -- $ -- $ 250.0 $ 300.0 $ .7
Average pay rate (a)
Average receive rate 5.54% 6.02% 5.94%
Variable to fixed rates $200.0 $ -- $ -- $ -- $ -- $ -- $ 200.0 $ (.6)
Average pay rate 7.17% 7.17%
Average receive rate (b)
Fixed U.S. rates to fixed
foreign rates (c)
To Japanese yen $ -- $100.0 $ -- $ -- $ -- $ -- $ 100.0 $ (23.3)
Average pay rate (in
Japanese yen) (d) 1.99% 1.99%
Average receive rate 6.66% 6.66%
To deutsche marks $ -- $100.0 $ -- $ -- $ -- $ -- $ 100.0 $ (15.3)
Average pay rate (in
deutsche marks) (e) 4.73% 4.73%
Average receive rate 6.64% 6.64%
To Dutch guilders $ -- $ 50.0 $ -- $ -- $ -- $ -- $ 50.0 $ (8.1)
Average pay rate (in
Dutch guilders) (f) 4.58% 4.58%
Average receive rate 6.77% 6.77%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The average pay rate is based upon 6-month forward LIBOR.
(b) The average receive rate is based upon 3-month forward LIBOR.
(c) The indicated fair values of interest rate swaps that swap from fixed U.S.
rates to fixed foreign rates include the fair values of the exchange of the
notional principal amounts at the end of the swap terms as well as the
exchange of interest streams over the life of the swaps. The fair values of
the currency exchange are also included in the disclosures of foreign
currency exchange rate sensitivity included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997.
(d) The average pay rate (in Japanese yen) is based upon a notional principal
amount of 10.9 billion Japanese yen.
(e) The average pay rate (in deutsche marks) is based upon a notional principal
amount of 153.3 million deutsche marks.
(f) The average pay rate (in Dutch guilders) is based upon a notional principal
amount of 85.9 million Dutch guilders.
</FN>
-24-
FINANCIAL CONDITION
Operating activities provided cash of $6.1 million for the six months ended June
28, 1998, compared to $101.9 million of cash used before the sale of receivables
for the corresponding period in 1997. This increased cash generation was
principally the result of improved working capital management in the six months
ended June 28, 1998, as compared to the corresponding period in 1997.
Investing activities for the six months ended June 28, 1998, provided cash
of $234.8 million due principally to the receipt of $288.0 million of proceeds
from the sale of the household products business in North America and Latin
America, excluding Mexico and Brazil. Excluding the $288.0 million of sales
proceeds, investing activities for the six months ended June 28, 1998, used cash
of $53.2 million compared to $70.0 million in cash used in the corresponding
period in 1997. This lower cash usage in 1998 primarily resulted from a reduced
level of capital expenditures in the first half of 1998 compared to the
corresponding period in 1997.
Financing activities used cash of $281.7 million for the six months ended
June 28, 1998, compared to cash generated of $236.5 million in the first six
months of 1997. The increase in cash used in financing activities during the
first half of 1998 over the corresponding period in 1997 was principally the
result of cash expended for the stock repurchase program and for the redemption
of preferred stock of a subsidiary, coupled with lower borrowing levels in 1998
due, in part, to increased cash from operating activities and the receipt of
proceeds from the sale of a portion of the household products business.
During the six months ended June 28, 1998, a wholly owned subsidiary of the
Corporation issued $300.0 million of fixed rate, senior unsecured notes that
were guaranteed by the Corporation, of which $150.0 million is due in 2007 and
the balance is due in 2028. Proceeds of that debt issuance were used to repay
borrowings outstanding under the Corporation's revolving credit facility. In
addition, during that period, the Corporation retired $182.2 million of
long-term indebtedness in advance of their scheduled maturities. As a result of
changes in the Corporation's debt portfolio, average debt maturity was 6.1 years
at June 28, 1998, compared to 3.9 years at December 31, 1997. These changes in
the Corporation's debt portfolio, coupled with changes in the Corporation's
interest rate hedge portfolio described above, had the effect of decreasing the
Corporation's variable rate debt to total debt ratio from 63% at December 31,
1997, to 39% at June 28, 1998.
-25-
In addition to measuring its cash flow generation and usage based upon the
operating, investing, and financing classifications included in the Consolidated
Statement of Cash Flows, the Corporation also measures its free cash flow. Free
cash flow, a measure commonly employed by bond rating agencies and banks, is
defined by the Corporation as cash available for debt reduction (including
short-term borrowings), prior to the effects of cash received from divested
businesses, issuances of equity, and sales of receivables and to the effects of
cash paid for stock repurchases and for the redemption of stock of subsidiaries.
Free cash flow, a more inclusive measure of the Corporation's cash flow
generation than cash flow from operating activities included in the Consolidated
Statement of Cash Flows, considers items such as cash used for capital
expenditures and dividends, as well as net cash inflows or outflows from hedging
activities. During the six months ended June 28, 1998, the Corporation
experienced negative free cash flow of $98.0 million compared to negative free
cash flow of $183.3 million for the corresponding period in 1997. This $85.3
million improvement in free cash flow during the first half of 1998 over the
1997 level was primarily the result of improved working capital management.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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.
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: market
acceptance of the new products introduced in 1997 and 1998 and scheduled for
introduction in 1998; the level of sales generated from these new products
relative to expectations, based on the 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; the
ability of the Corporation and its suppliers to meet scheduled timetables of new
product introductions; unforeseen competitive pressure or other difficulty in
maintaining mutually beneficial relationships with key distributors or
penetrating new channels of distribution; adverse changes in currency exchange
rates or raw material commodity prices, both in absolute terms and relative to
competitors' risk profiles; delays in or unanticipated inefficiencies resulting
from manufacturing and administrative reorganization actions in progress or
contemplated by the strategic repositioning described in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997, and updated
herein; and the continuation of modest economic growth in the United States and
Europe and gradual improvement in the economic environment in Asia.
In addition to the foregoing, the Corporation's ability to realize the
anticipated benefits during 1998 and in the future of the restructuring actions
undertaken in 1998 is dependent upon current market conditions, as well as the
timing and effectiveness of the relocation or consolidation of production and
administrative processes. The ability to realize the benefits inherent in the
balance of the restructuring actions is dependent on the selection and
implementation of economically viable projects in addition to the restructuring
actions taken to date. The ability to achieve certain
-26-
sales and profitability targets and cash flow projections also is dependent upon
the Corporation's ability to identify appropriate selected acquisitions that are
complementary to the repositioned business units at acquisition prices that are
consistent with these objectives.
There can be no assurance that the Corporation will consummate the sales of
the household products business in Brazil and the glass container-forming and
inspection equipment business and complete the recapitalization of the
recreational products business. Further, the Corporation's ability to realize
aggregate proceeds from the sales of the household products business (excluding
certain assets associated with the Corporation's cleaning and lighting products)
in North America and Latin America, excluding Brazil, and the glass
container-forming and inspection business and from the recapitalization of the
recreational products business of over $700 million on a gross basis or
approximately $550 million on a net basis, is dependent upon, with respect to
the sale of the glass container-forming and inspection equipment business, the
Corporation's receipt of regulatory and other necessary approvals and the
satisfaction of customary closing conditions, and with respect to the
recapitalization of the recreational products business, the satisfaction of
customary closing conditions.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is included in Item 2 of Part I of this
report under the caption "Interest Rate Sensitivity" and in the seventh
paragraph under the caption "Earnings" and is incorporated by reference herein.
In addition, reference is made to Item 7A of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997.
-27-
THE BLACK & DECKER CORPORATION
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Corporation's products and allegations of patent and trademark
infringement. The Corporation is also 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 current exposure 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.
The Corporation also is involved in lawsuits and administrative proceedings
with respect to claims involving the discharge of hazardous substances into the
environment. Certain of these claims assert damages and liability for remedial
investigations and cleanup costs with respect to sites at which the Corporation
has been identified as a potentially responsible party under federal and state
environmental laws and regulations (off-site). Other matters involve sites that
the Corporation currently owns and operates or has previously sold (on-site).
For off-site claims, the Corporation makes an assessment of the cost 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 on-site matters associated with properties currently owned, an
assessment is made as to whether an investigation and remediation would be
required under applicable federal and state law. For on-site matters associated
with properties previously sold, the Corporation considers the terms of sale as
well as applicable federal and state laws to determine if the Corporation has
any remaining liability. If the Corporation is determined to have potential
liability for properties currently owned or previously sold, an estimate is made
of the total cost of investigation and remediation and other potential costs
associated with the site.
The Corporation's estimate of the costs associated with legal, product
liability, and environmental exposures is accrued if, in management's judgment,
the likelihood of a loss is probable. These accrued liabilities are not
discounted. Insurance recoveries for environmental and certain general liability
claims are not recognized until realized.
As of June 28, 1998, the Corporation had no known probable but inestimable
exposures for awards and assessments in connection with environmental matters
and other litigation and administrative proceedings that could have a material
effect on the Corporation.
-28-
Management is of the opinion that the amounts accrued for awards or
assessments in connection with the environmental matters and other litigation
and administrative proceedings to which the Corporation is a party are adequate
and, accordingly, ultimate resolution of these matters will not have a material
adverse effect on the Corporation.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As indicated in Note 5 of Notes to Consolidated Financial Statements, in June
1998, a wholly owned subsidiary of the Corporation issued senior unsecured notes
(the "Debt Securities") that were guaranteed by the Corporation. Closing on the
sale of the Debt Securities occurred on June 26, 1998, and the title and amount
of the Debt Securities were as follows: $150,000,000 of 6.55% Senior Notes due
2007 and $150,000,000 of 7.05% Senior Notes due 2028. The Debt Securities were
unconditionally and irrevocably guaranteed by the Corporation. The initial
purchasers of the Debt Securities were Lehman Brothers Inc., Citicorp
Securities, Inc., NationsBanc Montgomery Securities LLC, and Chase Securities
Inc. The Debt Securities were issued pursuant to the exemption from registration
in Section 4(2) of the Securities Act of 1933 and may be resold in reliance upon
the exemption to the registration requirements provided by Rule 144A. All of the
Debt Securities were sold for cash and the Price to Investors, Discounts and
Commissions, and Proceeds to Issuers were are follows:
===================================================================================================================
Price to Discounts and Proceeds to
Investors(1) Commissions Issuer(2)
- -------------------------------------------------------------------------------------------------------------------
Per 2007 Note.......................... 99.703% .65% 99.053%
Total ................................. $149,554,500 $975,000 $148,579,500
- -------------------------------------------------------------------------------------------------------------------
Per 2028 Note......................... 99.837% .875% 98.962%
Total................................. $149,755,500 $1,312,500 $148,443,000
===================================================================================================================
<FN>
(1) Plus accrued interest, if any, from June 26, 1998.
(2) Before deducting expenses payable by the Issuer estimated at $550,000.
</FN>
As indicated in Note 2 of Notes to Consolidated Financial Statements under
the heading "Repurchase of Common Stock," in connection with the Corporation's
stock repurchase program the Corporation sold put options on 400,000 shares of
its Common Stock during the first six months of 1998. The put options were sold
in a series of transactions with an investment banking firm subject to customary
transfer restrictions in reliance upon the exemption from registration in
Section 4(2) of the Securities Act of 1933. The Corporation received aggregate
premiums of $.7 million in connection with these transactions. Each of the put
options is exercisable on a single fixed date specified in the option contract.
The average strike price of the put options sold during the first six months of
1998 was $53.11 per share.
-29-
ITEM 5 OTHER INFORMATION
As indicated in the Proxy Statement distributed to the Corporation's
stockholders in connection with the 1998 Annual Meeting of Stockholders, it is
expected that the Corporation's 1999 Annual Meeting of Stockholders (the "1999
Meeting") will be held on April 27, 1999.
Stockholders wishing to submit a proposal to be considered for inclusion in
the Corporation's proxy statement for the 1999 Meeting in accordance with the
provisions of Rule 14a-8 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), must submit the proposal in writing and the proposal must
be received by the Corporation on or before November 3, 1998.
The advance notice provisions included in the Corporation's Bylaws provide
that stockholders wishing to bring business before a stockholders' meeting,
among other things, must give written notice to the Corporation of the business
to be introduced at the meeting and the notice must be received by the
Corporation's Corporate Secretary not less than 90 nor more than 110 days prior
to the meeting. As a result, with the exception of stockholder proposals
submitted in accordance with the provisions of Rule 14a-8 under the Exchange
Act, to be properly brought before the 1999 Meeting, business introduced by a
stockholder of the Corporation must be received by the Corporation's Corporate
Secretary on or before January 27, 1999, but not before January 7, 1999.
-30-
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
2(a)(i) Transaction Agreement dated as of May 10, 1998, by and between The
Black & Decker Corporation and Windmere-Durable Holdings, Inc.*
2(a)(ii) Amendment No. 1 to Transaction Agreement dated as of June 26,
1998, by and between The Black & Decker Corporation and
Windmere-Durable Holdings, Inc.*
2(b)(i) Reorganization, Recapitalization and Stock Purchase Agreement
dated as of June 29, 1998, by and between The Black & Decker
Corporation, True Temper Sports, Inc. and TTSI LLC.*
2(b)(ii) Amendment No. 1 to Reorganization, Recapitalization and Stock
Purchase Agreement dated as of August 1, 1998, by and between The
Black & Decker Corporation, True Temper Sports, Inc. and TTSI
LLC.*
2(c) Transaction Agreement dated as of July 12, 1998, by and between
The Black & Decker Corporation and Bucher Holding AG.*
3 Bylaws of the Corporation, as amended.
4 Indenture dated as of June 26, 1998, by and between Black & Decker
Holdings Inc., as Issuer, the Corporation, as Guarantor, and The
First National Bank of Chicago, as Trustee.
11 Computation of Earnings Per Share.
12 Computation of Ratios.
27 Financial Data Schedule.
- ---------------------
* Certain schedules and attachments have been omitted. The Corporation agrees
to provide a copy of these schedules and attachments to the Securities and
Exchange Commission upon request.
On April 15, 1998, the Corporation filed a Current Report on Form 8-K with the
Securities and Exchange Commission. This Current Report on Form 8-K, filed
pursuant to Item 5 of that Form, stated that the Corporation had reported its
earnings for the quarter ended March 29, 1998. The Corporation did not file any
other reports on Form 8-K during the three-month period ended June 28, 1998.
All other items were not applicable.
-31-
THE BLACK & DECKER CORPORATION
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BLACK & DECKER CORPORATION
By /s/ THOMAS M. SCHOEWE
Thomas M. Schoewe
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
By /s/ STEPHEN F. REEVES
Stephen F. Reeves
Vice President and Controller
Date: August 12, 1998