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 April 4, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-1553
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THE BLACK & DECKER CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0248090
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 East Joppa Road Towson, Maryland 21286
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(Address of principal executive offices) (Zip Code)
(410) 716-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
The number of shares of Common Stock outstanding as of May 2, 1999: 86,997,148
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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
April 4, 1999
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings (Unaudited)
For the Three Months Ended April 4, 1999 and March 29, 1998.............3
Consolidated Balance Sheet
April 4, 1999 (Unaudited) and December 31, 1998.........................4
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended April 4, 1999 and March 29, 1998.............5
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended April 4, 1999 and March 29, 1998.............6
Notes to Consolidated Financial Statements (Unaudited).....................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................25
Item 4. Submission of Matters to a Vote of Security Holders...................26
Item 5. Other Information.....................................................26
Item 6. Exhibits and Reports on Form 8-K......................................27
SIGNATURES....................................................................28
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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)
Three Months Ended
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April 4, 1999 March 29, 1998
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Sales $ 978.5 $ 1,008.3
Cost of goods sold 628.2 658.3
Selling, general, and administrative expenses 271.9 279.9
Write-off of goodwill -- 900.0
Restructuring and exit costs -- 140.0
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Operating Income (Loss) 78.4 (969.9)
Interest expense (net of interest income) 22.2 28.4
Other income 1.5 .3
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Earnings (Loss) Before Income Taxes 57.7 (998.0)
Income taxes (benefit) 18.5 (26.6)
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Net Earnings (Loss) $ 39.2 $ (971.4)
=================================================================================================
Net Earnings (Loss) Per Common Share -- Basic $ .45 $ (10.21)
=================================================================================================
Shares Used in Computing Basic Earnings Per Share
(in Millions) 87.3 95.1
=================================================================================================
Net Earnings (Loss) Per Common Share -- Assuming Dilution $ .44 $ (10.21)
=================================================================================================
Shares Used in Computing Diluted Earnings Per
Share (in Millions) 88.6 95.1
=================================================================================================
Dividends Per Common Share $ .12 $ .12
=================================================================================================
<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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April 4, 1999
(Unaudited) December 31, 1998
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Assets
Cash and cash equivalents $ 130.2 $ 87.9
Trade receivables 763.8 792.4
Inventories 700.7 636.9
Other current assets 197.0 234.6
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Total Current Assets 1,791.7 1,751.8
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Property, Plant, and Equipment 706.2 727.6
Goodwill 758.3 768.7
Other Assets 620.9 604.4
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$ 3,877.1 $ 3,852.5
=================================================================================================
Liabilities and Stockholders' Equity
Short-term borrowings $ 102.1 $ 152.5
Current maturities of long-term debt 88.2 59.2
Trade accounts payable 400.4 348.8
Other accrued liabilities 702.0 814.2
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Total Current Liabilities 1,292.7 1,374.7
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Long-Term Debt 1,282.1 1,148.9
Deferred Income Taxes 277.3 279.9
Postretirement Benefits 262.8 263.5
Other Long-Term Liabilities 205.4 211.5
Stockholders' Equity
Common stock, par value $.50 per share 43.5 43.7
Capital in excess of par value 846.5 871.4
Retained earnings (deficit) (207.8) (236.6)
Accumulated other comprehensive income (loss) (125.4) (104.5)
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Total Stockholders' Equity 556.8 574.0
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$ 3,877.1 $ 3,852.5
=================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
-5-
CONSOLIDATED STATEMENT OF 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 Total
Common Par Excess of Earnings Comprehensive Stockholders'
Shares Value Par Value (Deficit) Income (Loss) Equity
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Balance at December 31, 1997 94,842,544 $ 47.4 $ 1,278.2 $ 562.0 $ (96.2) $ 1,791.4
Comprehensive income:
Net loss -- -- -- (971.4) -- (971.4)
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (19.8) (19.8)
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Comprehensive income (loss) -- -- -- (971.4) (19.8) (991.2)
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Cash dividends ($.12 per share) -- -- -- (11.5) -- (11.5)
Purchase and retirement of
common stock (681,000) (.3) (33.5) -- -- (33.8)
Common stock issued under
employee benefit plans 835,137 .4 16.9 -- -- 17.3
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Balance at March 29, 1998 94,996,681 $ 47.5 $ 1,261.6 $ (420.9) $ (116.0) $ 772.2
====================================================================================================================
Balance at December 31, 1998 87,498,424 $ 43.7 $ 871.4 $ (236.6) $ (104.5) $ 574.0
Comprehensive income:
Net earnings -- -- -- 39.2 -- 39.2
Foreign currency translation
adjustments, less effect of
hedging activities (net of tax) -- -- -- -- (20.9) (20.9)
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Comprehensive income (loss) -- -- -- 39.2 (20.9) 18.3
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Cash dividends ($.12 per share) -- -- -- (10.4) -- (10.4)
Purchase and retirement of
common stock (610,900) (.3) (31.8) -- -- (32.1)
Common stock issued under
employee benefit plans 178,498 .1 6.9 -- -- 7.0
- --------------------------------------------------------------------------------------------------------------------
Balance at April 4, 1999 87,066,022 $ 43.5 $ 846.5 $ (207.8) $ (125.4) $ 556.8
====================================================================================================================
<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)
Three Months Ended
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April 4, 1999 March 29, 1998
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Operating Activities
Net earnings (loss) $ 39.2 $ (971.4)
Adjustments to reconcile net earnings (loss) to cash flow from
operating activities:
Non-cash charges and credits:
Depreciation and amortization 40.9 38.8
Goodwill write-off -- 900.0
Restructuring and exit costs -- 140.0
Other 2.5 6.2
Changes in selected working capital items:
Trade receivables 15.6 89.4
Inventories (78.1) (64.0)
Trade accounts payable 55.9 43.8
Restructuring spending (7.3) (4.6)
Changes in other assets and liabilities (73.5) (164.4)
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Cash Flow From Operating Activities (4.8) 13.8
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Investing Activities
Proceeds from disposal of assets 12.9 3.3
Capital expenditures (30.0) (32.2)
Cash inflow from hedging activities 52.4 82.3
Cash outflow from hedging activities (51.5) (81.5)
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Cash Flow From Investing Activities (16.2) (28.1)
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Cash Flow Before Financing Activities (21.0) (14.3)
Financing Activities
Net decrease in short-term borrowings (47.1) (97.4)
Proceeds from long-term debt (including revolving credit facility) 481.2 202.6
Payments on long-term debt (including revolving credit facility) (328.6) (162.0)
Redemption of preferred stock of subsidiary -- (41.7)
Purchase of common stock (32.1) (33.8)
Issuance of common stock 3.8 11.8
Cash dividends (10.4) (11.5)
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Cash Flow From Financing Activities 66.8 (132.0)
Effect of exchange rate changes on cash (3.5) (1.7)
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Increase (Decrease) In Cash And Cash Equivalents 42.3 (148.0)
Cash and cash equivalents at beginning of period 87.9 246.8
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Cash And Cash Equivalents At End Of Period $ 130.2 $ 98.8
=============================================================================================================
<FN>
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
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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-month period ended April 4, 1999, 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, 1998.
Certain amounts presented for the three months ended March 29, 1998, have
been reclassified to conform with the 1999 presentation.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is currently 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 what
effect SFAS No. 133 will have on its earnings and financial position.
NOTE 2: STRATEGIC REPOSITIONING
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, 1998, on January 26, 1998, the Corporation's Board of Directors
approved a comprehensive strategic repositioning plan designed to intensify
focus on core operations and improve operating performance. The plan includes
the following components: (i) the 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 then outstanding common
stock over a two-year period; and (iii) a restructuring of the Corporation's
remaining businesses.
The Corporation sold its household products business (other than certain
assets associated with the Corporation's cleaning and lighting products) in
North America, Central America, the
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Caribbean, South America (excluding Brazil), and Australia, principally in the
second quarter of 1998. The Corporation continues to evaluate various
alternatives with respect to its household products business in Brazil. The
Corporation completed the sale of Emhart Glass, its glass container-forming and
inspection equipment business, during the third quarter of 1998 and completed
the recapitalization of True Temper Sports, its recreational products business,
during the fourth quarter of 1998.
As of December 31, 1998, the Corporation had repurchased 9,025,400 shares
of its outstanding common stock under the strategic repositioning plan, of which
681,000 shares were repurchased during the three months ended March 29, 1998, at
an aggregate cost of $33.8 million. During the three months ended April 4, 1999,
the Corporation repurchased an additional 610,900 shares of common stock at an
aggregate cost of $32.1 million. The stock repurchase element of the strategic
repositioning plan is now complete. Subsequent to the announcement of the
strategic repositioning, the Corporation's Board of Directors authorized the
repurchase of an incremental 2,000,000 shares of the Corporation's outstanding
common stock with the intention of reducing the dilutive effect of stock
issuances under various stock-based employee benefit plans.
The restructuring program announced in January 1998 will be completed over
a period of two years and is being undertaken to reduce fixed costs. During the
three months ended March 29, 1998, the Corporation recognized restructuring and
exit costs of $140.0 million.
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. 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 $9.46 both
on a basic and diluted basis for the quarter ended March 29, 1998. The write-off
of goodwill related to the Building Products segment and the Fastening and
Assembly Systems segment and included a $40.0 million write-down of goodwill
associated with one of the divested businesses, and represented 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. This change represented a change in accounting principle
that is indistinguishable from a change in estimate.
-9-
NOTE 3: INVENTORIES
The components of inventory at the end of each period, in millions of dollars,
consisted of the following:
April 4, 1999 December 31, 1998
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FIFO cost:
Raw materials and work-in-process $ 179.9 $ 173.5
Finished products 539.7 482.3
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719.6 655.8
Excess of FIFO cost over LIFO inventory value (18.9) (18.9)
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$ 700.7 $ 636.9
================================================================================
Inventories are stated at the lower of cost or market. The cost of United
States inventories is based primarily on the last-in, first-out (LIFO) method;
all other inventories are based on the first-in, first-out (FIFO) method.
NOTE 4: GOODWILL
Goodwill at the end of each period, in millions of dollars, was as follows:
April 4, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Goodwill $ 1,296.9 $ 1,300.9
Less accumulated amortization 538.6 532.2
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$ 758.3 $ 768.7
================================================================================
NOTE 5: LONG-TERM DEBT
Indebtedness of subsidiaries of the Corporation in the aggregate principal
amounts of $604.8 million and $412.4 million were included in the Consolidated
Balance Sheet at April 4, 1999, and December 31, 1998, respectively, under the
captions short-term borrowings, current maturities of long-term debt, and
long-term debt.
NOTE 6: INTEREST EXPENSE (NET OF INTEREST INCOME)
Interest expense (net of interest income) for each period, in millions of
dollars, consisted of the following:
Three Months Ended
April 4, 1999 March 29, 1998
- --------------------------------------------------------------------------------
Interest expense $ 30.2 $ 36.6
Interest (income) (8.0) (8.2)
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$ 22.2 $ 28.4
================================================================================
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NOTE 7: BUSINESS SEGMENTS
The following table provides selected financial data for the Corporation's
business segments (in millions of dollars):
Reportable Business Segments
-------------------------------------------
Fastening Currency Corporate,
Power Tools Building & Assembly All Translation Adjustments,
Three Months Ended April 4, 1999 & Accessories Products Systems Total Others Adjustments & Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $643.0 $214.8 $126.4 $984.2 $ -- $ (5.7) $ -- $ 978.5
Segment profit (loss)
(for Consolidated, operating income) 39.6 26.0 21.2 86.8 -- (.5) (7.9) 78.4
Depreciation and amortization 21.3 8.8 3.9 34.0 -- (.3) 7.2 40.9
Capital expenditures 20.1 7.2 3.1 30.4 -- (.5) .1 30.0
Three Months Ended March 29, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $581.6 $189.6 $118.3 $889.5 $130.2 $(11.4) $ -- $1,008.3
Segment profit (loss)
(for Consolidated, operating income
before restructuring and exit costs
and write-off of goodwill) 31.9 24.8 19.2 75.9 4.1 (1.8) (8.1) 70.1
Depreciation and amortization 22.8 6.1 3.2 32.1 -- (.4) 7.1 38.8
Capital expenditures 17.5 9.3 2.0 28.8 3.5 (.3) .2 32.2
The Corporation operates in three reportable business segments: Power Tools
and Accessories, Building Products, 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,
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 plumbing products to customers outside North
America and for sales of the retained household products business. The Building
Products segment has worldwide responsibility for the manufacture and sale of
security hardware and for the manufacture of plumbing products as well as
responsibility for the sale of plumbing products to customers in North America.
The Fastening and Assembly Systems segment has worldwide responsibility for the
manufacture and sale of fastening and assembly systems.
The Corporation also operated several businesses that do not constitute
reportable business segments. These businesses included the manufacture and sale
of glass container-forming and inspection equipment, as well as recreational and
household products. In 1998, the Corporation completed the sale or
recapitalization of its glass container-forming and inspection equipment
business, Emhart Glass; its recreational products business, True Temper Sports;
and its household products business (excluding certain assets associated with
the Corporation's cleaning and lighting products) in North America, Latin
America (excluding Brazil), and Australia. 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, and the results of operations and financial
positions of these businesses have been included in the consolidated financial
statements through the dates of consummation of the respective transactions.
Amounts relating to these businesses are included in the preceding table
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under the caption "All Others." The results of the household products businesses
included under the caption "All Others" are based upon certain assumptions and
allocations. The household products businesses sold during 1998 were jointly
operated with the cleaning and lighting products businesses retained by the
Corporation. Further, the Corporation's divested household products businesses
in Australia and Latin America (excluding Brazil) were operated jointly with the
Corporation's power tools and accessories businesses. Accordingly, the results
of the household products businesses included in the segment table above under
the caption "All Others" were determined using certain assumptions and
allocations that the Corporation believes are reasonable under the
circumstances.
The Corporation assesses the performance of its reportable business
segments based upon a number of factors, including segment profit. In general,
segments follow the same accounting policies as those described in Note 1 of
Notes to Consolidated Financial Statements included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1998, except with respect to
foreign currency translation and except as further indicated below. The
financial statements of a segment's operating units located outside the United
States, except those units operating in highly inflationary economies, are
measured using the local currency as the functional currency. For these units
located outside 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 newly established budgeted rates of exchange. The
amounts included in the preceding table under the captions "Reportable Business
Segments," "All Others," and "Corporate, Adjustments, & Eliminations" are
reflected at the Corporation's current budgeted exchange rates. The amounts
included in the preceding table under the caption "Currency Translation
Adjustments" represent the difference between consolidated amounts determined
using budgeted rates of exchange and those determined based upon the rates of
exchange applicable under accounting principles generally accepted in the United
States.
Segment profit excludes interest income and expense, non-operating income
and expense, goodwill amortization, adjustments to eliminate intercompany profit
in inventory, and income tax expense. In addition, segment profit excludes
restructuring and exit costs and, for 1998, the write-off of goodwill. For
certain operations located in Brazil, Mexico, Venezuela, and Turkey, segment
profit is reduced by net interest expense and non-operating expenses. In
determining segment profit, expenses relating to pension and other
postretirement benefits are based solely upon estimated service costs. Corporate
expenses are allocated to each reportable segment based upon budgeted amounts.
No corporate expenses have been allocated to divested businesses. 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 sales 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 nonrecurring 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 Corporation's various
segments in a later period.
-12-
Amounts in the preceding table under the caption "Corporate, Adjustments, &
Eliminations" on the lines entitled "Depreciation and amortization" represent
depreciation of Corporate property and consolidated goodwill amortization.
The reconciliation of segment profit to the Corporation's earnings from
continuing operations before income taxes for each period, in millions of
dollars, is as follows:
Three Months Ended
- -------------------------------------------------------------------------------------------------------------
April 4, 1999 March 29, 1998
- -------------------------------------------------------------------------------------------------------------
Segment profit for total reportable business segments $ 86.8 $ 75.9
Segment profit for all other businesses -- 4.1
Items excluded from segment profit:
Adjustment of budgeted foreign exchange rates
to actual rates (.5) (1.8)
Depreciation of Corporate property and
amortization of goodwill (7.2) (7.1)
Adjustment to businesses' postretirement benefit
expenses booked in consolidation 8.2 8.3
Adjustment to eliminate net interest and non-operating
expenses from results of certain operations in Brazil,
Mexico, Venezuela, and Turkey .5 1.5
Other adjustments booked in consolidation directly
related to reportable business segments (3.7) (1.4)
Amounts allocated to businesses in arriving at segment profit
in excess of (less than) Corporate center operating expenses,
eliminations, and other amounts identified above (5.7) (9.4)
- -------------------------------------------------------------------------------------------------------------
Operating income before restructuring and exit costs and
write-off of goodwill 78.4 70.1
Restructuring and exit costs -- 140.0
Write-off of goodwill -- 900.0
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) 78.4 (969.9)
Interest expense, net of interest income 22.2 28.4
Other income 1.5 .3
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes $ 57.7 $ (998.0)
=============================================================================================================
-13-
NOTE 8: EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period are as
follows:
Three Months Ended
(Amounts in Millions Except Per Share Data) April 4, 1999 March 29, 1998
- -------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings (loss) $ 39.2 $ (971.4)
=============================================================================================================
Denominator:
Average number of common shares outstanding
for basic earnings per share 87.3 95.1
Employee stock options and stock issuable
under employee benefit plans 1.3 -- (a)
- -------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding
for diluted earnings per share 88.6 95.1
=============================================================================================================
Basic earnings (loss) per share $ .45 $ (10.21)
=============================================================================================================
Diluted earnings (loss) per share $ .44 $ (10.21)
=============================================================================================================
<FN>
(a) Due to the net loss incurred by the Corporation for the three-month period
ended March 29, 1998, the assumed exercise of stock options and stock
issuable under employee benefit plans is anti-dilutive. Accordingly, the
effect of 1.8 million shares, representing the dilutive effect of those
stock options and shares issuable, was excluded from the calculation of
diluted earnings per share for the quarter ended March 29, 1998. As a
result, the financial statements reflect diluted earnings per share equal
to basic earnings per share for the quarter ended March 29, 1998.
</FN>
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $39.2 million or $.44 per share on a
diluted basis for the three-month period ended April 4, 1999, compared to a net
loss of $971.4 million or $10.21 per share on a diluted basis for the
three-month period ended March 29, 1998. The net loss for the quarter ended
March 29, 1998, included a write-off of $900.0 million of goodwill through a
non-cash charge to operations and a pre-tax restructuring charge of $140.0
million ($100.0 million net of tax). Excluding both the restructuring charge and
goodwill write-off, net earnings for the quarter ended March 29, 1998, would
have been $28.6 million or $.29 per share on a diluted basis.
STRATEGIC REPOSITIONING
As more fully described in Note 2 of Notes to Consolidated Financial Statements
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations under the caption "Strategic Repositioning", included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1998,
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. The Corporation substantially completed this aspect of
the strategic repositioning plan through the sale or recapitalization of the
following non-strategic businesses: True Temper Sports, its recreational
products business, in the fourth quarter of 1998; Emhart Glass, its glass
container-forming and inspection equipment business, in the third quarter of
1998; and the household products business (other than certain assets associated
with the Corporation's cleaning and lighting business) in North America, Latin
America (excluding Brazil), and Australia, the majority of which was sold in the
second quarter of 1998.
The net proceeds from the sale of these businesses were used to fund the
second element of the strategic repositioning plan -- the planned repurchase of
approximately 10% of the Corporation's then outstanding common shares over a
two-year period. During the year ended December 31, 1998, the Corporation
repurchased 9,025,400 common shares, of which 681,000 were repurchased during
the quarter ended March 29, 1998, at an aggregate cost of $33.8 million. During
the period from January 1, 1999, through April 4, 1999, the Corporation
purchased an additional 610,900 shares of common stock at an aggregate cost of
$32.1 million.
The third element of the strategic repositioning plan involves a major
restructuring program, which is being undertaken to reduce fixed costs. As part
of the restructuring program, the Corporation is making significant changes to
its European power tools and accessories businesses by consolidating
distribution and transportation and centralizing finance, marketing, and support
services. These changes in Europe are being 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 is rationalizing its manufacturing plant network, resulting
in the closure of a number of manufacturing plants. The restructuring program
also includes actions to improve the cost position of other businesses.
-15-
This restructuring program resulted in a pre-tax charge of $140.0 million
during the three months ended March 29, 1998 ($100.0 million after tax). During
the three months ended April 4, 1999, the Corporation recognized $8.9 million of
additional pre-tax restructuring and exit costs associated with restructuring of
North American accessories packaging operations and Latin American power tools
operations, and as a result of the settlement of claims associated with a
divested business. That $8.9 million charge was offset, however, by a gain
realized on the sale in the first quarter of 1999 of a facility, exited as part
of the restructuring actions taken in 1998, that had a fair value exceeding its
net book value at the time of the 1998 charge. Additional actions are possible
as the program progresses in 1999.
A summary of the Corporation's restructuring activity during 1999 is as
follows:
Reserve Established Utilization of Reserve
Reserve at in 1999, Net of ---------------------- Reserve at
(Dollars in Millions) December 31, 1998 Gain Recognized Cash Non-Cash April 4, 1999
- -------------------------------------------------------------------------------------------------------------------
Severance benefits and cost of
voluntary retirement program $39.9 $ 4.4 $(7.3) $ -- $37.0
Asset write-offs -- .5 -- (.5) --
Other charges 10.9 (4.9) -- 3.0 9.0
- -------------------------------------------------------------------------------------------------------------------
Total $50.8 $ -- $(7.3) $ 2.5 $46.0
===================================================================================================================
In the preceding table, the negative $3.0 million non-cash reserve usage in
1999 represents $5.9 million of non-cash reserve usage offset by the $8.9
million gain on the sale of the facility described above.
In addition to the restructuring charge, the Corporation anticipates that
related expenses of approximately $60 million will be charged to operations over
a two-year period as the restructuring program progresses, $44.4 million of
which were recognized during the year ended December 31, 1998. These related
expenses, which are incremental to the plans being implemented, do not qualify
as restructuring or exit costs under generally accepted accounting principles.
During the three-month periods ended April 4, 1999, and March 29, 1998, the
Corporation recognized $3.5 million and $5.6 million, respectively, of expenses
related to the restructuring program.
Benefits from the restructuring actions taken in 1998 and 1999 are expected
to approximate $100 million on an annual, pre-tax basis once the restructuring
plan is fully implemented.
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 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 sold businesses, realistic valuation than
the undiscounted approach. The adoption of this discounted cash flow approach,
however, may result in greater earnings volatility because decreases in
projected discounted cash flows of certain businesses will result in timely
recognition of future impairment. This change in method of measuring goodwill
impairment represents a change in accounting principle that is indistinguishable
from a change in estimate.
In connection with this change in accounting with respect to the
measurement of goodwill impairment, the Corporation recognized a non-cash charge
of $900.0 million in the first quarter of
-16-
1998 ($9.46 per share both on a basic and diluted basis for the quarter ended
March 29, 1998). The $900.0 million write-down, which related to goodwill
associated with the Corporation's Fastening and Assembly Systems segment and the
Building Products segment and included a $40.0 million write-down of goodwill
associated with one of the divested businesses, represented 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 included in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
SALES
The following chart sets forth an analysis of the consolidated changes in sales
for the three-month periods ended April 4, 1999, and March 29, 1998:
ANALYSIS OF CHANGES IN SALES
- --------------------------------------------------------------------------------
For the Three Months Ended
(Dollars in Millions) April 4, 1999 March 29, 1998
- --------------------------------------------------------------------------------
Total sales $ 978.5 $1,008.3
Unit volume - existing 13 % 3 %
- disposed (14)% -- %
Price (2)% (1)%
Currency -- % (3)%
- --------------------------------------------------------------------------------
Change in total sales (3)% (1)%
================================================================================
Note: In the above table and in the following discussion, existing unit volume
relates to businesses where period-to-period comparability exists.
Disposed unit volume relates to businesses where period-to-period
comparability does not exist due to the sale or recapitalization of a
particular business. For the three months ended April 4, 1999, disposed
unit volume relates to sales of 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); the glass
container-forming and inspection equipment business, Emhart Glass; and
the recreational products business, True Temper Sports; all of which were
sold or recapitalized during 1998.
Total consolidated sales for the three months ended April 4, 1999,
decreased by 3% from the 1998 level. Pricing actions, taken in response to
competitive pressures and as a result of volume-related price reductions
associated with higher unit volumes in the North American power tools and
accessories business, had a 2% negative effect on sales for the first quarter of
1999 as compared to the corresponding period in 1998. Total unit volume declined
by 1% during the three months ended April 4, 1999, from the 1998 levels, as a
13% rate of growth in unit volume in the Corporation's existing businesses was
more than offset by unit volume declines associated with the divested household
products, recreational products, and glass container-forming and inspection
equipment businesses. A contributing factor to the 13% rate of growth in
existing unit volume was the inclusion of four additional business days in the
first quarter of 1999 as compared to the first quarter of 1998 due to the timing
of the Corporation's fiscal calendar.
-17-
EARNINGS
Operating income for the three months ended April 4, 1999, was $78.4 million
compared to an operating loss of $969.9 million for the corresponding period in
1998. 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, operating income for the first quarter of 1999 increased by 12% from $70.1
million for the first quarter of 1998 to $78.4 million for the first quarter of
1999. Operating income as a percentage of sales was 8.0% for the three-month
period ended April 4, 1999, compared to 7.0% for the corresponding period in
1998, excluding the restructuring charge and write-off of goodwill.
Operating results for the three months ended April 4, 1999, and March 29,
1998, included $3.5 million and $5.6 million, respectively, of expenses directly
related to the restructuring program undertaken that do not qualify as
restructuring or exit costs under generally accepted accounting principles.
Excluding the effects of these restructuring-related expenses, as well as the
restructuring charge and the write-off of goodwill recognized in 1998, operating
income for the three months ended April 4, 1999, would have increased by 8%
from $75.7 million, or 7.5% of sales, for the first quarter of 1998 to $81.9
million, or 8.4% of sales, for the first quarter of 1999. This improvement in
operating income as a percentage of sales was experienced both in the Power
Tools and Accessories and in the Fastening and Assembly Systems segments and
offset a decline in the Building Products segment. Operating income as a
percentage of sales for the three-month period ended April 4, 1999, also
benefited from the absence of the less profitable divested businesses.
Gross margin as a percentage of sales was 35.8% and 34.7% for the
three-month periods ended April 4, 1999, and March 29, 1998, respectively. The
increase in gross margin during the first quarter of 1999 compared to the prior
year primarily resulted from increased productivity, the absence of lower margin
products in the divested businesses, and cost benefits resulting from
restructuring actions taken, partially offset by negative pricing actions.
Selling, general, and administrative expenses as a percentage of total
sales was 27.8% for both the three-month periods ended April 4, 1999, and March
29, 1998.
Net interest expense (interest expense less interest income) for the
three-month period ended April 4, 1999, was $22.2 million as compared to $28.4
million for the three-month period ended March 29, 1998. The lower level of net
interest expense in the first quarter of 1999 as compared to the first quarter
of 1998 was primarily the result of lower borrowing levels.
The Corporation maintains a portfolio of interest rate hedge instruments
for the purpose of managing interest rate exposure. During the quarter ended
April 4, 1999, the Corporation's portfolio increased as a result of entering
into new fixed to variable rate interest rate swaps with an aggregate notional
principal amount of $25.0 million. The variable rate debt to total debt ratio,
after taking interest rate hedges into account, was 54% at April 4, 1999,
compared to 47% at December 31, 1998.
Other income for the three-month periods ended April 4, 1999, and March 29,
1998, was not significant.
The Corporation recognized income tax expense of $18.5 million on pre-tax
earnings of $57.7 million, which equates to a reported tax rate of 32% for the
first quarter of 1999. The Corporation recognized an income tax benefit of $26.6
million on a pre-tax loss of $998.0 million for the three months ended March 29,
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
-18-
amount of $900.0 million, both recognized in the quarter ended March 29, 1998,
the Corporation's reported tax rate for the first quarter of 1998 would have
been 32%.
The Corporation reported net income of $39.2 million, or $.44 per share on
a diluted basis, for the three-month period ended April 4, 1999. The Corporation
reported a net loss of $971.4 million, or $10.21 per share both on a basic and
diluted basis, for the three-month period ended March 29, 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 quarter ended March 29,
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 after-tax restructuring
charge and goodwill write-off would have been $28.6 million ($.29 per share on
this diluted basis) for the quarter ended March 29, 1998.
BUSINESS SEGMENTS
As more fully described in Note 7 of Notes to Consolidated Financial Statements,
the Corporation operates in three reportable business segments: Power Tools and
Accessories, Building Products, and Fastening and Assembly Systems.
Power Tools and Accessories
- ---------------------------
Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 7 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
For the Three Months Ended April 4, 1999 March 29, 1998
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $ 643.0 $ 581.6
Segment profit 39.6 31.9
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Power Tools and Accessories segment
during the first quarter of 1999 increased 11% over the 1998 level despite
negative pricing actions taken in response to competitive pressures and as a
result of volume-related price reductions. Sales of power tool products in North
America benefited from double-digit rates of growth in sales of the DEWALT(R)
professional power tools, consumer tools, and outdoor products lines. In
addition, sales of accessories in North America during 1999 increased at
double-digit rates from the 1998 level.
Sales in Europe decreased at a low single-digit rate in the first quarter
of 1999 from the 1998 level, primarily as a result of sales weakness in Germany
and Eastern Europe. Throughout Europe, decreased sales of consumer power tools
and accessories, household products and outdoor products during the quarter
ended April 4, 1999, compared to the corresponding period in 1998, more than
offset increased sales of professional power tools.
Sales in other geographic areas declined at a high single-digit rate in the
first quarter of 1999 from the 1998 levels. This decline, however, was not
significant to the Corporation in absolute terms.
-19-
Segment profit as a percentage of sales for the Power Tools and Accessories
segment was 6.2% in the first quarter of 1999 compared to 5.5% in 1998. This
improvement was driven by higher gross margins in North America and Europe,
which were the result of restructuring benefits and higher manufacturing
volumes, that more than offset negative price pressures.
Building Products
- -----------------
Segment sales and profit for the Building Products segment, determined on the
basis described in Note 7 of Notes to Consolidated Financial Statements, were as
follows (in millions of dollars):
For the Three Months Ended April 4, 1999 March 29, 1998
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $ 214.8 $ 189.6
Segment profit 26.0 24.8
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Building Products segment increased
by 13% for the three months ended April 4, 1999, over the 1998 level, due
principally to strong sales of security hardware in North America. This sales
growth, however, was in comparison to relatively weak sales in the first quarter
of 1998. Sales of security hardware in Europe for the first quarter of 1999
approximated the prior year level. Sales of plumbing products in North America
increased at a low single-digit rate in the first quarter of 1999 over the 1998
level.
Segment profit as a percentage of sales for the Building Products segment
was 12.1% in the first three months of 1999 compared to 13.1% in 1998. Segment
profit as a percentage of sales in 1999 declined from the 1998 level as
decreased profitability with respect to security hardware products, principally
associated with manufacturing inefficiencies, more than offset profitability
gains in plumbing products which stemmed from productivity initiatives and
headcount reductions.
Fastening and Assembly Systems
- ------------------------------
Segment sales and profit for the Fastening and Assembly Systems segment,
determined on the basis described in Note 7 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):
For the Three Months Ended April 4, 1999 March 29, 1998
- --------------------------------------------------------------------------------
Sales to unaffiliated customers $ 126.4 $ 118.3
Segment profit 21.2 19.2
- --------------------------------------------------------------------------------
Sales to unaffiliated customers in the Fastening and Assembly Systems
segment increased by 7% in the first quarter of 1999 over the 1998 level, due in
part to strong sales of new products and strong results with automotive
customers in North America and Europe.
Segment profit as a percentage of sales for the Fastening and Assembly
Systems segment increased from 16.2% in the first quarter of 1998 to 16.8% in
1999 as a result of productivity initiatives which more than offset negative
price pressure.
-20-
INTEREST RATE SENSITIVITY
Due to the change during the quarter ended April 4, 1999, described above, in
the Corporation's interest rate hedge portfolio, the following table provides
information as of April 4, 1999, about the 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, 1998.
Notional Principal Amounts and Interest Rate Detail by Contractual Maturity Dates
Year Ending Dec. 31, Fair Value
9 Mos. Ending ----------------------------------------- (Assets)/
(U.S. Dollars in Millions) Dec. 31, 1999 2000 2001 2002 2003 Thereafter Total Liabilities
- --------------------------------------------------------------------------------------------------------------------------
Interest Rate Derivatives
Interest Rate Swaps
(all U.S. dollar denomi-
nated)
Fixed to variable rates $ -- $ 50.0 $ -- $ -- $125.0 $ 275.0 $ 450.0 $ .4
Average pay rate (a)
Average receive rate 5.54% 6.02% 6.01% 5.96%
Fixed U.S. rates to fixed
foreign rates (b)
To Japanese yen $100.0 $ -- $ -- $ -- $ -- $ -- $ 100.0 $ (17.6)
Average pay rate (in
Japanese yen) (c) 1.99% 1.99%
Average receive rate 6.66% 6.66%
To deutsche marks $100.0 $ -- $ -- $ -- $ -- $ -- $ 100.0 $ (16.3)
Average pay rate (in
deutsche marks) (d) 4.73% 4.73%
Average receive rate 6.64% 6.64%
To Dutch guilders $ 50.0 $ -- $ -- $ -- $ -- $ -- $ 50.0 $ (11.6)
Average pay rate (in
Dutch guilders) (e) 4.58% 4.58%
Average receive rate 6.77% 6.77%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The average pay rate is based upon 6-month forward LIBOR, except for $150.0
million in notional amount which matures after 2003 and is based upon
3-month forward LIBOR.
(b) 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, 1998.
(c) The average pay rate (in Japanese yen) is based upon a notional principal
amount of 10.9 billion Japanese yen.
(d) The average pay rate (in deutsche marks) is based upon a notional principal
amount of 153.3 million deutsche marks.
(e) The average pay rate (in Dutch guilders) is based upon a notional principal
amount of 85.9 million Dutch guilders.
</FN>
IMPACT OF YEAR 2000
The year 2000 ("Y2K") issue arises out of the fact that many computer programs
were written using two digits to identify the applicable year rather than four
digits. As a result, computer programs with date-sensitive software or equipment
with embedded date-sensitive technology may recognize a two-digit code for any
year in the next century as related to this century. For example, "00," entered
in a date-field for the year "2000," may be interpreted as the year "1900." This
error may result in system or equipment failures or miscalculations and
disruptions of operations,
-21-
including, among other things, an inability to process transactions or engage in
other normal business activities.
The Corporation is taking action to minimize the impact of Y2K issues in
its business. These actions, which are being separately undertaken by each of
the Corporation's businesses and monitored by the Corporation on a centralized
basis, are categorized into the following phases: (i) awareness, during which
the businesses conduct Y2K awareness meetings and establish Y2K project offices;
(ii) assessment, during which the businesses complete inventories of Y2K issues,
determine remediation strategies, and assign priorities to various remediation
efforts based, in part, on the significance of the individual system or location
to the businesses' overall operations; (iii) remediation, during which the
businesses take the necessary actions to renovate, upgrade, replace, or retire
systems that are not Y2K compliant; (iv) testing, during which remediation
actions are evaluated for effectiveness; and (v) implementation, during which
remediation actions are integrated into the production environment. These phases
are being evaluated separately for each of the businesses' significant Y2K
exposures, which consist of: (i) software and hardware; (ii) manufacturing
equipment; (iii) facilities equipment; (iv) key customers; (v) key suppliers;
and (vi) products.
For each of the businesses' significant Y2K exposures, the awareness,
assessment and remediation phases have been completed and approximately 80% of
the testing has been completed. Further testing is planned for the second
quarter of 1999. Surveys of key customers, suppliers, and partners for Y2K
compliance generally have been completed, with a response rate in the 80% to
100% range. Selective customer review meetings have been held, and others are
planned. The Corporation has been certified for electronic data interface (EDI)
transactions by the National Retailers Federation. Key suppliers have been or
are being identified for further surveys, reviews, testing, and evaluation.
Contingency planning with critical suppliers is planned or is, in some cases,
completed. Evaluation of the Corporation's products has been completed without
identification of any significant Y2K impact. To date, the Corporation has not
discovered any significant Y2K issues related to embedded systems that
management expects, after taking into account the Corporation's Y2K evaluation
and remediation program, will have a material adverse effect on the continuity
of the Corporation's business. Remediation and testing of embedded systems is
approximately 80% complete with planned completion in the second quarter of
1999.
Each of the Corporation's businesses have established key milestones for
completion of the remediation, testing, and implementation phases of the Y2K
program. In general, these milestones call for completion of the testing and
implementation phases for all critical systems by no later than the end of the
second quarter of 1999 so that any slippage in the milestones for these critical
systems can be corrected in the third quarter of 1999. For non-critical systems,
these milestones generally call for completion of the remediation phase by no
later than the end of the second quarter of 1999 and completion of the testing
and implementation phases by no later than the end of the third quarter of 1999
so that any slippage in milestones can be corrected in the fourth quarter of
1999.
In order to improve operating performance over the last several years, the
Corporation has undertaken or commenced a number of significant systems
initiatives, including a major reengineering of supply-chain and distribution
systems throughout the world. In the North American Power Tools business, for
example, the Corporation has implemented advanced supply-chain management
systems and SAP information systems. Although the Corporation's systems
initiatives were unrelated to concerns over the Y2K issue, an ancillary benefit
of many of these
-22-
systems improvements is that the new systems are Y2K compliant. During the last
several years, the Corporation has spent approximately $11 million to address
issues related to the Y2K problem. During the remainder of 1999, the Corporation
expects to spend an additional $4 million to address Y2K issues, of which
approximately $2 million is attributable to new systems initiatives in Europe
that have been accelerated to address Y2K issues. These costs include internal
information systems resources redirected to the Corporation's Y2K program. Other
costs for implementing systems improvements within the Corporation that were
planned primarily for operational and supply-chain improvements and were not
accelerated as a result of Y2K concerns are not included in the foregoing costs.
The external costs associated with these systems improvements, which are
significant, generally have been capitalized as part of other assets. The
internal information systems department costs that are included above as Y2K
costs are expensed as incurred, are being funded by cash flow from operations,
and are not expected to have a material adverse effect on the Corporation.
Management believes that the Corporation has an effective program in place
to resolve the Y2K issue in a timely manner. As noted above, the Corporation has
not yet completed all necessary phases of its Y2K program. In the event that the
Corporation does not complete any additional phases of its program, significant
subsidiaries of the Corporation would be unable to take customer orders,
manufacture or ship products, invoice customers, or collect payments. In
addition, although the Corporation has undertaken surveys of key customers,
suppliers, and partners to determine the extent to which the Corporation's
interface systems are vulnerable to those third parties' failure to remediate
their own Y2K issues, there is no guarantee that the systems of other companies
on which the Corporation's systems rely will be timely converted. If those
systems are not updated or otherwise are not Y2K compliant, the inability of the
Corporation to interface effectively with these third parties could have a
material adverse effect on the Corporation and its financial condition and
operating and financial performance. In addition, disruptions to the economy
generally resulting from Y2K issues could also materially adversely affect the
Corporation. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Corporation has contingency plans for certain critical applications and
is in the process of developing such plans for other critical applications in
the event that remediation milestones are not achieved. Such contingency plans
involve consideration of a number of possible actions, including, to the extent
necessary, manual workarounds, temporary increases in inventories, and
adjustments to staffing strategies. The Corporation is also considering methods
for "early warning" of problems related to Y2K with rapid escalation and
resolution through teams of in-house and outside experts. The Corporation
intends to develop additional contingency plans with its customers, suppliers,
and partners during 1999 based on risks and possible business impact.
FINANCIAL CONDITION
Operating activities used cash of $4.8 million for the three months ended April
4, 1999, compared to $13.8 million of cash provided for the corresponding period
in 1998. This decreased cash generation was principally the result of an
increase in working capital in the quarter ended April 4, 1999, as compared to
the corresponding quarter in 1998. The working capital increase primarily
relates to higher trade receivables due to sales growth in the Corporation's
existing businesses and increased inventory levels to support higher sales
levels.
-23-
Investing activities for the three months ended April 4, 1999, used cash of
$16.2 million compared to $28.1 million of cash used in the corresponding period
in 1998. This lower cash usage in 1999 was principally due to increased proceeds
from the disposal of assets in the first quarter of 1999 compared to the
corresponding period in 1998.
Financing activities generated cash of $66.8 million for the three months
ended April 4, 1999, compared to cash used of $132.0 million in the first three
months of 1998. The change is primarily the result of increased borrowings under
short-term credit lines and the Corporation's revolving credit facility at the
end of the first quarter of 1999 over the 1998 year-end level as compared to the
decline in such borrowings that occurred at the end of the first quarter of 1998
from the 1997 year-end level.
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.
Effective with this filing, the Corporation has modified its definition of free
cash flow to be cash flow from operating activities of continuing operations,
less capital expenditures of continuing operations, plus proceeds from the
disposal of assets (excluding proceeds from business sales). The revised
definition is intended to represent cash generation available to all capital
providers. The Corporation's prior definition was oriented towards creditors. It
is the Corporation's intention, when reporting historical information, to
exclude changes in its accounts receivable sale program from free cash flow. The
accounts receivable sale program was discontinued in 1996. Free cash flow can
now be derived directly from the relevant captions on the Consolidated Statement
of Cash Flows.
Based on the revised definition, during the three months ended April 4,
1999, the Corporation experienced negative free cash flow of $21.9 million
compared to negative free cash flow of $15.1 million for the corresponding
period in 1998. The negative free cash flow for the quarter ended April 4, 1999,
resulted from the normal seasonal working capital build offset by favorable cash
taxes paid compared to the corresponding period in 1998. Calculated on the basis
of the revised definition, free cash flow was $240.7 million, $163.5 million,
and $298.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively.
Average debt maturity was 6.1 years at April 4, 1999, compared to 6.7 years
at December 31, 1998.
During the quarter ending April 4, 1999, the Corporation's credit rating
was upgraded from BBB- to BBB by Standard & Poor's Rating Services.
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 1998 and 1999 and
scheduled for introduction in 1999; 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
-24-
Corporation and its suppliers to meet scheduled timetables of new product
introductions; unforeseen competitive pressure or other difficulties 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, 1998; the degree of
working capital investment required to meet customer service levels; gradual
improvement in the economic environment in Asia and Latin America; and economic
growth in North America which more than offsets economic softness in Europe.
In addition to the foregoing, the Corporation's ability to realize the
anticipated benefits of the restructuring actions undertaken in 1998 and 1999 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 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 Corporation's existing businesses at acquisition prices that are consistent
with these objectives.
The incremental costs of the year 2000 program and the time by which the
Corporation believes it will complete the year 2000 remediation, testing, and
implementation phases, as well as new systems initiatives that are year
2000-compliant, are based upon management's best estimates, which were derived
using numerous assumptions of future events including the continued availability
of certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
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 sixth 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, 1998.
-25-
THE BLACK & DECKER CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is involved in various lawsuits in the ordinary course of
business. The 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 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 April 4, 1999, 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.
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.
-26-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders was held on April 27, 1999, for the
election of directors and to ratify the selection of Ernst & Young LLP as
independent public accountants for the Corporation for fiscal year 1999. A total
of 78,695,329 of the 87,290,269 votes entitled to be cast at the meeting were
present in person or by proxy. At the meeting, the stockholders:
(1) Elected the following directors:
Number of Shares
Number of Shares AUTHORITY
Directors VOTED FOR WITHHELD
---------------------------------------------------------------------------
Nolan D. Archibald 78,409,710 285,619
Alonzo G. Decker, Jr. 78,420,721 274,608
Norman R. Augustine 77,003,690 1,691,639
Barbara L. Bowles 78,463,624 231,705
Malcolm Candlish 78,430,552 264,777
Manuel A. Fernandez 78,168,402 526,927
Anthony Luiso 78,457,528 237,801
Mark H. Willes 78,455,251 240,078
(2) Ratified the selection of Ernst & Young LLP as independent public
accountants for the Corporation for fiscal year 1999 by an affirmative
vote of 78,441,700; votes against ratification were 80,345; and
abstentions were 173,284.
No other matters were submitted to a vote of the stockholders at the meeting.
ITEM 5. OTHER INFORMATION
On April 21, 1999, the Corporation announced that it had hired Paul F. McBride
as executive vice president of the Corporation and president of the Power Tools
and Accessories Group to replace Joseph Galli, who had resigned. The Corporation
also announced the promotions of the following individuals in the Power Tools
and Accessories Group: James J. Roberts to president of U.S. Accessories; Edward
J. Scanlon to president of The Home Depot Division; and John W. Schiech to
president of DEWALT Professional Power Tools, North America.
-27-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
12 Computation of Ratios.
27 Financial Data Schedule.
On January 26, 1999, the Corporation filed a Current Report on Form 8-K with the
Commission. That Current Report on Form 8-K, filed pursuant to Item 5 of that
Form, stated that, on January 25, 1999, the Corporation had reported its
earnings for the three and twelve months ended December 31, 1998.
Also on January 26, 1999, the Corporation filed a Current Report on Form 8-K
with the Commission. That Current Report on Form 8-K, filed pursuant to Item 5
of that Form, furnished selected unaudited supplemental information about the
Corporation's business segments for each of the quarters in the year ended
December 31, 1998, prepared in accordance with the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.
The Corporation did not file any other reports on Form 8-K during the
three-month period ended April 4, 1999.
All other items were not applicable.
-28-
THE BLACK & DECKER CORPORATION
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BLACK & DECKER CORPORATION
By /s/ 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: May 19, 1999